DAL TILE INTERNATIONAL INC, S-1/A, 1996-08-08

DAL TILE INTERNATIONAL INC
S-1/A, 1996-08-08
STRUCTURAL CLAY PRODUCTS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 8, 1996
REGISTRATION NO. 333-5069

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

DAL-TILE INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

DELAWARE 3253 13-3548809
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION OF CLASSIFICATION CODE
INCORPORATION OR NUMBER)
ORGANIZATION)

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

7834 HAWN FREEWAY
DALLAS, TEXAS 75217
(214) 398-1411

(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

CARLOS E. SALA
CHIEF FINANCIAL OFFICER
DAL-TILE INTERNATIONAL INC.
7834 HAWN FREEWAY
DALLAS, TEXAS 75217
(214) 398-1411

(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

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

COPIES OF ALL COMMUNICATIONS TO:
FREDERICK H. FOGEL, ESQ. JOHN T. GAFFNEY, ESQ.
FRIED, FRANK, HARRIS, SHRIVER & CRAVATH, SWAINE & MOORE
JACOBSON WORLDWIDE PLAZA
ONE NEW YORK PLAZA 825 EIGHTH AVENUE
NEW YORK, NEW YORK 10004 NEW YORK, NEW YORK 10019-7475
(212) 859-8000 (212) 474-1000

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.

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

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.

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<PAGE>

DAL-TILE INTERNATIONAL INC.

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

CROSS REFERENCE SHEET
PURSUANT TO ITEM 501 OF REGULATION S-K, SHOWING LOCATION IN
PROSPECTUS OF INFORMATION REQUIRED BY PART I OF FORM S-1

<TABLE>
<CAPTION>
LOCATION OR CAPTION IN
REGISTRATION STATEMENT ITEM AND HEADING PROSPECTUS
--------------------------------------- ----------------------
<C> <C> <S>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus...... Forepart of the
Registration Statement;
Outside Front Cover Page
of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................. Inside Front Cover Page of
Prospectus; Outside Back
Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges................ Prospectus Summary; Risk
Factors; Unaudited Pro
Forma Consolidated
Financial Information;
Selected Consolidated
Financial Data
4. Use of Proceeds.............................. Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price.............. Risk Factors; Underwriting
6. Dilution..................................... Risk Factors; Dilution
7. Selling Security Holders..................... Not applicable
8. Plan of Distribution......................... Outside Front Cover Page of
Prospectus; Underwriting
9. Description of Securities to be Registered... Outside Front Cover Page of
Prospectus; Prospectus
Summary; Description of
Capital Stock
10. Interests of Named Experts and Counsel....... Legal Matters; Experts
11. Information with Respect to the Company...... Outside Front Cover Page of
Prospectus; Prospectus
Summary; Risk Factors;
Refinancing; Use of
Proceeds; Dividend Policy;
Capitalization; Unaudited
Pro Forma Consolidated
Financial Information;
Selected Consolidated
Financial Data;
Management's Discussion
and Analysis of Financial
Condition and Results of
Operations; Business;
Management; Principal
Stockholders; Certain
Transactions; Armstrong
Agreements; Description of
Capital Stock; Description
of Certain Indebtedness;
Shares Eligible for Future
Sale; Available
Information; Index to
Consolidated Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities............................. Not applicable
</TABLE>
<PAGE>

EXPLANATORY NOTE

This Amendment No. 2 to Registration Statement contains two forms of
prospectus: (1) one to be used in connection with an underwritten public
offering in the United States and Canada (the "U.S. Prospectus"); and (2) one
to be used in a concurrent underwritten public offering outside the United
States and Canada (the "International Prospectus"). The U.S. Prospectus and
the International Prospectus are identical except for the front and back cover
pages. The form of U.S. Prospectus is included herein and is followed by the
alternate pages to be used in the International Prospectus. The alternate
pages for the International Prospectus included herein are each labeled
"International Prospectus Alternate Page." To the extent required, final forms
of each prospectus will be filed with the Securities and Exchange Commission
under Rule 424(b) under the Securities Act of 1933, as amended.
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED AUGUST 8, 1996
PROSPECTUS

7,000,000 SHARES

DAL-TILE INTERNATIONAL INC.

COMMON STOCK

--------

All of the shares of Common Stock, $.01 par value per share (the "Common
Stock"), offered hereby are being sold by Dal-Tile International Inc. Of the
7,000,000 shares of Common Stock offered hereby, a total of 5,600,000 shares
are being offered hereby for sale in the United States and Canada (the "U.S.
Offering") by the U.S. Underwriters (as defined) and a total of 1,400,000
shares are being offered by the Managers (as defined) in a concurrent
international offering outside the United States and Canada (the "International
Offering" and, together with the U.S. Offering, the "Offerings").

Prior to the Offerings, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $16.00 and $18.00 per share. See "Underwriting" for
information relating to the factors considered in determining the initial
public offering price.

Concurrently with the consummation of the Offerings, the Company will sell in
a private placement to a subsidiary of Armstrong World Industries, Inc., an
owner of Common Stock, approximately 588,235 shares of Common Stock, at a price
per share equal to the initial public offering price per share for the Common
Stock in the Offerings, for an aggregate purchase price of approximately
$10,000,000 (the "Private Placement").

The Common Stock has been approved for listing on the New York Stock
Exchange, subject to official notice of issuance, under the symbol "DTL."

--------

SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.

--------

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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- ------------------------------------------------------
Total(3) $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

(1) For information regarding indemnification of the U.S. Underwriters and
the Managers, see "Underwriting."

(2) Before deducting expenses estimated at $1,800,000 payable by the Company.

(3) The Company has granted the U.S. Underwriters a 30-day option to purchase
up to 1,050,000 additional shares of Common Stock solely to cover over-
allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions,
and Proceeds to Company will be $ , $ , and $ , respectively.

--------

The shares of Common Stock are being offered by the several U.S. Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1996, at the office of Smith Barney Inc., 333 West 34th Street, New
York, New York 10001.

--------
SMITH BARNEY INC.
DILLON, READ & CO. INC.
GOLDMAN, SACHS & CO.
MORGAN STANLEY & CO.
INCORPORATED

, 1996
<PAGE>

[PHOTOGRAPHS OF COMMERCIAL APPLICATIONS OF TILE]

Daltile, one of the U.S. ceramic tile industry's leading brands and long
recognized as a leader for high quality products, is introducing more new
fashion oriented products than ever before. Daltile markets a full offering of
residential and commercial products distributed primarily through Company-
operated sales centers.

[LOGO]
Daltile (TM)

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

The Company has a number of trademarks and trade names, including
Daltile(TM), American Olean(R) and Homesource(TM).

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

IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements and
related notes thereto appearing elsewhere in this Prospectus. Industry data
used throughout this Prospectus were obtained from industry publications and
internal Company estimates that the Company believes to be reliable, but has
not independently verified. Unless the context otherwise requires, all
references to "Dal-Tile" herein refer to Dal-Tile International Inc. and all
references to the "Company" herein refer collectively to Dal-Tile and its
subsidiaries, including the operations of American Olean Tile Company, Inc.
which was acquired on December 29, 1995. Except where otherwise indicated, the
information in this Prospectus, including all share and per share amounts, (i)
assumes the U.S. Underwriters' over-allotment option is not exercised, and (ii)
reflects the conversion of all shares of all classes of the Company's currently
outstanding capital stock into 45,404,472 shares of Common Stock (the "Common
Stock Conversion"). See "Description of Capital Stock--Common Stock Conversion"
and "Underwriting."

THE COMPANY

The Company believes that it is the largest manufacturer, distributor and
marketer of ceramic tile in North America, and one of the largest in the world.
The Company produces and distributes a broad line of high quality wall tile and
floor tile products for both residential and commercial applications, marketed
primarily under its Daltile and American Olean brand names. The Company's
strengths include (i) the U.S. ceramic tile industry's broadest distribution
system, consisting of Company-operated sales centers, independent distributors
and home center retailers, (ii) leading brand names, (iii) North America's
largest ceramic tile manufacturing capacity, with manufacturing plants in the
United States and Mexico, and (iv) the U.S. ceramic tile industry's most
comprehensive product offering, including glazed and unglazed ceramic tile,
stone products and installation materials and tools. From 1985 through 1995,
the Company's net sales have increased from $169.1 million to $474.8 million,
exclusive of the AO Acquisition described below.

On December 29, 1995, the Company acquired American Olean Tile Company, Inc.
("AO") and certain related assets of the ceramic tile business of Armstrong
World Industries, Inc. ("AWI") (the "AO Acquisition"). As a result of the AO
Acquisition, the Company has increased its presence in all ceramic tile
applications and distribution channels and expects to achieve significant cost
savings. The Company believes, inclusive of AO, that it had an approximately
27% unit share of the 1.32 billion square feet of ceramic tile sold in the
United States in 1995, which was significantly greater than the Company's
nearest competitor. Pro forma for the AO Acquisition, the Company's net sales
and operating income for the fiscal year ended December 31, 1995 were $724.4
million and $117.2 million, respectively. See "Unaudited Pro Forma Consolidated
Financial Information."

INDUSTRY OVERVIEW

Since 1991, U.S. ceramic tile sales (by unit volume) have increased from
approximately 916 million square feet to approximately 1.32 billion square feet
in 1995. The Company believes that ceramic tile consumption has increased due
to (i) increasing usage of tile, particularly floor tile, in remodeling and
redecorating applications, (ii) the development of new uses for tile such as
countertops and back splashes, (iii) increasing usage of tile in areas of the
home such as dens, patios, kitchens and foyers, and (iv) increasing usage of
tile in commercial applications such as restaurants, schools, hospitals,
hotels, airports and retail establishments. The Company expects these trends to
continue due to increasing consumer awareness of ceramic tile's aesthetic and
utilitarian advantages, as well as ceramic tile's relatively low cost over its
useful life.

U.S. ceramic tile unit sales increased at a compound annual rate of 9.5% from
1991 to 1995. During the same period, carpet, resilient flooring and wood
flooring unit sales increased 6.2%, 4.4% and 8.2%, respectively.

3
<PAGE>

Nevertheless, ceramic tile comprised only a small portion of the approximately
23 billion square feet of U.S. floor covering sales in 1995. In addition,
despite a 39% increase in U.S. per capita ceramic tile consumption from 1991 to
1995, the United States continues to lag significantly behind the per capita
consumption in many Western European countries, which the Company believes is
an indication of growth potential in the U.S. ceramic tile business.

COMPANY ATTRIBUTES AND OPERATING STRATEGIES

The Company believes that it is well positioned to capitalize on the growing
demand for ceramic tile. The following attributes and operating strategies have
enabled the Company to achieve its current market presence and should serve as
a basis for the Company's future growth and profitability:

. INDUSTRY'S BROADEST DISTRIBUTION NETWORK. The Company's products are sold
through (i) Company-operated sales centers, (ii) independent distributors,
and (iii) home center retailers. The Company's sales center network consists
of approximately 235 Company-operated sales centers (after giving effect to
the anticipated closing of redundant sales centers in connection with the AO
Acquisition) in 44 states, which is the largest wholesale distribution
network in the U.S. ceramic tile industry, serving customers in all 50
states. The sales centers function as a "one-stop" source for ceramic tile,
stone products and installation materials and tools ("allied products"),
serving tile contractors, architects, design professionals, builders and
developers. As a result of the AO Acquisition, the Company also markets its
products to over 100 independent distributor locations for resale to retail
outlets. In addition, the Company believes that it is one of the U.S. ceramic
tile industry's largest suppliers to the do-it-yourself ("DIY") and buy-it-
yourself ("BIY") markets by supplying home center retailers, including The
Home Depot, Lowe's, Menards and Payless Cashways. The home center retailer
channel has provided the Company with new sources of sales over the past five
years. Sales to both independent distributors and home center retailers are
expected to present significant growth opportunities for the Company.

. LEADING BRAND NAMES MARKETED THROUGH TARGETED DISTRIBUTION CHANNELS. The
Company believes that it has two of the leading brand names in the U.S.
ceramic tile industry--Daltile and American Olean--and has recently
established the new Homesource brand name. The Company's strategy is to
independently market each of its brands to create brand differentiation
within its respective customer segments. Company-operated sales centers
principally distribute the Daltile brand, while the American Olean brand is
principally marketed through independent distributors. In addition to
distributing the Daltile and American Olean brands, home center retailers
distribute the newly established home center brand--Homesource.

. NEW PRODUCT DEVELOPMENT DRIVEN BY TECHNOLOGICAL INNOVATION. The Company
believes that, due to technological innovations, the U.S. ceramic tile
industry is increasing its fashion orientation, particularly in floor tile.
The Company has developed capabilities to produce fashionable and innovative
tile products and to simulate natural products such as stone, marble and
wood. In order to capitalize on the increasing demand for, and higher margins
generated by, fashion-oriented tile products, the Company has (i) increased
the number of new floor tile product introductions, (ii) focused on
shortening product introduction cycle time, (iii) expanded its relationships
with leading glaze and equipment manufacturers, (iv) focused on evolving
consumer preferences to deliver products consistent with current design
trends, and (v) increased its investment in research and development to
further develop new products and manufacturing capabilities.

4
<PAGE>

of its competitors, including foreign ceramic tile manufacturers. Management
believes that the Company's comprehensive product line, including its trim
and angle pieces and fashion-oriented tile products, results in an average
selling price for Company-produced tile that is higher than the industry
average. The Company also sells products manufactured by third parties for
resale, including ceramic tile and allied products, which constituted
approximately 30% of net sales in 1995, inclusive of AO. The Company intends
to increase the amount of Company-manufactured products as a percentage of
net sales, which products historically have generated higher margins than
products purchased for resale.

. LOW COST MANUFACTURING. The Company has annual manufacturing capacity of
approximately 321 million square feet, the largest ceramic tile manufacturing
capacity in North America. The Company's lowest cost manufacturing facility
is located in Monterrey, Mexico and represents approximately 40% of the
Company's manufacturing capacity. In addition, as a result of the AO
Acquisition, the Company has the contractual right to be supplied with an
additional 24 million square feet of floor tile annually by a Mexican joint
venture. In 1995, the Company initiated full production at its newest
facility, a highly automated wall tile plant in El Paso, Texas. Since 1991,
the Company (exclusive of AO) has invested approximately $90 million in
capital expenditures, including approximately $63 million in new plants and
state-of-the-art equipment to increase manufacturing capacity, improve
efficiency and develop new manufacturing capabilities. Over the next 18
months, the Company intends to further increase capacity at its existing
floor tile factories in the United States and Mexico. The Company believes
that additional manufacturing investments will continue to generate
attractive rates of return due to the Company's economies of scale in
manufacturing and its broad distribution network, thereby allowing the
Company to spread fixed costs over a wider sales base.

SIGNIFICANT BENEFITS RESULTING FROM THE AO ACQUISITION

In addition to providing the Company with one of the U.S. ceramic tile
industry's leading brands and product lines and a significantly increased
presence in the independent distributor channel, the AO Acquisition provides
the Company with the opportunity to achieve significant cost savings and sales
diversification.

. COST SAVINGS. The Company expects to achieve significant cost savings as a
result of the AO Acquisition by (i) consolidating manufacturing facilities,
(ii) restructuring its sales organizations, and (iii) eliminating duplicative
administration functions. The Company believes that the operational changes
implemented to date will enable it to achieve annual cost savings of
approximately $34.9 million (of which approximately $26.8 million is expected
to be realized in 1996, and the full amount is expected to be realized
beginning in 1997). These cost savings include $10.1 million attributable to
reductions in depreciation and amortization expense pursuant to purchase
accounting. In connection with these operational changes, the Company has
recorded non-recurring pre-tax merger integration charges of $9.0 million in
the six months ended June 30, 1996 and $22.4 million in the fiscal year ended
December 31, 1995. In addition to the operational changes implemented to
date, the Company intends to implement additional cost saving initiatives,
which the Company believes will enable it to realize significant additional
cost savings.

THE ANTICIPATED COST SAVINGS DESCRIBED HEREIN ARE BASED ON ESTIMATES AND
ASSUMPTIONS MADE BY THE COMPANY THAT, ALTHOUGH CONSIDERED REASONABLE BY THE
COMPANY, ARE SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND OTHER
UNCERTAINTIES. THERE CAN BE NO ASSURANCE THAT SUCH COST SAVINGS WILL BE
ACHIEVED OR THAT THE BENEFITS OF SUCH COST SAVINGS WILL NOT BE MITIGATED BY
OTHER FACTORS AFFECTING THE COMPANY'S PERFORMANCE. SEE "RISK FACTORS--RISKS
RELATED TO REALIZING BENEFITS FROM AO ACQUISITION."

. SALES DIVERSIFICATION. As a result of the AO Acquisition, the Company is
diversified both in its business mix and geographical presence. The Company
believes that its sales are relatively evenly distributed between residential
and commercial applications. In addition, AO's significant presence in the
northeast and midwest regions of the United States complements the Company's
long-standing presence in the west and sunbelt regions of the United States.

5
<PAGE>

BACKGROUND

The Company commenced operations in 1947 as the Dallas Ceramic Company and
established its first wall tile manufacturing facility and corporate
headquarters in Dallas, Texas. On January 9, 1990, AEA Investors Inc., a
privately held corporation headquartered in New York ("AEA Investors"),
arranged for Dal-Tile to acquire (the "AEA Acquisition") all the outstanding
capital stock of Dal-Tile Corporation, its affiliated companies and certain
related assets. After giving effect to the Offerings and the Private Placement,
DTI Investors LLC ("DTI Investors"), whose members include AEA Investors,
certain current and former management employees of AEA Investors, AEA
Investors' investor-stockholders, and certain members of Company management
(the "DTI Investors Group"), will beneficially own 54.0% of the outstanding
Common Stock (52.9%, if the U.S. Underwriters' over-allotment option is
exercised in full).

As part of the AO Acquisition, which was completed on December 29, 1995, AWI
received 37% of Dal-Tile's then outstanding capital stock and paid the Company
cash in the amount of $27.6 million. After giving effect to the Offerings and
the Private Placement, Armstrong Enterprises, Inc., a wholly owned subsidiary
of AWI ("AEI"), will beneficially own 32.8% of the outstanding Common Stock
(32.2%, if the U.S. Underwriters' over-allotment option is exercised in full).

Dal-Tile was incorporated under Delaware law in 1987. The principal executive
offices of the Company are located at 7834 Hawn Freeway, Dallas, Texas 75217.
Its telephone number at that address is (214) 398-1411.

ARMSTRONG AGREEMENTS

FORWARD-LOOKING STATEMENTS

This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended, and is
subject to the safe-harbor created by such sections. The Company's actual
results may differ significantly from the results discussed in such forward-
looking statements. Certain factors that might cause such differences include,
but are not limited to, the "Risk Factors" described herein.

RISK FACTORS

See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Common Stock.

6
<PAGE>

THE OFFERINGS

Common Stock offered in the
Offerings:
U.S. Offering............. 5,600,000 shares (1)
International Offering.... 1,400,000 shares
------
Total................... 7,000,000 shares (1)

Common Stock to be sold in
the Private Placement......
588,235 shares

Common Stock to be
outstanding after the
Offerings and the Private
Placement..................
52,992,707 shares (1)(2)

Use of proceeds............. The aggregate amount of the estimated net
proceeds from the Offerings and the Private
Placement will be used, together with amounts
borrowed under the New Bank Facilities (as
defined), to repay certain outstanding
indebtedness in connection with the Refinancing
(as defined) and to pay related prepayment
premiums and fees and expenses.

As part of the Refinancing, Dal-Tile's wholly
owned subsidiary, Dal-Tile Group Inc. ("Dal-Tile
Group"), has entered into the Commitment Letter
(as defined) pursuant to which certain lenders
have severally agreed to provide the New Bank
Facilities pursuant to the New Bank Credit
Agreement (as defined). After the Refinancing,
the Company will have remaining availability
under the New Revolving Credit Facility (as
defined), which may be used for general corporate
purposes, including capital expenditures.

The entering into of the New Bank Credit
Agreement is a condition to the closing of the
Offerings. The Refinancing is expected to be
completed simultaneously with or shortly after
the closing of the Offerings and the Private
Placement. See "Refinancing," "Use of Proceeds,"
"Capitalization," "Armstrong Agreements" and
"Description of Certain Indebtedness."

New York Stock Exchange
symbol..................... The Common Stock has been approved for listing on
the New York Stock Exchange, subject to official
notice of issuance, under the symbol "DTL."
- --------

(1) Does not include 1,050,000 shares of Common Stock that are subject to an
over-allotment option granted by Dal-Tile to the U.S. Underwriters. See
"Underwriting."

(2) Excludes 4,204,747 shares of Common Stock reserved for issuance upon the
exercise of outstanding stock options granted to certain employees of the
Company pursuant to the Company's stock option plans. See "Management--
Executive Compensation," "Management--Stock Option Plan" and "Description
of Capital Stock--Common Stock Conversion."

7
<PAGE>

SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA

The following table presents summary consolidated historical, pro forma and
as adjusted financial data at the dates and for the periods indicated.
Operating results for the six months ended June 30, 1996 are not necessarily
indicative of the results that may be expected for the full year ending
December 31, 1996. The summary consolidated pro forma and as adjusted financial
data are provided for informational purposes only and do not purport to be
indicative of the results which actually would have been obtained had the AO
Acquisition, the Refinancing, or both, as the case may be, been completed on
the dates indicated and which may be expected to occur in the future. The
following data should be read in conjunction with "Selected Consolidated
Financial Data," "Unaudited Pro Forma Consolidated Financial Information,"
"Risk Factors--Risks Related to Realizing Benefits from AO Acquisition,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and related
notes thereto included elsewhere in this Prospectus (the "Consolidated
Financial Statements").

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- -------------------
PRO FORMA
1993 1994 1995 1995(1) 1995 1996(2)
--------- -------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.............. $ 440,573 $506,309 $474,812 $724,446 $235,955 $ 351,523
Cost of goods sold..... 239,379 268,272 225,364 370,378 113,298 183,455
--------- -------- -------- -------- -------- ---------
Gross profit........... 201,194 238,037 249,448 354,068 122,657 168,068
Operating expenses (ex-
cluding non-recurring
charges).............. 157,314 169,720 172,493 236,832 86,700 122,916
Non-recurring charges:
Provision for merger
integration charges... -- -- 22,430(3) -- -- 9,000(4)
Provision for special
charges............... 53,233(5) -- -- -- -- --
Write-down of goodwill. 214,235(6) -- -- -- -- --
--------- -------- -------- -------- -------- ---------
Operating income
(loss)................ (223,588) 68,317 54,525 117,236 35,957 36,152
Interest expense (net). 46,229 52,139 54,203 54,203 26,419 26,293
Other (income) expense. 1,088 (1,341) (2,994) (2,994) (2,023) 491
--------- -------- -------- -------- -------- ---------
Income (loss) before
income taxes.......... (270,905) 17,519 3,316 66,027 11,561 9,368
Income tax provision
(benefit)............. (3,225) 10,614 1,176 23,413 6,254 3,549
--------- -------- -------- -------- -------- ---------
Net income (loss)...... $(267,680) $ 6,905 $ 2,140 $ 42,614 $ 5,307 $ 5,819
========= ======== ======== ======== ======== =========
AS ADJUSTED OPERATING
DATA:
Net income as adjusted. $ 61,148(7) $ 19,969(8)
======== =========
Net income per share as
adjusted (9).......... $ 1.11 $ 0.36
======== =========
Weighted average shares
outstanding as ad-
justed (9)............ 54,935 54,881
OTHER OPERATING DATA:
Net sales (United
States and Canada).... $ 394,044 $457,715 $451,800 $701,434 $222,760 $ 340,642
Net sales (Mexico)..... $ 46,529 $ 48,594 $ 23,012 $ 23,012 $ 13,195 $ 10,881
Gross margin........... 45.7% 47.0% 52.5% 48.9% 52.0% 47.8%
Operating income before
non-recurring charges
(10).................. $ 43,880 $ 68,317 $ 76,955 $117,236 $ 35,957 $ 45,152
Operating margin before
non-recurring charges
...................... 10.0% 13.5% 16.2% 16.2% 15.2% 12.8%
Depreciation and amor-
tization.............. $ 22,019 $ 17,020 $ 17,164 $ 20,962 $ 8,599 $ 11,884
Capital expenditures... $ 17,066 $ 14,160 $ 29,392 $ 38,964 $ 16,376 $ 11,188
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED(11)
-------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... $150,070 $194,384
Total assets.......................................... 635,498 613,206
Total debt............................................ 521,217 420,497
Stockholders' equity.................................. 14,812 114,099
</TABLE>

(footnotes appear on following page)

8
<PAGE>

- --------

(1) Pro forma operating data for the year ended December 31, 1995 have been
prepared to give effect to the AO Acquisition (including the benefits of
certain cost savings initiatives) as if such transaction had occurred on
January 1, 1995, and the elimination of a pre-tax $22.4 million merger
integration charge recorded by the Company as a result of the AO
Acquisition. See "Unaudited Pro Forma Consolidated Financial Information"
and "Risk Factors--Risks Related to Realizing Benefits from AO
Acquisition."

(2) Operating data for the six months ended June 30, 1996 include the results
of operations of AO and certain related assets of the ceramic tile
business of AWI, but do not give full effect to the anticipated benefits
of certain cost savings initiatives in connection with the AO Acquisition
which have been implemented to date.
(3) In the fourth quarter of 1995, the Company recorded a pre-tax $22.4
million merger integration charge for the revaluation of certain assets in
connection with the AO Acquisition. See Note 6 to the Consolidated
Financial Statements.
(4) In the first quarter of 1996, the Company recorded a pre-tax $9.0 million
merger integration charge for the closing of duplicative sales centers and
distribution centers, the closing of certain manufacturing facilities and
severance costs. See Note 7 to the Consolidated Financial Statements.
(5) In the fourth quarter of 1993, the Company established provisions for a
distribution enhancement program, revaluation of certain assets and
severance costs for retiring employees. As a result, the Company recorded
a pre-tax $53.2 million special charge in the fourth quarter of 1993. See
Note 8 to the Consolidated Financial Statements.
(6) In connection with a review of its operations during the fourth quarter of
1993, the Company wrote off $214.2 million of goodwill related to the
following business units: Dal-Tile of Mexico, S.A. de C.V., formerly
Ceramica Regiomontona, S.A. de C.V. ("Dal-Tile Mexico"), Materiales
Ceramicos, S.A. de C.V. ("Materiales"), Dal-Minerals Company ("Dal-
Minerals") and R&M Supplies Inc. ("R&M"). See Note 9 to the Consolidated
Financial Statements.

(7) Net income as adjusted for the year ended December 31, 1995 has been
prepared to give effect to the AO Acquisition (including the benefits of
certain cost savings initiatives) and the Refinancing as if such
transactions had occurred on January 1, 1995, and the elimination of a
pre-tax $22.4 million merger integration charge recorded by the Company as
a result of the AO Acquisition. See "Refinancing," "Use of Proceeds,"
"Capitalization," "Unaudited Pro Forma Consolidated Financial Information"
and "Risk Factors--Risks Related to Realizing Benefits from AO
Acquisition."

(8) Net income as adjusted for the six months ended June 30, 1996 has been
prepared to give effect to the Refinancing as if such transaction had
occurred on January 1, 1996, and the elimination of a pre-tax $9.0 million
merger integration charge recorded by the Company as a result of the AO
Acquisition. See "Refinancing," "Use of Proceeds," "Capitalization" and
"Unaudited Pro Forma Consolidated Financial Information."

(9) Net income per share as adjusted data are based on net income as adjusted
and the weighted average number of shares of Common Stock outstanding
during the period after giving effect to the Refinancing and the Common
Stock Conversion. See "Unaudited Pro Forma Consolidated Financial
Information," "Refinancing" and "Description of Capital Stock--Common
Stock Conversion."
(10) Operating income before non-recurring charges represents, for any period,
the sum of operating income (loss) plus non-recurring charges. The Company
believes that operating income before non-recurring charges provides
useful information regarding the Company's financial performance.
Operating income before non-recurring charges should not be considered in
isolation or as an alternative to net income as an indicator of the
Company's operating performance, or as an alternative to the Company's
cash flow from operating activities as a measure of liquidity.

(11) As adjusted balance sheet data have been prepared to give effect to the
Refinancing as if it had occurred on June 30, 1996. See "Refinancing,"
"Use of Proceeds" and "Capitalization." In connection with the
Refinancing, the Company will record an extraordinary charge estimated to
be $20.7 million, net of tax ($0.38 per share of Common Stock), for the
write off of existing deferred financing fees, the Termination Fee (as
defined), and prepayment premiums on certain debt to be repaid. This
charge will be recorded upon completion of the Refinancing, which is
expected to occur in the Company's third quarter of 1996. See "Unaudited
Pro Forma Consolidated Financial Information."

9
<PAGE>

RISK FACTORS

In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors in
evaluating an investment in the shares of Common Stock offered hereby.

RISKS RELATED TO REALIZING BENEFITS FROM AO ACQUISITION

The Company has taken and plans to take certain measures which are expected
to result in significant cost savings in connection with the AO Acquisition,
including (i) consolidating manufacturing facilities, (ii) restructuring its
sales organizations, and (iii) eliminating duplicative administrative
functions. There can be no assurance that the Company will achieve the cost
savings from the AO Acquisition that management expects or that such cost
savings will occur within the time frame contemplated. Realization of such
cost savings also could be affected by a number of factors beyond the
Company's control, such as general economic conditions, increased operating
costs, potential revenue instability arising from the cost savings initiatives
or otherwise, labor relations, the response of competitors or customers,
regulatory considerations and delays in implementation. In addition, certain
of the benefits from the AO Acquisition are dependent upon the Company taking
certain future actions. The Company has recorded non-recurring merger
integration charges of $22.4 million in the fourth quarter of the year ended
December 31, 1995, and of $9.0 million in the six months ended June 30, 1996.
See Notes 6 and 7 to the Consolidated Financial Statements. The Company could
incur additional non-recurring merger integration charges which, depending on
the actions taken and the accounting period, could be material. The allocation
of the purchase price relating to the AO Acquisition also is subject to final
revision based upon additional information concerning asset and liability
valuations. In addition, there can be no assurance that net sales and
profitability historically attributable to AO and the Company will be
representative of the Company's performance during the completion of, and
following the integration of, their respective businesses.

The Company manufactured inventory at certain AO plants prior to their
closure at the end of the first quarter of 1996. This higher cost inventory,
relative to inventory produced at the remaining plants, has negatively
affected the Company's gross margin in the second quarter of 1996 and will
negatively affect the Company's gross margin in the third quarter of 1996 as
it is sold.

CYCLICAL BUSINESS

The U.S ceramic tile industry is highly dependent on residential and
commercial construction activity--new construction as well as remodeling--
which is cyclical in nature and is significantly affected by changes in
general and local economic conditions. These include interest rates, housing
demand, employment levels, financing availability, commercial rental vacancy
rates and consumer confidence. A prolonged recession in any of the residential
or commercial construction industries (new construction as well as remodeling)
could result in a significant decrease in the Company's operating performance.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."

LEVERAGE

Although the Offerings and the Private Placement will decrease the Company's
indebtedness and interest expense, the Company will continue to be highly
leveraged. At June 30, 1996, on a pro forma basis after giving effect to the
Refinancing, the Company's consolidated indebtedness would have been $420.5
million and its stockholders' equity would have been $114.1 million. On such a
pro forma basis, this indebtedness would have consisted of (i) the $275.0
million New Term Loan (as defined), (ii) $128.5 million of borrowings under
the New Revolving Credit Facility, and (iii) $17.0 million of other long-term
indebtedness. The Company may incur additional indebtedness in the future,
subject to certain limitations contained in the instruments governing its
indebtedness. See "Refinancing," "Use of Proceeds," "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Certain
Indebtedness."

10
<PAGE>

The New Bank Credit Agreement will impose operating and financial
restrictions on the Company. Among other restrictions, the New Bank Credit
Agreement provides that, on a rolling four-quarter basis, earnings before
interest, taxes, depreciation and amortization minus capital expenditures must
be at least 1.50 times Total Interest Expense (as defined) at December 31,
1996, increasing to 2.00 times at December 31, 1997, 2.50 times at December
31, 1998 and 3.00 times at December 31, 2001 and thereafter. In addition, the
New Bank Credit Agreement provides for (i) a minimum Net Worth (as defined) of
$100 million plus 50% of Net Income (as defined), (ii) a minimum ratio of
current assets at 1.50 times current liabilities, and (iii) maximum capital
expenditures, in amounts increasing from $65 million at December 31, 1996 to
$90 million at December 31, 2002 (such covenant to be eliminated if, for any
period of four consecutive fiscal quarters, the ratio of earnings before
interest, taxes, depreciation and amortization minus capital expenditures is
greater than 5.00 times Total Interest Expense). There can be no assurance
that the Company's existing cash balances and cash flow from operations
together with borrowings available under the New Bank Credit Agreement will be
sufficient to meet all of its debt service requirements and to fund its
capital expenditure requirements for the foreseeable future. See "Description
of Certain Indebtedness--New Bank Credit Agreement."

The indenture (the "Zero Coupon Note Indenture") under which Dal-Tile's
Senior Secured Zero Coupon Notes Due July 15, 1998 (the "Zero Coupon Notes")
were issued contains certain restrictions as to the incurrence of indebtedness
by Dal-Tile and its subsidiaries. Under the Zero Coupon Note Indenture, Dal-
Tile and its Restricted Subsidiaries (as defined) may not (subject to certain
exceptions) incur any Debt (as defined) unless, immediately after giving
effect to the incurrence of such Debt and the receipt and application of the
proceeds thereof, the Consolidated Cash Flow Ratio (as defined) for the
preceding four full fiscal quarters determined on a pro forma basis as if such
Debt had been incurred and the proceeds thereof applied at the beginning of
such four fiscal quarters, would be greater than 2.00 to 1. In addition,
pursuant to a pledge agreement (the "Pledge Agreement"), the Zero Coupon Notes
are secured by a pledge of all the outstanding capital stock of Dal-Tile
Group. See "Description of Certain Indebtedness--Existing Indebtedness to be
Refinanced in the Refinancing--The Zero Coupon Notes."

In connection with the Refinancing, Dal-Tile is soliciting consents from the
holders of at least a majority in principal amount of the outstanding Zero
Coupon Notes to effect certain amendments (the "Proposed Amendments") to the
Zero Coupon Note Indenture, including the elimination of substantially all of
the restrictive covenants and the termination of the Pledge Agreement. As of
July 31, 1996, Dal-Tile had received the requisite number of consents
necessary to effect the Proposed Amendments, and on August 1, 1996, Dal-Tile
and Citibank, N.A., as trustee under the Zero Coupon Note Indenture, executed
the first supplemental indenture to the Zero Coupon Note Indenture (the
"Supplemental Indenture") with respect to the Proposed Amendments. The
Proposed Amendments will not become operative unless the Zero Coupon Tender
Offer (as defined) is consummated. See "Refinancing--Tender Offer and
Solicitation."

The degree to which the Company is leveraged has important consequences to
holders of Common Stock, including the following: (i) a substantial portion of
the Company's cash flow from operations will be required to be dedicated to
the payment of the Company's debt service obligations; (ii) the Company's high
degree of leverage will make it more sensitive to a downturn in general
economic conditions; (iii) the Company's substantial indebtedness may limit
its capacity to respond to market conditions (including its ability to satisfy
capital expenditure requirements) or to meet its contractual or financial
obligations; (iv) pursuant to the instruments governing its indebtedness, the
Company is subject to restrictive financial and operating covenants that could
limit its ability to conduct its business; and (v) the Company may be more
highly leveraged than other companies with which it competes, which may place
it at a competitive disadvantage. In addition, if and to the extent the
Company requires additional financing in the future for working capital,
capital expenditures or other purposes, the Company's leverage may impair its
ability to obtain such additional financing.

To the extent that the Company's existing resources and future earnings are
insufficient to fund the Company's activities or to repay indebtedness
(including annual amortization payments under the New Term Loan), the Company
may need to raise additional funds through public or private financings. If
additional funds

11
<PAGE>

are raised through the issuance of equity securities, the percentage ownership
of the Company's stockholders at that time would be diluted. Further, such
equity securities may have rights, preferences or privileges senior to those
of the Common Stock. See "Description of Capital Stock."

COMPETITIVE INDUSTRY

The Company's products are sold in a highly competitive marketplace. In the
floor and wall covering businesses, the Company competes with vendors of
carpet, resilient flooring, wood flooring, laminates, marble, porcelain, wall
paper, paint and other products. With regard to ceramic tile sales, the
Company faces extensive competition from domestic and foreign manufacturers
and independent distributors. Although the Company believes that it is the
largest manufacturer, distributor and marketer of ceramic tile in North
America, certain of its U.S. competitors are subsidiaries of publicly held
companies that may have greater resources and access to capital than the
Company. In addition, some of the Company's foreign competitors may be larger
and have greater resources and access to capital than the Company. In 1995,
approximately 59% of U.S. ceramic tile sales (by unit volume) consisted of
imports, including the approximately 10% of ceramic tile sold in the United
States that was manufactured by the Company in Mexico. In general, the
proportion of U.S. ceramic tile sales attributable to imports has increased in
recent years. Consequently, changes in exchange rates could affect the
Company's position with respect to its foreign competitors. See "--Impact of
Mexican Operations; Currency Fluctuations," "Ceramic Tile Industry" and
"Business--Competition."

IMPACT OF MEXICAN OPERATIONS; CURRENCY FLUCTUATIONS

Approximately 40% of the Company's manufacturing capacity is owned and
operated by subsidiaries in Mexico (exclusive of manufacturing capacity
available from the Company's Mexican joint venture). Accordingly, an event
which has a material adverse impact on the Company's Mexican operations may
have a material adverse impact on the operations of the Company as a whole.
The marketing, manufacturing and regulatory environments in Mexico differ
somewhat from those in the United States.

The Company's Mexican facility is primarily a provider of ceramic tile to
the Company's U.S. operations and in addition sells ceramic tile in Mexico. In
the six months ended June 30, 1996, sales in Mexico represented 3% of the
Company's consolidated net sales. The Company's sales in Mexico are peso-
denominated and primarily all of the Mexican facility's cost of sales and
operating expenses are peso-denominated. In the six months ended June 30,
1996, peso-denominated cost of sales and operating expenses represented 10% of
the Company's consolidated cost of sales and operating expenses. The Company's
exposure to exchange rate changes is favorable to operating results when the
peso devalues against the U.S. dollar, since peso costs exceed peso revenues.
As the peso appreciates against the U.S. dollar, the effect is unfavorable to
the Company's operating results. In addition to exchange rate changes on
operating results, foreign currency transaction gains or losses are recognized
in other income and expense. During the six months ended June 30, 1996, the
Company recorded a transaction loss of approximately $0.5 million. Except for
peso transactions, management utilizes foreign currency forward contracts to
offset exposure to exchange rate changes, although the number and amount of
such contracts are not significant. Since the exposure to the peso exchange
rate change is favorable when the peso devalues against the U.S. dollar and
management does not expect the peso to appreciate significantly against the
U.S. dollar in the near term, management has not entered into peso currency
forward contracts. In addition, non-cash increases or reductions to
stockholders' equity may occur as a result of translation of foreign assets
and liabilities into dollars.

The Mexican peso has been subject to large devaluations in the past, and may
be subject to significant fluctuations in the future. During 1994, the Mexican
peso devalued 37% and during 1995, the peso devalued 36%. These devaluations
resulted in a reduction of stockholders' equity of approximately $33.8 million
and $22.3 million in 1994 and 1995, respectively, as a result of translating
peso-denominated assets and liabilities into dollars. Any future devaluation
of the peso against the dollar may affect the Company's results of operations
or financial condition and may affect the value of a holder's investment in
the Common Stock.

Over the last few years, a program of reform has begun to modify the nature
of the Mexican government's role in the Mexican economy. Nevertheless, the
Mexican government continues to exercise significant influence over many
aspects of the Mexican economy. Accordingly, Mexican government actions
concerning the economy

12
<PAGE>

could have significant effects on private sector entities, including the
Company. The Company cannot assure that future Mexican governmental actions or
future developments in the Mexican economy, including a continued slowdown of
the Mexican economy or the development of any social unrest, over which the
Company has no control, will not impair the Company's operations or financial
condition or adversely affect the market price of the Common Stock.

TARIFFS AND CUSTOMS DUTIES

The United States is a party to the General Agreement on Tariffs and Trade
("GATT"). Under GATT, the United States currently imposes import duties on
ceramic tile from non-North American countries at 17%, to be reduced ratably
to 8 1/2% by 2005. Accordingly, GATT may stimulate competition from non-North
American manufacturers who now export, or who may seek to export, ceramic tile
to the United States. The Company cannot predict with certainty the effect
that GATT may have on the Company's operations.

In 1993, Mexico, the United States and Canada approved the North American
Free Trade Agreement ("NAFTA"). NAFTA has, among other things, removed and
will continue to remove, over a transition period, most normal customs duties
imposed on goods traded among the three countries. In addition, NAFTA will
remove or limit many investment restrictions, liberalize trade in services,
provide a specialized means for settlement of, and remedies for, trade
disputes arising under NAFTA, and will result in new laws and regulations to
further these goals. Although NAFTA lowers the tariffs imposed on the
Company's ceramic tile manufactured in Mexico and sold in the United States,
it also may stimulate competition in the United States and Canada from
manufacturers located in Mexico. The United States currently imposes import
duties on ceramic tile from Mexico of 13%, although these duties on imports
from Mexico are being phased out ratably under NAFTA over a 13-year period. It
is uncertain what ultimate effect NAFTA will have on the Company's results of
operations.

CONTROL BY CERTAIN STOCKHOLDERS

After giving effect to the Offerings and the Private Placement, DTI
Investors, whose members include the DTI Investors Group, will beneficially
own 54.0% of the outstanding shares of Common Stock (52.9%, if the U.S.
Underwriters' over-allotment option is exercised in full), and AEI will
beneficially own 32.8% of the outstanding shares of Common Stock (32.2%, if
the U.S. Underwriters' over-allotment option is exercised in full). AEA
Investors is the managing member of DTI Investors and, as such, has the power
to control the business of DTI Investors, including the power to vote shares
of Common Stock owned by DTI Investors. Pursuant to a Shareholders Agreement
dated as of December 29, 1995, as amended (the "Shareholders Agreement"),
among Dal-Tile, AEA Investors, DTI Investors, AWI, AEI and Armstrong Cork
Finance Corporation, each of DTI Investors and AWI is obligated to vote shares
of Common Stock owned or controlled by it for (i) six directors designated by
DTI Investors, (ii) three directors designated by AWI, and (iii) the chief
executive officer of Dal-Tile. Acting pursuant to the Shareholders Agreement,
DTI Investors and AWI have sufficient voting power to control the election of
directors. Pursuant to the Shareholders Agreement, the Company is prohibited
from engaging in, without the approval of a majority of the Board of Directors
(including at least one AWI designee), certain dispositions to third parties
involving more than 20% of the total assets of the Company on a cumulative
basis, excluding, however, such dispositions in the ordinary course of
business, and excluding the sale of all or substantially all of the stock or
assets of the Company. DTI Investors has sufficient voting power to decide the
results of other matters submitted to a vote of stockholders. Furthermore,
such control could preclude any unsolicited acquisition of the Company and,
consequently, adversely affect the market price of the Common Stock.

DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS

Following the completion of the Offerings and the Private Placement, the
Company intends to retain any future earnings for use in its business.
Additionally, payment of dividends by Dal-Tile on the Common Stock currently
is restricted under the terms of the Zero Coupon Note Indenture. As a result,
Dal-Tile does not anticipate paying any cash dividends in the foreseeable
future.

13
<PAGE>

Dal-Tile is a holding company with no operations or significant assets other
than its investment in its wholly owned subsidiary, Dal-Tile Group, and its
49.99% interest in Recumbriementos Interceramic, S.A. de C.V. ("RISA"), a
Mexican joint venture with Internacional de Ceramica, S.A. de C.V.
("Interceramic"). Dal-Tile Group is a separate and distinct legal entity and
has no obligation, contingent or otherwise, to make funds available to Dal-
Tile, whether in the form of loans, dividends or other cash distributions. The
Existing Bank Credit Agreement limits, and the New Bank Credit Agreement will
limit, dividends, loans and other cash distributions from Dal-Tile Group to
Dal-Tile, so that profits generated by Dal-Tile Group may not be available to
Dal-Tile to pay cash dividends or repay indebtedness or otherwise. In light of
these limitations, Dal-Tile Group will be prohibited from making such
dividends, loans and other cash distributions and Dal-Tile does not believe
that Dal-Tile Group will be able to make such dividends, loans and other cash
distributions in the foreseeable future. If the need by Dal-Tile for cash
distributions from Dal-Tile Group should arise in the future (for example, to
repay indebtedness), there can be no assurance that Dal-Tile Group will be
permitted to make such cash distributions. See "Dividend Policy" and
"Description of Certain Indebtedness."

FORWARD-LOOKING STATEMENTS

This Prospectus contains certain forward-looking statements concerning the
Company's operations, economic performance and financial condition, including,
in particular, the AO Acquisition, the integration of AO's operations into the
Company's existing operations and the Company's expectations of its future
performance on an operating basis as a result of the AO Acquisition. Such
statements are subject to various risks and uncertainties. Actual results
could differ materially from those currently anticipated due to a number of
factors, including those identified under this "Risk Factors" section and
elsewhere in this Prospectus.

REGULATIONS AND ENVIRONMENTAL CONSIDERATIONS

The Company's operations are subject to various U.S. and Mexican
environmental statutes and regulations, including laws and regulations
addressing materials used in the Company's products. In addition, certain of
the Company's operations are subject to U.S. federal, state and local and
Mexican environmental laws and regulations that impose limitations on the
discharge of pollutants into the air and water and establish standards for the
treatment, storage and disposal of solid and hazardous wastes. Although the
Company believes it has made sufficient capital expenditures to maintain
compliance with existing laws and regulations, future expenditures may be
necessary as compliance standards and technology change. Unforeseen
significant expenditures required to maintain such compliance, including
unforeseen liabilities, could have an adverse effect on the Company's business
and financial condition.

The Company has from time to time been, and presently is, the subject of
administrative proceedings, litigation and investigations relating to
environmental and related matters. Although management does not believe that
such proceedings, litigation and investigations will have a material adverse
effect on the Company, based, among other factors, on certain indemnification
rights the Company enjoys, there can be no assurance that the Company will not
become involved in future litigation or other proceedings or, if the Company
were found to be responsible or liable in any litigation or proceeding, that
such costs would not be material to the Company, or that indemnification
pursuant to such indemnification rights will otherwise be available. See
"Business--Environmental Regulation."

ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

There has been no public market for the Common Stock prior to the Offerings,
and there can be no assurance that a significant public market for the Common
Stock will develop or will continue after the Offerings. The initial public
offering price for the Common Stock will be determined by negotiations among
the Company, the Representatives (as defined) and the Managers (as defined),
and may not be indicative of the prices that may prevail in the public market.
See "Underwriting" for a discussion of factors considered in determining the
initial public offering price. There can be no assurance that the market price
of the Common Stock will not decline below the initial public offering price.
The Company believes that variations in the Company's results of operations
and other factors, including analyst estimates and general economic
conditions, may cause the market

14
<PAGE>

price of the Common Stock to vary significantly. In addition, from time to
time in recent years, the securities markets have experienced significant
price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of particular companies.
Following the Offerings, sales or the expectation of sales of substantial
amounts of Common Stock in the public market by the Company or its
stockholders also could adversely affect the prevailing market prices for the
Common Stock. See "Shares Eligible for Future Sale."

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offerings and the Private Placement, the Company will
have outstanding 52,992,707 shares of Common Stock (54,042,707 shares, if the
U.S. Underwriters' over-allotment option is exercised in full), all of which
will be freely transferable without restriction or further registration under
the Securities Act, except for the shares sold in the Private Placement and
for any shares held by affiliates. Each of (i) the Company, (ii) the Company's
executive officers and directors who currently own shares of Common Stock or
options or warrants to purchase Common Stock, and (iii) stockholders of the
Company owning substantially all the outstanding Common Stock immediately
prior to the Offerings and the Private Placement (the "Existing
Stockholders"), have agreed not to offer, sell, contract to sell, or otherwise
dispose of, any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for Common Stock, or grant any options or warrants
to purchase Common Stock, except in certain circumstances, for 180 days after
the date of this Prospectus without the prior written consent of Smith Barney
Inc. Following the Offerings, sales or the expectation of sales of substantial
amounts of Common Stock in the public market could adversely affect the
prevailing market prices for the Common Stock. See "Shares Eligible for Future
Sale."

In addition, 4,836,425 shares of Common Stock will be reserved for issuances
pursuant to the Company's stock option plans. At June 30, 1996, options for
the purchase of 4,204,747 shares of Common Stock were outstanding. These
shares will be available for sale in the public market from time to time upon
registration or pursuant to available exemptions from registration. See
"Shares Eligible for Future Sale," "Management--Executive Compensation" and
"Management--Stock Option Plan."

ANTITAKEOVER PROVISIONS

Dal-Tile's Second Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws contain certain provisions that could have the
effect of discouraging or making more difficult the acquisition of Dal-Tile by
means of a tender offer, a proxy contest or otherwise, even though such an
acquisition might be economically beneficial to the Company's stockholders.
These provisions include advance notice procedures for stockholders to
nominate candidates for election as directors of Dal-Tile and for stockholders
to submit proposals for consideration at stockholders' meetings. The ability
of Dal-Tile to issue preferred stock, par value $.01 per share ("Preferred
Stock"), in one or more classes or series, with such powers, designations,
preferences and relative, participating, optional or special rights,
qualifications, limitations or restrictions as may be determined by the Board
of Directors of Dal-Tile (the "Board of Directors"), also could make such an
acquisition more difficult. In addition, these provisions may make the removal
of management more difficult, even in cases where such removal would be
favorable to the interests of the Company's stockholders.

Dal-Tile is subject to Section 203 of the Delaware General Corporation Law
(the "DGCL"), which limits transactions between a publicly held company and
"interested stockholders" (generally, those stockholders who, together with
their affiliates and associates, own 15% or more of a company's outstanding
capital stock). This provision of the DGCL also may have the effect of
deterring certain potential acquisitions of Dal-Tile. See "Description of
Capital Stock--Preferred Stock" and "Description of Capital Stock--Possible
Antitakeover Effect of Certain Charter and Bylaw Provisions."

DILUTION

Based upon the pro forma deficit in net tangible book value of the Company
at June 30, 1996, investors in the Offerings and the Private Placement will
suffer an immediate and substantial dilution of approximately $17.97 in net
tangible book value per share of Common Stock. See "Dilution."

15
<PAGE>

USE OF PROCEEDS

At an assumed initial public offering price of $17.00 per share (the mid-
point of the price range set forth on the cover of this Prospectus), the net
proceeds from the Offerings (after deducting the underwriting discounts and
commissions and estimated offering expenses) are estimated to be approximately
$110.0 million ($126.6 million, if the U.S. Underwriters' over-allotment
option is exercised in full). The net proceeds from the Private Placement are
estimated to be approximately $10.0 million. The aggregate amount of such
estimated net proceeds ($120.0 million) ($136.6 million, if the U.S.
Underwriters' over-allotment option is exercised in full) will be used by the
Company to repay outstanding indebtedness in connection with the Refinancing
and to pay related prepayment premiums and fees and expenses; provided,
however, that the net proceeds from the Offerings will not be used to repay
Series A Notes (as defined) or Series B Notes (as defined). See "Refinancing"
and "Capitalization."

For information with respect to the interest rates and maturity dates of the
Company's indebtedness, see "Refinancing" and "Description of Certain
Indebtedness."

16
<PAGE>

REFINANCING

The Company is undertaking the Offerings and the Private Placement and the
other transactions described below (collectively, the "Refinancing") as a
refinancing plan designed to improve its financial and operating flexibility,
to reduce its interest expense and to extend the amortization of its senior
indebtedness.

REDEMPTION

On June 17, 1996, Dal-Tile notified the trustee under the Zero Coupon Note
Indenture that it had determined to exercise its right to redeem (the
"Redemption") approximately 24.5% of the principal amount at maturity of the
Zero Coupon Notes (such Zero Coupon Notes to be redeemed, the "Redeemed
Notes"). The Redeemed Notes were redeemed on August 6, 1996 (the "Redemption
Date"). In the Redemption, Dal-Tile used the approximately $27.6 million which
AWI paid to Dal-Tile as part of the AO Acquisition to redeem $32.6 million
aggregate principal amount at maturity of Zero Coupon Notes (at a price of
106% of the $26.0 million accreted value at the Redemption Date).

TENDER OFFER AND SOLICITATION

Concurrently with the Offerings and the Private Placement, Dal-Tile is
offering to purchase for cash (the "Zero Coupon Tender Offer") all Zero Coupon
Notes not otherwise called for redemption at a price per $1,000 principal
amount at maturity of Zero Coupon Notes equal to (i) the present value on the
purchase date of $1,000 per Zero Coupon Note (the amount payable on July 15,
1998, which is the stated maturity date (the "Stated Maturity Date") of the
Zero Coupon Notes) determined on the basis of a yield to the Stated Maturity
Date equal to the yield on the 5 1/8% U.S. Treasury Note due June 30, 1998
plus 100 basis points, minus (ii) $5.00 per Zero Coupon Note, which is equal
to the Consent Payment (as defined below), from holders who validly tender and
do not withdraw their Zero Coupon Notes pursuant to the Zero Coupon Tender
Offer. In conjunction with the Zero Coupon Tender Offer, Dal-Tile is
soliciting consents (the "Zero Coupon Solicitation") from the holders of at
least a majority in principal amount of the Zero Coupon Notes not otherwise
called in the Redemption to effect the Proposed Amendments, including the
elimination of substantially all of the restrictive covenants and the
termination of the Pledge Agreement. As consideration for the consents and
subject to certain conditions, Dal-Tile will pay a consent payment (the
"Consent Payment") equal to $5.00 per $1,000 principal amount of Zero Coupon
Notes for which a valid consent is received. The Zero Coupon Tender Offer and
the Zero Coupon Solicitation are conditioned upon, among other things, (i) the
execution by the trustee under the Zero Coupon Note Indenture of a
supplemental indenture to the Zero Coupon Note Indenture implementing the
Proposed Amendments following the receipt of consents from the holders of a
majority in principal amount of the Zero Coupon Notes (other than Redeemed
Notes), (ii) the consummation of the Offerings, and (iii) the completion of
the Refinancing. As of July 31, 1996, Dal-Tile had received the requisite
number of consents necessary to effect the Proposed Amendments, and on August
1, 1996, Dal-Tile and Citibank, N.A., as trustee under the Zero Coupon Note
Indenture, executed the Supplemental Indenture with respect to the Proposed
Amendments. The Proposed Amendments will not become operative unless the Zero
Coupon Tender Offer is consummated.

NEW BANK CREDIT AGREEMENT

Pursuant to a commitment letter (the "Commitment Letter"), each of Chase
Securities Inc. and The Chase Manhattan Bank, N.A., Credit Suisse and Goldman,
Sachs & Co. and Pearl Street, L.P. have severally agreed to provide new credit
facilities to Dal-Tile Group (the "New Bank Facilities") under a new credit
agreement to be entered into (the "New Bank Credit Agreement"). The New Bank
Facilities consist of a $275 million term loan (the "New Term Loan"), the
proceeds of which will be drawn down shortly following the consummation of the
Offerings and the Private Placement, and a $250 million revolving credit
facility (the "New Revolving Credit Facility"). The New Bank Credit Agreement
will contain customary events of default appropriate in the context of the
proposed transaction, and will provide for customary fees and charges.
Borrowings under the Existing Bank Credit Agreement bore a weighted average
interest rate of 7.8% per annum at June 30, 1996. If the New

17
<PAGE>

Bank Credit Agreement had been in place at June 30, 1996, the New Term Loan
would have borne interest at 6.8% per annum at June 30, 1996, and borrowings
under the New Revolving Credit Facility would have borne interest at rate of
6.8% per annum at June 30, 1996. See "Description of Certain Indebtedness--New
Bank Credit Agreement."

FUNDING FOR AND CONDITIONS OF THE REFINANCING

The Company intends to use the net proceeds of the Offerings and the Private
Placement and borrowings under the New Bank Credit Agreement (i) to repay in
full outstanding borrowings by Dal-Tile Group under its existing bank credit
agreement, consisting of a $160 million revolving credit facility ($123.2
million outstanding at June 30, 1996) (the "Existing Bank Credit Agreement"),
(ii) to repay $176 million of 10.625% Series A Notes due January 9, 2000 (the
"Series A Notes") and $100 million of 10.770% Series B Notes due January 9,
2002 (the "Series B Notes") issued by Dal-Tile Group pursuant to a note
agreement (the "Series Note Agreement"), (iii) to fund the Zero Coupon Tender
Offer and the Zero Coupon Solicitation for the Zero Coupon Notes not acquired
in the Redemption, and (iv) to pay accrued interest and estimated prepayment
premiums for the Series A Notes, Series B Notes and Zero Coupon Notes, and
fees and expenses; provided, however, that the net proceeds from the Offerings
will not be used to repay Series A Notes or Series B Notes.

The entering into of the New Bank Credit Agreement is a condition to the
closing of the Offerings. The Refinancing is expected to be completed
simultaneously with or shortly after the closing of the Offerings. The closing
of the Offerings and the Private Placement is not contingent upon consummation
of the Zero Coupon Tender Offer. There can be no assurance that 100% of the
Zero Coupon Notes will be redeemed and acquired by the Company in the
Redemption and the Zero Coupon Tender Offer or that the terms of the Zero
Coupon Tender Offer will not vary from those assumed by the Company herein.

The following table sets forth the estimated sources and uses of funds to be
used to effect the Refinancing, assuming that the Refinancing occurred on June
30, 1996.

SOURCES OF FUNDS: (IN MILLIONS)
<TABLE>
<S> <C>
Cash proceeds from sale of capital stock to AWI in the AO Acquisi-
tion.............................................................. $ 27.6
New Term Loan...................................................... 275.0
New Revolving Credit Facility(1)................................... 128.5
Offerings(2)....................................................... 110.0
Private Placement.................................................. 10.0
------
Total............................................................ $551.1
======

USES OF FUNDS:
Redemption of Zero Coupon Notes(3)................................. $ 27.6
Zero Coupon Tender Offer(4)........................................ 79.0
Prepayment of Series A Notes....................................... 176.0
Prepayment of Series B Notes....................................... 100.0
Repayment of indebtedness under Existing Bank Credit Agreement(5).. 123.2
Accrued interest, estimated prepayment premiums for Series A Notes,
Series B Notes and Zero Coupon Tender Offer, Consent Payments and
fees and expenses(6).............................................. 45.3
------
Total............................................................ $551.1
======
</TABLE>
- --------

(1) The New Bank Credit Agreement will provide for borrowings under the New
Revolving Credit Facility of up to $250.0 million. The Company will have
remaining availability under the New Revolving Credit Facility which may
be used for general corporate purposes, including capital expenditures.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."

18
<PAGE>

(2) Represents estimated net proceeds of the Offerings (after deducting
estimated underwriting discounts and commissions and offering expenses
payable by the Company of $9.0 million) assuming an initial public
offering price of $17.00 per share (the mid-point of the price range set
forth on the cover of this Prospectus).
(3) Includes the prepayment premium of 6% of accreted value of the Zero Coupon
Notes subject to the Redemption.
(4) Assumes that 100% of the Zero Coupon Notes remaining after the Redemption
are acquired by the Company in the Zero Coupon Tender Offer. There can be
no assurance that all such Zero Coupon Notes will be so acquired by the
Company or that the terms of the Zero Coupon Tender Offer will not vary
from those assumed by the Company herein.

(5) At June 30, 1996, the weighted average interest rate for outstanding
indebtedness under the Existing Bank Credit Agreement was 7.8% per annum.
The Existing Bank Credit Agreement matures on the earlier of (i) January
9, 1998 and (ii) the seventh day following a "Change of Control" as
defined therein.
(6) Represents fees and expenses related to the foregoing transactions (other
than the Offerings and the Private Placement), including lender fees,
legal, accounting and other professional fees, and a $4.0 million fee to
AEA Investors in connection with the termination of the Company's
management agreement with AEA Investors (the "Termination Fee").

For further information with respect to the Company's indebtedness, see
"Description of Certain Indebtedness."

DIVIDEND POLICY

Dal-Tile is a holding company with no operations or significant assets other
than its investment in Dal-Tile Group and its 49.99% interest in RISA. Dal-
Tile Group is a separate and distinct legal entity and has no obligation,
contingent or otherwise, to make funds available to Dal-Tile, whether in the
form of loans, dividends or other cash distributions. The New Bank Credit
Agreement will limit dividends, loans and other cash distributions from Dal-
Tile Group to Dal-Tile, so that profits generated by Dal-Tile Group may not be
available to Dal-Tile to pay cash dividends or repay indebtedness or
otherwise. In light of these limitations, Dal-Tile Group will be prohibited
from making such dividends, loans and other cash distributions and Dal-Tile
does not believe that Dal-Tile Group will be able to make such dividends,
loans and other cash distributions in the foreseeable future. If the need for
cash distributions from Dal-Tile Group should arise in the future (for
example, to repay indebtedness), there can be no assurance that it will be
permitted to make such cash distributions. See "Description of Certain
Indebtedness."

In the absence of such restrictions or limitations, the declaration and
payment of dividends will be at the sole discretion of the Board of Directors
and subject to normal limitations under the DGCL. The timing, amount and form
of dividends, if any, will depend, among other things, on the Company's
results of operations, financial condition, cash requirements, plans for
expansion and other factors deemed relevant by the Board of Directors.

19
<PAGE>

DILUTION

At June 30, 1996, the net tangible book value of the Company was a deficit
of $171.2 million, or $3.77 per share of Common Stock. The deficit in net
tangible book value per share represents the amount of total assets (excluding
intangible assets) less total liabilities, divided by the total number of
shares of Common Stock that will be outstanding upon consummation of the
Common Stock Conversion.

After giving effect to the receipt of $110.0 million of estimated net
proceeds from the sale by Dal-Tile of 7,000,000 shares of Common Stock in the
Offerings, at an assumed initial public offering price of $17.00 per share
(the mid-point of the price range set forth on the cover of this Prospectus),
the receipt of $10.0 million of estimated net proceeds from the sale by Dal-
Tile of 588,235 shares of Common Stock in the Private Placement, and the
application of such estimated net proceeds as described under "Use of
Proceeds," the net tangible book value at June 30, 1996 would have been a
deficit of $51.2 million, or $0.97 per share of Common Stock. This represents
an immediate increase in net tangible book value of $2.80 per share of Common
Stock to the Existing Stockholders and an immediate dilution to new investors
in the Offerings and the Private Placement of $17.97 per share of Common
Stock. The following table illustrates such dilution:

<TABLE>
<S> <C> <C>
Assumed per share initial price to public................... $17.00
Deficit in net tangible book value per share at June 30,
1996..................................................... $(3.77)
Increase in net tangible book value per share attributable 2.80
to new investors......................................... ------
Pro forma deficit in net tangible book value per share after
the Offerings and the Private Placement.................... (0.97)
------
Dilution per share to new investors......................... $17.97
======
</TABLE>

The following table sets forth, at June 30, 1996, the difference between the
Existing Stockholders and the new investors who purchase Common Stock in the
Offerings at an assumed initial public offering price of $17.00 per share,
with respect to the number of shares purchased from the Company, the total
consideration paid and the average price per share paid:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders......... 45,404,472 85.7% $334,075,017 72.1% $ 7.36
New investors................. 7,588,235 14.3 128,999,995 27.9 17.00
---------- ----- ------------ -----
Total (1)................... 52,992,707 100.0% $463,075,012 100.0%
========== ===== ============ =====
</TABLE>
- --------

(1) Excludes 4,204,747 shares of Common Stock reserved for issuance upon the
exercise of outstanding stock options granted to certain employees of the
Company pursuant to the Company's stock option plans at an average
exercise price of approximately $9.38 per share. To the extent such
options are exercised, there will be further dilution to new investors.
See "Management--Executive Compensation," "Management--Stock Option Plan"
and "Description of Capital Stock--Common Stock Conversion."

20
<PAGE>

CAPITALIZATION

The following table sets forth at June 30, 1996, (i) the historical
consolidated capitalization of the Company, and (ii) the consolidated
capitalization, as adjusted to reflect the Refinancing, including the sale by
the Company of 7,000,000 shares of Common Stock in the Offerings (assuming an
initial public offering price of $17.00 per share), the sale by the Company of
588,235 shares of Common Stock in the Private Placement, and the application
of the estimated net proceeds therefrom. See "Refinancing," "Use of Proceeds,"
"Unaudited Pro Forma Consolidated Financial Information," "Selected
Consolidated Financial Data," "Armstrong Agreements" and "Description of
Capital Stock--Common Stock Conversion."

<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt...................... $ 47,047 $ 3,047
-------- --------
Long-term debt (excluding current portion):
Zero Coupon Notes.................................... 105,008 --
Existing Bank Credit Agreement....................... 123,197 --
New Term Loan........................................ -- 275,000
New Revolving Credit Facility........................ -- 128,485
Series A Notes....................................... 132,000 --
Series B Notes....................................... 100,000 --
Industrial Development Refunding and Revenue Bonds... 5,500 5,500
Other................................................ 8,465 8,465
-------- --------
Total long-term debt............................... 474,170 417,450
-------- --------
Total debt....................................... 521,217 420,497
-------- --------
Stockholders' equity:
Preferred Stock, $.01 par value per share; 11,100,000
shares authorized; no shares issued and outstanding.
Common Stock, $.01 par value per share; 200,000,000
shares authorized; 45,404,472 shares issued and out-
standing, actual; 52,992,707 shares issued and out-
standing, as adjusted (1)...........................
Additional paid-in capital........................... 334,076 454,076
Accumulated deficit.................................. (260,185) (280,898)(2)
Currency translation adjustment...................... (59,079) (59,079)
-------- --------
Total stockholders' equity......................... 14,812 114,099
-------- --------
Total capitalization............................. $536,029 $534,596
======== ========
</TABLE>
- --------

(1) Excludes 4,204,747 shares of Common Stock reserved for issuance upon the
exercise of outstanding stock options granted to certain employees of the
Company pursuant to the Company's stock option plans. See "Management--
Executive Compensation," "Management--Stock Option Plan" and "Description
of Capital Stock--Common Stock Conversion."

(2) In connection with the Refinancing, the Company will record an
extraordinary charge estimated to be $20.7 million, net of tax, for the
write off of existing deferred financing fees, the Termination Fee and
prepayment premiums on certain debt to be repaid. This charge will be
recorded upon completion of the Refinancing, which is expected to occur in
the Company's third quarter of 1996. See "Unaudited Pro Forma Consolidated
Financial Information."

21
<PAGE>

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The unaudited pro forma consolidated financial statements presented below
reflect the effects of adjustments to the historical consolidated financial
statements of the Company necessary to give pro forma effect to the AO
Acquisition and the Refinancing, including the Offerings and the Private
Placement and the application of the estimated net proceeds therefrom. The pro
forma operating data for the year ended December 31, 1995 give effect to the
AO Acquisition, including certain identified cost savings, and to the
Refinancing, including the Offerings and the Private Placement and the
application of the estimated net proceeds therefrom, as if such transactions
had occurred on January 1, 1995. The pro forma operating data for the six
months ended June 30, 1996 give effect to the Refinancing, including the
Offerings and the Private Placement and the application of the estimated net
proceeds therefrom, as if such transactions had occurred on January 1, 1996.
The pro forma balance sheet data has been prepared as if the Refinancing,
including the Offerings and the Private Placement and the application of the
estimated net proceeds therefrom, had occurred on June 30, 1996.

Management believes that the assumptions used provide a reasonable basis on
which to present the pro forma financial data; however, such assumptions are
subject to significant business, economic and other uncertainties. The
unaudited pro forma consolidated financial statements are provided for
informational purposes only and should not be construed to be indicative of
the Company's results of operations or financial position had the AO
Acquisition and the Refinancing, including the Offerings and the Private
Placement, been consummated on or as of the dates assumed, and are not
intended to project the Company's results of operations or its financial
position for any future period or as of any future date.

The following Unaudited Pro Forma Consolidated Financial Information should
be read in conjunction with the Consolidated Financial Statements, the
consolidated financial statements of the Ceramic Tile Operations of AWI and,
in each case, the related notes, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.

The following assumptions have been utilized to determine the adjustments
included in the unaudited pro forma consolidated financial statements of the
Company:

a. The AO Acquisition was accounted for by the Company as a purchase.
Accordingly, the assets and liabilities acquired and assumed were adjusted
to reflect their fair market values at the date of the AO Acquisition. Pro
forma adjustments for the AO Acquisition represent the Company's
preliminary determination of these amounts and are based upon available
information and certain assumptions the Company considers reasonable. The
final purchase price allocation for the AO Acquisition could differ from
that set forth below.

b. For purposes of the pro forma operating data for the year ended
December 31, 1995, in addition to assuming the AO Acquisition occurred at
the beginning of such period, the pro forma adjustments assume that the
following cost savings initiatives also were undertaken at such time and
that the estimated savings therefrom were realized for such period: (i) the
elimination of duplicative manufacturing facilities and Company-operated
sales centers; (ii) the reduction of duplicative sales organization staff;
and (iii) the elimination of duplicative research and development programs;
offset in part by increased costs in connection with management information
systems and advertising. The estimated net savings of $34.9 million for the
pro forma fiscal year ended December 31, 1995 (of which $10.1 million
represents reductions in depreciation and amortization expense pursuant to
purchase accounting) are reflected in the pro forma adjustments. The full
amount of the annual cost savings of $34.9 million are not expected to be
achieved until 1997. THE ANTICIPATED COST SAVINGS DESCRIBED HEREIN ARE
BASED ON ESTIMATES AND ASSUMPTIONS MADE BY THE COMPANY THAT, ALTHOUGH
CONSIDERED REASONABLE BY THE COMPANY, ARE SUBJECT TO SIGNIFICANT BUSINESS,
ECONOMIC AND OTHER UNCERTAINTIES. THERE CAN BE NO ASSURANCE THAT SUCH COST
SAVINGS WILL BE ACHIEVED OR THAT THE BENEFITS OF SUCH COST SAVINGS WILL NOT
BE MITIGATED BY OTHER FACTORS AFFECTING THE COMPANY'S PERFORMANCE. SEE
"RISK FACTORS--RISKS RELATED TO REALIZING BENEFITS FROM AO ACQUISITION."

