DAL TILE INTERNATIONAL INC, S-1/A, 1996-07-16

DAL TILE INTERNATIONAL INC
S-1/A, 1996-07-16
STRUCTURAL CLAY PRODUCTS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 1996

REGISTRATION NO. 333-5069

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

AMENDMENT NO. 1

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. Prospectus Summary; Use of
Use of Proceeds.............................. 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. 1 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 JULY 16, 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 $ 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]

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

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 311 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 three months ended March 31, 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>

RECENT DEVELOPMENTS

Net sales for the three months ended June 30, 1996 increased to $181.2
million from $116.6 million in the comparable 1995 period. The increase in net
sales was primarily due to the inclusion of AO's operations in the 1996 period.
Gross profit for the three months ended June 30, 1996 increased to $85.3
million from $61.4 million in the comparable 1995 period, while gross profit
margin declined to 47.1% from 52.7%. The gross profit margin declined
principally due to the inclusion of AO's operations, which historically
generated lower gross margins than the Company. Operating income for the three
months ended June 30, 1996 increased to $22.0 million from $19.4 million in the
comparable 1995 period. Net income for the three months ended June 30, 1996
increased to $4.9 million from $4.5 million in the comparable 1995 period.

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.............
International Offering.... 5,600,000 shares (1)

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 The Common Stock has been approved for listing on
symbol................ 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 three months ended March 31, 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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- ------------------
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 $119,353 $170,674
Cost of goods sold..... 239,379 268,272 225,364 370,378 58,110 87,940
--------- -------- -------- -------- -------- --------
Gross profit........... 201,194 238,037 249,448 354,068 61,243 82,734
Operating expenses (ex-
cluding non-recurring
charges).............. 157,314 169,720 172,493 236,832 44,666 59,510
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 16,577 14,224
Interest expense (net). 46,229 52,139 54,203 54,203 13,079 13,259
Other (income) expense. 1,088 (1,341) (2,994) (2,994) (1,600) (531)
--------- -------- -------- -------- -------- --------
Income (loss) before
income taxes.......... (270,905) 17,519 3,316 66,027 5,098 1,496
Income tax provision
(benefit)............. (3,225) 10,614 1,176 23,413 4,272 566
--------- -------- -------- -------- -------- --------
Net income (loss)...... $(267,680) $ 6,905 $ 2,140 $ 42,614 $ 826 $ 930
========= ======== ======== ======== ======== ========
AS ADJUSTED OPERATING
DATA:
Net income as adjusted. $ 61,148(7) $ 10,828(8)
======== ========
Net income per share as
adjusted (9).......... $ 1.11 $ 0.20
======== ========
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 $111,306 $165,489
Net sales (Mexico)..... $ 46,529 $ 48,594 $ 23,012 $ 23,012 $ 8,047 $ 5,185
Gross margin........... 45.7% 47.0% 52.5% 48.9% 51.3% 48.5%
Operating income before
non-recurring charges
(10).................. $ 43,880 $ 68,317 $ 76,955 $117,236 $ 16,577 $ 23,224
Operating margin before
non-recurring charges
...................... 10.0% 13.5% 16.2% 16.2% 13.9% 13.6%
Depreciation and amor-
tization.............. $ 22,019 $ 17,020 $ 17,164 $ 20,962 $ 4,302 $ 5,390
Capital expenditures... $ 17,066 $ 14,160 $ 29,392 $ 38,964 $ 5,505 $ 5,673
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
ACTUAL AS ADJUSTED(11)
-------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... $165,141 $202,321
Total assets.......................................... 642,514 621,458
Total debt............................................ 523,534 415,487
Stockholders' equity.................................. 10,364 109,284
</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 three months ended March 31, 1996 include the
results of operations of AO and certain related assets of the ceramic tile
business of AWI, but do not give 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 three months ended March 31, 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 March 31, 1996. See "Refinancing",
"Use of Proceeds" and "Capitalization". In connection with the
Refinancing, the Company will record an extraordinary charge estimated to
be $21.1 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 three months ended March 31,
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, will negatively impact
the Company's gross margins in the second and third quarters 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 March 31, 1996, on a pro forma basis after giving effect to the
Refinancing, the Company's consolidated indebtedness would have been $415.5
million and its stockholders' equity would have been $109.3 million. On such a
pro forma basis, this indebtedness would have consisted of (i) the $275.0
million New Term Loan (as defined), (ii) $123.2 million of borrowings under
the New Revolving Credit Facility, and (iii) $17.2 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
$95 million at December 31, 2004 (such covenant to be eliminated when 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 to the Zero Coupon Note Indenture,
including the elimination of substantially all of the restrictive covenants
and the termination of the Pledge Agreement. There can be no assurance that
the requisite number of consents will be received or that the Zero Coupon Note
Indenture will be so amended. 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 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".

11
<PAGE>

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 first quarter of 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 first quarter of 1996, peso-denominated cost of
sales and operating expenses represented 9% 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 first quarter of 1996, the Company recorded a transaction
gain of approximately $0.8 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, 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 Amended and Restated Certificate of Incorporation (the "Restated
Certificate of Incorporation") and Amended and Restated Bylaws (the "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 March 31, 1996, investors in the Offerings and the Private Placement will
suffer an immediate and substantial dilution of approximately $18.09 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") on August 6, 1996 (the "Redemption Date"). In the Redemption, Dal-Tile
will use 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 basis points, minus (ii) $ 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 certain amendments to the Zero Coupon Note Indenture
(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 $ 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.

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 concurrently with or 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. 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

17
<PAGE>

existing bank credit agreement, consisting of a $160 million revolving credit
facility ($128.3 million outstanding at March 31, 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
March 31, 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)................................... 123.2
Offerings(2)....................................................... 110.0
Private Placement.................................................. 10.0
------
Total............................................................ $545.8
======

USES OF FUNDS:
Redemption of Zero Coupon Notes(3)................................. $ 27.6
Zero Coupon Tender Offer(4)........................................ 76.0
Prepayment of Series A Notes....................................... 176.0
Prepayment of Series B Notes....................................... 100.0
Repayment of indebtedness under Existing Bank Credit Agreement(5).. 128.3
Accrued interest, estimated prepayment premiums for Series A Notes,
Series B Notes and Zero Coupon Tender Offer, Consent Payments and
fees and expenses(6).............................................. 37.9
------
Total............................................................ $545.8
======
</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".

(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.

18
<PAGE>

(5) At March 31, 1996, the weighted average interest rate for outstanding
indebtedness under the Existing Bank Credit Agreement was 7.9% 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 March 31, 1996, the net tangible book value of the Company was a deficit
of $177.7 million, or $3.91 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 March 31, 1996 would have been a
deficit of $57.7 million, or $1.09 per share of Common Stock. This represents
an immediate increase in net tangible book value of $2.82 per share of Common
Stock to the Existing Stockholders and an immediate dilution to new investors
in the Offerings and the Private Placement of $18.09 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 March 31,
1996..................................................... $(3.91)
Increase in net tangible book value per share attributable 2.82
to new investors......................................... ------
Pro forma deficit in net tangible book value per share after
the Offerings and the Private Placement.................... (1.09)
------
Dilution per share to new investors......................... $18.09
======
</TABLE>

The following table sets forth, at March 31, 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 March 31, 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>
MARCH 31, 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.................................... 101,997 --
Existing Bank Credit Agreement....................... 128,297 --
New Term Loan........................................ -- 275,000
New Revolving Credit Facility........................ -- 123,247
Series A Notes....................................... 132,000 --
Series B Notes....................................... 100,000 --
Industrial Development Refunding and Revenue Bonds... 5,500 5,500
Other................................................ 8,693 8,693
-------- --------
Total long-term debt............................... 476,487 412,440
-------- --------
Total debt....................................... 523,534 415,487
-------- --------
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.................................. (265,074) (286,154)(2)
Currency translation adjustment...................... (58,638) (58,638)
-------- --------
Total stockholders' equity......................... 10,364 109,284
-------- --------
Total capitalization............................. $533,898 $524,771
======== ========
</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 $21.1 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 three
months ended March 31, 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 March 31, 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 $33.9 million ($21.1 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