22
<PAGE>

c. The pro forma adjustments assume that 100% of the Zero Coupon Notes
were redeemed and acquired in the Redemption and the Zero Coupon Tender
Offer, respectively. There can be no assurance that 100% of the Zero Coupon
Notes will be so redeemed and acquired by the Company or that the terms of
the Zero Coupon Tender Offer will not vary from those assumed by the
Company herein. The closing of the Offerings and the Private Placement is
not contingent upon consummation of the Zero Coupon Tender Offer.

d. Assuming an initial public offering price of $17.00 per share (the
mid-point of the price range set forth on the cover of this Prospectus),
the net proceeds to the Company from the Offerings are estimated to be
$110.0 million (assuming the U.S. Underwriters' over-allotment option is
not exercised), after deducting estimated underwriting discounts and
commissions and offering expenses payable by the Company. The net proceeds
to the Company from the Private Placement are estimated to be $10.0
million.

In connection with the Refinancing, the Company will record an extraordinary
charge estimated to be $33.3 million ($20.7 million, net of tax) for the write
off of existing deferred financing fees, the Termination Fee and prepayment
premiums on certain debt to be repaid. This charge will be recorded in the
Company's third quarter of 1996 upon completion of the Refinancing.

23
<PAGE>

DAL-TILE INTERNATIONAL INC.

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

JUNE 30, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
REFINANCING AS
HISTORICAL ADJUSTMENTS ADJUSTED
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................. $ 33,576 $ (27,575)(1) $ 6,001
Trade accounts receivable............ 108,389 -- 108,389
Inventories.......................... 118,960 -- 118,960
Prepaid expenses..................... 3,477 -- 3,477
Deferred tax asset................... -- 7,030 (1) 7,030
Other current assets................. 10,867 -- 10,867
--------- --------- ---------
Total current assets.............. 275,269 (20,545) 254,724
Property, plant and equipment, net... 170,753 -- 170,753
Goodwill net of amortization......... 159,634 -- 159,634
Finance costs, net of amortization... 5,747 (1,747)(1) 4,000
Other assets......................... 24,095 -- 24,095
--------- --------- ---------
Total assets...................... $ 635,498 $ (22,292) $ 613,206
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued
expenses............................ $ 42,279 $ -- $ 42,279
Accrued interest payable............. 15,255 (15,255)(1) --
Current portion of long-term debt.... 47,047 (44,000)(2) 3,047
Deferred income taxes................ 5,604 (5,604)(1) --
Other current liabilities............ 15,014 -- 15,014
--------- --------- ---------
Total current liabilities......... 125,199 (64,859) 60,340
Long-term debt........................ 474,170 (100,720)(1)
44,000 (2) 417,450
Other long-term liabilities........... 20,315 -- 20,315
Deferred income taxes................. 1,002 -- 1,002
--------- --------- ---------
Total liabilities................. 620,686 (121,579) 499,107
Stockholders' Equity:
Common stock and additional paid-in-
capital............................. 334,076 120,000 (1) 454,076
Accumulated deficit.................. (260,185) (20,713)(1) (280,898)
Currency translation adjustment...... (59,079) -- (59,079)
--------- --------- ---------
Total stockholders' equity........ 14,812 99,287 114,099 (10)
--------- --------- ---------
Total liabilities and stockhold-
ers' equity...................... $ 635,498 $ (22,292) $ 613,206
========= ========= =========
</TABLE>

24
<PAGE>

DAL-TILE INTERNATIONAL INC.

UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
DAL-TILE CERAMIC TILE
INTERNATIONAL OPERATIONS PRO FORMA PRO FORMA REFINANCING PRO FORMA
INC. OF AWI ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
------------- ------------ ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $474,812 $240,049 $ 9,585 (3) $724,446 $ -- $724,446
Cost of goods sold...... 225,364 171,377 (7,263)(4) 370,378 370,378
(19,100)(5)
-------- -------- ------- -------- ------- --------
Gross profit........... 249,448 68,672 35,948 354,068 354,068
Expenses:
Transportation......... 33,535 -- 9,585 (3) 43,120 -- 43,120
Selling, general and
administrative........ 134,193 61,723 (1,269)(4) 188,947 188,947
(5,700)(5)
Provision for merger
integration charges... 22,430 (733) (21,697)(6) -- -- --
Amortization of
goodwill.............. 4,765 1,522 (1,522)(7) 4,765 -- 4,765
-------- -------- ------- -------- ------- --------
Operating income....... 54,525 6,160 56,551 117,236 117,236
Interest expense........ 55,453 7,951 (7,951)(8) 55,453 (27,917)(10) 27,536
Interest income......... 1,250 1,292 (1,292)(8) 1,250 -- 1,250
Other income, net....... 2,994 -- -- 2,994 800 (11) 3,794
-------- -------- ------- -------- ------- --------
Income (loss) before
income taxes.......... 3,316 (499) 63,210 66,027 28,717 94,744
Income tax provision.... 1,176 509 21,728 (9) 23,413 10,183 (9) 33,596
-------- -------- ------- -------- ------- --------
Net income (loss)...... $ 2,140 $ (1,008) $41,482 $ 42,614 $18,534 $ 61,148
======== ======== ======= ======== ======= ========
Net income per share... $ 1.11
========
Weighted average shares
outstanding........... 54,935(12)
</TABLE>

25
<PAGE>

DAL-TILE INTERNATIONAL INC.

UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT

FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
Net sales.............................. $351,523 $ -- $351,523
Cost of goods sold..................... 183,455 -- 183,455
-------- -------- --------
Gross profit.......................... 168,068 -- 168,068
Expenses:
Transportation........................ 21,669 -- 21,669
Selling, general and administrative... 98,445 -- 98,445
Provision for merger integration
charges.............................. 9,000 (9,000)(6) --
Amortization of intangibles........... 2,802 -- 2,802
-------- -------- --------
Operating income...................... 36,152 9,000 45,152
Interest expense....................... 27,429 (13,337)(10) 14,092
Interest income........................ 1,136 -- 1,136
Other expense, net..................... (491) 400 (11) (91)
-------- -------- --------
Income before income taxes............ 9,368 22,737 32,105
Income tax provision................... 3,549 8,587 (9) 12,136
-------- -------- --------
Net income............................ $ 5,819 $ 14,150 $ 19,969
======== ======== ========
Net income per share.................. $ 0.36
========
Weighted average shares outstanding... 54,881(12)
</TABLE>

26
<PAGE>

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

(1) To reflect the application of the estimated net proceeds from the
Offerings and the Private Placement, borrowings under the New Bank Credit
Agreement and the cash received from AWI in connection with the AO
Acquisition, and their application as follows:

(a) A summary of the sources and uses of cash are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Net proceeds from the Offerings and the Private Placement. $120,000
Reduce long-term indebtedness............................. (100,720)
Pay accrued interest...................................... (15,255)
Prepayment premium for the Redemption..................... (1,700)
Estimated prepayment premiums for Series A Notes, Series B
Notes and Zero Coupon Tender Offer, Consent Payments and
fees and expenses........................................ (29,900)
--------
Net reduction in cash..................................... $(27,575)
========
</TABLE>

(b) To pay debt issuance costs related to new debt facilities
($4,000,000), net of the write down in debt issuance cost of prior
debt facility ($5,747,000).

(d) To reduce long-term indebtedness under the Zero Coupon Notes, the
Series A Notes, the Series B Notes and the Existing Bank Credit
Agreement.

(e) To record an extraordinary charge ($33,300,000) ($20,713,000, net of
tax) for the write off of existing deferred financing fees,
Termination Fee, Consent Payments and prepayment premiums on certain
debt to be repaid.

(2) To reclassify the appropriate current portion of long-term debt as a
result of the New Bank Credit Agreement.

(3) To reflect freight costs of AO as a component of transportation expenses
rather than as a component of net sales for consistent income statement
presentation.

(4) To reduce depreciation expense to reflect the write-down to estimated fair
value of AO assets acquired. The adjustment has been allocated between
cost of goods sold and selling, general and administrative expenses.

The write-down in historical fixed assets and net write-up of other non-
current assets acquired in the AO Acquisition, which includes certain
intangibles, to estimated fair values at the date of the AO Acquisition
are as follows:

<TABLE>
<CAPTION>
AO PURCHASE PRICE FAIR VALUE AT
HISTORICAL COST ADJUSTMENT ACQUISITION DATE
--------------- -------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Total property, plant
and equipment.......... $223,121 $(167,284) $55,837
Less: Accumulated depre-
ciation................ (71,541) 71,541 --
-------- --------- -------
Net property, plant and
equipment.............. $151,580 $ (95,743) $55,837
Other non-current as-
sets................... $ 19,783 $ (19,783) $ --
Trade name.............. -- 21,100 21,100
</TABLE>

The net property, plant and equipment purchase price write-down is due
primarily to minimal value having been assigned to AO's Lansdale and
Jackson wall tile manufacturing facilities, which were closed in the first
quarter of 1996.

27
<PAGE>

Depreciation and amortization expense adjustments include the following:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Elimination of AO historical depreciation and amortiza-
tion expense............................................ $(13,816)
Recording of depreciation and amortization expense based
on fair values at the date of the AO Acquisition........ 3,762
--------
Decrease in depreciation and amortization expense
(including the amortization of goodwill--see Note (7)).. $(10,054)
</TABLE>

(5) The following are the estimated cost savings (excluding the $10.1 million
attributable to reduction in depreciation and amortization expense
described in Notes (4) and (7) pursuant to purchase accounting) associated
with the cost savings initiatives previously undertaken in connection with
the AO Acquisition:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-------------------------------
COST OF SELLING, GENERAL AND
SALES ADMINISTRATIVE EXPENSES
------- -----------------------
(IN THOUSANDS)
<S> <C> <C>
Cost savings (reflected in the pro
forma income statement):
Manufacturing(a)...................... $19,100 --
Sales organization(b)................. -- $ 5,000
Corporate expenses(c)................. -- 1,600
Research and development expenses(d).. -- 1,500
Regional distribution center(e)....... -- 500
Advertising and marketing(f).......... -- (1,500)
Information systems(g)................ -- (1,400)
------- -------
Total cost savings reflected in pro
forma $19,100 $ 5,700
income statement................... ======= =======
Total cost savings................ $24,800
=======
</TABLE>

(a) Reflects the March 1996 closings of the Lansdale, PA and Jackson, TN
wall tile facilities and the reallocation of production to the
Company's other wall tile facilities. Such other facilities have
significantly lower unit production costs than the historical unit
production costs of the Lansdale and Jackson facilities. Additionally,
the reallocation of production increases the capacity utilization of
the other facilities. Accordingly, the Company's average unit
production costs would have decreased on a pro forma basis in 1995.

(b) Represents elimination in January 1996 of approximately 115 sales
organization staff members. These personnel were employed in redundant
positions which were eliminated upon combination.

(c) Reflects the reduction of insurance premiums as a result of more
favorable terms obtained by the combined Company and the combination of
various departments based on the elimination of corporate personnel in
Lansdale, PA. The corporate personnel that were eliminated were
primarily from the finance, accounting, purchasing and human resources
departments.

(d) Represents the closing of the Lansdale, PA research and development
department in January 1996. As a result of the AO Acquisition, the
Company had redundant personnel in research and development and will
now conduct all research and development operations from its Dallas, TX
facility.

(e) Represents the closing of one regional distribution center in the third
quarter of 1996 and the consolidation of its functions into existing
facilities. These savings primarily represent the elimination of
administrative overhead.

(f) In order to provide a more beneficial transition as a result of the AO
Acquisition, the Company expects an increase in marketing and
advertising costs. Although savings are expected in certain areas of
advertising, the adjustment reflects an increase in advertising costs
in order to maintain product differentiation and customer base.

(g) As a result of the combination, the Company would have incurred on a
pro forma basis in 1995 an additional $1.4 million in information
systems costs to fully integrate the Company under one system.

(6) To eliminate pre-tax merger integration charges recorded by the Company
associated with cost savings initiatives undertaken in connection with
the AO Acquisition.

(7)To eliminate amortization of AO's historical goodwill and intangible asset
balances.

28
<PAGE>

(8) To eliminate interest income and expense related to investments and debt
of AO not acquired or assumed in the AO Acquisition.

(9) Represents estimated pro forma net impact to tax expense resulting from
the pro forma adjustments.

(10) To reduce interest expense as a result of the Refinancing. The
Refinancing includes the entering into of the New Bank Credit Agreement
with interest on borrowings thereunder based on a variable rate plus a
margin. A 1/8% rise in the interest rate would have caused interest
expense to increase by approximately $482,000 and $250,000 for the year
ended December 31, 1995 and the six months ended June 30, 1996,
respectively.

The interest expense adjustment was calculated as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Elimination of historical interest
expense(a).............................. $(53,900) $(26,341)
Estimated interest expense in connection
with Refinancing (b).................... 25,368 12,696
Amortization of debt issuance fees from 615 308
the Refinancing......................... --------- --------
Interest expense adjustment.............. $(27,917) $(13,337)
========= ========
</TABLE>
--------
(a) Does not include interest expense related to certain debt
that will not be repaid in the Refinancing.

(b) The pro forma interest expense was calculated on a
quarterly basis using average historic debt balances
(ranging from $500.1 million to $527.8 million in 1995 and
$521.2 million to $523.5 million in 1996), less the
Refinancing Amount (as defined) of $108.0 million in 1995
and 100.7 million in 1996, using average variable interest
rates calculated on a quarterly basis (ranging from 6.3% to
6.7% per annum). "Refinancing Amount" means the sum of (i)
the net proceeds from the Offerings and the Private
Placement plus (ii) the cash contribution received from AWI
in connection with the AO Acquisition, less (iii) the
premiums payable in connection with the prepayment of
certain debt, less (iv) the Termination Fee, less (v)
accrued interest, less (vi) transaction fees.

This computation assumes 100% of the Zero Coupon Notes are tendered
pursuant to the Zero Coupon Tender Offer. The closings of the Offerings
and the Private Placement are not contingent upon the consummation of the
Zero Coupon Tender Offer. The effects of not including the Zero Coupon
Tender Offer are as follows: (i) pro forma stockholders' equity as of June
30, 1996 would be $117,520,000; (ii) pro forma net income and net income
per share would be $57,934,000 and $1.05 for the year ended December 31,
1995, respectively; and (iii) pro forma net income and net income per
share would be $18,378,000 and $0.33 for the six months ended June 30,
1996, respectively.

(11) To reflect the elimination of the AEA Investors management fee.

(12) The calculation of weighted average shares outstanding is as follows:
<TABLE>
<CAPTION>
YEAR SIX MONTHS
ENDED ENDED
DECEMBER JUNE 30,
31, 1995 1996
----------- -----------
<S> <C> <C>
Weighted shares outstanding during the period
prior to
the AO Acquisition............................... 28,604,811 45,404,472
Weighted shares issued in connection with the AO
Acquisition...................................... 16,799,661
Net effect of dilutive stock options based on
the treasury stock method(a)..................... 1,942,407 1,888,405
Shares issued in connection with the Offerings and
the 7,588,235 7,588,235
Private Placement................................ ----------- -----------
Total......................................... 54,935,114 54,881,112
=========== ===========
Net income........................................ $61,148,000 $19,969,000
Primary and fully diluted earnings per share...... $1.11 $.36
</TABLE>
--------
(a) Dilution is determined using an initial public offering price of
$17.00 per share (the mid-point of the price range set forth on the
cover of this Prospectus) as compared to the securities' stated
exercise prices.

29
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents: (i) selected consolidated historical financial
data for, and at the end of, the years ended December 31, 1991, 1992, 1993,
1994 and 1995 derived from the Company's audited consolidated financial
statements for such periods; and (ii) selected consolidated historical
financial data for, and at the end of, the six months ended June 30, 1995 and
1996 derived from the Company's unaudited consolidated financial statements
for such periods. The unaudited consolidated financial statements of the
Company include all adjustments, consisting of normal recurring accruals,
which the Company considers necessary for a fair presentation of its financial
position at the end of, and the results of its operations for, those periods.
Operating results for the six months ended June 30, 1996 reflect the results
of operations of AO and certain related assets of the ceramic tile business of
AWI, which were acquired by the Company from AWI on December 29, 1995.
Operating results for the six months ended June 30, 1996 are not necessarily
indicative of the results that may be expected for the full year ending
December 31, 1996. The selected consolidated historical financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial
Statements.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- --------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.............. $357,564 $398,017 $ 440,573 $506,309 $474,812 $235,955 $351,523
Cost of goods sold..... 189,861 210,121 239,379 268,272 225,364 113,298 183,455
-------- -------- --------- -------- -------- -------- --------
Gross profit........... 167,703 187,896 201,194 238,037 249,448 122,657 168,068
Operating expenses
(excluding non-
recurring charges).... 128,103 138,467 157,314 169,720 172,493 86,700 122,916
Non-recurring charges:
Provision for merger
integration charges... -- -- -- -- 22,430(1) -- 9,000(2)
Provision for special
charges............... -- -- 53,233(3) -- -- -- --
Write-down of goodwill. -- -- 214,235(4) -- -- -- --
-------- -------- --------- -------- -------- -------- --------
Operating income
(loss)................ 39,600 49,429 (223,588) 68,317 54,525 35,957 36,152
Interest expense (net). 47,172 43,571 46,229 52,139 54,203 26,419 26,293
Other (income) expense. 575 653 1,088 (1,341) (2,994) (2,023) 491
-------- -------- --------- -------- -------- -------- --------
Income (loss) before
income taxes.......... (8,147) 5,205 (270,905) 17,519 3,316 11,561 9,368
Income tax provision
(benefit)............. 1,105 5,179 (3,225) 10,614 1,176 6,254 3,549
-------- -------- --------- -------- -------- -------- --------
Net income (loss)...... $ (9,252) $ 26 $(267,680) $ 6,905 $ 2,140 $ 5,307 $ 5,819
======== ======== ========= ======== ======== ======== ========
OTHER OPERATING DATA:
Net sales (United
States and Canada).... $315,360 $348,874 $ 394,044 $457,715 $451,800 $222,760 $340,642
Net sales (Mexico)..... $ 42,204 $ 49,143 $ 46,529 $ 48,594 $ 23,012 $ 13,195 $ 10,881
Gross margin........... 46.9% 47.2% 45.7% 47.0% 52.5% 52.0% 47.8%
Operating income before
non-recurring
charges(5)............ $ 39,600 $ 49,429 $ 43,880 $ 68,317 $ 76,955 $ 35,957 $ 45,152
Operating margin before
non-recurring charges
...................... 11.1% 12.4% 10.0% 13.5% 16.2% 15.2% 12.8%
Depreciation and amor-
tization.............. $ 22,746 $ 21,457 $ 22,019 $ 17,020 $ 17,164 $ 8,599 $ 11,884
Capital expenditures... $ 8,286 $ 20,689 $ 17,066 $ 14,160 $ 29,392 $ 16,376 $ 11,188
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital........ $106,780 $116,840 $ 119,109 $115,717 $152,128 $ 80,281 $150,070
Total assets........... 715,814 718,987 512,830 488,417 672,393 485,080 635,498
Total debt............. 444,669 456,003 492,137 492,753 527,816 500,528 521,217
Stockholders' equity
(capital deficiency).. 192,626 189,515 (77,449) (103,823) 9,639 (110,728) 14,812
</TABLE>
- --------
(1) In the fourth quarter of 1995, the Company recorded a pre-tax $22.4
million merger integration charge for the revaluation of certain assets in
connection with AO Acquisitions. See Note 6 to the Consolidated Financial
Statements.
(2) In the first quarter of 1996, the Company recorded a pre-tax $9.0 million
merger integration charge for the closing of duplicative sales centers and
distribution centers, the closing of certain manufacturing facilities and
severance costs. See Note 7 to the Consolidated Financial Statements.
(3) In the fourth quarter of 1993, the Company established provisions for a
distribution enhancement program, revaluation of certain assets and
severance costs for retiring employees. As a result, the Company recorded
a pre-tax $53.2 million special charge in the fourth quarter of 1993. See
Note 8 to the Consolidated Financial Statements.
(4) In connection with a review of its operations during the fourth quarter of
1993, the Company wrote off $214.2 million of goodwill related to the
following business units: Dal-Tile Mexico, Materiales, Dal-Minerals and
R&M. See Note 9 to the Consolidated Financial Statements.
(5) Operating income before non-recurring charges represents, for any period,
the sum of operating income (loss) plus non-recurring charges. The Company
believes that operating income before non-recurring charges provides
useful information regarding the Company's financial performance.
Operating income before non-recurring charges should not be considered in
isolation or as an alternative to net income as an indicator of the
Company's operating performance, or as an alternative to the Company's
cash flow from operating activities as a measure of liquidity.

30
<PAGE>

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

OVERVIEW
Historically, the Company has pursued a growth strategy focused on enhancing
its level of vertical integration through opening Company-operated sales
centers in the United States as outlets for Company-manufactured products and
products purchased for resale and increasing manufacturing capacity. Since
1994, the Company has introduced high-end floor tile products, initiated
targeted marketing programs and increased sales to home center retailers. Over
the past ten years, the Company's net sales increased from $169.1 million in
1985 to $474.8 million in 1995, exclusive of the AO Acquisition.

In addition, the Company has benefitted from low cost manufacturing
facilities in Mexico and the United States. The Company has employed various
manufacturing and distribution strategies to further improve efficiencies,
including (i) investing in technologically advanced manufacturing equipment;
(ii) utilizing fast-fire kiln technology; (iii) establishing a network of
regional distribution centers ("RDCs") to improve customer service; (iv)
reducing the number of stock keeping units ("SKUs"); (v) increasing plant
specialization by product line; (vi) improving production planning and
logistics; and (vii) investing in management information systems. The Company
believes these steps have enabled the Company to streamline distribution,
improve customer service and maintain attractive margins.

On December 29, 1995, the Company completed the AO Acquisition. As a result
of the AO Acquisition, the Company has increased its presence in all ceramic
tile applications and distribution channels and expects to achieve significant
cost savings by consolidating manufacturing facilities, restructuring its
sales organizations and eliminating duplicative administrative functions. See
"Risk Factors--Risks Relating to Realizing Benefits from AO Acquisition." The
Company believes, inclusive of AO, that it had an approximately 27% unit share
of the 1.32 billion square feet of ceramic tile sold in the United States in
1995, which was significantly greater than the Company's nearest competitor.
The Company has significantly increased its sales to independent distributors
as a result of the AO Acquisition. Sales through this channel carry lower
gross margins than sales made through the Company's sales centers, but due to
lower operating expense levels, comparable operating margins are achieved.

As part of the AO Acquisition, AWI paid $27.6 million in cash to the
Company. The AO Acquisition was accounted for under the purchase method of
accounting. In exchange for the stock, cash and assets contributed as part of
the AO Acquisition, AWI received 37% of the issued and outstanding capital
stock of the Company. In connection with the AO Acquisition, the Company
recorded pre-tax merger integration charges of $9.0 million in the six months
ended June 30, 1996 and $22.4 million in the fiscal year ended December 31,
1995. These charges were taken principally to write-down less efficient and
duplicative manufacturing equipment not needed in the combined Company,
reserve for closings of duplicative sales centers and distribution centers,
and provide for severance costs associated with the elimination of overlapping
positions. The Company manufactured inventory at certain AO plants prior to
their closure at the end of the first quarter of 1996. This higher cost
inventory, relative to inventory produced at the remaining plants, will
negatively impact the Company's gross margins in the second and third quarters
of 1996 as it is sold. The Company expects that results thereafter will
benefit from the Company's low-cost production and cost initiatives undertaken
in connection with the AO Acquisition. In connection with the Refinancing, the
Company will record an extraordinary charge estimated to be $20.7 million, net
of tax, for the write off of existing deferred financing fees, the Termination
Fee and prepayment premiums on certain debt to be repaid. This charge will be
recorded upon completion of the Refinancing, which is expected to occur in the
Company's third quarter of 1996. See "Unaudited Pro Forma Consolidated
Financial Information."

The following is a discussion of the results of operations for the six
months ended June 30, 1996 compared with the six months ended June 30, 1995,
the year ended December 31, 1995 compared with the year ended December 31,
1994 and the year ended December 31, 1994 compared with the year ended
December 31, 1993 for the Company.

31
<PAGE>

The Company's operating results for the six months ended June 30, 1996
reflect the results of operations of AO and certain related assets of the
ceramic tile business of AWI, which were acquired by the Company from AWI on
December 29, 1995. Because the Company's results for the six months ended June
30, 1995 do not reflect the AO Acquisition, the results for such periods are
not directly comparable.

RESULTS OF OPERATIONS

The following table sets forth certain operating data of the Company as a
percentage of net sales for the periods indicated below:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
-------------------- ------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........ 54.3 53.0 47.5 48.0 52.2
----- ----- ----- ----- -----
Gross profit.............. 45.7 47.0 52.5 52.0 47.8
Operating expenses........ 35.7 33.5 36.4 36.7 35.0
----- ----- ----- ----- -----
10.0 13.5 16.1 15.3 12.8
Non-recurring charges:
Provision for merger
integration charges.... -- -- 4.7 -- 2.6
Provision for special
charges................ 12.1 -- -- -- --
Write-down of goodwill.. 48.6 -- -- -- --
----- ----- ----- ----- -----
Operating income (loss)... (50.7) 13.5 11.4 15.3 10.2
Interest expense (net).... 10.5 10.3 11.4 11.2 7.5
Other (income) expense.... 0.2 (0.3) (0.6) (0.9) 0.1
----- ----- ----- ----- -----
Income (loss) before
income taxes............. (61.4) 3.5 0.6 5.0 2.6
Income tax provision (ben- (0.7) 2.1 0.2 2.7 1.0
efit).................... ----- ----- ----- ----- -----
Net income (loss)......... (60.7)% 1.4% 0.4% 2.3% 1.6%
===== ===== ===== ===== =====
</TABLE>

SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995

NET SALES. Net sales for the six months ended June 30, 1996 increased to
$351.5 million from $236.0 million for the six months ended June 30, 1995, an
increase of $115.5 million, or 49%. The increase in net sales of $115.5
million was due principally to the inclusion of AO's operations in 1996 and
increased shipments to home center retailers. Although 32 duplicative sales
centers have been consolidated into other locations, the Company generally has
been able to transfer revenues from the closed locations to other existing
sales centers.

GROSS PROFIT. Gross profit increased $45.4 million, or 37.0%, to $168.1
million for the six months ended June 30, 1996 from $122.1 million for the six
months ended June 30, 1996. The increase in gross profit is principally the
result of the increase in net sales.

32
<PAGE>

Gross margin decreased for the six months ended June 30, 1996 to 47.8% from
52.0% for the comparable period in 1995. The decrease in gross margin is
primarily due to production at higher cost facilities acquired as part of the
AO Acquisition, which historically resulted in AO generating lower gross
margins than the Company. These facilities were closed in March 1996 and
production has been shifted to lower cost manufacturing plants. In addition,
as a result of the AO Acquisition, the Company has a significantly increased
presence in the independent distributor channel. Sales through this channel
carry lower gross margins than sales made through the Company's sales service
centers, but due to lower operating expense levels, comparable operating
margins are achieved.

The Company experienced lower gross margins in the second quarter of 1996 as
compared to the first quarter of 1996. The Company manufactured inventory at
certain AO plants prior to their closure at the end of the first quarter of
1996. This higher cost inventory, relative to inventory produced at the
remaining plants, has negatively affected the Company's gross margin in the
second quarter of 1996 and will negatively affect the Company's gross margin
in the third quarter of 1996 as it is sold.

EXPENSES. Expenses increased to $131.9 million for the six months ended June
30, 1996 from $86.7 million for the six months ended June 30, 1995. The
increase in expenses is primarily due to inclusion of AO's operations. In
addition, results for the first quarter of 1996 include $9.0 million of merger
integration charges, contributing to the increase for the six months ended
June 30, 1996. Expenses as a percent of sales increased from 36.7% for the six
months ended June 30, 1995 to 37.5% for the comparable period in 1996.

Excluding merger integration charges, expenses for the six months ended June
30, 1996 decreased to 35.0% of sales. The decrease in expenses as a percent of
sales (excluding merger integration charges) for the six months ended June 30,
1996 as compared to the same period in 1995 is due to consolidation savings
achieved by integrating sales forces, closing duplicative sales service
centers and consolidating administrative functions. These savings were offset
in part by increased advertising costs to increase brand name recognition,
increased information systems costs for integration to one system, and
retention of duplicative personnel during a transition period while closing
sales centers. Additionally, sales made to independent distributors require
lower operating expense levels which offset the lower gross margins generated
through this distribution channel.

MERGER INTEGRATION CHARGES. In the first quarter of 1996, the Company
recorded a pre-tax merger integration charge of $9.0 million for the closings
of duplicative sales centers, duplicative distribution centers, and certain
manufacturing facilities, as well as incurrence of severance costs associated
with the elimination of overlapping positions. The majority of the $9.0
million is a cash charge related to lease commitments associated with closings
of duplicative facilities extending beyond 1996.

OPERATING INCOME. Operating income increased to $36.2 million for the six
months ended June 30, 1996 from $36.0 million for the six months ended June
30, 1995. Operating income (excluding merger integration charges) increased to
$45.2 for the six months ended June 30, 1996 from $36.0 million for the
comparable period in 1995. Operating income (excluding merger integration
charges) increased as a result of the AO Acquisition and related cost savings,
but was offset in part by lower gross margins.

INTEREST EXPENSE (NET). Interest expense (net) of $26.3 million for the six
months ended June 30, 1996 is comparable to interest expense (net) of $26.4
million for the six months ended June 30, 1995.

INCOME TAXES. The income tax provision reflects effective tax rates of 38%
and 54% for the six months ended June 30, 1996 and 1995, respectively. The
high effective rate in the six months ended June 30, 1995 reflects the
Company's inability to record a tax loss benefit in the United States due to
its net operating loss carry forward position for U.S. federal income tax
purposes.

33
<PAGE>

NET INCOME. Net income increased to $5.8 million for the six months ended
June 30, 1996 from $5.3 million for the six months ended June 30, 1995.
Excluding merger integration charges, net income increased to $11.4 million
for the six months ended June 30, 1996 from $5.3 million for the comparable
period in 1995. The increase in net income (excluding merger integration
charges) reflects the improvements in operating income (excluding merger
integration charges) offset by transaction gain reductions in 1996 as a result
of the stabilizing of the peso in 1996.

PESO-U.S. DOLLAR EXCHANGE RATE. The Company's Mexican facility is primarily
a provider of ceramic tile to the Company's U.S. operations and in addition
sells ceramic tile in Mexico. In the six months ended June 30, 1996, sales in
Mexico represented 3% of the Company's consolidated net sales. The Company's
sales in Mexico are peso-denominated and primarily all of the Mexican
facility's cost of sales and operating expenses are peso-denominated. In the
six months ended June 30, 1996, peso-denominated cost of sales and operating
expenses represented 10% of the Company's consolidated cost of sales and
expenses. The Company's exposure to exchange rate changes is favorable to
operating results when the peso devalues against the U.S. dollar, since peso
costs exceed peso revenues. As the peso appreciates against the U.S. dollar,
the effect is unfavorable to the Company's operating results. In addition to
exchange rate changes on operating results, foreign currency transaction gains
or losses are recognized in other income and expense. During the six months
ended June 30, 1996, the Company recorded a transaction loss of approximately
$0.5 million. Except for peso transactions, management utilizes foreign
currency forward contracts to offset exposure to exchange rate changes,
although the number and amount of such contracts are not significant. Since
the exposure to the peso exchange rate change is favorable when the peso
devalues against the U.S. dollar and management does not expect the peso to
appreciate significantly against the U.S. dollar in the near term, management
has not entered into peso currency forward contracts.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

NET SALES. Net sales for the year ended December 31, 1995 decreased to
$474.8 million from $506.3 million in 1994, a decrease of $31.5 million, or
6.2%. The consolidated decrease of $31.5 million is primarily the result of
the Mexican sales decline of $25.6 million as a result of translating peso
revenues into U.S. dollars at lower exchange rates and adverse economic
conditions in Mexico. Sales in the United States, which represented 94.0% of
total Company sales, decreased $6.6 million, or 1.5%, while sales to Canada,
which represented 1.0% of total Company sales, increased $0.7 million, or
13.0%. U.S. sales declined primarily as a result of decreases in the new
residential housing sector of tile applications. Although the Company's sales
were affected by the decline in the residential sector of tile applications,
the 1.5% U.S. sales decline was less than the 7.0% decline in U.S. housing
starts due to increased shipments to home center retailers, price increases,
the opening of 13 new sales centers in 1995, the introduction of new high-end
floor tile products, and increased sales in the commercial sector of tile
applications.

GROSS PROFIT. Gross profit increased $11.4 million, or 4.8%, to $249.4
million in 1995, from $238.0 million in 1994. The $31.5 million decrease in
net sales was more than offset by a $42.9 million decrease in cost of sales
resulting in a $11.4 million gross profit increase. Gross profit as a
percentage of sales increased to 52.5% in 1995 from 47.0% in 1994. In 1995,
the increases in gross profits and gross profit margin reflected the benefits
of a new sales commission program which emphasized high margin products and
new products in high-end floor tile applications. Additionally, the Company
benefited from price increases in the United States, manufacturing
efficiencies and the favorable impact on manufacturing costs resulting from
the devaluation of the peso.

EXPENSES. Total expenses in 1995 were $194.9 million, which included $22.4
million for merger integration charges described below, as compared to $169.7
million in 1994. Excluding merger integration charges, 1995 expenses were
$172.5 million, as compared to $169.7 million in 1994, an increase of 1.6%.
Expenses (excluding merger integration charges), as a percentage of sales,
increased to 36.4% in 1995 from 33.5% in 1994. The increase of $2.8 million
was the result of a $5.5 million increase in the first quarter offset by total
reductions of $2.7 million in the final three quarters. In the first quarter,
the Company was temporarily incurring excess costs to support duplicate
distribution functions until the RDCs and related systems were fully
implemented. Additionally, expenses increased in the first quarter due to new
marketing programs and the start-

34
<PAGE>

up of ten sales centers opened in the first quarter of 1995. During the second
quarter, management implemented a cost-reduction program, which resulted in
decreased expenses in the final three quarters of 1995 compared to the final
three quarters of 1994.

MERGER INTEGRATION CHARGES. In the fourth quarter of 1995, the Company
recorded a pre-tax merger integration charge of $22.4 million for the
revaluation of certain assets in connection with the AO Acquisition. Also, in
connection with the AO Acquisition and the Company's merger integration plans,
the Company will close certain manufacturing facilities, as well as
duplicative sales service centers, and will discontinue the use of certain
equipment. The non-cash portion of the merger integration charges is
approximately $20.2 million and represents the write-down of less efficient
and duplicative equipment not needed in the combined Company. The cash portion
of the merger integration charges is approximately $2.2 million, which
primarily consists of leasehold commitments on equipment.

OPERATING INCOME. Operating income decreased $13.8 million, or 20.2%, to
$54.5 million in 1995, from $68.3 million in 1994. The decrease was primarily
due to the merger integration charges of $22.4 million. Operating income
(excluding merger integration charges) increased to $77.0 million, or 12.7%,
in 1995 from $68.3 million in 1994 resulting in an increase in the operating
margin (excluding merger integration charges), to 16.2% in 1995 from 13.5% in
1994. The operating margin increased as a result of improvements in gross
profit, reflecting new high-end products, price increases, manufacturing
efficiencies, a new commission structure and the favorable cost effects
resulting from the devaluation of the Mexican peso.

INTEREST EXPENSE (NET). Interest expense (net) increased by 4.0%, to $54.2
million in 1995 from $52.1 million in 1994 due to an increase in debt levels
during the year to finance the construction of the El Paso facility and other
expansions.

INCOME TAX PROVISION. In 1995 and 1994, the income tax provision reflected
an effective tax rate of 35.5% and 60.6%, respectively. Inflationary
accounting required by Mexican tax law as a result of the 1995 peso
devaluation significantly reduced the effective tax rate in Mexico. This
reduction in the effective tax rate was offset primarily by the non-
deductibility for U.S. tax purposes of the Company's goodwill amortization,
resulting in an effective tax rate of 35.5%.

The income tax provision for 1994 reflects a high effective tax rate due
primarily to the non-deductibility for U.S. income tax purposes of the
Company's goodwill amortization. Although the accreted interest on the Zero
Coupon Notes is not payable until their maturity date of July 15, 1998, the
interest expense is deductible for tax purposes.

NET INCOME. Net income decreased $4.8 million, or 69.0%, to $2.1 million in
1995 from $6.9 million in 1994 due to merger integration charges. Excluding
merger integration charges, net income increased to $16.6 million, or 140.5%,
in 1995 from $6.9 million in 1994. The increase (excluding merger integration
charges) is primarily a result of the improved gross margins and to a lesser
extent the reduction in the effective tax rate in 1995 as compared to 1994.

PESO-U.S. DOLLAR EXCHANGE RATE. During 1995, the Mexican peso suffered an
approximate 36% decline in value against the U.S. dollar. Since the Company
incurs more peso-denominated costs than revenues generated in pesos, the
effect on income from operations was favorable to the Company. Additionally, a
foreign transaction gain of $4.1 million was realized due to settling of peso-
denominated monetary liabilities in the United States after the devaluation.
The devaluation also resulted in a non-cash reduction in stockholders' equity
of approximately $22.3 million.

YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993

NET SALES. Net sales for the year ended December 31, 1994 increased to
$506.3 million, from $440.6 million in 1993, an increase of $65.7 million, or
14.9%. Same store sales (those sales centers open at least one full year)
increased 14.0% in 1994. Sales in the United States, which represented 89.5%
of total Company sales, increased $63.0 million, or 16.2%. The improvement in
U.S. sales is attributable to growth in overall tile

35
<PAGE>

applications, additional penetration in existing markets, the continuing
maturation of sales centers opened in 1992 and 1993 and growth in shipments to
home improvement centers. In addition, the Company opened 12 new sales centers
in the United States during 1994. Sales in Mexico increased $2.1 million, or
4.4%. Mexican operations have been impacted by political and economic
uncertainties, as well as increased competition from domestic manufacturers.

GROSS PROFIT. Gross profit increased $36.8 million, or 18.3%, to $238.0
million in 1994 from $201.2 million in 1993. Gross profit as a percentage of
sales increased to 47.0% in 1994 from 45.7% in 1993. In 1994, the increase in
the gross profit margin was due primarily to benefits from improved
manufacturing efficiencies and the peso devaluation.

EXPENSES. Total expenses in 1993 of $424.8 million, which included $53.2
million and $214.2 million for special charges and write-down of goodwill,
respectively, decreased to $169.7 million in 1994 due to the non-recurrence of
the special charges and write-down of goodwill. Expenses increased 7.9%, to
$169.7 million in 1994 from $157.3 million in 1993, excluding special charges
and write-down of goodwill. This increase resulted from costs associated with
the 14.9% growth in sales associated with the six RDCs opened during the year
and start-up expenses incurred to open the 12 new sales centers. These
increases were partially offset by a decrease in amortization of goodwill due
to the write-down of goodwill in 1993. Expenses as a percentage of sales
decreased to 33.5% in 1994 from 35.7% in 1993 (excluding special charges and
write-down of goodwill). This decrease resulted primarily from increasing
sales in sales centers open at least one full year without a corresponding
increase in these sales centers' operating expenses.

OPERATING INCOME. Operating income increased to $68.3 million in 1994 from
an operating loss in 1993 of $223.6 million. The increase was primarily due to
the non-recurrence of the special charges and write-down of goodwill.
Operating income increased to $68.3 million in 1994 from $43.9 million in
1993, resulting in an increase in the operating margin (excluding special
charges and write-down of goodwill) to 13.5% in 1994 from 10.0% in 1993. The
operating margin increased due to improvements in gross margins, operating
efficiency improvements at the store level and the decrease in amortization of
goodwill.

INTEREST EXPENSE (NET). Interest expense (net) increased to $52.1 million in
1994 from $46.2 million in 1993, an increase of $5.9 million, or 12.8%, due to
higher interest rates and higher debt levels during the year.

INCOME TAX PROVISION (BENEFIT). In 1994, the income tax provision reflects
an effective tax rate of 60.6% as compared to an income tax benefit in 1993 of
1.2%. The income tax provision for 1994 reflects a high effective tax rate due
primarily to the non-deductibility for tax purposes of the Company's goodwill
amortization. Although the accreted interest on the Zero Coupon Notes is not
payable until their maturity date of July 15, 1998, the interest expense is
deductible for tax purposes. In 1993, the lower than expected tax benefit was
due to the non-deductibility for tax purposes of the write-down and
amortization of goodwill and also due to the limitation for tax purposes of
the loss carryback for recognition of a tax refund.

NET INCOME (LOSS). Net income increased $274.6 million, to $6.9 million in
1994, from a loss in 1993 of $267.7 million, as a result of the non-recurrence
of special charges and write-down of goodwill in 1993. Excluding the special
charges and write-down of goodwill, net income increased $13.8 million, to
$6.9 million in 1994, from a loss in 1993 of $6.9 million. Net income,
excluding special charges and write-down of goodwill, increased as a result of
increased operating income offset in part by increased interest expense.

PESO-U.S. DOLLAR EXCHANGE RATE. During 1994, the peso declined 37% in value
against the U.S. dollar, with the largest decline in December, when the peso
decreased approximately 30% in value. Since the Company's Mexican subsidiaries
incur more peso-denominated costs than revenues generated in pesos (due to
dollar-denominated sales), the effect on income from operations was favorable
to the Company. Additionally, a foreign transaction gain of $2.3 million was
realized due to dollar-denominated monetary assets in Mexico exceeding dollar-
denominated monetary liabilities. The devaluation also resulted in a reduction
in stockholders' equity of approximately $33.6 million resulting from
translating peso-denominated assets and liabilities into dollars.

36
<PAGE>

SPECIAL CHARGES. During the fourth quarter of 1993, following a review of
its operations, the Company established provisions for a distribution
enhancement program, revaluation of certain assets, and severance costs for
retiring employees. As a result, the Company recorded a $53,233,000 special
charge in the fourth quarter, which consisted of:

<TABLE>
<S> <C>
Distribution enhancement program............................. $23,350,000
Asset revaluation............................................ 25,155,000
Severance costs.............................................. 4,728,000
-----------
$53,233,000
===========
</TABLE>

The primary components of the distribution enhancement program were
$3,800,000 for facility consolidations, $6,406,000 for costs associated with
inventory relocation, $5,795,000 for lease obligations related to excess
facilities, and $7,349,000 for costs associated with the fourth quarter 1993
study and implementation of this program.

In connection with the review, inventories and property, plant, and
equipment were written down $25,155,000 in the fourth quarter of 1993. This
write-down consisted of a $17,000,000 reserve for inventories which under the
distribution enhancement program were not cost beneficial to relocate. The
remainder of the $25,155,000 charge consisted of write-downs of $8,155,000 for
manufacturing equipment which was replaced with more efficient technology.

WRITE-DOWN OF GOODWILL. During the fourth quarter of 1993, management
reviewed the operations referred to above under "Special Charges." In
connection with this review, the Company assessed the carrying amounts of
goodwill at each of the Company's business units. As a result, the Company
recorded a $214,235,000 write-down of goodwill.

The Mexican business units (Dal-Tile Mexico and Materiales) had not achieved
expected operating results, due primarily to large increases in capacity added
by other Mexican tile manufacturers in anticipation of strong growth in
Mexico. An oversupply of production capacity throughout 1993 resulted in
pricing pressures and a reduction of the Company's market share in Mexico.
Additionally, the Mexican economy retreated during 1993. Exports to the United
States market did not grow as expected due to downturns in the construction
industry and continued recessionary conditions in California.

The Company's subsidiary, Dal-Minerals, owns the mineral rights to
significant reserves of talcose rock (talc). It was expected that the
Company's usage of talc would significantly increase and that alternative uses
of talc could be identified and economically exploited. The Company's use of
talc was not significantly increased and the Company was unable to develop
satisfactory alternative markets for talc.

R&M, a distributor of refractories, projected its cash flows to
significantly decline as more efficient technology replaced the use of
refractories.

Based on these assessments, management believed that goodwill was impaired
at the business units referred to above. As a result, the fair value of these
business units was estimated using independent firms and cash flow projections
and compared to the carrying values of related assets. Accordingly, in 1993,
the Company wrote-down related unamortized goodwill balances as set forth
below:

<TABLE>
<S> <C>
Dal-Tile Mexico and Materiales.............................. $ 97,658,000
Dal-Minerals................................................ 87,073,000
R&M......................................................... 29,504,000
------------
$214,235,000
============
</TABLE>

37
<PAGE>

QUARTERLY RESULTS

The following table sets forth certain unaudited quarterly operating results
for the quarter ended June 30, 1996 and the fiscal years ended December 31,
1995 and 1994. This information is unaudited but, in the opinion of the
Company's management, includes all adjustments necessary for a fair
presentation of the results of operations for such periods.

<TABLE>
<S> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Year Ended December 31, 1996
Net sales............................ $170,674 $180,849
Gross profit......................... 82,734 85,334
Operating income before non-recurring
charges............................. 23,224 21,928
Gross margin......................... 48.5% 47.2%
Operating margin before non-recurring
charges............................. 13.6% 12.1%
Year Ended December 31, 1995
Net sales............................ $119,353 $116,602 $117,991 $120,865
Gross profit......................... 61,243 61,414 62,570 64,220
Operating income before non-recurring
charges............................. 16,577 19,380 20,493 20,505
Gross margin......................... 51.3% 52.7% 53.0% 53.1%
Operating margin before non-recurring
charges............................. 13.9% 16.6% 17.4% 17.0%
Year Ended December 31, 1994
Net sales............................ $117,177 $129,568 $132,077 $127,486
Gross profit......................... 53,468 60,250 63,286 61,032
Operating income before non-recurring
charges............................. 14,299 18,566 18,644 16,808
Gross margin......................... 45.6% 46.5% 47.9% 47.9%
Operating margin before non-recurring
charges............................. 12.2% 14.3% 14.1% 13.2%
</TABLE>

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("Statement 121"), which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying value.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company has adopted Statement 121 and, based
on current circumstances, such adoption will not materially impact the
Company's annual financial results.

In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-
Based Compensation" ("Statement 123"), which provides an alternative to APB
Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for
stock-based compensation issued to employees. Statement 123 allows for a fair
value based method of accounting for employee stock options and similar equity
instruments. However, for companies that continue to account for stock-based
compensation arrangements under APB Opinion No. 25, Statement 123 requires
disclosure of the pro forma effect on net income and net income per share of
its fair value based accounting for those arrangements. These disclosure
requirements are effective for fiscal years beginning after December 15, 1995,
or upon initial adoption of Statement 123, if earlier. The Company continues
to evaluate the provisions of Statement 123 and has not determined whether it
will adopt the recognition and measurement provisions of Statement 123, which
adoption the Company believes will not materially impact the Company's
financial results.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company's principal sources of cash were from operating
activities and bank borrowings. Cash used in operating activities was $15.7
million for the six months ended June 30, 1996 and cash provided

38
<PAGE>

by operating activities was $9.6 million for the same period in 1995. Cash was
used in the six months ended June 30, 1996, principally to fund payments of
trade accounts payable as a result of the timing of payments to vendors,
capital expenditures and the payment of the $17.0 million semiannual interest
due in respect to the Series A Notes and the Series B Notes. Cash provided by
operating activities was $40.7 million in 1995 compared to $31.5 million in
1994. Cash flow from operations was the primary source of cash.

On January 9, 1990, as part of the AEA Acquisition, the Company entered into
the Series Note Agreement with respect to the Series A Notes and the Series B
Notes and the Existing Bank Credit Agreement. The Series A Notes and the
Series B Notes had an aggregate outstanding balance of $276.0 million on June
30, 1996. The Series A Notes and Series B Notes are payable in annual
installments with the first installment of $44.0 million having been due on
January 9, 1996 with additional annual installments, continuing through
January 9, 2002. On January 9, 1996, the Company paid $44.0 million in
principal on the Series A Notes and $17.0 million in interest on the Series A
Notes and the Series B Notes; the payments were funded from cash and
borrowings under the Existing Bank Credit Agreement. Interest payments in an
amount equal to approximately $14.7 million on July 9, 1996, and declining
thereafter with each principal payment, are payable in respect of the Series A
Notes and Series B Notes on January 9 and July 9 of each year.

On August 11, 1993, Dal-Tile issued $133.2 million principal amount at
maturity of the Zero Coupon Notes (which are due July 15, 1998) from which it
received gross proceeds of approximately $75.0 million and net proceeds of
approximately $71.1 million after deducting fees and expenses. The net
proceeds were used to make an equity contribution to Dal-Tile's wholly owned
subsidiary, Dal-Tile Group, which used such amounts to reduce the outstanding
principal amount under the Existing Bank Credit Agreement. The Zero Coupon
Note Indenture currently prohibits Dal-Tile from paying dividends on the
Common Stock.

Amounts available for borrowing under the Existing Bank Credit Agreement are
limited to the lower of the commitment amount and a borrowing base amount
calculated based on certain levels of inventories and accounts receivable. On
June 30, 1996, the borrowing base calculation did not restrict the Company's
availability under the Existing Bank Credit Agreement of $160 million.
Outstanding borrowings at June 30, 1996 were $123.2 million, and additional
availability was $36.8 million. Under the Existing Bank Credit Agreement, a
commitment fee of 0.5% per annum of the unused line of credit is payable
monthly. Outstanding borrowings under the Existing Bank Credit Agreement are
payable in full on January 9, 1998. Dal-Tile's subsidiaries currently are
prohibited from paying dividends or making loans or advances to Dal-Tile. Dal-
Tile's subsidiaries also are prohibited from incurring additional debt and are
required to maintain certain minimum levels of net worth (as defined in the
Existing Bank Credit Agreement) and working capital and to satisfy a minimum
quick ratio requirement as part of the Existing Bank Credit Agreement. The
Company was in compliance with such covenants at June 30, 1996.

In connection with the AO Acquisition, the Company received $27.6 million in
cash, which is included in the June 30, 1996 Consolidated Financial Statements
as cash. The Company had an additional $6.0 million in cash balances, for
total cash balances of $33.6 million at June 30, 1996.

The Company's liquidity requirements arise primarily from working capital
needs, which consist principally of inventory and accounts receivable, capital
expenditures and debt service. Cash used in financing activities was
approximately $12.5 million for the six months ended June 30, 1996, which
reflected borrowings under the Existing Bank Credit Agreement to repay $44.0
million in principal under the Series A Notes and $17.0 million in interest on
the Series A Notes and the Series B Notes. Cash provided by financing
activities was $24.2 million for the year ended December 31, 1995 (excluding
$27.6 million from proceeds of the sale of capital stock to AWI), which
primarily reflects borrowings under the Existing Bank Credit Agreement and, to
a lesser extent, vendor borrowings to finance certain machinery and equipment
at the new El Paso wall tile manufacturing facility plant. Cash used in
financing activities was $8.4 million for the year ended December 31, 1994,
which reflected repayments under the Existing Bank Credit Agreement.

The Company is undertaking the Refinancing to improve its financial and
operating flexibility, to reduce its interest expense and to extend the
amortization of its senior indebtedness.

39
<PAGE>

The Company has paid $27.6 million out of the cash proceeds from the AO
Acquisition to redeem $32.6 million aggregate principal amount at maturity
($26.0 million aggregate accreted value at the Redemption Date) of the Zero
Coupon Notes at a redemption price of 106% of their accreted value on the
Redemption Date.

In July 1996 the Company commenced the Zero Coupon Tender Offer and the Zero
Coupon Solicitation with respect to the outstanding Zero Coupon Notes,
excluding the Redeemed Notes previously called for redemption. The Zero Coupon
Tender Offer will expire on August 13, 1996 unless extended.

Additionally, the Company expects to enter into the New Bank Credit
Agreement contemporaneously with the closing of the Offerings and the Private
Placement. The Refinancing is expected to be completed simultaneously with or
shortly after the closing of the Offerings and the Private Placement. The
Company will use the net proceeds of the Offerings and the Private Placement
and the borrowings under the New Bank Credit Agreement: (i) to effect the Zero
Coupon Tender Offer and the Zero Coupon Solicitation; (ii) to repay in full
outstanding borrowings by Dal-Tile's wholly owned subsidiary, Dal-Tile Group,
under the Existing Bank Credit Agreement; (iii) to repay $176.0 million of the
Series A Notes and $100.0 million of the Series B Notes; and (iv) to pay
accrued interest and estimated prepayment premiums on certain debt to be
repaid, the Termination Fee of $4.0 million and fees and expenses; provided,
however, that the net proceeds from the Offerings will not be used to repay
Series A Notes or Series B Notes. In connection with the Refinancing, the
Company will record an extraordinary charge of $20.7 million, net of tax, for
the write off of existing deferred financing fees, the Termination Fee and
prepayment premiums on certain debt to be repaid. This charge will be recorded
in the Company's third quarter of 1996 upon completion of the Refinancing. See
"Unaudited Pro Forma Consolidated Financial Information."

The New Term Loan will be $275.0 million and the New Revolving Credit
Facility will be $250.0 million. Loans under the New Bank Credit Agreement
will bear interest at variable rates. The Company will be required to make
annual amortization payments in respect of the New Bank Credit Agreement. See
"Refinancing," "Capitalization" and "Description of Certain Indebtedness--New
Bank Credit Agreement."

The Company believes that existing cash balances and cash flow from
operating activities (if generated as anticipated) together with borrowings
available under the New Bank Credit Agreement will be sufficient to fund
future working capital needs, capital spending requirements and debt service
requirements of the Company in the forseeable future.

Capital expenditures were $14.2 million and $29.4 million for the years
ended December 31, 1994 and 1995 respectively, and were $11.2 million for the
six months ended June 30, 1996. The expenditures during 1995 were used to fund
the construction of the El Paso plant, routine capital expenditures and
leasehold improvements of new sales centers. The expenditures during 1996 were
used to fund routine capital improvements. During 1996 and 1997 the Company
plans to spend approximately $50.0 million (of which $11.2 million has been
expended through June 30, 1996) and $50.0 million, respectively, to expand its
manufacturing capacity, improve manufacturing efficiencies, upgrade its
research and development facilities, integrate the Company's and AO's
management information systems, make leasehold improvements at certain sales
centers and fund routine capital maintenance. As of June 30, 1996, the Company
had entered into commitments of approximately $14.0 million for these
expansion plans. The Company estimates total cash AO merger integration costs
of approximately $17.0 million pertaining to severance and lease commitments
for manufacturing, distribution and corporate facility consolidations, as well
as elimination of duplicate and overlapping positions. Of this amount, the
Company incurred cash costs of $12.8 million in connection with the AO merger
integration in the first six months of 1996. The Company believes cash
generated from operations and availability under the New Bank Credit Agreement
will be sufficient to fund expansion of its manufacturing facilities and
merger integration costs.

In 1994, the Company began implementation of its distribution enhancement
program. This program centered around the six RDCs which began operations in
1994. During 1995, the costs associated with this program were completed.
Costs of $10.8 million relating to the completion of the RDC infrastructure
and consolidation with the Company sales centers were fully implemented. In
addition, costs of $1.4 million relating to severance payments for executives
and other employees were incurred in 1995. The AO Acquisition has prompted the
Company to reevaluate the RDC system, including location of the RDCs and
product flow through the RDCs. As a result of this evaluation, the Company has
closed one RDC and anticipates closing one additional RDC.

40
<PAGE>

At June 30, 1996, the Company's accumulated deficit was $260.2 million. The
Company believes that the deficit has not affected its ability to obtain
financing or negotiate favorable terms with its vendors due in part to working
capital of $150.1 million at June 30, 1996 and additional availability of
$36.8 million under the Existing Bank Credit Agreement at June 30, 1996.

The peso devaluation and economic uncertainties in Mexico are not expected
to have a significant impact on the Company's liquidity. Since the Company has
no peso-based borrowings, high interest rates in Mexico are not expected to
directly affect the Company. The Company may encounter changes in its credit
terms to Mexican customers; however, the consolidated impact is not expected
to be material. Since the Company's Mexican subsidiaries incur more peso-
denominated costs than revenues generated in pesos, the effect of any peso
devaluation on income from operations has been favorable to the Company.

The Company is involved in various judicial and administrative proceedings
relating to environmental matters. The Company is currently engaged in
environmental investigation and remediation programs at certain sites relating
to activities prior to the AEA Acquisition and AO Acquisition, respectively.
The Company maintains a reserve for remediation relating to environmental
conditions and activities existing prior to the AEA Acquisition and is
entitled to indemnification with respect to certain expenditures incurred in
connection with environmental matters. It does not expect the ultimate
liability with respect to such investigation and remediation activities to
have a material effect on the Company's liquidity and financial condition. In
addition, with respect to the investigation and remediation programs relating
to environmental conditions and activities prior to the AO Acquisition, the
Company believes that, based on currently available information and the terms
and conditions of AWI's indemnification obligations under the AO Acquisition
Agreement (as defined below), any liability of AO that is reasonably likely to
arise with respect to such sites would not result in a material adverse effect
on the Company. See "Business--Environmental Regulation."

The United States is a party to GATT. Under GATT, the United States
currently imposes import duties on ceramic tile from non-North American
countries at 17%, to be reduced ratably to 8 1/2% by 2005. Accordingly, GATT
may stimulate competition from non-North American manufacturers who now
export, or who may seek to export, ceramic tile to the United States. The
Company cannot predict with certainty the effect that GATT may have on the
Company's operations.

In 1993, NAFTA was approved by Mexico, the United States, and Canada. NAFTA
has, among other things, removed and will continue to remove, over a
transition period, most normal customs duties imposed on goods traded among
the three countries. In addition, NAFTA will remove or limit many investment
restrictions, liberalize trade in services, provide a specialized means of
settlement of, and remedies for, trade disputes arising under NAFTA, and will
result in new laws and regulations to further these goals. Although NAFTA
lowers the tariffs imposed on the Company's ceramic tile manufactured in
Mexico and sold in the United States, it also may stimulate competition in the
United States and Canada from manufacturers located in Mexico. The United
States currently imposes import duties on ceramic tile from Mexico of 13%,
although these duties on imports from Mexico are being phased out ratably
under NAFTA over a 13-year period. It is uncertain what ultimate effect NAFTA
will have on the Company's results of operations.

EFFECTS OF INFLATION

The Company believes it has generally been able to increase selling prices
and enhance productivity to offset increases in costs resulting from inflation
in the United States and Mexico. Inflation has not had a material impact on
the Company's results of operations during the years ended 1993, 1994 and
1995. Approximately 80.0% of the Company's inventory is valued using the LIFO
inventory accounting method. Therefore, current costs are reflected in cost of
sales rather than in inventory balances. The impact of inflation in Mexico is
uncertain at this time.

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CERAMIC TILE INDUSTRY

Since 1991, the U.S. ceramic tile industry has grown at a faster rate than
overall U.S. construction activity. The Company believes that such growth is
attributable primarily to ceramic floor tile's increasing share over other
types of floor coverings and expects this trend to continue. Within the U.S.
floor covering business, ceramic floor tile principally competes with carpet,
resilient flooring, wood flooring, marble and other stone products. Within the
U.S. wall covering business, ceramic tile principally competes with paint,
wall paper, laminates, fiberglass, corian, marble, granite and wood paneling.
Since 1991, U.S. ceramic tile sales (by unit volume) are estimated to have
increased at a compound annual rate of 9.5% from approximately 916 million
square feet in 1991 to approximately 1.32 billion square feet in 1995. During
this same period, the U.S. new construction market increased at a 6.9%
compound annual rate. Despite an increase of approximately 39% in U.S. per
capita ceramic tile consumption from 3.6 square feet in 1991 to 5.0 square
feet in 1995, the United States continues to lag significantly behind the per
capita ceramic tile consumption in many Western European countries.

The Company believes that a majority of U.S. ceramic tile sales (by unit
volume) in 1995 was comprised of floor tile and that floor tile has been
steadily increasing its share of U.S. ceramic tile sales since 1991. U.S.
ceramic tile unit sales increased at a compound annual rate of 9.5% from 1991
to 1995, primarily as a result of ceramic floor tile increasing its share of
the new residential and residential remodeling segments relative to other
flooring products. During the same period, unit volume sales for carpet,
resilient flooring and wood flooring products increased at compound annual
rates of 6.2%, 4.4% and 8.2%, respectively, while the approximately 23 billion
square foot U.S. floor covering market increased at a compound annual rate of
5.9%. A high percentage of U.S. ceramic floor tile sales are contributed by
imported products. The Company believes that the large percentage of ceramic
floor tile imports into the United States primarily is attributable to the
relative cost position of, and style and design innovation by, European
producers. In the Company's opinion, these advantages have narrowed as a
result of an increasing focus on style and design by American manufacturers,
as well as the introduction in the United States of new technology such as
fast-fire kilns and glaze application equipment which have significantly
improved floor tile's fashion orientation. This technology also has served to
lower manufacturing costs through reduced cycle times, increased yields and
improved labor productivity.

The U.S. wall tile segment consists primarily of 4 1/4 and 6 inch square
tile and a variety of complementary trim and angle pieces. Domestic tile
manufacturers represent the majority of the U.S. wall tile segment. Although
there is no technological or economic barrier to entry in the U.S. wall tile
segment, the Company believes that foreign manufacturers generally have not
offered the breadth of trim and angle pieces necessary for a competitive wall
tile product offering. Traditionally, foreign applications have not utilized
the breadth of trim and angle pieces of comparable U.S. applications. In
addition, wall tile manufacturers must develop capabilities to achieve
consistent color shades for both different production runs and the
corresponding trim and angle pieces to be utilized in a specific application.
As the number of colors, textures and finishes in a product offering
increases, this manufacturing process becomes more complex, particularly in
terms of color shading consistency.

Ceramic tile is used for residential and commercial applications (new
construction as well as remodeling). Glazed wall tile is used for interior
walls, shower walls, countertops, vanity tops, ceilings and kitchen
backsplashes, as well as light duty residential floors. Ceramic floor tile is
common in commercial and residential floors, walls, countertops, patios and
exterior cladding. Unglazed mosaic tile typically is applied in commercial
walls and floors, as well as in decorative murals and logos. Glazed mosaics
are commonly used in light usage areas as a complement to the unglazed mosaic
products, kitchen backsplashes, shower walls, and as a decorative accent
blended into unglazed mosaics. Both glazed and unglazed mosaic tile are also
commonly used in bathrooms for residential and commercial purposes.

The U.S. ceramic tile industry is highly fragmented at both the
manufacturing and distribution levels. In 1995, approximately 59% of U.S.
ceramic tile sales consisted of imports, including the approximately 10% of
ceramic tile sold in the United States that was manufactured by the Company in
Mexico. Historically, U.S. ceramic tile imports were principally from Italian
manufacturers, as well as from Mexican, Spanish and Brazilian manufacturers.
In recent years, Mexican manufacturers (including the Company) have increased
their export

42
<PAGE>

sales to the United States because of weakness in the Mexican economy and
improvement in their relative cost position due to the devaluation of the
peso. The United States currently imposes import duties on ceramic tile from
Mexico of 13%, although these duties on imports from Mexico are being phased
out ratably under NAFTA over a 13-year period. Under GATT, the United States
currently imposes import duties on ceramic tile from non-North American
countries at 17%, to be reduced ratably to 8 1/2% by 2005.

The U.S. ceramic tile industry distributes its products through three
distinct distribution channels which, in general, target specific
applications. The industry's largest distribution channel is the independent
distributor channel consisting of both independent ceramic tile wholesalers
and floor covering wholesalers. The Company believes that this channel
represents approximately one-half of the U.S. ceramic tile industry's unit
volume sales and that this channel is highly fragmented, consisting of more
than 1,000 distributors, including many single store operations. Foreign
manufacturers primarily utilize this distribution channel to access U.S.
consumers of ceramic tile. The independent distributor's largest selling
product is floor tile and this channel primarily targets residential
remodeling and new residential construction applications. The Company believes
that ceramic tile manufacturer-operated sales centers represent approximately
one-third of the U.S. ceramic tile industry's unit volume sales. Sales centers
primarily serve residential new construction applications, as well as
commercial new construction and remodeling applications. The Company believes
that the remainder of the U.S. ceramic tile industry's unit volume sales is
distributed through home center retailers. Home center retailers primarily
serve residential remodeling applications. In addition, the Company believes
that home center retailers have increased consumer awareness and accessibility
of ceramic tile.

On large commercial and residential projects, ceramic tile manufacturers
often seek to work directly with architects, builders, developers and design
professionals on aesthetic, technical and service considerations in an attempt
to obtain specifications for use of their products. On smaller residential and
commercial projects, consumers typically contact tile contractors for product
and installation advice. Ceramic tile contractors often influence purchasing
decisions and, in the Company's opinion, seek to purchase from a supplier with
high quality standards, a broad product line, local distribution and
competitive prices.

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BUSINESS

The Company believes that it is the largest manufacturer, distributor and
marketer of ceramic tile in North America, and one of the largest in the
world. The Company produces and distributes a broad line of high quality wall
tile and floor tile products for both residential and commercial applications,
marketed primarily under its Daltile and American Olean brand names. The
Company's strengths include (i) the U.S. ceramic tile industry's broadest
distribution system, consisting of Company-operated sales centers, independent
distributors and home center retailers, (ii) leading brand names, (iii) North
America's largest ceramic tile manufacturing capacity, with manufacturing
plants in the United States and Mexico, and (iv) the U.S. ceramic tile
industry's most comprehensive product offering, including glazed and unglazed
ceramic tile, stone products and installation materials and tools. From 1985
through 1995, the Company's net sales have increased from $169.1 million to
$474.8 million, exclusive of the AO Acquisition described below.

On December 29, 1995, the Company acquired AO and certain related assets of
the ceramic tile business of AWI. As a result of the AO Acquisition, the
Company has increased its presence in all ceramic tile applications and
distribution channels and expects to achieve significant cost savings. The
Company believes, inclusive of AO, that it had an approximately 27% unit share
of the 1.32 billion square feet of ceramic tile sold in the United States in
1995, which was significantly greater than the Company's nearest competitor.
Pro forma for the AO Acquisition, the Company's net sales and operating income
for the fiscal year ended December 31, 1995 were $724.4 million and $117.2
million, respectively. See "Unaudited Pro Forma Consolidated Financial
Information."

COMPANY ATTRIBUTES AND OPERATING STRATEGIES

The Company believes that it is well positioned to capitalize on the growing
demand for ceramic tile. The following attributes and operating strategies
have enabled the Company to achieve its current market presence and should
serve as a basis for the Company's future growth and profitability:

. INDUSTRY'S BROADEST DISTRIBUTION NETWORK. The Company's products are sold
through (i) Company-operated sales centers, (ii) independent distributors,
and (iii) home center retailers. The Company's sales center network consists
of approximately 235 Company-operated sales centers (after giving effect to
the anticipated closing of redundant sales centers in connection with the AO
Acquisition) in 44 states, which is the largest wholesale distribution
network in the U.S. ceramic tile industry, serving customers in all 50
states. The sales centers function as a "one-stop" source for ceramic tile,
stone products and allied products, serving tile contractors, architects,
design professionals, builders and developers. As a result of the AO
Acquisition, the Company also markets its products to over 100 independent
distributor locations for resale to retail outlets. In addition, the Company
believes that it is one of the U.S. ceramic tile industry's largest
suppliers to the DIY and BIY markets by supplying home center retailers,
including The Home Depot, Lowe's, Menards and Payless Cashways. The home
center retailer channel has provided the Company with new sources of sales
over the past five years. Sales to both independent distributors and home
center retailers are expected to present significant growth opportunities
for the Company.

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<PAGE>

number of new floor tile product introductions, (ii) focused on shortening
product introduction cycle time, (iii) expanded its relationships with
leading glaze and equipment manufacturers, (iv) focused on evolving consumer
preferences to deliver products consistent with current design trends, and
(v) increased its investment in research and development to further develop
new products and manufacturing capabilities.

. BROAD AND DIFFERENTIATED PRODUCT LINE. The Company offers the most
comprehensive product line in the U.S. ceramic tile industry, including
glazed floor tile, glazed wall tile, glazed and unglazed mosaic tile,
porcelain tile, quarry tile, stone products and allied products. In
addition, the Company believes that it produces one of the industry's
largest offerings of colors, textures and finishes and that its ability to
efficiently manufacture the industry's largest offering of trim and angle
pieces differentiates the Company from many of its competitors, including
foreign ceramic tile manufacturers. Management believes that the Company's
comprehensive product line, including its trim and angle pieces and fashion-
oriented tile products, results in an average selling price for Company-
produced tile that is higher than the industry average. The Company also
sells products manufactured by third parties for resale, including ceramic
tile and allied products, which constituted approximately 30% of net sales
in 1995, inclusive of AO. The Company intends to increase the amount of
Company-manufactured products as a percentage of net sales, which products
historically have generated higher margins than products purchased for
resale.

. LOW COST MANUFACTURING. The Company has annual manufacturing capacity of
approximately 321 million square feet, the largest ceramic tile
manufacturing capacity in North America. The Company's lowest cost
manufacturing facility is located in Monterrey, Mexico and represents
approximately 40% of the Company's manufacturing capacity. In addition, as a
result of the AO Acquisition, the Company has the contractual right to be
supplied with an additional 24 million square feet of floor tile annually by
a Mexican joint venture. In 1995, the Company initiated full production at
its newest facility, a highly automated wall tile plant in El Paso, Texas.
Since 1991, the Company (exclusive of AO) has invested approximately $90
million in capital expenditures, including approximately $63 million in new
plants and state-of-the-art equipment to increase manufacturing capacity,
improve efficiency and develop new manufacturing capabilities. Over the next
18 months, the Company intends to further increase capacity at its existing
floor tile factories in the United States and Mexico. The Company believes
that additional manufacturing investments will continue to generate
attractive rates of return due to the Company's economies of scale in
manufacturing and its broad distribution network, thereby allowing the
Company to spread fixed costs over a wider sales base.

SIGNIFICANT BENEFITS RESULTING FROM THE AO ACQUISITION

. COST SAVINGS. The Company expects to achieve significant cost savings as a
result of the AO Acquisition by (i) consolidating manufacturing facilities,
(ii) restructuring its sales organizations, and (iii) eliminating
duplicative administration functions. The Company believes that the
operational changes implemented to date will enable it to achieve annual
cost savings of approximately $34.9 million (of which approximately $26.8
million is expected to be realized in 1996, and the full amount is expected
to be realized beginning in 1997). These cost savings include $10.1 million
attributable to reductions in depreciation and amortization expense pursuant
to purchase accounting. In connection with these operational changes, the
Company has recorded non-recurring pre-tax merger integration charges of
$9.0 million in the six months ended June 30, 1996 and $22.4 million in the
fiscal year ended December 31, 1995. In addition to the operational changes
implemented to date, the Company intends to implement additional cost saving
initiatives, which the Company believes will enable it to realize
significant additional cost savings.

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<PAGE>

. SALES DIVERSIFICATION. As a result of the AO Acquisition, the Company is
diversified both in its business mix and geographical presence. The Company
believes that its sales are relatively evenly distributed between
residential and commercial applications. In addition, AO's significant
presence in the northeast and midwest regions of the United States
complements the Company's long-standing presence in the west and sunbelt
regions of the United States.

DISTRIBUTION, SALES AND MARKETING

The Company distributes its products through three separate distribution
channels consisting of (i) Company-operated sales centers, (ii) independent
distributors, and (iii) home center retailers. The Company has organized its
business into three strategic business units to address the specific customer
needs of each distribution channel. Each strategic business unit is supported
by a dedicated sales force.

The Company has a network of regional distribution centers located
strategically throughout the United States in order to improve customer
service in each distribution channel through shorter lead times, increased
order fill rates and improved on-time deliveries to its customers. In
addition, the RDCs enhance the Company's ability to plan and schedule
production and to manage its inventory requirements.

COMPANY-OPERATED SALES CENTERS

The Company primarily distributes its Daltile brand products through its
network of approximately 235 Company-operated sales centers in North America
(after giving effect to the anticipated closing of redundant sales centers in
connection with the AO Acquisition) in 44 states, which is the largest
wholesale distribution network in the U.S. ceramic tile industry, serving
customers in all 50 states. For the fiscal year ended December 31, 1995,
approximately 87% of the Company's net sales (exclusive of AO net sales) were
made through its sales center distribution system in the United States and
Canada. Giving effect to the AO Acquisition on a pro forma basis would have
reduced the sales center contribution to approximately 80% of net sales in
1995 due to the addition of AO's network of independent distributors and AO's
sales to home center retailers.

In addition to sales center staff, this distribution channel is supported by
a dedicated sales force of over 100 people. The Company's Daltile brand also
has a dedicated group of over 40 sales representatives for the architectural
community. The architectural community exercises significant influence over
the specification of products utilized in commercial applications.

The Company has designed each sales center to serve as a "one-stop" source
that provides its customers with one of the U.S. ceramic tile industry's
broadest product lines--a complete selection of glazed floor tile, glazed wall
tile, glazed and unglazed mosaic tile, porcelain tile, quarry tile, stone
products and allied products. In addition to products manufactured by the
Company, the sales centers carry a selection of other products to provide
customers with a broader product line. The sales centers generally range in
size from 2,000 to 30,000 square feet, with a typical center occupying
approximately 12,000 square feet. The sales centers consist of a showroom
dedicated to displaying the Company's product offerings together with office
space and a warehouse in which inventory is stocked. Sales center displays and
inventories are designed to reflect local consumer preferences. The Company's
sales centers generally are located in light industrial areas rather than
retail areas and generally occupy moderately priced leased space under short-
term leases.

The Company has expanded its sales center distribution system from 152 U.S.
sales centers in 1991 to approximately 270 U.S. sales centers, which includes
61 sales centers acquired in the AO Acquisition, as of December 31, 1995. The
Company is in the process of consolidating its sales center network and
expects to reduce its total sales centers to approximately 235 by early 1997.
Beginning in 1997, the Company may open additional sales centers in areas
where factors such as population, construction activity, local economic
conditions and usage of tile create an attractive environment for a sales
center. From time to time, the Company closes sales centers in locations where
economic and competitive conditions have changed.

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INDEPENDENT DISTRIBUTORS

As a result of the AO Acquisition, the Company significantly expanded its
presence in the independent distributor channel. The Company believes that
this channel represents approximately one-half of the U.S. ceramic tile
industry's unit volume sales. The independent distributor channel is the
largest channel for ceramic floor tile and is expected by the Company to
present a significant growth opportunity for the Company. The Company has a
dedicated business unit, which includes 11 regional sales managers, to serve
the particular requirements of this channel. The Company currently distributes
the American Olean brand through approximately 100 independent distributor
locations who service retail outlets. The Company's strategy is to increase
its presence in the independent distributor channel, particularly in floor
tile products.

Sales within Mexico are made primarily through a network of independent
retailers who are principally supplied by the Company's Monterrey, Mexico
manufacturing facility.

HOME CENTER RETAILERS

The Company also believes that it is one of the U.S. ceramic tile industry's
largest suppliers to the DIY and BIY markets by supplying home center
retailers, such as The Home Depot, Lowe's, Menards and Payless Cashways,
serving more than 1,000 home center retail outlets nationwide. The home center
retailer channel has provided the Company with new sources of sales over the
past five years, having grown from a nominal amount in 1991 to approximately
$60 million in 1995 on a pro forma basis inclusive of AO. Sales to home center
retailers are expected to continue presenting significant growth opportunities
for the Company.

ESTABLISHED BRANDS AND SPECIAL MARKETING PROGRAMS

The Company believes that it has two of the leading brand names in the U.S.
ceramic tile industry--Daltile and American Olean--and has recently
established the new Homesource brand name. Daltile and American Olean have
each been marketed for more than 30 years and have achieved high brand
recognition among customers.

The Company-operated sales centers distribute the Daltile brand, which was
repositioned in the marketplace in 1996. This repositioning included the
introduction of an updated product array, a new logo, new sampling materials
and a fully integrated marketing program, all emphasizing a new focus on
fashion. The product offering was streamlined based on the Company's
assessment of the needs of professional installers, designers, architects and
builders, as well as a review of competitive product offerings. The marketing
program includes advertising to targeted customer segments, public relations
support, merchandising (displays/sample boards, chip chests),
literature/catalogs and an internet website. Through its Daltile brand, the
Company provides the most comprehensive product offering in the U.S. ceramic
tile industry.

The American Olean brand consists of a full product offering and is
distributed primarily through independent distributors. The brand is supported
by a fully integrated marketing program, including trade publication
advertising, consumer advertising, public relations efforts, cooperative
advertising programs for dealers and distributors, displays, merchandising
(sample boards, chip chests), and literature/catalogs.

In addition to distributing the Daltile and American Olean brands, home
center retailers distribute a newly established home center brand--Homesource.
The Homesource brand includes a targeted product offering, customized point of
sale displays and merchandising, cooperative advertising support, literature/
catalogs and sampling materials.

The Company also has special marketing programs with the following
established brands: Kohler(R) for bathroom and kitchen fixture color
coordination; and Laura Ashley(R) for home furnishing accessories
coordination. Through such programs, the Company develops ceramic tile
products and merchandising programs to complement these other product lines.
The Company believes its brands and the special marketing programs increase
the value of its tile products through differentiation.

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PRODUCTS AND PRODUCT DEVELOPMENT

The Company manufactures and sells different types of ceramic tile in
various sizes and styles for commercial and residential use, as well as
related trim and angle pieces. The Company also sells stone and quarry-related
products and allied products purchased from third-party manufacturers.
Management believes that "one-stop shopping," which requires a full product
line at each of its Company-operated sales centers, is an important
competitive advantage in servicing its core customers, especially tile
contractors.

For the fiscal year ended December 31, 1995, approximately 70% of Company
net sales (exclusive of AO net sales) were Company-manufactured products, with
the remainder being provided by other domestic manufacturers, as well as
foreign manufacturers located principally in Italy, Spain and Japan. This
percentage would not have materially changed in 1995 as a result of the AO
Acquisition. The Company intends to increase the amount of Company-
manufactured products as a percentage of net sales.

The Company believes that, due to technological innovations, the U.S.
ceramic tile industry is increasing its fashion orientation, particularly in
floor tile. The Company has developed capabilities to produce fashionable and
innovative tile products and to simulate natural products such as stone,
marble and wood. In order to capitalize on the increased demand for, and high
margins available from, fashion-oriented tile products, the Company has (i)
increased the number of new floor tile product introductions, (ii) focused on
shortening product introduction cycle time, (iii) expanded its relationships
with leading glaze and raw material manufacturers, (iv) focused on consumer
preferences to deliver products consistent with current design trends, and (v)
increased its investment in research and development to further develop new
products and manufacturing capabilities.

CUSTOMERS

The Company's core customers consist of large and small tile contractors,
architects, design professionals, builders, developers, independent
distributors and flooring dealers. The Company also sells to the DIY and BIY
market through relationships with home center retailers, such as The Home
Depot, Lowe's, Menards and Payless Cashways, and is a significant supplier to
this channel. The Company has a broad and diversified customer base,
consisting of more than 30,000 active accounts in the United States.

The Company also has sales to over 250 national accounts, including
recognized national restaurant chains, such as McDonald's, Wendy's, Taco Bell
and Denny's, and other national chain stores, such as Barnes & Noble book
stores, Wal-Mart stores, and Exxon service stations.

The Company does not rely on any one customer or group of customers for a
material amount of its net sales. The Company's largest customer for the
fiscal year ended December 31, 1995 accounted for approximately 6% of net
sales (inclusive of AO net sales), and the Company's ten largest customers
accounted for approximately 13% of net sales (inclusive of AO net sales) in
such period.

MANUFACTURING

The Company operates 11 manufacturing facilities with an aggregate annual
manufacturing capacity of 321 million square feet. Since 1991, the Company
(exclusive of AO) has invested approximately $90 million in capital
expenditures, including approximately $63 million in new plants and state-of-
the-art equipment to increase manufacturing capacity, improve efficiency and
develop new capabilities. Manufacturing capacity expanded from 203 million
square feet in 1991 to 321 million currently. As a result of the AO
Acquisition, the Company also has a 49.99% interest in RISA, a Mexican joint
venture with Interceramic, which, pursuant to contractual arrangements, will
supply the Company, at the Company's option, with up to 24 million additional
square feet of floor tile annually. In the third quarter of 1996, the Company
acquired a floor tile facility with an annual manufacturing capacity of
approximately 10 million square feet in North Carolina for a purchase price of
$3.5 million.

The Company's largest and lowest cost manufacturing facility, which
represents approximately 40% of the Company's annual manufacturing capacity,
is located in Monterrey, Mexico. The Company's newest

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manufacturing plant is a state-of-the-art wall tile facility in El Paso, Texas
with capacity of 20 million square feet. The Company believes that its El Paso
facility is one of the lowest cost wall tile facilities in the United States,
primarily as a result of the facility's high kiln recovery and high
productivity rates. The Company's manufacturing organization also creates
additional competitive advantages for the Company due to its ability to
manufacture a differentiated product line consisting of one of the industry's
broadest product offerings of colors, textures and finishes, as well as the
industry's largest offering of trim and angle pieces and in its ability to
utilize the industry's newest technology. The Company's manufacturing strategy
is to maximize production at its lowest cost manufacturing facilities,
continue ongoing improvements by implementing demonstrated best practices,
seek opportunities to specialize its factories by product line and continue to
invest in manufacturing technology to lower its costs, develop new
capabilities and expand capacity.

The following table summarizes the products currently manufactured at the
Company's facilities:

<TABLE>
<CAPTION>
FACILITY PRODUCT TYPE
-------- ------------
<S> <C>
Fayette, AL (1)...... Unglazed quarry tile
Pocatello, ID........ Glazed porcelain tile
Lewisport, KY (1).... Unglazed quarry tile
Monterrey, Mexico.... Glazed wall tile; Glazed floor tile; Glazed mosaics
Mt. Gilead, NC....... Glazed floor tile
Olean, NY (1)........ Unglazed ceramic mosaic tile
Gettysburg, PA....... Glazed and unglazed mosaic tile
Jackson, TN (1)...... Glazed mosaic tile
Conroe, TX........... Glazed floor tile
Dallas, TX........... Glazed wall tile
El Paso, TX.......... Glazed wall tile
Coleman, TX.......... Unglazed quarry tile
</TABLE>
- --------
(1) Acquired as part of the AO Acquisition.

The Company commenced operations in Mexico at its Monterrey facility in 1955
and, since then, has been manufacturing products at this facility for U.S. and
Mexican consumption. Throughout its history, the Monterrey facility has
produced ceramic tile which meets U.S. quality standards as defined by the
American National Standards Institute. The Monterrey location contains five
distinct manufacturing facilities, three of which produce ceramic tile, one of
which produces frit (ground glass) and one of which produces refractories.

As a result of the AO Acquisition, the Company has evaluated all of its
manufacturing facilities and has begun to consolidate its manufacturing
network. The Company consolidated its wall tile production at the end of the
first quarter of 1996 by closing its Lansdale and Jackson wall tile
facilities. See "Risk Factors." In addition, the Company plans to consolidate
a portion of its mosaic tile production in late 1996.

RAW MATERIALS

The Company manufactures (i) wall tile primarily from talc and clay, (ii)
floor tile and glazed mosaic tile primarily from impure nepheline syenite and
clay, (iii) unglazed ceramic mosaic tile primarily from pure nepheline syenite
and clay, and (iv) unglazed quarry tile from clay.

The Company owns long-term talc mining rights in Texas which satisfy nearly
all of the Company's talc requirements. Talc represents the Company's largest
tonnage raw material requirements. The Company owns long-term clay mining
rights in Kentucky which satisfy nearly all of the Company's clay requirements
for producing unglazed quarry tile.

The Company purchases a number of different grades of clay for the
manufacture of its non-quarry tile. Management believes that there is an
adequate supply of all grades of clay and that all are readily available from
a number of independent sources.

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The Company purchases all of its impure nepheline syenite requirements from
Minnesota Mining and Manufacturing Company; however, management believes that
there is an adequate supply of impure nepheline syenite which can be obtained
from other sources. The Company purchases pure nepheline syenite from Unimin
Corporation which is the only major supplier of this raw material in North
America. Management believes that if there were a supply interruption of pure
nepheline syenite, the Company could use feldspar in its production of mosaic
tile, which can be purchased from a number of sources at comparable cost.

The Company uses glazes on a significant percentage of its manufactured
tile. Glazes consist of a mixture of frit (ground glass), zircon, stains and
other materials, with frit representing the largest ingredient. The Company
manufactures approximately 64% of its frit requirements.

The Company reviews its sources of raw materials periodically and may
eliminate or reduce the use of certain raw materials based on the cost and
chemical composition of alternative sources.

MANAGEMENT INFORMATION SYSTEMS

As a result of the AO Acquisition, the Company will combine two management
information systems into one fully integrated management information system.
To facilitate the integration of the two systems, the Company has engaged the
services of a major systems integration firm to assist in the planning,
training and conversion process. The integration is anticipated to be
completed in 1997.

COMPETITION

Sales of the Company's products are made in a highly competitive
marketplace. The Company estimates that approximately 100 tile manufacturers
participate in the U.S. ceramic tile industry, more than half of which are
based outside of the United States. With respect to the Company's various
product lines, the Company estimates that it competes with at least ten major
U.S. and foreign floor tile manufacturers, including Interceramic, American
Marazzi Tile (a member of Italy's Marazzi Group) and Florida Tile Industries,
and with at least seven major U.S. and foreign wall tile manufacturers,
including Interceramic, U.S. Ceramic Tile (which was recently acquired by
Laufen Ceramic Tile), Florida Tile Industries and Monarch Tile, as well as
with numerous other U.S. and foreign floor tile and wall tile manufacturers.
Although the U.S. ceramic tile industry is highly fragmented at both the
manufacturing and distribution levels, the Company believes that it is the
largest manufacturer, distributor and marketer of ceramic tile in North
America, and one of the largest in the world. In addition to competition from
domestic and foreign tile manufacturers, the Company encounters competition
from manufacturers of products which serve as an alternative to tile. Certain
of the Company's domestic competitors are subsidiaries of publicly held
companies that may have greater resources than the Company. Competition in the
tile industry is based on price, customer service, quality and design. The
Company believes that it has a favorable competitive position as a result of
its extensive North American distribution system and manufacturing capacity,
together with its vertically integrated operations. In particular, although
certain major tile manufacturers operate sales centers, none approach the
extent of the Company's system. In addition, as part of the AO Acquisition,
the Company now utilizes a network of independent distributors for the
American Olean brand products. The Company's competitors--domestic and
foreign--which do not have extensive sales center networks, rely primarily on
independent distributors, including the Company's sales center network, and
home center retailers. In 1995, approximately 59% of U.S. ceramic tile sales
(by unit volume) consisted of imports, including the approximately 10% of
ceramic tile sold in the United States that was manufactured by the Company in
Mexico. In general, the proportion of U.S. ceramic tile sales attributable to
imports has increased in recent years. Consequently, changes in exchange rates
could affect the Company's position with respect to foreign competitors.

The Company's products compete with numerous other wall and floor coverings
for residential and commercial uses. Among such floor coverings are carpet,
wood flooring, resilient flooring and stone products (such as marble, granite,
slate and limestone tile). Among such wall coverings are paint, wallpaper,
porcelain,

50
<PAGE>

laminates and wood paneling. Ceramic tile products compete effectively as to
price with carpeting, wood flooring and vinyl flooring, and are generally
cheaper than natural stone products. Although the cost of installation of
ceramic tile is higher than the cost of installation of carpet, wood flooring
and some wall coverings, it is generally believed that ceramic tile has a
lower cost over its useful life, primarily due to ceramic tile's durability.

EMPLOYEES

At June 30, 1996, the Company employed approximately 7,300 persons. At June
30, 1996, approximately 2,600 of the Company employees were employed by its
Mexican subsidiaries. Approximately 10% of the Company's employees in the
United States are represented by unions. Approximately 85% of the Company's
employees in Mexico are represented by a union under a collective bargaining
agreement, which expires in 1997. The Company has not experienced a
significant work stoppage in Mexico in over 15 years and has experienced only
one brief work stoppage in the United States over the past 15 years. The
Company believes that relations with its employees are good.

TRADEMARKS

The Company owns rights to certain material trademarks and trade names,
including Daltile, American Olean, Homesource and Dal-Monte, which are used in
the marketing of its products. The Company believes that breadth of product
line, customer service and price are important in tile selection and that the
trademarks and trade names themselves are important as source identifiers that
help differentiate Company product lines from those of competitors.

ENVIRONMENTAL REGULATION

The Company is subject to various U.S. federal, state, local and foreign
environmental laws and regulations, including those governing air emissions,
wastewater discharges, the use, storage, treatment and disposal of solid and
hazardous materials, and the remediation of contamination associated with such
disposal. Because of the nature of its business, the Company has incurred, and
will continue to incur, costs relating to compliance with such laws and
regulations. A number of the Company's facilities have conducted tile
manufacturing operations for many years and have used lead compounds and other
hazardous materials in their glazing operations. The Company's facilities
located in the United States have discontinued the use of lead compounds in
glaze materials. The Texas environmental proceedings discussed below arose
principally in connection with the Company's disposal of waste materials
containing lead compounds prior to the AEA Acquisition in 1990. The Company
also is involved in the remediation of historic contamination at certain of
its other present and former facilities, as well as at other locations in the
United States.

The Company is involved in environmental remediation programs with respect
to two sites near its Dallas facility, which are proceeding under the
oversight of the Texas Natural Resource Conservation Commission ("TNRCC"). In
March 1991, the Company and the predecessor to the TNRCC agreed to an
administrative order (the "1991 Order") relating to past waste disposal
activities conducted prior to the AEA Acquisition. The 1991 Order related
principally to the disposal by the Company of waste materials containing lead
compounds in a gravel pit ("Elam") near the City of Mesquite's landfill in
Dallas County during a period from 1980 to 1987, and the disposal of
miscellaneous solid wastes that were contaminated by lead compounds at a
Company-operated landfill located on Pleasant Run Road ("Pleasant Run") in
Dallas County from 1986 to May of 1990. Pursuant to the 1991 Order, the
Company paid a non-deferred assessed penalty of $350,000 and contributed
another $350,000 to a fund dedicated to environmental enhancement activities
in Dallas County. An additional $300,000 of assessed penalties under the 1991
Order has been deferred pending the timely and satisfactory completion of the
technical recommendations in the 1991 Order. The Company's closure plan for
Elam has been approved by the TNRCC and closure is currently underway. The
Company estimates that such closure will cost approximately $5.5 million. The
Company expects to recover at least 50% of such costs pursuant to the
Settlement Agreement with two of the former owners of the Company described
below, and the Company

51
<PAGE>

believes that any amounts not recovered pursuant to the Settlement Agreement
will not have a material adverse effect on the Company. Pleasant Run has been
remediated in accordance with a TNRCC-approved closure plan. In 1993 and 1994,
the Company settled tort actions alleging personal injury and property damage
filed on behalf of certain residents and owners of property near Elam and
Pleasant Run for an aggregate amount of approximately $1.36 million.

The remediation described above followed a related criminal investigation
which led to the indictments and, in 1993, the convictions of a former owner
and a former senior executive officer of the Company on federal charges of
violating environmental laws. The U.S. Attorney's Office for the Northern
District of Texas (the "U.S. Attorney's Office"), which obtained the
indictments, informed the Company in writing on April 22, 1992 that, based on
information in the possession of the U.S. Attorney's Office, it had decided
not to prosecute the Company for violations of environmental criminal
statutes.

The Company is involved in an environmental remediation program with respect
to the disposal of hazardous wastes prior to the AEA Acquisition at a third
site near its Dallas facility. In October 1994, the Company, Master-Halco,
Inc. (a manufacturing company not affiliated with the Company), certain third
party individuals and the TNRCC agreed to an administrative order (the "1994
Order") relating to, among other things, the alleged disposal of waste
materials containing lead compounds generated by the Company and others at a
gravel pit on Kleburg Road ("Walton") in Dallas prior to 1980. Pursuant to the
1994 Order, the Company currently is in the process of completing a remedial
investigation with respect to the Walton site. In addition, pursuant to the
1994 Order, among other things, an administrative penalty of $213,200 assessed
against the individuals has been deferred pending timely and satisfactory
completion of the technical recommendations in the 1994 Order. The Company has
agreed to indemnify such individuals against any costs relating to the
disposal of industrial solid waste at the site. Although the cost to remediate
the Walton site cannot be predicted with certainty at this time, the Company
believes, based on current preliminary estimates, that the remediation may
cost between approximately $10 million and $15 million. The Company expects to
recover at least 50% of the foregoing costs pursuant to the Settlement
Agreement with two of the former owners of the Company described below, and
the Company believes that any amounts not recovered pursuant to the Settlement
Agreement will not have a material adverse effect on the Company. In 1994, an
action alleging personal injury and property damage was filed against the
Company and others on behalf of certain residents and owners of property near
such site. In 1994, the Company settled this action by agreeing to remediate
soil contamination on the plaintiffs' property and agreeing to pay
approximately $500,000.

On May 20, 1993, the Company entered into an agreement with Robert M.
Brittingham and John G. Brittingham, two of the former owners of the Company
(the "Settlement Agreement"), pursuant to which substantially all of the costs
incurred to the date thereof by the Company (approximately $12 million) in
respect of the 1991 Order, the three Dallas area sites described above and
certain related matters, including certain of the notices of violation
referred to above, have been repaid to the Company. Such former owners are
also obligated, pursuant to the terms of the Settlement Agreement, to
indemnify the Company against 50% of all expenditures incurred in connection
with various environmental violations relating to the Company's U.S.
operations occurring prior to the AEA Acquisition in excess of the
approximately $12 million already paid, until such total excess expenditures
reach a formula amount (currently estimated to be approximately $18 million),
and 100% of all such expenditures in excess of the formula amount. The
Company's expenditures to date in respect of the matters described above
(including substantially all its expenditures in connection with the
settlements described above) have been covered by the Settlement Agreement,
and the Company has the right to recover at least 50% of future related
expenditures pursuant to the Settlement Agreement. The Company believes that
it has established adequate reserves on its Consolidated Financial Statements
in connection with these matters. Accordingly, the Company believes (taking
into account the indemnification rights referred to above and the reserves it
has established) that its liability for environmental violations occurring
prior to the AEA Acquisition will not have a material adverse effect on the
Company. The Company believes that these two former owners currently have
assets far in excess of their potential liability under the Settlement
Agreement, and, accordingly, the Company believes that they will be able to
satisfy all of their obligations pursuant to their

52
<PAGE>

agreement with the Company. Future events which cannot be predicted could
affect the ability of these former owners to satisfy their obligations.
Therefore, no assurance can be given that they will be able to meet their
obligations when they arise.

Under the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA") and similar state statutes, regardless of fault or the legality
of original disposal, certain classes of persons, including generators of
hazardous substances, are subject to claims for response costs by federal and
state agencies. Such persons may be held jointly and severally liable for any
such claims. The Company has been named as a potentially responsible party
("PRP") under CERCLA and similar state statutes with respect to the historic
disposal of certain hazardous substances at various other sites in the United
States. With respect to certain of these sites, the Company has entered into
de minimis settlements; at certain other sites, the liability of the Company
remains pending. Based on currently available information, the Company
believes that its ultimate allocation of costs associated with the
investigation and remediation of these pending sites will not, in the
aggregate, have a material adverse effect on the Company's financial
condition. In addition, subject to the terms of the Stock Purchase Agreement,
dated as of December 21, 1995 (the "AO Acquisition Agreement"), pursuant to
which the Company acquired AO, AWI agreed to indemnify the Company for various
costs and expenses that may be incurred in the future by the Company arising
out of pre-closing environmental conditions and activities with respect to AO.
The Company believes that, based on currently available information and the
terms and conditions of AWI's indemnification obligations under the AO
Acquisition Agreement, any liability of AO that is reasonably likely to arise
out of any of the sites at which AO has been named as a PRP as a result of
pre-closing activities would not result in a material adverse effect on the
Company.

The Company believes that its manufacturing facilities are in substantial
compliance with current environmental laws and regulations. The Company's
manufacturing facilities generate wastes regulated under the Resource
Conservation and Recovery Act and other U.S. federal and state laws. The
Company also generates non-hazardous wastes and is engaged in recycling and
pollution prevention programs. Compliance with current laws and regulations
has not had, and is not expected to have, a material adverse effect on the
Company, including with respect to its capital expenditures, earnings and
competitive position. The Company in its ordinary course of business treats
its costs incurred in connection with ongoing environmental compliance matters
as ordinary expenses.

Numerous aspects of the manufacture of ceramic tile currently require
expenditures for environmental compliance. For example, the mixing of raw
materials, preparation of glazes, and pressing, drying and firing of tile all
are sources of air emissions that require expenditures for compliance with
laws and regulations governing air emissions, including the purchase,
operation and maintenance of control equipment to prevent or limit air
emissions. Many of these manufacturing processes also currently result in the
accumulation of dust that may contain silica, thereby requiring expenditures
for capital equipment in order to comply with Occupational Safety and Health
Administration ("OSHA") regulations with respect to potential employee
exposure to such dust. In addition, the rinsing of spray dryers and containers
used for the preparation of glaze and tile body results in wastewater
discharges that require expenditures for compliance with laws and regulations
governing water pollution. Finally, certain of the Company's manufacturing
processes, including the preparation of glaze, the assembly of certain tiles
and the operation and maintenance of equipment, at times result in the
generation of solid and hazardous waste that require expenditures in
connection with the appropriate handling, treatment, storage and disposal of
such waste.

In addition, in light of the lengthy manufacturing history of the Company's
facilities, it is possible that additional environmental issues and related
matters may arise relating to past activities which the Company cannot now
predict, including tort liability and liability under environmental laws. In
particular, a number of the Company's facilities located in the United States
used lead compounds in glaze materials. The Company's Mexican facility
continues to use lead compounds in their glaze materials on certain specially
ordered tiles. Significant exposure to lead compounds may have adverse health
effects. Although it is impossible to quantify the Company's liability, if
any, in respect of these matters, including liability to individuals exposed
to lead

53
<PAGE>

compounds, no claims relating to its use of lead compounds or waste disposal
matters have been made against the Company except as set forth above. In
addition, it is impossible to predict the effect which future environmental
regulation in the United States, Mexico and Canada could have on the Company.

The Company has established an environmental compliance group reporting
directly to the Chief Executive Officer to help ensure that the Company
remains in compliance with environmental laws and regulations and to oversee
remediation activities.

GEOGRAPHIC LOCATION

Financial information by geographic location for the three years ended
December 31, 1995 is set forth in Note 14 to the Consolidated Financial
Statements included elsewhere in this Prospectus. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."

PROPERTIES

The Company owns or leases manufacturing, distribution, office and sales
facilities in the United States, Canada and Mexico, as described below.

MANUFACTURING, DISTRIBUTION AND OFFICE FACILITIES

The Company owns or leases 18 manufacturing, distribution and office
facilities. The location of, use of, and the floor area of, such facilities
are described as follows:

<TABLE>
<CAPTION>
LOCATION USE SQ. FEET LEASED/OWNED
- -------- --- --------- ------------
<S> <C> <C> <C>
Fayette, AL........ Manufacturing 276,467 Owned
Hayward, CA........ Distribution Center 90,400 Leased(1)
Los Angeles, CA.... Distribution Center 100,000 Leased(1)
Jacksonville, FL... Distribution Center 104,000 Leased(1)
Pocatello, ID...... Manufacturing 91,580 Leased(1)
Indianapolis, IN... Distribution Center 86,400 Leased(2)
Lewisport, KY...... Manufacturing 270,836 Owned
Baltimore, MD...... Distribution Center 83,800 Leased(1)
Monterrey, Mexico.. Manufacturing, Distribution & Office 1,114,175 Owned
Mt. Gilead, NC..... Manufacturing 250,000 Owned
Olean, NY.......... Manufacturing 278,417 Owned
Gettysburg, PA..... Manufacturing 218,609 Owned
Lansdale, PA....... Distribution Center & Office 1,196,051 Owned
Jackson, TN........ Manufacturing & Distribution 655,211 Owned
Coleman, TX........ Manufacturing 62,603 Owned
Conroe, TX......... Manufacturing 208,059 Owned
Dallas, TX......... Manufacturing, Distribution & Office 753,536 Owned
El Paso, TX........ Manufacturing 161,714 Ground
Lease(3)
</TABLE>
- --------
(1) The leases for the Hayward, CA; Los Angeles, CA; Jacksonville, FL;
Pocatello, ID; and Baltimore, MD facilities expire on March 31, 1999;
March 31, 2002; May 31, 1999; April 6, 1997; and June 30, 2001,
respectively, and are subject to renewal options.

(2) The Indianapolis, IN facility is subject to two lease agreements: the
first covers 64,000 sq. feet and expires on May 31, 2000; and the second is
a month-to-month lease that covers 22,400 sq. feet. This facility is
ceasing operations in the third quarter of 1996.
(3) The ground lease expires on November 21, 2034.

54
<PAGE>

SALES CENTERS

The Company owns eight sales centers aggregating 156,386 square feet. Their
location and floor area are as follows:

<TABLE>
<CAPTION>
SQUARE
LOCATION FEET
-------- ------
<S> <C>
Phoenix, AZ........................... 15,320
Escondido, CA......................... 14,207
Denver, CO............................ 22,500
St. Louis, MO......................... 17,375
Houston, TX........................... 21,250
Richardson, TX........................ 23,777
San Antonio, TX....................... 15,520
Salt Lake City, UT.................... 26,437
</TABLE>

In addition, the Company leased approximately 265 sales centers as of June
30, 1996 aggregating approximately 3.0 million square feet pursuant to leases
that extend for terms on average of three-to-five years with expiration dates
primarily from 1996-2000.

For a description of the Company's aggregate rental expenses with respect to
its operating leases, see Note 13 to the Consolidated Financial Statements
included elsewhere in this Prospectus relating to commitments and
contingencies.

LEGAL PROCEEDINGS

In addition to the proceedings described under "Business--Environmental
Regulation," the Company is involved in various lawsuits arising in the normal
course of business. In the opinion of management, the ultimate outcome of
these lawsuits will not have a material adverse effect on the Company.

55
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of Dal-Tile are set forth below.
Certain of the executive officers hold positions with Dal-Tile Corporation or
Dal-Tile Mexico, each a subsidiary of Dal-Tile. All directors hold office
until the annual meeting of stockholders following their election or until
their successors are duly elected and qualified. Officers are appointed by the
Board of Directors and serve at the discretion thereof.

<TABLE>
<CAPTION>
NAME AGE POSITION OR OFFICE HELD
---- --- -----------------------
<C> <C> <S>
Charles J. Pilliod, Jr. ....... 77 Chairman of the Board
Howard I. Bull................. President and Chief Executive Officer and
56 Director
E. Mandell de Windt............ 75 Director
Drew Lewis..................... 64 Director
George A. Lorch................ 54 Director
Vincent A. Mai................. 56 Director
Frank A. Riddick III........... 39 Director
Robert J. Shannon, Jr. ........ 48 Director
Henry F. Skelsey............... 38 Vice President and Director
John M. Goldsmith.............. 33 Vice President and Director
William R. Bronson............. 54 Vice President, Information Systems
James E. Eckelberger........... 57 Vice President, Logistics
David F. Finnigan.............. 40 Vice President, Sales Center Operations
William R. Hanks............... 42 Vice President, Manufacturing
Matthew J. Kahny............... 35 Vice President, Independent Distributor
Operations
Executive Vice President and Chief
Barry J. Kulpa................. 48 Operating Officer
Carlos E. Sala................. 37 Executive Vice President, Chief Financial
Officer and Treasurer
Javier Eugenio Martinez Serna.. 44 Vice President, Mexico Operations
Thomas Scott Smith............. 48 Vice President, Human Resources
Harold G. Turk................. 50 Vice President, Home Center Services
</TABLE>

Charles J. Pilliod, Jr., Chairman of the Board of Directors--Mr. Pilliod has
been the Chairman of the Board of Directors since October 1993 and a Director
since March 1990. From October 20, 1993 through April 14, 1994, he also served
as President and Chief Executive Officer of the Company. Mr. Pilliod served as
U.S. Ambassador to Mexico from 1986 to 1989. Prior to that, he was the
Chairman and Chief Executive Officer of Goodyear Tire & Rubber Company. Mr.
Pilliod is also a director of A. Schulman Inc. and Marvin & Palmer Associates,
Inc. and serves as the Chairman of the Board of Directors of CasTech Aluminum
Group Inc.

Howard I. Bull, President and Chief Executive Officer and Director--Mr. Bull
has been President and Chief Executive Officer and a Director of the Company
since April 15, 1994. Prior to joining the Company, Mr. Bull spent ten years
with Baker Hughes Incorporated, a worldwide diversified oil services company,
where he became Chief Executive Officer for Baker Hughes Drilling Equipment
Company. Additionally, he served York International Corporation, a worldwide
manufacturer and distributor of air conditioner and refrigeration equipment,
as President of its Applied Systems Division and Air Conditioning Business
Group. Mr. Bull is a director of Marine Drilling Companies, Inc.

E. Mandell de Windt, Director--Mr. de Windt has been a Director since March
1990. From March 1990 through October 1993, he was Chairman of the Board of
Directors. Mr. de Windt is the retired Chairman and Chief Executive Officer of
Eaton Corporation, a diversified manufacturing concern. He is currently a
Director and Chairman of the Executive Committee of Birmingham Steel Corp.

Drew Lewis, Director--Mr. Lewis has been a Director of the Company since
March 1990. Mr. Lewis is currently Chairman and Chief Executive Officer of
Union Pacific Corp., a transportation, natural resources and environmental
services concern and served as President of Union Pacific Corp. from April
1986 to May 1994.

56
<PAGE>

He served as U.S. Secretary of Transportation between 1981 and 1983. Mr. Lewis
is also a director of Ford Motor Company, AT&T Corp., American Express Co.,
FPL Group, Inc., Gannett Co., Inc., Union Pacific Resources Group Inc., Lucent
Technologies, Inc. and Mafco Consolidated Group.

George A. Lorch, Director--Mr. Lorch has been a Director of the Company
since December 29, 1995. Mr. Lorch has been Chairman and Chief Executive
Officer of AWI, a stockholder of Dal-Tile, since April 1994. Mr. Lorch was an
Executive Vice President of AWI from March 1988 to September 1993 and served
as President and Chief Executive Officer of AWI from September 1993 to April
1994. Mr. Lorch is also a director of Stanley Works, Household International
and R.R. Donnelley & Sons Company.

Vincent A. Mai, Director--Mr. Mai has been a Director of the Company since
October 1989. Mr. Mai has been the President and Chief Executive Officer of
AEA Investors (the managing member of DTI Investors, which is a beneficial
owner of Common Stock), since April 1989. For the preceding 15 years, he was a
Managing Director of Lehman Brothers Inc., an investment banking firm. Mr. Mai
also is a director of the Federal National Mortgage Association.

Frank A. Riddick III, Director--Mr. Riddick has been a Director of the
Company since December 29, 1995. Mr. Riddick has been Senior Vice President,
Finance and Chief Financial Officer of AWI, a stockholder of Dal-Tile, since
April 1995. Previously, he held the following positions with FMC Corporation,
a chemicals and machinery company: Controller, May 1993-March 1995 and
Treasurer, December 1990-May 1993.

Robert J. Shannon, Jr., Director--Mr. Shannon has been a Director of the
Company since December 29, 1995. Mr. Shannon currently is President,
International Floor Products Operations of AWI, a stockholder of Dal-Tile.
From March 1992 through December 29, 1995, Mr. Shannon was President of AO,
then a subsidiary of AWI. During 1991, Mr. Shannon was General Manager,
Worldwide Gasket Products, of AWI.

Henry F. Skelsey, Vice President and Director--Mr. Skelsey has been a Vice
President and a Director of the Company since October 1989. Mr. Skelsey has
been a Managing Director of AEA Investors (the managing member of DTI
Investors, which is a beneficial owner of Common Stock), since March 1988.
Prior to his association with AEA Investors, Mr. Skelsey was a Vice President
in the Merchant Banking division of Lehman Brothers Inc., an investment
banking firm. Mr. Skelsey is also a director of Teltrend Inc.

John M. Goldsmith, Vice President and Director--Mr. Goldsmith has been a
Vice President and a Director of the Company since April 1996. Mr. Goldsmith
is a Principal of AEA Investors (the managing member of DTI Investors, which
is a beneficial owner of Common Stock), and has been associated with AEA
Investors since 1989. Previously, he was a member of the Financial Services
practice of Ernst & Young, an independent accounting firm.

William R. Bronson, Vice President, Information Systems--Mr. Bronson has
been Vice President, Information Systems of the Company since January 1996.
From July 1994 to January 1996 he was the Vice President, Logistics for the
Company. From August 1990 to July 1994 he was a Business Unit Manager for
Tandem Computers, Inc., a manufacturer and distributor of computer systems.

James E. Eckelberger, Vice President, Logistics--Mr. Eckelberger has been
Vice President, Logistics since February 1996. From March 1994 until February
1996, Mr. Eckelberger was Vice President-Logistics of B.J.'s Wholesale Club, a
wholesale-retail membership club for consumer goods. From September 1992 until
January 1994 he was the Vice President-Logistics for Pace Membership
Warehouse, a wholesale-retail membership club for consumer goods. From 1988-
1992 Mr. Eckelberger was commanding officer (CEO) of the U.S. Navy's Aviation
Supply Office.

57
<PAGE>

David F. Finnigan, Vice President, Sales Center Operations--Mr. Finnigan has
been Vice President, Sales Center Operations since January 1996. From 1990
through December 29, 1995, Mr. Finnigan was at AO, then a subsidiary of AWI,
where he became Vice President-Sales.

William R. Hanks, Vice President, Manufacturing--Mr. Hanks has been Vice
President-Manufacturing since February 1994. He has been with the Company
since March 1985 and prior to 1994 served as General Manager, Assistant Plant
Manager and Vice President-Manufacturing of the Company's floor covering
products manufacturing facility.

Matthew J. Kahny, Vice President, Independent Distributor Operations--Mr.
Kahny has been Vice President, Independent Distributor Operations since
January 1996. From July 1983 through December 29, 1995, Mr. Kahny served at
AO, then a subsidiary of AWI, where he became Business Team Manager, Floor
Tile Products.

Barry J. Kulpa, Executive Vice President and Chief Operating Officer--Mr.
Kulpa has been an Executive Vice President since June 1996 and the Chief
Operating Officer of the Company since June 1994. Prior to joining the
Company, Mr. Kulpa was Chief Financial Officer for David Weekley Homes, a
national homebuilder in Houston, Texas. Prior to that, Mr. Kulpa spent ten
years with Baker Hughes Incorporated, a worldwide diversified oil services
company, where he held various Vice President positions, concluding with Vice
President-Operations, Hughes Tool.

Carlos E. Sala, Executive Vice President, Chief Financial Officer and
Treasurer--Mr. Sala has been an Executive Vice President since June 1996 and
the Chief Financial Officer of the Company since March 1991. Previously, he
was Vice President of International Operations since March 1990. Prior to his
association with the Company, he was a Mergers & Acquisitions Manager at Ernst
& Young, an independent accounting firm, from 1988 to 1990. Mr. Sala is a
certified public accountant.

Javier Eugenio Martinez Serna, Vice President, Mexico Operations--Mr.
Martinez has been Vice President, Mexico Operations since August 1995. Prior
to August 1995, he was a director of Materiales since December 1985.

Thomas Scott Smith, Vice President, Human Resources--Mr. Smith has been Vice
President, Human Resources since January 1996. From October 1993 to December
1995 Mr. Smith was President, Grant T.F.W. Industries of Energy Ventures, a
tubular goods manufacturer for the oil and gas drilling industry. For 21 years
prior to October 1993, Mr. Smith was at Baker Hughes, Incorporated, a
worldwide diversified oil services company, where he served as a Vice
President-Manufacturing, a General Manager and the Director of Human
Resources.

Harold G. Turk, Vice President, Home Center Services--Mr. Turk has been a
Vice President, Home Center Services of the Company since January 1996. In
1995, he was Executive Vice President of Field Operations; in 1994, he was
Executive Vice President of Marketing; and, since April 1991, he was Executive
Vice President of Sales and Marketing, Western Region. Mr. Turk was a Vice
President of Warehouse Administration and Sales of the Company from 1976 to
1991.

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

Pursuant to the Shareholders Agreement, DTI Investors and AWI have agreed to
cause the Board of Directors of Dal-Tile to be comprised of six individuals
designated by DTI Investors, three individuals designated by AWI and the Chief
Executive Officer of Dal-Tile. The six individuals designated by DTI Investors
are: Messrs. Pilliod, de Windt, Lewis, Mai, Goldsmith and Skelsey. The three
individuals designated by AWI are: Messrs. Lorch, Riddick and Shannon. The
rights and obligations of DTI Investors and AWI to designate directors are
subject to change in the event of certain circumstances, more particularly
described in the Shareholders Agreement. See "Principal Stockholders--
Shareholders Agreement."

58
<PAGE>

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth certain information with respect to the
annual and long-term compensation of the Company's Chief Executive Officer,
each of the Company's four other most highly compensated executive officers,
and the former President of the Company's Mexican subsidiaries, in each case,
for the fiscal years ended December 31, 1993, 1994 and 1995:

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
----------------- ------------
SECURITIES
NAME AND PRINCIPAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS OPTIONS/SARS COMPENSATION
------------------ ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Howard I. Bull.......... 1995 $400,000 $180,000 0 $ 56,517(2)(3)
President and Chief
Executive Officer(1) 1994 284,615 325,000 388,500 30,776
Harold L. Turk.......... 1995 273,000 98,460 0 746,401(5)(6)(7)(3)
President of Mexican
subsidiaries(4) 1994 468,000 299,500 0 90,698
1993 468,000 247,000 0 79,717
Barry J. Kulpa.......... 1995 282,600 117,450 0 5,577(3)
Vice President and
Chief Operating
Officer(8) 1994 132,501 89,436 111,000 44,772
Harold G. Turk.......... 1995 253,850 74,589 0 11,580(9)(3)
Vice President, Home
Center Services 1994 240,000 156,250 0 6,868
1993 244,615 125,000 0 6,971
Carlos E. Sala.......... 1995 215,000 89,100 0 0
Vice President, Chief
Financial Officer and
Treasurer 1994 200,000 144,000 0 91
1993 178,365 90,000 0 284
William R. Hanks........ 1995 173,078 70,875 0 0
Vice President,
Manufacturing 1994 139,248 85,000 0 175
1993 81,538 32,000 0 150
</TABLE>
- --------
(1) Mr. Bull was appointed to his position as President and Chief Executive
Officer on April 15, 1994.
(2) The amount shown includes $48,825 of relocation expenses incurred in
fiscal year 1995 by Howard I. Bull which were reimbursed by the Company.
(3) The amounts shown include paid vacation for fiscal year 1995 to Howard I.
Bull, in the amount of $7,692; Barry J. Kulpa, in the amount of $5,577;
Harold G. Turk, in the amount of $4,904; and Harold L. Turk, in the amount
of $26,393.
(4) Mr. Turk retired on July 31, 1995.
(5) The amounts shown include distributions to Harold L. Turk from the
Retirement Plan for the Employees of Dal-Tile Mexico of $370,277 and the
Pension Plan of Materiales of $226,499. The amounts shown also include
contributions of $1,165 made by the Mexican subsidiaries to workers'
profit sharing for the benefit of Harold L. Turk.
(6) The amount shown includes payments to Harold L. Turk from August 1995
through December 1995 for monthly consulting fees of $18,750, totaling
$93,750.
(7) The amount shown includes repayment of relocation expenses in fiscal 1995
for Harold L. Turk in the amount of $10,000. It also includes a $15,000
payment to Mr. Turk to allow him to purchase his company car, and a
retirement bonus of $3,317.
(8) Mr. Kulpa was appointed to his position as Vice President and Chief
Operating Officer on July 2, 1994.
(9) The amounts shown include premiums paid for fiscal 1995 by the Company for
split dollar life insurance in the amount of $6,676 for the benefit of
Harold G. Turk.

59
<PAGE>

OPTION GRANTS

There were no options or stock appreciation rights ("SARs") granted during
fiscal 1995 by the Company to any of the named executive officers of the
Company in the Summary Compensation Table above.

OPTION EXERCISE TABLE

The following table sets forth the number of shares covered by both
exercisable and unexercisable stock options as of December 31, 1995.

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

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN
OPTIONS/SARS AT FISCAL THE MONEY OPTIONS/SARS AT
YEAR-END FISCAL YEAR-END (1)
------------------------- -------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Howard I. Bull.......... 0 0 155,400 233,100 $140,000 $210,000
Harold L. Turk(2)....... 0 0 334,898 4,440 301,710 4,000
Barry J. Kulpa.......... 0 0 44,400 66,600 40,000 60,000
Harold G. Turk.......... 0 0 198,535 4,440 178,860 4,000
Carlos E. Sala.......... 0 0 104,662 6,338 94,290 5,710
William R. Hanks........ 0 0 56,455 2,220 50,860 2,000
</TABLE>
- --------
(1) Values for "in-the-money" options represent the positive spread between
the respective exercise prices of outstanding stock options and the value
of the Common Stock as of December 31, 1995 as determined by the Company's
management in accordance with an internal valuation.
(2) Harold L. Turk retired from the Company in July 1995.

STOCK OPTION PLAN

GENERAL

The Board of Directors of Dal-Tile has adopted the Dal-Tile International
Inc. 1996 Amended and Restated Stock Option Plan (the "Stock Option Plan")
effective as of August 8, 1996. The Stock Option Plan is an amendment and
restatement of Dal-Tile's 1990 Stock Option Plan (as previously amended). The
Stock Option Plan is designed to help the Company attract and retain skilled
individuals for key positions within the Company by permitting the Company to
offer such individuals the opportunity to acquire an equity interest in Dal-
Tile.

SUMMARY OF STOCK OPTION PLAN

The following summary description of the principal terms of the Stock Option
Plan does not purport to be complete and is qualified in its entirety by the
full text of the Stock Option Plan, a copy of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.

Pursuant to the Stock Option Plan, key employees of the Company will be
eligible to receive awards of stock options ("Options") in consideration for
services performed for the Company (such key employees, "Optionees").
Currently, there are approximately 50 persons eligible to receive awards under
the Stock Option Plan. Options granted under the Stock Option Plan may be
either nonqualified stock options or "incentive stock options", within the
meaning of Section 422 of the U.S. Internal Revenue Code of 1986, as amended
(the "Code").

The total number of shares of Common Stock with respect to which Options may
be awarded under the Stock Option Plan (subject to antidilution and similar
adjustments) equals 4,836,425 minus the sum of the

60
<PAGE>

number of shares subject to outstanding Options previously granted under the
Stock Option Plan and the number of shares previously issued pursuant to the
exercise of Options granted under the Stock Option Plan. As of June 30, 1996,
Options for the purchase of 4,204,747 shares of Common Stock were outstanding,
and no shares have been issued pursuant to the exercise of previously granted
options. To date, the Company has not determined to grant any additional
Options under the Stock Option Plan; however, it may do so in the future.

The Stock Option Plan is administered by a committee consisting of at least
two members of the Board of Directors and may consist of the full Board of
Directors (the "Committee"). Subject to the provisions of the Stock Option
Plan, the Committee will determine when and to whom Options will be granted,
the number of shares covered by each Option and the terms and provisions
applicable to each Option; provided, however, that the Committee may not award
Options to any employee with respect to more than 277,500 shares of Common
Stock in any fiscal year during the term of the Stock Option Plan. Awards may
be made under the Stock Option Plan to such key employees of the Company as
the Committee in its sole discretion shall decide. The Committee may interpret
the Stock Option Plan and may at any time adopt such rules and regulations for
the Stock Option Plan as it deems advisable.

An Option may be granted on such terms and conditions as the Committee may
approve, provided that all Options must be granted with an exercise price
equal to the fair market value of the underlying shares as of the date of
grant (110% in the case of incentive stock options granted to a "ten percent
shareholder" (as defined in Section 422 of the Code)). Payment of the Option
exercise price may be made by a certified or official bank check or, subject
to Committee consent, by the surrender of shares of Common Stock. Unless the
Committee otherwise provides in the agreement evidencing the grant of an
Option, an Option becomes exercisable with respect to 25% of the underlying
shares on the date of grant, and with respect to an additional 25% on each of
the first three anniversaries of the date of grant. Each Option shall be for
such term as the Committee shall determine, provided that no incentive stock
option shall have a term of greater than ten years (five years in the case of
an incentive stock option granted to a "ten percent shareholder"). In the
event of certain change in control transactions, each outstanding Option shall
vest and entitle the holder thereof to receive, upon exercise, the same amount
and kind of stock, securities, cash, property or other consideration that each
holder of Common Stock was entitled to receive in such transaction in respect
of a share. Prior to the Offerings, there has been no public market for the
Common Stock.

The Board of Directors of Dal-Tile may at any time and from time to time
suspend, amend, modify or terminate the Stock Option Plan; provided, however,
that, to the extent required by Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or any other law,
regulation or stock exchange rule, no such change shall be effective without
the requisite approval of the Company's stockholders. In addition, no such
change may impair any award previously granted, except with the written
consent of the grantee.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The following discussion is a brief summary of the principal United States
Federal income tax consequences under current Federal income tax laws relating
to Options awarded under the Stock Option Plan. This summary is not intended
to be exhaustive and, among other things, does not describe state, local or
foreign income and other tax consequences.

An Optionee will not recognize any taxable income upon the grant of a
nonqualified option and the Company will not be entitled to a tax deduction
with respect to such grant. Upon exercise of a nonqualified Option, the excess
of the fair market value of the Common Stock on the exercise date over the
exercise price will be taxable as compensation income to the Optionee. Subject
to the Optionee including such excess amount in income or the Company
satisfying applicable reporting requirements, the Company should be entitled
to a tax deduction in the amount of such compensation income. The Optionee's
tax basis for the Common Stock received pursuant to the exercise of an Option
will equal the sum of the compensation income recognized and the exercise
price.

61
<PAGE>

In the event of a sale of Common Stock received upon the exercise of a
nonqualified Option, any appreciation or depreciation after the exercise date
generally will be taxed as capital gain or loss and will be long-term gain or
loss if the holding period for such Common Stock was more than one year.

Generally, an Optionee should not recognize taxable income at the time of
grant or exercise of an incentive stock option and the Company should not be
entitled to a tax deduction with respect to such grant or exercise. The
exercise of an incentive stock option generally will give rise to an item of
tax preference that may result in alternative minimum tax liability for the
Optionee.

A sale or other disposition by an Optionee of shares acquired upon the
exercise of an incentive stock option more than one year after the transfer of
the shares to such Optionee and more than two years after the date of grant of
the incentive stock option should result in any difference between the net
sale proceeds and the exercise price being treated as long-term capital gain
or loss to the Optionee with no deduction being allowed to the Company. Upon a
sale or other disposition of shares acquired upon the exercise of an incentive
stock option within one year after the transfer of the shares to the Optionee
or within two years after the date of grant of the incentive stock option
(including the delivery of such shares in payment of the exercise price of
another incentive stock option within such period), any excess of (a) the
lesser of (i) the fair market value of the shares at the time of exercise of
the Option and (ii) the amount realized on such disqualifying sale or other
disposition of the shares, over (b) the exercise price of such shares, should
constitute ordinary income to the Optionee and the Company should be entitled
to a deduction in the amount of such income. The excess, if any, of the amount
realized on a disqualifying sale over the fair market value of the shares at
the time of the exercise of the Option generally will constitute short-term or
long-term capital gain, and will not be deductible by the Company.

Special rules may apply to Optionees who are subject to Section 16 of the
Exchange Act.

Under certain circumstances the accelerated vesting or exercise of Options
in connection with a change of control of the Company might be deemed an
"excess parachute payment" for purposes of the golden parachute tax provisions
of Section 280G of the Code. To the extent it is so considered, the Optionee
may be subject to a 20% excise tax and the Company may be denied a tax
deduction.

Section 162(m) of the Code generally disallows a Federal income tax
deduction to any publicly held corporation for compensation paid in excess of
$1 million in any taxable year to the chief executive officer or any of the
four other most highly compensated executive officers who are employed by the
Company on the last day of the taxable year. Compensation attributable to
Options granted under the Stock Option Plan prior to the Company's first
stockholder meeting in which directors are elected in the year 2000 should not
be subject to the deduction limitation. The Committee will determine whether
or not to administer the Stock Option Plan so that compensation attributable
to Options granted thereafter would not be subject to such deduction
limitation.

DIRECTOR COMPENSATION

Directors who are full-time employees of the Company receive no additional
compensation for serving on the Board of Directors or its committees.
Directors who are not full-time employees of the Company or employees of AEA
Investors receive an annual fee of $5,000, except for the Chairman, who
receives an annual fee of $25,000, and $500 for each Board of Directors
meeting attended, plus reimbursement for traveling costs and other out-of-
pocket expenses incurred in attending such meetings. Directors who serve on
one or more of the Audit Committee, Compensation Committee or Executive
Committee receive $500 for attending a committee meeting which occurs on a
date other than the date of a meeting of the full Board of Directors.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with Howard I. Bull,
Harold G. Turk and Carlos E. Sala. The agreement with Mr. Bull, which will
expire on April 15, 1997, provides for the payment of an annual

62
<PAGE>

salary of not less than $400,000. The agreement with Harold G. Turk, which
expires on December 31, 1999, provides for the payment of an annual base
salary of at least $225,000. Mr. Sala's employment agreement expires on
February 5, 1998 and provides for payment of annual compensation, including
base salary and bonuses, of not less than $145,000. Each of the employment
contracts described herein contains provisions prohibiting the employee from
competing with the Company during the term of employment and, in certain
cases, for a period thereafter. In addition, the employment contract with
Carlos E. Sala provides that if his employment is terminated without cause
before the expiration of the contract, Mr. Sala will be paid, on a semimonthly
basis, all compensation owing under the contract for the remainder of the
contract term, provided he complies with all noncompetition restrictions.
These payments, however, will be offset by amounts earned by Mr. Sala
subsequent to the termination of employment without cause. The employment
contract with Mr. Bull provides that if his employment is terminated without
cause before the expiration of the contract, Mr. Bull will be paid, on the
date of termination and thereafter, all salary owed for the remainder of the
term, in accordance with the Company's usual payroll practices. The Company
entered into a consulting agreement with Harold L. Turk, which will expire on
July 31, 1998, which provides that Mr. Turk will be paid a monthly consulting
fee of $18,750 from August 1, 1995 through July 31, 1996. The monthly fee
decreases to $14,583 for the period August 1, 1996 through July 31, 1997, and
to $10,417 for the period August 1, 1997 through July 31, 1998.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The following directors served on Dal-Tile's Compensation Committee during
the fiscal year ended December 31, 1995: Drew Lewis, E. Mandell de Windt,
Vincent A. Mai, Charles J. Pilliod, Jr., Henry F. Skelsey and Romulo
O'Farrill, Jr. Mr. O'Farrill ceased to be a director on December 29, 1995. See
"--Directors and Executive Officers." Charles J. Pilliod, Jr., Henry F.
Skelsey and Vincent A. Mai also served as officers of Dal-Tile and certain of
its subsidiaries during such fiscal year. Messrs. Mai and Skelsey are officers
of AEA Investors, the managing member of DTI Investors, which is a beneficial
owner of Common Stock. AEA Investors received a management fee and
reimbursement for expenses totaling $991,000 during the fiscal year ended
December 31, 1995. See "Principal Stockholders" and "Certain Transactions" for
further information regarding AEA Investors and DTI Investors.

63
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information as of June 30, 1996 after
giving effect to the DTI Merger (as defined below) regarding the beneficial
ownership of Common Stock (a) immediately prior to the Offerings and the
Private Placement, and (b) as adjusted to reflect the sale of the shares of
Common Stock in the Offerings and the Private Placement, by (i) each person
known to Dal-Tile to own beneficially more than 5% of the outstanding shares
of Common Stock, (ii) each of Dal-Tile's directors, (iii) each of the
executive officers named in the table under "Management--Executive
Compensation--Summary Compensation Table," and (iv) all the Company's
directors and executive officers as a group.

Prior to the Offerings and the Private Placement, DTI Investors, whose
members include the DTI Investors Group, became the holder of all the capital
stock previously owned by the DTI Investors Group as the result of the merger
of a subsidiary of DTI Investors with and into Dal-Tile, with Dal-Tile as the
surviving corporation (the "DTI Merger").

<TABLE>
<CAPTION>
PERCENT OF
COMMON STOCK OWNED
-----------------------------------
BEFORE THE AFTER THE
NUMBER OF OFFERINGS AND THE OFFERINGS AND THE
SHARES(1) PRIVATE PLACEMENT PRIVATE PLACEMENT
---------- ----------------- -----------------
<S> <C> <C> <C>
DTI Investors LLC(2).... 28,604,811 63.0% 54.0%
c/o AEA Investors Inc.
65 East 55th Street
New York, NY 10022
AEA Investors Inc.(3)... 28,604,811 63.0 54.0
65 East 55th Street
New York, NY 10022
Armstrong Enterprises,
Inc.(4)................ 16,799,661 37.0 32.8
Liberty and Charlotte
Streets
P.O. Box 3001
Lancaster, PA 17604
Charles J. Pilliod, Jr.. 111,000(5)(17) * *
Howard I. Bull.......... 329,148(6)(17) * *
E. Mandell de Windt..... 0(17) -- --
Drew Lewis.............. 0(17) -- --
George A. Lorch......... 0(7) -- --
Vincent A. Mai.......... 0(8)(17) -- --
Frank A. Riddick III.... 0(9) -- --
Robert J. Shannon....... 0(10) -- --
Henry F. Skelsey........ 0(11)(17) -- --
John M. Goldsmith....... 0(12)(17) -- --
William R. Hanks........ 74,747(13) * *
Barry J. Kulpa.......... 178,666(14) * *
Carlos E. Sala.......... 133,267(15) * *
Harold G. Turk.......... 198,535(16) * *
All directors and execu-
tive officers as a
group (20 persons)..... 1,253,523 2.7 2.3
</TABLE>
- --------
* Less than 1%
(1) For purposes of this table, a person or group of persons is deemed to
have "beneficial ownership" of any shares as of a given date which such
person has the right to acquire within 60 days after such date. For
purposes of computing the percentage of outstanding shares held by each
person or group of persons named above on a given date, any shares which
such person or persons have the right to acquire within 60 days after
such date is deemed to be outstanding, but is not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person.

(2) Prior to the Offerings and the Private Placement, as a result of the DTI
Merger, DTI Investors became the holder of all the capital stock of Dal-
Tile previously held directly by the DTI Investors Group.

64
<PAGE>

(3) AEA Investors is the managing member of DTI Investors and accordingly may
be deemed to beneficially own such shares.

(4) AEI is a wholly owned subsidiary of AWI. Taking into account the 588,235
shares of Common Stock to be acquired by AEI in the Private Placement,
AEI would be the beneficial owner of 17,387,896 shares of Common Stock.
Upon completion of the acquisition of all the Additional AWI Shares
(assuming they are acquired at an average price of $17 per share), AEI
would be the beneficial owner of 18,270,249 shares of Common Stock. See
"Armstrong Agreements."
(5) Consists of 111,000 shares subject to options. Shares are held in nominee
name, Hertrus and Company.
(6) Consists of 329,148 shares subject to options.
(7) Excludes 16,799,661 shares indirectly owned by AWI, for which Mr. Lorch
serves as an officer and director. Mr. Lorch disclaims beneficial
ownership of such shares.
(8) Excludes 28,604,811 shares owned by DTI Investors, the managing member of
which is AEA Investors. Mr. Mai is a member of DTI Investors and serves
as an officer and director of AEA Investors. Mr. Mai disclaims beneficial
ownership of the shares beneficially owned by DTI Investors and AEA
Investors.
(9) Excludes 16,799,661 shares indirectly owned by AWI, for which Mr. Riddick
serves as an officer. Mr. Riddick disclaims beneficial ownership of such
shares.
(10) Excludes 16,799,661 shares indirectly owned by AWI, for which Mr. Shannon
serves as an officer. Mr. Shannon disclaims beneficial ownership of such
shares.
(11) Excludes 28,604,811 shares owned by DTI Investors, the managing member of
which is AEA Investors. Mr. Skelsey is a member of DTI Investors and
serves as an officer of AEA Investors. Mr. Skelsey disclaims beneficial
ownership of the shares beneficially owned by DTI Investors and AEA
Investors.
(12) Excludes 28,604,811 shares owned by DTI Investors, the managing member of
which is AEA Investors. Mr. Goldsmith serves as a principal of AEA
Investors. Mr. Goldsmith disclaims beneficial ownership of the shares
beneficially owned by DTI Investors and AEA Investors.
(13) Consists of 74,747 shares subject to options.
(14) Consists of 178,666 shares subject to options.
(15) Consists of 133,267 shares subject to options.
(16) Consists of 198,535 shares subject to options.
(17) Such director is a member of DTI Investors. Under the rules of the
Securities and Exchange Commission, as such director does not have voting
or investment power over the shares of Common Stock owned by DTI
Investors, such director does not have beneficial ownership of such
shares. Such director's membership interest in DTI Investors represents a
less than 1% indirect interest in the Common Stock of the Company, which
interest is in addition to any stock options held by such director.

SHAREHOLDERS AGREEMENT

Pursuant to the Shareholders Agreement, each of DTI Investors and AWI has
agreed to vote the shares of Common Stock owned or controlled by it to
effectuate the provisions of the Shareholders Agreement, including for the
election as directors of Dal-Tile of (i) six individuals designated by DTI
Investors, (ii) three individuals designated by AWI, and (iii) the Chief
Executive Officer of Dal-Tile. The rights and obligations of DTI Investors and
AWI to designate directors are subject to change in the event of certain
circumstances, more particularly described in the Shareholders Agreement. The
Shareholders Agreement, among other things, contains provisions (A) providing
for registration rights under certain circumstances under the Securities Act,
and (B) prohibiting the parties from acquiring additional shares of Common
Stock (other than the Additional AWI Shares) until the earlier to occur of (x)
the fourth anniversary of the Offerings and (y) the sale by DTI Investors or
AWI or its subsidiaries of 25% or more of the Common Stock owned by the DTI
Investors Group or AWI and its subsidiaries, as the case may be, as of
December 31, 1995.

Pursuant to the Shareholders Agreement, the Company is prohibited from
engaging in, without the approval of a majority of the Board of Directors
(including at least one AWI designee), any sale or transfer to a third party
by merger or otherwise by the Company or any of its subsidiaries (in one
transaction or a series of related transactions) of any subsidiary of the
Company or assets of the Company or a subsidiary thereof which involves more
than 20% of the total assets of the Company and its subsidiaries taken as a
whole on a cumulative basis, excluding, however, such dispositions in the
ordinary course of business (including, but not limited to, sales of inventory
and finished goods), and excluding the sale of all or substantially all of the
stock or assets of the Company.

65
<PAGE>

CERTAIN TRANSACTIONS

AEA Investors (the managing member of DTI Investors, which is a beneficial
owner of Common Stock), currently provides management, consulting and
financial services to the Company for professional service fees and is
reimbursed for out-of-pocket expenses. In 1995, 1994 and 1993, payments of the
management fee and reimbursement for expenses totaled $991,000, $1,015,373 and
$963,222, respectively. Such services include, but are not necessarily limited
to, advice and assistance concerning the strategy, planning and financing of
the Company, as needed from time to time. Upon consummation of the Offerings,
the management agreement will be terminated and AEA Investors will be paid the
Termination Fee of $4.0 million in connection therewith. The Company receives
the benefit of volume discounts for certain office services and supplies made
available to various companies associated with AEA Investors pursuant to
arrangements managed by a subsidiary of AEA Investors. Messrs. Mai and Skelsey
are officers and/or directors of Dal-Tile; Mr. Mai is President and Chief
Executive Officer of AEA Investors, and Mr. Skelsey is a Vice President and
Managing Director of AEA Investors.

On December 29, 1995, AWI acquired 37% of the outstanding capital stock of
Dal-Tile in connection with the AO Acquisition. In connection with the AO
Acquisition, Dal-Tile entered into agreements with AWI relating to (i) the use
by the Company of certain trademarks owned by AWI, and (ii) certain transition
services (including computer services) to be supplied by AWI or its affiliates
to the Company. These agreements were negotiated in connection with the AO
Acquisition and have arms'-length terms and conditions. Transactions pursuant
to such agreements are in the ordinary course of business. Messrs. Lorch,
Riddick and Shannon are directors of the Registrant; Mr. Lorch is a director
and executive officer of AWI, and Messrs. Riddick and Shannon are officers of
AWI.

Before the AO Acquisition, AO was a subsidiary of AWI. As a subsidiary of
AWI, AO purchased pyrophyllite from Newfoundland Minerals and installation
materials from an affiliate of AWI, and incurred expenses relating to
management information systems and engineering services provided by AWI or its
affiliates.

ARMSTRONG AGREEMENTS

Concurrently with the consummation of the Offerings, the Company will sell
in the Private Placement to AEI approximately 588,235 shares of Common Stock,
at a price per share equal to the initial public offering price per share for
the Common Stock in the Offerings, for an aggregate purchase price of
approximately $10,000,000. AWI and AEI have agreed that such Common Stock is
being acquired by AEI for investment purposes only and not with a view toward
distribution and that neither AWI nor any subsidiary of AWI will sell or
otherwise dispose of such Common Stock in violation of any applicable laws or
regulations, including Federal and state securities laws and regulations.

During the 270-day period following the first to occur of (i) the closing of
the sale of Common Stock to the U.S. Underwriters pursuant to the exercise of
their over-allotment option and (ii) the expiration of such option, AWI or one
or more of its subsidiaries will purchase, from time to time, additional
Common Stock in open market transactions at then prevailing market prices
having an aggregate purchase price (exclusive of brokerage commissions) of
$15,000,000 in connection therewith. AWI and its subsidiaries will effect all
purchases of the Additonal AWI Shares in compliance with all applicable laws
and regulations, including Federal and state securities laws and regulations.
AWI will give the Company and AEA Investors notice of each such purchase made
by AWI or any of its subsidiaries within three business days thereafter.

AWI, AEI and Armstrong Cork Finance Corporation are parties to the
Shareholders Agreement. See "Principal Stockholders--Shareholders Agreement."

66
<PAGE>

DESCRIPTION OF CAPITAL STOCK

COMMON STOCK CONVERSION

Immediately prior to the consummation of the Offerings and the Private
Placement: (a) Dal-Tile will amend and restate its currently existing
certificate of incorporation to, among other things, increase the number of
authorized shares of capital stock to 200,000,000 shares of Common Stock and
11,100,000 shares of Preferred Stock, $.01 par value per share; and (b) the
Common Stock Conversion will be effected (i.e., all existing classes of Dal-
Tile's capital stock will be converted into a total of 45,404,472 shares of
Common Stock). In addition, all outstanding options to purchase Dal-Tile's
existing capital stock will be converted into 4,204,747 options to purchase
Common Stock. The Offerings and the Private Placement will not be consummated
unless both the Common Stock Conversion is consummated and the New Bank Credit
Agreement is entered into. See "Certain Transactions" and "Shares Eligible for
Future Sale."

GENERAL

The following brief description of Dal-Tile's capital stock does not purport
to be complete and is subject in all respects to applicable Delaware law and
to the provisions of the Second Amended and Restated Certificate of
Incorporation and the Amended and Restated Bylaws, copies of which have been
filed as exhibits to the Registration Statement on Form S-1 (together with all
amendments, schedules and exhibits thereto, the "Registration Statement") of
which this Prospectus is a part and to which exhibits reference is hereby
made.

The authorized capital stock of Dal-Tile will consist of 200,000,000 shares
of Common Stock, $.01 par value per share, and 11,100,000 shares of Preferred
Stock, par value $.01 per share. Immediately following consummation of the
Offerings and the Private Placement, there will be 52,992,707 shares of Common
Stock outstanding, no shares of Preferred Stock outstanding and 4,204,747
shares of Common Stock will be issuable upon exercise of outstanding options.

COMMON STOCK

Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders, including the election of directors.
Holders of Common Stock do not have cumulative voting rights and, therefore,
holders of a majority of the shares voting for the election of directors can
elect all the directors. In such event, the holders of the remaining shares
will not be able to elect any directors.