MARCH 31, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
REFINANCING AS
HISTORICAL ADJUSTMENTS ADJUSTED
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................. $ 39,131 $ (27,575)(1) $ 11,556
Trade accounts receivable............ 106,879 -- 106,879
Inventories.......................... 121,876 -- 121,876
Prepaid expenses..................... 4,345 -- 4,345
Deferred tax asset................... -- 8,826 (1) 8,826
Other current assets................. 9,483 -- 9,483
--------- --------- ---------
Total current assets.............. 281,714 (18,749) 262,965
Property, plant and equipment, net... 169,862 -- 169,862
Goodwill net of amortization......... 160,825 -- 160,825
Finance costs, net of amortization... 6,307 (2,307)(1) 4,000
Other assets......................... 23,806 -- 23,806
--------- --------- ---------
Total assets...................... $ 642,514 $ (21,056) $ 621,458
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued
expenses............................ $ 47,290 $ -- $ 47,290
Accrued interest payable............. 7,928 (7,928)(1) --
Current portion of long-term debt.... 47,047 (44,000)(2) 3,047
Deferred income taxes................ 4,001 (4,001)(1) --
Other current liabilities............ 10,307 -- 10,307
--------- --------- ---------
Total current liabilities......... 116,573 (55,929) 60,644
Long-term debt........................ 476,487 (108,047)(1)
44,000 (2) 412,440
Other long-term liabilities........... 38,022 -- 38,022
Deferred income taxes................. 1,068 -- 1,068
--------- --------- ---------
Total liabilities................. 632,150 (119,976) 512,174
Stockholders' Equity:
Common stock and additional paid-in-
capital............................. 334,076 120,000 (1) 454,076
Accumulated deficit.................. (265,074) (21,080)(1) (286,154)
Currency translation adjustment...... (58,638) -- (58,638)
--------- --------- ---------
Total stockholders' equity........ 10,364 98,920 109,284 (10)
--------- --------- ---------
Total liabilities and stockhold-
ers' equity...................... $ 642,514 $ (21,056) $ 621,458
========= ========= =========
</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 THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
Net sales............................... $170,674 $ -- $170,674
Cost of goods sold...................... 87,940 -- 87,940
-------- ------ --------
Gross profit........................... 82,734 -- 82,734
Expenses:
Transportation......................... 9,957 -- 9,957
Selling, general and administrative.... 48,362 -- 48,362
Provision for merger integration
charges............................... 9,000 (9,000)(6) --
Amortization of goodwill............... 1,191 -- 1,191
-------- ------ --------
Operating income....................... 14,224 9,000 23,224
Interest expense........................ 13,843 (6,721)(10) 7,122
Interest income......................... 584 -- 584
Other income, net....................... 531 200 (11) 731
-------- ------ --------
Income before income taxes............. 1,496 15,921 17,417
Income tax provision.................... 566 6,023 (9) 6,589
-------- ------ --------
Net income............................. $ 930 $9,898 $ 10,828
======== ====== ========
Net income per share................... $ 0.20
========
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) To reduce cash by $27,575,000 to reflect funding of the Redemption.

(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 ($6,307,000).

(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 ($33,900,000) ($21,080,000, 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>

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>

27
<PAGE>

(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 centers(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 are expected to decrease.

(b) Represents elimination in January 1996 of approximately 150 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 expects an increase of $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.

(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

28
<PAGE>

margin. A 1/8% rise in the interest rate would have caused interest
expense to increase by approximately $482,000 and $125,000 for the year
ended December 31, 1995 and the three months ended March 31, 1996,
respectively.

The interest expense adjustment was calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996
----------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Elimination of historical interest
expense(a)............................. $(53,900) $(13,162)
Estimated interest expense in connection
with Refinancing (b)................... 25,368 6,287
Amortization of debt issuance fees from 615 154
the Refinancing........................ --------- ---------
Interest expense adjustment............. $(27,917) $(6,721)
========= =========
</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 $523.5 million in 1996), less the Refinancing
Amount (as defined) of $108.0 million, using average
variable interest rates calculated on a quarterly basis
(ranging from 6.4% 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
March 31, 1996 would be $112,698,000; (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 $9,978,000 and $0.18 for the three months ended
March 31, 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>
THREE
YEAR MONTHS
ENDED ENDED
DECEMBER MARCH 31,
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 $10,828,000
Primary and fully diluted earnings per share...... $1.11 $0.20
</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 three months ended March 31, 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 three months ended March 31, 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 three months ended March 31, 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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- --------------------
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 $ 119,353 $ 170,674
Cost of goods sold..... 189,861 210,121 239,379 268,272 225,364 58,110 87,940
-------- -------- --------- -------- -------- --------- ---------
Gross profit........... 167,703 187,896 201,194 238,037 249,448 61,243 82,734
Operating expenses
(excluding non-
recurring charges).... 128,103 138,467 157,314 169,720 172,493 44,666 59,510
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 16,577 14,224
Interest expense (net). 47,172 43,571 46,229 52,139 54,203 13,079 13,259
Other (income) expense. 575 653 1,088 (1,341) (2,994) (1,600) (531)
-------- -------- --------- -------- -------- --------- ---------
Income (loss) before
income taxes.......... (8,147) 5,205 (270,905) 17,519 3,316 5,098 1,496
Income tax provision
(benefit)............. 1,105 5,179 (3,225) 10,614 1,176 4,272 566
-------- -------- --------- -------- -------- --------- ---------
Net income (loss)...... $ (9,252) $ 26 $(267,680) $ 6,905 $ 2,140 $ 826 $ 930
======== ======== ========= ======== ======== ========= =========
OTHER OPERATING DATA:
Net sales (United
States and Canada).... $315,360 $348,874 $ 394,044 $457,715 $451,800 $ 111,306 $ 165,489
Net sales (Mexico)..... $ 42,204 $ 49,143 $ 46,529 $ 48,594 $ 23,012 $ 8,047 $ 5,185
Gross margin........... 46.9% 47.2% 45.7% 47.0% 52.5% 51.3% 48.5%
Operating income before
non-recurring
charges(5)............ $ 39,600 $ 49,429 $ 43,880 $ 68,317 $ 76,955 $ 16,577 $ 23,224
Operating margin before
non-recurring charges
...................... 11.1% 12.4% 10.0% 13.5% 16.2% 13.9% 13.6%
Depreciation and amor-
tization.............. $ 22,746 $ 21,457 $ 22,019 $ 17,020 $ 17,164 $ 4,302 $ 5,390
Capital expenditures... $ 8,286 $ 20,689 $ 17,066 $ 14,160 $ 29,392 $ 5,505 $ 5,673
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital........ $106,780 $116,840 $ 119,109 $115,717 $152,128 $ 134,738 $ 165,141
Total assets........... 715,814 718,987 512,830 488,417 672,393 484,282 642,514
Total debt............. 444,669 456,003 492,137 492,753 527,816 508,583 523,534
Stockholders' equity
(capital deficiency).. 192,626 189,515 (77,449) (103,823) 9,639 (119,885) 10,364
</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 three
months ended March 31, 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 $21.1 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 three
months ended March 31, 1996 compared with the three months ended March 31,
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 three months ended March 31, 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 three months ended
March 31, 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>
THREE
MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------- ------------
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 48.7 51.5
----- ----- ----- ----- -----
Gross profit.............. 45.7 47.0 52.5 51.3 48.5
Operating expenses........ 35.7 33.5 36.4 37.4 34.9
----- ----- ----- ----- -----
10.0 13.5 16.1 13.9 13.6
Non-recurring charges:
Provision for merger in-
tegration charges...... -- -- 4.7 -- 5.3
Provision for special
charges................ 12.1 -- -- -- --
Write-down of goodwill.. 48.6 -- -- -- --
----- ----- ----- ----- -----
Operating income (loss)... (50.7) 13.5 11.4 13.9 8.3
Interest expense (net).... 10.5 10.3 11.4 11.0 7.8
Other (income) expense.... 0.2 (0.3) (0.6) (1.3) (0.3)
----- ----- ----- ----- -----
Income (loss) before in-
come taxes............... (61.4) 3.5 0.6 4.2 0.8
Income tax provision (ben- (0.7) 2.1 0.2 3.6 0.3
efit).................... ----- ----- ----- ----- -----
Net income (loss)......... (60.7)% 1.4% 0.4% 0.6% 0.5%
===== ===== ===== ===== =====
</TABLE>

THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995

NET SALES. Net sales for the first quarter increased to $170.7 million in
1996 from $119.4 million in 1995, an increase of $51.3 million, or 43%. The
increase in net sales was due to the inclusion of AO's operations in the 1996
first quarter and increased shipments to home improvement centers. Sales in
Mexico (which accounted for 3% of consolidated sales in the first quarter of
1996) decreased approximately $3.0 million, principally as a result of
translating peso revenues at devalued exchange rates and general economic
conditions in Mexico.