Holders of the Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, after payment of dividends required to be paid on
outstanding Preferred Stock, if any, and subject to the terms of the
agreements governing Dal-Tile's long-term debt. See "Dividend Policy" and
"Description of Certain Indebtedness." In the event of the liquidation,
dissolution or winding up of Dal-Tile, the holders of Common Stock are
entitled to share pro rata in all assets remaining after payment of
liabilities, subject to prior distribution rights of Preferred Stock then
outstanding, if any.

The Common Stock has no preemptive, conversion or redemption rights and is
not subject to further calls or assessments by Dal-Tile. Immediately upon
consummation of the Offerings and the Private Placement, all the outstanding
shares of Common Stock will be validly issued, fully paid and nonassessable.

Prior to the Offerings, there has been no public market for the Common
Stock. The Common Stock has been approved for listing on the New York Stock
Exchange, subject to official notice of issuance, under the symbol "DTL."

The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services L.L.C.

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<PAGE>

PREFERRED STOCK

The Board of Directors is authorized without further stockholder action to
provide for the issuance from time to time of up to 11,100,000 shares of
Preferred Stock, in one or more series, with such powers, designations,
preferences and relative, participating, optional or other special rights,
qualifications, limitations or restrictions as will be set forth in the
resolutions providing for the issue of such series of Preferred Stock adopted
by the Board of Directors. The holders of Preferred Stock will have no
preemptive rights (unless otherwise provided in the applicable certificate of
designation) and will not be subject to future assessments by Dal-Tile. Such
Preferred Stock may have voting or other rights which could adversely affect
the rights of holders of the Common Stock. In addition, the issuance of
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, under certain circumstances,
make it more difficult for a third party to gain control of Dal-Tile,
discourage bids for the Common Stock at a premium, or otherwise adversely
affect the market price of the Common Stock. On the date of this Prospectus,
there are no shares of Preferred Stock issued and outstanding.

POSSIBLE ANTITAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS

The DGCL and certain provisions of the Second Amended and Restated
Certificate of Incorporation and the Amended and Restated Bylaws could have
the effect of discouraging or making more difficult the acquisition of Dal-
Tile by means of a tender offer, a proxy contest or otherwise, even though
such an acquisition might be economically beneficial to the Company's
stockholders. In addition, these provisions may make the removal of management
more difficult, even in cases where such removal would be favorable to the
interests of the Company's stockholders.

ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER
PROPOSALS

The Amended and Restated Bylaws establish an advance notice procedure for
stockholders to make nominations of candidates for election as directors at an
annual meeting or a special meeting or to bring other business before an
annual meeting of stockholders of Dal-Tile (the "Stockholder Notice
Procedure"). The Stockholder Notice Procedure provides that only persons who
are nominated by, or at the direction of, the Board of Directors, or by a
stockholder who has given timely written notice to the Secretary of Dal-Tile
prior to the meeting at which directors are to be elected, will be eligible
for election as directors of Dal-Tile. The Stockholder Notice Procedure
provides that at an annual meeting only such business may be conducted as has
been specified in the notice of the meeting given by, or at the direction of,
the Board of Directors (or any duly authorized committee thereof) or brought
before the meeting by, or at the direction of, the Board of Directors (or any
duly authorized committee thereof) or by a stockholder who has given timely
written notice to the Secretary of Dal-Tile of such stockholder's intention to
bring such business before such meeting.

Under the Stockholder Notice Procedure, a stockholder's notice of
nominations of candidates for election as directors or business to be
conducted at an annual meeting will be timely only if it is received by Dal-
Tile not less than 60 days nor more than 90 days prior to the date of the
annual meeting or, in the event that less than 70 days' notice or prior public
disclosure of the date of the annual meeting is given or made to stockholders,
not later than the close of business on the tenth day following the day on
which such notice was mailed or such public disclosure was made, whichever
first occurs. Under the Stockholder Notice Procedure, for notice of a
stockholder nomination to be made at a special meeting at which directors are
to be elected to be timely, such notice must be received by Dal-Tile not later
than the close of business on the tenth day following the day on which such
notice of the date of the special meeting was mailed or public disclosure of
the date of the special meeting was made, whichever first occurs.

In addition, under the Stockholder Notice Procedure, a stockholder's notice
to Dal-Tile proposing to nominate a person for election as a director at an
annual meeting or a special meeting or conduct certain business at an annual
meeting must contain certain specified information. If the Chairman of the
Board of Directors presiding at a meeting determines that a person was not
nominated or other business was not brought before the meeting in accordance
with the Stockholder Notice Procedure, such person will not be eligible for
election as a director or such business will not be conducted at such meeting,
as the case may be.

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<PAGE>

DIRECTOR'S LIABILITY

The Second Amended and Restated Certificate of Incorporation provides that
to the fullest extent permitted by the DGCL as it currently exists, a director
of Dal-Tile shall not be liable to Dal-Tile or its stockholders for monetary
damages for breach of fiduciary duty as a director. Under current Delaware
law, liability of a director may not be limited (i) for any breach of the
director's duty of loyalty to Dal-Tile or its stockholders, (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend
payments or stock redemptions or repurchases, and (iv) for any transaction
from which the director derives an improper personal benefit. The effect of
this provision of the Restated Certificate of Incorporation is to eliminate
the rights of Dal-Tile and its stockholders (through stockholders' derivative
suits on behalf of Dal-Tile) to recover monetary damages from a director for
breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (i) through (iv) above. This provision does
not limit or eliminate the rights of Dal-Tile or any stockholder to seek non-
monetary relief such as an injunction or rescission in the event of a breach
of a director's duty of care. In addition, the Amended and Restated Bylaws
provide that Dal-Tile shall indemnify its directors and executive officers to
the extent stated therein.

SECTION 203 OF THE DGCL

Dal-Tile is a Delaware corporation and is subject to Section 203 of the
DGCL. In general, Section 203 prevents an "interested stockholder" (defined as
a person who is the owner of 15% or more of a corporation's voting stock, or
who, as an affiliate or associate of a corporation, was the owner of 15% or
more of that corporation's voting stock within the prior three years) from
engaging in a "business combination" (as defined under the DGCL) with a
Delaware corporation for three years following the date such person became an
interested stockholder unless: (i) before such person became an interested
stockholder, the board of directors of the corporation approved the
transaction or the business combination in which the interested stockholder
became an interested stockholder; (ii) upon consummation of the transaction
that resulted in the interested stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced
(excluding shares owned by persons who are both officers and directors of the
corporation and shares held by certain employee stock ownership plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer); or (iii) following the transaction in which such person
became an interested stockholder, the business combination is approved by the
board of directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of at least two-thirds of
the outstanding voting stock of the corporation not owned by the "interested
stockholder." A "business combination" generally includes mergers, stock or
asset sales and other transactions resulting in a financial benefit to the
"interested stockholders."

CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK

Upon consummation of the Offerings and the Private Placement, Dal-Tile's
authorized but unissued capital stock will consist of 147,007,293 shares of
Common Stock (145,957,293 shares, if the U.S. Underwriters' over-allotment
option is exercised in full) and 11,100,000 shares of Preferred Stock. All the
foregoing authorized but unissued shares of capital stock will be available
for future issuance without stockholder approval. These additional shares may
be utilized for a variety of corporate purposes, including issuance pursuant
to employee stock options and other employee plans, director stock options and
future public offerings to raise additional capital or to facilitate corporate
acquisitions.

Dal-Tile does not presently have any plans to issue additional shares of
Common Stock other than shares of Common Stock which may be issued upon
exercise of existing options or options which may be granted in the future to
Dal-Tile's directors or employees.

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<PAGE>

DESCRIPTION OF CERTAIN INDEBTEDNESS

NEW BANK CREDIT AGREEMENT

In connection with the Refinancing, Dal-Tile Group has received the
Commitment Letter pursuant to which each of Chase Securities Inc. and The
Chase Manhattan Bank, N.A. (as to 50%), Credit Suisse (as to 25%) and Goldman,
Sachs & Co. and Pearl Street, L.P. (as to 25%) have severally committed to
provide the New Bank Facilities, consisting of the $275 million New Term Loan
(the proceeds of which will be drawn down concurrently with or shortly after
the consummation of the Offerings and the Private Placement), and the $250
million New Revolving Credit Facility. The Commitment Letter provides that the
New Bank Credit Agreement shall be executed and delivered no later than August
31, 1996.

The following summary of certain provisions of the Commitment Letter does
not purport to be complete and is qualified in its entirety by the provisions
of the Commitment Letter, a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part, and is subject
to the negotiation and execution of the definitive loan documentation with
respect to the New Bank Credit Agreement.

NEW TERM LOAN. The New Bank Credit Agreement will include a $275 million
term loan. The New Term Loan will be repayable in consecutive quarterly
installments commencing on March 31, 1997 and ending on December 31, 2002, in
aggregate amounts for each of the following periods as follows (with the
installments within each year being equal):

<TABLE>
<CAPTION>
AGGREGATE
YEAR AMOUNT
---- -----------
<S> <C>
1997............................. $30,000,000
1998............................. $40,000,000
1999............................. $40,000,000
2000............................. $50,000,000
2001............................. $50,000,000
2002............................. $65,000,000
</TABLE>

The New Term Loan may be prepaid and commitments may be reduced by Dal-Tile
Group without premium or penalty in minimum amounts to be agreed upon.
Voluntary prepayments of the New Term Loan will be applied ratably to
subsequent scheduled repayments of the New Term Loan after giving effect to
all prior repayments. In addition, the New Bank Credit Agreement provides for
mandatory repayments, subject to certain exceptions, of the New Term Loan (and
after the New Term Loan has been repaid, commitment reductions under the New
Revolving Credit Facility) out of the net proceeds of the sale or disposition
of assets (other than certain sales in the ordinary course of business which
do not exceed $1 million). Such mandatory prepayments to the New Term Loan
will be applied pro rata to the remaining scheduled repayments of the New Term
Loan.

NEW REVOLVING CREDIT FACILITY. The New Revolving Credit Facility is a $250
million revolving credit facility. The New Revolving Credit Facility is
inclusive of a $35 million letter of credit subfacility and a $25 million
swing line loan subfacility, and will be available on a revolving basis until
December 31, 2002.

USE OF PROCEEDS. Initial borrowings of the New Bank Facilities will be used
to refinance indebtedness under the Existing Bank Credit Agreement, to
refinance and repurchase other existing indebtedness of the Company and to pay
the Termination Fee and other fees and expenses. Subsequent borrowings under
the New Revolving Credit Facility may be used for general corporate purposes
of the Company and the repayment and repurchase of other existing indebtedness
of the Company.

INTEREST RATE. The New Bank Facilities will bear interest at a rate equal
to, at the Company's option, (i) the ABR (as defined) in effect from time to
time plus the Applicable Margin for ABR Loans (as set forth below) (the "ABR
Loans"), or (ii) the Eurodollar Rate (as defined) for the respective interest
period plus the Applicable Margin (as set forth below) for Eurodollar Loans
(the "Eurodollar Loans"); provided that all swing

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line loans shall bear interest based upon the ABR. The Applicable Margin will
vary depending upon the ratio of Consolidated Total Debt to Consolidated
EBITDA (as defined in the New Bank Credit Agreement) and whether such loan is
an ABR Loan or a Eurodollar Loan, as set forth below:

<TABLE>
<CAPTION>
RATIO OF CONSOLIDATED TOTAL ABR EURODOLLAR
DEBT TO CONSOLIDATED EBITDA LOANS LOANS
--------------------------- ----- ----------
<S> <C> <C>
equal to or greater than 3.75 to 1 0.25% 1.25%
equal to or greater than 3.25 to 1 but less than 3.75
to 1 0.00% 1.00%
equal to or greater than 3.00 to 1 but less than 3.25
to 1 0.00% 0.75%
equal to or greater than 2.50 to 1 but less than 3.00
to 1 0.00% 0.625%
equal to or greater than 2.00 to 1 but less than 2.50
to 1 0.00% 0.50%
less than 2.00 to 1 0.00% 0.375%
</TABLE>

"ABR" means the highest of (i) the rate of interest publicly announced by the
Administrative Agent under the New Bank Credit Agreement (the "Administrative
Agent") as its prime rate in effect at its principal office in New York City,
(ii) the secondary market rate for three-month certificates of deposit
(adjusted for statutory reserve requirements) plus 1% and (iii) the federal
funds effective rate from time to time plus 0.5%. "Eurodollar Rate" means the
rate (adjusted for statutory reserve requirements for eurocurrency
liabilities) at which eurodollar deposits for one, two, three or six months
(as selected by Dal-Tile Group) are offered to the Administrative Agent in the
interbank eurodollar market. Interest on ABR Loans will be payable quarterly
in arrears. Interest on Eurodollar Loans will be payable on the last day of
each relevant interest period and, in the case of any interest period longer
than three months, on each successive date three months after the first day of
such interest period.

At any time when Dal-Tile Group is in default in the payment of any amount
due under the New Bank Credit Agreement, the principal of all loans shall bear
interest at 2% above the rate otherwise applicable thereto. Overdue interest,
fees and other amounts shall bear interest at 2% above the rate applicable
under the New Revolving Credit Facility for ABR Loans.

FEES. Dal-Tile Group will be required to pay commitment fees on the average
daily unused portion of the New Revolving Credit Facility, payable quarterly
in arrears, at a rate per annum as set forth below:

<TABLE>
<CAPTION>
RATIO OF CONSOLIDATED TOTAL COMMITMENT
DEBT TO CONSOLIDATED EBITDA FEE
--------------------------- ----------
<S> <C>
equal to or greater than 3.75 to 1 0.375%
equal to or greater than 3.25 to 1 but less than 3.75 to 1 0.300%
equal to or greater than 3.00 to 1 but less than 3.25 to 1 0.250%
equal to or greater than 2.50 to 1 but less than 3.00 to 1 0.225%
equal to or greater than 2.00 to 1 but less than 2.50 to 1 0.200%
less than 2.00 to 1 0.175%
</TABLE>

Swing line loans shall, for purposes of the commitment fee calculations only,
not be deemed to be a utilization of the New Revolving Credit Facility.

The Commitment Letter provides for certain additional customary fees and
charges, including (i) fees on the aggregate commitments under the New Bank
Credit Agreement (including fees from the date of the Commitment Letter until
closing), (ii) annual administrative fees, (iii) fronting bank fees for the
letter of credit issuing bank, and (iv) customary issuance, amendment, payment
and negotiation charges payable to the issuing lender for its own account.

GUARANTEES. The New Bank Credit Agreement will be guaranteed by Dal-Tile and
each of Dal-Tile Group's material direct and indirect domestic subsidiaries.

CONDITIONS. The initial funding by the lenders under the New Bank Credit
Agreement (the "Lenders") will be subject to a number of conditions,
including, among other things, (a) the receipt by Dal-Tile Group or

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<PAGE>

Dal-Tile of net proceeds of at least $110 million from the Offerings; (b) the
redemption, repurchase or prepayment by Dal-Tile Group of specified existing
indebtedness and accrued interest thereon (subject to certain exceptions); (c)
the absence of any material adverse effect on the (i) business, assets,
property, condition (financial or otherwise) or prospects of Dal-Tile Group
and its subsidiaries taken as a whole, or (ii) the validity or enforceability
of the New Bank Credit Agreement or the rights and remedies of the
Administrative Agent and the Lenders; and (d) other conditions customary for
transactions similar to those contemplated by the New Bank Credit Agreement.

COVENANTS. The New Bank Credit Agreement will contain customary affirmative
and restrictive covenants, as well as financial covenants, under which the
Company must operate. Among other restrictions, the New Bank Credit Agreement
provides that, on a rolling four-quarter basis, earnings before interest,
taxes, depreciation and amortization minus capital expenditures must be at
least 1.50 times Total Interest Expense (as defined) at December 31, 1996,
increasing to 2.00 times at December 31, 1997, 2.50 times at December 31, 1998
and 3.00 times at December 31, 2001 and thereafter. In addition, the New Bank
Credit Agreement provides for (i) a minimum Net Worth (as defined) of $100
million plus 50% of Net Income (as defined), (ii) a minimum ratio of current
assets at 1.50 times current liabilities, and (iii) maximum capital
expenditures, in amounts increasing from $65 million at December 31, 1996 to
$90 million at December 31, 2002 (such covenant to be eliminated if, for any
period of four consecutive fiscal quarters, the ratio of earnings before
interest, taxes, depreciation and amortization minus capital expenditures is
greater than 5.00 times Total Interest Expense). Failure to comply with any of
such covenants will permit the Administrative Agent to accelerate, subject to
the terms of the New Bank Credit Agreement, the maturity of all amounts
outstanding under the New Bank Credit Agreement, and to terminate Dal-Tile
Group's ability to borrow under the New Revolving Credit Facility.

EVENTS OF DEFAULT. The New Bank Credit Agreement will contain customary
events of default appropriate in the context of the proposed transaction,
including payment defaults, breach of representations and warranties, covenant
defaults, certain cross-defaults, certain events of bankruptcy and insolvency,
ERISA events, judgment defaults, failure of any guaranty supporting the New
Bank Credit Agreement and a "Change of Control" as defined therein.

EXISTING INDEBTEDNESS TO BE REFINANCED IN THE REFINANCING

The Company intends to refinance the existing indebtedness of the Company
summarized below pursuant to the Refinancing. The summaries of such
indebtedness contained herein do not purport to be complete and are qualified
in their entirety by reference to the provisions of the various agreements and
indentures related thereto, copies of which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. Capitalized terms
used in this section and not otherwise defined shall have the meanings
ascribed thereto in the Zero Coupon Note Indenture, the Existing Bank Credit
Agreement or the Series Note Agreement, as applicable.

THE ZERO COUPON NOTES

On August 11, 1993, Dal-Tile issued the Zero Coupon Notes with proceeds of
$75,006,252, before fees and expenses, having a yield to maturity of 12% per
annum (computed on a semiannual bond equivalent basis), calculated from August
11, 1993. The Zero Coupon Notes defer interest payments until maturity on July
15, 1998, at which time principal and interest of $133,200,000 becomes due and
payable. The Zero Coupon Notes are not redeemable at the option of Dal-Tile,
except that if Dal-Tile issues shares of capital stock before July 16, 1996,
Dal-Tile, at its option, may use the net proceeds to redeem up to 33% of the
outstanding Zero Coupon Notes. In the Redemption, Dal-Tile used approximately
$27.6 million which AWI contributed as part of the AO Acquisition to redeem
$32.6 million aggregate principal amount at maturity of Zero Coupon Notes
($26.0 million aggregate accreted value at the Redemption Date). The
Redemption was at 106% of the accreted value of the Redeemed Notes. See
"Refinancing--Redemption," "Use of Proceeds" and "Capitalization." Dal-Tile
also is required to redeem the outstanding Zero Coupon Notes at 101% of the
accreted value if there shall occur a Change of Control. Pursuant to the
Pledge Agreement, the Zero Coupon Notes are secured by a pledge of all the
outstanding capital stock of Dal-Tile Group. Under the Zero Coupon
Solicitation and in conjunction with the Zero Coupon Tender Offer, Dal-Tile is
soliciting consents from the holders of at least a majority in principal

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<PAGE>

amount of the Zero Coupon Notes not otherwise called in the Redemption to
effect certain amendments to the Zero Coupon Note Indenture, including the
elimination of substantially all of the restrictive covenants described below
and the termination of the Pledge Agreement. As of July 31, 1996, Dal-Tile had
received the requisite number of consents necessary to effect the Proposed
Amendments, and on August 1, 1996, Dal-Tile and Citibank, N.A., as trustee
under the Zero Coupon Note Indenture, executed the Supplemental Indenture with
respect to the Proposed Amendments. The Proposed Amendments will not become
operative unless the Zero Coupon Tender Offer is consummated. See
"Refinancing--Tender Offer and Solicitation."

AFFIRMATIVE AND NEGATIVE COVENANTS. The Zero Coupon Note Indenture currently
contains a number of covenants including, among others, covenants restricting
Dal-Tile and its subsidiaries with respect to the incurrence of indebtedness,
the creation of liens, entering into sales or leases, the declaration or
payment of dividends, the making of certain investments and loans,
distributions by and transfers to subsidiaries, payments of certain management
fees, the consummation of certain transactions such as sales of substantial
assets, mergers or consolidations or other transactions, or changes of control
of Dal-Tile. In addition, the Zero Coupon Note Indenture contains affirmative
covenants by Dal-Tile including, among others, preservation of corporate
existence, maintenance of insurance, payment of taxes and other claims, and
delivery of financial and other information.

LIMITATION ON CONSOLIDATED DEBT. Dal-Tile and its Restricted Subsidiaries
currently may not (subject to certain exceptions) incur any Debt unless
immediately after giving effect to the incurrence of such Debt and the receipt
and application of the proceeds thereof, the Consolidated Cash Flow Ratio for
the preceding four full fiscal quarters determined on a pro forma basis as if
such Debt had been incurred and the proceeds thereof applied at the beginning
of such four fiscal quarters, would be greater than 2.00 to 1.

RESTRICTED PAYMENTS. Subject to certain exceptions, the Zero Coupon Note
Indenture currently restricts the ability of Dal-Tile, among other things, (i)
to declare or pay any dividend, or make any distribution, in respect of its
Capital Stock or to the holders thereof, (ii) to (or permit any of its
Restricted Subsidiaries to) purchase, redeem, or otherwise retire or acquire
for value (a) any Capital Stock of Dal-Tile or (b) any securities convertible
or exchangeable into shares of Capital Stock of Dal-Tile or any options,
warrants or rights to purchase or acquire shares of Capital Stock of Dal-Tile
or securities convertible or exchangeable into shares of Capital Stock of Dal-
Tile, (iii) to make loans, guarantees, advances or capital contributions to,
or investments in the stock or securities of entities other than Restricted
Subsidiaries, and (iv) to redeem, defease (including, but not limited to,
legal or covenant defeasance), repurchase, retire or otherwise acquire or
retire for value prior to any scheduled maturity, repayment or sinking fund
payment Debt of Dal-Tile (other than the Zero Coupon Notes) which is pari
passu with or subordinate in right of payment to the Zero Coupon Notes (each
of clauses (i) through (iv) being a "Restricted Payment") unless: (1)
subsequent to the date of the Zero Coupon Note Indenture, Dal-Tile has
received net cash proceeds from the issuance and sale of shares of its Capital
Stock (other than Disqualified Stock) to any Person equal to or greater than
$50 million, and has made an offer to purchase outstanding Zero Coupon Notes
in an aggregate amount equal to not less than (i) 75% of the net cash proceeds
of such issuance and sale to any Person or Persons other than AEA Investors,
but not less than $37.5 million, minus (ii) the aggregate redemption price
paid in respect of Zero Coupon Notes redeemed prior to the date thereof, at
declining prices (ranging from 106% to 100% of the Accreted Value as of the
date of purchase); (2) upon giving effect to such Restricted Payment, no Event
of Default, or event that with the lapse of time or the giving of notice, or
both, would constitute an Event of Default, shall have occurred; and (3) upon
giving effect to such Restricted Payment, the aggregate of all Restricted
Payments made subsequent to the date of the Zero Coupon Note Indenture would
not exceed the sum of: (a) 50% of cumulative Consolidated Net Income (or,
where Consolidated Net Income shall be negative, minus 100% of such deficit)
for the period commencing on the date of the Zero Coupon Indenture and ending
on the last day of the last full fiscal quarter ending immediately preceding
the date of such Restricted Payment; plus (b) 100% of the aggregate net cash
proceeds from the issuance after the date of the Zero Coupon Note Indenture of
Capital Stock (other than Disqualified Stock) of Dal-Tile and options,
warrants or other rights on Capital Stock (other than Disqualified Stock) of
Dal-Tile, other than to a Subsidiary of Dal-Tile; minus (c) the amount of net
cash proceeds from the issuance and sale of Capital Stock used by Dal-Tile to
redeem Zero Coupon Notes or to purchase Zero Coupon Notes pursuant to clause
(1) above.

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<PAGE>

THE EXISTING BANK CREDIT AGREEMENT

Pursuant to the Existing Bank Credit Agreement with National Westminster
Bank, USA, as agent bank, Credit Suisse and NCNB Texas National Bank, N.A. as
co-agents, Dal-Tile Group has a $160 million revolving credit facility
available. The Existing Bank Credit Agreement terminates, and all borrowings
thereunder are due and payable, on the earlier of (i) January 9, 1998 and (ii)
the seventh day following a Change in Control. At June 30, 1996, there was an
aggregate principal amount of $123.2 million outstanding under the Existing
Bank Credit Agreement bearing interest at a weighted average rate of 7.8% per
annum.

Under the Existing Bank Credit Agreement, borrowings may be made as Prime
Rate Loans or Eurodollar Loans. On and after January 9, 1994, Eurodollar Loans
and Prime Rate Loans must be repaid if the aggregate principal amount of all
such Loans outstanding exceeds the lesser of (i) the then Total Commitment and
(ii) a borrowing base amount based on eligible accounts receivable and
eligible inventory. The maximum amount available to Dal-Tile Group under the
inventory letter of credit facility is equal to the lesser of (i) $25 million
and (ii) the excess of (x) the Total Commitment over (y) the aggregate
outstanding principal amount of Prime Rate Loans and Eurodollar Loans. Prime
Rate Loans bear interest at rates per annum equal to the sum of the Prime Rate
and a margin varying from 0% to 1 1/4%, based on Dal-Tile Group's Ratio of
Total Liabilities to Consolidated Adjusted Net Worth. Eurodollar Loans
(available for one-, two-, three-, and six-month interest periods) bear
interest at rates per annum equal to the sum of the Eurodollar Base Rate and a
margin varying from 1% to 2 1/4%, based on Dal-Tile Group's ratio of total
liabilities to consolidated adjusted net worth.

The Existing Bank Credit Agreement contains a number of covenants,
including, among others, covenants restricting Dal-Tile Group and its
subsidiaries with respect to the incurrence of indebtedness, the creation of
liens, entering into sale and leaseback transactions, entering into leases,
the declaration or payment of dividends, the making of certain investments and
loans, engaging in businesses unrelated to the manufacture and distribution of
tile and related building products (unless such unrelated business contributes
less than 20% of total consolidated revenues of Dal-Tile Group and constitutes
less than 20% of the consolidated assets of Dal-Tile Group), transfers to
affiliates, payments of certain management fees, the consummation of certain
transactions such as sales of substantial assets, mergers or consolidations
and other transactions. In addition, the Existing Bank Credit Agreement
contains affirmative covenants by Dal-Tile Group and its subsidiaries,
including, among others, compliance with laws, preservation of corporate
existence, maintenance of insurance, payment of taxes and debt, maintenance of
properties, environmental compliance and delivery of financial and other
information to the lenders under the Existing Bank Credit Agreement. Dal-Tile
Group also is required to comply with certain financial tests and maintain
certain financial ratios.

THE SERIES A NOTES AND THE SERIES B NOTES

The Series A Notes and the Series B Notes were issued pursuant to the Series
Note Agreement entered into between Dal-Tile Group and certain institutional
investors in connection with the AEA Acquisition. The Series A Notes mature on
January 9, 2000. Each Series A Note bears interest at the rate of 10.625% per
annum. Interest on the Series A Notes is payable semiannually on January 9 and
July 9. The Series B Notes mature on January 9, 2002. Each Series B Note bears
interest at the rate of 10.770% per annum payable semiannually on January 9
and July 9.

The Series A Notes are subject to mandatory prepayment in the amount of $44
million on January 9 in each of the years 1996 through and including 1999. The
Series B Notes are subject to mandatory prepayment in the amount of $20
million on January 9 in each of the years 1998 through and including 2001. On
March 31, 1996, there were $176 million aggregate principal amount of
outstanding Series A Notes, and $100 million aggregate principal amount of
outstanding Series B Notes.

Dal-Tile Group may, at its option, prepay the Series A Notes and the Series
B Notes, in whole or in part, at any time upon due notice, by paying the
holders thereof a Make-Whole Premium together with interest accrued on the
Series A Notes and the Series B Notes to the date of prepayment. In addition,
upon a Change of Control, Dal-Tile Group shall prepay in full all of the
Series A Notes and the Series B Notes held by each holder who has

74
<PAGE>

accepted Dal-Tile Group's prepayment offer by paying to each such holder a
Make-Whole Premium with respect to the unpaid principal amount of such Series
A Notes and Series B Notes together with interest accrued on the Notes to the
date of prepayment.

The covenants of the Series A Notes and the Series B Notes are substantially
equivalent to those under the Existing Bank Credit Agreement.

SHARES ELIGIBLE FOR FUTURE SALE

There has been no public market for the Common Stock prior to the Offerings.
No prediction can be made as to the effect, if any, that market sales of
shares of Common Stock or the availability of shares of Common Stock for sale
will have on the market price prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock of Dal-Tile in the public market
after the lapse of the restrictions described below could adversely affect
prevailing market prices and the ability of the Company to raise equity
capital in the future at a time and price which it deems appropriate.

Upon completion of the Offerings and the Private Placement, Dal-Tile will
have outstanding 52,992,707 shares of Common Stock (54,042,707 shares, if the
U.S. Underwriters' over-allotment option is exercised in full). All these
shares of Common Stock will be freely tradeable without restriction or
limitation under the Securities Act, except to the extent such shares are
subject to the agreement with the U.S. Underwriters described below, and
except for the shares sold in the Private Placement and for any shares held by
"affiliates," as that term is defined under the Securities Act, of the
Company. The shares held by affiliates may only be sold if they are registered
under the Securities Act or unless an exemption from registration, such as the
exemption provided by Rule 144 under the Securities Act ("Rule 144"), is
available.

In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned shares
constituting "restricted securities" (generally defined as securities acquired
from the Company or an affiliate of the Company in a non-public transaction)
for at least two years, is entitled to sell within any three-month period a
number of shares that does not exceed the greater of one percent of the
outstanding Common Stock or the average weekly trading volume in the Common
Stock during the four calendar weeks preceding the date on which notice of
such sale is filed pursuant to Rule 144. Sales under Rule 144 also are subject
to certain provisions regarding the manner of sale, notice requirements and
the availability of current public information about the Company. A
stockholder (or stockholders whose shares are aggregated) who is not an
affiliate of the Company for at least 90 days prior to a proposed transaction
and who has beneficially owned "restricted securities" for at least three
years is entitled to sell such shares under Rule 144 without regard to the
limitations described above.

In addition, 4,836,425 shares of Common Stock will be reserved for issuance
pursuant to the Company's stock option plans. At June 30, 1996, options for
the purchase of 4,204,747 shares of Common Stock were outstanding. These
shares will be available for sale in the public market from time to time upon
registration or pursuant to available exemptions from registration. See
"Management--Executive Compensation" and "Management--Stock Option Plan."

Each of (i) the Company, (ii) the Company's executive officers and directors
who currently own shares of Common Stock or options or warrants to purchase
Common Stock, and (iii) the Existing Stockholders owning substantially all the
outstanding Common Stock, have agreed not to offer, sell, contract to sell, or
otherwise dispose of, any shares of Common Stock or any securities convertible
into, or exercisable or exchangeable for Common Stock, or grant any options or
warrants to purchase Common Stock, except in certain circumstances, for a
period of 180 days following the date of this Prospectus without the prior
consent of Smith Barney Inc. (the "Lockup"). Following the Lockup, these
shares will be eligible for sale in the public market subject to the
restrictions described above. See "Underwriting."

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<PAGE>

Loan), the Company may need to raise additional funds through public or
private financings. If additional funds are raised through the issuance of
equity securities, the percentage ownership of the Company's stockholders at
that time would be diluted. Further, such equity securities may have rights,
preferences or privileges senior to those of the Common Stock. See
"Description of Capital Stock."

CERTAIN U.S. TAX CONSEQUENCES TO NON-U.S. STOCKHOLDERS

The following is a general discussion of the material Federal income and
estate tax consequences of the ownership and disposition of a share of Common
Stock by beneficial owner of such shares that is not a U.S. person for U.S.
Federal income tax purposes (a "non-U.S. holder"). For purposes of this
discussion, a "U.S. person" means a citizen or resident of the United States,
a corporation or partnership created or organized in the United States or
under the laws of the United States or of any State or political subdivision
of the foregoing, or any estate or trust whose income is includible in gross
income for U.S. Federal income tax purposes regardless of its source. The
discussion does not address all aspects of Federal income and estate taxation
nor any aspects of state, local, or foreign tax laws. The discussion does not
consider any specific facts or circumstances that may apply to particular non-
U.S. holders (including insurance companies, tax-exempt organizations,
financial institutions, broker dealers or certain U.S. expatriates).
Furthermore, the following discussion is based on current provisions of the
Code, the regulations promulgated thereunder and administrative and judicial
interpretations as of the date hereof, all of which are subject to change,
possibly with retroactive effect. Treasury regulations were recently proposed
that would, if adopted in their present form, revise in certain respects the
rules applicable to non-U.S. holders of Common Stock (the "Proposed
Regulations"). The Proposed Regulations are generally proposed to be effective
with respect to payments made after December 31, 1997. It is not certain
whether, or in what form, the Proposed Regulations will be adopted as final
regulations. Each prospective investor is urged to consult its own tax adviser
as to its personal tax situation with respect to the U.S. Federal, state and
local consequences of owning and disposing of a share of Common Stock, as well
as any tax consequences arising under the laws of any other taxing
jurisdiction.

U.S. INCOME TAX CONSEQUENCES

It is not currently contemplated that Dal-Tile will pay dividends on the
Common Stock in the foreseeable future. If Dal-Tile were to pay a dividend in
the future, such a dividend paid to a non-U.S. holder would be subject to U.S.
withholding tax at a 30% rate, or if applicable, a lower treaty rate, unless
the dividend is effectively connected with the conduct of a trade or business
in the United States by a non-U.S. holder (and, if certain tax treaties apply,
is attributable to a United States permanent establishment maintained by such
non-U.S. holder). A dividend that is effectively connected with the conduct of
a trade or business in the United States by the non-U.S. holder (and, if
certain tax treaties apply, is attributable to a United States permanent
establishment maintained by such non-U.S. holder) will generally be exempt
from the withholding tax described above and subject instead (i) to the U.S.
Federal income tax on net income that applies to U.S. persons and (ii) with
respect to corporate holders under certain circumstances, a 30% (or, if
applicable, lower treaty rate) branch profits tax that in general is imposed
on its "effectively connected earnings and profits" (within the meaning of the
Code) for the taxable year, as adjusted for certain items.

Under current Treasury Regulations, dividends paid to an address in a
foreign country are presumed to be paid to a resident of that country (unless
the payor has knowledge to the contrary) for purposes of the withholding
discussed above and, under the current interpretation of the Treasury
Regulations, for purposes of determining the applicability of a tax treaty
rate. Under the Proposed Regulations, however, a non-U.S. holder of Common
Stock who wishes to claim the benefit of an applicable treaty rate would be
required to satisfy applicable certification and other requirements. In the
case of a foreign partnership, the certification requirement would generally
be applied to the partners of the partnership. In addition, the Proposed
Regulations also would require the partnership to provide certain information,
including a United States taxpayer identification number, and

76
<PAGE>

would provide look-through rules for tiered partnerships. A non-U.S. holder
that is eligible for a reduced rate of U.S. withholding tax pursuant to an
income tax treaty may obtain a refund of any excess amounts withheld by filing
an appropriate claim for refund with the Internal Revenue Service (the "IRS").

Under current law, a non-U.S. holder generally will not be subject to U.S.
Federal income tax on any gain recognized on a sale or other disposition of a
share of Common Stock unless (i) the gain is effectively connected with the
conduct of a trade or business within the United States of the non-U.S. holder
and, if certain tax treaties apply, is attributable to a United States
permanent establishment maintained by the non-U.S. holder, (ii) the gain is
not described in clause (i) above, the non-U.S. holder is an individual who
holds the share as a capital asset, is present in the United States for 183
days or more in the taxable year of the disposition and either (a) such
individual has a "tax home" (as defined for U.S. Federal income tax purposes)
in the United States or (b) the gain is attributable to an office or other
fixed place of business maintained in the United States by such individual, or
(iii) the Company is or has been a United States real property holding
corporation (a "USRPHC") for United States federal income tax purposes (which
the Company does not believe that it is or is likely to become) at any time
within the shorter of the five year period preceding such disposition or such
non-U.S. holder's holding period. If the Company were to become a USRPHC,
gains realized upon a disposition of Common Stock by a non-U.S. holder which
did not directly or indirectly own more than 5% of the Common Stock during the
shorter of the periods described above generally would not be subject to
United States federal income tax, provided that the Common Stock is "regularly
traded" on an established securities market. In case of a non-U.S. holder that
is described under clause (i) above, its gain will be subject to the U.S.
Federal income tax on net income that applies to U.S. persons and, in
addition, if such non-U.S. holder is a foreign corporation, it may be subject
to the branch profits tax as described in the preceding paragraph. An
individual non-U.S. holder that is described under clause (ii) above will be
subject to a flat 30% tax on the gain derived from the sale, which may be
offset by certain U.S. capital losses (notwithstanding the fact that he or she
is not considered a resident of the United States). Thus, individual non-U.S.
holders who have spent 183 days or more in the United States in the taxable
year in which they contemplate a sale of the Common Stock are urged to consult
their tax advisers as to the tax consequences of such sale.

U.S. ESTATE TAX CONSEQUENCES

Shares of Common Stock owned at the time of his or her death by an
individual non-U.S. holder will be includible in his or her gross estate for
U.S. Federal estate tax purposes unless an applicable estate tax treaty
provides otherwise, and may be subject to U.S. Federal estate tax.

BACK-UP WITHHOLDING AND INFORMATION REPORTING

DIVIDENDS

Except as provided below, Dal-Tile must report annually to the IRS and to
each non-U.S. holder the amount of dividends paid to and the tax withheld with
respect to such holder. These information reporting requirements apply
regardless of whether withholding was reduced or eliminated by an applicable
tax treaty. Copies of these information returns may also be available under
the provisions of a specific treaty or agreement with the tax authorities in
the country in which the non-U.S. holder resides. In general, backup
withholding at a rate of 31% and additional information reporting will apply
to dividends paid on shares of Common Stock to holders that are not "exempt
recipients" and that fail to provide in the manner required certain
identifying information (such as the holder's name, address and taxpayer
identification number ). Generally, individuals are not exempt recipients,
whereas corporations and certain other entities generally are exempt
recipients. However, dividends that are subject to U.S. withholding tax at the
30% statutory rate or at a reduced tax treaty rate are exempt from backup
withholding of U.S. Federal income tax and such additional information
reporting.

BROKER SALES

If a non-U.S. holder sells shares of Common Stock through a U.S. office of a
U.S. or foreign broker, the broker is required to file an information return
and is required to withhold 31% of the sale proceeds unless the non-U.S.
holder is an exempt recipient or has provided the broker with the information
and statements, under

77
<PAGE>

penalties of perjury, necessary to establish an exemption from backup
withholding. If payment of the proceeds of the sale of a share by a non-U.S.
holder is made to or through the foreign office of a broker, that broker will
not be required to backup withhold or, except as provided in the next
sentence, to file information returns. In the case of proceeds from a sale of
a share by a non-U.S. holder paid to or through the foreign office of a U.S.
broker or a foreign office of a foreign broker that is (i) a controlled
foreign corporation for U.S. tax purposes or (ii) a person 50% or more of
whose gross income for the three-year period ending with the close of the
taxable year preceding the year of payment (or for the part of that period
that the broker has been in existence) is effectively connected with the
conduct of a trade or business within the United States (a "Foreign U.S.
Connected Broker"), information reporting is required unless the broker has
documentary evidence in its files that the payee is not a U.S. person and
certain other conditions are met, or the payee otherwise establishes an
exemption.

REFUNDS

Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder may be refunded or credited against the non-U.S. holder's U.S.
Federal income tax liability, provided that the required information is
furnished to the IRS.

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<PAGE>

UNDERWRITING

Upon the terms and subject to the conditions stated in the U.S. Underwriting
Agreement, each of the underwriters of the U.S. Offering named below (the
"U.S. Underwriters"), for whom Smith Barney Inc., Dillon, Read & Co. Inc.,
Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated are acting as the
representatives (the "Representatives"), has severally agreed to purchase, and
the Company has agreed to sell to each U.S. Underwriter, the number of shares
of Common Stock set forth opposite the name of such U.S. Underwriter below:

<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
----------------- ---------
<S> <C>
Smith Barney Inc. ..............................................
Dillon, Read & Co. Inc. ........................................
Goldman, Sachs & Co. ...........................................
Morgan Stanley & Co. Incorporated...............................
---------
Total......................................................... 5,600,000
=========
</TABLE>

Under the terms and subject to the conditions contained in the International
Underwriting Agreement, each of the managers of the concurrent International
Offering named below (the "Managers"), for whom Smith Barney Inc., Dillon,
Read & Co. Inc., Goldman Sachs International and Morgan Stanley & Co.
International Limited, are acting as lead managers (the "Lead Managers"), has
severally agreed to purchase, and the Company has agreed to sell to each
Manager, the number of shares of Common Stock set forth opposite the name of
such Manager below:

<TABLE>
<CAPTION>
NUMBER OF
MANAGERS SHARES
-------- ---------
<S> <C>
Smith Barney Inc. ..............................................
Dillon, Read & Co. Inc. ........................................
Goldman Sachs International.....................................
Morgan Stanley & Co. International Limited......................
---------
Total......................................................... 1,400,000
=========
</TABLE>

Each of the U.S. Underwriting Agreement and the International Underwriting
Agreement provides that the obligations of the several U.S. Underwriters and
the several Managers to pay for and accept delivery of the shares of Common
Stock offered hereby are subject to the approval of certain legal matters by
counsel and to certain other conditions. The U.S. Underwriters and the
Managers are obligated to take and pay for all shares of Common Stock offered
hereby (other than those covered by the over-allotment option described below)
if any such shares are taken.

The U.S. Underwriters and the Managers (collectively, the "Underwriters")
initially propose to offer part of the shares offered hereby directly to the
public at the public offering price set forth on the cover page of this
Prospectus and part of the shares offered hereby to certain dealers at a price
which represents a concession not in excess of $ per share under the public
offering price. The U.S. Underwriters and the Managers may allow, and such
dealers may reallow, a concession not in excess of $ per share to other
U.S. Underwriters or Managers, respectively, or to certain other dealers. The
Representatives and the Managers have advised the Company that the U.S.
Underwriters and the Managers do not intend to confirm any shares to accounts
over which they exercise discretionary authority. After the initial public
offering, the public offering price and such concessions may be changed by the
Underwriters.

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<PAGE>

The Company has granted the U.S. Underwriters an option, exercisable at any
time and from time to time during a 30-day period from the date of this
Prospectus, to purchase up to an aggregate of 1,050,000 additional shares of
Common Stock at the public offering price set forth on the cover page hereof
less underwriting commissions. The U.S. Underwriters may exercise such option
to purchase additional shares solely for the purpose of covering over-
allotments, if any, incurred in connection with the sales of the shares of
Common Stock offered hereby. To the extent such option is exercised, each U.S.
Underwriter will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite each U.S. Underwriter's name in the preceding U.S.
Underwriters table bears to the total number of shares of Common Stock offered
by the U.S. Underwriters hereby.

At the request of the Company, the U.S. Underwriters have reserved up to
250,000 shares of Common Stock for sale at the initial offering price to
persons who are directors, officers or employees of, or otherwise affiliated
or associated with, the Company and certain other parties. The number of
shares available for sale to the general public will be reduced to the extent
such individuals purchase such reserved shares. Any reserved shares not so
purchased will be released for sale by the U.S. Underwriters to the general
public no later than the closing date of the Offerings (which is expected to
be three business days after the date of this Prospectus) on the same terms as
the other shares offered hereby. Reserved shares purchased by such individuals
will, except as restricted by applicable securities laws, be available for
resale following the Offerings.

The Company and the U.S. Underwriters and the Managers have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.

Each of (i) the Company, (ii) the Company's executive officers and directors
who currently own shares of Common Stock or options or warrants to purchase
Common Stock, and (iii) the Existing Shareholders owing substantially all the
outstanding Common Stock, have agreed that, for a period of 180 days from the
date of this Prospectus, they will not, without the prior written consent of
Smith Barney Inc., offer, sell, contract to sell, or otherwise dispose of, any
Common Stock or securities convertible into or exercisable or exchangeable for
Common Stock, or grant any options or warrants to purchase Common Stock,
except in certain circumstances.

The U.S. Underwriters and the Managers have entered into an Agreement
between U.S. Underwriters and Managers pursuant to which each U.S. Underwriter
has agreed that, as part of the distribution of the shares offered in the U.S.
Offering (i) it is not purchasing any such shares for the account of anyone
other than a U.S. or Canadian Person, and (ii) it has not offered or sold, and
will not offer, sell, resell or deliver, directly or indirectly, any of such
shares or distributed any prospectus relating to the U.S. Offering outside the
United States or Canada or to anyone other than a U.S. or Canadian Person. In
addition, each Manager has agreed that as part of the distribution of the
shares offered in the International Offering: (i) it is not purchasing any
such shares for the account of any U.S. or Canadian Person, and (ii) it has
not offered or sold, and will not offer, sell, resell or deliver, directly or
indirectly, any of such shares or distribute any prospectus relating to the
International Offering in the United States or Canada or to any U.S. or
Canadian Person. Each Manager has also agreed that it will offer to sell
shares only in compliance with all relevant requirements of any applicable
laws.

The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the U.S. Underwriting Agreement, the
International Underwriting Agreement and the Agreement Between U.S.
Underwriters and Managers, including (i) certain purchases and sales between
the U.S. Underwriters and the Managers, (ii) certain offers, sales, resales,
deliveries or distributions to or through investment advisors or other persons
exercising investment discretion, (iii) purchases, offers or sales by a U.S.
Underwriter who is also acting as a Manager or by a Manager who is also acting
as a U.S. Underwriter, and (iv) other transactions specifically approved by
the Representatives and the Managers. As used herein, "U.S. or Canadian
Person" means any resident or national of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada or any estate or trust the income of which
is

80
<PAGE>

subject to U.S. or Canadian income taxation regardless of the source of its
income (other than the foreign branch of any U.S. or Canadian Person), and
includes any U.S. or Canadian branch of a person other than a U.S. or Canadian
Person.

Any offer of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the relevant province of Canada
in which such offer is made.

Each Manager has represented and agreed that (i) it has not offered or sold
and will not offer or sell in the United Kingdom, by means of any document,
any shares other than to persons whose ordinary business it is to buy or sell
shares or debentures, whether as principal or agent or in circumstances which
do not constitute an offer to the public within the meaning of the Public
Offering of Securities Regulation 1995, (ii) it has complied and will comply
with all applicable provisions of the Financial Services Act 1986 with respect
to anything done by it in relation to the shares in, from, or otherwise
involving, the United Kingdom, and (iii) it has only issued or passed on and
will only issue or pass on to any person in the United Kingdom any document
received by it in connection with the issue of the shares if that person is of
a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1995 or is a person to whom the
document may otherwise lawfully be issued or passed on.

No action has been or will be taken in any jurisdiction by the Company, the
U.S. Underwriters or the Managers that would permit any offering to the
general public of the Common Stock offered hereby in any jurisdiction other
than the United States.

Purchasers of the Common Stock offered hereby may be required to pay stamp
taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the offering price set forth on the cover
page hereof.

Pursuant to the Agreement Between U.S. Underwriters and Managers, sales may
be made between the U.S. Underwriters and the Managers of such number of
shares of Common Stock as may be mutually agreed. The price of any shares so
sold shall be the public offering price as then in effect for Common Stock
being sold by the U.S. Underwriters and the Managers, less all or any part of
the selling concession, unless otherwise determined by mutual agreement. To
the extent that there are sales between the U.S. Underwriters and the Managers
pursuant to the Agreement Between U.S. Underwriters and Managers, the number
of shares initially available for sale by the U.S. Underwriters and by the
Managers may be more or less than the number of shares appearing on the front
cover of this Prospectus.

Prior to the Offerings, there has been no public market for Common Stock.
The initial public offering price of the shares was negotiated between the
Company and the Representatives. Among the factors considered in determining
such price were the history of and prospects for the Company's business and
the industry in which it competes, an assessment of the Company's management
and the present state of the Company's development, the past and present
revenues and earnings of the Company, the prospects for growth of the
Company's net sales and earnings, the current state of the economy in each of
the United States and Mexico, and the current level of economic activity in
the industry in which the Company competes and in related or comparable
industries, and currently prevailing conditions in the securities markets,
including current market valuations of publicly traded companies which the
Company and the Underwriters believe to be comparable to the Company.

The Common Stock has been approved for listing on the New York Stock
Exchange, subject to official notice of issuance, under the symbol "DTL."
There can be no assurance that an active trading market will develop for the
Common Stock or that the Common Stock will trade in the public market
subsequent to the Offerings or at or above the initial price to public.

Smith Barney Inc. is acting as Dealer Manager in the Zero Coupon Tender
Offer and the Zero Coupon Solicitation, for which they will receive customary
compensation.

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<PAGE>

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Fried, Frank, Harris, Shriver & Jacobson (a partnership including
professional corporations), One New York Plaza, New York, New York. Certain
legal matters will be passed upon for the Underwriters by Cravath, Swaine &
Moore, New York, New York.

EXPERTS

The Consolidated Financial Statements and consolidated financial statement
schedule of Dal-Tile at December 31, 1994 and 1995, and for each of the three
years in the period ended December 31, 1995, appearing in this Prospectus and
the Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing.

The consolidated financial statements of Ceramic Tile Operations of
Armstrong World Industries, Inc. and subsidiaries as of December 31, 1994 and
December 29, 1995 and for both of the years in the two-year period ended
December 31, 1994 and for the period ended December 29, 1995, appearing in
this Prospectus and the Registration Statement, have been audited by KPMG Peat
Marwick LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of said firm as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act, with respect
to the Common Stock offered hereby. This Prospectus, which is part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement. For further information with respect to the
Company and the Common Stock offered hereby, reference is hereby made to the
Registration Statement. Statements contained in this Prospectus regarding the
contents of any contract, agreement or other document are not necessarily
complete. With respect to each such contract, agreement or document filed as
an exhibit to the Registration Statement, reference is made to the exhibit for
a more complete description of the matter involved, and each such statement
shall be deemed qualified in all respects by such reference.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports
and other information with the Commission. The Registration Statement filed by
the Company with the Commission, as well as such reports and other information
filed by the Company with the Commission, may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and should also be available for
inspection and copying at the regional offices of the Commission located in
the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies
of such material can also be obtained by mail from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Copies of such material will be available for inspection at
the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005. Such material may also be accessed electronically by means of the
Commission's home page on the Internet (http://www.sec.gov).

82
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

DAL-TILE INTERNATIONAL INC.

<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30,
1996..................................................................... F-3
Consolidated Statements of Operations for each of the three years in the
period ended
December 31, 1995, and each of the six month periods ended June 30, 1995
and 1996................................................................. F-4
Consolidated Statements of Stockholders' Equity (Capital Deficiency) for
each of the
three years in the period ended December 31, 1995 and for the six month
period ended
June 30, 1996............................................................ F-5
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1995, and each of the six month periods ended
June 30, 1995 and 1996................................................... F-6
Notes to Consolidated Financial Statements................................ F-7

CERAMIC TILE OPERATIONS OF ARMSTRONG WORLD INDUSTRIES, INC.

Report of KPMG Peat Marwick LLP, Independent Auditors..................... F-23
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1994 and December 29,
1995..................................................................... F-24
Consolidated Statements of Operations for each of the years ended December
31, 1993 and 1994 and the year ended December 29, 1995................... F-25
Consolidated Statements of Cash Flows for each of the years ended December
29, 1993 and 1994 and the year ended December 29, 1995................... F-26
Notes to Consolidated Financial Statements................................ F-27
</TABLE>

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors
Dal-Tile International Inc.

We have audited the accompanying consolidated balance sheets of Dal-Tile
International Inc. (the Company) as of December 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity (capital
deficiency), and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company'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.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Dal-Tile International Inc. at December 31, 1994 and 1995, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.

Ernst & Young LLP
Dallas, Texas

March 15, 1996,
except as to Note
18, as to which
the date is August
8, 1996

F-2
<PAGE>

DAL-TILE INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31 (UNAUDITED)
------------------ JUNE 30,
1994 1995 1996
-------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.......................................... $ 12,977 $ 72,965 $ 33,576
Trade accounts receivable..................... 85,148 103,909 108,389
Inventories................................... 80,467 118,811 118,960
Prepaid expenses.............................. 3,293 3,872 3,477
Other current assets.......................... 7,381 8,531 10,867
-------- -------- --------
Total current assets........................ 189,266 308,088 275,269
Property, plant, and equipment, at cost:
Land.......................................... 12,776 19,444 19,381
Leasehold improvements........................ 7,298 8,567 8,805
Buildings..................................... 56,748 63,065 63,267
Machinery and equipment....................... 73,132 104,520 112,104
Construction in process....................... 10,346 14,400 17,470
-------- -------- --------
160,300 209,996 221,027
Accumulated depreciation...................... 37,557 42,073 50,274
-------- -------- --------
122,743 167,923 170,753
Goodwill, net of amortization.................. 166,781 162,016 159,634
Finance costs, net of amortization............. 8,461 6,432 5,747
Trade name and other assets.................... 1,166 27,934 24,095
-------- -------- --------
Total assets................................ $488,417 $672,393 $635,498
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL
DEFICIENCY)
Current liabilities:
Trade accounts payable........................ $ 19,162 $ 38,755 $ 18,688
Accrued expenses.............................. 14,640 27,983 23,591
Accrued interest payable...................... 17,088 17,398 15,255
Current portion of long-term debt............. 3,349 47,047 47,047
Income taxes payable.......................... 3,257 -- --
Deferred income taxes......................... 5,941 3,981 5,604
Other current liabilities..................... 10,112 20,796 15,014
-------- -------- --------
Total current liabilities................... 73,549 155,960 125,199
Long-term debt................................. 489,404 480,769 474,170
Other long-term liabilities.................... 22,635 25,023 20,315
Deferred income taxes.......................... 6,652 1,002 1,002
Commitments and contingencies
Stockholders' equity (capital deficiency):
Common stock.................................. 25 41 41
Additional paid-in capital.................... 200,475 334,035 334,035
Accumulated deficit........................... (268,144) (266,004) (260,185)
Currency translation adjustment............... (36,179) (58,433) (59,079)
-------- -------- --------
Total stockholders' equity (capital
deficiency)................................ (103,823) 9,639 14,812
-------- -------- --------
Total liabilities and stockholders' equity
(capital deficiency)....................... $488,417 $672,393 $635,498
======== ======== ========
</TABLE>

See accompanying notes.

F-3
<PAGE>

DAL-TILE INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31 30
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 440,573 $ 506,309 $ 474,812 $ 235,955 $ 351,523
Cost of goods sold...... 239,379 268,272 225,364 113,298 183,455
---------- ---------- ---------- ---------- ----------
201,194 238,037 249,448 122,657 168,068
Operating expenses:
Transportation........ 25,860 32,068 33,535 16,271 21,669
Selling, general and
administrative....... 120,748 132,887 134,193 68,047 98,445
Provision for merger
integration charges.. -- -- 22,430 -- 9,000
Provision for special
charges.............. 53,233 -- -- -- --
Amortization of
goodwill............. 10,706 4,765 4,765 2,382 2,802
Write-down of
goodwill............. 214,235 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total expenses...... 424,782 169,720 194,923 86,700 131,916
---------- ---------- ---------- ---------- ----------
Operating income
(loss)................. (223,588) 68,317 54,525 35,957 36,152
Interest expense........ 46,746 53,542 55,453 27,287 27,429
Interest income......... 517 1,403 1,250 868 1,136
Other (income) expense.. 1,088 (1,341) (2,994) (2,023) 491
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... (270,905) 17,519 3,316 11,561 9,368
Income tax provision
(benefit).............. (3,225) 10,614 1,176 6,254 3,549
---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ (267,680) $ 6,905 $ 2,140 $ 5,307 $ 5,819
========== ========== ========== ========== ==========
Net income (loss) per
share.................. $ (9.15) $ 0.22 $ 0.07 $ 0.17 $ 0.12
========== ========== ========== ========== ==========
Weighted average number
of shares outstanding
(Note 2)............... 29,265,294 30,729,702 30,685,297 30,518,521 47,292,877
</TABLE>

See accompanying notes.

F-4
<PAGE>

DAL-TILE INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CURRENCY
----------------------------------------------------- PAID-IN ACCUMULATED TRANSLATION
CLASS A CLASS B CLASS C CLASS D CLASS E CLASS F TOTAL CAPITAL DEFICIT ADJUSTMENT TOTAL
------- ------- ------- ------- ------- ------- ----- ---------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1992............. $ 10 $-- $ 3 $ 10 $ 1 $ 1 $ 25 $199,975 $ (7,369) $ (3,116) $ 189,515
Net loss......... -- -- -- -- -- -- -- -- (267,680) -- (267,680)
Currency
translation
adjustment...... -- -- -- -- -- -- -- -- -- 716 716
---- ---- --- ---- --- --- ---- -------- --------- --------- ---------
Balance at
December 31,
1993............. 10 -- 3 10 1 1 25 199,975 (275,049) (2,400) (77,449)
Net income....... -- -- -- -- -- -- -- -- 6,905 -- 6,905
Proceeds from
sale of stock... -- -- -- -- -- -- -- 500 -- -- 500
Currency
translation
adjustment...... -- -- -- -- -- -- -- -- -- (33,779) (33,779)
---- ---- --- ---- --- --- ---- -------- --------- --------- ---------
Balance at
December 31,
1994............. 10 -- 3 10 1 1 25 200,475 (268,144) (36,179) (103,823)
Net income....... -- -- -- -- -- -- -- -- 2,140 -- 2,140
Stock issued in
connection with
the AO
Acquisition..... 6 -- 2 6 1 1 16 133,560 -- -- 133,576
Currency
translation
adjustment...... -- -- -- -- -- -- -- -- -- (22,254) (22,254)
---- ---- --- ---- --- --- ---- -------- --------- --------- ---------
Balance at
December 31,
1995............. 16 -- 5 16 2 2 41 334,035 (266,004) (58,433) 9,639
Net income
(unaudited)..... -- -- -- -- -- -- -- -- 5,819 -- 5,819
Currency
translation
adjustment
(unaudited)..... -- -- -- -- -- -- -- -- -- (646) (646)
---- ---- --- ---- --- --- ---- -------- --------- --------- ---------
Balance at June
30, 1996
(unaudited)...... $ 16 $-- $ 5 $ 16 $ 2 $ 2 $ 41 $334,035 $(260,185) $ (59,079) $ 14,812
==== ==== === ==== === === ==== ======== ========= ========= =========
</TABLE>

See accompanying notes.

F-5
<PAGE>

DAL-TILE INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31 JUNE 30
----------------------------- -------------------
1993 1994 1995 1995 1996
--------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......... $(267,680) $ 6,905 $ 2,140 $ 5,307 $ 5,819
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating activities:
Depreciation and
amortization............ 22,019 17,020 17,164 8,599 11,884
Write-down of goodwill... 214,235 -- -- -- --
Merger integration
reserve................. -- -- 22,430 -- --
Special charge reserve... 51,293 -- -- -- --
Foreign exchange
transaction (gain)
loss.................... (321) (6,564) (6,067) (3,148) 145
Zero Coupon Notes
interest expense........ 3,473 9,700 10,899 5,270 5,930
Deferred income tax
provision (benefit)..... (6,727) 763 (3,088) 3,113 359
Changes in operating
assets and liabilities,
net of
assets/liabilities of
business acquired:
Trade accounts
receivable............ (11,808) (13,726) 8,581 1,355 (4,455)
Inventories............ (16,911) 1,911 (3,580) (8,929) (131)
Other assets........... (891) 1,695 (5,754) 868 (2,558)
Trade accounts payable
and accrued expenses.. (2,899) 14,890 12,371 (1,368) (21,233)
Accrued interest
payable............... 200 307 354 (325) (2,144)
Other liabilities...... 9,824 (1,431) (14,787) (1,156) (9,313)
--------- -------- -------- -------- ---------
Net cash provided by (used
in) operating
activities............... (6,193) 31,470 40,663 9,586 (15,697)
INVESTING ACTIVITIES
Expenditures for property,
plant, and equipment,
net...................... (17,066) (14,160) (29,392) (16,376) (11,188)
FINANCING ACTIVITIES
Repayment of long-term
debt..................... (86,392) (36,934) (22,538) (17,422) (49,630)
Borrowings under long-term
debt..................... 44,032 28,000 46,702 19,927 37,101
Proceeds from sale of
stock.................... -- 500 27,575 -- --
Proceeds from issuance of
Zero Coupon Notes........ 71,131 -- -- -- --
--------- -------- -------- -------- ---------
Net cash provided by (used
in) financing
activities............... 28,771 (8,434) 51,739 2,505 (12,529)
Effect of exchange rate
changes on cash.......... 407 (4,694) (3,022) (432) 25
--------- -------- -------- -------- ---------
Net increase (decrease) in
cash..................... 5,919 4,182 59,988 (4,717) (39,389)
Cash at beginning of
year..................... 2,876 8,795 12,977 12,977 72,965
--------- -------- -------- -------- ---------
Cash at end of year....... $ 8,795 $ 12,977 $ 72,965 $ 8,260 $ 33,576
========= ======== ======== ======== =========
</TABLE>

See accompanying notes.

F-6
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)

1. ORGANIZATION

Dal-Tile International Inc. (the "Company"), a holding company, owns the
outstanding capital stock of its sole direct subsidiary, Dal-Tile Group Inc.
(the "Group"), and conducts its operations through the Group. The Group also
conducts substantially all of its operations through its subsidiaries. The
Company, as a stand-alone holding company, has no operations and primarily has
as its assets, cash and the investment in the Group and as its liabilities,
the Senior Secured Zero Coupon Notes issued in 1993 (Note 4).

The Group is a multinational manufacturing and distribution company
operating in the United States, Mexico, and Canada. The Group offers a full
range of ceramic tile products and accessories. The Group's products are sold
principally through its extensive network of company-operated sales centers.
The Group also distributes products through independent distributors and sells
to home center retailers and flooring dealers as a result of the 1995
acquisition.

ACQUISITION

On December 29, 1995, the Company completed the acquisition of all of the
issued and outstanding stock of American Olean Tile Company, Inc. ("AO"), a
wholly owned subsidiary of Armstrong World Industries, Inc. ("AWI") and
certain related assets of the Ceramic Tile Operations of AWI (the "AO
Acquisition"). The AO Acquisition was accounted for under the purchase method
of accounting. As part of the AO Acquisition, AWI contributed $27,575,000 cash
to the Company.

In exchange for the stock and assets contributed as part of the AO
Acquisition, AWI received an aggregate of 590,238 shares of Class A Common
Stock of the Company, 5,873 shares of Class B Common Stock of the Company,
183,244 shares of Class C Common Stock of the Company, 587,302 shares of Class
D Common Stock of the Company, 73,413 shares of Class E Common Stock of the
Company, and 73,413 shares of Class F Common Stock of the Company,
representing, after giving effect to such issuance, 37% of the issued and
outstanding capital stock of the Company. The fair value of the capital stock
issued in connection with the AO Acquisition and the related cash contribution
by AWI was approximately $133,575,000 for both financial reporting and income
tax purposes. The determination of the fair value of the Company's stock was
based on arms'-length negotiations between the Company and AWI. The Company
obtained an independent appraisal of the value of the ceramic tile operations
acquired from AWI. The financial statements include the assets acquired and
liabilities assumed and exclude the results of operations for the year ended
December 31, 1995, as the acquisition occurred on December 29, 1995. The
Company's operating results for the six months ended June 30, 1996 reflect the
results of operations of AO.

AO manufactures and markets commercial and residential glazed and unglazed
tile for sale to contractors, distributors and home improvement centers in the
United States and Canada. The allocation of the purchase price and liabilities
assumed is based on a preliminary appraisal and is subject to change. Such
allocation is as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Cash contribution received.................................. $ 27,575
Trade accounts receivable................................... 29,946
Prepaid expenses............................................ 910
Inventories................................................. 44,171
Property, plant, and equipment.............................. 55,837
Trade name.................................................. 21,100
Investment in RISA.......................................... 1,000
Trade accounts payable and accrued expenses................. (21,412)
Other liabilities........................................... (25,552)
--------
Total purchase price...................................... $133,575
========
</TABLE>

F-7
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
1. ORGANIZATION--(CONTINUED)

The summarized unaudited pro forma results of operations for the two years
ended December 31, are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1994 1995
----------- -----------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net revenues....................................... $735,991 $724,446
Net income......................................... 18,879 42,614
Net income per share............................... 0.40 0.90
</TABLE>

The unaudited pro forma results do not necessarily represent results which
would have occurred if the AO Acquisition had taken place on the dates
indicated nor are they necessarily indicative of the results of future
operations. The pro forma results for 1995 reflect cost savings of $24,800,000
resulting from the consolidation of the two companies, but do not reflect
$22,430,000 of non-recurring merger integration charges recorded in 1995 in
connection with the AO Acquisition.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements do not give effect, except for the
calculation of earnings per share, to (i) the restatement of the Company's
certificate of incorporation to increase the number of authorized shares of
capital stock, and (ii) the conversion of all shares of all classes of the
Company's currently outstanding capital stock into 45,404,472 shares of a
single class of common stock (the "common stock conversion"). The common stock
conversion will be effected immediately prior to the consummation of the
refinancing referred to in Note 17. Accordingly, references to the common
stock in the consolidated financial statements, except for the calculation of
earnings per share, reflect the outstanding classes of common stock and the
number of outstanding shares of each such class prior to the common stock
conversion.

The consolidated financial statements reflect the consolidation of all
accounts of the Company, which includes the Group and the Group's wholly owned
subsidiaries:

<TABLE>
<CAPTION>
FORM OF ENTITY
--------------
<S> <C>
The Group............................................. U.S. corporation
Dal-Tile Corporation.................................. U.S. corporation
American Olean Tile Company, Inc...................... U.S. corporation
R&M Supplies, Inc. ("R&M")............................ U.S. corporation
Dal-Minerals Company ("Dal-Minerals")................. U.S. corporation
Dal-Tile of Mexico, S.A. de C.V. ("Dal-Tile Mexico"),
formerly Ceramica Regiomontana, S.A. de C.V. ........ Mexican corporation
Materiales Ceramicos, S.A. de C.V. ("Materiales")..... Mexican corporation
Dal-Tile of Canada Inc. .............................. Canadian corporation
</TABLE>

Significant intercompany transactions and balances have been eliminated in
consolidation.

USE OF ESTIMATES

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 and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

F-8
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments to be cash equivalents.

INVENTORIES

U.S. finished products inventories are valued at the lower of cost (last-in,
first-out ("LIFO")) or market, while U.S. raw materials and goods-in-process
inventories are valued at the lower of cost (first-in, first-out ("FIFO")) or
market. Mexican and Canadian inventories are valued at the lower of cost
(FIFO) or market.

DEPRECIATION

Depreciation for financial reporting purposes is determined using the
straight-line method. Estimated useful lives are as follows:

<TABLE>
<CAPTION>
YEARS
-------------
<S> <C>
Leasehold improvements....................................... life of lease
Buildings.................................................... 20--30
Machinery and equipment...................................... 3--20
</TABLE>

GOODWILL

Goodwill, which represents the excess cost over the fair value of net assets
acquired, is amortized on a straight-line basis over the expected period to be
benefited of 40 years. Accumulated amortization at December 31, 1994 and 1995
and June 30, 1996, was $47,595,000, $52,360,000 and $54,742,000, respectively.
The carrying value of goodwill is reviewed if the facts and circumstances
suggest that it may be impaired. If an impairment exists, the impairment loss
is measured by comparing the fair value of the business unit's long-lived
assets to their carrying amount (See Note 8).

FINANCE COSTS

Finance costs incurred in connection with financing are being amortized over
the term of the related debt on a straight-line basis. Accumulated
amortization at December 31, 1994 and 1995 and June 30, 1996, was
approximately $6,885,000, $8,963,000 and $10,037,000, respectively.

ADVERTISING EXPENSES

Advertising and promotion expenses are charged to income during the year in
which they are incurred. Advertising and promotion expenses incurred for the
years ended December 31, 1993, 1994, and 1995 and the six months ended June
30, 1995 and 1996 amounted to $3,631,000, $4,499,000, $4,668,000, $1,894,000
and $4,234,000, respectively.

RETIREMENT PLANS

Dal-Tile Corporation maintains a defined contribution plan for eligible
employees. A participant may contribute up to 5% of his annual compensation to
the plan. Contributions by Dal-Tile Corporation to the plan are at the
discretion of its Board of Directors. The plan also allows employee
contributions under a 401(k) provision.

F-9
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

Dal-Tile Mexico and Materiales maintain defined benefit plans for eligible
employees with funding policies based on local statutes.

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS

The Company's Mexican operations use the Mexican peso as their functional
currency. Assets and liabilities are translated from the functional currency
into the U.S. dollar using the period-end exchange rates. Income and expense
accounts are translated from the functional currency into the U.S. dollar
using the average exchange rate for the period. Translation gains or losses
are included as a component of stockholders' equity. Gains and losses
resulting from foreign currency transactions are reflected currently in the
consolidated statements of operations. The Company experienced foreign
currency transaction gains (loss) of $(100,000), $2,300,000, $4,100,000,
$2,611,000 and $(523,000) for the years ended December 31, 1993, 1994, and
1995 and the six months ended June 30, 1995 and 1996, respectively.

CONCENTRATIONS OF CREDIT RISK

The Company is engaged in the manufacturing and distribution of glazed and
unglazed wall, floor, and mosaic tile in the United States and Mexico and the
distribution of manufactured products in Canada. The Company grants credit to
customers, substantially all of whom are dependent upon the construction
economic sector. The Company continuously evaluates its customers' financial
condition and often requires payments to its customers to be issued on behalf
of the customer and the Company. In addition, the Company frequently obtains
liens on property to secure accounts receivable. Credit losses have been
within management's expectation. Trade accounts receivable are net of an
allowance for losses from uncollectible accounts of $3,892,000, $9,389,000
(including $4,760,000 related to the AO Acquisition) and $9,017,000 (including
$2,787,000 related to the AO Acquisition) at December 31, 1994 and 1995 and
June 30, 1996, respectively.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the 1996
presentation.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (Statement 121), which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying value.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company has adopted Statement 121 and, based
on current circumstances, such adoption will not materially impact the
Company's annual financial results.