GROSS PROFIT. Gross profit increased $21.5 million, or 35.1%, to $82.7
million in the first quarter of 1996 from $61.2 million in the first quarter
of 1995 principally as a result of the increase in net sales. Gross margin
decreased in the first quarter of 1996 to 48.5% from 51.3% in the first
quarter 1995 due to lower gross margins associated with sales made to
independent distributors and unfavorable manufacturing variances in connection
with inventory reductions.

EXPENSES. Expenses increased to $68.5 million in the first quarter of 1996
from $44.7 million in the first quarter of 1995 due to the inclusion of AO's
operations and $9.0 million of merger integration charges. Expenses as a
percent of sales increased from 37.4% in 1995 to 40.2% in 1996 principally as
a result of the 1996 merger integration charges. Excluding merger integration
charges, expenses decreased to 34.9% of sales due to consolidation savings
achieved by integrating sales forces, closing duplicative sales service
centers and consolidating administrative functions. Additionally as mentioned
above, sales made to independent distributors require lower operating expense
levels which offset the lower gross margins generated through this channel.

32
<PAGE>

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 the 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 sales centers and RDCs extending beyond 1996.

OPERATING INCOME. Operating income decreased to $14.2 million in the first
quarter of 1996 from $16.6 million in the first quarter of 1995 principally as
a result of merger integration charges. Operating income increased to $23.2
million in 1996, excluding non-recurring merger integration charges, as
compared to $16.6 million in 1995 as a result of the AO Acquisition and
related cost savings offset in part by lower gross margins. The operating
margin before non-recurring merger integration charges decreased principally
as a result of lower gross margins, offset in part by lower operating expenses
associated with sales to independent distributors.

INTEREST EXPENSE (NET). Interest expense (net) of $13.3 million in the first
quarter of 1996 was comparable to interest expense in the first quarter of
1995 of $13.1 million.

INCOME TAXES. The income tax provision reflects effective tax rates of 38%
and 84% for the three months ended March 31, 1996 and 1995, respectively. The
high effective rate in 1995 reflects the inability to record a tax loss
benefit in the United States due to the Company being in a net operating loss
carryforward position for U.S. federal income tax purposes.

NET INCOME. Net income increased to $0.9 million in 1996 from $0.8 million
in 1995. Net income increased $5.7 million from $0.8 million in 1995 to $6.5
million in 1996, excluding the merger integration charges, principally as a
result of improvements in operating income (excluding merger integration
charges) offset in part by transaction gain reductions in 1996 as a result of
the stabilizing of the peso in the first quarter of 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 first quarter of 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 first quarter of
1996, peso-denominated cost of sales and operating expenses represented 9% 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 first quarter of 1996, the Company recorded a
transaction gain of approximately $0.8 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

33
<PAGE>

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-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

34
<PAGE>

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 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.

35
<PAGE>

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.

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

36
<PAGE>

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>

QUARTERLY RESULTS

The following table sets forth certain unaudited quarterly operating results
for the quarter ended March 31, 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
Gross profit......................... 82,734
Operating income before non-recurring
charges............................. 23,224
Gross margin......................... 48.5%
Operating margin before non-recurring
charges............................. 13.6%
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>

37
<PAGE>

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 $21.0
million for the three months ended March 31, 1996 and cash provided by
operating activities was $6.0 million for the same period in 1995. Cash was
used in the three months ended March 31, 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 March
31, 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
March 31, 1996, the borrowing base calculation did not restrict the Company's
availability under

38
<PAGE>

the Existing Bank Credit Agreement of $160 million. Outstanding borrowings at
March 31, 1996 were $128.3 million, and additional availability was $31.7
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 March 31, 1996.

In connection with the AO Acquisition, the Company received $27.6 million in
cash, which is included in the March 31, 1996 Consolidated Financial
Statements as cash. The Company had an additional $11.5 million in cash
balances, for total cash balances of $39.1 million at March 31, 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 $7.2 million for the three months ended March 31, 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.

The Company plans to use the $27.6 million 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.

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 $21.1 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.

39
<PAGE>

Capital expenditures were $14.2 million and $29.4 million for the years
ended December 31, 1994 and 1995 respectively, and were $5.7 million for the
three months ended March 31, 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 $5.7 million has been
expended through March 31, 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 March 31, 1996, the
Company had entered into commitments of approximately $10.0 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 $6.1 million in connection with the AO merger
integration in the first quarter 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
anticipates closing two RDCs.

At March 31, 1996, the Company's accumulated deficit was $265.1 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 $165.1 million at March 31, 1996 and additional availability of
$31.7 million under the Existing Bank Credit Agreement at March 31, 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.

40
<PAGE>

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.

41
<PAGE>

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

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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
thousands of 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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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 311 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 three months ended March 31, 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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<PAGE>

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 311 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. During such period, manufacturing capacity expanded
from 203 million square feet in 1991 to 311 million square feet in 1995. 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 June 1996, the
Company acquired an option to purchase a floor tile facility with an annual
manufacturing capacity of approximately 10 million square feet in North
Carolina, which the Company expects to exercise by the end of July 1996.

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
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, over one-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,

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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 17 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
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 will
cease 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 March
31, 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............. 53 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............... 34 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, President and Chief Executive
Officer of Union Pacific Corp., a transportation, natural resources and
environmental services concern. He served as U.S. Secretary of Transportation
between 1981 and

56
<PAGE>

1983. Mr. Lewis is also a director of Ford Motor Company, AT&T Corp., American
Express Co., FPL Group, Inc., Gannett Co., Inc. and Union Pacific Resources
Group Inc.

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.

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 , 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 will include the DTI Investors Group, will become the holder of all
the capital stock currently owned by the DTI Investors Group as the result of
the planned 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) The DTI Investors Group currently owns 63% of Dal-Tile's outstanding
capital stock. Prior to the Offerings and the Private Placement, DTI
Investors will become the holder of all such capital stock as the result
of the DTI Merger.

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.

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.

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, on an 11.1-for-1 basis). 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 on an 11.1-for-1 basis. 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 Restated Certificate of Incorporation and the
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.

67
<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 classes or 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 classes or 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 Restated Certificate of Incorporation
and the 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 Restated Bylaws establish an advance notice procedure for stockholders
to make nominations of candidates for election as directors 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 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 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 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 Restated Certificate of Incorporation provides that
Dal-Tile shall indemnify its directors and executive officers to the fullest
extent permitted by Delaware law.

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 current 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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<PAGE>

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
$95 million at December 31, 2004 (such covenant to be eliminated when 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. The Redemption will be at 106% of the accreted
value. In the Redemption, Dal-Tile intends to use 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). 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

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<PAGE>

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
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 and the
termination of the Pledge Agreement. 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
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 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 March 31, 1996, there was an
aggregate principal amount of $128.3 million outstanding under the Existing
Bank Credit Agreement bearing interest at a weighted average rate of 7.9% 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, 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

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<PAGE>

shall prepay in full all of the Series A Notes and the Series B Notes held by
each holder who has 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, 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.

78
<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.

79
<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 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, 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.

81
<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 March 31,
1996..................................................................... F-3
Consolidated Statements of Operations for each of the three years in the
period ended
December 31, 1995, and each of the three month periods ended March 31,
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 three month
period ended
March 31, 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 three month periods ended
March 31, 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 July
, 1996

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

The foregoing report is in the form that will be signed upon the completion
of the recapitalization described in Note 18 to the Consolidated Financial
Statements.

/s/ Ernst & Young LLP

Dallas, Texas

July 16, 1996

F-2
<PAGE>

DAL-TILE INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31 (UNAUDITED)
------------------ MARCH 31,
1994 1995 1996
-------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.......................................... $ 12,977 $ 72,965 $ 39,131
Trade accounts receivable..................... 85,148 103,909 106,879
Inventories................................... 80,467 118,811 121,876
Prepaid expenses.............................. 3,293 3,872 4,345
Other current assets.......................... 7,381 8,531 9,483
-------- -------- --------
Total current assets........................ 189,266 308,088 281,714
Property, plant, and equipment, at cost:
Land.......................................... 12,776 19,444 19,444
Leasehold improvements........................ 7,298 8,567 8,741
Buildings..................................... 56,748 63,065 63,125
Machinery and equipment....................... 73,132 104,520 104,907
Construction in process....................... 10,346 14,400 19,872
-------- -------- --------
160,300 209,996 216,089
Accumulated depreciation...................... 37,557 42,073 46,227
-------- -------- --------
122,743 167,923 169,862
Goodwill, net of amortization.................. 166,781 162,016 160,825
Finance costs, net of amortization............. 8,461 6,432 6,307
Trade name and other assets.................... 1,166 27,934 23,806
-------- -------- --------
Total assets................................ $488,417 $672,393 $642,514
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL
DEFICIENCY)
Current liabilities:
Trade accounts payable........................ $ 19,162 $ 38,755 $ 19,798
Accrued expenses.............................. 14,640 27,983 27,492
Accrued interest payable...................... 17,088 17,398 7,928
Current portion of long-term debt............. 3,349 47,047 47,047
Income taxes payable.......................... 3,257 -- --
Deferred income taxes......................... 5,941 3,981 4,001
Other current liabilities..................... 10,112 20,796 10,307
-------- -------- --------
Total current liabilities................... 73,549 155,960 116,573
Long-term debt................................. 489,404 480,769 476,487
Other long-term liabilities.................... 22,635 25,023 38,022
Deferred income taxes.......................... 6,652 1,002 1,068
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) (265,074)
Currency translation adjustment............... (36,179) (58,433) (58,638)
-------- -------- --------
Total stockholders' equity (capital
deficiency)................................ (103,823) 9,639 10,364
-------- -------- --------
Total liabilities and stockholders' equity
(capital deficiency)....................... $488,417 $672,393 $642,514
======== ======== ========
</TABLE>

See accompanying notes.

F-3
<PAGE>

DAL-TILE INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
---------------------------------- ----------------------
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 $ 119,353 $ 170,674
Cost of goods sold...... 239,379 268,272 225,364 58,110 87,940
---------- ---------- ---------- ---------- ----------
201,194 238,037 249,448 61,243 82,734
Operating expenses:
Transportation........ 25,860 32,068 33,535 8,042 9,957
Selling............... 68,412 75,566 76,758 19,367 24,418
General and
administrative....... 52,336 57,321 57,435 16,066 23,944
Provision for merger
integration charges.. -- -- 22,430 -- 9,000
Provision for special
charges.............. 53,233 -- -- -- --
Amortization of
goodwill............. 10,706 4,765 4,765 1,191 1,191
Write-down of
goodwill............. 214,235 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total expenses...... 424,782 169,720 194,923 44,666 68,510
---------- ---------- ---------- ---------- ----------
Operating income
(loss)................. (223,588) 68,317 54,525 16,577 14,224
Interest expense........ 46,746 53,542 55,453 13,567 13,843
Interest income......... 517 1,403 1,250 488 584
Other (income) expense.. 1,088 (1,341) (2,994) (1,600) (531)
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... (270,905) 17,519 3,316 5,098 1,496
Income tax provision
(benefit).............. (3,225) 10,614 1,176 4,272 566
---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ (267,680) $ 6,905 $ 2,140 $ 826 $ 930
========== ========== ========== ========== ==========
Net income (loss) per
share.................. $ (9.15) $ 0.22 $ 0.07 $ 0.03 $ 0.02
========== ========== ========== ========== ==========
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)...... -- -- -- -- -- -- -- -- 930 -- 930
Currency
translation
adjustment
(unaudited)...... -- -- -- -- -- -- -- -- -- (205) (205)
---- ---- --- ---- --- --- ---- -------- --------- --------- ---------
Balance at March
31, 1996
(unaudited)....... $ 16 $-- $ 5 $ 16 $ 2 $ 2 $ 41 $334,035 $(265,074) $ (58,638) $ 10,364
==== ==== === ==== === === ==== ======== ========= ========= =========
</TABLE>

See accompanying notes.

F-5
<PAGE>

DAL-TILE INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31 MARCH 31
----------------------------- ---------------------
1993 1994 1995 1995 1996
--------- -------- -------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....... $(267,680) $ 6,905 $ 2,140 $ 826 $ 930
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization.......... 22,019 17,020 17,164 4,302 5,390
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) (1,576) 363
Zero Coupon Notes
interest expense...... 3,473 9,700 10,899 2,576 2,919
Deferred income tax
provision (benefit)... (6,727) 763 (3,088) 680 86
Changes in operating
assets and
liabilities, net of
assets/liabilities of
business acquired:
Trade accounts
receivable.......... (11,808) (13,726) 8,581 2,997 (2,905)
Inventories.......... (16,911) 1,911 (3,580) (2,280) (3,049)
Other assets......... (891) 1,695 (5,754) (584) (1,521)
Trade accounts
payable and accrued
expenses............ (2,899) 14,890 12,371 (1,903) (16,270)
Accrued interest
payable............. 200 307 354 (8,685) (9,472)
Other liabilities.... 9,824 (1,431) (14,787) 9,647 2,561
--------- -------- -------- --------- ----------
Net cash provided by
(used in) operating
activities............. (6,193) 31,470 40,663 6,000 (20,968)
INVESTING ACTIVITIES
Expenditures for
property, plant, and
equipment, net......... (17,066) (14,160) (29,392) (5,505) (5,673)
FINANCING ACTIVITIES
Repayment of long-term
debt................... (86,392) (36,934) (22,538) (746) (44,300)
Borrowings under long-
term debt.............. 44,032 28,000 46,702 14,000 37,100
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 13,254 (7,200)
Effect of exchange rate
changes on cash........ 407 (4,694) (3,022) (2,353) 7
--------- -------- -------- --------- ----------
Net increase (decrease)
in cash................ 5,919 4,182 59,988 11,396 (33,834)
Cash at beginning of
year................... 2,876 8,795 12,977 12,973 72,965
--------- -------- -------- --------- ----------
Cash at end of year..... $ 8,795 $ 12,977 $ 72,965 $ 24,369 $ 39,131
========= ======== ======== ========= ==========
</TABLE>

See accompanying notes.

F-6
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 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 three months ended March 31, 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 THREE MONTHS ENDED MARCH 31, 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 THREE MONTHS ENDED MARCH 31, 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 March 31, 1996, was $47,595,000, $52,360,000 and $53,551,000,
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 March 31, 1996, was
approximately $6,885,000, $8,963,000 and $9,500,000, 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 three months ended March
31, 1995 and 1996 amounted to $3,631,000, $4,499,000, $4,668,000, $1,000,000
and $1,671,000, 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 THREE MONTHS ENDED MARCH 31, 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,
$1,966,000 and $759,000 for the years ended December 31, 1993, 1994, and 1995
and the three months ended March 31, 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 $8,364,000 (including
$2,352,000 related to the AO Acquisition) at December 31, 1994 and 1995 and
March 31, 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 THREE MONTHS ENDED MARCH 31, 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 March 31, 1996 and for
the three-month periods ended March 31, 1995 and March 31, 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 March 31, 1996 and the results of operations and cash flows for
the three-month periods ended March 31, 1995 and March 31, 1996. The results
of operations for the three-month period ended March 31, 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
---------------- MARCH 31,
1994 1995 1996
------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Finished products in U.S. ........................ $64,407 $ 95,355 $ 98,466
Finished products in Mexico....................... 4,659 4,303 4,123
Finished products in Canada....................... 1,715 3,362 3,300
Goods-in-process.................................. 1,231 3,567 2,998
Raw materials..................................... 8,455 12,224 12,989
------- -------- --------
Total inventories................................. $80,467 $118,811 $121,876
======= ======== ========
</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 March 31, 1996, respectively.