In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-
Based Compensation" (Statement 123), which provides an alternative to APB
Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for
stock-based compensation issued to employees. Statement 123 allows for a fair
value based method of accounting for employee stock options and similar equity
instruments. However, for companies that continue to account for stock-based
compensation arrangements under APB Opinion No. 25, Statement 123 requires
disclosure of the pro forma effect on net income and net income per share of
its fair value based accounting for those arrangements. These disclosure
requirements are effective for fiscal years beginning after December 15, 1995,
or upon initial adoption of Statement 123, if earlier. The Company continues

F-10
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

to evaluate the provisions of Statement 123 and has not determined whether it
will adopt the recognition and measurement provisions of Statement 123, which
adoption the Company believes will not materially impact the Company's
financial results.

NET INCOME (LOSS) PER SHARE

Net income (loss) per share is computed using the weighted average number of
shares of common stock and common stock equivalents outstanding during each
respective period. Common stock equivalents result from outstanding options to
purchase common stock. Pursuant to the requirements of the Securities and
Exchange Commission, common stock options granted during the 12-month period
immediately prior to the proposed initial public offering of the Company's
common stock have been included in the calculation of shares used in computing
earnings per share as if they were outstanding for all periods presented
(using the treasury stock method and the estimated public offering price in
calculating equivalent shares).

PRO FORMA NET INCOME PER SHARE (UNAUDITED)

Pro forma net income per share is computed using the weighted average number
of shares of common stock and common stock equivalents outstanding during each
respective period, and gives effect of the shares issued in connection with
the AO Acquisition as discussed more fully in Note 1. Common stock equivalents
result from outstanding options to purchase common stock. Pursuant to the
requirements of the Securities and Exchange Commission, common stock options
granted during the 12-month period immediately prior to the proposed initial
public offering of the Company's common stock have been included in the
calculation of shares used in computing earnings per share as if they were
outstanding for all periods presented (using the treasury stock method and the
estimated public offering price in calculating equivalent shares).

INTERIM FINANCIAL INFORMATION (UNAUDITED)

The accompanying interim financial information as of June 30, 1996 and for
the six-month periods ended June 30, 1995 and June 30, 1996 has not been
audited but in the opinion of management of the Company includes all
adjustments, consisting of normal recurring adjustments, which the Company
considers necessary for a fair presentation of the Company's financial
position as of June 30, 1996 and the results of operations and cash flows for
the six-month periods ended June 30, 1995 and June 30, 1996. The results of
operations for the six-month period ended June 30, 1996 are not necessarily
indicative of the results to be expected for any subsequent interim period or
for the year ending December 31, 1996.

3. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31
---------------- JUNE 30,
1994 1995 1996
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Finished products in U.S. ........................ $64,407 $ 95,355 $ 95,369
Finished products in Mexico....................... 4,659 4,303 3,583
Finished products in Canada....................... 1,715 3,362 1,996
Goods-in-process.................................. 1,231 3,567 3,391
Raw materials..................................... 8,455 12,224 14,621
------- -------- --------
Total inventories................................. $80,467 $118,811 $118,960
======= ======== ========
</TABLE>

If U.S. finished products inventories were shown at current costs
(approximating the FIFO method) rather than at LIFO values, inventories would
have been $2,800,000 lower, $2,500,000 lower and $2,500,000 lower than
reported at December 31, 1994 and 1995 and June 30, 1996, respectively.

F-11
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)

4. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31
----------------- JUNE 30,
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Dal-Tile International Senior Secured Zero Cou-
pon Notes, interest at 12%, due July 15, 1998.. $ 88,179 $ 99,078 $105,008
Dal-Tile Group unsecured Series A notes,
interest due semi-annually at 10.625%,
principal due in annual installments of $44,000
commencing January 9, 1996 and through January
9, 2000........................................ 220,000 220,000 176,000
Dal-Tile Group unsecured Series B notes,
interest due semi-annually at 10.77%, principal
due in annual installments of $20,000
commencing January 9, 1998 and through January
9, 2002........................................ 100,000 100,000 100,000
Dal-Tile Group unsecured revolving line of
credit, interest due monthly at LIBOR plus 2%
or prime plus 1% (approximately 7.69% at
December 31, 1995), principal due January 9,
1998........................................... 69,697 91,197 123,197
Dal-Tile Corporation Series 1987 and 1986
Industrial Development Refunding and Revenue
Bonds, interest due monthly at a variable rate
not to exceed 15% (approximately 5.2% at
December 31, 1995), bonds redeemable in
variable annual installments through March 1,
2004, secured by certain manufacturing
facilities..................................... 7,200 6,500 6,200
Other........................................... 7,677 11,041 10,812
-------- -------- --------
492,753 527,816 521,217
Less current portion............................ 3,349 47,047 47,047
-------- -------- --------
$489,404 $480,769 $474,170
======== ======== ========
</TABLE>

On August 11, 1993, the Company issued Senior Secured Zero Coupon Notes with
proceeds of $75,006,252, before fees and expenses, at a 12% annual interest
rate calculated semi-annually. The Zero Coupon Notes defer interest payments
until maturity on July 15, 1998 at which time principal and interest of
$133,200,000 become due. The Zero Coupon Notes are not redeemable at the
option of the Company, except that in the event the Company issues shares of
capital stock before July 16, 1996, the Company, at its option, may use the
net proceeds to redeem up to 33% of the outstanding Zero Coupon Notes. Such
redemption will be at 106% of the Accreted Value. The Company is also required
to redeem the outstanding Zero Coupon Notes at 101% of the Accreted Value if
there shall occur a Change of Control as defined in the Zero Coupon Note
Indenture. The Zero Coupon Notes are secured by a pledge of all the
outstanding shares of the Group. Under the terms of the Indenture relating to
the Zero Coupon Notes, the Company is restricted, among other things, from
incurring additional debt, paying dividends, and selling certain assets.

The Group has a revolving line of credit agreement with a group of banks
which provides for borrowing up to $160,000,000. Amounts available for
borrowing under the revolving line of credit agreement are limited to

F-12
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)

4. LONG-TERM DEBT--(CONTINUED)

the lower of $160,000,000 or the borrowing base, as defined, which is
calculated based on levels of trade accounts receivable and inventories. As of
December 31, 1995 and June 30, 1996, the borrowing base calculation did not
restrict the availability under the revolving line of credit agreement of
$160,000,000. A commitment fee of 0.5% of the unused revolving line of credit
is payable monthly. Under the terms of the revolving line of credit, the Group
is required to maintain, among other things, certain minimum levels of net
worth, working capital, and quick ratio. The Group also has restrictions on
the payment of dividends and the making of intercompany loans to the Company
under the credit agreement and at December 31, 1995 and June 30, 1996, is
prohibited from making such payments.

Under the terms of the Industrial Development Refunding and Revenue Bonds,
Dal-Tile Corporation is required to maintain certain minimum levels on net
worth, current ratio, and debt coverage.

Aggregate maturities of long-term debt for the five years subsequent to
December 31, 1995, are:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996..................................................... $ 47,047
1997..................................................... 46,823
1998..................................................... 290,997
1999..................................................... 66,451
2000..................................................... 66,451
</TABLE>

Total interest cost incurred for the years ended December 31, 1993, 1994,
and 1995 and the six months ended June 30, 1995 and 1996, amounted to
approximately $47,306,000, $54,208,000, $56,699,000, $26,642,000 and
$26,913,000, respectively, of which approximately $560,000, $666,000,
$1,246,000, $394,000 and $578,000, respectively, was capitalized to property,
plant, and equipment. Total interest paid, net of interest received, was
$42,093,000, $42,446,000, $43,460,000, $21,846,000 and $23,684,000 for the
years ended December 31, 1993, 1994, and 1995 and the six months ended June
30, 1995 and 1996, respectively.

F-13
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)

5. CAPITAL STRUCTURE

Common stock consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------ JUNE 30,
1994 1995 1996
----- ----- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Common stock, $.01 par value:
Class A--authorized shares--1,290,714, issued and
outstanding shares--1,005,000 at December 31, 1994,
authorized shares--2,830,952, issued and outstanding
shares--1,595,238 at December 31, 1995 and June 30,
1996................................................ $10 $16 $16
Class B--authorized, issued and outstanding shares--
10,000 at December 31, 1994, authorized shares--
23,873, issued and outstanding shares--15,873 at
December 31, 1995 and June 30, 1996................. -- -- --
Class C--authorized, issued and outstanding shares--
312,010 at December 31, 1994, authorized shares--
745,254, issued and outstanding shares--495,254 at
December 31, 1995 and June 30, 1996................. 3 5 5
Class D--authorized, issued and outstanding shares--
1,000,000 at December 31, 1994, authorized shares--
2,387,302, issued and outstanding shares--1,587,302
at December 31, 1995 and June 30, 1996.............. 10 16 16
Class E--authorized, issued and outstanding shares--
125,000 at December 31, 1994, authorized shares--
298,413, issued and outstanding shares--198,413 at
December 31, 1995 and June 30, 1996................. 1 2 2
Class F--authorized, issued and outstanding shares--
125,000 at December 31, 1994, authorized shares--
298,413, issued and outstanding shares--198,413 at
December 31, 1995 and June 30, 1996................. 1 2 2
----- ----- ---
$25 $41 $41
===== ===== ===
</TABLE>

The Company's authorized capital consists of six classes of common stock
with various rights and privileges. Class B Common Stock retains sole voting
privileges among all classes. All classes of common stock share ratably in
dividends. At December 31, 1995 and June 30, 1996, the Company has authorized
1,000,000 shares of preferred stock.

Class A and Class D Common Stock have primary liquidation preferences equal
to the amount of the respective original investment, $100 per share. Class B,
Class C, Class E, and Class F Common Stock would participate in liquidation
proceeds only after the holders of Class A and Class D shares have recovered
their primary preference. Thereafter, Class B, Class C, and Class E have
preferences equal to $100 per share. Class F Common Stock is not entitled to
participate in liquidation proceeds unless the holders of Class D Common Stock
have recovered a minimum of 20% rate of return, compounded annually, on the
shares of Class D and Class E Common Stock that the Class D Common
shareholders own. Once Class F Common Stock has recovered its $100 per share
preference, all classes share ratably in any remaining liquidation proceeds.

6. PROVISION FOR MERGER INTEGRATION CHARGES

In the fourth quarter of 1995, the Company recorded a pre-tax charge of
$22,430,000 for the revaluation of certain assets in connection with the AO
Acquisition and the Company's merger integration plan (Note 1). The primary
component of the charge was a write down of duplicate management information
systems including future lease commitments on system hardware of $15,750,000.
As a result of the AO Acquisition, the Company will combine two independent
systems into one fully integrated system, utilizing the management information

F-14
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)

6. PROVISION FOR MERGER INTEGRATION CHARGES--(CONTINUED)

system of AO. The Company will discontinue the use of its current information
system during 1996. The operating leases related to such software will expire
over the next three years. In addition, the Company has recorded a charge of
$5,400,000 for inventory revaluation as a result of the elimination of certain
product lines formerly produced at the Lansdale and Jackson manufacturing
facilities that will be discontinued as a result of the AO Acquisition, as
well as a general SKU reduction to occur in 1996. The Company recorded a
charge of $1,280,000 in connection with closure of certain duplicative sale
service centers. The Company expects to complete its sales centers
consolidation by the first quarter of 1997. The noncash portion of the charge
(approximately $20,200,000) represents the write-down of certain equipment and
the revaluation of inventory. The cash portion of the merger integration
charge is approximately $2,200,000 which primarily consists of leasehold
commitments on equipment.

7. PROVISION FOR MERGER INTEGRATION CHARGES--FIRST QUARTER OF 1996 (UNAUDITED)

In connection with the AO Acquisition and the Company's merger integration
plan, the Company recorded an integration charge in the first quarter of
$9,000,000 for the closings of duplicative sales centers, duplicative
distribution centers, elimination of overlapping positions and the closing of
the Pocatello, ID manufacturing facility. The Company expects to complete
these actions by the first quarter of 1997. The primary components of the
charge are $7,400,000 for lease commitments, $1,300,000 for severance and
employee contracts and $300,000 for shut down costs of the closed facilities.
The leases are primarily associated with sales centers that are expected to
close by the first quarter of 1997 and expire over the next three-to-five
years. Approximately 130 positions were eliminated from the Company's sales
and administrative departments.

8. PROVISION FOR SPECIAL CHARGES

During the fourth quarter of 1993, following a review of its operations, the
Company established provisions for a distribution enhancement program,
revaluation of certain assets, and severance costs for retiring employees. As
a result, the Company recorded a $53,233,000 special charge in the fourth
quarter which consisted of:

<TABLE>
<S> <C>
Distribution enhancement program................................ $23,350,000
Asset revaluation............................................... 25,155,000
Severance costs................................................. 4,728,000
-----------
$53,233,000
===========
</TABLE>

In connection with the review, inventories and property, plant, and
equipment were written down $25,155,000 in the fourth quarter of 1993. This
write-down consists of a $17,000,000 reserve for inventories which under the
distribution enhancement program were not cost beneficial to relocate. The
remainder of the $25,155,000 charge consists of write-downs of $8,155,000 for
manufacturing equipment which was replaced with more efficient technology.

9. GOODWILL

During the fourth quarter of 1993, management reviewed (as described in Note
8) its five operating subsidiaries. In connection with this review, the
Company assessed the carrying amounts of goodwill at each of the Company's
business units using the methodology described in Note 2 and as a result,
recorded a $214,235,000 write-down of goodwill.

F-15
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)

9. GOODWILL--(CONTINUED)

The Mexican business units (Dal-Tile Mexico and Materiales) did not achieve
expected operating results due primarily to large increases in capacity added
by other Mexican tile manufacturers in anticipation of strong growth in
Mexico. An oversupply of production capacity throughout 1993 resulted in
pricing pressures and a reduction of the Company's market share in Mexico.
Exports to the U.S. market did not grow as expected due to downturns in the
construction industry and continued recessionary conditions in California.
Additionally, the Mexican economy retreated during 1993.

Dal-Minerals owns the mineral rights to significant reserves of talcose rock
(talc). It was expected that the Company's usage of talc would significantly
increase and that alternative uses of talc could be identified and
economically exploited. The Company's uses of talc was not increasing
significantly and the Company was unable to satisfactorily develop alternative
markets for talc.

R&M, as a distributor of refractories, projected their cash flows to
significantly decline as more efficient technology replaced the use of
refractories.

Management believed this assessment in 1993 indicated that goodwill was
impaired at the business units referred to above. As a result, the fair value
of these business units was estimated using independent firms and cash flow
projections and compared to the carrying value of those assets. Accordingly,
in 1993, the Company wrote-off the related unamortized goodwill balances as
shown below:

<TABLE>
<S> <C>
Dal-Tile Mexico and Materiales................................. $ 97,658,000
Dal-Minerals................................................... 87,073,000
R&M............................................................ 29,504,000
------------
$214,235,000
============
</TABLE>

10. INCOME TAXES

Income (loss) before income taxes relating to operations in the United
States and Mexico is as follows:

<TABLE>
<CAPTION>
1993 1994 1995
--------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
United States................................... $(179,309) $ (645) $(4,100)
Mexico.......................................... (91,848) 18,261 7,754
Other........................................... 252 (97) (338)
--------- ------- -------
$(270,905) $17,519 $ 3,316
========= ======= =======
</TABLE>

The components of the provision for income taxes include the following for:

<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. federal--current.............................. $ -- $ -- $ --
U.S. state--current................................ 1,223 2,474 2,179
U.S.--deferred..................................... (7,400) -- --
------- ------- -------
(6,177) 2,474 2,179
Mexico--current.................................... 3,270 6,615 1,471
Mexico--deferred................................... (318) 1,525 (2,474)
------- ------- -------
2,952 8,140 (1,003)
------- ------- -------
Total............................................ $(3,225) $10,614 $ 1,176
======= ======= =======
</TABLE>

F-16
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
10. INCOME TAXES--(CONTINUED)

Principal reconciling items from income tax computed at the U.S. statutory
rate of 35% in 1995, 35% in 1994, and 35% in 1993 are as follows:

<TABLE>
<CAPTION>
1993 1994 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision (benefit) at statutory rate.......... $(94,818) $ 6,132 $ 1,161
Amortization of goodwill....................... 3,749 1,668 1,668
Write-down of goodwill......................... 74,982 -- --
State income tax............................... (1,444) 1,676 1,416
Loss not benefited (utilized).................. 14,736 (672) 1,436
Other.......................................... (74) 1,462 (399)
Difference between U.S. and Mexico statutory
rate.......................................... (356) 348 (4,106)
-------- ------- -------
$ (3,225) $10,614 $ 1,176
======== ======= =======
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities are as follows:

<TABLE>
<CAPTION>
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Book basis of PP&E over tax.......................... $ 20,150 $ 10,847
Book basis of inventories over tax................... 4,750 3,981
Book basis of other assets over tax.................. 1,784 1,756
Other, net........................................... 2,551 8
-------- --------
Total deferred tax liabilities..................... 29,235 16,592
Deferred tax assets:
Reserve for merger integration charges and special
charges............................................. 17,194 10,818
Net operating loss carryforwards..................... 9,355 5,425
Expenses not yet deductible for tax.................. 4,157 5,500
-------- --------
Total deferred tax assets.............................. 30,706 21,743
Valuation allowance for deferred tax assets............ (14,064) (10,134)
-------- --------
Net deferred tax assets................................ 16,642 11,609
-------- --------
Net deferred tax liabilities........................... $ 12,593 $ 4,983
======== ========
</TABLE>

The Company has a U.S. loss carryforward for regular tax purposes of
approximately $22,334,000, which expires in 2008-2010. The Company has
determined that it is more likely than not that a portion of the deferred tax
assets related to the U.S. operations may not be realized due to (i) U.S. tax
losses that have been previously incurred (with no carrybacks available), (ii)
the somewhat cyclical nature of the Company's business, and (iii) the fact
that the Company continues to be highly leveraged.

Total income tax payments, net of refunds received, during the years 1993,
1994, and 1995 were $3,517,000, $5,842,000 and $6,145,000, respectively.

No U.S. taxes have been provided on the undistributed earnings of foreign
subsidiaries since the Group expects these earnings to be indefinitely
reinvested. The undistributed earnings aggregate approximately $36,000,000 at
December 31, 1995. Since the determination of the amount of unrecognized
deferred tax liability and of the amount of withholding taxes that would be
payable upon remittance of these earnings is not practicable, these amounts
have not been determined.

F-17
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
10. INCOME TAXES--(CONTINUED)

A company operating in Mexico is generally required by law to contribute 10%
of pre-tax profits (subject to certain adjustments) directly to employees.
These mandatory charges were not deductible for Mexican income tax purposes
during 1993, 1994, or 1995 and, for financial statement presentation purposes,
have been classified as components of income tax expense. Total tax provision
amounts accrued by Dal-Tile Mexico and Materiales for this obligation amounted
to approximately $1,200,000, $2,200,000, $1,500,000, $1,148,000 and $301,000
for 1993, 1994, and 1995 and the six months ended June 30, 1995 and 1996,
respectively.

11. RELATED PARTY TRANSACTIONS

AEA Investors Inc., the managing member of DTI Investors LLC, which is a
beneficial owner of Common Stock, provides management, consulting, and
financial services to the Company for fees and expenses. The Company has
incurred fees and expenses for such services of $963,000, $1,015,000,
$991,000, $431,000 and $434,000 for the three years ended December 31, 1993,
1994, 1995 and for the six months ended June 30, 1995 and 1996, respectively.
Certain directors and officers of the Company are members of DTI Investors
LLC, the managing member of which is AEA Investors Inc. Certain directors and
officers of the Company also serve as directors, officers and/or principals of
AEA Investors Inc.

12. STOCK OPTION PLAN

The Company has a stock option plan (the Plan) that provides for the
granting of options for up to 435,714 shares of its Class A Common Stock to
key employees of Dal-Tile Corporation and its subsidiaries and affiliates.
Options granted under the Plan prior to January 1, 1996 vest 20% at the date
of the grant and 20% on each successive anniversary of the date of the grant
until fully vested. Options granted after January 1, 1996 vest 25% at the date
of the grant and 25% on each successive anniversary of the date of the grant
until fully vested. In each case, the options expire on the tenth anniversary
of the date of the grant; however, these terms may be modified on an
individual grant basis at the discretion of the Company's Board of Directors.

Stock option activity under the Plan is summarized as follows:

<TABLE>
<CAPTION>
NUMBER OF TOTAL OPTION
SHARES PRICE
--------- ------------
<S> <C> <C>
Outstanding at December 31, 1992.................... 256,530 $25,653,000
Granted........................................... 10,000 1,000,000
Canceled.......................................... (41,357) (4,135,700)
------- -----------
Outstanding at December 31, 1993.................... 225,173 22,517,300
Granted........................................... 50,000 5,000,000
Canceled.......................................... (3,000) (300,000)
------- -----------
Outstanding at December 31, 1994.................... 272,173 27,217,300
Granted........................................... 5,500 550,000
Canceled.......................................... (43,858) (4,385,800)
------- -----------
Outstanding at December 31, 1995 (191,751 shares
exercisable)....................................... 233,815 23,381,500
Granted........................................... 156,055 17,244,951
Canceled.......................................... (11,064) (1,106,400)
------- -----------
Outstanding at June 30, 1996 (231,410 shares
exercisable)....................................... 378,806 $39,520,051
======= ===========
</TABLE>

The Company has reserved 435,714 shares of Class A Common Stock for options,
56,908 of which are ungranted and are for future issuance under the Plan.

F-18
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)

13. COMMITMENTS AND CONTINGENCIES

Dal-Tile Corporation leases substantially all of its sales service centers
and various warehouse, manufacturing, and transportation equipment under terms
of noncancelable operating leases. The minimum aggregate annual lease payments
subsequent to December 31, 1995, are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1996........................................................ $17,213
1997........................................................ 13,739
1998........................................................ 10,598
1999........................................................ 7,918
2000........................................................ 4,609
Thereafter.................................................. 5,100
-------
$59,177
=======
</TABLE>

Rental expense amounted to approximately $17,076,000, $14,603,000,
$16,427,000, $6,358,000 and $8,714,000 for the years ended December 31, 1993,
1994 and 1995 and the six months ended June 30, 1995 and 1996, respectively.

The Company is subject to federal, state, and local laws and regulations
relating to the environment and to work places. Laws that affect or could
affect the Group's United States operations include, among others, the Clean
Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and
the Occupational Safety and Health Act. The Company believes that it is
currently in substantial compliance with such laws and the regulations
promulgated thereunder.

The Company is involved in various judicial and administrative proceedings
relating to environmental matters. The Company, in the past, has disposed, or
arranged for the disposal, of substances which are now characterized as
hazardous, and currently is engaged in the cleanup of hazardous substances at
certain sites. It is the Company's policy to accrue liabilities for remedial
investigations and cleanup activities when it is probable that such
liabilities have been incurred and when they can be reasonably estimated. The
Company has provided reserves which management believes are adequate to cover
liabilities that the Company is likely to incur with respect to such
investigations and cleanup activities, taking into account current information
available to the Company, the Company's past experiences with respect to
environmental investigations and cleanups, and contractual rights of
indemnification. However, estimates of future response costs are necessarily
imprecise due to, among other things, the possible identification of presently
unknown sites and the allocation of costs among potentially responsible
parties with respect to any such sites. Accordingly, there can be no assurance
that the Company will not become involved in future litigation or other
proceedings or, if the Company were found to be responsible or liable in any
litigation or proceeding, that such costs would not be material to the
Company.

The Company is also a defendant in various lawsuits arising from normal
business activities.

In the opinion of management, the ultimate liability likely to result from
the contingencies described above is not expected to have a material adverse
effect on the Company's consolidated financial condition, results of
operations and liquidity.

F-19
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)

14. GEOGRAPHIC AREA OPERATIONS

The Company currently conducts its business in one industry segment,
engaging in the manufacturing and distribution of wall, floor, and mosaic
tile. The Company operates manufacturing facilities in the U.S. and Mexico and
in 1993, 1994 and 1995 distributed products through wholly-owned sales service
centers in the U.S. and Canada and nonaffiliated distributors in Mexico.
Intercompany sales between geographic areas are accounted for at amounts that
are generally above cost and in compliance with rules and regulations of
governing tax authorities. Such intercompany sales are eliminated in the
consolidated financial statements.

Financial information by geographical area is summarized below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1993 1994 1995
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Consolidated revenue:
Unaffiliated customers:
United States................................. $ 389,887 $452,903 $446,323
Mexico........................................ 46,529 48,594 23,012
Other......................................... 4,157 4,812 5,477
--------- -------- --------
Total consolidated revenues from unaffiliated
customers................................... 440,573 506,309 474,812
Intercompany revenue:
United States................................. 1,807 3,041 3,174
Mexico........................................ 50,360 55,245 43,109
Eliminations.................................. (52,167) (58,286) (46,283)
--------- -------- --------
Total consolidated revenue................... $ 440,573 $506,309 $474,812
========= ======== ========
Consolidated operating income (loss):
United States................................. $(131,775) $ 52,507 $ 48,874
Mexico........................................ (91,676) 16,283 6,120
Eliminations/other............................ (137) (473) (469)
--------- -------- --------
Total consolidated operating income (loss)... $(223,588) $ 68,317 $ 54,525
========= ======== ========
Consolidated identifiable assets:
United States................................. $ 408,178 $412,292 $618,328
Mexico........................................ 99,900 65,955 38,585
Eliminations/other............................ 4,752 10,170 15,480
--------- -------- --------
Total consolidated identifiable assets....... $ 512,830 $488,417 $672,393
========= ======== ========
</TABLE>

15. FINANCIAL INSTRUMENTS

The carrying amounts of cash, trade accounts receivable, and trade accounts
payable approximate fair value because of the short maturity of those
instruments. The carrying amount of the Company's long-term debt approximates
its fair value, which the Company estimates based on incremental rates of
comparable borrowing arrangements.

F-20
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)

16. CONDENSED UNCONSOLIDATED FINANCIAL STATEMENTS

Provided below are the condensed unconsolidated financial statements of the
Company.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-------------------
1994 1995
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Condensed balance sheets:
Cash............................................. $ 3,483 $ 30,371
Finance costs and other assets................... 2,883 3,027
Investment in the Group, net of accumulated
losses.......................................... -- 79,343
--------- --------
$ 6,366 $112,741
========= ========
Senior Secured Zero Coupon Notes................. $ 88,179 $ 99,078
Other liabilities................................ 4,480 4,024
Accumulated losses, net of investment in the
Group........................................... 17,530 --
Stockholder's equity............................. (103,823) 9,639
--------- --------
$ 6,366 $112,741
========= ========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1993 1994 1995
--------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Condensed statements of income (loss):
Equity in net income (loss) of the Group.... $(263,843) $17,855 $14,125
Other expense............................... 196 566 450
Interest income............................. 125 98 142
Interest expense............................ 3,766 10,482 11,677
--------- ------- -------
Net income (loss)........................... $(267,680) $ 6,905 $ 2,140
========= ======= =======
Condensed statements of cash flows:
Cash flow provided by operating activities.. $ 4,185 $ (327) $ (687)
Investing activities:
Investment in the Group................... (72,006) -- --
Financing activities:
Proceeds from sale of stock............... -- 500 27,575
Proceeds from issuance of Senior Secured
Zero Coupon Notes........................ 71,131 -- --
--------- ------- -------
Net increase in cash........................ 3,310 173 26,888
Cash at beginning of period................. -- 3,310 3,483
--------- ------- -------
Cash at end of period....................... $ 3,310 $ 3,483 $30,371
========= ======= =======
</TABLE>

17. REFINANCING (UNAUDITED)

The Company has filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission for initial public offerings of equity
securities and also contemplates a private placement of its equity securities
and entering into a new bank credit agreement, all of which are designed to
repay substantially all the Company's debt.

F-21
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)

18. SUBSEQUENT EVENT--CAPITAL STRUCTURE (UNAUDITED)

Immediately prior to the initial public offering of the Company's common
stock, the Company will effect a recapitalization of its current capital
stock. Pursuant to the common stock conversion, all the classes of the
Company's previously outstanding common stock will be converted into
45,404,472 shares of a single class of common stock.

F-22
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Armstrong World Industries, Inc.:

We have audited the accompanying consolidated balance sheets of Ceramic Tile
Operations of Armstrong World Industries, Inc. and subsidiaries as of December
29, 1995 and December 31, 1994, and the related consolidated statements of
operations and cash flows for the period ended December 29, 1995 and for both
of the years in the two-year period ended December 31, 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ceramic
Tile Operations of Armstrong World Industries, Inc. and subsidiaries as of
December 29, 1995 and December 31, 1994 and the results of their operations
and their cash flows for the period ended December 29, 1995 and for both of
the years in the two-year period ended December 31, 1994 in conformity with
generally accepted accounting principles.

KPMG Peat Marwick LLP
February 2, 1996

F-23
<PAGE>

CERAMIC TILE OPERATIONS OF ARMSTRONG WORLD INDUSTRIES, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF DECEMBER 29,
1994 1995
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable (less allowance for
discounts and losses:
1994--$3,375: 1995--$4,010)............ $ 30,087 $ 30,696
Inventories............................. 64,442 72,411
Income tax benefits..................... 18,981 22,660
Other current assets.................... 2,284 1,805
-------- --------
Total current assets................. 115,794 127,572
Property, plant and equipment (less
accumulated depreciation: 1994--
$63,882: 1995--$71,541)................ 159,920 151,580
Investment in Recubrimientos
Interceramic, S.A. de C.V. ............ 14,279 12,268
Other noncurrent assets................. 21,612 19,783
-------- --------
Total assets......................... $311,605 $311,203
======== ========
LIABILITIES AND EQUITY
Current liabilities:
Current installments of long-term debt.. $ 151 $ --
Current amounts due to affiliates....... 3,697 7,611
Accounts payable and accrued expenses... 18,814 18,360
-------- --------
Total current liabilities............ 22,662 25,971
Long-term debt........................... 1,000 1,000
Deferred income taxes.................... 19,797 23,195
Long-term advances due to affiliates..... 47,149 71,206
Other long-term liabilities.............. 5,153 5,317
-------- --------
Total noncurrent liabilities......... 73,099 100,718
Equity:
Common stocks........................... 329 101
Capital in excess of par values......... 333,377 303,604
Accumulated deficit..................... (118,044) (119,053)
Foreign currency translation............ 182 (138)
-------- --------
Total equity......................... 215,844 184,514
-------- --------
Total liabilities and equity....... $311,605 $311,203
======== ========
</TABLE>

The accompanying footnotes are an integral part of these statements.

F-24
<PAGE>

CERAMIC TILE OPERATIONS OF ARMSTRONG WORLD INDUSTRIES, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERIOD ENDED DECEMBER 29,
-------------------------- -------------------------
1993 1994 1995
------------ ------------ -------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales................ $ 210,668 $ 220,250 $240,049
Cost of goods sold....... 168,887 159,427 171,377
------------ ------------ --------
Gross profit............. 41,781 60,823 68,672
Selling, general, and
administrative ex-
penses................ 67,134 59,705 61,615
(Income)/loss from
Recubrimientos
Interceramic, S.A. de
C.V. ................. (369) 783 1,630
Restructuring
charge/(credit)....... 19,279 (350) (733)
------------ ------------ --------
Operating income/(loss).. (44,263) 685 6,160
Interest income.......... (13) (219) (1,292)
Interest expense......... 2,231 4,268 7,951
------------ ------------ --------
Loss before income tax
(benefit) .............. (46,481) (3,364) (499)
Income tax (benefit)..... (16,227) (799) 509
------------ ------------ --------
Net loss............. $ (30,254) $ (2,565) $ (1,008)
============ ============ ========
</TABLE>

The accompanying footnotes are an integral part of these statements.

F-25
<PAGE>

CERAMIC TILE OPERATIONS OF ARMSTRONG WORLD INDUSTRIES, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD
ENDED
YEARS ENDED DECEMBER
DECEMBER 31, 29,
----------------- --------
1993 1994 1995
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $(30,254) $(2,565) $(1,008)
Adjustments to net loss:
Depreciation and amortization............... 14,945 14,074 13,816
Deferred income taxes....................... (8,832) 9,848 3,398
Restructuring charge/(credit)............... 19,279 (350) (733)
Restructuring payments...................... (5,491) (2,464) (1,523)
Loss on sales of assets..................... 1,432 224 229
Changes in operating assets and liabilities,
net of restructuring:
(Increase)/decrease in receivables.......... (1,186) 1,509 (609)
(Increase)/decrease in inventories.......... 5,126 (8,605) (7,969)
(Increase)/decrease in income tax benefits.. 7,572 5,574 (3,679)
(Increase)/decrease in other current as-
sets....................................... (403) (1,356) 479
(Increase)/decrease in investment in
Recubrimientos Interceramic,
S.A. de C.V. .............................. (369) 491 1,411
(Increase)/decrease in other noncurrent as-
sets....................................... (4,899) (800) 270
Increase/(decrease) in accounts payable and
accrued expenses........................... 6,179 (5,898) 1,069
Increase in other long-term liabilities..... 1,913 1,223 164
Other, net.................................. (1,272) 1,049 (421)
-------- ------- -------
Net cash provided by operating activities..... 3,740 11,954 4,893
Cash flows from investing activities:
Purchases of property, plant and equipment... (19,734) (20,393) (9,572)
Proceeds from sales of assets................ 670 55 6,859
-------- ------- -------
Net cash used for investing activities........ (19,064) (20,338) (2,713)
Cash flows from financing activities:
Increase/(decrease) in current installments
of long-term debt........................... -- 58 (151)
Increase/(decrease) in current amounts due to
affiliates.................................. (3,942) 5,332 3,914
Reduction of long-term debt.................. (93) (178) --
Dividends paid -- -- (30,000)
Increase in long-term amounts due to aff-
iliates..................................... 19,359 3,172 24,057
-------- ------- -------
Net cash provided by/(used for) financing ac-
tivities..................................... 15,324 8,384 (2,180)
-------- ------- -------
Net change in cash............................ -- -- --
======== ======= =======
</TABLE>

The accompanying footnotes are an integral part of these statements.

F-26
<PAGE>

CERAMIC TILE OPERATIONS OF ARMSTRONG WORLD INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND THE PERIOD ENDED DECEMBER 29,
1995
(AMOUNTS IN THOUSANDS)
Ceramic Tile Operations of Armstrong World Industries, Inc. (CTO, or the
Company) manufactures and markets commercial and residential ceramic tile for
sale to contractors, distributors, and home improvement centers in the United
States and Canada.

On December 29, 1995, Armstrong World Industries, Inc. (AWI) completed the
combination of CTO with Dal-Tile International, Inc. In exchange for a 37%
ownership in the new combination, AWI donated substantially all of its equity
in CTO and contributed $27,575 in cash. AWI retained certain assets and
liabilities primarily related to employee benefits. AWI recorded a loss of
$116,800 from the formation of this combination. These transactions are not
reflected in these statements.

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The accompanying consolidated financial statements include:

a. the accounts of American Olean Tile Company, Inc. (AOT), a wholly
owned subsidiary of AWI, through December 29, 1995. AOT manufactures and
markets commercial and residential ceramic tile for sale to contractors,
distributors, and AWI.

b. allocations and specifically identifiable transactions and balances of
AWI, the parent company. AWI manufactures and markets a variety of indoor
furnishings. AWI also markets and distributes ceramic tile to home
improvement centers.

c. specifically identifiable transactions and balances of Armstrong World
Industries Canada Ltd. (AWICL), an affiliated foreign subsidiary. The
Newfoundland division of AWICL mines pyrophyllite, a mineral used in the
manufacture of ceramic tile, for exclusive sale to AOT.

d. specifically identifiable transactions and balances of Armstrong Cork
Finance Corporation (ACFC), an affiliated domestic subsidiary. Assets in
ACFC consist of its 49.99% investment in the equity of Recubrimientos
Interceramic, S. A. de C. V. (RISA), Chihuahua, Mexico, and related
goodwill and intangible assets. RISA produces residential ceramic tiles for
sale to AOT and other unaffiliated customers.

All significant intra-operations transactions have been eliminated from the
consolidated statements.

These statements are prepared in accordance with generally accepted
accounting principles and include management estimates and judgments, where
appropriate. Actual results may differ from these estimates.

ALLOCATIONS FROM AWI AND AFFILIATED SUBSIDIARIES

The method of allocating expenses to CTO from the accounts of AWI involved
the use of proportional cost allocation based on AWI departmental effort
analysis and actual participation in benefit programs by AOT employees.
Allocations of expenses to CTO from affiliated subsidiaries were based upon
transactions specifically identified within the accounting records of these
subsidiaries. Management asserts that the methodology used was reasonable.

CASH AND EQUIVALENTS

Cash positions are not reflected on the balance sheets of CTO, since these
accounts were in overdraft positions that have been classified as current
liabilities.

ACCOUNTS RECEIVABLE

Accounts receivable include trade receivables which are recorded in gross
billed amounts as of the date of shipment. Provisions have been made for
estimated applicable discounts and losses.

F-27
<PAGE>

CERAMIC TILE OPERATIONS OF ARMSTRONG WORLD INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND THE PERIOD ENDED DECEMBER 29,
1995
(AMOUNTS IN THOUSANDS)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

INVENTORIES

In excess of 90% of the December 31, 1994 and December 29, 1995 inventories
were valued using the FIFO method, with the remaining inventories valued at
the lower of average cost or market.

CURRENT AMOUNTS DUE TO/FROM AFFILIATES

Current amounts due to/from affiliates represent the net amounts payable or
receivable from affiliated companies.

INCOME TAXES

Current and deferred income taxes payable, deferred tax assets, and tax
expense of CTO are the amounts originally recorded on the accounting records
of AOT plus the tax effects calculated at statutory rates for allocated
amounts from the accounts of AWI and affiliated subsidiaries. The tax benefits
are primarily the result of AWI's allocation to AOT of AOT's proportional
share of AWI's consolidated tax benefit or liability. On the accounts of AWI
and affiliated subsidiaries, amounts payable or receivable at December 31,
1994 and December 29, 1995 represent the accumulation of tax expense or
benefit associated with allocated amounts from all prior years. The Company
follows Statement of Financial Accounting Standards Number 109, Accounting for
Income Taxes, under which deferred tax assets and liabilities are recognized
using enacted tax rates for the expected future tax consequences of events
that have been recognized in the financial statements or tax returns.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment values are stated at acquisition cost with
accumulated depreciation and amortization deducted to arrive at net book
value. Depreciation charges for financial reporting are determined on the
straight-line method over estimated useful lives. The principal lives used in
determining depreciation rates of various assets are buildings, 20-45 years,
and machinery and equipment, 4-20 years.

OTHER NONCURRENT ASSETS

Noncurrent assets are carried at cost or less. Goodwill and other nontax-
deductible intangible assets are stated on the basis of cost and are amortized
over a forty-year period. The Company assesses the recoverability of these
intangible assets by determining whether the goodwill balance over its
remaining life can be recovered through projected undiscounted future cash
flows. Other intangible assets primarily include tax-deductible acquired
intangibles and computer software. Tax-deductible intangibles are stated on
the basis of cost and are being amortized over periods ranging from four to
forty years. On an ongoing basis, management reviews the valuation and
amortization of tax-deductible intangible assets. Computer software is
amortized over periods ranging from three to five years.

ENVIRONMENTAL COSTS

Recurring costs associated with emission abatement and the management and
disposal of waste materials in ongoing operations are expensed on a current
basis. Costs are also accrued when associated with the required environmental
remediation when it becomes probable that a liability has been incurred and
its proportionate share

F-28
<PAGE>

CERAMIC TILE OPERATIONS OF ARMSTRONG WORLD INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND THE PERIOD ENDED DECEMBER 29,
1995
(AMOUNTS IN THOUSANDS)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

of the amount can be reasonably estimated. CTO environmental reserves were
$1,333 at December 31, 1994 and $346 at December 29, 1995.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable represents amounts billed to AOT by trade suppliers.
Accrued expenses primarily include employment costs, restructuring accruals,
and other accrued expenses such as current insurance costs, interest payable
to unaffiliated companies, and sundry payables.

NOTE 2--ADVERTISING

Advertising costs were $6,927 in 1993, $6,169 in 1994 and $5,286 in 1995.

NOTE 3--INCOME TAXES

<TABLE>
<CAPTION>
DETAILS OF TAXES 1993 1994 1995
- ---------------- -------- ------- -------
<S> <C> <C> <C>
Earnings (loss) before income taxes (benefit):
Domestic.......................................... $(46,766) $(2,573) $ 1,147
Foreign........................................... 128 (713) (1,646)
Eliminations...................................... 157 (78) --
-------- ------- -------
Total.......................................... $(46,481) $(3,364) $ (499)
======== ======= =======
Income taxes benefit:
Payable:
Federal.......................................... $(16,815) $(5,407) $(3,830)
Foreign.......................................... (82) 25 (6)
-------- ------- -------
(16,897) (5,382) (3,836)
Deferred:
Federal.......................................... 670 4,583 4,345
-------- ------- -------
Total income taxes (benefit)................... $(16,227) $ (799) $ 509
======== ======= =======
<CAPTION>
RECONCILIATION TO U.S. STATUTORY TAX RATE 1993 1994 1995
- ----------------------------------------- -------- ------- -------
<S> <C> <C> <C>
Tax (benefit) at statutory rate.................... $(16,268) $(1,177) $ (175)
(Benefit) loss on foreign-source income............ (285) 279 571
Meals and entertainment............................ 50 110 113
Other items........................................ 276 (11) --
-------- ------- -------
Tax expense (benefit) at effective rates........... $(16,227) $ (799) $ 509
======== ======= =======
</TABLE>

F-29
<PAGE>

CERAMIC TILE OPERATIONS OF ARMSTRONG WORLD INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND THE PERIOD ENDED DECEMBER 29,
1995
(AMOUNTS IN THOUSANDS)
NOTE 3--INCOME TAXES--(CONTINUED)

Income tax benefits were $18,891 in 1994 and $22,660 in 1995. Of these
amounts, deferred tax benefits were $7,756 in 1994 and $ 6,810 in 1995. The
tax effects of principal temporary differences between the carrying amounts of
assets and liabilities and their tax bases are summarized in the following
table:

<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Restructuring benefits..................................... $(12,978) $ (7,203)
Inventory valuation........................................ (969) (1,343)
Bad debt/billing adjustments............................... (975) (1,175)
Fixed asset writedown...................................... (700) (239)
Employment costs*.......................................... (908) (2,080)
Other*..................................................... (410) (349)
-------- --------
Net deferred assets.................................... $(16,940) $(12,389)
======== ========
Accumulated depreciation................................... $ 23,283 $ 24,581
Trademarks................................................. 3,992 3,241
Goodwill................................................... 1,102 --
Other...................................................... 604 952
-------- --------
Total deferred income tax liabilities.................. $ 28,981 $ 28,774
-------- --------
Net deferred income tax liabilities.................... $ 12,041 $ 16,385
-------- --------
Less net income tax (benefits)--current deferred........... (7,756) (6,810)
-------- --------
Deferred income taxes--long-term....................... $ 19,797 $ 23,195
======== ========
</TABLE>
- --------
*Certain items in 1994 have been reclassified compared to previously published
reports.

NOTE 4--INVENTORIES

<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Finished goods............................................... $ 52,339 $ 65,184
Goods in process............................................. 2,564 2,353
Raw materials and supplies................................... 9,539 4,874
-------- --------
Total...................................................... $ 64,442 $ 72,411
======== ========

NOTE 5--PROPERTY, PLANT, AND EQUIPMENT

<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Land......................................................... $ 8,740 $ 6,509
Buildings.................................................... 62,121 56,614
Machinery and equipment...................................... 142,840 153,203
Construction in progress..................................... 10,101 6,795
-------- --------
223,802 223,121
Less accumulated depreciation................................ 63,882 71,541
-------- --------
Net........................................................ $159,920 $151,580
======== ========
</TABLE>

F-30
<PAGE>

CERAMIC TILE OPERATIONS OF ARMSTRONG WORLD INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND THE PERIOD ENDED DECEMBER 29,
1995
(AMOUNTS IN THOUSANDS)

NOTE 5--PROPERTY, PLANT, AND EQUIPMENT--(CONTINUED)

The $681 increase in gross book value to $223,121 at the end of 1995
included $9,572 for capital additions and a $10,253 reduction from sales and
the retirement of fully depreciated assets. Depreciation expense amounted to
$12,081, $11,922, and $12,038 in the years ended December 31, 1993 and 1994,
and the period ended December 29, 1995, respectively.

NOTE 6--INVESTMENT IN RECUBRIMIENTOS INTERCERAMIC S.A. DE C.V.

The investment in RISA is recorded by ACFC under the equity method of
accounting for investments in unconsolidated affiliates. The investment also
includes goodwill (amortized over forty years) and capitalized start-up costs
(amortized over five years) related to the purchase of CTO's interest in RISA.
Details of the investment in RISA are as follows:

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Balance at beginning of year................................. $14,770 $14,279
Loss after tax............................................... (519) (1,411)
Amortization of goodwill and other intangibles............... (264) (219)
Foreign currency revaluation................................. 292 (381)
------- -------
Balance at end of year..................................... $14,279 $12,268
======= =======

NOTE 7--OTHER NONCURRENT ASSETS

<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Goodwill and other nontax-deductible intangible assets (net
of accumulated amortization of 1994--$2,193; 1995--$2,552).. $12,426 $12,219
Tax-deductible intangible assets (excluding computer
software) (net of accumulated amortization of 1994--$2,104;
1995--$3,026)............................................... 6,010 5,088
Computer software (net of accumulated amortization of 1994--
$1,267; 1995--$2,151)....................................... 2,440 1,657
Other........................................................ 736 819
------- -------
Total...................................................... $21,612 $19,783
======= =======
</TABLE>

Amortization of goodwill and other nontax-deductible intangibles charged
against earnings before income tax amounted to $359, $356, and $356 for the
years ended December 31, 1993 and 1994, and the period ended December 29,
1995, respectively. Amortization of tax-deductible intangibles charged against
earnings before income tax amounted to $1,714, $922, and $922 for the years
ended December 31, 1993 and 1994, and the period ended December 29, 1995,
respectively. Amortization of computer software charged against earnings
before income taxes (benefit) amounted to $527, $617, and $281 for the years
ended December 31, 1993 and 1994, and the period ended December 29, 1995,
respectively. Other noncurrent assets are allocations from the accounts of AWI
related to participation by AOT managers in deferred compensation and benefit
security plans.

F-31
<PAGE>

CERAMIC TILE OPERATIONS OF ARMSTRONG WORLD INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND THE PERIOD ENDED DECEMBER 29,
1995
(AMOUNTS IN THOUSANDS)

NOTE 8--ACCOUNTS PAYABLE AND ACCRUED EXPENSES

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Bank overdrafts................................................. $ 1,877 $ 1,842
Accounts payable................................................ 4,137 4,928
Employment costs................................................ 4,248 4,945
Restructuring costs............................................. 1,593 440
Other accrued expenses.......................................... 6,959 6,205
------- -------
Total....................................................... $18,814 $18,360
======= =======
</TABLE>

NOTE 9--RESTRUCTURING CHARGE/(CREDIT)

Restructuring charge (credit) for CTO amounted to $19,279 in 1993, ($350) in
1994, and ($733) in 1995. The 1993 charges were primarily the result of write-
downs of the value of land, buildings, and equipment, as well as accruals made
for severance and special retirement incentives associated with the elimination
of employee positions.

<TABLE>
<CAPTION>
RESTRUCTURING CHARGE/(CREDIT) 1993 1994 1995
- ----------------------------- ------- ----- -----
<S> <C> <C> <C>
Property, plant, and equipment........................... $11,274 -- $(733)
Tax-deductible intangibles............................... 1,805 -- --
Early retirement incentives.............................. 5,368 (350) --
Severance pay............................................ 832 -- --
------- ----- -----
Total charge/(credit) before tax..................... $19,279 $(350) $(733)
======= ===== =====
</TABLE>

<TABLE>
<CAPTION>
RESTRUCTURING RESERVES 1994 1995
- ---------------------- ------- -------
<S> <C> <C>
Balance at beginning of year:
Restructuring costs........................................ $ 5,222 $ 1,593
Reductions to inventories, property, plant and equipment,
goodwill, and
tax-deductible intangibles................................ 24,617 14,665
------- -------
Total.................................................... 29,839 16,258
======= =======
Charges/(credit)............................................. (350) (733)
Severance payments........................................... (2,464) (325)
Plant shutdown payments...................................... -- (1,198)
Retirement of assets......................................... (10,767) (11,440)
Balance at end of year:
Restructuring costs........................................ 1,593 440
Reductions to inventories, property, plant and equipment,
goodwill, and tax-deductible intangibles.................. 14,665 2,122
------- -------
Total.................................................... $16,258 $ 2,562
======= =======
</TABLE>

F-32
<PAGE>

CERAMIC TILE OPERATIONS OF ARMSTRONG WORLD INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND THE PERIOD ENDED DECEMBER 29,
1995
(AMOUNTS IN THOUSANDS)

NOTE 10--PENSION COSTS

AOT has a defined-benefit pension plan covering all production and
maintenance employees at each of its six plant locations. Benefits paid from
the plan are based on the employee's compensation and years of service.
Generally, the Company's practice is to fund the actuarially determined
current service costs and the amounts necessary to amortize prior service
obligations over periods ranging up to 30 years, but not in excess of the full
funding limitation. Funding requirements are determined independently of
expense, using an expected long-term rate of return on assets of 8.67%. The
plan is subject to the full funding limitation in 1993, 1994 and 1995. AOT
made contributions of $658 in 1993. Effective March 31, 1994, the plan was
merged into the Retirement Income Plan of AWI and the plan's pension assets
and related obligations are included with those of the AWI retirement plan at
December 31, 1994 and December 29, 1995. Consequently, no contributions were
made in 1994 and 1995.

<TABLE>
<CAPTION>
NET COST FOR PENSION PLAN 1993 1994 1995
- ------------------------- -------- -------- -------
<S> <C> <C> <C>
Actual (return) loss on plan assets............... $ (3,221) $ 2,609 $(9,837)
Less amount deferred.............................. 801 (5,097) 7,319
-------- -------- -------
Expected return on plan assets.................... (2,420) (2,488) (2,518)
Net amortization and other........................ 305 (318) (223)
Service cost--benefits earned during the year..... 900 1,030 801
Interest cost on the projected benefit obliga-
tion............................................. 2,555 2,702 2,617
-------- -------- -------
Net pension cost................................ $ 1,340 $ 926 $ 677
======== ======== =======
</TABLE>

<TABLE>
<CAPTION>
FUNDED STATUS OF PENSION PLAN 1994* 1995
- ----------------------------- -------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................ $(31,455) $(32,184)
Accumulated benefit obligation........................... $(33,498) $(34,273)
Projected benefit obligation for services rendered to
date.................................................... $(33,858) $(34,641)
Plan assets at fair value.................................. $ 29,929 $ 30,147
-------- --------
Projected benefit obligation in excess of plan assets...... $ (3,929) $ (4,494)
Unrecognized prior service cost............................ 4,549 4,244
Unrecognized net loss--experience differed from assump-
tions..................................................... (2,587) (2,394)
-------- --------
Accrued pension cost..................................... $ (1,967) $ (2,644)
======== ========
</TABLE>
- --------
* The 1994 funded status data have been adjusted to accurately reflect the
merger of the American Olean plan with the Armstrong plan.

Rates used to determine the actuarial present value of the pension benefit
obligations at the end of 1994 and 1995 were:

a. the discount rate or the assumed rate at which the pension benefits
could be effectively settled of 8.00% in 1994 and 7.00% in 1995, and

b. the compensation rate or the long-term rate at which compensation is
expected to increase as a result of inflation, promotions, seniority,
and other factors of 4.75% for 1994 and 1995.

The expected long-term rate of return on assets was 8.50% for 1994 and 8.75%
for 1995.

The plan assets at December 29, 1995 are based on measurements from October
31, 1995 to December 29, 1995. Stated at fair value, they are primarily listed
stocks, bonds, and investments with a major insurance company.

F-33
<PAGE>

CERAMIC TILE OPERATIONS OF ARMSTRONG WORLD INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND THE PERIOD ENDED DECEMBER 29,
1995
(AMOUNTS IN THOUSANDS)

NOTE 11--DEBT

<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Long-term debt:
7% Industrial development bond due 2004........................ $1,000 $1,000
17.3% Capitalized truck fleet lease due 1995................... 151 --
------ ------
Total long-term debt......................................... 1,151 1,000
Less current installments...................................... 151 --
------ ------
Net long-term debt........................................... $1,000 $1,000
====== ======
</TABLE>

NOTE 12--SCHEDULE OF EQUITY

<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
COMMON STOCKS
American Olean Tile Company, Inc.
$100 par value, authorized and issued 2,285
shares...................................... $ 229 $ 229 $ 229
Armstrong World Industries Canada, Ltd.
(Newfoundland).............................. 100 100 100
--------- --------- ---------
Balance at beginning of year............. $ 329 $ 329 $ 329
========= ========= =========
Decrease due to reincorporation of American
Olean Tile Company, Inc.*................... (228)
--------- --------- ---------
American Olean Tile Company, Inc.
$1 per value, authorized and issued 1,000
shares...................................... $ 1
$100 par value, authorized and issued 2,285
shares..................................... $ 229 $ 229
Armstrong World Industries Canada, Ltd.
(Newfoundland).............................. 100 100 100
--------- --------- ---------
Balance at end of year................... $ 329 $ 329 $ 101
========= ========= =========
CAPITAL IN EXCESS OF PAR VALUES
Balance at beginning of year................. $ 333,377 $ 333,377 $ 333,377
Increase due to reincorporation*............. 227
Less dividend (see note 15).................. (30,000)
--------- --------- ---------
Balance at end of year................... $ 333,377 $ 333,377 $ 303,604
========= ========= =========
ACCUMULATED DEFICIT
Balance at beginning of year................. ($85,224) ($115,479) ($118,044)
Net loss..................................... (30,254) (2,565) (1,008)
--------- --------- ---------
Balance at end of year................... ($115,479) ($118,044) ($119,053)
========= ========= =========
FOREIGN CURRENCY TRANSLATION
Balance at beginning of year................. $ 579 $ 418 $ 182
Translation adjustments:
Armstrong World Industries, Canada, Ltd.
(Newfoundland)............................. (161) (528) 61
Recubrimientos Interceramic, S. A. de
C.V. ...................................... -- 292 (381)
--------- --------- ---------
Balance at end of year................... $ 418 $ 182 $ (138)
--------- --------- ---------
Total equity............................. $ 218,645 $ 215,844 $ 184,514
========= ========= =========
</TABLE>
- --------
* In January 1995, AOT, previously incorporated in New York, was reincorporated
in Pennsylvania.

F-34
<PAGE>

CERAMIC TILE OPERATIONS OF ARMSTRONG WORLD INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND THE PERIOD ENDED DECEMBER 29,
1995
(AMOUNTS IN THOUSANDS)

NOTE 13--LEASED PROPERTY UNDER OPERATING LEASES

Rental expenses were $4,527, $4,440, and $4,620 for 1993 and 1994 and the
period ended December 29, 1995, respectively, for all operating leases except
those with terms of a month or less that were not renewed. Operating leases
principally involve the rental of facilities for sales service centers. As of
December 29, 1995 future minimum rental payments under operating leases that
have initial non-cancelable lease terms in excess of one year were:

<TABLE>
<S> <C>
1996.............................................................. $ 5,478
1997.............................................................. 4,261
1998.............................................................. 1,894
1999.............................................................. 1,530
2000.............................................................. 1,016
Later years....................................................... 1,568
-------
Total........................................................... $15,747
=======
</TABLE>

NOTE 14--CREDIT RISK

Financial instruments which potentially subject the Company to significant
concentrations of credit risk primarily consist of accounts receivable.
Concentrations of credit risk with respect to accounts receivable are limited
due to the large number of entities comprising CTO's customer base and their
dispersion across differential geographical areas. As of December 29, 1995,
CTO had no significant concentrations of credit risk.

Included in the gross accounts receivable is an amount of $620 due from
Color Tile, Inc. on which a reserve of $596 has been established. On January
24, 1996, Color Tile filed for protection under Chapter 11 of the United
States Bankruptcy Code. The Company anticipates recovering none of the January
24 net outstanding amount of $596.

NOTE 15--RELATED PARTY TRANSACTIONS

CTO sold ceramic tile products to AWI for resale primarily to home
improvement centers in the United States. In 1993, 1994 and 1995, sales were
$13,522, $20,747 and $28,914, respectively.

CTO incurred interest expense on demand notes from affiliated companies in
the amounts of $2,110, $4,134, and $7,856 in the years 1993, 1994, and 1995,
respectively. CTO also accrued interest income on demand notes to affiliated
companies in the amounts of $214 and $1,285 in the years 1994 and 1995,
respectively. Interest expense on loans from affiliated companies is computed
at prime plus 1%.

In January, 1995, CTO declared and paid a dividend of $30,000 to its parent
corporation, Armstrong Enterprises, Inc. (AEI), a wholly owned subsidiary of
AWI. This dividend was returned to CTO in the form of a demand note payable to
AEI.

F-35
<PAGE>

[PHOTOGRAPHS OF RESIDENTIAL APPLICATIONS OF TILE]

For decades, American Olean has been one of the U.S. ceramic tile industry's
leading brands. American Olean continues to offer its customers traditional
advantages such as floor/wall coordination and a full offering of residential
and commercial products. American Olean products are offered primarily through
independent distributors.

[LOGO] American Olean
<PAGE>

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE U.S. UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO
ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE
DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 10
Use of Proceeds........................................................... 16
Refinancing............................................................... 17
Dividend Policy........................................................... 19
Dilution.................................................................. 20
Capitalization............................................................ 21
Unaudited Pro Forma Consolidated
Financial Information.................................................... 22
Selected Consolidated Financial Data...................................... 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 31
Ceramic Tile Industry..................................................... 42
Business.................................................................. 44
Management................................................................ 56
Principal Stockholders.................................................... 64
Certain Transactions...................................................... 66
Armstrong Agreements...................................................... 66
Description of Capital Stock.............................................. 67
Description of Certain Indebtedness....................................... 70
Shares Eligible for Future Sale........................................... 75
Certain U.S. Tax Consequences to Non-U.S. Stockholders.................... 76
Underwriting.............................................................. 79
Legal Matters............................................................. 82
Experts................................................................... 82
Available Information..................................................... 82
Index to Consolidated Financial Statements................................ F-1
</TABLE>

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

7,000,000 SHARES

DAL-TILE INTERNATIONAL INC.

COMMON STOCK

--------

PROSPECTUS

, 1996

--------

SMITH BARNEY INC.
DILLON, READ & CO. INC.
GOLDMAN, SACHS & CO.
MORGAN STANLEY & CO.
INCORPORATED

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

[INTERNATIONAL PROSPECTUS ALTERNATE PAGE]
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED AUGUST 8, 1996
PROSPECTUS

7,000,000 SHARES

DAL-TILE INTERNATIONAL INC.

COMMON STOCK

--------

All of the shares of Common Stock, $.01 par value per share (the "Common
Stock"), offered hereby are being sold by Dal-Tile International Inc. Of the
7,000,000 shares of Common Stock offered hereby, a total of 1,400,000 shares
are being offered hereby in an international offering outside the United States
and Canada (the "International Offering") by the Managers (as defined) and a
total of 5,600,000 shares are being offered by the U.S. Underwriters (as
defined) in a concurrent offering in the United States and Canada (the "U.S.
Offering" and, together with the International Offering, the "Offerings").

The Common Stock has been approved for listing on the New York Stock
Exchange, subject to official notice of issuance, under the symbol "DTL."

--------

SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.

--------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- ------------------------------------------------------
Total(3) $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

(1) For information regarding indemnification of the Managers and the U.S.
Underwriters, see "Underwriting."

(2) Before deducting expenses estimated at $1,800,000 payable by the Company.

--------

The shares of Common Stock are being offered by the several Managers named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. It is expected that certificates for the shares of Common
Stock offered hereby will be available for delivery on or about , 1996,
at the offices of Smith Barney Inc., 333 West 34th Street, New York, New York
10001.

--------

SMITH BARNEY INC.
DILLON, READ & CO. INC.
GOLDMAN SACHS INTERNATIONAL
MORGAN STANLEY & CO.
INTERNATIONAL

, 1996
<PAGE>

[INTERNATIONAL PROSPECTUS ALTERNATE PAGE]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE MANAGERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. THE DELIVERY OF
THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

-----------

TABLE OF CONTENTS

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

7,000,000 SHARES

DAL-TILE INTERNATIONAL INC.

COMMON STOCK

-------

PROSPECTUS

, 1996

-------

SMITH BARNEY INC.
DILLON, READ & CO. INC.
GOLDMAN SACHS INTERNATIONAL
MORGAN STANLEY & CO.
INTERNATIONAL

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*

The following table sets forth the estimated expenses to be borne by the
Company, in connection with the issuance and distribution of the securities
being registered hereby, other than underwriting discounts and commissions.

<TABLE>
<S> <C>
SEC registration fee.......................................... $ 51,552
NASD filing fee............................................... 15,450
Accounting fees and expenses.................................. 400,000
Legal fees and expenses....................................... 550,000
Blue Sky expenses and counsel fees............................ 15,000
Printing and engraving expenses............................... 475,000
NYSE listing fee.............................................. 256,249
Transfer Agent and Registrar fees and expenses................ 1,000
Miscellaneous expenses........................................ 35,749
----------
Total....................................................... $1,800,000
==========
</TABLE>
--------
* Except for the SEC registration fee, the NASD filing fee and
the NYSE listing fee, all the foregoing expenses have been
estimated.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Article SEVENTH of the Second Amended and Restated Certificate of
Incorporation of the Registrant provides as follows:

"To the fullest extent permitted by the Delaware General Corporation Law as
the same exists or may hereafter be amended, a Director of the Corporation
shall not be liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a Director."

Section 145 of the General Corporation Law of the State of Delaware provides
as follows:

Under certain circumstances a corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was a
director, officer, employee or agent of the corporation or is or was serving
at its request in such capacity in another corporation or business
association, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.

In a derivative action, i.e., one by or in the right of the corporation,
indemnification may be made only for expenses actually and reasonably incurred
by a director, officer, employee or agent of the corporation, or a person who
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or business association in connection
with the defense or settlement of an action or suit, if such person has acted
in good faith and in a manner that he or she reasonably believed to be in or
not opposed to the best interests of the corporation, except that no
indemnification shall be made if such person shall have been adjudged to be
liable to the corporation, unless and only to the extent that the court in
which the action or suit was brought shall determine upon application that the
defendant is fairly and reasonably entitled to indemnity for such expenses
despite such adjudication of liability.

II-1
<PAGE>

The Company has entered into agreements to provide indemnification for its
directors in addition to the indemnification provided for in the Amended and
Restated Bylaws of the Registrant. These agreements, among other things,
indemnify the directors, to the fullest extent provided by Delaware law, for
certain expenses (including attorneys' fees), losses, claims, liabilities,
judgments, fines and settlement amounts incurred by such indemnitee in any
action or proceeding, including any action by or in the right of the Company,
on account of services as a director or officer of any affiliate of the
Registrant, or as a director or officer of any other company or enterprise
that the indemnitee provides services to at the request of the Registrant.

The form of Underwriting Agreements filed as Exhibit 1.1 provides for the
indemnification of the Company, its controlling persons, its directors and
certain of its officers by the Underwriters and the Managers against certain
liabilities, including liabilities under the Securities Act.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

On May 1, 1994, Howard I. Bull purchased 5,000 shares of Class A Common
Stock at a price of $100.00 per share and 582 shares of Class C Common Stock
at a price of $0.03 per share. (The foregoing does not give effect to the
Common Stock Conversion.)

In exchange for the stock and assets contributed as part of the AO
Acquisition, on December 29, 1995, AWI received an aggregate of 590,238 shares
of Class A Common Stock, 5,873 shares of Class B Common Stock, 183,244 shares
of Class C Common Stock, 587,302 shares of Class D Common Stock, 73,413 shares
of Class E Common Stock and 73,413 shares of Class F Common Stock of the
Company at a price of approximately $88.26 per share. (The foregoing does not
give effect to the Common Stock Conversion.)

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) EXHIBITS. The following is a list of exhibits filed as part of the
Registration Statement.

<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
+1.1 Form of Underwriting Agreements.
2.1 Stock Purchase Agreement, dated as of December 21, 1995, by and among
Dal-Tile International, Inc., Armstrong Enterprises, Inc., Armstrong
Cork Finance Corporation and Armstrong World Industries, Inc. (Filed
as Exhibit 2 to the Registrant's Current Report on Form 8-K filed on
January 16, 1996 and incorporated herein by reference.)
+2.2 Form of DTI Merger Agreement, among Dal-Tile International, Inc., DTI
Investors LLC and DTI Merger Company.
+3.1 Form of Second Amended and Restated Certificate of Incorporation of
the Company.
+3.2 Form of Amended and Restated Bylaws of the Company.
*4.1 Specimen form of certificate for Common Stock.
+5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson, counsel to the
Company, as to the legality of the securities being offered.
+10.1 Dal-Tile International Inc. 1996 Amended and Restated Stock Option
Plan.
*10.2 Consulting Agreement dated as of August 1, 1995, among Harold L. Turk,
Dal-Tile International, Inc., Dal-Tile Corporation, DTM/CM Holdings
Inc., Dal-Minerals Company, Ceramica Regiomontana S.A. de C.V. and
Materiales Ceramicos, S.A. de C.V.
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
10.3 Amended and Restated Employment Agreement, dated June 7, 1993,
between Dal-Tile Corporation and Harold G. Turk. (Filed as Exhibit
10.2.3 to the Registrant's Registration Statement on Form S-1, Number
33-64140 and incorporated herein by reference.)
10.4 Employment Agreement, dated February 5, 1990, between Dal-Tile
Corporation and Carlos E. Sala. (Filed as Exhibit 10.2.4 to the
Registrant's Registration Statement on Form S-1, Number 33-64140 and
incorporated herein by reference.)
10.5 Employment Agreement, dated April 15, 1994, between Dal-Tile
Corporation and Howard I. Bull. (Filed as Exhibit 10.2.5 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1994 and incorporated herein by reference.)
10.6 Indenture dated as of August 11, 1993, between Dal-Tile International
Inc. and Citibank, N.A., as trustee relating to the Zero Coupon
Notes. (Filed as Exhibit 4.1 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993 and incorporated
herein by reference.)
10.7 Pledge Agreement dated as of August 11, 1993, between Dal-Tile
International Inc. and Citibank, N.A., as Collateral Agent, relating
to the Zero Coupon Notes. (Filed as Exhibit 4.2 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference.)
+10.8 First Supplemental Indenture dated as of August 1, 1996, between Dal-
Tile International Inc. and Citibank, N.A., as trustee, relating to
the Zero Coupon Notes.
10.9 Bank Credit Agreement dated as of January 9, 1990, among Dal-Tile
Group Inc., the Banks signatory thereto and National Westminster Bank
USA, as agent. (Filed as Exhibit 10.3.1 to the Registrant's
Registration Statement on Form S-1, Number 33-64140 and incorporated
herein by reference.)
10.10 Amendment to Bank Credit Agreement, dated April 17, 1991, among Dal-
Tile Group Inc., National Westminster Bank USA, Credit Suisse and
NationsBank (formerly NCNB Texas National Bank).
(Filed as Exhibit 10.3.2 to the Registrant's Registration Statement
on Form S-1, Number 33-64140 and incorporated herein by reference.)
10.11 Amendment to Bank Credit Agreement, dated March 30, 1994, among Dal-
Tile Group Inc., National Westminster Bank USA, Credit Suisse and
NationsBank (formerly NCNB Texas National Bank).
(Filed as Exhibit 10.3.3 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1993 and incorporated herein by
reference.)
10.12 10.625% Series A and 10.770% Series B Senior Note Purchase Agreement
dated as of January 9, 1990, between Dal-Tile Group Inc. and the
Purchasers named therein. (Filed as Exhibit 10.3.3 to the
Registrant's Registration Statement on Form S-1, Number 33-64140 and
incorporated herein by reference.)
10.13 Amendment to 10.625% Series A and 10.770% Series B Note Purchase
Agreement, dated March 24, 1994, between Dal-Tile Group Inc. and the
Purchasers named therein. (Filed as Exhibit 10.3.5 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1993 and incorporated herein by reference.)
10.14 Form of Indemnification Agreement between the Dal-Tile International
Inc. and its directors. (Filed as Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1, Number 33-64140 and incorporated
herein by reference.)
10.15 Settlement Agreement dated as of May 20, 1993, among AEA Investors
Inc., DTM Investors Inc., Dal-Tile Group Inc., Dal-Tile Corporation,
Dal-Minerals Company and Robert M. Brittingham and John G.
Brittingham. (Filed as Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1, Number 33-64140 and incorporated herein by
reference.)
10.16 Shareholders Agreement, dated December 29, 1995, among Dal-Tile
International Inc., AEA Investors Inc., Armstrong World Industries,
Inc., Armstrong Enterprises, Inc. and Armstrong Cork Finance
Corporation. (Filed as Exhibit 10.6 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference.)
+10.17 Agreement, dated July 15, 1996, among Dal-Tile International Inc.,
AEA Investors Inc., DTI Investors LLC, Armstrong World Industries,
Inc., Armstrong Enterprises, Inc. and Armstrong Cork Finance
Corporation.
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
*10.18 Commitment Letter, dated June 26, 1996, among Dal-Tile Group Inc. and
Chase Securities Inc., The Chase Manhattan Bank, N.A., Credit Suisse,
Goldman, Sachs & Co. and Pearl Street, L.P.
*21.1 List of subsidiaries of the Dal-Tile International Inc.
23.1 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in
Exhibit 5.1).
+23.2 Consent of Ernst & Young LLP.
+23.3 Consent of KPMG Peat Marwick LLP.
*24.1 Powers of Attorney.
</TABLE>
- --------

+ Filed herewith.
* Previously filed.

(b) FINANCIAL STATEMENT SCHEDULES:

Schedule II -- Valuation and Qualifying Accounts

All other schedules are omitted because they are inapplicable or the
requested information is shown in the financial statements or notes thereto.

ITEM 17. UNDERTAKINGS.

(a) Insofar as indemnification by the Issuer for liabilities arising under
the Act may be permitted to directors, officers and controlling persons of the
Issuer pursuant to the foregoing provisions, or otherwise, the Issuer has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Issuer of expenses incurred or paid by a director, officer
or controlling person of the Issuers in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Issuer will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

(b) The undersigned Company hereby undertakes that:

(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus to be filed by the registration pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

II-4
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE COMPANY HAS DULY
CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF DALLAS, STATE OF
TEXAS ON THE 8TH DAY OF AUGUST, 1996.

DAL-TILE INTERNATIONAL INC.

/s/ Howard I. Bull
By: _________________________________
HOWARD I. BULL
PRESIDENT AND CHIEF EXECUTIVE
OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATES INDICATED.

SIGNATURE TITLE DATE

* Chairman of the Board of
- ------------------------------- Directors August 8, 1996
CHARLES J. PILLIOD, JR.

President and Chief
/s/ Howard I. Bull Executive Officer and August 8, 1996
- ------------------------------- Director (Principal
HOWARD I. BULL Executive Officer)

/s/ Carlos E. Sala Executive Vice President and
- ------------------------------- Chief Financial Officer August 8, 1996
CARLOS E. SALA (Principal Financial and
Accounting Officer)

* Vice President and Director
- ------------------------------- August 8, 1996
JOHN M. GOLDSMITH

* Vice President and Director
- ------------------------------- August 8, 1996
HENRY F. SKELSEY

Director
- ------------------------------- August 8, 1996
E. MANDELL DE WINDT

II-5
<PAGE>

SIGNATURE TITLE DATE

* Director
- ------------------------------- August 8, 1996
DREW LEWIS

Director
- ------------------------------- August 8, 1996
VINCENT A. MAI

* Director
- ------------------------------- August 8, 1996
GEORGE A. LORCH

* Director
- ------------------------------- August 8, 1996
FRANK A. RIDDICK III

- ------------------------------- Director
ROBERT J. SHANNON, JR. August 8, 1996

*By /s/ Carlos E. Sala
----------------------------
CARLOS E. SALA
ATTORNEY-IN-FACT

II-6
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors
Dal-Tile International Inc.

We have audited the consolidated financial statements of Dal-Tile
International Inc. as of December 31, 1994 and 1995, and for each of the three
years in the period ended December 31, 1995, and have issued our report thereon
dated March 15, 1996 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule listed in Item 16(b) of
this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

ERNST & YOUNG LLP

Dallas, Texas

March 15, 1996,
except as to Note
18, as to which the
date is August 8,
1996

S-1
<PAGE>

SCHEDULE II

DAL-TILE INTERNATIONAL INC.

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

Allowance for Losses from Uncollectible Accounts:

<TABLE>
<CAPTION>
(c)
ADDITIONS DTI (b)(c)
BALANCE AT CHARGED TO (WITHOUT AO) AO DTI
BEGINNING COSTS AND (a) BALANCE AT BALANCE AT BALANCE AT
OF PERIOD EXPENSES DEDUCTIONS END OF PERIOD END OF PERIOD END OF PERIOD
---------- ---------- ---------- ------------- ------------- -------------
(AMOUNT IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1993.................... $2,139 $4,955 $4,743 $2,351 $ -- $ --
1994.................... 2,351 6,294 4,753 3,892 -- --
1995.................... 3,892 5,111 4,374 4,629 4,760 9,389
</TABLE>

- --------
(a)Uncollectible accounts written off, net or recoveries.
(b)AO's bad debt allowance.
(c)"DTI" means Dal-Tile International Inc. "AO" means American Olean Tile
Company, Inc.

S-2
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S> <C>
+1.1 Form of Underwriting Agreements.
2.1 Stock Purchase Agreement, dated as of December 21, 1995, by and
among Dal-Tile International, Inc., Armstrong Enterprises, Inc.,
Armstrong Cork Finance Corporation and Armstrong World
Industries, Inc. (Filed as Exhibit 2 to the Registrant's Current
Report on Form 8-K filed on January 16, 1996 and incorporated
herein by reference.)
+2.2 Form of DTI Merger Agreement, among Dal-Tile International Inc.,
DTI Investors LLC and DTI Merger Company.
+3.1 Form of Second Amended and Restated Certificate of Incorporation
of the Company.
+3.2 Form of Amended and Restated Bylaws of the Company.
*4.1 Specimen form of certificate for Common Stock.
+5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson, counsel to
the Company, as to the legality of the securities being offered.
+10.1 Dal-Tile International Inc. 1996 Amended and Restated Stock
Option Plan.
*10.2 Consulting Agreement dated as of August 1, 1995, among Harold L.
Turk, Dal-Tile International Inc., Dal-Tile Corporation, DTM/CM
Holdings Inc., Dal-Minerals Company, Ceramica Regiomontana S.A.
de C.V. and Materiales Ceramicos, S.A. de C.V.
10.3 Amended and Restated Employment Agreement, dated June 7, 1993,
between Dal-Tile Corporation and Harold G. Turk. (Filed as
Exhibit 10.2.3 to the Registrant's Registration Statement on
Form S-1, Number 33-64140 and incorporated herein by reference.)
10.4 Employment Agreement, dated February 5, 1990, between Dal-Tile
Corporation and Carlos E. Sala. (Filed as Exhibit 10.2.4 to the
Registrant's Registration Statement on Form S-1, Number 33-64140
and incorporated herein by reference.)
10.5 Employment Agreement, dated April 15, 1994, between Dal-Tile
Corporation and Howard I. Bull. (Filed as Exhibit 10.2.5 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference.)
10.6 Indenture dated as of August 11, 1993, between Dal-Tile
International Inc. and Citibank, N.A., as trustee relating to
the Zero Coupon Notes. (Filed as Exhibit 4.1 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993
and incorporated herein by reference.)
10.7 Pledge Agreement dated as of August 11, 1993, between Dal-Tile
International Inc. and Citibank, N.A., as Collateral Agent,
relating to the Zero Coupon Notes. (Filed as Exhibit 4.2 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.)
+10.8 First Supplemental Indenture dated as of August 1, 1996, between
Dal-Tile International Inc. and Citibank, N.A., as trustee,
relating to the Zero Coupon Notes.
10.9 Bank Credit Agreement dated as of January 9, 1990, among Dal-
Tile Group Inc., the Banks signatory thereto and National
Westminster Bank USA, as agent. (Filed as Exhibit 10.3.1 to the
Registrant's Registration Statement on Form S-1, Number 33-64140
and incorporated herein by reference.)
10.10 Amendment to Bank Credit Agreement, dated April 17, 1991, among
Dal-Tile Group Inc., National Westminster Bank USA, Credit
Suisse and NationsBank (formerly NCNB Texas National Bank).
(Filed as Exhibit 10.3.2 to the Registrant's Registration
Statement on Form S-1, Number 33-64140 and incorporated herein
by reference.)
10.11 Amendment to Bank Credit Agreement, dated March 30, 1994, among
Dal-Tile Group Inc., National Westminster Bank USA, Credit
Suisse and NationsBank (formerly NCNB Texas National Bank).
(Filed as Exhibit 10.3.3 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993 and incorporated
herein by reference.)
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S> <C>
10.12 10.625% Series A and 10.770% Series B Senior Note Purchase
Agreement dated as of January 9, 1990, between Dal-Tile Group
Inc. and the Purchasers named therein. (Filed as Exhibit 10.3.3
to the Registrant's Registration Statement on Form S-1, Number
33-64140 and incorporated herein by reference.)
10.13 Amendment to 10.625% Series A and 10.770% Series B Note Purchase
Agreement, dated March 24, 1994, between Dal-Tile Group Inc. and
the Purchasers named therein. (Filed as Exhibit 10.3.5 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.)
10.14 Form of Indemnification Agreement between the Dal-Tile
International Inc. and its directors. (Filed as Exhibit 10.4 to
the Registrant's Registration Statement on Form S-1, Number 33-
64140 and incorporated herein by reference.)
10.15 Settlement Agreement dated as of May 20, 1993, among AEA
Investors Inc., DTM Investors Inc., Dal-Tile Group Inc., Dal-
Tile Corporation, Dal-Minerals Company and Robert M. Brittingham
and John G. Brittingham. (Filed as Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1, Number 33-64140
and incorporated herein by reference.)
10.16 Shareholders Agreement, dated December 29, 1995, among Dal-Tile
International Inc., AEA Investors Inc., Armstrong World
Industries, Inc., Armstrong Enterprises, Inc. and Armstrong Cork
Finance Corporation. (Filed as Exhibit 10.6 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995
and incorporated herein by reference.)
+10.17 Agreement, dated July 15, 1996, among Dal-Tile International
Inc., AEA Investors Inc., DTI Investors LLC, Armstrong World
Industries, Inc., Armstrong Enterprises, Inc. and Armstrong Cork
Finance Corporation.
*10.18 Commitment Letter, dated June 26, 1996, among Dal-Tile Group
Inc. and Chase Securities Inc., The Chase Manhattan Bank, N.A.,
Credit Suisse, Goldman, Sachs & Co. and Pearl Street, L.P.
*21.1 List of subsidiaries of the Dal-Tile International Inc.
23.1 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in
Exhibit 5.1).
+23.2 Consent of Ernst & Young LLP.
+23.3 Consent of KPMG Peat Marwick LLP.
*24.1 Powers of Attorney.
</TABLE>
- --------

+ Filed herewith.
* Previously filed.

<PAGE>

EXHIBIT 1.1

[CS&M Draft--8/6/96]

5,600,000 SHARES

DAL-TILE INTERNATIONAL INC.

COMMON STOCK

U.S. UNDERWRITING AGREEMENT
---------------------------

August [ ] , 1996

SMITH BARNEY INC.
DILLON, READ & CO. INC.
GOLDMAN, SACHS & CO.
MORGAN STANLEY & CO. INCORPORATED

As Representatives of the several U.S. Underwriters

c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013

Ladies and Gentlemen:

Dal-Tile International Inc., a Delaware corporation (the "Company"),
proposes to issue and sell an aggregate of 5,600,000 shares of its common stock,
par value $0.01 per share (the "Firm Shares"), to the several Underwriters named
in Schedule I hereto (the "U.S. Underwriters") for whom Smith Barney Inc.,
Dillon, Read & Co. Inc., Goldman, Sachs & Co. and Morgan Stanley & Co.
Incorporated are acting as representatives (the "Representatives"). In
addition, solely for the purpose of covering over-allotments, the Company
proposes to sell to the U.S. Underwriters, upon the terms and conditions set
forth in Section 2 hereof, up to an additional 1,050,000 shares (the "Additional
Shares") of the Company's common stock. The Firm Shares and the Additional
Shares are hereinafter collectively referred to as the "Shares". The Company's
common stock, par value $0.01
<PAGE>

per share, including the Shares and the International Shares (as defined
herein), is hereinafter referred to as the "Common Stock".

It is understood that the Company is currently entering into an
International Underwriting Agreement, dated the date hereof (the "International
Underwriting Agreement"), providing for the sale of 1,400,000 shares of the
Common Stock by the Company (the "International Shares"), through arrangements
with certain underwriters outside the United States and Canada (the "Managers"),
for whom Smith Barney Inc., Dillon, Read & Co. Inc., Goldman Sachs International
and Morgan Stanley & Co. International Limited are acting as lead managers (the
"Lead Managers"). The International Shares and the Shares, collectively, are
herein called the "Underwritten Shares".

The Company also understands that the Representatives and the Lead
Managers have entered into an agreement (the "Agreement Between U.S.
Underwriters and Managers") contemplating the coordination of certain
transactions between the U.S. Underwriters and the Managers and that, pursuant
thereto and subject to the conditions set forth therein, the U.S. Underwriters
may purchase from the Managers a portion of the International Shares or sell to
the Managers a portion of the Shares. The Company understands that any such
purchases and sales between the U.S. Underwriters and the Managers shall be
governed by the Agreement Between U.S. Underwriters and Managers and shall not
be governed by the terms of this Agreement or the International Underwriting
Agreement.

The Company wishes to confirm as follows its respective agreements
with you and the other several U.S. Underwriters on whose behalf you are acting,
in connection with the several purchases of the Shares by the U.S. Underwriters.

1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1, including prospectuses subject to
completion, relating to the Underwritten Shares. The term "Registration
Statement" as used in this Agreement means the registration statement (including
all financial schedules and exhibits), as amended at the time it becomes
effective, and as thereafter amended by post-effective amendment, and any
registration statement and
<PAGE>

any amendments thereto filed pursuant to Rule 462(b) of the Act relating to the
offering covered by the initial registration statement (file number 333-
05069)(the "Rule 462(b) Registration Statement"). The term "Prospectuses" as
used in this Agreement means the prospectuses in the forms included in the
Registration Statement, or, if the prospectuses included in the Registration
Statement omit information in reliance on Rule 430A under the Act and such
information is included in prospectuses filed with the Commission pursuant to
Rule 424(b) under the Act, the term "Prospectuses" as used in this Agreement
means the prospectuses in the forms included in the Registration Statement as
supplemented by the addition of the Rule 430A information contained in the
prospectuses filed with the Commission pursuant to Rule 424(b). The term
"Prepricing Prospectuses" as used in this Agreement means the prospectuses
subject to completion in the forms included in the Registration Statement at the
time of the initial filing of the Registration Statement with the Commission,
and as such prospectuses shall have been amended from time to time prior to the
date of the Prospectuses.

It is understood that two forms of Prepricing Prospectus and two forms
of Prospectus are to be used in connection with the offering and sale of the
Underwritten Shares: a Prepricing Prospectus and a Prospectus relating to the
Shares that are to be offered and sold in the United States (as defined herein)
or Canada (as defined herein) to U.S. or Canadian Persons (the "U.S. Prepricing
Prospectus" and the "U.S. Prospectus", respectively), and a Prepricing
Prospectus and a Prospectus relating to the International Shares which are to be
offered and sold outside the United States or Canada to persons other than U.S.
or Canadian Persons (the "International Prepricing Prospectus" and the
"International Prospectus", respectively). The U.S. Prospectus and the
International Prospectus are herein collectively called the "Prospectuses," and
the U.S. Prepricing Prospectus and the International Prepricing Prospectus are
herein called the "Prepricing Prospectuses". For purposes of this Agreement:
"Rules and Regulations" means the rules and regulations adopted by the
Commission under either the Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as applicable; "U.S. or Canadian Person" means any
resident or national of the United States or Canada, any corporation,
partnership or other entity created or organized in or under the laws of the
United States or Canada or any estate or trust the income of which is subject to
United States or Canadian income taxation regardless of the source of its income
(other than the foreign branch of any U.S. or Canadian Person), and includes any
United States or Canadian branch of a person other than a U.S. or Canadian
Person; "United States"
<PAGE>

means the United States of America (including the states thereof and the
District of Columbia) and its territories, its possessions and other areas
subject to its jurisdiction; and "Canada" means Canada and its territories, its
possessions and other areas subject to its jurisdiction.

2. AGREEMENTS TO SELL AND PURCHASE. Upon the basis of the
representations, warranties and agreements of the U.S. Underwriters contained
herein and subject to all the terms and conditions set forth herein, the Company
hereby agrees to issue and sell to each U.S. Underwriter and, upon the basis of
the representations, warranties and agreements of the Company contained herein
and subject to all the terms and conditions set forth herein, each U.S.
Underwriter agrees, severally and not jointly, to purchase from the Company, at
a purchase price of $ [ ] per share (the "purchase price per share"), the
number of Firm Shares set forth opposite the name of such U.S. Underwriter in
Schedule I hereto (or such number of Firm Shares increased as set forth in
Section 10 hereof).

Upon the basis of the representations, warranties and agreements of
the U.S. Underwriters contained herein and subject to all the terms and
conditions set forth herein, the Company also agrees to sell to the U.S.
Underwriters, and, upon the basis of the representations, warranties and
agreements of the Company contained herein and subject to all the terms and
conditions set forth herein, the U.S. Underwriters shall have the right to
purchase from the Company at the purchase price per share, pursuant to an option
(the "over-allotment option") which may be exercised at any time (but only once)
prior to 5:00 p.m., New York City time, on the 30th day after the date of the
U.S. Prospectus (or, if such 30th day shall be a Saturday or Sunday or a
holiday, on the next business day thereafter when the New York Stock Exchange is
open for trading), up to an aggregate of 1,050,000 Additional Shares from the
Company. Additional Shares may be purchased only for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. Upon
any exercise of the over-allotment option, each U.S. Underwriter, severally and
not jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments as you may determine in order to avoid fractional
shares) which bears the same proportion to the number of Additional Shares to be
sold by the Company as the number of Firm Shares set forth opposite the name of
such U.S. Underwriter in Schedule I hereto (or such number of Firm Shares
increased as set forth in Section 10 hereof) bears to the aggregate number of
Firm Shares to be sold by the Company.
<PAGE>

Each U.S. Underwriter represents, warrants, covenants and agrees that,
except as contemplated under Section 2 of the Agreement Between U.S.
Underwriters and Managers dated the date hereof, (i) it is not purchasing any
Shares for the account of anyone other than a U.S. or Canadian Person, (ii) it
has not offered or sold, and will not offer, sell, resell or deliver, directly
or indirectly, any Shares or distribute any U.S. Prospectus outside the United
States or Canada or to anyone other than a U.S. or Canadian Person, and (iii)
any offer of Shares in Canada will be made only pursuant to an exemption from
the requirement to file a prospectus in the relevant province of Canada in which
such offer is made and any such offer will not result in the Company being
required to take any action under any national, provincial and local law in
Canada, except for the filing with the securities regulatory authority of each
province in which the sale of the Shares are made of a trade report in the
prescribed form, together with the applicable fee.

3. TERMS OF PUBLIC OFFERING. The Company has been advised by you
that the U.S. Underwriters propose to make a public offering of their respective
portions of the Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable and initially
to offer the Shares upon the terms set forth in the U.S. Prospectus.

4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the U.S.
Underwriters of and payment for the Firm Shares shall be made at the office of
[Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional
corporations), One New York Plaza, New York, NY 10004-1980 [the location of the
New Credit Facility Closing]], at 10:00 a.m., New York City time, on August [ ],
1996 (the "Closing Date"). The place of closing for the Firm Shares and the
Closing Date may be varied by agreement between you and the Company.

Delivery to the U.S. Underwriters of and payment for any Additional
Shares to be purchased by the U.S. Underwriters shall be made at the
aforementioned office of [Fried, Frank, Harris, Shriver & Jacobson (a
partnership including professional corporations)] at such time on such date (the
"Option Closing Date"), which may be the same as the Closing Date but shall in
no event be earlier than the Closing Date nor earlier than two nor later than
ten business days after the giving of the notice hereinafter referred to, as
shall be specified in a written notice from you on behalf of the U.S.
Underwriters to the Company of the U.S. Underwriters' determination to
<PAGE>

purchase a number, specified in such notice, of Additional Shares. The place of
closing for any Additional Shares and the Option Closing Date for such Shares
may be varied by agreement between you and the Company.

Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request by written notice (it being understood that a facsimile
transmission shall be deemed written notice) prior to 9:30 a.m., New York City
time, on the second business day preceding the Closing Date or the Option
Closing Date, as the case may be. Such certificates shall be made available to
you in New York City for inspection and packaging not later than 9:30 a.m., New
York City time, on the business day next preceding the Closing Date or the
Option Closing Date, as the case may be. The certificates, and stockpowers, if
applicable, evidencing the Firm Shares and any Additional Shares to be purchased
hereunder shall be delivered to you on the Closing Date or the Option Closing
Date, as the case may be, against payment of the purchase price therefor in
immediately available funds.

5. AGREEMENTS OF THE COMPANY. The Company agrees with the several
U.S. Underwriters as follows:

net worth or results of operations, or of the happening of any event, including
the filing of any information, documents or reports pursuant to the Exchange
Act, that (x) makes any statement of a material fact made in the Registration
Statement untrue or which requires the making of any additions to or changes in
the Registration Statement in order to state a material fact required by the Act
to be stated therein or necessary in order to make the statements therein not
misleading, or (y) makes any statement of a material fact made in the
Prospectuses (as then amended or supplemented) untrue or which requires the
making of any additions or changes in the Prospectuses (as then amended or
supplemented) in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, or of the necessity to
amend or supplement the Prospectuses (as then amended or supplemented) to comply
with the Act or any other United States law. If at any time the Commission
shall issue any stop order suspending the effectiveness of the Registration
Statement, the Company will make every reasonable effort to obtain the
withdrawal of such order at the earliest possible time. Each U.S. Underwriter
hereby agrees to use its reasonable efforts not to deliver any Prepricing
Prospectus or Prospectus after receipt of notice described in the first sentence
of this paragraph until the Company shall have taken corrective action.

(c) The Company will furnish to you, without charge, five signed
copies (which may be photocopies of the original copies) of the Registration
Statement as originally filed with the Commission and of each amendment thereto,
including financial statements and all exhibits to the Registration Statement,
and of any Rule 462(b) Registration Statement and any amendment thereto, and
will also furnish to you, without charge, such number of conformed copies of the
Registration Statement as originally filed and of each amendment thereto, but
without exhibits, and of any Rule 462(b) Registration Statement and any
amendment thereto, as you may reasonably request.

(d) The Company will not (i) file any amendment to the Registration
Statement, any Rule 462(b) Registration Statement or amendment thereto, or make
any amendment or supplement to the Prospectuses of which you shall not
previously have been advised or to which you shall reasonably object after being
so advised or (ii) so long as, in the written opinion of counsel for the U.S.
Underwriters, a U.S. Prospectus is required to be delivered in connection with
sales by any U.S. Underwriter or dealer, file any information, documents or
reports pursuant to the Exchange Act, without delivering a copy of such
information, documents or
<PAGE>

reports to you, as Representatives of the U.S. Underwriters, prior to or
concurrently with such filing.

(e) Prior to the execution and delivery of this Agreement, the
Company has delivered to you, without charge, in such quantities as you have
requested, copies of each form of the U.S. Prepricing Prospectus. Subject to
the final sentence of Section 5(b) hereof, the Company consents to the use, in
accordance with the provisions of the Act and with the securities or Blue Sky
laws of the jurisdictions in which the Shares are offered by the several U.S.
Underwriters and by dealers, prior to the date of the U.S. Prospectus, of each
U.S. Prepricing Prospectus so furnished by the Company.

(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the written
opinion of counsel for the U.S. Underwriters a U.S. Prospectus is required by
the Act to be delivered in connection with sales by any U.S. Underwriter or
dealer, the Company will expeditiously deliver to each U.S. Underwriter and each
dealer, without charge, as many copies of the U.S. Prospectus (and of any
amendment or supplement thereto) as you may request. The Company consents to
the use of the U.S. Prospectus (and of any amendment or supplement thereto) in
accordance with the provisions of the Act and with the securities or Blue Sky
laws of the jurisdictions in which the Shares are offered by the several U.S.
Underwriters and by all dealers to whom Shares may be sold, both in connection
with the offering and sale of the Shares and for such period of time thereafter
as the U.S. Prospectus is required by the Act to be delivered in connection with
sales by any U.S. Underwriter or dealer. If during such period of time any
event shall occur that in the reasonable judgment of the Company or in the
written opinion of counsel for the U.S. Underwriters is required to be set forth
in the U.S. Prospectus (as then amended or supplemented) or should be set forth
therein in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is necessary
to supplement or amend the U.S. Prospectus to comply with the Act or any other
United States law, the Company will forthwith prepare and, subject to the
provisions of paragraph (d) above, file with the Commission an appropriate
supplement or amendment thereto and will expeditiously furnish to the U.S.
Underwriters and dealers a reasonable number of copies thereof. Each U.S.
Underwriter agrees that upon the receipt of any supplement or amendment to the
U.S. Prospectus it will not deliver any such U.S. Prospectus other than as
supplemented or amended. In the event that the Company and you, as
<PAGE>

Representatives of the several U.S. Underwriters, agree that the U.S. Prospectus
should be amended or supplemented, the Company, if reasonably requested by you,
will promptly issue a press release announcing or disclosing the matters to be
covered by the proposed amendment or supplement.

(g) The Company will cooperate with you and with counsel for the U.S.
Underwriters in connection with the registration or qualification of the Shares
for offering and sale by the several U.S. Underwriters and by dealers under the
securities or Blue Sky laws of such jurisdictions as you may reasonably
designate and will file such consents to service of process or other documents
reasonably necessary or appropriate in order to effect such registration or
qualification; provided that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not now so qualified or
to take any action that would subject it to service of process in suits, other
than those arising out of the offering or sale of the Shares, in any
jurisdiction where it is not now so subject.

(h) The Company will make generally available to its security holders
a consolidated earnings statement, which need not be audited, covering a twelve-
month period commencing after the effective date of the Registration Statement
and ending not later than 15 months thereafter, as soon as reasonably
practicable after the end of such period, which consolidated earnings statement
shall satisfy the provisions of Section 11(a) of the Act.

(i) During the period of two years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the Company
mailed to stockholders or filed with the Commission or the New York Stock
Exchange, and (ii) from time to time such other information concerning the
Company as you may reasonably request.

(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 hereof or by notice given by you terminating this
Agreement pursuant to Section 10 or Section 11 hereof) or if this Agreement
shall be terminated by the U.S. Underwriters because of any failure or refusal
on the part of the Company to comply with the terms or fulfill any of the
conditions of this Agreement, the Company agrees to reimburse the
Representatives for all reasonable out-of-pocket expenses
<PAGE>

(including reasonable fees and expenses of counsel for the U.S. Underwriters)
incurred by you in connection herewith.

(k) The Company will apply the net proceeds from the sale of the
Shares to be sold by it hereunder substantially in accordance with the
description set forth in the Prospectuses.

(l) If Rule 430A of the Act is employed, the Company will timely file
the Prospectuses pursuant to Rule 424(b) under the Act and will advise you of
the time and manner of such filing.

(m) Except as provided in this Agreement, for a period of 180 days
after the date hereof (the "Lock-up Period"), the Company will not, without the
prior written consent of Smith Barney Inc., offer, sell, contract to sell or
otherwise dispose of any Common Stock (or any securities convertible into or
exercisable or exchangeable for Common Stock), or grant any options or warrants
to purchase Common Stock, except for the sale of Shares to the U.S. Underwriters
pursuant to this Agreement and the Managers pursuant to the International
Underwriting Agreement; provided, however, that notwithstanding the foregoing,
-------- -------
the Company may sell, contract to sell or grant options to purchase Common Stock
pursuant to any employee stock option plan or benefit plan or arrangement in
effect on the date hereof and may offer, issue and sell Common Stock issuable
under options or warrants outstanding on the date hereof or granted pursuant to
an employee stock option plan or benefit plan in effect on the date hereof.

(n) The Company has furnished or will furnish to you "lock-up"
letters, in substantially the form attached hereto as Annex III, signed by each
of the executive officers, directors and holders of capital stock of the Company
listed on Annex IV.

(o) Except as stated in this Agreement and in the International
Underwriting Agreement and in the Prepricing Prospectuses and Prospectuses, the
Company has not taken, nor will it take, directly or indirectly, any action
designed to or that could reasonably be expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Shares.

(p) The Company will use its best efforts to have the Common Stock
listed, subject to notice of issuance, on the New York Stock Exchange
concurrently with the effectiveness of the Registration Statement.
<PAGE>

6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each U.S. Underwriter that:

(a) Each U.S. Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Act, complied when
so filed in all material respects with the provisions of the Act, except that
this representation and warranty does not apply to statements in or omissions
from such U.S. Prepricing Prospectus (or any amendment or supplement thereto)
made in reliance upon and in conformity with information relating to any U.S.
Underwriter or Manager furnished to the Company in writing by a U.S. Underwriter
through the Representatives or by a Manager through the Lead Managers expressly
for use therein. The Commission has not issued any order preventing or
suspending the use of any Prepricing Prospectus.

(b) The Registration Statement in the form in which it became or
becomes effective and also in such form as it may be when any post-effective
amendment thereto or any Rule 462(b) Registration Statement or amendment
thereto shall become effective and the U.S. Prospectus and any supplement or
amendment thereto when filed with the Commission under Rule 424(b) under the
Act, complied or will comply in all material respects with the provisions of the
Act and did not or will not at any such times contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; except that this
representation and warranty does not apply to statements in or omissions from
the Registration Statement or the Prospectuses made in reliance upon and in
conformity with information relating to any U.S. Underwriter or Manager
furnished to the Company in writing by a U.S. Underwriter through the
Representatives or by a Manager through the Lead Managers expressly for use
therein.

(c) Upon consummation of the Common Stock Conversion: (i) all the
outstanding shares of Common Stock of the Company will be duly authorized and
validly issued, will be fully paid and nonassessable and will be free of any
preemptive or similar rights; (ii) the Underwritten Shares to be issued and sold
by the Company pursuant to this Agreement and the International Underwriting
Agreement will be duly authorized and, when issued and delivered to the U.S.
Underwriters and Managers against payment therefor in accordance with the terms
hereof and thereof, will be validly issued, fully paid and nonassessable and
free of any preemptive or similar

<PAGE>

rights; and (iii) the capital stock of the Company will conform to the
description thereof in the Registration Statement and the Prospectuses.

(d) The Company is a corporation duly organized and validly existing
in good standing under the laws of the State of Delaware with full corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectuses, and is
duly registered and qualified to conduct its business and is in good standing in
each jurisdiction where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or qualify does not have a material adverse effect on the
financial condition, business, properties, net worth or results of operations of
the Company and the Subsidiaries (as hereinafter defined), taken as a whole (a
"Material Adverse Effect").

(e) All the Company's subsidiaries (as defined by Rule 1-02(x) of
Regulation S-X under the Act) other than Recumbrimientos Interceramica, S.A. de
C.V. ("RISA") (collectively, the "Subsidiaries") are listed in Exhibit 21.1 to
the Registration Statement. (i) Each Subsidiary is a corporation duly
organized, validly existing and in good standing in the jurisdiction of its
incorporation, with full corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the Registration
Statement and the Prospectuses, and is duly registered and qualified to conduct
its business and is in good standing in each jurisdiction or place where the
nature of its properties or the conduct of its business requires such
registration or qualification, except where the failure so to register or
qualify does not have a Material Adverse Effect; (ii) all the outstanding shares
of capital stock of each of the Subsidiaries have been duly authorized and
validly issued, are fully paid and nonassessable; and (iii) all the outstanding
shares of capital stock of each of the Subsidiaries are owned by the Company
directly, or indirectly through one or more of the other Subsidiaries, or
through a combination or both, free and clear of any lien, adverse claim,
security interest, equity or other encumbrance (collectively, "Liens") (other
than, in the case of Dal-Tile Group Inc., the Lien created under the Pledge
Agreement (as defined in the Prospectuses)).

any of the Subsidiaries, or to which any of their respective properties, is
subject that are required to be described in the Registration Statement or the
Prospectuses but are not described as required, and there are no agreements,
contracts, indentures, leases or other instruments relating to the Company that
are required to be described in the Registration Statement or the Prospectuses
or to be filed as an exhibit to the Registration Statement that are not
described or filed as required by the Act or the Exchange Act.

(g) Neither the Company nor any of the Subsidiaries is (i) in
violation of its certificate or articles of incorporation or by-laws, or other
organizational documents, (ii) in violation of any law, ordinance,
administrative or governmental rule or regulation applicable to the Company or
any of the Subsidiaries or of any decree of any court or governmental agency or
body having jurisdiction over the Company or any of the Subsidiaries, except
where any such violation or violations would not, individually or in the
aggregate, have a Material Adverse Effect, or (iii) in default in the
performance of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any other agreement,
indenture, lease or other instrument to which the Company or any of the
Subsidiaries is a party or by which any of them or any of their respective
properties may be bound, and no condition or state of facts exists, which with
the passage of time or the giving of notice or both, would constitute such a
default, except where any such default or defaults would not, individually or in
the aggregate, have a Material Adverse Effect.

(h) Neither the issuance and sale of the Underwritten Shares, the
consummation of the Common Stock Conversion, the execution, delivery or
performance of this Agreement, the International Underwriting Agreement and the
New Credit Facility (as hereinafter defined) (this Agreement and such other
agreements being referred to collectively as the "Transaction Agreements") by
the Company nor the consummation by the Company of the transactions contemplated
by the Transaction Agreements (i) requires any consent, approval, authorization
or other order of or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency or official (except
such as may be required for the registration of the Shares under the Act and the
Exchange Act and compliance with the securities or Blue Sky laws of various
jurisdictions, all of which have been or will be effected in accordance with
this Agreement, and except for consents, approvals, authorizations, orders,
registrations or filings with any court, regulatory body, administrative agency
or other
<PAGE>

governmental body, agency or official outside the United States which are
required by the securities laws of any such foreign jurisdiction and except for
the filing of the Second Amended and Restated Certificate of Incorporation of
the Company with the Secretary of State of the State of Delaware), (ii)
conflicts or will conflict with or constitutes or will constitute a breach of,
or a default under, the certificate or articles of incorporation or bylaws, or
other organizational documents, of the Company or any of the Subsidiaries, (iii)
conflicts or will conflict with or constitutes or will constitute a breach of,
or a default under, any agreement, indenture, lease or other instrument to which
the Company or any of the Subsidiaries is a party or by which any of them or any
of their respective properties may be bound, except for such conflicts, breaches
or defaults which would not, individually or in the aggregate, have a Material
Adverse Effect, (iv) violates or will violate any statute, law, regulation or
judgment, injunction, order or decree applicable to the Company or any of the
Subsidiaries or any of their respective properties, except for such violations
which would not, individually or in the aggregate, have a Material Adverse
Effect, or (v) will result in the creation or imposition of any Lien upon any
property or assets of the Company or any of the Subsidiaries pursuant to the
terms of any agreement or instrument to which any of them is a party or by which
any of them may be bound or to which any of the property or assets of any of
them is subject, except for such Liens which would not, individually or in the
aggregate, have a Material Adverse Effect.

(i) The accountants, Ernst & Young LLP, who have certified or shall
certify the financial statements included in the Registration Statement and the
Prospectuses (or any amendment or supplement thereto) are independent public
accountants as required by the Act.

on a basis consistent with such historical statements, except for the pro forma
--- -----
adjustments specified therein, and present fairly in all material respects the
historical and proposed transactions contemplated by the Prospectuses and the
Transaction Agreements, and, in the opinion of the Company, the assumptions used
in the preparation of such pro forma financial statements are reasonable and the
--- -----
adjustments used therein are appropriate to give effect to the transactions or
circumstances referred to therein. The other financial and statistical
information and data of the Company and the Subsidiaries and AO, as applicable,
included in the Registration Statement and the Prospectuses (and any amendment
or supplement thereto), historical and pro forma, are, in all material respects,
--- -----
prepared on a basis consistent with such financial statements and the books and
records of the Company and the Subsidiaries and AO, as applicable, and, with
respect to such historical financial and statistical information and data, are
accurate in all material respects.

(k) The execution and delivery of, and the performance by the Company
of its obligations under, each of the Transaction Agreements have been duly and
validly authorized by the Company, and each of the Transaction Agreements has
been duly executed and delivered by the Company and constitutes the valid and
legally binding agreement of the Company, enforceable against the Company in
accordance with its terms, except (i) the enforceability of such Transaction
Agreements may be limited by bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer, fraudulent conveyance, preferential transfer or other
similar laws now or hereafter in effect relating to creditors' rights generally
and may be subject to general principles of equity, regardless of whether such
enforceability is considered in a proceeding in equity or at law, and (ii)
rights to indemnity and contribution hereunder or under the International
Underwriting Agreement may be limited by federal or state securities laws or the
public policy underlying such laws.

change in the capital stock of the Company, or material increase in the short-
term debt or long-term debt, of the Company and the Subsidiaries taken as a
whole, and (iii) there has not been any development having or which could
reasonably be expected to have, a Material Adverse Effect.

(m) Each of the Company and the Subsidiaries has good and marketable
title to all real property and good title to all personal property described in
the Prospectuses as being owned by it, free and clear of all Liens except such
as are described in the Registration Statement and the Prospectuses or in a
document filed as an exhibit to the Registration Statement and except for such
Liens as would not, individually or in the aggregate, have a Material Adverse
Effect; and all the property described in the Prospectuses as being held under
lease by each of the Company and the Subsidiaries is held by it under valid,
subsisting and enforceable leases, except, with respect to each of the foregoing
representations in this paragraph (m), as would not have a Material Adverse
Effect.

(n) The Company has not distributed and, prior to the later to occur
of (i) the Closing Date or the Option Closing Date, if any, and (ii) completion
of the distribution of the Shares, will not distribute any offering material in
connection with the offering and sale of the Shares other than the Registration
Statement, the Prepricing Prospectuses, the Prospectuses or other materials, if
any, permitted by the Act.

(o) The Company and each of the Subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("Permits") as are necessary to own its respective properties and to
conduct its business in the manner described in the Prospectuses, except where
the failure to have any such Permit or Permits would not individually or in the
aggregate, have a Material Adverse Effect and subject to such qualifications as
may be set forth in the Prospectuses; the Company and each of the Subsidiaries
has fulfilled and performed all its material obligations with respect to such
Permits and no event has occurred that allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the holder of any such Permit, except where the
failure to fulfill or perform such obligations or the happening of any such
events with respect to such Permits would not, individually or in the aggregate,
have a Material Adverse Effect and subject in each case to such qualification as
may be set forth in the Prospectuses; and, except as described in the
Prospectuses, none of

<PAGE>

such Permits contains any restriction which, individually or in the aggregate,
could cause a Material Adverse Effect.

(p) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that: (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

(q) To the Company's knowledge, neither the Company nor any of its
Subsidiaries nor any employee or agent of the Company or any Subsidiary has made
any payment of funds of the Company or any Subsidiary or received or retained
any funds in violation of any law, rule or regulation, which payment, receipt or
retention of funds is of a character required to be disclosed in the
Prospectuses.

(r) The Company and each of the Subsidiaries have filed all material
tax returns required to be filed, which returns are true and correct in all
material respects, and neither the Company nor any Subsidiary is in default in
the payment of any taxes which were payable pursuant to said returns or any
assessments with respect thereto, except where such default or defaults would
not, individually or in the aggregate, have a Material Adverse Effect.

(s) Except as described in the Prospectuses and the Registration
Statement, no holder of any security of the Company has any right to require
registration of shares of Common Stock or any other security of the Company
because of the filing of the Registration Statement or consummation of the
transactions contemplated by this Agreement or the International Underwriting
Agreement, or otherwise. No such rights, if any, were exercised nor will be
exercised in connection with the sale of the Shares and for a period of 180 days
after the date hereof. Except as described in or contemplated by the
Prospectuses, there are no outstanding options, warrants or other rights calling
for the issuance of, and there are no commitments, plans or arrangements to
issue, any shares of Common Stock
<PAGE>

of the Company or any security convertible into or exchangeable or exercisable
for Common Stock of the Company.

(t) The Company and the Subsidiaries own or possess all patents,
trademarks, trademark registrations, service marks, service mark registrations,
trade names, copyrights, licenses, inventions, trade secrets and rights
described in the Prospectus as being owned by them or any of them or necessary
for the conduct of their respective businesses, except where the lack of such
ownership or possession would not, individually or in the aggregate, have a
Material Adverse Effect; and the Company is not aware of any claim to the
contrary or any challenge by any other person to the rights of the Company or
the Subsidiaries with respect to the foregoing which if upheld would,
individually or in the aggregate, have a Material Adverse Effect.

(u) (i) The Company and each of the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are customary in the businesses in which they are
engaged; (ii) all policies of insurance and fidelity or surety bonds insuring
the Company or any of the Subsidiaries or their respective businesses, assets,
employees, officers and directors are in full force and effect; (iii) the
Company and the Subsidiaries are in compliance with the terms of such policies
and instruments in all material respects; and (iv) there are no claims by the
Company or any of the Subsidiaries under any such policy or instrument as to
which any insurance company is denying liability or defending under a
reservation of rights clause, except, with respect to each of the foregoing
representations in this paragraph (u), as would not have a Material Adverse
Effect.

(v) The Company is not now and, upon sale of the Underwritten Shares
to be issued and sold in accordance herewith and with the International
Underwriting Agreement and upon application of the net proceeds to the Company
from such sale as described in the Prospectuses under the captions "Use of
Proceeds" and "Refinancing," will not be an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.

respects with all terms and conditions of, all permits, licenses, authorizations
or other approvals required of them under Environmental Laws to conduct their
respective businesses, except, in the case of each of clauses (i) and (ii), as
would not have a Material Adverse Effect.

Except as described in the Registration Statement and Prospectuses
(and any amendment or supplement thereto), there are no past or present actions
(including on-site and off-site disposal of Hazardous Substances (as hereinafter
defined)), omissions or conditions regarding the Company or the Subsidiaries or
any real property upon which any of them conduct their respective business
operations that have formed, or to the best knowledge of the Company after
reasonably inquiry are reasonably likely to form, the basis of any claim or
violation against the Company or any of the Subsidiaries (including releases or
discharges of Hazardous Substances) under Environmental Laws, except for claims
or violations that would not, individually or in the aggregate, have a Material
Adverse Effect.

In connection with establishing appropriate financial reserves for
environmental liabilities, the Company from time to time updates its estimates
of costs associated with the investigation, remediation and monitoring of
identified on-site and off-site disposal sites (as described in the Registration
Statement and Prospectuses (and any amendment or supplement thereto)). On the
basis of such updates, the Company has reasonably concluded that, based on
current, and reasonably anticipated future, Environmental Laws, any such
associated costs not reflected in its established reserves as of the latest date
of the Company's financial statements contained in the Prospectuses would not,
singly or in the aggregate, have a Material Adverse Effect.

As used herein, "Environmental Laws" means any and all applicable
foreign, federal, state or local laws, regulations, rules, ordinances, judgments
or decrees relating to the protection of human health, safety or the
environment, or to Hazardous Substances. As used herein, "Hazardous Substances"
means any and all explosive, radioactive, hazardous, toxic or otherwise
dangerous materials, pollutants, contaminants or wastes regulated pursuant to
Environmental Laws.

and regulations thereunder; and none of such documents or reports contained an
untrue statement of any material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, except, with respect to each of the foregoing representations in
this paragraph (x), as could not have a Material Adverse Effect.

(y) To the best knowledge of the Company, no labor problem exists
with its employees or with employees of any Subsidiary or, to the knowledge of
the Company, is imminent that could adversely affect the Company and the
Subsidiaries, considered as one enterprise, and the Company is not aware of any
existing or imminent labor disturbance by the employees of any of its or a
Subsidiary's principal suppliers, contractors or customers that could be
expected to have a Material Adverse Effect.

(z) The Company has complied with all provisions of Florida Statutes,
(S)517.075, relating to issuers doing business with Cuba.

(aa) The Company has taken all actions as are necessary and
appropriate to cause the Common Stock Conversion (the "Common Stock
Conversion"), as described in the Prospectuses under the caption "Description of
Capital Stock - Common Stock Conversion", to occur and all conditions precedent
to the consummation of the Common Stock Conversion, other than the filing of
Second Amended and Restated Certificate of Incorporation of the Company with the
Secretary of State of the State of Delaware and the closing of the offerings
contemplated by this Agreement and the International Underwriting Agreement,
have been satisfied.

(bb) On or prior to the closing hereunder on the Closing Date, the
Company will have entered into the New Bank Credit Agreement (as defined and
described in the Prospectuses) (the "New Credit Facility") in an aggregate
principal amount of $[ ], of which (i) $[ ] will be available on the Closing
Date to repay indebtedness as part of the Refinancing (as defined and described
in the Prospectuses under the captions "Use of Proceeds" and "The Refinancing"),
and (ii) at least $[ ] will be available on the Closing Date and thereafter
for general corporate purposes.

(cc) After the consummation of the Common Stock Conversion, the
Company will have an authorized, issued and outstanding capitalization as set
forth in the Registration Statement and Prospectuses.
<PAGE>

(dd) (i) To the knowledge of the Company, the representations and
warranties of the Company with respect to the Subsidiaries contained in
paragraph (e)(i) also apply to, and are true and correct in all respects
regarding, RISA (replacing references to "Subsidiary" or "Subsidiaries" with
RISA each place that they appear); (ii) nothing has come to the attention of the
Company that would lead the Company to believe that the representations and
warranties of the Company with respect to the Subsidiaries contained in each of
paragraphs e(ii), (f), (g), (h), (l)(iii), (m), (o), (q), (r), (t), (u) and (w)
also apply to, and are true and correct in all respects regarding, RISA
(replacing references to "Subsidiary" or "Subsidiaries" with RISA each place
that they appear and removing all knowledge qualifiers from such representations
and warranties); and (iii) the Company has the contractual right to acquire
49.99% of the outstanding shares of capital stock of RISA, free and clear of any
Liens other than Liens pursuant to (A) the Master Investment and Cooperation
Agreement, dated October 12, 1990, among Armstrong World Industries, Inc.,
American Cork Finance Corporation ("ACF"), RISA, International de Ceramica, S.A.
de C.V. and certain other parties and (B) the Trust Agreement by and between ACF
and Banco Nacional de Mexico S.N.C., dated October 17, 1990.

7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each of you and each other U.S. Underwriter and each
person, if any, who controls any U.S. Underwriter within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act from and against any and all
losses, claims, damages, liabilities and expenses (including reasonable costs of
investigation) arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in any U.S. Prepricing Prospectus
or in the Registration Statement or the U.S. Prospectus or in any amendment or
supplement thereto, or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages, liabilities or expenses arise out of or are based upon
any untrue statement or omission or alleged untrue statement or omission which
has been made therein or omitted therefrom in reliance upon and in conformity
with the information relating to such U.S. Underwriter or Manager furnished in
writing to the Company by or on behalf of any U.S. Underwriter through you or by
or on behalf of any Manager through a Lead Manager expressly for use in
connection therewith; provided, however, that the indemnification contained in
this paragraph (a) with respect to any U.S. Prepricing Prospectus shall not
inure to the benefit of any U.S. Underwriter (or to the benefit of any person
<PAGE>

controlling such U.S. Underwriter) on account of any such loss, claim, damage,
liability or expense arising from the sale of the Shares by such U.S.
Underwriter to any person if a copy of the U.S. Prospectus shall not have been
delivered or sent to such person within the time required by the Act and the
regulations thereunder, and the untrue statement or alleged untrue statement or
omission or alleged omission of a material fact contained in such U.S.
Prepricing Prospectus was corrected in the U.S. Prospectus, provided that the
Company has delivered the U.S. Prospectus to the several U.S. Underwriters in
requisite quantity on a timely basis to permit such delivery or sending. The
foregoing indemnity agreement shall be in addition to any liability which the
Company may otherwise have.

(b) If any action, suit or proceeding shall be brought against any
U.S. Underwriter or any person controlling any U.S. Underwriter in respect of
which indemnity may be sought against the Company, such U.S. Underwriter or such
controlling person shall promptly notify the parties against whom
indemnification is being sought (the "indemnifying parties"), and such
indemnifying parties shall assume the defense thereof, including the employment
of counsel and payment of all fees and expenses. Such U.S. Underwriter or any
such controlling person shall have the right to employ separate counsel in any
such action, suit or proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such U.S.
Underwriter or such controlling person unless (i) the indemnifying parties have
agreed in writing to pay such fees and expenses, (ii) the indemnifying parties
have failed to assume the defense and employ counsel, or (iii) the named parties
to any such action, suit or proceeding (including any impleaded parties) include
both such U.S. Underwriter or such controlling person and the indemnifying
parties and such U.S. Underwriter or such controlling person shall have been
advised by its counsel in writing that representation of such indemnified party
and any indemnifying party by the same counsel would be inappropriate under
applicable standards of professional conduct (whether or not such representation
by the same counsel has been proposed) due to actual or potential differing
interests between them (in which case the indemnifying party shall not have the
right to assume the defense of such action, suit or proceeding on behalf of such
U.S. Underwriter or such controlling person). It is understood, however, that
the indemnifying parties shall, in connection with any one such action, suit or
proceeding or separate but substantially similar or related actions, suits or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the reasonable fees and expenses of only one
separate firm of attorneys (in
<PAGE>

addition to any local counsel) at any time for all such U.S. Underwriters and
controlling persons not having actual or potential differing interests with you
or among themselves, which firm shall be designated in writing by Smith Barney
Inc., and that all such fees and expenses shall be reimbursed as they are
incurred. The indemnifying parties shall not be liable for any settlement of
any such action, suit or proceeding effected without their written consent, but
if settled with such written consent, or if there be a final judgment for the
plaintiff in any such action, suit or proceeding, the indemnifying parties agree
to indemnify and hold harmless any U.S. Underwriter and any such controlling
person, to the extent provided in the preceding paragraph, from and against any
loss, claim, damage, liability or expense by reason of such settlement or
judgment.

(c) Each U.S. Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement and any person who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the
same extent as the foregoing indemnity from the Company to each U.S.
Underwriter, but only with respect to information relating to such U.S.
Underwriter furnished in writing by or on behalf of such U.S. Underwriter
through you expressly for use in the Registration Statement, the U.S. Prospectus
or any U.S. Prepricing Prospectus, or any amendment or supplement thereto. If
any action, suit or proceeding shall be brought against the Company, any of its
directors, any such officer or any such controlling person based on the
Registration Statement, the U.S. Prospectus or any U.S. Prepricing Prospectus,
or any amendment or supplement thereto, and in respect of which indemnity may be
sought against any U.S. Underwriter pursuant to this paragraph (c), such U.S.
Underwriter shall have the rights and duties given to the Company by paragraph
(b) above (except that if the Company shall have assumed the defense thereof
such U.S. Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof, but the fees and
expenses of such counsel shall be at such U.S. Underwriter's expense), and the
Company, its directors, any such officer, and any such controlling person shall
have the rights and duties given to the U.S. Underwriters by paragraph (b)
above. The foregoing Indemnity agreement shall be in addition to any liability
which any U.S. Underwriter may otherwise have.

(d) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
<PAGE>

respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the U.S. Underwriters on the other hand from the
offering of the Shares, or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of the Company on the one hand and the U.S. Underwriters on
the other hand in connection with the statements or omissions that resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the U.S. Underwriters on the other hand shall be
deemed to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the U.S. Underwriters, in
each case as set forth in the table on the cover page of the U.S. Prospectus;
provided, however, that, in the event that the U.S. Underwriters shall have
- -------- -------
purchased any Additional Shares hereunder, any determination of the relative
benefits received by the Company or the U.S. Underwriters from the offering of
the Shares shall include the net proceeds (before deducting expenses) received
by the Company, and the underwriting discounts and commissions received by the
U.S. Underwriters, from the sale of such Additional Shares, in each case
computed on the basis of the respective amounts set forth in the notes to the
table on the cover page of the U.S. Prospectus. The relative fault of the
Company on the one hand and the U.S. Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or by the U.S. Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.

(e) The Company and the U.S. Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined by
a pro rata allocation (even if the U.S. Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in paragraph (d) above. The
amount paid or payable by an indemnified party as
<PAGE>

a result of the losses, claims, damages, liabilities and expenses referred to in
paragraph (d) above shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating any claim or defending any such action,
suit or proceeding. Notwithstanding the provisions of this Section 7, no U.S.
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price of the Shares underwritten by it and distributed to the
public exceeds the amount of any damages which such U.S. Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The U.S. Underwriters' obligations to contribute pursuant to
this Section 7 are several in proportion to the respective numbers of Firm
Shares set forth opposite their names in Schedule I hereto (or such numbers of
Firm Shares increased as set forth in Section 10 hereof) and not joint.

(f) No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such action, suit or proceeding.

(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 7 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any U.S. Underwriter or any person
controlling any U.S. Underwriter, the Company, its directors or officers or any
person controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor to
any U.S. Underwriter or any person controlling any U.S. Underwriter, or to the
Company, its directors or officers or any person controlling the Company, shall
be entitled to the
<PAGE>

benefits of the indemnity, contribution and reimbursement agreements contained
in this Section 7.

8. CONDITIONS OF U.S. UNDERWRITERS' OBLIGATIONS. The several
obligations of the U.S. Underwriters to purchase the Firm Shares and the
Additional Shares, as applicable, hereunder are subject to the following
conditions:

(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
Registration Statement or such post-effective amendment shall have become
effective not later than 5:30 p.m. New York City time, on the date hereof, or at
such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall have been
timely made; no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceeding for that purpose shall have
been instituted or, to the knowledge of the Company or any U.S. Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectuses or
otherwise) shall have been complied with to your reasonable satisfaction.

(b) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change, or any development involving a prospective
change, in or affecting the condition (financial or other), business,
properties, net worth or results of operations of the Company or the
Subsidiaries not contemplated by the Prospectuses, which in your opinion, as
Representatives of the several U.S. Underwriters, would materially, adversely
affect the market for the Shares, or (ii) any event or development relating to
or involving the Company or any officer or director of the Company which makes
any statement made in the Prospectuses untrue or which, in the opinion of the
Company and its counsel or the U.S. Underwriters and their counsel, requires the
making of any addition to or change in the Prospectuses in order to state a
material fact required by the Act or any other United States law to be stated
therein or necessary in order to make the statements therein not misleading, if
amending or supplementing the Prospectuses to reflect such event or development
would, in your opinion, as Representatives of the several U.S. Underwriters,
materially adversely affect the market for the Shares.
<PAGE>

(c) You shall have received on the Closing Date, an opinion of Fried,
Frank, Harris, Shriver & Jacobson, (a partnership including professional
corporations), counsel for the Company, dated the Closing Date and addressed to
you, as Representatives of the several U.S. Underwriters, in substantially the
form attached hereto as Annex I.

(d) You shall have received on the Closing Date, an opinion of
Consultoria Juridicia Mercantil, S.A. de C.V., counsel for Materiales Ceramicos,
S.A. de C.V. and Dal-Tile Mexico, S.A. de C.V., dated the Closing Date and
addressed to you, as Representatives of the several U.S. Underwriters, in
substantially the form attached hereto as Annex II.

(e) You shall have received on the Closing Date an opinion and a Rule
10b-5 statement of Cravath, Swaine & Moore, counsel for the U.S. Underwriters,
dated the Closing Date and addressed to you, as Representatives of the several
U.S. Underwriters, with respect to all matters as you may reasonably request.

(f) You shall have received letters addressed to you, as
Representatives of the several U.S. Underwriters, and dated the date hereof and
the Closing Date from Ernst & Young LLP, independent certified public
accountants, substantially in the forms heretofore approved by you.

the representations and warranties of the Company contained in this Agreement
that is qualified as to materiality shall be true and correct, and each of the
representations and warranties of the Company that is not so qualified as to
materiality shall be true and correct in all material respects, on and as of the
date hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and you shall have received a certificate, dated the Closing Date
and signed by the chief executive officer and the chief financial officer of the
Company (or such other officers as are acceptable to you), to the effect set
forth in this Section 8(g) and in Section 8(h) hereof.

(h) The Company shall not have failed at or prior to the Closing Date
to have performed or complied with, in all material respects, any of its
agreements herein contained and required to be performed or complied with by it
hereunder at or prior to the Closing Date.

(i) The Company shall have furnished or caused to be furnished to you
such further certificates and documents as you shall have reasonably requested.

(j) The Common Stock shall have been listed or approved for listing,
subject to notice of issuance, on the New York Stock Exchange.

(k) The closing under the International Underwriting Agreement shall
have occurred concurrently with the closing hereunder on the Closing Date.

(l) The Company shall have furnished or caused to be furnished to you
evidence that the Common Stock Conversion shall have occurred [at or before the
date hereof] [concurrently with the closing hereunder on the Closing Date].

(m) The Company shall have furnished or caused to be furnished to you
the lock-up letters referred to in Section 5(n) hereto on or prior to the
Closing Date.

(n) Concurrent with the Closing hereunder on the Closing Date, the
Company shall have entered into the New Credit Facility and have borrowed funds
under the New Credit Facility that, together with the proceeds from the
offerings contemplated by this Agreement and the International Underwriting
Agreement and other cash on-hand available to the Company, will be sufficient to
consummate the transactions described
<PAGE>

under the captions "Use of Proceeds" and "The Refinancing" in the Prospectuses.

All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to you and your counsel.

Any certificate or document signed by any officer of the Company and
delivered to you, as Representatives of the U.S. Underwriters, or to counsel for
the U.S. Underwriters, shall be deemed a representation and warranty by the
Company to each U.S. Underwriter as to the statements made therein.

The several obligations of the U.S. Underwriters to purchase
Additional Shares hereunder are subject to the satisfaction on and as of the
Option Closing Date of the conditions set forth in this Section 8, except that,
if the Option Closing Date is other than the Closing Date, the certificates,
opinions and letters referred to in paragraphs (c) through (i) shall be dated
the Option Closing Date and the opinions called for by paragraphs (c), (d) and
(e) shall be revised to reflect the sale of Additional Shares.

9. EXPENSES. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by the
Company of its obligations hereunder: (i) the preparation, printing or
reproduction, and filing with the Commission of the registration statement
(including financial statements and exhibits thereto), each Prepricing
Prospectus, the Prospectuses, and each amendment or supplement to any of them;
(ii) the printing (or reproduction) and delivery (including postage, air freight
charges and charges for counting and packaging) of such copies of each
registration statement (including the Registration Statement), each Prepricing
Prospectus, the Prospectuses, and all amendments or supplements to any of them
as may be reasonably requested for use in connection with the offering and sale
of the Shares; (iii) the preparation, printing, authentication, issuance and
delivery of certificates for the Shares, including any stamp taxes in connection
with the original issuance and sale of the Shares; (iv) the printing (or
reproduction) and delivery of the preliminary and supplemental Blue Sky
Memoranda in connection with the offering of the Shares; (v) the registration of
the Shares under the Exchange Act and the listing of the Shares on the New York
Stock Exchange; (vi) the registration or qualification of the Shares for offer
and sale under the securities or Blue Sky laws of the several states as provided
in Section 5(g) hereof (including the
<PAGE>

reasonable fees, expenses and disbursements of counsel for the U.S. Underwriters
and Managers relating to the preparation, printing or reproduction, and delivery
of the preliminary and supplemental Blue Sky Memoranda and such registration and
qualification); (vii) the filing fees and the reasonable fees and expenses of
counsel for the U.S. Underwriters and Managers in connection with any filings
required to be made with the National Association of Securities Dealers, Inc.;
(viii) the transportation and other expenses incurred by or on behalf of
representatives of the Company (which does not include the U.S. Underwriters or
the Managers or their representatives) in connection with presentations to
prospective purchasers of the Shares; and (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel) for the Company.

10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the Registration Statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the Registration Statement or such post-
effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Company,
by notifying you, or by you, as Representatives of the several U.S.
Underwriters, by notifying the Company.

If any one or more of the U.S. Underwriters shall fail or refuse to
purchase Shares which it or they are obligated to purchase hereunder on the
Closing Date, and the aggregate number of Shares which such defaulting U.S.
Underwriter or U. S. Underwriters are obligated but fail or refuse to purchase
is not more than one-tenth of the aggregate number of Shares which the U.S.
Underwriters are obligated to purchase on the Closing Date, each non-defaulting
U.S. Underwriter shall be obligated, severally, in the proportion which the
number of Firm Shares set forth opposite its name in Schedule I hereto bears to
the aggregate number of Firm Shares set forth opposite the names of all non-
defaulting U.S. Underwriters or in such other proportion as you may specify in
accordance with Section 20 of the Master Agreement Among Underwriters of Smith
Barney Inc., to purchase the Shares which such defaulting U.S. Underwriter or
U.S. Underwriters are obligated, but fail or refuse, to purchase. If any one or
more of the U.S. Underwriters shall fail or refuse to purchase Shares which it
or they are obligated to purchase on the Closing Date and the aggregate number
of
<PAGE>

Shares with respect to which such default occurs is more than one-tenth of the
aggregate number of Shares which the U.S. Underwriters are obligated to purchase
on the Closing Date and arrangements satisfactory to you and the Company for the
purchase of such Shares by one or more non-defaulting U.S. Underwriters or other
party or parties approved by you and the Company are not made within 36 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting U.S. Underwriter or the Company. In any such case which
does not result in termination of this Agreement, either you or the Company
shall have the right to postpone the Closing Date, but in no event for longer
than seven days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected. Any action taken under this paragraph shall not relieve any defaulting
U.S. Underwriter from liability in respect of any such default of any such U.S.
Underwriter under this Agreement. The term "U.S. Underwriter" as used in this
Agreement includes, for all purposes of this Agreement, any party not listed in
Schedule I hereto who, with your approval and the approval of the Company,
purchases Shares which a defaulting U.S. Underwriter is obligated, but fails or
refuses, to purchase.

Any notice under this Section 10 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.

11. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
U.S. Underwriter to the Company, by notice to the Company, if prior to the
Closing Date or the Option Closing Date (if different from the Closing Date and
then only as to the Additional Shares), as the case may be, (i) trading in
securities generally on the New York Stock Exchange, the American Stock Exchange
or the Nasdaq National Market shall have been suspended or materially limited,
(ii) a general moratorium on commercial banking activities in New York or Texas
shall have been declared by either federal or state authorities, or (iii) there
shall have occurred any outbreak or escalation of hostilities or other
international or domestic calamity, crisis or change in political, financial or
economic conditions, the effect of which on the financial markets of the United
States is such as to make it, in your judgment, impracticable or inadvisable to
commence or continue the offering of the Shares at the offering price to the
public set forth on the cover page of the U.S. Prospectus or to enforce
contracts for the resale of the Shares by the U.S. Underwriters.

<PAGE>

Notice of such termination may be given to the Company by telegram,
telecopy or telephone and shall be subsequently confirmed by letter.

12. INFORMATION FURNISHED BY THE U.S. UNDERWRITERS. The statements
set forth in the last paragraph on the cover page, the stabilization legend on
the inside front cover page, and the statements in the first, second, fourth,
ninth, tenth, eleventh, twelfth, thirteenth (except to the extent that such
paragraph relates to actions taken, or to be taken, by the Company) and
fifteenth paragraphs, and the third sentence of the sixth paragraph, under the
caption "Underwriting" in any U.S. Prepricing Prospectus and in the U.S.
Prospectus constitute the only information furnished by or on behalf of the U.S.
Underwriters through you as such information is referred to in Sections 6(a),
6(b) and 7 hereof.

13. MISCELLANEOUS. Except as otherwise provided in Sections 5, 10
and 11 hereof, notice given pursuant to any provision of this Agreement shall be
in writing and shall be delivered (i) if to the Company, at the office of the
Company at Dal-Tile International Inc., 7834 Hawn Freeway, Dallas, TX 75217,
Attention: Carlos E. Sala, Chief Financial Officer; or (ii) if to you, as
Representatives of the several U.S. Underwriters, care of Smith Barney Inc., 388
Greenwich Street, New York, New York 10013, Attention: Manager, Investment
Banking Division.

This Agreement has been and is made solely for the benefit of the
several U.S. Underwriters, the Company, its directors and officers, and the
other controlling persons referred to in Section 7 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the
term "successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any U.S. Underwriter of any of the Shares in his
status as such purchaser.

14. APPLICABLE LAW; COUNTERPARTS. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE
TO CONTRACTS MADE AND TO BE PERFORMED WITHIN THE STATE OF NEW YORK.

This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart
<PAGE>

hereof shall have been executed and delivered on behalf of each party hereto.

Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several U.S. Underwriters.

Very truly yours,

DAL-TILE INTERNATIONAL INC.

By
--------------------------------
Name: Carlos E. Sala
Title: Chief Financial Officer

Confirmed as of the date first
above mentioned on behalf of
themselves and the other several U.S.
Underwriters named in Schedule I
hereto.

SMITH BARNEY INC.
DILLON, READ & CO. INC.
GOLDMAN, SACHS & CO.
MORGAN STANLEY & CO. INCORPORATED

As Representatives of the Several U.S. Underwriters

By SMITH BARNEY INC.

By ____________________________
Name:
Title:
<PAGE>

SCHEDULE I

DAL-TILE INTERNATIONAL INC.

Number of
Underwriter Firm Shares
- ----------- -----------

Smith Barney Inc.

Dillon, Read & Co. Inc.

Goldman, Sachs & Co.

Morgan Stanley & Co.
Incorporated

[ ]

[ ] ________

Total ........... 5,600,000
=========
<PAGE>

[CS&M Draft--8/07/96]

1,400,000 SHARES

DAL-TILE INTERNATIONAL INC.

COMMON STOCK

INTERNATIONAL UNDERWRITING AGREEMENT
------------------------------------

August [ ] , 1996

SMITH BARNEY INC.
DILLON, READ & CO. INC.
GOLDMAN SACHS INTERNATIONAL
MORGAN STANLEY & CO. INTERNATIONAL LIMITED

As Lead Managers for the several Managers

c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013

Ladies and Gentlemen:

Dal-Tile International Inc., a Delaware corporation (the "Company"),
proposes to issue and sell an aggregate of 1,400,000 shares of its common stock,
par value $0.01 per share (the "Shares"), to the several Underwriters named in
Schedule I hereto (the "Managers") for whom Smith Barney Inc., Dillon, Read &
Co. Inc., Goldman Sachs International and Morgan Stanley & Co. International
Limited are acting as representatives (the "Lead Managers"). The Company's
common stock, par value $0.01 per share, including the Shares and the U.S.
Shares (as defined herein), is hereinafter referred to as the "Common Stock".

It is understood that the Company is currently entering into a U.S.
Underwriting Agreement, dated the date hereof (the "U.S. Underwriting
<PAGE>

Agreement"), providing for the sale of 5,600,000 shares of the Common Stock by
the Company (the "Firm U.S. Shares") (plus an option granted by the Company to
purchase up to an additional 1,050,000 shares of Common Stock (the "Additional
U.S. Shares") solely for the purpose of covering over-allotments) through
arrangements with certain underwriters in the United States and Canada (the
"U.S. Underwriters"), for whom Smith Barney Inc., Dillon, Read & Co. Inc.,
Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated are acting as
representatives (the "Representatives"). All shares of Common Stock proposed to
be offered to the U.S. Underwriters pursuant to the U.S. Underwriting Agreement,
including the Firm Shares and the Additional U.S. Shares, are herein called the
"U.S. Shares". The U.S. Shares and the Shares, collectively, are herein called
the "Underwritten Shares".

The Company also understands that the Lead Managers and the
Representatives have entered into an agreement (the "Agreement Between U.S.
Underwriters and Managers") contemplating the coordination of certain
transactions between the Managers and the U.S. Underwriters and that, pursuant
thereto and subject to the conditions set forth therein, the Managers may
purchase from the U.S. Underwriters a portion of the U.S. Shares or sell to the
U.S. Underwriters a portion of the Shares. The Company understands that any
such purchases and sales between the Managers and the U.S. Underwriters shall be
governed by the Agreement Between U.S. Underwriters and Managers and shall not
be governed by the terms of this Agreement or the U.S. Underwriting Agreement.

The Company wishes to confirm as follows its respective agreements
with you and the other several Managers on whose behalf you are acting, in
connection with the several purchases of the Shares by the Managers.

It is understood that two forms of Prepricing Prospectus and two forms
of Prospectus are to be used in connection with the offering and sale of the
Underwritten Shares: a Prepricing Prospectus and a Prospectus relating to the
U.S. Shares that are to be offered and sold in the United States (as defined
herein) or Canada (as defined herein) to U.S. or Canadian Persons (the "U.S.
Prepricing Prospectus" and the "U.S. Prospectus", respectively), and a
Prepricing Prospectus and a Prospectus relating to the Shares which are to be
offered and sold outside the United States or Canada to persons other than U.S.
or Canadian Persons (the "International Prepricing Prospectus" and the
"International Prospectus", respectively). The U.S. Prospectus and the
International Prospectus are herein collectively called the "Prospectuses," and
the U.S. Prepricing Prospectus and the International Prepricing Prospectus are
herein called the "Prepricing Prospectuses". For purposes of this Agreement:
"Rules and Regulations" means the rules and regulations adopted by the
Commission under either the Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as applicable; "U.S. or Canadian Person" means any
resident or national of the United States or Canada, any corporation,
partnership or other entity created or organized in or under the laws of the
United States or Canada or any estate or trust the income of which is subject to
United States or Canadian income taxation regardless of the source of its income
(other than the foreign branch of any U.S. or Canadian Person), and includes any
United States or Canadian branch of a person other than a U.S. or Canadian
Person; "United States"
<PAGE>

2. AGREEMENTS TO SELL AND PURCHASE. Upon the basis of the
representations, warranties and agreements of the Managers contained herein and
subject to all the terms and conditions set forth herein, the Company hereby
agrees to issue and sell to each Manager and, upon the basis of the
representations, warranties and agreements of the Company contained herein and
subject to all the terms and conditions set forth herein, each Manager agrees,
severally and not jointly, to purchase from the Company, at a purchase price of
$ [ ] per share (the "purchase price per share"), the number of Shares set
forth opposite the name of such Manager in Schedule I hereto (or such number of
Shares increased as set forth in Section 10 hereof).

Each Manager represents, warrants, covenants and agrees that, except
as contemplated under Section 2 of the Agreement Between U.S. Underwriters and
Managers dated the date hereof, (i) it is not purchasing any Shares for the
account of any U.S. or Canadian Person, (ii) it has not offered or sold, and
will not offer, sell, resell or deliver, directly or indirectly, any Shares or
distribute any International Prospectus to any U.S. or Canadian Person, and
(iii) any offer of Shares will be made only in compliance with all relevant
requirements of all applicable laws.

3. TERMS OF PUBLIC OFFERING. The Company has been advised by you
that the Managers propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Shares upon the terms set forth in the International Prospectus.

4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the
Managers of and payment for the Shares shall be made at the office of [Fried,
Frank, Harris, Shriver & Jacobson (a partnership including professional
corporations), One New York Plaza, New York, NY 10004-1980 [the location of the
New Credit Facility Closing]], at 10:00 a.m., New York City time, on August
[ ], 1996 (the "Closing Date"). The place of closing for the Shares and the
Closing Date may be varied by agreement between you and the Company.
<PAGE>

Certificates for the Shares to be purchased hereunder shall be
registered in such names and in such denominations as you shall request by
written notice (it being understood that a facsimile transmission shall be
deemed written notice) prior to 9:30 a.m., New York City time, on the second
business day preceding the Closing Date. Such certificates shall be made
available to you in New York City for inspection and packaging not later than
9:30 a.m., New York City time, on the business day next preceding the Closing
Date. The certificates, and stockpowers, if applicable, evidencing the Shares
to be purchased hereunder shall be delivered to you on the Closing Date against
payment of the purchase price therefor in immediately available funds.