F-11
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)

4. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31
----------------- MARCH 31,
1994 1995 1996
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Dal-Tile International Senior Secured Zero
Coupon Notes, interest at 12%, due July 15,
1998......................................... $ 88,179 $ 99,078 $101,997
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 91,197 128,297
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 11,040
-------- -------- --------
492,753 527,816 523,534
Less current portion.......................... 3,349 47,047 47,047
-------- -------- --------
$489,404 $480,769 $476,487
======== ======== ========
</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 THREE MONTHS ENDED MARCH 31, 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 March 31, 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 March 31, 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 three months ended March 31, 1995 and 1996, amounted to
approximately $47,306,000, $54,208,000, $56,699,000, $13,234,000 and
$13,560,000, respectively, of which approximately $560,000, $666,000,
$1,246,000, $186,000 and $254,000, 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, $19,678,000 and $20,442,000 for the
years ended December 31, 1993, 1994, and 1995 and the three months ended March
31, 1995 and 1996, respectively.

F-13
<PAGE>

DAL-TILE INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)

5. CAPITAL STRUCTURE

Common stock consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------ MARCH 31,
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 March 31, 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 March 31, 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 March 31, 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 March 31, 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 March 31, 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 March 31, 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 March 31, 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 THREE MONTHS ENDED MARCH 31, 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 THREE MONTHS ENDED MARCH 31, 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 THREE MONTHS ENDED MARCH 31, 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. A valuation allowance
exists against temporary differences related to U.S. operations due to the
uncertainty of the deferred tax assets being realized.

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 THREE MONTHS ENDED MARCH 31, 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, $1,085,000 and $141,000
for 1993, 1994, and 1995 and the three months ended March 31, 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, $228,000 and $230,000 for the three years ended December 31, 1993,
1994, 1995 and for the three months ended March 31, 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 March 31, 1996 (224,410 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 THREE MONTHS ENDED MARCH 31, 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, $3,219,000 and $3,677,000 for the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 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 THREE MONTHS ENDED MARCH 31, 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 THREE MONTHS ENDED MARCH 31, 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 contemplates entering into a new bank credit agreement, both 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 THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)

18. SUBSEQUENT EVENT--CAPITAL STRUCTURE (UNAUDITED)

On July , 1996, immediately prior to the initial public offering of the
Company's common stock, the Company effected a recapitalization of its current
capital stock. Pursuant to the common stock conversion, all the classes of the
Company's previously outstanding common stock were 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
31, 1994 and December 29, 1995, and the related consolidated statements of
operations and cash flows for both of the years in the two-year period ended
December 31, 1994 and for the period ended December 29, 1995. 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 31, 1994, and December 29, 1995, and the results of their operations
and their cash flows for both of the years in the two-year period ended
December 31, 1994 and for the period ended December 29, 1995, in conformity
with generally accepted accounting principles.

KPMG Peat Marwick LLP
February 2, 1996
Philadelphia, Pennsylvania

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]

<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]

SUBJECT TO COMPLETION, DATED JULY 16, 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 $ 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**...................................
Legal fees and expenses**........................................
Blue Sky expenses and counsel fees............................... 15,000
Printing and engraving expenses**................................
NYSE listing fee**...............................................
Transfer Agent and Registrar fees and expenses**.................
Miscellaneous expenses**.........................................
-------
Total.......................................................... $
=======
</TABLE>
--------
* Except for the SEC registration fee, the NASD filing fee and
the NYSE listing fee, all the foregoing expenses have been
estimated.
** To be completed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Article SEVENTH of the 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 attorney's 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 attorney's 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 Agreement 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 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 Agreement.
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 DTI Merger Agreement, among Dal-Tile International, Inc., DTI
Investors LLC and DTI Merger Company.
+3.1 Form of 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 Form of 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 Dal-Tile
International, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.)
10.8 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.)
10.9 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.)
10.10 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.)
10.11 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.)
10.12 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.)
10.13 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.)
10.14 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.)
10.15 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.)
+10.16 Agreement, dated July , 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>
10.17 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>
- --------

* Previously filed.

+ To be filed by amendment.

(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 16TH DAY OF JULY, 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 July 16, 1996
- -------------------------------
CHARLES J. PILLIOD, JR.

President and Chief
* Executive Officer and July 16, 1996
- ------------------------------- Director (Principal
HOWARD I. BULL Executive Officer)

/s/ Carlos E. Sala Executive Vice President and July 16, 1996
- ------------------------------- Chief Financial Officer
(Principal Financial and
CARLOS E. SALA Accounting Officer)

Vice President and Director
* July 16, 1996
- -------------------------------
JOHN M. GOLDSMITH

* Vice President and Director July 16, 1996
- -------------------------------

HENRY F. SKELSEY

- ------------------------------- Director July 16, 1996

E. MANDELL DE WINDT

II-5
<PAGE>

SIGNATURE TITLE DATE

Director
* July 16, 1996
- -------------------------------
DREW LEWIS

Director
- ------------------------------- July 16, 1996
VINCENT A. MAI

Director
* July 16, 1996
- -------------------------------
GEORGE A. LORCH

Director
* July 16, 1996
- -------------------------------
FRANK A. RIDDICK III

- ------------------------------- Director
ROBERT J. SHANNON, JR. July 16, 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 July ,
1996

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

The foregoing report is in the form that will be signed upon the completion
of the recapitalization described in Note 18 to the Consolidated Financial
Statements.

/s/ ERNST & YOUNG LLP

Dallas, Texas

July 16, 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 Agreement.
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 DTI Merger Agreement, among Dal-Tile International Inc., DTI
Investors LLC and DTI Merger Company.
+3.1 Form of 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 Form of 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 Dal-
Tile International, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1993 and incorporated herein by
reference.)
10.8 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.)
10.9 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.)
10.10 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>
10.11 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.)
10.12 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.)
10.13 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.)
10.14 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.)
10.15 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.)
+10.16 Agreement, dated July , 1996, among Dal-Tile International
Inc., AEA Investors Inc., Armstrong World Industries, Inc.,
Armstrong Enterprises, Inc. and Armstrong Cork Finance
Corporation.
10.17 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>
- --------

* Previously filed.

+ To be filed by amendment.

<PAGE>

EXHIBIT 4.1

TEMPORARY CERTIFICATE -- EXCHANGEABLE FOR DEFINITIVE ENGRAVED CERTIFICATE WHEN
READY FOR DELIVERY

T SHARES

DAL-TILE INTERNATIONAL INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

COMMON STOCK COMMON STOCK

SEE REVERSE FOR
CERTAIN DEFINTIONS

CUSIP 23426R 10 8

This Certifies that

is the owner of

FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF DAL-TILE
INTERNATIONAL INC. TRANSFERABLE ON THE BOOKS OF THE CORPORATION IN PERSON OR BY
THE REGISTRAR.
WITNESS THE FACSIMILE OF THE CORPORATION AND THE FACSIMILE SIGNATURES
OF ITS DULY AUTHORIZED OFFICERS.

Dated:

COUNTERSIGNED AND REGISTERED:
ChaseMellon Shareholder Services, L.L.C. PRESIDENT
TRANSFER AGENT
AND REGISTRAR.

[SEAL]

AUTHORIZED SIGNATURE. TREASURER
<PAGE>

DAL-TILE INTERNATIONAL INC.

The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

<TABLE>
<CAPTION>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _______ Custodian_______
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with rights of under Uniform Gifts to Minors
survivorship and not as tenants Act ________________________
in common (State)

</TABLE>

Additional abbreviations may also be used though not in the above list.

For value received, _____________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

[ ]
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF
ASSIGNEE)

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

- ------------------------------------------------------------------------shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint

- --------------------------------------------------------------Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.

Dated __________________

---------------------------------------------------------
NOTICE: The signature to the assignement must correspond
with the name as written upon the face of the certificate
in every particular without alteration or enlargement or
any change whatever. The signature of the person
executing this power must be guaranteed by an Eligible
Guarantor Institution such as a Commercial Bank, Trust
Company, Securities Broker/Dealer, Credit Union, or a
Savings Association participating in a Medallion program
approved by the Securities Transfer Association, Inc.

<PAGE>

EXHIBIT 10.1

Draft
7/15/96
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 [A date before
the effective date of the offering].

(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 10.2

CONSULTING AGREEMENT
--------------------

CONSULTING AGREEMENT, dated as of the 1st day of August 1995, by and
among Harold L. Turk ("Turk"), Dal-Tile International Inc. ("DTI"), Dal-Tile
Corporation ("Dal-Tile"),DTM/CM Holdings Inc. ("DTC/CM"),Dal-Minerals Company
("Dal-Minerals") Ceramica Regiomontana S.A. de C.V. ("Ceramica"), and
Materiales Ceramicos, S.A. de C.V. ("Materiales"). DTI, Dal-Tile, DTM/CM, Dal-
Minerals, Ceramica, Materiales and their affiliates are sometimes herein
collectively referred to as the "Company".

WHEREAS, Turk desires to provide consulting services to the Company
pursuant to the terms and subject to the conditions hereof;

NOW, THEREFORE, the parties hereto agree as follows:

1. Term. The term of this Consulting Agreement (the "Term") shall
----
extend from the date hereof and shall expire on July 31, 1998.

2. Services. Turk shall be available to consult with the Company at
--------
such times and with respect to such matters as may be agreed upon between Turk
and the Company. Business travel and entertainment expenses agreed upon between
Turk and the Company will be paid by the Company. Turk shall cooperate fully
with the Company regarding all company matters, including but not limited to,
environmental matters, customs issues, road show matters and any and all
communications with public and/or banking community.

3. Compensation.
------------

(a) As compensation in full for the consulting services to be
rendered to the Company hereunder, Turk shall be entitled to receive a
consulting fee payable in monthly installments of:
<PAGE>

. $18,750 monthly from 1st day of August 1995 until 31st day of July 1996
($225,000)

. $14,583 monthly from 1st day of August 1996 until 31st day of July 1997
($175,000)

. $10,417 monthly from 1st day of August 1997 until 31st day of July 1998
($125,000)

Upon the death of Turk, the amounts owing to him pursuant to this Section 3
shall be paid to his spouse, Maxine, with the amount to be paid in installments
for the balance of the Term in accordance with the terms of this Section 3.

4. Incorporation by Reference. Sections 3, 4 and 5 of the
--------------------------
Retirement Agreement, dated as of the date hereof, among the parties hereto, are
hereby incorporate by reference herein and made a part hereof.

5. Miscellaneous. The Consulting Agreement shall be
-------------
governed by and interpreted in accordance with the laws of the State of Texas,
and shall not be amended other than by the written agreement of the parties
hereto.

6. The provisions of this Agreement shall be binding on and
shall inure to the benefit of the heirs, successors and assigns of the parties
hereto and on their estates and legal representatives.

7. In the event of any litigation or proceedings involving
the provisions of this Agreement, the party who is determined by the tier of
fact to be the prevailing party shall be entitled to be reimbursed by the other
party hereof for the legal fees and expenses incurred by him or it in connection
with such litigation or procedures.

IN WITNESS WHEREOF, the parties hereto have executed this
Consulting Agreement as of the date first above written.

/s/HAROLD L. TURK
-------------------
Harold L. Turk

<PAGE>

DAL-TILE INTERNATIONAL INC.

By: /s/ Howard I. Bull
-----------------------------------

Name: Howard I. Bull
---------------------------------

Title: President & C.E.O.
--------------------------------

DAL-TILE CORPORATION

By: /s/ Howard I. Bull
-----------------------------------

Name: Howard I. Bull
---------------------------------

Title: Chairman of the Board
--------------------------------

DTM/CM HOLDING INC.

By: /s/ Howard I. Bull
-----------------------------------

Name: Howard I. Bull
---------------------------------

Title: Chairman of the Board
--------------------------------

CERAMICA REGIOMONTANA, S.A. DE C.V.

By: /s/ Howard I. Bull
-----------------------------------

Name: Howard I. Bull
---------------------------------

Title: Chairman of the Board
--------------------------------

DAL-MINERALS COMPANY

By: /s/ Howard I. Bull
-----------------------------------

Name: Howard I. Bull
---------------------------------

Title: Chairman of the Board
--------------------------------

MATERIALES CERAMICOS, S.A. DE C.V.

By: /s/ Howard I. Bull
-----------------------------------

Name: Howard I. Bull
---------------------------------

Title: Chairman of the Board
--------------------------------

<PAGE>

EXHIBIT 10.17

June 26, 1996

Senior Secured Credit Facilities
--------------------------------
Commitment Letter
-----------------

Dal-Tile Group Inc.
7834 C.F. Hawn Freeway
P.O. Box 17130
Dallas, Texas 75217

Attention: Mr. Carlos Sala, Executive Vice President and Chief Financial Officer

Ladies and Gentlemen:

You have advised the Arranger and the Co-Arrangers listed on the signature
pages hereto, and the Administrative Agent, the Documentation Agent and the
Syndication Agent listed on the signature pages hereto (collectively, the
"Managing Agents"), that you plan to refinance your outstanding indebtedness
---------------
(the "Refinancing") and are considering an initial public offering of your
-----------
common stock (the "IPO"). In connection with the Refinancing, you have
---
requested that the Arranger and the Co-Arrangers agree to act as the arranger
and the co-arrangers, respectively, of, and structure, arrange and syndicate,
senior credit facilities (the "Credit Facilities") in an aggregate amount of
-----------------
$525,000,000, if you consummate the IPO in connection with the Refinancing (the
"IPO Credit Facilities"), or $675,000,000, if you do not (the "Non-IPO Credit
--------------------- --------------
Facilities"), and that the Managing Agents severally commit to provide in the
- ----------
aggregate the entire principal amount of the IPO Credit Facilities or the Non-
IPO Credit Facilities, as the case may be, and to agree to serve as the
administrative agent, the documentation agent and the syndication agent,
respectively, therefor.

The Arranger and the Co-Arrangers are pleased to advise you that they are
willing to act as the arranger and the co-arrangers, respectively, for the
Credit Facilities, and the Managing Agents are pleased to advise you that they
are willing to serve as the administrative agent, the documentation agent and
the syndication agent, respectively, of the Credit Facilities. You agree that no
other agents, co-agents or arrangers will be appointed, no
<PAGE>

other titles will be awarded and no compensation (other than that expressly
contemplated by the Term Sheets, the Fee Letter and the Supplemental Fee Letter
referred to below) will be paid in connection with the Credit Facilities unless
you and we shall so agree.

Furthermore, each Managing Agent is pleased to advise you of its commitment to
provide the percentage of the IPO Credit Facilities and the Non-IPO Credit
Facilities specified under its signature on the signature pages hereto, upon the
terms and subject to the conditions set forth or referred to in this commitment
letter (the "Commitment Letter") and in the Summary of Terms and Conditions
------------------
attached hereto as Exhibit A, in the case of the IPO Credit Facilities, or
Exhibit B, in the case of the Non-IPO Credit Facilities (Exhibits A and B being
referred to as the "Term Sheets").
-----------

The Arranger and the Co-Arrangers intend to syndicate the IPO Credit
Facilities, promptly upon the execution of this Commitment Letter, to a group
of financial institutions (together with the Managing Agents, the "Lenders")
-------
identified in consultation with you. In the event that, on a date (the "Notice
------
Date") on or prior to November 15, 1996, you advise us that you are electing to
- ----
utilize the Non-IPO Credit Facilities, we will then commence syndication of the
Non-IPO Credit Facilities. You agree actively to assist the Arranger and Co-
Arrangers in completing a satisfactory syndication of the IPO Credit Facilities
and, if you elect to utilize them, the Non-IPO Credit Facilities. Such
assistance shall, in each case, include (a) your using commercially reasonable
efforts to ensure that the syndication efforts benefit materially from your
existing lending relationships and the existing lending relationships of AEA
Investors, Inc. ("AEA Investors"), (b) direct contact between your senior
-------------
management and advisors and the proposed Lenders, (c) assistance in the
preparation of a Confidential Information Memorandum and other materials to be
used in connection with the syndication (including assistance in the completion
of our due diligence review of you and your subsidiaries as an aid to such
preparation) and (d) the hosting, with the Arranger, of one or more meetings of
prospective Lenders. The closing date of the Credit Facilities (the "Closing
-------
Date") shall be set so as to give us at least 45 days to syndicate the IPO
- ----
Credit Facilities and, if you advise us of your election to utilize the Non-IPO
Credit Facilities, at least 45 days after the Notice Date to syndicate the Non-
IPO Credit Facilities.