5. AGREEMENTS OF THE COMPANY. The Company agrees with the several
Managers as follows:

(b) The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission for
amendment of or a supplement to the Registration Statement, any Prepricing
Prospectuses or the Prospectuses or for additional information; (ii) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; and (iii) within the period of time referred to in paragraph (f)
below, of any change in the Company's condition (financial or other), business,
properties, net worth or results of operations, or of the happening of any
event, including the filing of any information, documents or reports pursuant to
the Exchange Act, that (x) makes any statement of a material fact made in the
Registration Statement untrue or which requires the making of any additions to
or changes in the Registration Statement in order to state a material fact
required by the Act to be stated therein or necessary in order to make the
statements therein not misleading, or (y) makes any statement of a material
<PAGE>

fact made in the Prospectuses (as then amended or supplemented) untrue or which
requires the making of any additions or changes in the Prospectuses (as then
amended or supplemented) in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, or of the
necessity to amend or supplement the Prospectuses (as then amended or
supplemented) to comply with the Act or any other United States law. If at any
time the Commission shall issue any stop order suspending the effectiveness of
the Registration Statement, the Company will make every reasonable effort to
obtain the withdrawal of such order at the earliest possible time. Each Manager
hereby agrees to use its reasonable efforts not to deliver any Prepricing
Prospectus or Prospectus after receipt of notice described in the first sentence
of this paragraph until the Company shall have taken corrective action.

(d) The Company will not (i) file any amendment to the Registration
Statement, any Rule 462(b) Registration Statement or amendment thereto, or make
any amendment or supplement to the Prospectuses of which you shall not
previously have been advised or to which you shall reasonably object after being
so advised or (ii) so long as, in the written opinion of counsel for the
Managers, an International Prospectus is required to be delivered in connection
with sales by any Manager or dealer, file any information, documents or reports
pursuant to the Exchange Act, without delivering a copy of such information,
documents or reports to you, as Lead Managers for the Managers, prior to or
concurrently with such filing.

(e) Prior to the execution and delivery of this Agreement, the
Company has delivered to you, without charge, in such quantities as you have
requested, copies of each form of the International Prepricing Prospectus.
Subject to the final sentence of Section 5(b) hereof, the
<PAGE>

Company consents to the use, in accordance with the provisions of the Act and
with the securities laws of the jurisdictions in which the Shares are offered by
the several Managers and by dealers, prior to the date of the International
Prospectus, of each International Prepricing Prospectus so furnished by the
Company.

(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the written
opinion of counsel for the Managers an International Prospectus is required by
the Act to be delivered in connection with sales by any Manager or dealer, the
Company will expeditiously deliver to each Manager and each dealer, without
charge, as many copies of the International Prospectus (and of any amendment or
supplement thereto) as you may request. The Company consents to the use of the
International Prospectus (and of any amendment or supplement thereto) in
accordance with the provisions of the Act and with the securities laws of the
jurisdictions in which the Shares are offered by the several Managers and by all
dealers to whom Shares may be sold, both in connection with the offering and
sale of the Shares and for such period of time thereafter as the International
Prospectus is required by the Act to be delivered in connection with sales by
any Manager or dealer. If during such period of time any event shall occur that
in the reasonable judgment of the Company or in the written opinion of counsel
for the Managers is required to be set forth in the International Prospectus (as
then amended or supplemented) or should be set forth therein in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary to supplement or amend the
International Prospectus to comply with the Act or any other United States law,
the Company will forthwith prepare and, subject to the provisions of paragraph
(d) above, file with the Commission an appropriate supplement or amendment
thereto and will expeditiously furnish to the Managers and dealers a reasonable
number of copies thereof. Each Manager agrees that upon the receipt of any
supplement or amendment to the International Prospectus it will not deliver any
such International Prospectus other than as supplemented or amended. In the
event that the Company and you, as Lead Managers for the several Managers, agree
that the International Prospectus should be amended or supplemented, the
Company, if reasonably requested by you, will promptly issue a press release
announcing or disclosing the matters to be covered by the proposed amendment or
supplement.

(g) The Company will cooperate with you and with counsel for the
Managers in connection with the registration or qualification of the
<PAGE>

Shares for offering and sale by the several Managers and by dealers under the
securities laws of such jurisdictions as you may reasonably designate and will
file such consents to service of process or other documents reasonably necessary
or appropriate in order to effect such registration or qualification; provided
that in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action that would
subject it to service of process in suits, other than those arising out of the
offering or sale of the Shares, in any jurisdiction where it is not now so
subject.

(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 hereof or by notice given by you terminating this
Agreement pursuant to Section 10 or Section 11 hereof) or if this Agreement
shall be terminated by the Managers because of any failure or refusal on the
part of the Company to comply with the terms or fulfill any of the conditions of
this Agreement, the Company agrees to reimburse the Lead Managers for all
reasonable out-of-pocket expenses (including reasonable fees and expenses of
counsel for the Managers) incurred by you in connection herewith.

(k) The Company will apply the net proceeds from the sale of the
Shares to be sold by it hereunder substantially in accordance with the
description set forth in the Prospectuses.
<PAGE>

(l) If Rule 430A of the Act is employed, the Company will timely file
the Prospectuses pursuant to Rule 424(b) under the Act and will advise you of
the time and manner of such filing.

(m) Except as provided in this Agreement, for a period of 180 days
after the date hereof (the "Lock-up Period"), the Company will not, without the
prior written consent of Smith Barney Inc., offer, sell, contract to sell or
otherwise dispose of any Common Stock (or any securities convertible into or
exercisable or exchangeable for Common Stock), or grant any options or warrants
to purchase Common Stock, except for the sale of Shares to the Managers pursuant
to this Agreement and the U.S. Underwriters pursuant to the U.S. Underwriting
Agreement; provided, however, that notwithstanding the foregoing, the Company
-------- -------
may sell, contract to sell or grant options to purchase Common Stock pursuant to
any employee stock option plan or benefit plan or arrangement in effect on the
date hereof and may offer, issue and sell Common Stock issuable under options or
warrants outstanding on the date hereof or granted pursuant to an employee stock
option plan or benefit plan in effect on the date hereof.

(o) Except as stated in this Agreement and in the U.S. Underwriting
Agreement and in the Prepricing Prospectuses and Prospectuses, the Company has
not taken, nor will it take, directly or indirectly, any action designed to or
that could reasonably be expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Shares.

6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Manager that:

when so filed in all material respects with the provisions of the Act, except
that this representation and warranty does not apply to statements in or
omissions from such U.S. Prepricing Prospectus (or any amendment or supplement
thereto) made in reliance upon and in conformity with information relating to
any U.S. Underwriter or Manager furnished to the Company in writing by a U.S.
Underwriter through the Representatives or by a Manager through the Lead
Managers expressly for use therein. The Commission has not issued any order
preventing or suspending the use of any Prepricing Prospectus.

(b) The Registration Statement in the form in which it became or
becomes effective and also in such form as it may be when any post-effective
amendment thereto or any Rule 462(b) Registration Statement or amendment
thereto shall become effective and the U.S. Prospectus and any supplement or
amendment thereto when filed with the Commission under Rule 424(b) under the
Act, complied or will comply in all material respects with the provisions of the
Act and did not or will not at any such times contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; except that this
representation and warranty does not apply to statements in or omissions from
the Registration Statement or the Prospectuses made in reliance upon and in
conformity with information relating to any Manager or U.S. Underwriter
furnished to the Company in writing by a Manager through the Lead Managers or by
a U.S. Underwriter through the Representatives expressly for use therein.

(c) Upon consummation of the Common Stock Conversion: (i) all the
outstanding shares of Common Stock of the Company will be duly authorized and
validly issued, will be fully paid and nonassessable and will be free of any
preemptive or similar rights; (ii) the Underwritten Shares to be issued and sold
by the Company pursuant to this Agreement and the U.S. Underwriting Agreement
will be duly authorized and, when issued and delivered to the Managers and U.S.
Underwriters against payment therefor in accordance with the terms hereof and
thereof, will be validly issued, fully paid and nonassessable and free of any
preemptive or similar rights; and (iii) the capital stock of the Company will
conform to the description thereof in the Registration Statement and the
Prospectuses.

to conduct its business as described in the Registration Statement and the
Prospectuses, and is duly registered and qualified to conduct its business and
is in good standing in each jurisdiction where the nature of its properties or
the conduct of its business requires such registration or qualification, except
where the failure so to register or qualify does not have a material adverse
effect on the financial condition, business, properties, net worth or results of
operations of the Company and the Subsidiaries (as hereinafter defined), taken
as a whole (a "Material Adverse Effect").

(f) Other than as set forth in the Prospectuses (or any amendment or
supplement thereto), there are no legal or governmental proceedings pending or,
to the knowledge of the Company, threatened, against the Company or any of the
Subsidiaries or to which the Company or any of the Subsidiaries, or to which any
of their respective properties, is subject that are required to be described in
the Registration Statement or the Prospectuses but are not described as
required, and there are no agreements, contracts, indentures, leases or other
instruments relating to the Company that are required to be described in the
Registration Statement or

<PAGE>

the Prospectuses or to be filed as an exhibit to the Registration Statement
that are not described or filed as required by the Act or the Exchange Act.

(h) Neither the issuance and sale of the Underwritten Shares, the
consummation of the Common Stock Conversion, the execution, delivery or
performance of this Agreement, the U.S. Underwriting Agreement and the New
Credit Facility (as hereinafter defined) (this Agreement and such other
agreements being referred to collectively as the "Transaction Agreements") by
the Company nor the consummation by the Company of the transactions contemplated
by the Transaction Agreements (i) requires any consent, approval, authorization
or other order of or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency or official (except
such as may be required for the registration of the Shares under the Act and the
Exchange Act and compliance with the securities or Blue Sky laws of various
jurisdictions, all of which have been or will be effected in accordance with
this Agreement, and except for consents, approvals, authorizations, orders,
registrations or filings with any court, regulatory body, administrative agency
or other governmental body, agency or official outside the United States which
are required by the securities laws of any such foreign jurisdiction and except
for the filing of the Second Amended and Restated Certificate of Incorporation
of the Company with the Secretary of State of the State of Delaware), (ii)
conflicts or will conflict with or constitutes or will constitute a breach of,
or a default under, the
<PAGE>

certificate or articles of incorporation or bylaws, or other organizational
documents, of the Company or any of the Subsidiaries, (iii) conflicts or will
conflict with or constitutes or will constitute a breach of, or a default under,
any agreement, indenture, lease or other instrument to which the Company or any
of the Subsidiaries is a party or by which any of them or any of their
respective properties may be bound, except for such conflicts, breaches or
defaults which would not, individually or in the aggregate, have a Material
Adverse Effect, (iv) violates or will violate any statute, law, regulation or
judgment, injunction, order or decree applicable to the Company or any of the
Subsidiaries or any of their respective properties, except for such violations
which would not, individually or in the aggregate, have a Material Adverse
Effect, or (v) will result in the creation or imposition of any Lien upon any
property or assets of the Company or any of the Subsidiaries pursuant to the
terms of any agreement or instrument to which any of them is a party or by which
any of them may be bound or to which any of the property or assets of any of
them is subject, except for such Liens which would not, individually or in the
aggregate, have a Material Adverse Effect.

(j) The consolidated historical and pro forma financial statements of
--- -----
the Company and the Ceramic Tile Operations of Armstrong World Industries, Inc.
("AO"), together with related schedules and notes, set forth in the Registration
Statement and the Prospectuses (and any amendment or supplement thereto) comply
as to form in all material respects with the requirements of the Act. Such
historical financial statements fairly present in all material respects the
consolidated financial position of the Company and the Subsidiaries and AO, as
applicable, at the respective dates indicated and the results of their
operations and their cash flows for the respective periods indicated, in
accordance with generally accepted accounting principles consistently applied
throughout such periods except as disclosed therein. Such pro forma financial
--- -----
statements have been prepared on a basis consistent with such historical
statements, except for the pro forma adjustments specified therein, and present
--- -----
fairly in all material respects the historical and proposed transactions
contemplated by the Prospectuses and the Transaction Agreements, and, in the
opinion of the Company, the assumptions used in the preparation of such pro
---
forma financial statements are reasonable and the adjustments used therein are
- -----
<PAGE>

appropriate to give effect to the transactions or circumstances referred to
therein. The other financial and statistical information and data of the
Company and the Subsidiaries and AO, as applicable, included in the Registration
Statement and the Prospectuses (and any amendment or supplement thereto),
historical and pro forma, are, in all material respects, prepared on a basis
--- -----
consistent with such financial statements and the books and records of the
Company and the Subsidiaries and AO, as applicable, and, with respect to such
historical financial and statistical information and data, are accurate in all
material respects.

(k) The execution and delivery of, and the performance by the Company
of its obligations under, each of the Transaction Agreements have been duly and
validly authorized by the Company, and each of the Transaction Agreements has
been duly executed and delivered by the Company and constitutes the valid and
legally binding agreement of the Company, enforceable against the Company in
accordance with its terms, except (i) the enforceability of such Transaction
Agreements may be limited by bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer, fraudulent conveyance, preferential transfer or other
similar laws now or hereafter in effect relating to creditors' rights generally
and may be subject to general principles of equity, regardless of whether such
enforceability is considered in a proceeding in equity or at law, and (ii)
rights to indemnity and contribution hereunder or under the U.S. Underwriting
Agreement may be limited by federal or state securities laws or the public
policy underlying such laws.

(l) Except as disclosed in or contemplated by the Registration
Statement and the Prospectuses (or any amendment or supplement thereto),
subsequent to the respective dates as of which such information is given in the
Registration Statement and the Prospectuses (or any amendment or supplement
thereto), (i) neither the Company nor any of the Subsidiaries has incurred any
liability or obligation, direct or contingent, that is material to the Company
and the Subsidiaries taken as a whole, or entered into any transaction, not in
the ordinary course of business, that is material to the Company and the
Subsidiaries taken as a whole, (ii) there has not been any change in the capital
stock of the Company, or material increase in the short-term debt or long-term
debt, of the Company and the Subsidiaries taken as a whole, and (iii) there has
not been any development having or which could reasonably be expected to have, a
Material Adverse Effect.
<PAGE>

(n) The Company has not distributed and, prior to the later to occur
of (i) the Closing Date or the Option Closing Date (as defined in the U.S.
Underwriting Agreement), if any, and (ii) completion of the distribution of the
Shares, will not distribute any offering material in connection with the
offering and sale of the Shares other than the Registration Statement, the
Prepricing Prospectuses, the Prospectuses or other materials, if any, permitted
by the Act.

(p) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that: (i) transactions are
<PAGE>

executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

(s) Except as described in the Prospectuses and the Registration
Statement, no holder of any security of the Company has any right to require
registration of shares of Common Stock or any other security of the Company
because of the filing of the Registration Statement or consummation of the
transactions contemplated by this Agreement or the U.S. Underwriting Agreement,
or otherwise. No such rights, if any, were exercised nor will be exercised in
connection with the sale of the Shares and for a period of 180 days after the
date hereof. Except as described in or contemplated by the Prospectuses, there
are no outstanding options, warrants or other rights calling for the issuance
of, and there are no commitments, plans or arrangements to issue, any shares of
Common Stock of the Company or any security convertible into or exchangeable or
exercisable for Common Stock of the Company.

rights described in the Prospectus as being owned by them or any of them or
necessary for the conduct of their respective businesses, except where the lack
of such ownership or possession would not, individually or in the aggregate,
have a Material Adverse Effect; and the Company is not aware of any claim to the
contrary or any challenge by any other person to the rights of the Company or
the Subsidiaries with respect to the foregoing which if upheld would,
individually or in the aggregate, have a Material Adverse Effect.

(v) The Company is not now and, upon sale of the Underwritten Shares
to be issued and sold in accordance herewith and with the U.S. Underwriting
Agreement and upon application of the net proceeds to the Company from such sale
as described in the Prospectuses under the captions "Use of Proceeds" and
"Refinancing," will not be an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.

(w) Except as described in the Registration Statement and
Prospectuses (and any amendment or supplement thereto), the Company and the
Subsidiaries (i) are in compliance in all respects with Environmental Laws (as
hereinafter defined) and (ii) have received, and are in compliance in all
respects with all terms and conditions of, all permits, licenses, authorizations
or other approvals required of them under Environmental Laws to conduct their
respective businesses, except, in the case of each of clauses (i) and (ii), as
would not have a Material Adverse Effect.
<PAGE>

(x) The Company has filed in a timely manner each document or report
required to be filed by it pursuant to the Exchange Act and the rules and
regulations thereunder; each such document or report at the time it was filed
conformed to the requirements of the Exchange Act and the rules and regulations
thereunder; and none of such documents or reports contained an untrue statement
of any material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, except, with
respect to each of the
<PAGE>

foregoing representations in this paragraph (x), as could not have a Material
Adverse Effect.

(z) The Company has complied with all provisions of Florida Statutes,
(S)517.075, relating to issuers doing business with Cuba.

(aa) The Company has taken all actions as are necessary and
appropriate to cause the Common Stock Conversion (the "Common Stock
Conversion"), as described in the Prospectuses under the caption "Description of
Capital Stock - Common Stock Conversion", to occur and all conditions precedent
to the consummation of the Common Stock Conversion, other than the filing of the
Second Amended and Restated Certificate of Incorporation with the Secretary of
State of the State of Delaware and the closing of the offerings contemplated by
this Agreement and the U.S. Underwriting Agreement, have been satisfied.

(cc) After the consummation of the Common Stock Conversion, the
Company will have an authorized, issued and outstanding capitalization as set
forth in the Registration Statement and Prospectuses.

RISA each place that they appear); (ii) nothing has come to the attention of the
Company that would lead the Company to believe that the representations and
warranties of the Company with respect to the Subsidiaries contained in each of
paragraphs e(ii), (f), (g), (h), (l)(iii), (m), (o), (q), (r), (t), (u) and (w)
also apply to, and are true and correct in all respects regarding, RISA
(replacing references to "Subsidiary" or "Subsidiaries" with RISA each place
that they appear and removing all knowledge qualifiers from such representations
and warranties); and (iii) the Company has the contractual right to acquire
49.99% of the outstanding shares of capital stock of RISA, free and clear of any
Liens other than Liens pursuant to (A) the Master Investment and Cooperation
Agreement, dated October 12, 1990, among Armstrong World Industries, Inc.,
American Cork Finance Corporation ("ACF"), RISA, International de Ceramica, S.A.
de C.V. and certain other parties and (B) the Trust Agreement by and between ACF
and Banco Nacional de Mexico S.N.C., dated October 17, 1990.

7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each of you and each other Manager and each person,
if any, who controls any Manager within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act from and against any and all losses, claims,
damages, liabilities and expenses (including reasonable costs of investigation)
arising out of or based upon any untrue statement or alleged untrue statement of
a material fact contained in any International Prepricing Prospectus or in the
Registration Statement or the International Prospectus or in any amendment or
supplement thereto, or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages, liabilities or expenses arise out of or are based upon
any untrue statement or omission or alleged untrue statement or omission which
has been made therein or omitted therefrom in reliance upon and in conformity
with the information relating to such Manager or U.S. Underwriter furnished in
writing to the Company by or on behalf of any Manager through you or by or on
behalf of any U.S. Underwriter through a Representative expressly for use in
connection therewith; provided, however, that the indemnification contained in
this paragraph (a) with respect to any International Prepricing Prospectus shall
not inure to the benefit of any Manager (or to the benefit of any person
controlling such Manager) on account of any such loss, claim, damage, liability
or expense arising from the sale of the Shares by such Manager to any person if
a copy of the International Prospectus shall not have been delivered or sent to
such person within the time required by the
<PAGE>

Act and the regulations thereunder, and the untrue statement or alleged untrue
statement or omission or alleged omission of a material fact contained in such
International Prepricing Prospectus was corrected in the International
Prospectus, provided that the Company has delivered the International Prospectus
to the several Managers in requisite quantity on a timely basis to permit such
delivery or sending. The foregoing indemnity agreement shall be in addition to
any liability which the Company may otherwise have.

(b) If any action, suit or proceeding shall be brought against any
Manager or any person controlling any Manager in respect of which indemnity may
be sought against the Company, such Manager or such controlling person shall
promptly notify the parties against whom indemnification is being sought (the
"indemnifying parties"), and such indemnifying parties shall assume the defense
thereof, including the employment of counsel and payment of all fees and
expenses. Such Manager or any such controlling person shall have the right to
employ separate counsel in any such action, suit or proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Manager or such controlling person unless (i)
the indemnifying parties have agreed in writing to pay such fees and expenses,
(ii) the indemnifying parties have failed to assume the defense and employ
counsel, or (iii) the named parties to any such action, suit or proceeding
(including any impleaded parties) include both such Manager or such controlling
person and the indemnifying parties and such Manager or such controlling person
shall have been advised by its counsel in writing that representation of such
indemnified party and any indemnifying party by the same counsel would be
inappropriate under applicable standards of professional conduct (whether or not
such representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the indemnifying party
shall not have the right to assume the defense of such action, suit or
proceeding on behalf of such Manager or such controlling person). It is
understood, however, that the indemnifying parties shall, in connection with any
one such action, suit or proceeding or separate but substantially similar or
related actions, suits or proceedings in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for all such Managers and controlling persons not having
actual or potential differing interests with you or among themselves, which firm
shall be designated in writing by Smith Barney Inc., and that all such fees and
expenses shall be reimbursed as they are incurred. The indemnifying parties

<PAGE>

shall not be liable for any settlement of any such action, suit or proceeding
effected without their written consent, but if settled with such written
consent, or if there be a final judgment for the plaintiff in any such action,
suit or proceeding, the indemnifying parties agree to indemnify and hold
harmless any Manager and any such controlling person, to the extent provided in
the preceding paragraph, from and against any loss, claim, damage, liability or
expense by reason of such settlement or judgment.

(c) Each Manager agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement and any person who controls the Company within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the
foregoing indemnity from the Company to each Manager, but only with respect to
information relating to such Manager furnished in writing by or on behalf of
such Manager through you expressly for use in the Registration Statement, the
International Prospectus or any International Prepricing Prospectus, or any
amendment or supplement thereto. If any action, suit or proceeding shall be
brought against the Company, any of its directors, any such officer or any such
controlling person based on the Registration Statement, the International
Prospectus or any International Prepricing Prospectus, or any amendment or
supplement thereto, and in respect of which indemnity may be sought against any
Manager pursuant to this paragraph (c), such Manager shall have the rights and
duties given to the Company by paragraph (b) above (except that if the Company
shall have assumed the defense thereof such Manager shall not be required to do
so, but may employ separate counsel therein and participate in the defense
thereof, but the fees and expenses of such counsel shall be at such Manager's
expense), and the Company, its directors, any such officer, and any such
controlling person shall have the rights and duties given to the Managers by
paragraph (b) above. The foregoing Indemnity agreement shall be in addition to
any liability which any Manager may otherwise have.

(d) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Managers on the other hand from the offering of
the Shares, or (ii) if the allocation provided by clause (i) above is

<PAGE>

not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and the Managers on the other hand
in connection with the statements or omissions that resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Managers on the other hand shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Managers, in each case as set forth in the table on
the cover page of the International Prospectus. The relative fault of the
Company on the one hand and the Managers on the other hand shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
by the Managers on the other hand and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.

(e) The Company and the Managers agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by a pro
rata allocation (even if the Managers were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in paragraph (d) above. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages,
liabilities and expenses referred to in paragraph (d) above shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
any claim or defending any such action, suit or proceeding. Notwithstanding the
provisions of this Section 7, no Manager shall be required to contribute any
amount in excess of the amount by which the total price of the Shares
underwritten by it and distributed to the public exceeds the amount of any
damages which such Manager has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Managers' obligations to contribute
pursuant to this Section 7 are several in proportion to the respective numbers
of Shares set forth opposite their names in Schedule I hereto (or
<PAGE>

such numbers of Shares increased as set forth in Section 10 hereof) and not
joint.

(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 7 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Manager or any person controlling any
Manager, the Company, its directors or officers or any person controlling the
Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii)
any termination of this Agreement. A successor to any Manager or any person
controlling any Manager, or to the Company, its directors or officers or any
person controlling the Company, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this Section
7.

8. CONDITIONS OF MANAGERS' OBLIGATIONS. The several obligations of
the Managers to purchase the Shares hereunder are subject to the following
conditions:

<PAGE>

of the Company or any Manager, threatened by the Commission, and any request of
the Commission for additional information (to be included in the Registration
Statement or the Prospectuses or otherwise) shall have been complied with to
your reasonable satisfaction.

(b) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change, or any development involving a prospective
change, in or affecting the condition (financial or other), business,
properties, net worth or results of operations of the Company or the
Subsidiaries not contemplated by the Prospectuses, which in your opinion, as
Lead Managers for the several Managers, would materially, adversely affect the
market for the Shares, or (ii) any event or development relating to or involving
the Company or any officer or director of the Company which makes any statement
made in the Prospectuses untrue or which, in the opinion of the Company and its
counsel or the Managers and their counsel, requires the making of any addition
to or change in the Prospectuses in order to state a material fact required by
the Act or any other United States law to be stated therein or necessary in
order to make the statements therein not misleading, if amending or
supplementing the Prospectuses to reflect such event or development would, in
your opinion, as Lead Managers for the several Managers, materially adversely
affect the market for the Shares.

(c) You shall have received on the Closing Date, an opinion of Fried,
Frank, Harris, Shriver & Jacobson, (a partnership including professional
corporations), counsel for the Company, dated the Closing Date and addressed to
you, as Lead Managers for the several Managers, in substantially the form
attached hereto as Annex I.

(d) You shall have received on the Closing Date, an opinion of
Consultoria Juridicia Mercantil, S.A. de C.V., counsel for Materiales Ceramicos,
S.A. de C.V. and Dal-Tile Mexico, S.A. de C.V., dated the Closing Date and
addressed to you, as Lead Managers for the several Managers, in substantially
the form attached hereto as Annex II.

(e) You shall have received on the Closing Date an opinion and a Rule
10b-5 statement of Cravath, Swaine & Moore, counsel for the Managers, dated the
Closing Date and addressed to you, as Lead Managers for the several Managers,
with respect to all matters as you may reasonably request.

<PAGE>

(f) You shall have received letters addressed to you, as Lead
Managers for the several Managers, and dated the date hereof and the Closing
Date from Ernst & Young LLP, independent certified public accountants,
substantially in the forms heretofore approved by you.

(g) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission at or prior to the Closing Date; (ii) there shall
not have been any material change in the capital stock of the Company nor any
material increase in the short-term or long-term debt of the Company (other than
in the ordinary course of business) from that set forth or contemplated in the
Registration Statement or the Prospectuses (or any amendment or supplement
thereto); (iii) there shall not have been, since the respective dates as of
which information is given in the Registration Statement and the Prospectuses
(or any amendment or supplement thereto), except as may otherwise be stated in
the Registration Statement and Prospectuses (or any amendment or supplement
thereto), any Material Adverse Effect; (iv) the Company and the Subsidiaries
shall not have any liabilities or obligations, direct or contingent (whether or
not in the ordinary course of business), that are material to the Company and
the Subsidiaries, taken as a whole, other than those reflected in the
Registration Statement or the Prospectuses (or any amendment or supplement
thereto); and (v) each of the representations and warranties of the Company
contained in this Agreement that is qualified as to materiality shall be true
and correct, and each of the representations and warranties of the Company that
is not so qualified as to materiality shall be true and correct in all material
respects, on and as of the date hereof and on and as of the Closing Date as if
made on and as of the Closing Date, and you shall have received a certificate,
dated the Closing Date and signed by the chief executive officer and the chief
financial officer of the Company (or such other officers as are acceptable to
you), to the effect set forth in this Section 8(g) and in Section 8(h) hereof.

(i) The Company shall have furnished or caused to be furnished to you
such further certificates and documents as you shall have reasonably requested.

<PAGE>

(j) The Common Stock shall have been listed or approved for listing,
subject to notice of issuance, on the New York Stock Exchange.

(k) The closing under the U.S. Underwriting Agreement shall have
occurred concurrently with the closing hereunder on the Closing Date.

(m) The Company shall have furnished or caused to be furnished to you
the lock-up letters referred to in Section 5(n) hereto on or prior to the
Closing Date.

(n) Concurrent with the Closing hereunder on the Closing Date, the
Company shall have entered into the New Credit Facility and have borrowed funds
under the New Credit Facility that, together with the proceeds from the
offerings contemplated by this Agreement and the U.S. Underwriting Agreement
and other cash on-hand available to the Company, will be sufficient to
consummate the transactions described under the captions "Use of Proceeds" and
"The Refinancing" in the Prospectuses.

All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to you and your counsel.

Any certificate or document signed by any officer of the Company and
delivered to you, as Lead Managers for the Managers, or to counsel for the
Managers, shall be deemed a representation and warranty by the Company to each
Manager as to the statements made therein.

Prepricing Prospectus, the Prospectuses, and all amendments or supplements to
any of them as may be reasonably requested for use in connection with the
offering and sale of the Shares; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Shares, including
any stamp taxes in connection with the original issuance and sale of the Shares;
(iv) the printing (or reproduction) and delivery of the preliminary and
supplemental Blue Sky Memoranda in connection with the offering of the Shares;
(v) the registration of the Shares under the Exchange Act and the listing of the
Shares on the New York Stock Exchange; (vi) the registration or qualification of
the Shares for offer and sale under the securities laws of the several
jurisdictions as provided in Section 5(g) hereof (including the reasonable fees,
expenses and disbursements of counsel for the Managers and U.S. Underwriters
relating thereto); (vii) the filing fees and the reasonable fees and expenses of
counsel for the Managers and U.S. Underwriters in connection with any filings
required to be made with the National Association of Securities Dealers, Inc.;
(viii) the transportation and other expenses incurred by or on behalf of
representatives of the Company (which does not include the Managers or the U.S.
Underwriters or their representatives) in connection with presentations to
prospective purchasers of the Shares; and (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel) for the Company.

10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the Registration Statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the Registration Statement or such post-
effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Company,
by notifying you, or by you, as Lead Managers for the several Managers, by
notifying the Company.

If any one or more of the Managers shall fail or refuse to purchase
Shares which it or they are obligated to purchase hereunder on the Closing Date,
and the aggregate number of Shares which such defaulting Manager or Managers are
obligated but fail or refuse to purchase is not more than one-tenth of the
aggregate number of Shares which the Managers are obligated to purchase on the
Closing Date, each non-defaulting Manager shall be obligated, severally, in the
proportion which the number of Shares

<PAGE>

set forth opposite its name in Schedule I hereto bears to the aggregate number
of Shares set forth opposite the names of all non-defaulting Managers or in such
other proportion as you may specify in accordance with Section 20 of the Master
Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares which
such defaulting Manager or Managers are obligated, but fail or refuse, to
purchase. If any one or more of the Managers shall fail or refuse to purchase
Shares which it or they are obligated to purchase on the Closing Date and the
aggregate number of Shares with respect to which such default occurs is more
than one-tenth of the aggregate number of Shares which the Managers are
obligated to purchase on the Closing Date and arrangements satisfactory to you
and the Company for the purchase of such Shares by one or more non-defaulting
Managers or other party or parties approved by you and the Company are not made
within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Manager or the Company. In any such
case which does not result in termination of this Agreement, either you or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected. Any action taken under this paragraph shall not relieve any
defaulting Manager from liability in respect of any such default of any such
Manager under this Agreement. The term "Manager" as used in this Agreement
includes, for all purposes of this Agreement, any party not listed in Schedule I
hereto who, with your approval and the approval of the Company, purchases Shares
which a defaulting Manager is obligated, but fails or refuses, to purchase.

Any notice under this Section 10 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.

11. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Manager to the Company, by notice to the Company, if prior to the Closing Date
(i) trading in securities generally on the New York Stock Exchange, the American
Stock Exchange or the Nasdaq National Market shall have been suspended or
materially limited, (ii) a general moratorium on commercial banking activities
in New York or Texas shall have been declared by either federal or state
authorities, or (iii) there shall have occurred any outbreak or escalation of
hostilities or other international or domestic calamity, crisis or change in
political, financial or economic conditions, the effect of which on the
financial markets of the United States is such as to
<PAGE>

make it, in your judgment, impracticable or inadvisable to commence or continue
the offering of the Shares at the offering price to the public set forth on the
cover page of the International Prospectus or to enforce contracts for the
resale of the Shares by the Managers.

Notice of such termination may be given to the Company by telegram,
telecopy or telephone and shall be subsequently confirmed by letter.

12. INFORMATION FURNISHED BY THE MANAGERS. The statements set forth
in the last paragraph on the cover page, the stabilization legend on the inside
front cover page, and the statements in the first, second, fourth, ninth, tenth,
eleventh, twelfth, thirteenth (except to the extent that such paragraph relates
to actions taken, or to be taken, by the Company) and fifteenth paragraphs, and
the third sentence of the sixth paragraph, under the caption "Underwriting" in
any International Prepricing Prospectus and in the International Prospectus
constitute the only information furnished by or on behalf of the Managers
through you as such information is referred to in Sections 6(a), 6(b) and 7
hereof.

13. MISCELLANEOUS. Except as otherwise provided in Sections 5, 10
and 11 hereof, notice given pursuant to any provision of this Agreement shall be
in writing and shall be delivered (i) if to the Company, at the office of the
Company at Dal-Tile International Inc., 7834 Hawn Freeway, Dallas, TX 75217,
Attention: Carlos E. Sala, Chief Financial Officer; or (ii) if to you, as Lead
Managers for the several Managers, care of Smith Barney Inc., 388 Greenwich
Street, New York, New York 10013, Attention: Manager, Investment Banking
Division.

This Agreement has been and is made solely for the benefit of the
several Managers, the Company, its directors and officers, and the other
controlling persons referred to in Section 7 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the
term "successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Manager of any of the Shares in his status as
such purchaser.
<PAGE>

Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Managers.

Very truly yours,

DAL-TILE INTERNATIONAL INC.

By ________________________
Name: Carlos E. Sala
Title: Chief Financial Officer

Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Managers named in Schedule I
hereto.

SMITH BARNEY INC.
DILLON, READ & CO. INC.
GOLDMAN SACHS INTERNATIONAL
MORGAN STANLEY & CO. INTERNATIONAL LIMITED

As Lead Managers for the Several Managers

By SMITH BARNEY INC.

By ____________________________
Name:
Title:
<PAGE>

SCHEDULE I

DAL-TILE INTERNATIONAL INC.

Number of
Manager Shares
- ------- ---------

Smith Barney Inc.

Dillon, Read & Co. Inc.

Goldman Sachs International

Morgan Stanley & Co.
International Limited

[ ]

[ ] _________

Total ........... 1,400,000
=========

<PAGE>

EXHIBIT 2.2

================================================================================

AGREEMENT AND PLAN OF MERGER

by and among

DAL-TILE INTERNATIONAL INC.,

DTI INVESTORS LLC,

and

DTI MERGER COMPANY

Dated as of August 7, 1996

================================================================================
<PAGE>

DEFINED TERMS
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Agreement..............................................Preamble
Certificate of Merger..................................Section 1.3
Closing................................................Section 1.2
Closing Date...........................................Section 1.2
Company................................................Preamble
DGCL...................................................Section 1.1
Dissenting Stockholders................................Section 4.1(a)
Effective Time.........................................Section 1.3
Investors..............................................Preamble
LLC Units..............................................Section 4.1(a)
Merger.................................................Section 1.1
Merger Sub.............................................Preamble
Shares.................................................Section 4.1(a)
Surviving Corporation..................................Section 1.1
</TABLE>
<PAGE>

AGREEMENT AND PLAN OF MERGER

AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of
---------
August 7, 1996, by and among Dal-Tile International Inc., a Delaware
corporation (the "Company"), DTI Investors LLC, a Delaware limited liability
-------
company ("Investors") and DTI Merger Company ("Merger Sub"), a Delaware
--------- ----------
corporation which is owned 63% by Investors and 37% by Armstrong Enterprises,
Inc.

WHEREAS, the board of directors of each of the Company and Merger Sub
and the Members of Investors each have determined that it is in the best
interest of their respective stockholders or members to effect the transactions
contemplated hereby; and

WHEREAS, the board of directors and the holders of the Class B common
stock of the Company, the board of directors and the stockholders of Merger Sub
and the Members of Investors each have approved the merger of Merger Sub with
and into the Company in accordance with applicable law, upon the terms and
subject to the conditions set forth herein; and

WHEREAS, the Company has issued and outstanding 1,595,238 shares of
Class A Common Stock, 15,873 shares of Class B Common Stock, 495,254 shares of
Class C Common Stock, 1,587,302 shares of Class D Common Stock, 198,413 shares
of Class E Common Stock, and 198,413 shares of Class F Common Stock; and

WHEREAS, Merger Sub has issued and outstanding 100 shares of common
stock,

NOW, THEREFORE, in consideration of the foregoing, and of the
covenants and agreements contained herein, and intending to be legally bound
hereby, the parties hereto hereby agree as follows:

ARTICLE 1

THE MERGER;

THE CLOSING; EFFECTIVE TIME

Section 1.1. The Merger. Subject to the terms and conditions of this
----------
Agreement, at the Effective Time (as defined in Section 1.3), Merger Sub shall
-----------
be merged with and into the Company in accordance with this Agreement and the
separate corporate existence of Merger Sub shall thereupon cease (the "Merger").
------
The Company shall be the surviving corporation in the Merger (sometimes
hereinafter referred to as the "Surviving Corporation") and shall continue to
--------- -----------
be governed by the laws of the State of Delaware, and the separate corporate
existence of the Company with all its rights, privileges, immunities, powers and
franchises shall continue unaffected by the Merger. The Merger

<PAGE>

shall have the effects specified in the Delaware General Corporation Law (the
"DGCL") and, to the extent relevant, the Delaware Limited Liability Company Act.
----

Section 1.2. The Closing. Subject to the terms and conditions of
-----------
this Agreement, the closing of the Merger (the "Closing") shall take place at
-------
the offices of Fried, Frank, Harris, Shriver & Jacobson, at 9:00 a.m., local
time, on August 12, 1996, or at such other time, date or place as is agreed to
in writing by the parties hereto. The date on which the Closing occurs is
hereinafter referred to as the "Closing Date."
------------

Section 1.3. Effective Time. On the Closing Date, immediately
--------------
following the Closing, the parties hereto shall cause a certificate of merger
meeting the requirements of Section 251 of the DGCL (the "Certificate of
--------------
Merger") to be properly executed and filed in accordance with such section. The
- ------
Merger shall become effective upon the filing of the Certificate of Merger with
the Secretary of State of the State of Delaware in accordance with the DGCL or
at such later time as the parties hereto shall have agreed upon and designated
in such filing as the effective time of the Merger (the "Effective Time").
--------------

ARTICLE 2

CERTIFICATE OF INCORPORATION AND BY-LAWS

OF THE SURVIVING CORPORATION

Section 2.1. Certificate of Incorporation. The Restated Certificate
----------------------------
of Incorporation of the Company as in effect immediately prior to the Effective
Time shall be the Certificate of Incorporation of the Surviving Corporation,
until duly amended in accordance with the terms thereof and the DGCL.

Section 2.2. By-Laws. The By-Laws of the Company in effect at the
-------
Effective Time shall be the By-Laws of the Surviving Corporation, until duly
amended in accordance with the terms thereof and the DGCL.

ARTICLE 3

DIRECTORS AND OFFICERS

OF THE SURVIVING CORPORATION

Section 3.1. Directors. The directors of the Company immediately
---------
prior to the Effective Time shall, from and after the Effective Time, be the
directors of the Surviving Corporation until their successors have been duly
elected or appointed and qualified or until their earlier death, resignation or
removal in accordance with the Surviving Corporation's Certificate of
Incorporation and By-Laws.

<PAGE>

Section 3.2. Officers. The officers of the Company immediately prior
--------
to the Effective Time shall, from and after the Effective Time, be the officers
of the Surviving Corporation until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's Certificate of Incorporation and By-
Laws.

ARTICLE 4

CONVERSION OR CANCELLATION

OF SHARES IN THE MERGER

Section 4.1. Conversion or Cancellation of Shares. The manner of
------------------------------------
converting or canceling shares of the Company and Merger Sub in the Merger shall
be as follows:

(a) At the Effective Time, each share of Class A, Class B, Class C,
Class D, Class E and Class F Common Stock, each with a par value $0.01 per share
(the "Shares"), of the Company issued and outstanding immediately prior to the
------
Effective Time (other than Shares (i) which are owned by any stockholder of
Merger Sub or (ii) which are held by stockholders ("Dissenting Stockholders")
-----------------------
exercising appraisal rights with respect to such Shares pursuant to Section 262
of the DGCL) shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into one Class A, Class B, Class C, Class D,
Class E or Class F Unit, respectively, representing membership interests in
Investors (the "LLC Units"). All such Shares, by virtue of the Merger and
---------
without any action on the part of the holders thereof, shall no longer be
outstanding and shall be canceled and retired and shall cease to exist, and each
holder of a certificate representing any such Shares shall thereafter cease to
have any rights with respect to such Shares, except the right, if any, to
receive certificates representing the appropriate LLC Units or the right, if
any, to receive payment from the Surviving Corporation of the "fair value" of
such Shares as determined in accordance with Section 262 of the DGCL.

(b) At the Effective Time, each Share issued and outstanding
immediately prior to the Effective Time and owned by any stockholder of Merger
Sub immediately prior to the Effective Time, shall, by virtue of the Merger and
without any action on the part of the holder thereof, cease to be outstanding,
shall be canceled and retired and shall cease to exist.

(c) At the Effective Time, each share of common stock, par value $0.01
per share, of Merger Sub issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of Merger Sub or the holders of such Shares, be converted into 15,952.38 shares
of Class A Common Stock, 158.73 shares of Class B Common Stock, 4,952.54 shares
of Class C Common Stock,

3
<PAGE>

15,873.02 shares of Class D Common Stock, 1,984.13 shares of Class E Common
Stock and 1,984.13 shares of Class F Common Stock, each par value $0.01 per
share, of the Surviving Corporation. It is intended that the number of the
shares of Class A Common Stock, Class B Common Stock, Class C Common Stock,
Class D Common Stock, Class E Common Stock and Class F Common Stock resulting
from such conversion shall be rounded to the nearest whole number of shares held
by each holder thereof, with the result that (1) the 37 shares of common stock
of Merger Sub held by Armstrong Enterprises, Inc. immediately prior to the
Effective Time shall be converted (in the aggregate) into 590,238 shares of
Class A Common Stock, 5,873 shares of Class B Common Stock, 183,244 shares of
Class C Common Stock, 587,302 shares of Class D Common Stock, 73,413 shares of
Class E Common Stock and 73,413 shares of Class F Common Stock, each par value
$0.01 per share, of the Surviving Corporation, and (2) the 63 shares of common
stock of Merger Sub held by Investors immediately prior to the Effective Time
shall be converted (in the aggregate) into 1,005,000 shares of Class A Common
Stock, 10,000 shares of Class B Common Stock, 312,010 shares of Class C Common
Stock, 1,000,000 shares of Class D Common Stock, 125,000 shares of Class E
Common Stock, and 125,000 shares Class F Common Stock, each par value $0.01 per
share, of the Surviving Corporation.

(d) At the Effective Time, each outstanding option to purchase Class A
Common Stock of the Company shall continue under the same terms and conditions
as in effect prior to the Merger, and shall constitute options to purchase Class
A Common Stock of the Surviving Corporation.

Section 4.2. Dissenters' Rights. If any Dissenting Stockholder shall
------------------
fail to perfect or shall have effectively lost the right to dissent, the Shares
held by such Dissenting Stockholder shall thereupon be treated as though such
Shares had been converted into LLC Units pursuant to Section 4.1.
-----------

Section 4.3. Transfer of Shares After the Effective Time. No
-------------------------------------------
transfers of Shares which are issued and outstanding prior to the Effective Time
shall be made on the stock transfer books of the Surviving Corporation at or
after the Effective Time.

ARTICLE 5

COVENANTS

Section 5.1. Reasonable Efforts; Other Actions. Subject to the terms
---------------------------------
and conditions herein provided, each of the parties hereto agrees to use its
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done as promptly as practicable, all things necessary, proper or
advisable under applicable laws to consummate and make effective the
transactions contemplated by this Agreement, including obtaining any
governmental or other consents, transfers, orders, qualifications, waivers,
authorizations, exemptions and approvals, providing all notices and making all

4
<PAGE>

registrations, filings and applications necessary or desirable for the
consummation of the transactions contemplated herein, including, without
limitation, the execution and delivery of all agreements or other documents
contemplated hereunder to be so executed and delivered.

Section 5.2. Information Statement The Company will cause a notice
---------------------
of merger and information statement to be sent, prior to the Effective Time, to
the stockholders of the Company pursuant to Section 262(d)(2) of the DGCL.

ARTICLE 6

REPRESENTATIONS AND WARRANTIES

OF THE COMPANY

The Company hereby represents and warrants to Investors and Merger Sub
as follows:

Section 6.1. Organization and Standing. The Company is a
-------------------------
corporation, duly organized, validly existing and in good standing under the
laws of Delaware.

Section 6.2. Authority. (a) The Company has all requisite power and
---------
authority to execute and deliver this Agreement and to consummate the
transactions contemplated herein. The execution and delivery of this Agreement
and the consummation of the transactions contemplated herein by the Company has
been duly authorized by all necessary action of the Company.

(b) This Agreement has been duly and validly executed and delivered by
the Company and constitutes a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
other similar laws of general applicability relating to or affecting creditors'
rights and to general principles of equity.

(c) The execution and delivery of this Agreement by the Company does
not, and the consummation of the transactions contemplated herein will not, (i)
violate or conflict with its certificate of incorporation or by-laws, (ii)
constitute a breach or default or give rise to any lien or third party right of
termination under any material agreement, understanding or undertaking to which
it is a party or by which it is bound, (iii) violate any provision of any
applicable law, rule or regulation to which the Company, is subject, or (iv)
violate any order, judgment or decree applicable to the Company, except, in the
case of clauses (ii), (iii) and (iv) hereof, as would not have a material
adverse effect on the ability of the Company to consummate the transactions
contemplated herein.

5
<PAGE>

Section 6.3. Consents and Approvals. Neither the execution and
----------------------
delivery of this Agreement by the Company nor the consummation of the
transactions contemplated herein will require any consent, approval,
authorization or permit of, or filing with or notification to, any Governmental
Authority on the part of the Company.

ARTICLE 7

REPRESENTATIONS AND WARRANTIES

OF INVESTORS AND MERGER SUB

Each of Investors and Merger Sub hereby represents and warrants to the
Company as follows:

Section 7.1. Organization and Standing. Investors is a limited
-------------------------
liability company and Merger Sub is a corporation, each of which is duly
organized, validly existing and in good standing under the laws of Delaware.

Section 7.2. Authority. (a) Each of Investors and Merger Sub has
---------
all requisite power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated herein. The execution and delivery of
this Agreement and the consummation of the transactions contemplated herein by
each of Investors and Merger Sub have been duly authorized by all necessary
action of each of Investors and Merger Sub.

(b) This Agreement has been duly and validly executed and delivered by
each of Investors and Merger Sub and constitutes a valid and binding agreement
of each of Investors and Merger Sub, enforceable against each in accordance with
its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and other similar laws of general applicability
relating to or affecting creditors' rights and to general principles of equity.

(c) The execution and delivery of this Agreement by each of Investors
and Merger Sub do not, and the consummation of the transactions contemplated
herein will not, (i) violate or conflict with, respectively, its certificate of
formation and operating agreement or its certificate of incorporation and by-
laws, (ii) constitute a breach or default or give rise to any lien or third
party right of termination under any material agreement, understanding or
undertaking to which it is a party or by which it is bound, (iii) violate any
provision of any applicable law, rule or regulation to which Investors or Merger
Sub is subject, or (iv) violate any order, judgment or decree applicable to
Investors or Merger Sub, except, in the case of clauses (ii), (iii) and (iv)
hereof, as would not have a material adverse effect on the ability of Investors
or Merger Sub to consummate the transactions contemplated herein.

6
<PAGE>

Section 7.3. Consents and Approvals. Neither the execution and
----------------------
delivery of this Agreement by each of Investors and Merger Sub nor the
consummation of the transactions contemplated herein will require any consent,
approval, authorization or permit of, or filing with or notification to, any
Governmental Authority on the part of Investors or Merger Sub.

ARTICLE 8

TERMINATION

Section 8.1. Termination by Mutual Consent. This Agreement may be
-----------------------------
terminated and the Merger may be abandoned at any time prior to the Effective
Time by the mutual written consent of Investors, Merger Sub and the Company.

ARTICLE 9

GENERAL PROVISIONS

Section 9.1. Notices. Any notice required to be given hereunder
-------
shall be sufficient if in writing, and sent by facsimile transmission and by
courier service (with proof of service), hand delivery or certified or
registered mail (return receipt requested and first-class postage prepaid),
addressed as follows:

(a) If to the Company: (b) If to Merger Sub:

Howard I. Bull Christine J. Smith, Esq.
Dal-Tile International Inc. AEA Investors Inc.
7834 Haven Freeway 65 East 55th Street
Dallas, Texas 75217 New York, NY 10022
Facsimile: (214) 309-4300 Facsimile: (212) 888-1459

With a copy to: With a copy to:

Frederick H. Fogel, Esq. Frederick H. Fogel, Esq.
Fried, Frank, Harris, Shriver & Fried, Frank, Harris, Shriver &
Jacobson Jacobson
One New York Plaza One New York Plaza
New York, NY 10004 New York, NY 10004
Facsimile: (212) 859-4000 Facsimile: (212) 859-4000

7
<PAGE>

With a copy to:

Christine J. Smith, Esq.
AEA Investors Inc.
65 East 55th Street
New York, NY 10022
Facsimile: (212) 888-1459

With a copy to:

Frederick H. Fogel, Esq.
Fried, Frank, Harris, Shriver &
Jacobson
One New York Plaza
New York, NY 10004
Facsimile: (212) 859-4000

or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.

Section 9.2. Assignment; Binding Effect; Benefit. Neither this
-----------------------------------
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of law or otherwise)
without the prior written consent of the other parties. Subject to the preceding
sentence, this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns.

Section 9.3. Amendment. This Agreement may be amended by the parties
---------
hereto at any time prior to the Effective Time provided that no amendment shall
be made which by law requires the further approval of stockholders of the
Company without

8
<PAGE>

obtaining such further approval. This Agreement may not be amended or modified
except by an instrument in writing signed by or on behalf of each of the parties
hereto.

Section 9.4. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware without regard to
its rules of conflict of laws.

Section 9.5. Counterparts. This Agreement may be executed by the
------------
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a
number of copies of this Agreement, each of which may be signed by less than all
of the parties hereto, but together all such copies are signed by all of the
parties hereto.

Section 9.6. Headings. Headings of the Articles and Sections of this
--------
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.

Section 9.7. Interpretation. In this Agreement, unless the context
--------------
otherwise requires, words describing the singular number shall include the
plural and vice versa, and words denoting any gender shall include all genders
and words denoting natural persons shall include corporations and partnerships
and vice versa.

Section 9.8. Severability. Any term or provision of this Agreement
------------
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or otherwise affecting the validity or
enforceability of any of the terms or provisions of this Agreement in any other
jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable.

Section 9.9. Enforcement of Agreement. The parties hereto agree that
------------------------
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any Delaware court, this
being in addition to any other remedy to which they may be entitled at law or in
equity.

9
<PAGE>

IN WITNESS WHEREOF, the parties have executed this Agreement and caused the same
to be duly delivered on their behalf as of the day and year first written above.

DAL-TILE INTERNATIONAL INC.

By:
----------------------------------
Name:

Title:

DTI INVESTORS LLC

By: AEA Investors Inc., its manager

By:
----------------------------------
Name:

Title:

DTI MERGER COMPANY

By:
----------------------------------
Name:

Title:

<PAGE>

EXHIBIT 3.1

SECOND AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

DAL-TILE INTERNATIONAL INC.

(Pursuant to Sections 242 and 245 of the General
Corporation Law of the State of Delaware)

The undersigned Secretary of DAL-TILE INTERNATIONAL INC., a corporation
organized and existing under the laws of the State of Delaware, hereby
certifies as follows:

1. The Corporation's present name is Dal-Tile International Inc. It
was originally incorporated under the name of Gamma Four Holdings Inc. The
date of filing of its original Certificate of Incorporation with the Secretary
of State was January 30, 1987.

2. This Second Amended and Restated Certificate of Incorporation
amends and restates the Amended and Restated Certificate of Incorporation of the
Corporation, as now in effect (the "Existing Certificate of Incorporation").
-------------------------------------
This Second Amended and Restated Certificate of Incorporation was proposed by
the Board of Directors of the Corporation and adopted by the stockholders of the
Corporation in the manner and by the vote prescribed by Sections 242 and 245 of
the General Corporation Law of the State of Delaware (the "DGCL"), the written
----
consent of the stockholders having been given in accordance with Section 228 of
the DGCL. The Existing Certificate of Incorporation hereby is amended and
restated in its entirety to read as follows:

FIRST: The name of the Corporation is Dal-Tile International
Inc.
<PAGE>

SECOND: The address of the Corporation's registered office in
the State of Delaware is Corporation Trust Center, 1209 Orange Street,
in the City of Wilmington, County of New Castle. The name of its
registered agent as such address is The Corporation Trust Company.

THIRD: The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be organized under
the General Corporation Law of Delaware.

FOURTH: The total number of shares of all classes of stock
which the Corporation shall have authority to issue is 211,100,000
shares, divided into two classes, of which (a) 200,000,000 shares of
par value $.01 per share shall be designated as Common Stock, and (b)
11,100,000 shares of par value $.01 per share shall be designated as
Preferred Stock.

A statement of the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, in respect of
each class of stock is as follows:

A. Preferred Stock.
---------------

Shares of the Preferred Stock of the Corporation may be
issued from time to time in one or more series, each of which series
shall have such distinctive designation or title as shall be fixed by
the Board of Directors prior to the issuance of any shares thereof.
Each such series of Preferred Stock shall have such voting powers,
full or limited, or no voting powers, and such preferences and
relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as shall be
stated in such resolution or resolutions providing for the issue of
such series of Preferred Stock as may be adopted from time to time by
the Board of Directors prior to the issuance of any shares thereof
pursuant to the authority hereby vested in it, all in accordance with
the laws of the State of Delaware.

B. Common Stock.
------------

1. Dividends. Subject to the preferential rights, if any,
---------
of the holders of Preferred Stock, the holders of shares of Common
Stock shall be entitled to receive, when and if declared by the Board
of Directors, out of the assets of the Corporation which are by law

-2-
<PAGE>

available therefor, dividends payable either in cash, in property or
in shares of Common Stock.

2. Voting Rights. Except as otherwise required by law, at
-------------
every annual or special meeting of stockholders of the Corporation,
every holder of Common Stock shall be entitled to one vote, in person
or by proxy, for each share of Common Stock standing in his, her or
its name on the books of the Corporation.

3. Liquidation, Dissolution or Winding Up. In the event of
--------------------------------------
any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Corporation, after payment or provision for the
payment of the debts and other liabilities of the Corporation and of
the preferential amounts, if any, to which the holders of Preferred
Stock shall be entitled, the holders of all outstanding shares of
Common Stock shall be entitled to share ratably in the remaining net
assets of the Corporation.

C. Reclassification.
----------------

On the date this Second Amended and Restated Certificate of
Incorporation becomes effective, without the further action of the
Corporation or the stockholders of the Corporation: (1) the 1,595,238
then outstanding shares of Class A Common Stock of the Corporation
shall automatically be converted into 17,707,141.8 fully paid and
nonassessable shares of Common Stock; (2) the 15,873 then outstanding
shares of Class B Common Stock of the Corporation shall automatically
be converted into 176,190.3 fully paid and nonassessable shares of
Common Stock; (3) the 495,254 then outstanding shares of Class C
Common Stock of the Corporation shall automatically be converted into
5,497,319.4 fully paid and nonassessable shares of Common Stock; (4)
the 198,413 then outstanding shares of Class E Common Stock of the
Corporation shall automatically be converted into 2,202,384.3 fully
paid and nonassessable shares of Common Stock; and (5) the 1,785,715
aggregate then outstanding shares of Class D Common Stock and Class F
Common Stock of the Corporation shall automatically be converted into
19,821,436.5 fully paid and nonassessable shares of Common Stock.

Each stockholder shall deliver to the Corporation his, her or
its stock certificates representing shares of Class A Common

-3-
<PAGE>

Stock, Class B Common Stock, Class C Common Stock, Class D Common
Stock, Class E Common Stock or Class F Common Stock of the
Corporation, and the proper officers of the Corporation shall execute,
issue and deliver to each such stockholder certificates representing
shares of Common Stock.

FIFTH: Elections of directors need not be by ballot unless
the By-Laws of the Corporation so provided.

SIXTH: The Board of Directors of the Corporation may make
By-Laws and, from time to time, may alter, amend or repeal By-Laws.

SEVENTH: To the fullest extent permitted by the Delaware
General Corporation Law as the same exists or may hereafter be
amended, a Director of the Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director.

IN WITNESS WHEREOF, the undersigned has signed this instrument
the _____ day of ______, 1996.

---------------------------------
Christine J. Smith
Secretary

-4-

<PAGE>

EXHIBIT 3.2
AMENDED AND RESTATED

BY-LAWS

DAL-TILE INTERNATIONAL INC.

ARTICLE 1
---------

Stockholders
------------

SECTION 1. Annual Meeting. The annual meeting of the stockholders of
--------------
the Corporation shall be held on such date, at such time and at such place
within or without the State of Delaware as may be designated by the Board of
Directors, for the purpose of electing Directors and for the transaction of such
other business as may be properly brought before the meeting.

SECTION 2. Special Meetings. Except as otherwise provided in the
----------------
Certificate of Incorporation, a special meeting of the stockholders of the
Corporation may be called at any time by the Board of Directors, the Chairman of
the Board or the President and shall be called by the Chairman of the Board, the
President or the Secretary at the request in writing of stockholders holding
together at least fifty percent (50%) of the number of shares of stock
outstanding and entitled to vote at such meeting. Any special meeting of the
stockholders shall be held on such date, at such time and at such place within
or without the State of Delaware as the Board of Directors or the officer
calling the meeting may designate. At a special meeting of the stockholders, no
business shall be transacted and no corporate action shall be taken other than
that stated in the notice of the meeting unless all of the stockholders are
present in person or by proxy, in which case any and all business may be
transacted at the meeting even though the meeting is held without notice.

SECTION 3. Notice of Meetings. Except as otherwise provided in these
------------------
By-Laws or by law, a written notice of each meeting of the stockholders shall be
given not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each stockholder of the Corporation entitled to vote at such
meeting at his address as it appears on the records of the Corporation. The
notice shall state the place, date and hour of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is called.
<PAGE>

SECTION 4. Quorum. At any meeting of the stockholders, the holders
------
of a majority in number of the total outstanding shares of stock of the
Corporation entitled to vote at such meeting, present in person or represented
by proxy, shall constitute a quorum of the stockholders for all purposes, unless
the representation of a larger number of shares shall be required by law, by the
Certificate of Incorporation or by these By-Laws, in which case the
representation of the number of shares so required shall constitute a quorum;
provided, however, that at any meeting of the stockholders at which the holders
- -------- -------
of any class of stock of the Corporation shall be entitled to vote separately as
a class, the holders of a majority in number of the total outstanding shares of
such class, present in person or represented by proxy, shall constitute a quorum
for purposes of such class vote unless the representation of a larger number of
shares of such class shall be required by law, by the Certificate of
Incorporation or by these By-Laws, in which case the representation of the
number of shares of such class so required shall constitute a quorum.

SECTION 5. Adjourned Meetings. Whether or not a quorum shall be
------------------
present in person or represented at any meeting of the stockholders, the holders
of a majority in number of shares of stock of the Corporation present in person
or represented by proxy and entitled to vote at such meeting may adjourn from
time to time; provided, however, that if the holders of any class of stock of
-------- -------
the Corporation are entitled to vote separately as a class upon any matter at
such meeting, any adjournment of the meeting in respect of action by such class
upon such matter shall be determined by the holders of a majority of the shares
of such class present in person or represented by proxy and entitled to vote at
such meeting. When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting, the stockholders, or the holders of any class of stock entitled to vote
separately as a class, as the case may be, may transact any business which might
have been transacted by them at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the adjourned meeting.

SECTION 6. Organization. The Chairman of the Board or, in his
------------
absence, the President shall call all meetings of the stockholders to order, and
shall act as Chairman of such meetings. In the absence of the Chairman of the
Board and the President, the holders of a majority in number of the shares of
stock of the Corporation present in person or represented by proxy and entitled
to vote at such meeting shall elect a Chairman of the meeting.

The Secretary of the Corporation shall act as Secretary of all
meetings of the stockholders; but in the absence of the Secretary, the Chairman
of the meeting may appoint any person to act as Secretary of the meeting. It
shall be the duty of the Secretary

-2-
<PAGE>

of the Corporation to prepare and make, at least ten (10) days before every
meeting of stockholders, a complete list of stockholders entitled to vote at
such meeting, arranged in alphabetical order and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open, either at a place within the city where the meeting is
to be held, which place shall be specified in the notice of the meeting or, if
not so specified, at the place where the meeting is to be held, for the ten (10)
days next preceding the meeting, to the examination of any stockholder, for any
purpose germane to the meeting, during ordinary business hours, and shall be
produced and kept at the time and place of the meeting during the whole time
thereof and subject to the inspection of any stockholder who may be present.

SECTION 7. Voting. Except as otherwise provided in the Certificate
------
of Incorporation or by law, each stockholder shall be entitled to one vote for
each share of the capital stock of the Corporation registered in the name of
such stockholder upon the books of the Corporation. Each stockholder entitled
to vote at a meeting of stockholders or to express consent or dissent to
corporate action in writing without a meeting may authorize another person or
persons to act for him by proxy, but no such proxy shall be voted or acted upon
after three (3) years from its date, unless the proxy provides for a longer
period. When directed by the presiding officer or upon the demand of any
stockholder, the vote upon any matter before a meeting of stockholders shall be
by ballot. Except as otherwise provided by law or by the Certificate of
Incorporation, Directors shall be elected by a plurality of the votes cast at a
meeting of stockholders by the stockholders entitled to vote in the election
and, whenever any corporate action, other than the election of Directors is to
be taken, it shall be authorized by a majority of the votes cast at a meeting of
stockholders by the stockholders entitled to vote thereon.

Shares of the capital stock of the Corporation belonging to the
Corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors of such other corporation is held, directly or
indirectly, by the Corporation, shall neither be entitled to vote nor be counted
for quorum purposes.

SECTION 8. Inspectors. When required by law or directed by the
----------
presiding officer or upon the demand of any stockholder entitled to vote, but
not otherwise, the polls shall be opened and closed, the proxies and ballots
shall be received and taken in charge, and all questions touching the
qualification of voters, the validity of proxies and the acceptance or rejection
of votes shall be decided at any meeting of the stockholders by two or more
Inspectors who may be appointed by the Board of Directors before the meeting, or
if not so appointed, shall be appointed by the presiding officer at the meeting.
If any person so appointed fails to appear or act, the vacancy may be filled by
appointment in like manner.

-3-
<PAGE>

SECTION 9. Consent of Stockholders in Lieu of Meeting. Unless
------------------------------------------
otherwise provided in the Certificate of Incorporation, any action required to
be taken or which may be taken at any annual or special meeting of the
stockholders of the Corporation, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of any such corporation action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.

SECTION 10. Advance Notice Provisions for Election of Directors.
---------------------------------------------------
Only persons who are nominated in accordance with the following procedures shall
be eligible for election as directors of the Corporation. Nominations of
persons for election to the Board of Directors may be made at any annual meeting
of stockholders, or at any special meeting of stockholders called for the
purpose of electing directors, (a) by or at the direction of the Board of
Directors (or any duly authorized committee thereof), or (b) by any stockholder
of the Corporation (i) who is a stockholder of record on the date of the giving
of the notice provided for in this Section 10 and on the record date for the
determination of stockholders entitled to vote at such meeting and (ii) who
complies with the notice procedure set forth in this Section 10.

In addition to any other applicable requirements, for a nomination to
be made by a stockholder, such stockholder must have given timely notice thereof
in proper written form to the Secretary of the Corporation.

To be timely, a stockholder's notice to the Secretary must be
delivered to or mailed and received at the principal executive offices of the
Corporation (a) in the case of an annual meeting, not less than sixty (60) days
nor more than ninety (90) days prior to the date of the annual meeting;
provided, however, that if less than seventy (70) days' notice or prior public
- -------- -------
disclosure of the date of the annual meeting is given or made to stockholders,
notice by the stockholder in order to be timely must be so received not later
than the close of business on the tenth (10th) day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure of the date of the annual meeting was made, whichever first occurs;
and (b) in the case of a special meeting of stockholders called for the purpose
of electing directors, not later than the close of business on the tenth (10th)
day following the day on which notice of the date of the special meeting was
mailed or public disclosure of the date of the special meeting was made,
whichever first occurs.

To be in proper written form, a stockholder's notice to the Secretary
must set forth (a) as to each person whom the stockholder proposes to nominate
for election as

-4-
<PAGE>

a director (i) the name, age, business address and residence address of the
person, (ii) the principal occupation or employment of the person, (iii) the
class or series and number of shares of capital stock of the Corporation which
are owned beneficially or of record by the person, and (iv) any other
information relating to the person that would be required to be disclosed in a
proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules
and regulations promulgated thereunder; and (b) as to the stockholder giving the
notice (i) the name and record address of such stockholder, (ii) the class or
series and number of shares of capital stock of the Corporation which are owned
beneficially or of record by such stockholder, (iii) a description of all
arrangements or understandings between such stockholder and each proposed
nominee and any other person or persons (including their names) pursuant to
which the nomination(s) are to be made by such stockholder, (iv) a
representation that such stockholder intends to appear in person or by proxy at
the meeting to nominate the persons named in its notice, and (v) any other
information relating to such stockholder that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Exchange Act and the rules and regulations promulgated thereunder. Such notice
must be accompanied by a written consent of each proposed nominee to being named
as a nominee and to serve as a director if elected.

No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 10. If the Chairman of the meeting determines that a nomination was not
made in accordance with the foregoing procedures, the Chairman shall declare to
the meeting that the nomination was defective and such defective nomination
shall be disregarded.

SECTION 11. Advance Notice Provisions for Business to be Transacted
-------------------------------------------------------
at Annual Meeting. No business may be transacted at an annual meeting of
- -----------------
stockholders, other than business that is: (a) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors (or any duly authorized committee thereof); (b) otherwise properly
brought before the annual meeting by or at the direction of the Board of
Directors (or any duly authorized committee thereof); or (c) otherwise properly
brought before the annual meeting by any stockholder of the Corporation (i) who
is a stockholder of record on the date of the giving of the notice provided for
in this Section 11 and on the record date for the determination of stockholders
entitled to vote at such meeting and (ii) who complies with the notice procedure
set forth in this Section 11.

In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary of
the Corporation.

-5-
<PAGE>

To be timely, a stockholder's notice to the Secretary must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than sixty (60) days nor more than ninety (90) days prior
to the date of the annual meeting; provided, however, that if less than seventy
-------- -------
(70) days' notice or prior public disclosure of the date of the annual meeting
is given or made to stockholders, notice by the stockholder in order to be
timely must be so received not later than the close of business on the tenth
(10th) day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure of the date of the annual meeting
was made, whichever first occurs.

To be in proper written form, a stockholder's notice to the Secretary
must set forth as to each matter such stockholder proposes to bring before the
annual meeting (1) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (2) the name and record address of such stockholder, (3) the
class or series and number of shares of capital stock of the Corporation which
are owned beneficially or of record by such stockholder, (4) a description of
all arrangements or understandings between such stockholder and any other person
or persons (including their names) in connection with the proposal of such
business by such stockholder and any material interest of such stockholder in
such business, and (5) a representation that such stockholder intends to appear
in person or by proxy at the annual meeting to bring such business before the
meeting.

No business shall be conducted at the annual meeting of stockholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 11; provided, however, that once business
-------- -------
has been properly brought before the annual meeting in accordance with such
procedures, nothing in this Section 11 shall be deemed to preclude discussion by
any stockholder of any such business. If the Chairman of the meeting determines
that business was not properly brought before the annual meeting in accordance
with the foregoing procedures, the Chairman shall declare to the meeting that
the business was not properly brought before the meeting and such business shall
not be transacted.

SECTION 12. Order of Business. The order of business at all meetings
-----------------
of the stockholders shall be as determined by the Chairman of the meeting.

ARTICLE II
----------

Board of Directors
------------------

SECTION 1. Number and Term of Office. The business and affairs of
-------------------------
the Corporation shall be managed by or under the direction of ten (10)
Directors, who need not be stockholders of the Corporation. The Directors
shall, except as hereinafter

-6-
<PAGE>

otherwise provided for filling vacancies, be elected at the annual meeting of
stockholders, and shall hold office until their respective successors are
elected and qualified or until their earlier resignation or removal. The number
of Directors may be altered from time to time by amendment of these By-Laws.

SECTION 2. Removal, Vacancies and Additional Directors. The
-------------------------------------------
stockholders may, at any special meeting the notice of which shall state that it
is called for that purpose, remove, with or without case, any Director and fill
the vacancy; provided, however, that whenever any Director shall have been
-------- -------
elected by the holders of any class of stock of the Corporation voting
separately as a class under the provisions of the Certificate of Incorporation,
such Director may be removed and the vacancy filled only by the holders of that
class of stock voting separately as a class. Vacancies caused by any such
removal and not filled by the stockholders at the meeting at which such removal
shall have been made, or any vacancy caused by the death or resignation of any
Director or for any other reason, and any newly created directorship resulting
from any increase in the authorized number of Directors, may be filled by the
affirmative vote of a majority of the Directors then in office, although less
than a quorum, and any Director so elected to fill any such vacancy or newly
created directorship shall hold office until his successor is elected and
qualified or until his earlier resignation or removal.

When one or more Directors shall resign effective at a future date, a
majority of the Directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
Director so chosen shall hold office as herein provided in connection with the
filling of other vacancies.

SECTION 3. Place of Meeting. The Board of Directors may hold its
----------------
meetings in such place or places in the State of Delaware or outside the State
of Delaware as the Board from time to time shall determine.

SECTION 4. Regular Meetings. Regular meetings of the Board of
----------------
Directors shall be held at such times and places as the Board from time to time
by resolution shall determine. No notice shall be required for any regular
meeting of the Board of Directors; but a copy of every resolution fixing or
changing the time or place of regular meetings shall be mailed to every Director
at least five days before the first meeting held in pursuance thereof.

SECTION 5. Special Meetings. Special meetings of the Board of
----------------
Directors shall be held whenever called by direction of the Chairman of the
Board, the President or by any two of the Directors then in office.

-7-
<PAGE>

Notice of the day, hour and place of holding of each special meeting
shall be given by mailing the same at least three days before the meeting or by
causing the same to be delivered personally or transmitted by telegraph,
facsimile, telex or sent by certified, registered or overnight mail at least one
day before the meeting to each Director. Unless otherwise indicated in the
notice thereof, any and all business other than an amendment of these By-Laws
may be transacted at any special meeting, and an amendment of these By-Laws may
be acted upon if the notice of the meeting shall have stated that the amendment
of these By-Laws is one of the purposes of the meeting. At any meeting at which
every Director shall be present, even though without any notice, any business
may be transacted, including the amendment of these By-Laws.

SECTION 6. Quorum. Subject to the provisions of Section 2 of this
------
Article II, a majority of the members of the Board of Directors in office (but
in no case less than one-third of the total number of Directors nor less than
two Directors) shall constitute a quorum for the transaction of business and the
vote of the majority of the Directors present at any meeting of the Board of
Directors at which a quorum is present shall be the act of the Board of
Directors. If at any meeting of the Board there is less than a quorum present,
a majority of those present may adjourn the meeting from time to time.

SECTION 7. Organization. At each meeting of the Board of Directors,
------------
the Chairman of the Board, if one shall have been elected, or, in the absence of
the Chairman of the Board or if one shall not have been elected, the President
(or, in his absence, another Director chosen by a majority of the Directors
present) shall act as chairman of the meeting and preside thereat. The
Secretary or, in his absence, any person appointed by the chairman of the
meeting shall act as secretary of the meeting and keep the minutes thereof.

SECTION 8. Committees. The Board of Directors may, by resolution
----------
passed by a majority of the whole Board of Directors, designate one or more
committees, each committee to consist of one or more of the Directors of the
Corporation. The Board of Directors may designate one or more Directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified members. Any such
committee, to the extent provided by resolution passed by a majority of the
whole Board of Directors, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and the
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to amending the Certificate of Incorporation,
adopting an agreement of merger or consolidation,

-8-
<PAGE>

recommending to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, recommending to the
stockholders a dissolution of the Corporation or a revocation of a dissolution,
or amending these By-Laws; and unless such resolution, these By-Laws, or the
Certificate of Incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock.

SECTION 9. Conference Telephone Meetings. Unless otherwise
-----------------------------
restricted by the Certificate of Incorporation or by these By-Laws, the members
of the Board of Directors or any committee designated by the Board, may
participate in a meeting of the Board or such committee, as the case may be, by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and such
participation shall constitute presence in person at such meeting.

SECTION 10. Consent of Directors or Committee in Lieu of Meeting.
----------------------------------------------------
Unless otherwise restricted by the Certificate of Incorporation or by these By-
Laws, any action required or permitted to be taken at any meeting of the Board
of Directors, or of any committee thereof, may be taken without a meeting if all
members of the Board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the Board or committee, as the case may be.

ARTICLE III
-----------

Officers
--------

SECTION 1. Number and Qualifications. The officers of the
-------------------------
Corporation shall be elected by the Board of Directors and shall include the
President, one or more Vice Presidents, the Secretary and the Treasurer. If the
Board of Directors wishes, it also may elect as an officer of the Corporation a
Chairman of the Board and may elect other officers (including one or more
Assistant Treasurers and one or more Assistant Secretaries) as may be necessary
or desirable for the business of the Corporation. Any two or more offices may
be held by the same person, and no officer except the Chairman of the Board need
be a director. Each officer shall hold office until his successor shall have
been duly elected and shall have qualified, or until his death, or until he
shall have resigned or have been removed, as hereinafter provided in these By-
Laws.

All officers, agents and employees shall be subject to removal, with
or without cause, at any time by the Board of Directors. The removal of an
officer without cause shall be without prejudice to his contract rights, if any.
The election or appointment of an officer shall not of itself create contract
rights. All agents and

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<PAGE>

employees other than officers elected by the Board of Directors also shall
be subject to removal, with or without cause, at any time by the officers
appointing them.

Any vacancy caused by the death of any officer, his resignation, his
removal, or otherwise, may be filled by the Board of Directors, and any officer
so elected shall hold office at the pleasure of the Board of Directors.

In addition to the powers and duties of the officers of the
Corporation as set forth in the By-Laws, the officers shall have such authority
and shall perform such duties as from time to time may be determined by the
Board of Directors.

SECTION 2. Chairman of the Board. The Chairman of the Board, if one
---------------------
shall have been elected, if present, shall preside at each meeting of the Board
of Directors or the stockholders. He shall advise and counsel with the
President and with other executives of the Corporation, and also shall have such
other powers and shall perform such other duties as may from time to time be
assigned to him by the Board of Directors.

SECTION 3. The President. The President shall be the chief executive
-------------
officer of the Corporation. He shall, in the absence of the Chairman of the
Board or if a Chairman of the Board shall not have been elected, preside at each
meeting of the Board of Directors or the stockholders. He shall perform all
duties incident to the office of President and chief executive officer and also
shall have such other powers and shall perform such other duties as may from
time to time be assigned to him by the Board of Directors.

SECTION 4. Vice Presidents. Each Vice President shall perform all
---------------
duties incident to the office of Vice President and also shall have such other
powers and shall perform such other duties as may from time to time be assigned
to him by the By-Laws or by the Board of Directors, the Chairman of the Board or
the President.

SECTION 5. The Secretary. The Secretary shall keep the minutes of
-------------
all meetings of the Board of Directors and the minutes of all meetings of the
stockholders in books provided for that purpose; he shall attend to the giving
or serving of all notices of the Corporation; he shall have custody of the
corporate seal of the Corporation and shall affix the same to such documents and
other papers as the Board of Directors, the Chairman of the Board or the
President shall authorize and direct; he shall have charge of the stock
certificate books, transfer books and stock ledgers and such other books and
papers as the Board of Directors, the Chairman of the Board or the President
shall direct, all of which shall at all reasonable times be open to the
examination of any Director, upon application, at the office of the Corporation
during business hours; and he shall perform all duties incident to the office of
Secretary and also shall have such other powers and

-10-
<PAGE>

shall perform such other duties as may from time to time be assigned to him by
these By-Laws or the Board of Directors, the Chairman of the Board or the
President.

SECTION 6. The Treasurer. The Treasurer shall have custody of, and
-------------
when proper shall pay out, disburse or otherwise dispose of, all funds and
securities of the Corporation which may have come into his hands; he may endorse
on behalf of the Corporation for collection checks, notes and other obligations
and shall deposit the same to the credit of the Corporation in such bank or
banks or depositary or depositaries as the Board of Directors may designate; he
shall sign all receipts and vouchers for payments made to the Corporation; he
shall enter or cause to be entered regularly in the books of the Corporation
kept for the purpose full and accurate accounts of all moneys received or paid
or otherwise disposed of by him and whenever required by the Board of Directors
or the President shall render statements of such accounts; he shall, at all
reasonable times, exhibit his books and accounts to any Director of the
Corporation upon application at the office of the Corporation during business
hours; and he shall perform all duties incident to the office of Treasurer and
also shall have such other powers and shall perform such other duties as may
from time to time be assigned to him by these By-Laws or by the Board of
Directors, the Chairman of the Board or the President.

SECTION 7. Additional Officers. The Board of Directors may from time
-------------------
to time elect such other officers (who may but need not be Directors), including
a Controller, Assistant Treasurers, Assistant Secretaries and Assistant
Controllers, as the Board may deem advisable and such officers shall have such
authority and shall perform such duties as may from time to time be assigned to
them by the Board of Directors, the Chairman of the Board or the President.

The Board of Directors may from time to time by resolution delegate to
any Assistant Treasurer or Assistant Treasurers any of the powers or duties
herein assigned to the Treasurer; and may similarly delegate to any Assistant
Secretary or Assistant Secretaries any of the powers or duties herein assigned
to the Secretary.

SECTION 8. Giving of Bond by Officers. All officers of the
--------------------------
Corporation, if required to do so by the Board of Directors, shall furnish bonds
to the Corporation for the faithful performance of their duties, in such
penalties and with such conditions and security as the Board shall require.

SECTION 9. Voting Upon Stocks. Unless otherwise ordered by the Board
------------------
of Directors, the Chairman of the Board, the President or any Vice President
shall have full power and authority on behalf of the Corporation to attend and
to act and to vote, or in the name of the Corporation to execute proxies to
vote, at any meetings of stockholders of any corporation in which the
Corporation may hold stock, and at any such meetings shall possess and may
exercise, in person or by proxy, any and all rights, powers and

-11-
<PAGE>

privileges incident to the ownership of such stock. The Board of Directors may
from time to time, by resolution, confer like power upon any other person or
persons.

SECTION 10. Compensation of Officers. The officers of the
------------------------
Corporation shall be entitled to receive such compensation for their services as
shall from time to time be determined by the Board of Directors.

ARTICLE IV
----------

Stock-Seal-Fiscal Year
----------------------

SECTION 1. Certificates For Shares of Stock. The certificates for
--------------------------------
shares of stock of the Corporation shall be in such form, not inconsistent with
the Certificate of Incorporation, as shall be approved by the Board of
Directors. All certificates shall be signed by the Chairman of the Board, the
President or a Vice President and by the Secretary or an Assistant Secretary or
the Treasurer or an Assistant Treasurer, and shall not be valid unless so
signed.

In case any officer or officers who shall have signed any such
certificate or certificates shall cease to be such officer or officers of the
Corporation, whether because of death, resignation or otherwise, before such
certificate or certificates shall have been delivered by the Corporation, such
certificate or certificates may nevertheless be issued and delivered as though
the person or persons who signed such certificate or certificates had not ceased
to be such officer or officers of the Corporation.

All certificates for shares of stock shall be consecutively numbered
as the same are issued. The name of the person owning the shares represented
thereby with the number of such shares and the date of issue thereof shall be
entered on the books of the Corporation.

Except as hereinafter provided, all certificates surrendered to the
Corporation for transfer shall be cancelled, and no new certificates shall be
issued until former certificates for the same number of shares have been
surrendered and cancelled.

SECTION 2. Lost, Stolen or Destroyed Certificates. Whenever a person
--------------------------------------
owing a certificate for shares of stock of the Corporation alleges that it has
been lost, stolen or destroyed, he shall file in the office of the Corporation
an affidavit setting forth, to the best of his knowledge and belief, the time,
place and circumstances of the loss, theft or destruction, and, if required by
the Board of Directors, a bond of indemnity or other indemnification sufficient
in the opinion of the Board of Directors to indemnify the Corporation and its
agents against any claim that may be made against it or them on account of the
alleged loss, theft or destruction of any such certificate or the issuance of a
new certificate in replacement therefor. Thereupon the Corporation may cause to
be

-12-
<PAGE>

issued to such person a new certificate in replacement for the certificate
alleged to have been lost, stolen or destroyed. Upon the stub of every new
certificate so issued shall be noted the fact of such issue and the number, date
and the name of the registered owner of the lost, stolen or destroyed
certificate in lieu of which the new certificate is issued.

SECTION 3. Transfer of Shares. Shares of stock of the Corporation
------------------
shall be transferred on the books of the Corporation by the holder thereof, in
person or by his attorney duly authorized in writing, upon surrender and
cancellation of certificates for the number of shares of stock to be
transferred, except as provided in the preceding section; provided, however,
-------- -------
that the Corporation shall be entitled to recognize and enforce any lawful
restriction on transfer.

SECTION 4. Regulations. The Board of Directors shall have power and
-----------
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of certificates for shares of stock of the
Corporation.

SECTION 5. Record Date. In order that the Corporation may determine
-----------
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or to express consent to corporate action in writing
without a meeting or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, as the case may be, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty (60) nor less than
ten (10) days before the date of such meeting, nor more than sixty (60) days
prior to any other action.

If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; the record date for determining
stockholders entitled to express consent to corporate action in writing without
a meeting, when no prior action by the Board of Directors is necessary, shall be
the day on which the first written consent is expressed; and the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
- -------- -------
adjourned meeting.

SECTION 6. Dividends. Subject to the provisions of the Certificate
---------
of Incorporation, the Board of Directors shall have power to declare and pay
dividends upon

-13-
<PAGE>

shares of stock of the Corporation, but only out of funds available for the
payment of dividends as provided by law.

Subject to the provisions of the Certificate of Incorporation, any
dividends declared upon the stock of the Corporation shall be payable on such
date or dates as the Board of Directors shall determine. If the date fixed for
the payment of any dividend shall in any year fall upon a legal holiday, then
the dividend payable on such date shall be paid on the next day not a legal
holiday.

SECTION 7. Corporate Seal. The Board of Directors shall provide a
--------------
suitable seal, containing the name of the Corporation, which seal shall be kept
in the custody of the Secretary. A duplicate of the seal may be kept and be
used by any officer of the Corporation designated by the Board of Directors, the
Chairman of the Board or the President.

SECTION 8. Fiscal Year. The fiscal year of the Corporation shall be
-----------
such fiscal year as the Board of Directors from time to time by resolution shall
determine.

ARTICLE V
---------

Miscellaneous Provisions
------------------------

SECTION 1. Checks, Notes, Etc. All checks, drafts, bills of
-------------------
exchange, acceptances, notes or other obligations or orders for the payment of
money shall be signed and, if so required by the Board of Directors,
countersigned by such officers of the Corporation and/or other persons as the
Board of Directors from time to time shall designate.

Checks, drafts, bill of exchange, acceptances, notes, obligations and
orders for the payment of money made payable to the Corporation may be endorsed
for deposit to the credit of the Corporation with a duly authorized depository
by the Treasurer, or otherwise as the Board of Directors may from time to time,
by resolution, determine.

SECTION 2. Loans. No loans and no renewals of any loans shall be
-----
contracted on behalf of the Corporation except as authorized by the Board of
Directors. When authorized so to do by the Board of Directors, any officer or
agent of the Corporation may effect loans and advances for the Corporation from
any bank, trust company or other institution or from any firm, corporation or
individual, and for such loans and advances may make, execute and deliver
promissory notes, bonds or other evidences of indebtedness of the Corporation.
When authorized so to do by the Board of Directors, any officer or agent of the
Corporation may pledge, hypothecate or transfer, as security for the payment of
any and all loans, advances, indebtedness and liabilities of the Corporation,
any and all stocks, securities and other property at any time held by the

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<PAGE>

Corporation, and to that end may endorse, assign and deliver the same. Such
authority may be general or confined to specific instances.

SECTION 3. Waivers of Notice. Whenever any notice whatever is
-----------------
required to be given by law, by the Certificate of Incorporation or by these By-
Laws to any person or persons, a waiver thereof in writing, signed by the person
or persons entitled to the notice, whether before or after the time stated
therein, shall be deemed equivalent thereto.

SECTION 4. Inconsistent Provisions. If any provision of these By-
-----------------------
Laws is or becomes inconsistent with any provision of the Certificate of
Incorporation, the General Corporation Law of the State of Delaware or any other
applicable law, the provisions of these By-Laws shall not be given any effect to
the extent of such inconsistency, but shall otherwise be given full force and
effect.

ARTICLE VI
----------

Amendments
----------

These By-Laws and any amendment thereof may be altered, amended or
repealed, or new By-Laws may be adopted, by the Board of Directors at any
regular or special meeting by the affirmative vote of a majority of all of the
members of the Board, provided in the case of any special meeting at which all
of the members of the Board are not present, that the notice of such meeting
shall have stated that the amendment of these By-Laws was one of the purposes of
the meeting; but these By-Laws and any amendment thereof, including the By-Laws
adopted by the Board of Directors, may be altered, amended or repealed and other
By-Laws may be adopted by the holders of a majority of the total outstanding
stock of the Corporation entitled to vote an any annual meeting or at any
special meeting, provided, in the case of any special meeting, that notice of
such proposed alteration, amendment, repeal or adoption is included in the
notice of the meeting.

ARTICLE VII
-----------

Indemnification of Officers and Directors
-----------------------------------------

SECTION 1. General. The Corporation shall indemnify any person who
-------
was or is a party or is threatened to be made a party to any contemplated,
pending or completed action, suit, arbitration, alternate dispute resolution
mechanism, investigation, administrative hearing or any other proceeding,
whether civil, criminal, administrative or investigative ("Proceeding") (other
than an action by or in the right of the Corporation) in whole or in part
attributable to (a) the fact that he is or was a director or officer of the

-15-
<PAGE>

Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, employee benefit plan, trust or other enterprise (an "Indemnitee"), or
(b) anything done or not done by such Indemnitee in any such capacity, against
expenses (including attorneys' fees) and losses, claims, liabilities, judgments,
fines and amounts paid in settlement incurred by him or on his behalf in
connection with such Proceeding ("Losses") if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Corporation, and, with respect to any criminal Proceeding, had no reasonable
cause to believe his conduct was unlawful; provided, however, that except as
-------- -------
provided in Section 6 of this Article VII, the Corporation shall indemnify any
such Indemnitee in connection with a Proceeding initiated by such Indemnitee
only if such Proceeding was authorized by the Board of Directors.

SECTION 2. Actions by or in the Right of the Corporation. The
---------------------------------------------
Corporation shall indemnify any person who was or is made a party or is
threatened to be made a party to any pending, completed or threatened Proceeding
brought by or in the right of the Corporation to procure a judgment in its favor
in whole or in part attributable to (a) the fact that he is or was a director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise (also an "Indemnitee"), or
(b) anything done or not done by such Indemnitee in any such capacity, against
expenses (including attorneys' fees) and Losses actually incurred by him or on
his behalf in connection with such action or suit if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the Corporation, provided that no indemnification shall be made in respect of
any claim, issue or matter as to which Delaware law expressly prohibits such
indemnification by reason of an adjudication of liability of such person to the
Corporation unless and only to the extent that the Court of Chancery of the
State of Delaware or the court in which such action or suit was brought shall
determine equitable under the circumstances.

SECTION 3. Indemnification in Certain Cases. Notwithstanding any
--------------------------------
other provision of this Article VII, to the extent that an Indemnitee has been
wholly successful on the merits or otherwise absolved in any Proceeding referred
to in Section 1 or 2 of this Article VII on any claim, issue or matter therein,
he shall be indemnified against expenses (including attorneys' fees) and Losses
incurred by him or on his behalf in connection therewith. If Indemnitee is not
wholly successful in such Proceeding but is successful, on the merits or
otherwise, as to one or more but less than all claims, issues or matters in such
Proceeding, the Corporation shall indemnify Indemnitee, to the maximum extent
permitted by law, against expenses (including attorneys' fees) and Losses
actually incurred by Indemnitee in connection with each successfully resolved
claim, issue or matter. For purposes of this Section 3 and without limitation,
the termination of any such

-16-
<PAGE>

claim, issue or matter by dismissal with or without prejudice shall be deemed to
be a successful resolution as to such claim, issue or matter.

SECTION 4. Procedure. (a) Any indemnification under Sections 1 and 2
---------
of this Article VII (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the Indemnitee is proper (except that the right of Indemnitee
to receive payments pursuant to Section 5 of this Article VII shall not be
subject to this Section 4) in the circumstances because he has met the
applicable standard of conduct set forth in such Sections 1 and 2. When seeking
indemnification, Indemnitee shall submit a written request for indemnification
to the Corporation. Such request shall include documentation or information
which is necessary for the Corporation to make a determination of Indemnitee's
entitlement to indemnification and what is reasonably available to Indemnitee.
Such determination shall be made promptly, but in no event later than 30 days
after receipt by the Corporation of Indemnitee's written request for
indemnification. The Secretary of the Corporation shall, promptly upon receipt
of Indemnitee's request for indemnification, advise the Board of Directors that
Indemnitee has made such request for indemnification.

(b) The entitlement of Indemnitee to indemnification shall be
determined in the specific case by a majority vote of a quorum of the Board of
Directors consisting of Disinterested Directors, except that such determination
shall be made by Independent Legal Counsel, if either such a quorum is not
obtainable or the Board of Directors, by the majority vote of Disinterested
Directors, so directs.

(c) If the determination of entitlement is to be made by Independent
Legal Counsel, such Independent Legal Counsel shall be selected by the Board of
Directors and approved by Indemnitee. Upon failure of the Board of Directors so
to select such Independent Legal Counsel or upon failure of Indemnitee so to
approve, such Independent Legal Counsel shall be selected by the Chancellor of
the State of Delaware or such other person as such Chancellor shall designate to
make such selection.

(d) If the Board of Directors or Independent Legal Counsel shall have
determined that Indemnitee is not entitled to indemnification to the full extent
of Indemnitee's request, Indemnitee shall have the right to seek entitlement to
indemnification in accordance with the procedures set forth in Section 6 of this
Article VII.

(e) If the person or persons empowered pursuant to Section 4(b) of
this Article VII to make a determination with respect to entitlement to
indemnification shall have failed to make the requested determination within 90
days after receipt by the Corporation of such request, the requisite
determination of entitlement to indemnification

-17-
<PAGE>

shall be deemed to have been made and Indemnitee shall be absolutely entitled to
such indemnification, absent (i) misrepresentation by Indemnitee of a material
fact in the request for indemnification, or (ii) a final judicial determination
that all of any part of such indemnification is expressly prohibited by law.

(f) The termination of any Proceeding by judgment, order, settlement
or conviction, or upon a plea of nolo contendere or its equivalent, shall not,
---- ----------
of itself, adversely affect the rights of Indemnitee to indemnification
hereunder except as may be specifically provided herein, or create a presumption
that Indemnitee did not act in good faith and in a manner in which Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Corporation or create a presumption that (with respect to any criminal action or
proceeding) Indemnitee had reasonable cause to believe that Indemnitee's conduct
was unlawful.

(g) For purposes of any determination of good faith hereunder,
Indemnitee shall be deemed to have acted in good faith if Indemnitee's action is
based on the records or books of account of the Corporation or an Affiliate,
including financial statements, or on information supplied to Indemnitee by the
officers of the Corporation or an Affiliate in the course of their duties, or on
the advice of legal counsel for the Corporation or an Affiliate or on
information or records given or reports made to the Corporation or an Affiliate
by an independent certified public accountant or by an appraiser or other expert
selected with reasonable care by the Corporation or an Affiliate. The
provisions of this Section 4(g) of this Article VII shall not be deemed to be
exclusive or to limit in any way the other circumstances in which the Indemnitee
may be a deemed to have met the applicable standard of conduct set forth in
these By-Laws.

(h) The knowledge and/or actions, or failure to act, of any Director,
officer, agent or employee of the Corporation or an Affiliate shall not be
imputed to Indemnitee for purposes of determining the right to indemnification
under these By-Laws.

SECTION 5. Advances for Expenses and Costs. All expenses (including
-------------------------------
attorneys' fees) incurred by or on behalf of Indemnitee (or reasonably expected
by Indemnitee to be incurred by Indemnitee within three (3) months) in
connection with any Proceeding shall be paid by the Corporation in advance of
the final disposition of such Proceeding within twenty (20) days after the
receipt by the Corporation of a statement or statements from Indemnitee
requesting from time to time such advance or advances whether or not a
determination to indemnify has been made under Section 4 of this Article VII
(and even if the Board of Directors or Independent Legal Counsel has determined,
pursuant to Section 4, that Indemnitee is not entitled to indemnification by
reason of their conclusions that Indemnitee (a) did not act in good faith or in
a manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Corporation, or (b) had reasonable cause to believe his conduct
was unlawful, but not

-18-
<PAGE>

after the conclusion of judicial proceedings under Section 6 of this Article
VII). Indemnitee's entitlement to such advancement of expenses shall include
those incurred in connection with any Proceeding by Indemnitee seeking an
adjudication or award in arbitration pursuant to these By-Laws. Such statement
or statements shall evidence such expenses incurred (or reasonably expected to
be incurred) by Indemnitee in connection therewith and shall include or be
accompanied by a written undertaking by or on behalf of Indemnitee to repay such
amount if it shall ultimately be determined that Indemnitee is not entitled to
be indemnified therefor pursuant to the terms of this Article VII. The financial
ability of an Indemnitee to repay an advance shall not be a prerequisite to the
making of such an advance.

SECTION 6. Remedies in Cases of Determination not to Indemnify or to
---------------------------------------------------------
Advance Expenses. (a) If (i) a determination is made that Indemnitee is not
- ----------------
entitled to indemnification hereunder, (ii) advances are not made pursuant to
Section 5 of this Article VII, or (iii) payment has not been timely made
following a determination of entitlement to indemnification pursuant to Section
4 of this Article VII, Indemnitee shall be entitled to seek a final adjudication
in an appropriate court of the State of Delaware or any other court of competent
jurisdiction of Indemnitee's entitlement to such indemnification or advance.

(b) If a determination has been made in accordance with the procedures
set forth in Section 4 of this Article VII, in whole or in part, that Indemnitee
is not entitled to indemnification, any judicial proceeding referred to in
paragraph (a) of this Section 6 shall be de novo and Indemnitee shall not be
-- ----
prejudiced by reason of any such prior determination that Indemnitee is not
entitled to indemnification.

(c) If a determination is made or deemed to have been made pursuant to
the terms of Section 4 or 6 of this Article VII that Indemnitee is entitled to
indemnification, the Corporation shall be bound by such determination in any
judicial proceeding in the absence of (i) a misrepresentation of a material fact
by Indemnitee, or (ii) a final judgment determination that all or any part of
such indemnification is expressly prohibited by law.

(d) To the extent deemed appropriate by the court, interest shall be
paid by the Corporation to Indemnitee at a reasonable interest rate for amounts
which the Corporation indemnifies or is obligated to indemnify Indemnitee for
the period commencing with the date on which Indemnitee requested
indemnification (or reimbursement or advancement of expenses) and ending with
the date on which such payment is made to Indemnitee by the Corporation.

SECTION 7. Rights Non-Exclusive. The rights of indemnification and
--------------------
advancement of expenses provided by, or granted pursuant to, this Article VII
shall not be

-19-
<PAGE>

deemed exclusive of any other rights to which any person seeking indemnification
or advancement of expenses may be entitled under any law, certificate of
incorporation, by-law, agreement, vote of stockholders or resolution of
directors of otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office. No amendment, alteration,
rescission or replacement of these By-Laws or any provision hereof shall be
effective as to Indemnitee with respect to any action taken or omitted by such
Indemnitee in Indemnitee's position with the Corporation or an Affiliate or any
other entity which Indemnitee is or was serving at the request of the
Corporation prior to such amendment, alteration, rescission or replacement.

SECTION 8. Insurance. The Corporation shall have power to purchase
---------
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would have the
power to indemnify him against such liability under the provisions of this
Article VII.

SECTION 9. Survival of Rights. The indemnification and advancement
------------------
of expenses provided by, or granted pursuant to, this Article VII shall continue
as to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of such a
person.

SECTION 10. Indemnification of Employees and Agents of the
----------------------------------------------
Corporation. The Corporation may, by action of the Board of Directors from time
- -----------
to time, grant rights to indemnification and advancement of expenses to
employees and agents of the Corporation with the same scope and effect as the
provisions of this Article VII with respect to the indemnification of directors
and officers of the Corporation.

SECTION 11. Definitions. For purposes of this Article VII:
-----------

(a) "Affiliate" includes any corporation, partnership, joint venture,
---------
employee benefit plan, trust or other enterprise that directly or indirectly,
through one or more intermediaries, controls, or is controlled by, or is under
common control with, the Corporation.

(b) "Corporation" includes all constituent corporations absorbed in a
-----------
consolidation or merger as well as the resulting or surviving corporation so
that any person who is or was a director, officer, employee or agent of such a
constituent corporation or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture,

-20-
<PAGE>

employee benefit plan, trust or other enterprise shall stand in the same
position under the provisions of this Article VII with respect to the resulting
or surviving corporation as he would if he had served the resulting or surviving
corporation in the same capacity.

(c) "Disinterested Director" shall mean a director of the Corporation
----------------------
who is not or was not a party to the Proceeding in respect of which
indemnification is being sought by Indemnitee.

(d) "Independent Legal Counsel" shall mean a law firm or lawyer that
-------------------------
neither is presently nor in the past five years has been retained to represent
(i) the Corporation or Indemnitee in any matter material to either such party,
or (ii) any other party to the Proceeding giving rise to a claim for
indemnification hereunder. Notwithstanding the foregoing, the term "Independent
Counsel" shall not include any firm or person who, under the applicable
standards of professional conduct then prevailing, would have a conflict of
interest in representing either the Corporation or Indemnitee in an action to
determine Indemnitee's right to indemnification under these By-Laws. All fees
and expenses of the Independent Counsel incurred in connection with acting
pursuant to these By-Laws shall be borne by the Corporation.

ARTICLE VIII
------------

Offices
-------

SECTION 1. Registered Office. The registered office of the
-----------------
Corporation within the State of Delaware shall be in the City of Wilmington,
County of New Castle.

SECTION 2. Other Offices. The Corporation also may have an office or
-------------
offices other than said registered office at such place or places, either within
or without the State of Delaware, as the Board of Directors shall from time to
time determine or the business of the Corporation may require.

-21-

<PAGE>
EXHIBIT 5.1

[LETTERHEAD OF FRIED, FRANK, HARRIS, SHRIVER & JACOBSON]

WRITER'S DIRECT LINE
212-859-8000
August , 1996 (FAX: 212-859-4000)
Dal-Tile International Inc.
7834 Hawn Freeway
Dallas, Texas 75217

Ladies and Gentlemen:

We are acting as special counsel to Dal-Tile International Inc., a
Delaware corporation (the "Company"), in connection with the Company's
-------
Registration Statement on Form S-l (No. 333-5069) (the "Registration Statement")
----------------------
under the Securities Act of 1933, as amended (the "Securities Act"), with
--------------
respect to the underwritten public offerings of up to 8,050,000 shares of the
Company's common stock, par value $.01 per share (the "Common Stock"), including
------------
up to 1,050,000 shares of Common Stock issuable upon exercise of an over-
allotment option granted to the U.S. Underwriters. All the 8,050,000 shares of
Common Stock to be offered to the public are being issued by the Company. All
defined terms not otherwise defined herein shall have the meanings set forth in
the Prospectus forming a part of the Registration Statement.

We have examined the originals, or certified, conformed or
reproduction copies, of all records, agreements, instruments and documents as we
have deemed relevant or necessary as the basis for the opinion hereinafter
expressed. In all such examinations, we have assumed the genuineness of all
signatures, the authenticity of all original or certified copies and the
conformity to original or certified copies of all copies submitted to us as
conformed or reproduction copies. We also have assumed, with respect to all
parties to agreements or instruments relevant hereto other than the Company,
that such parties had the requisite power and authority (corporate or otherwise)
to execute, deliver and perform such agreements or instruments, that such
agreements or instruments have been duly authorized by all requisite action
(corporate or otherwise), executed and delivered by such parties, and that such
agreements or instruments are the valid, binding and enforceable obligations of
such parties. As to various questions of fact relevant to such opinions, we have
relied upon, and have assumed the accuracy of, certificates and oral or written
statements and other
<PAGE>

-2-

information of or from public officials, officers or representatives of the
Company and others.

Based upon the foregoing and subject to the limitations set forth
herein, we are of the opinion that the shares of Common Stock, when the terms of
the issuance and the sale thereof have been duly approved by the Board of
Directors of the Company in conformity with the Company's certificate of
incorporation and by-laws, and when issued, delivered and paid for in accordance
with the terms of the Registration Statement, the U.S. Underwriting Agreement
and the International Underwriting Agreement, will be validly issued, fully paid
and non-assessable.

This opinion is limited to the General Corporation Law of the State
of Delaware.

We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus forming part of the Registration Statement. In
giving such consent, we do not hereby admit that we are in the category of such
persons whose consent is required under Section 7 of the Securities Act.

The opinion expressed herein is solely for the benefit of the
Company and may not be relied upon in any manner or for any purpose by any other
person and may not be quoted in whole or in part without our prior written
consent.

Very truly yours,

FRIED, FRANK, HARRIS, SHRIVER & JACOBSON

By: /s/ Frederick H. Fogel
------------------------------------
Frederick H. Fogel

<PAGE>

EXHIBIT 10.1

DAL-TILE INTERNATIONAL INC.

1996 AMENDED AND RESTATED
STOCK OPTION PLAN

ARTICLE 1

GENERAL

1.1 Purpose. The purpose of this Dal-Tile International Inc. 1996
-------
Amended and Restated Stock Option Plan (the "Plan") is to provide for certain
key employees of Dal-Tile International Inc. ("Dal-Tile"), a Delaware
corporation, its successors and assigns and its subsidiaries and affiliates
(collectively, the "Company"), an incentive (i) to join and remain in the
service of the Company, (ii) to maintain and enhance the long-term performance
and profitability of the Company and (iii) to acquire a proprietary interest in
the success of the Company. The grant and exercise of Options under the Plan is
intended to meet the requirements of Rule 16b-3 of the 1934 Act (as hereinafter
defined) at all times during which the Company and its Insiders (as hereinafter
defined) are subject to the requirements of Section 16 of the 1934 Act.

1.2 Definition of Certain Terms.
---------------------------
(a) "Agreement" means an agreement issued pursuant to Section
Section 2.1.

(b) "Board" means the Board of Directors of Dal-Tile.

(d) "Committee" means the Committee appointed to administer the
Plan in accordance with Section 1.3.

<PAGE>

(e) "Common Stock" means the shares of Class A common stock, par value
$.01 per share, of Dal-Tile and, subject to Section 2.5, any other shares into
which such common stock shall thereafter be exchanged by reason of a
recapitalization, merger, consolidation, split-up, combination, exchange of
shares or the like.

(f) "Date of Grant" means the date as of which an Option is granted by
the Committee under an Agreement.

(g) "Fair Market Value" per share as of a particular date means (i)
the closing sales price per share of Common Stock on the national securities
exchange on which the Common Stock is principally traded for the last date
(including the Date of Grant) on which there was a sale of such Common Stock on
such exchange, or (ii) if the shares of Common Stock are not then traded on a
national securities exchange, the average of the closing bid and asked prices
for the shares of Common Stock in the over-the-counter market on which the
Common Stock is principally traded for the last date (including the Date of
Grant) on which there was a sale of such Common Stock in such market, or (iii)
if the shares of Common Stock are not then listed on a national securities
exchange or traded in an over-the-counter market, such value as the Committee,
in its sole discretion, shall determine.

(h) "Insider" means an insider as so defined for purposes of Section
16 of the 1934 Act.

(i) "Option" means any incentive stock option or "nonqualified" stock
option, both as described in Section 1.5, granted under the Plan.

(j) "Optionee" means an employee of the Company who has been awarded
any Option under this Plan.

(k) The terms "parent corporation" and "subsidiary corporation" as
used herein shall have the meaning given those terms in Code section

-2-
<PAGE>

425(e) and (f), respectively. A corporation shall be deemed a parent or a
subsidiary only for such periods during which the requisite ownership
relationship is maintained.

(l) "Plan" means this Dal-Tile International Inc. 1996 Amended and
Restated Stock Option Plan.

(m) "Termination With Cause," with respect to any Optionee, means
termination by the Company of such Optionee's employment for: (i)
misappropriation of corporate funds, (ii) conviction of a crime, (iii) willful
violation of written directions of the Chief Executive Officer or the Board of
Directors of the Company; or (iv) gross negligence and willful misconduct.

(n) "1934 Act" means the Securities Exchange Act of 1934, as amended.

1.3 Administration.
--------------

(a) (i) Subject to Section 1.3(e), the Plan shall be administered by
a committee of the Board which shall consist of at least two members of the
Board and which shall have the power of the Board to authorize awards under the
Plan. At all times during which Dal-Tile and its Insiders are subject to the
requirements of Section 16 of the 1934 Act, all members of the Committee shall
be "disinterested persons" or "Non-Employee Directors" as described in Rule 16b-
3 of the 1934 Act. From and after Dal-Tile's first stockholder meeting at which
directors are elected in the year 2,000, all members of the Committee shall be
"outside directors" for purposes of Section 162(m) of the Code. The members of
the Committee shall be appointed by, and may be changed from time to time in the
discretion of, the Board.

(b) The Committee shall have the authority (i) to exercise all of the
powers granted to it under the Plan, (ii) to construe, interpret and implement
the Plan and any Agreement executed pursuant to Section 2.1, (iii) to prescribe,
amend and rescind rules and regulations relating to the Plan, (iv) to make all
determinations necessary or advisable in administering the Plan, and (v) to
correct any defect, supply any omission

-3-
<PAGE>

and reconcile any inconsistency in the Plan and (vi) to grant Options on such
terms, not inconsistent with the Plan, as it shall determine.

(d) No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any award
thereunder.

(e) Notwithstanding anything to the contrary contained herein: (i)
until the Board shall appoint the members of the Committee, the Plan shall be
administered by the Board; and (ii) the Board may, in its sole discretion, at
any time and from time to time, resolve to administer the Plan. In either of
the foregoing events, the term "Committee" as used herein shall be deemed to
mean the Board.

1.4 Persons Eligible for Awards. Awards under the Plan may be made
---------------------------
from time to time to such key employees of the Company as the Committee shall in
its sole discretion select, provided, however, that subject to Section 3.4, the
Committee may not award Options to any such employee with respect to more than
25,000 shares of Common Stock in any fiscal year during the term of the Plan.

1.5 Types of Awards Under the Plan. Awards may be made under the
------------------------------
Plan in the form of (a) stock options which may, in the Committee's discretion,
be granted either as (i) "nonqualified" stock options subject to the provisions
of section 83 of the Code or (ii) "incentive stock options" described in section
422 of the Code, all as more fully set forth in Article 2.

1.6 Shares Available for Awards.
---------------------------
(a) Subject to Section 3.4 (relating to adjustments upon changes in
capitalization), as of any date the total number of shares of Common Stock with
respect to which Options may be outstanding under the Plan shall be equal to the
excess (if any) of (i) 435,714 shares over (ii) the sum of (A) the number of
shares subject to outstanding Options granted under the Plan and (B) the number
of shares previously

-4-
<PAGE>

transferred pursuant to the exercise of Options granted under the Plan. In
accordance with (and without limitation upon) the preceding sentence, but
subject to the requirements of Rule 16b-3 of the 1934 Act, if applicable, shares
of Common Stock covered by Options granted under the Plan which expire or
terminate for any reason shall again become available for award under the Plan.

(b) Shares that are issued upon the exercise of Options awarded under
the Plan shall be authorized and unissued or treasury shares of Common Stock.

(c) Without limiting the generality of the preceding provisions of
this Section 1.6, the Committee may, but solely with the Optionee's consent,
agree to cancel any award of Options under the Plan and issue new Options in
substitution therefor, provided that the Options as so substituted shall satisfy
all of the requirements of the Plan as of the date such new Options are awarded.

1.7 Option Price. The exercise price of each Option shall not be
------------
less than 100% of the Fair Market Value of the shares of Common Stock covered by
the Option as of the Date of Grant.

-5-
<PAGE>

ARTICLE 2
STOCK OPTIONS

2.1 Agreements Evidencing Stock Options.
------------------------------------
(a) Options awarded under the Plan shall be evidenced by Agreements
which shall not be inconsistent with the terms and provisions of the Plan, and,
in the case of incentive stock options, of section 422 of the Code, and which
shall contain such provisions as the Committee may in its sole discretion deem
necessary or desirable. Without limiting the generality of the foregoing, the
Committee may in any Agreement impose such restrictions or conditions upon the
exercise of such Option or upon the sale or other disposition of the shares of
Common Stock issuable upon exercise of such Option as the Committee may in its
sole discretion determine. By accepting an award pursuant to the Plan each
Optionee shall thereby agree that each such award shall be subject to all of the
terms and provisions of the Plan, including, but not limited to, the provisions
of Section 1.3(d).

(b) Each Agreement shall set forth the number of shares of Common
Stock subject to the Option granted thereby.

(c) Each Agreement relating to Options shall set forth the amount
payable by the Optionee to Investors upon exercise of the Option evidenced
thereby, subject to adjustment by the Committee to reflect changes in
capitalization as contemplated by Section 3.4.

(d) An Option granted under this Plan shall be an incentive stock
option only if the relevant Agreement by its terms (i) expressly sets forth the
rules described in Sections 2.8 and 2.9 hereof, and (ii) expressly states that
it is intended to qualify as an incentive stock option. Any Option granted
under this Plan which does not satisfy the foregoing requirements of this
Section 2.1(d) is intended to be a nonqualified

-6-
<PAGE>

stock option subject to the provisions of section 83 of the Code, and is
intended not to qualify for incentive stock option treatment under section 422
of the Code.

2.2 Term of Options.
---------------

(a) Each Agreement shall set forth the period during which the
Option evidenced thereby shall be exercisable, whether in whole or in part, and
any vesting provisions applicable to the Option, such terms to be determined by
the Committee in its discretion; provided that, notwithstanding the foregoing or
any other provision of the Plan, no Agreement shall permit an incentive stock
option to be exercisable more than 10 years after the date of grant.

(b) Each Agreement shall set forth such other terms and conditions,
not inconsistent with the terms of the Plan, as the Committee shall deem
appropriate.

2.3 Exercise of Options. Subject to the provisions of this Article
-------------------
2, each Option granted under the Plan shall be exercisable as follows:

(a) An Option shall become exercisable at such times and subject to
such conditions as the applicable Agreement may provide.

(b) Unless the applicable Agreement otherwise provides, an Option
granted under the Plan may be exercised from time to time as to all or part of
the shares as to which such Option shall then be exercisable.

(c) An Option shall be exercised by the filing of a written notice of
exercise with Dal-Tile, on such form and in such manner as the Committee shall
in its sole discretion prescribe.

(d) Any written notice of exercise of an Option shall be accompanied
by payment of the exercise price for the shares being purchased. Such payment
shall be made by certified or official bank check payable to Dal-Tile (or the
equivalent thereof, including shares of Common Stock, acceptable to the
Committee). As

-7-
<PAGE>

soon as practicable after receipt of such payment, Dal-Tile shall deliver to the
Optionee a certificate or certificates for the shares of Common Stock so
purchased.

2.4 Termination of Options.
----------------------
(a) Notwithstanding anything to the contrary in this Plan, except
as the Agreement may otherwise provide and as set forth in Section 2.4(b) and
Section 2.4(d), all incentive stock options and "nonqualified" stock options
granted to an Optionee (and already vested but not yet exercised) shall
terminate on the earliest to occur of the date which is 45 days after
termination of his employment with the Company for any reason (other than death,
disability or retirement at or after the Optionee's sixty-fifth birthday or at
such earlier retirement age as may be approved by the Committee (one year after
termination because of disability in the case of incentive stock options)).

(b) Notwithstanding anything to the contrary in this Plan, all
Options granted to an Optionee shall immediately expire and cease to be
exercisable and all rights granted to an Optionee under this Plan and such
Optionee's Agreement shall immediately expire in the event of a Termination With
Cause of the Optionee by the Company at any time.

(c) Unless the applicable Agreement expressly provides otherwise,
Options awarded to Optionees under the terms of the Plan will be exercisable
only in accordance with the following vesting schedule:

CUMULATIVE
PERCENTAGE OF
VESTING DATE TOTAL SHARES
------------

On the date of the applicable Agreement 25%
On the first anniversary of the date of
the Agreement 50%
On the second anniversary of the date of
the Agreement 75%
On the third anniversary of the date of
the Agreement 100%

The Committee may modify this vesting schedule in any manner that it deems
appropriate in any Agreement, and may provide different vesting schedules in
different

-8-
<PAGE>

Agreements in its sole discretion. Except as set forth in an Agreement, in the
event that an Optionee's employment with the Company is terminated for any
reason prior to the date on which the Optionee's right to exercise the Options
has fully vested pursuant to this Section 2.4(c), the Options will immediately
cease to be exercisable with respect to any and all shares which have not vested
as of the date of such termination.

2.5 Unless otherwise determined by the Committee coincident with the
grant of an Option or subsequently, in the event of a Transaction which occurs
after an initial public offering of a class of common stock of Dal-Tile pursuant
to an effective registration statement (and which does not also constitute a
Non-Control Transaction (as hereinafter defined)), each Optionee shall be
entitled to receive in respect of each share of Common Stock subject to his
Options (whether or not vested), upon exercise, the same amount and kind of
stock, securities, cash, property or other consideration that each holder of a
share of Common Stock was entitled to receive in the Transaction in respect of
each share. In the event of a Non-Control Transaction, each Optionee shall be
entitled to receive in respect of each share of Common Stock subject to his
Options, upon exercise of such Options after the vesting thereof, the same kind
of stock, securities, cash, property or other consideration that each holder of
a share of Common Stock was entitled to receive in the Non-Control Transaction
in respect of a share. Unless otherwise determined by the Committee, Options
will not automatically vest upon the occurrence of a Non-Control Transaction.

"Transaction" means (i) the approval by stockholders of the
liquidation or dissolution of the Company, (ii) a sale or other disposition of
80% or more of the outstanding voting stock of the Company, or (iii) the merger
or consolidation of the Company with or into any entity. "Non-Control
Transaction" means (i) a merger or consolidation in which the Company is the
surviving corporation and the shares of its outstanding Common Stock are not
changed into other securities or property pursuant to such merger or
consolidation, (ii) a merger or consolidation with an affiliate of the

-9-
<PAGE>

Company following which those persons who owned directly or indirectly a
majority of the outstanding shares of voting stock immediately prior to such
merger or consolidation will own a majority of the outstanding shares of voting
stock of the surviving corporation, or (iii) a sale or other disposition of
capital stock of the Company following which those persons who owned directly or
indirectly a majority of the outstanding shares of voting stock of the Company
immediately prior to such sale will own a majority of the outstanding shares of
voting stock of the purchasing entity. Notwithstanding anything in the Plan, the
proposed merger of DTI Merger Company with and into Dal-Tile (the "Merger"),
pursuant to which Dal-Tile is the surviving corporation, shall not affect the
operation of the Plan in any manner whatsoever, and, in particular, shall not be
or be deemed to be a Transaction and immediately subsequent to the Merger each
Option shall continue to be exercisable for Class A common stock, par value $.01
per share, of Dal-Tile.

2.6 Rule 16b-3. Notwithstanding anything in the Plan to the
-----------
contrary, the Plan shall be administered, and Options shall be granted and
exercised, in accordance with the 1934 Act and, specifically, Rule 16b-3
thereof.

2.7 $100,000 Limitation on Annual Vesting of Incentive Stock Options.
-----------------------------------------------------------------

(a) Subject to the further provisions of this Section 2.7, to the
extent that the aggregate fair market value of stock with respect to which
incentive stock options (determined without regard to the provisions of this
Section 2.7) are exercisable for the first time by any Optionee during any
calendar year (under all plans of the Optionee's employer corporation and its
parent and subsidiary corporations) exceeds $100,000 (or such limitation as set
forth in Section 422 of the Code as may be amended from time to time), such
Options shall be treated as Options that are "nonqualified" stock options.

(b) For purposes of Section 2.7(a), which shall be applied by
taking options into account in the order in which they were granted, the Fair
Market

-10-
<PAGE>

Value of any stock shall be determined as of the time the Option with respect to
such stock is granted.

(c) In applying the provisions of Section 2.7(a), there shall be
taken into account solely (i) incentive stock options granted to an Optionee
under this Plan, and (ii) incentive stock options granted to the Optionee after
December 31, 1986 under all other stock option plans of his employer
corporation, and its parent or subsidiary corporations.

(d) The foregoing provisions of this Section 2.7 shall in no way
limit or restrict the aggregate fair market value of the stock which may be
acquired in any calendar year upon the exercise of "nonqualified" stock options
granted under the Plan or under any other stock option plan of the Optionee's
employer corporation, or its parent or subsidiary corporations.

2.8 Special Rules for 10% Stockholders. Notwithstanding any
----------------------------------
provisions to the contrary, an incentive stock option may not be granted under
this Plan to an individual who, at the time the option is granted, owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of his employer corporation or of its parent or subsidiary corporations
(as such ownership may be determined for purposes of section 422 of the Code)
unless (a) at the time such incentive stock option is granted the option
exercise price is at least 110% of the Fair Market Value of the shares subject
to the incentive stock option and (b) the incentive stock option by its terms is
not exercisable after the expiration of 5 years from the date such incentive
stock option is granted.

-11-
<PAGE>

ARTICLE 3
MISCELLANEOUS

3.1 Amendment of the Plan;
Modification of Awards.
----------------------

(a) The Board may, without stockholder approval, from time to
time suspend or discontinue the Plan or revise or amend it in any respect
whatsoever, except that no such amendment shall impair any rights or obligations
under any award theretofore made under the Plan without the consent of the
person to whom such award was made, provided, further, that an amendment which
-------- -------
requires stockholder approval in order for the Plan to continue to comply with
Rule 16b-3 or any other law, regulation or stock exchange requirement shall not
be effective unless approved by the requisite vote of stockholders.

(b) With the consent of the Optionee and subject to the terms and
conditions of the Plan (including Section 3.1(a)), the Committee may amend
outstanding Agreements with such Optionee, for example, to (i) accelerate the
time or times at which an Option may be exercised or (ii) extend the scheduled
expiration date of the Option.

3.2 Nonassignability. No right granted to any Optionee under the
----------------
Plan or under any Agreement shall be assignable or transferable other than by
will or by the laws of descent and distribution. During the life of the
Optionee, all rights granted to the Optionee under the Plan or under any
Agreement shall be exercisable only by him.

3.3 Withholding of Taxes.
--------------------

(a) The Company shall be entitled to withhold from any payments
to an Optionee an amount sufficient to satisfy any federal, state and other
governmental tax required to be withheld in connection with the exercise of an
Option. Whenever

-12-
<PAGE>

under the Plan shares of Common Stock are to be delivered upon exercise of an
Option, Dal-Tile shall be entitled to require as a condition of delivery that
the Optionee remit an amount sufficient to satisfy all federal, state and other
governmental tax withholding requirements related thereto.

(b) Disposition of Incentive Stock Options. If an Optionee makes a
---------------------------------------
disposition, within the meaning of Section 424(c) of the Code and regulations
promulgated thereunder, of any share or shares of Common Stock issued to such
Optionee pursuant to the exercise of an Option granted as an Incentive Stock
Option within the two-year period commencing on the date after the Date of Grant
or within the one-year period commencing on the date after the date of transfer
of such share or shares of Common Stock to the Optionee pursuant to such
exercise, the Optionee shall, within ten (10) days of such disposition, notify
Dal-Tile thereof, by delivery of written notice to Dal-Tile at its principal
executive office.

3.4 Adjustments Upon Changes in Capitalization. If and to the extent
------------------------------------------
specified by the Committee, the number of shares of Common Stock or other stock
or securities which may be issued pursuant to the exercise of Options granted
under the Plan in the aggregate to any Optionee and the exercise price of
Options may be appropriately adjusted for any increase or decrease in the number
of issued shares of Common Stock resulting from the subdivision or combination
of shares of Common Stock or other capital adjustments, or the payment of a
stock dividend after the effective date of this Plan, or other increase or
decrease in the number of such shares of Common Stock effected without receipt
of consideration by Dal-Tile; provided, however, that any Options to purchase
fractional shares of Common Stock resulting from any such adjustment shall be
eliminated. Adjustments under this Section 3.4 shall be made by the Committee,
whose determination as to what adjustments shall be made, and the extent
thereof, shall be final, binding and conclusive.

-13-
<PAGE>

3.5 Right of Discharge Reserved. Nothing in this Plan or in any
---------------------------
Agreement shall confer upon any employee or other person the right to continue
in the employment or service of the Company or affect any right which the
Company may have to terminate the employment or service of such employee or
other person.

3.6 No Rights as a Stockholder. No Optionee or other person holding
--------------------------
an Option shall have any of the rights of a stockholder of Dal-Tile with respect
to shares subject to an Option until the issuance of a stock certificate to him
for such shares. Except as otherwise provided in Section 3.4, no adjustment
shall be made for dividends, distributions or other rights (whether ordinary or
extraordinary, and whether in cash, securities or other property) for which the
record date is prior to the date such stock certificate is issued.

3.7 Nature of Payments.
------------------

(a) Any and all payments of shares of Common Stock or cash
hereunder shall be granted, transferred or paid in consideration of services
performed by the Optionee for the Company.

(b) All such grants, issuances and payments shall constitute a
special incentive payment to the Optionee and shall not, unless otherwise
determined by the Committee, be taken into account in computing the amount of
salary or compensation of the Optionee for the purposes of determining any
pension, retirement, death or other benefits under (i) any pension, retirement,
life insurance or other benefit plan of the Company or (ii) any agreement
between the Company and the Optionee.

3.8 Non-Uniform Determinations.
--------------------------

The Committee's determinations under the Plan need not be uniform
and may be made by it selectively among persons who receive, or are eligible to
receive, awards under the Plan (whether or not such persons are similarly
situated). Without limiting the generality of the foregoing, the Committee shall
be entitled, among other things, to make non-uniform and selective
determinations, and to enter into non-

-14-
<PAGE>

uniform and selective Agreements, as to (i) the persons to receive awards under
the Plan, and (ii) the terms and provisions of awards under the Plan.

3.9 Other Payments or Awards. Nothing contained in the Plan shall be
------------------------
deemed in any way to limit or restrict the Company or the Committee from making
any award or payment to any person under any other plan, arrangement or
understanding, whether now existing or hereafter in effect.

3.10 Restrictions.
------------

(a) If the Committee shall at any time determine that any
Consent (as hereinafter defined) is necessary or desirable as a condition of, or
in connection with, the granting of any award under the Plan, the issuance or
purchase of shares or other rights thereunder or the taking of any other action
thereunder (each such action being hereinafter referred to as a "Plan Action"),
then such Plan Action shall not be taken, in whole or in part, unless and until
such Consent shall have been effected or obtained to the full satisfaction of
the Committee.

(b) The term "Consent" as used herein with respect to any Plan
Action means (i) any and all listings, registrations or qualifications in
respect thereof upon any securities exchange or under any federal, state or
local law, rule or regulation, (ii) any and all written agreements and
representations by the grantee with respect to the disposition of shares, or
with respect to any other matter, which the Committee shall deem necessary or
desirable to comply with the terms of any such listing, registration or
qualification or to obtain an exemption from the requirement that any such
listing, qualification or registration be made and (iii) any and all consents,
clearances and approvals in respect of a Plan Action by any governmental or
other regulatory bodies.

3.11 Section Headings. The section headings contained herein are for
----------------
the purposes of convenience only and are not intended to define or limit the
contents of said sections.

-15-
<PAGE>

3.12 Interpretation. Unless expressly stated in the relevant
---------------
Agreement, each Option is intended to be performance-based compensation within
the meaning of Section 162(m)(4)(c) and the Committee shall interpret the Plan
accordingly.

3.13 Effective Date and Term of Plan.
-------------------------------
(a) The 1996 Amended and Restated Stock Option Plan was approved
by the Board and stockholders of Dal-Tile and is effective as of August 8, 1996.

(b) The Plan shall terminate 10 years after its adoption by the
Board, and no awards shall thereafter be made under the Plan. Notwithstanding
the foregoing, all awards made under the Plan prior to the date on which the
Plan terminates shall remain in effect until such awards have been satisfied or
terminated in accordance with the terms and provisions of the Plan.

-16-

<PAGE>

EXHIBIT 10.8

_______________________________________________________________________

DAL-TILE INTERNATIONAL INC.

as Issuer,

and

CITIBANK, N.A.,

as Trustee

__________________________

FIRST SUPPLEMENTAL INDENTURE

Dated as of August 1, 1996

To the Indenture dated
as of August 11, 1993

Senior Secured Zero Coupon Notes Due July 15, 1998

_______________________________________________________________________
<PAGE>

FIRST SUPPLEMENTAL INDENTURE, dated as of August 1, 1996 (this "First
-----
Supplemental Indenture"), between Dal-Tile International Inc., a Delaware
- ----------------------
corporation (the "Company"), and Citibank, N.A., as Trustee (the "Trustee").
------- -------

WHEREAS, the Company has heretofore executed and delivered to the
Trustee an Indenture (the "Indenture"), dated as of August 11, 1993, providing
---------
for the issuance by the Company of its Senior Secured Zero Coupon Notes Due July
15, 1998 (the "Notes"); and
-----

WHEREAS, Section 902 of the Indenture provides that the Company, when
authorized by a resolution of the Board of Directors, and the Trustee, together
with the consent of the Holders of not less than a majority in principal amount
of the Outstanding Notes, may enter into a supplemental indenture for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the Indenture or the Pledge Agreement (as defined in the
Indenture), subject to certain exceptions specified in Section 902 of the
Indenture; and

WHEREAS, in accordance with Article 11 of the Indenture, the Company
has called $32,600,000 principal amount at maturity of the Notes for redemption
(such Notes to be redeemed, the "Redeemed Notes") on August 6, 1996 (the
--------------
"Redemption Date"), pursuant to a Notice of Redemption delivered on July 2, 1996
---------------
and has deposited with the Trustee monies sufficient to effect the redemption of
the Redeemed Notes at the Redemption Date, such that the Redeemed Notes are not
Outstanding for purposes of the Indenture; and

WHEREAS, there are now Outstanding under the Indenture Notes in
principal amount at maturity of $100,600,000; and

WHEREAS, the parties hereto are entering into this First Supplemental
Indenture to (i) eliminate certain of the definitions contained in Article 1 of
the Indenture, (ii) amend and/or eliminate certain provisions contained in
Articles 5, 8, 10 and 13 of the
<PAGE>

Indenture and (iii) terminate the Pledge Agreement (together, the "Proposed
--------
Amendments"); and
- ----------

WHEREAS, the Holders of a majority in aggregate principal amount of
the Outstanding Notes have duly consented to the Proposed Amendments; and

WHEREAS, the Company has heretofore delivered or is delivering
contemporaneously herewith to the Trustee (i) a copy of resolutions of the
Company's Board of Directors authorizing the execution of this First
Supplemental Indenture, (ii) evidence of the consent of the Holders of Notes
described in the immediately preceding clause and (iii) an Officer's Certificate
and an Opinion of Counsel each stating that all conditions precedent to the
execution and delivery of this First Supplemental Indenture have been complied
with; and

WHEREAS, all other acts and things necessary to make this First
Supplemental Indenture a valid, binding and enforceable instrument and all of
the conditions and requirements set forth in Section 902 of the Indenture have
been performed and fulfilled and the execution and delivery of this First
Supplemental Indenture have been in all respects duly authorized.

NOW, THEREFORE, in consideration of the premises and notwithstanding
any provisions of the Indenture which, absent this First Supplemental Indenture,
might operate to limit such action, the parties have executed and delivered this
First Supplemental Indenture, and the Company does hereby covenant and agree
with the Trustee for the benefit of the Holders, from time to time, of the Notes
issued under the Indenture, as follows:

SECTION 1. Definitions. (a) For all purposes of this First
-----------
Supplemental Indenture, except as otherwise expressly provided or unless the
context otherwise requires, the terms used herein shall have the meanings
assigned to them in the Indenture.

-2-
<PAGE>

(b) Any defined terms and any references thereto which are used solely
in the sections deleted by operation of Sections 2, 3 and 4 of this First
Supplemental Indenture are hereby deleted in their entireties from Section 101
of the Indenture.

SECTION 2. Elimination and Amendment of Certain Provisions of Article
----------------------------------------------------------
10 of the Indenture. (a) Sections 1008, 1009, 1010, 1011, 1012 and 1014 are
- -------------------
hereby deleted in their entireties together with any references thereto in the
Indenture including, without limitation, all references thereto, direct or
indirect, in Article 5 of the Indenture.
(b) Section 1016 of the Indenture is hereby amended to read as
follows:

"The Company covenants to file with the Trustee copies of annual
reports and of the information, documents, and other reports (or
copies of such portions of any of the foregoing as the Commission may
by rules and regulations prescribe) that the Company is required to
file with the Commission pursuant to Section 13 or Section 15(d) of
the Exchange Act; or, if the Company is not required to file
information, documents, or reports pursuant to either of such
Sections, then to file with the Trustee and the Commission, in
accordance with rules and regulations prescribed by the Commission,
such of the supplementary and periodic information, documents, and
reports which may be required pursuant to Section 13 of the Exchange
Act, in respect of a security listed and registered on a national
securities exchange as may be prescribed in such rules and
regulations."

SECTION 3. Amendment of Certain Provisions of Article 8 of the
---------------------------------------------------
Indenture. Section 801 of the Indenture is hereby amended to delete clauses (2)
- ---------
through (7) and the two paragraphs immediately following clause (7) thereof.

SECTION 4. Elimination of Article 13 of the Indenture and Termination
----------------------------------------------------------
of the Pledge Agreement. (a) Article 13 is hereby deleted in its entirety
- -----------------------
together with any references thereto in the Indenture, including, without
limitation, all references thereto, direct or indirect, in Article 5 of the
Indenture.

-3-
<PAGE>

(b) The Pledge Agreement shall be terminated in its entirety together
with any references thereto in the Indenture, including, without limitation, all
references thereto, direct or indirect, in Article 5 of the Indenture. All
collateral held by the Trustee pursuant to the Pledge Agreement shall,
concurrently with the date on which this First Supplemental Indenture shall
become operative in accordance with Section 5 hereof, be released and delivered
by the Trustee to the Company, without representation or warranty.

SECTION 5. Operation of Proposed Amendments. Upon the execution and
--------------------------------
delivery of this First Supplemental Indenture by the Trustee and the Company,
the First Supplemental Indenture will become effective but Sections 1, 2, 3 and
4 of this First Supplemental Indenture will not become operative until such time
as the Notes validly tendered pursuant to the Company's Offer to Purchase and
Consent Solicitation Statement dated July 17, 1996 (as further amended, modified
or supplemented from time to time, the "Statement") are accepted for purchase by
---------
the Company in accordance with such Statement.

SECTION 6. Concerning the Trustee. The Trustee accepts the trusts of
----------------------
the Indenture, as supplemented by this First Supplemental Indenture, and agrees
to perform the same, but only upon the terms and conditions set forth in the
Indenture, as supplemented by this First Supplemental Indenture, to which the
parties hereto and the Holders from time to time of the Notes agree and, except
as expressly set forth in the Indenture, shall incur no liability or
responsibility in respect thereof. Without limiting the generality of the
foregoing, the Trustee assumes no responsibility for the correctness of the
recitals herein contained, which shall be taken as the statements of the
Company. The Trustee makes no representation and shall have no responsibility
as to the validity or sufficiency of this First Supplemental Indenture.

-4-
<PAGE>

SECTION 7. Miscellaneous. (a) Except as hereby expressly amended,
-------------
the Indenture is in all respects ratified and confirmed and all the terms,
provisions and conditions thereof shall be and remain in full force and effect.
(b) All agreements of the Company in this First Supplemental Indenture
shall bind its successors. All agreements of the Trustee in this First
Supplemental Indenture shall bind its successors.
(c) THIS FIRST SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY THE LAWS OF
THE STATE OF NEW YORK, WITHOUT REGARD TO ITS CONFLICT OF LAWS DOCTRINE.
(d) If and to the extent that any provision of this First Supplemental
Indenture limits, qualifies or conflicts with another provision which is
required to be included herein or in the Indenture by the Trust Indenture Act of
1939, as amended such required provision shall control.
(e) The titles and headings of the sections of this First Supplemental
Indenture are for convenience only and shall not affect the construction hereof.
(f) This First Supplemental Indenture may be executed in counterparts,
each of which shall be an original; provided, however, that such counterparts
-------- -------
shall together constitute one and the same instrument.
(g) In case any provision of this First Supplemental Indenture shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions hereof or of the Indenture shall not in any way be
affected or impaired thereby.

-5-
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed, and their respective corporate seals
to be hereunto affixed and attested, all as of the date first written above.

DAL-TILE INTERNATIONAL INC.

By: /s/Richard Sewell
--------------------------
Name: Richard Sewell
Title: Vice President/Treasury

ATTEST

By:
--------------------------
Name:
Title:

CITIBANK, N.A., as Trustee

By: /s/Louis A. Piscitelli
---------------------------
Name: Louis A. Piscitelli
Title: Senior Trust Officer

ATTEST

By: /s/Wafaa Orfy
--------------------------
Name: Wafaa Orfy
Title: Senior Trust Officer

-6-

<PAGE>

EXHIBIT 10.17

AEA INVESTORS INC.

July 15, 1996

Mr. Frank A. Riddick III
Armstrong World Industries, Inc.
Liberty and Charlotte Streets
P.O. Box 3001
Lancaster, PA 17604

Re: Shareholders Agreement, dated as of December 29, 1995 (the
"Agreement"), among Dal-Tile International Inc. (the
---------
"Company"), AEA Investors Inc. ("AEA"), Armstrong World
------- ---
Industries, Inc. ("AWI"), Armstrong Enterprises, Inc. and
---
Armstrong Cork Finance Corporation.

Dear Frank:

As you know, the Company is preparing for an initial
underwritten public offering (the "IPO") of its common stock (the "Shares").
--------- -----------
This letter sets forth certain agreements among the undersigned with respect to
the IPO and certain related matters.

1. As we have discussed, we are planning to restructure the
equity holdings of the Company prior to the IPO so that the shares of each of
the six classes of the Company's common stock currently held by all holders
other than AWI and its subsidiaries are exchanged by way of a merger (the

"Merger") for interests in DTI Investors LLC, a Delaware limited liability
------
company (the "LLC"), such that, after the Merger, the LLC will own 63% of the
---
outstanding shares of the Company's common stock and AWI and its subsidiaries
will own the remaining 37%. To the extent necessary to effectuate the intent of
the Agreement (and until the LLC is dissolved), the LLC will be deemed to
replace and assume the obligations of the AEA Parties (as defined in the
Agreement), and the LLC hereby agrees to be bound thereby. The undersigned
further agree that, from and after the IPO, Sections 3.6 (a) and (b) of the
Agreement will be of no further force or effect.

2. (a) Simultaneously with the IPO, the Company will sell
directly (the "Direct Placement") to AWI or a subsidiary of AWI, and AWI or such
---------------------
subsidiary will purchase directly from the Company, at the price per share at
which Shares are being initially offered for sale to the public in the IPO (the
"Initial IPO Price"), such number of
-----------------

<PAGE>

Shares (rounded upwards to the nearest whole share) as is equal to the product
of (i) $10,000,000 multiplied by (ii) a fraction, the numerator of which is one
and the denominator of which is the Initial IPO Price. AWI hereby confirms and
agrees that the Shares being acquired by it or its subsidiary in the Direct
Placement are being acquired for investment purposes only and not with a view to
distribution. AWI agrees that neither it nor any subsidiary of it will sell or
otherwise dispose of such Shares in violation of any applicable laws or
regulations, including federal and state securities laws and regulations.

(b) During the 270-day period following the first to occur of
(i) the closing of the sale of Shares to the underwriters pursuant to the
exercise of their over-allotment option in the IPO (the "Over-Allotment Option")
---------------------
and (ii) the expiration of the Over-Allotment Option, AWI or one or more of its
subsidiaries will purchase, from time to time, additional Shares in open market
transactions at then prevailing market prices having an aggregate purchase price
(exclusive of brokerage commissions) of $15,000,000 (the "Open Market
-----------
Purchases") in connection therewith. AWI and its subsidiaries will engage
- --------
Smith Barney Inc. exclusively as the broker for any and all Open Market
Purchases in connection therewith. AWI and its subsidiaries will effect all Open
Market Purchases in compliance with all applicable laws and regulations,
including federal and state securities laws and regulations. AWI will give the
Company and AEA notice of each Open Market Purchase made by it or any of its
subsidiaries within three business days thereafter.

(c) The Company and AEA hereby waive the restrictions contained
in Section 4.7(b) of the Agreement solely to the extent necessary to permit AWI
or its subsidiaries to effect the Direct Placement and the Open Market
Purchases.

3. The undersigned agree to eliminate from the Agreement the
requirement that two additional directors be appointed to the Company's board of
directors in the event of a Qualified Public Offering (as defined in the
Agreement). Accordingly, Section 3.2(e) of the Agreement shall be of no further
force and effect, and the words", and prior to the occurrence of a Qualified
Public Offering," shall be deleted from Section 3.2(a) of the Agreement.

-2-
<PAGE>

This letter agreement shall amend and modify the Agreement to the extent
set forth herein. In all other respects the Agreement shall continue in full
force and effect. Please indicate your agreement as of the date first written
above by signing below.

Very truly yours,

AEA INVESTORS INC.

for itself and for

DTI INVESTORS LLC

By: /s/ Henry F. Skelsey
------------------------
Name:
Title:

DAL-TILE INTERNATIONAL INC.

By: /s/ Henry F. Skelsey
------------------------
Name:
Title:

Agreed and Accepted as of the date first above written:

ARMSTRONG WORLD INDUSTRIES, INC.

By: /s/ Frank A. Riddick III
-------------------------
Name: Frank Riddick III
Title: Sr. VP and CFO

ARMSTRONG ENTERPRISES, INC.

By: /s/ Frank A. Riddick III
--------------------------
Name: Frank A. Riddick III
Title:

ARMSTRONG CORK FINANCE CORPORATION

By: /s/ Frank A. Riddick III
--------------------------
Name: Frank A. Riddick III
Title:

-3-

<PAGE>

EXHIBIT 23.2

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors
Dal-Tile International Inc.

We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated March 15, 1996, in the Registration Statement
(Form S-1 No. 333-5069) and related Prospectus of Dal-Tile International Inc.
for the registration of shares of its common stock.

ERNST & YOUNG LLP

Dallas, Texas

August 8, 1996

<PAGE>

EXHIBIT 23.3

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Dal-Tile International Inc.:

We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.

KPMG Peat Marwick LLP

Philadelphia, Pennsylvania

August 8, 1996