The Arranger, in consultation with the Co-Arrangers and you, will manage all
aspects of the syndication, including decisions as to the selection of
institutions to be approached and when they will be approached, when their
commitments will be accepted, which institutions will participate, the
allocations of the commitments among the Lenders and the amount and
distribution of fees among the Lenders. To assist the Arranger in the
syndication efforts, you agree promptly to prepare and provide to us all
information with respect to you, the Refinancing and the other transactions
contemplated hereby, (a) including all financial information and projections
(the "Projections"), as we may reasonably request and (b) including, in
-----------
connection with syndication of the Non-IPO Credit Facilities, an environmental
and health and safety compliance review performed by a recognized environmental
consultant selected by you and reasonably acceptable to us relating to your
manufacturing facilities, other than those acquired from Armstrong World
Industries, Inc. You hereby represent and covenant that (a) all information
other than the Projections (the "Information"), taken as a whole, that has been
-----------
or will be made available to us by you or any
<PAGE>

of your representatives is or will be, when furnished, to the best of your
knowledge, complete and correct in all material respects and does not or will
not, when furnished, contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements contained
therein not materially misleading in light of the circumstances under which such
statements are made and (b) the Projections that have been or will be made
available to us by you or any of your representatives have been or will be
prepared in good faith based upon reasonable assumptions. You understand that in
arranging and syndicating the Credit Facilities we may use and rely on the
Information and Projections without independent verification thereof.

As consideration for the commitments of the Managing Agents hereunder and our
agreements to perform the services described herein, you agree to pay the
nonrefundable fees set forth in the Fee Letter and the Supplemental Fee Letter,
each dated the date hereof and delivered herewith (the "Fee Letter" and the
----------
"Supplemental Fee Letter", respectively).
-----------------------

We shall be entitled, with your consent (which shall not be unreasonably
withheld), to change the structure, terms or amounts of, or to eliminate, any of
the Non-IPO Credit Facilities if we determine that such changes are advisable in
order to ensure a successful syndication or an optimal credit structure for the
Non-IPO Credit Facilities and if the aggregate amount of the Non-IPO Credit
Facilities shall remain unchanged.

Our commitments and agreements hereunder are subject to (a) there not
occurring or after the date hereof becoming known to us any material adverse
condition or material adverse change in or affecting the business, operations,
property, condition (financial or otherwise) or prospects of you and your
subsidiaries, taken as a whole, (b) our not becoming aware after the date hereof
of any information or other matter affecting you or your subsidiaries or the
transactions contemplated hereby which is inconsistent in a material and adverse
manner with any such information or other matter disclosed to us prior to the
date hereof, that, in the aggregate, represents a material adverse change in or
affecting the business, operations, property, condition (financial or otherwise)
or prospects of you and your subsidiaries, taken as a whole (c) there not having
occurred a material disruption of or material adverse change in financial,
banking or capital market conditions that materially impairs the syndication of
the IPO Credit Facilities or the Non-IPO Credit Facilities, as the case may be,
(d) our satisfaction that prior to and during the syndication of the IPO Credit
Facilities or the Non-IPO Credit Facilities, as the case may be, there shall be
no competing offering, placement or arrangement of any debt securities or bank
financing by or on behalf of you or any of your affiliates, (e) the negotiation,
execution and delivery of definitive documentation with respect to the IPO
Credit Facilities on or prior to August 31, 1996 or with respect to the Non-IPO
Credit Facilities on or prior to December 31, 1996, in each case in a form
reflecting the terms hereof and satisfactory to us and counsel to the
Administrative Agent, and (f) the other conditions set forth or referred to in
the Term Sheets. The terms and conditions of the commitments and agreements
hereunder and of the Credit Facilities are not limited to those set forth herein
and in the Term Sheets. Those matters that are not covered by the provisions
hereof and of the Term Sheets are subject to the approval and agreement of you
and us.
<PAGE>

You agree (a) to indemnify and hold harmless each of us and our respective
affiliates and their respective officers, directors, employees, advisors, and
agents (each, an "indemnified person") from and against any and all losses,
-------------------
claims, damages and liabilities to which any such indemnified person may become
subject arising out of or in connection with this Commitment Letter, the Credit
Facilities, the use of the proceeds thereof, or any related transaction or any
claim, litigation, investigation or proceeding relating to any of the foregoing,
regardless of whether any indemnified person is a party thereto, and to
reimburse each indemnified person upon demand for any legal or other expenses
incurred in connection with investigating or defending any of the foregoing,

provided that the foregoing indemnity will not, as to any indemnified person,
- --------
apply to losses, claims, damages, liabilities or related expenses to the extent
they arise from the willful misconduct or gross negligence of such indemnified
person, and (b) to reimburse us and our respective affiliates on demand for all
out-of-pocket expenses (including due diligence expenses, syndication expenses,
travel expenses, and reasonable fees, charges and disbursements of counsel to
the Administrative Agent) incurred in connection with the Credit Facilities and
any related documentation (including this Commitment Letter, the Term Sheets,
the Fee Letter, the Supplemental Fee Letter and the definitive financing
documentation) or the administration, amendment, modification or waiver thereof.
No indemnified person shall be liable for any indirect or consequential damages
in connection with its activities related to the Credit Facilities.

This Commitment Letter shall not be assignable by you without our prior
written consent (and any purported assignment without such consent shall be null
and void), and is intended to be solely for the benefit of the parties hereto
and is not intended to confer any benefits upon, or create any rights in favor
of, any person other than the parties hereto. This Commitment Letter may not be
amended or waived except by an instrument in writing signed by you and each of
us. This Commitment Letter may be executed in any number of counterparts, each
of which shall be an original, and all of which, when taken together, shall
constitute one agreement. Delivery of an executed signature page of this
Commitment Letter by facsimile transmission shall be effective as delivery of a
manually executed counterpart hereof. This Commitment Letter, the Fee Letter
and the Supplemental Fee Letter are the only agreements that have been entered
into among us with respect to the Credit Facilities and set forth the entire
understanding of the parties with respect thereto. This Commitment Letter shall
be governed by, and construed in accordance with, the laws of the State of New
York.

This Commitment Letter is delivered to you on the understanding that neither
this Commitment Letter, the Term Sheets, the Fee Letter or the Supplemental Fee
Letter nor any of their terms or substance shall be disclosed, directly or
indirectly, to any other person except (a) to your officers, agents and advisors
who are directly involved in the consideration of this matter or (b) as may be
compelled in a judicial or administrative proceeding or as otherwise required by
law (in which case you agree to inform us promptly thereof), provided, that the
--------
foregoing restrictions shall cease to apply (except, subject to the foregoing
exceptions, in respect of the Fee Letter and the Supplemental Fee Letter and the
terms and substance thereof) after this Commitment Letter has been accepted by
you.

The reimbursement, indemnification and confidentiality provisions contained
herein and in the Fee Letter and the Supplemental Fee Letter shall remain in
full force and
<PAGE>

effect regardless of whether definitive financing documentation shall be
executed and delivered and nothwithstanding the termination of this Commitment
Letter or our commitments and agreements hereunder.

If the foregoing correctly sets forth the agreement between you and
us, please indicate your acceptance of the terms hereof and of the Term Sheets
and the Fee Letter by returning to the Administrative Agent executed
counterparts hereof and of the Fee Letter not later than 5:00 p.m., New York
City time, on June 28, 1996. Our commitments and agreements hereunder will
expire at such time in the event the Administrative Agent has not received such
executed counterparts in accordance with the immediately preceding sentence.

We are pleased to have been given the opportunity to assist you in
connection with this important financing.

Very truly yours,

CHASE SECURITIES INC.,
the Arranger

By: /s/ Peter E. Nightingale
------------------------------
Name: Peter E. Nightingale
Title: Managing Director

THE CHASE MANHATTAN BANK, N.A.,
the Administrative Agent

By: /s/ WILLIAM J. CAPPIANO
----------------------------
Name: William J. Cappiano
Title: Managing Director

Commitments Percentages:

IPO Credit Facilities: 50%
Non-IPO Credit Facilities: 50%
<PAGE>

CREDIT SUISSE,
a Co-Arranger and
the Documentation Agent

By:_______________________
Name:
Title:

Commitments Percentages:

IPO Credit Facilities: 25%
Non-IPO Credit Facilities: 25%

GOLDMAN, SACHS & CO.,
a Co-Arranger and Syndication Agent

_________________________________

PEARL STREET, L.P.,
a Lender

By:________________________
Name:
Title:

Commitments Percentages:

IPO Credit Facilities: 25%
Non-IPO Credit facilities: 25%

Accepted and agreed to
as of the date first
written above by:

DAL-TILE GROUP INC.

By:/s/ Carlos E. Sala
__________________________
Name: Carlos E. Sala
Title: Chief Financial Officer
<PAGE>

CREDIT SUISSE,
a Co-Arranger and
the Documentation Agent

By:_______________________
Name:
Title:

Commitments Percentages:

IPO Credit Facilities: 25%
Non-IPO Credit Facilities: 25%

GOLDMAN, SACHS & CO.,
a Co-Arranger and Syndication Agent

/S/ Goldman, Sachs & Co.
_________________________________

PEARL STREET, L.P.,
a Lender

By:/S/ Bob O'Shea
-----------------------------
Name: Bob O'Shea
Title: Authorized Signatory

Commitments Percentages:

IPO Credit Facilities: 25%
Non-IPO Credit facilities: 25%

Accepted and agreed to
as of the date first
written above by:

DAL-TILE GROUP INC.

By:
__________________________
Name:
Title:
<PAGE>

CREDIT SUISSE,
a Co-Arranger and
the Documentation Agent

By:/S/ Ann F. Lopez
---------------------------------
Name: ANN F. LOPEZ
Title: MEMBER OF SENIOR MANAGEMENT

By:/S/
---------------------------------
Name: CHRISTOPHER G. CUNNINGHAM
Title: MEMBER OF SENIOR MANAGERS

Commitments Percentages:

IPO Credit Facilities: 25%
Non-IPO Credit Facilities: 25%

GOLDMAN, SACHS & CO.,
a Co-Arranger and Syndication Agent

_________________________________

PEARL STREET, L.P.,
a Lender

By:________________________
Name:
Title:

Commitments Percentages:

IPO Credit Facilities: 25%
Non-IPO Credit facilities: 25%

Accepted and agreed to
as of the date first
written above by:

DAL-TILE GROUP INC.

By:
__________________________
Name:
Title:
<PAGE>

Exhibit A
---------

SENIOR CREDIT FACILITIES

Summary of Terms and Conditions
[IPO Version]
June 26, 1996

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

I. Parties
-------

Borrower: Dal-Tile Group Inc. (the "Borrower").
----------

Guarantors: Dal-Tile International Inc. ("Holdings") and each of the
----------
Borrower's material direct and indirect domestic

subsidiaries (the "Guarantors"; the Borrower and the
------------
Guarantors, collectively, the "Credit Parties"). In
----------------
connection with the IPO (as defined below), Holdings may

be merged with the Borrower.

Arranger: Chase Securities Inc. (in such capacity, the
"Arranger").
-----------
Co-Arrangers: Credit Suisse and Goldman, Sachs & Co. (in such
capacities, the "Co-Arrangers").
---------------
Administrative Agent: The Chase Manhattan Bank, N.A. ("Chase" and, in such
-------
capacity, the "Administrative Agent").
----------------------
Documentation Agent: Credit Suisse (in such capacity, the "Documentation
-------------
Agent").
-------
Syndication Agent: Goldman, Sachs & Co. (in such capacity, the "Syndication
-----------
Agent" and, together with the Administrative Agent and
-----
the Documentation Agent, the "Managing Agents").
------------------
Lenders: A syndicate of banks, financial institutions and other
entities, including the Managing Agents, arranged by the
Arranger (collectively, the "Lenders").
---------

II. Types and Amounts of
--------------------
Credit Facilities
-----------------

1. Term Loan Facility
------------------

Type and Amount of
Facility: Term loan facility (the "Term Loan Facility") in the
-------------------
amount of $275,000,000 (the loans thereunder, the "Term
-----
Loans").
------
<PAGE>

Availability: The Term Loans shall be made in a single drawing on the
Closing Date (as defined below).

Amortization: The Term Loans shall 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):

Aggregate
Year Amount
---- -----------
1997 $30,000,000
1998 $40,000,000
1999 $40,000,000
2000 $50,000,000
2001 $50,000,000
2002 $65,000,000

Purpose: The proceeds of the Term Loans shall be used to
refinance and repurchase existing indebtedness of the
Borrower, Holdings and their subsidiaries, and for
general corporate purposes.

2. Revolving Credit Facility
-------------------------

Type and Amount of
Facility: Revolving credit facility (the "Revolving Credit
----------------
Facility"; together with the Term Loan Facility, the
--------
"Credit Facilities") in the amount of $250,000,000
--------------------
(the loans thereunder, the "Revolving Credit Loans")
------------------------

Availability: The Revolving Credit Facility, subject to the
reductions provided for below, shall be available on a
revolving basis during the period commencing on the
Closing Date and ending on December 31, 2002 (the
"Revolving Credit Termination Date")
-----------------------------------

Reservation of
Portion of Revolving
Credit Facility: To the extent that any Zero Coupon Notes (as defined
below) are outstanding at any time, a portion of the
Revolving Credit Facility equal to the then accreted
amount of such Zero Coupon Notes shall be reserved for
the redemption, payment or repurchase thereof.
<PAGE>

Letters of Credit: A portion of the Revolving Credit Facility not in
excess of $35,000,000 shall be available for the
issuance of letters of credit (the "Letters of
----------
Credit") by Chase (in such capacity, the "Issuing
------- -------
Lender"). No Letter of Credit shall have an
-------
expiration date after the earlier of (a) one year
(or, with respect to Letters of Credit in an
aggregate face amount at any time of up to
$10,000,000, two years) after the date of issuance
and (b) five business days prior to the Revolving
Credit Termination Date, provided that any Letter
--------
of Credit with a one-year tenor may provide for the
renewal thereof for additional one-year periods
(which shall in no event extend beyond the date
referred to in clause (b) above).

Drawings under any Letter of Credit shall be
reimbursed by the Borrower (whether with its own
funds or with the proceeds of Revolving Credit
Loans) on the next business day. To the extent that
the Borrower does not so reimburse the Issuing
Lender, the Lenders under the Revolving Credit
Facility shall be irrevocably and unconditionally
obligated to reimburse the Issuing Lender on a pro
---
rata basis. Any drawing not reimbursed on the same
----
business day shall bear interest until reimbursed
in full.

Swing Line Loans: A portion of the Revolving Credit Facility not in
excess of $25,000,000 shall be available for swing
line loans (the "Swing Line Loans") from Chase (in
------------------
such capacity, the "Swing Line Lender") on same-day
--------------------
notice. Any such Swing Line Loans will reduce
availability under the Revolving Credit Facility on
a dollar-for-dollar basis. Each Lender under the
Revolving Credit Facility shall acquire, under
certain circumstances, an irrevocable and
unconditional pro rata participation in each Swing
Line Loan. --------

Maturity: The Revolving Credit Termination Date.

Purpose: The proceeds of the Revolving Credit Loans shall be
used to refinance and repurchase existing
indebtedness of the Borrower, Holdings and their
subsidiaries and for general corporate purposes.
<PAGE>

III. Certain Payment Provisions
--------------------------

Fees and Interest Rates: As set forth on Annex I.

Optional Prepayments and
Commitment Reductions: Loans may be prepaid and commitments may
be reduced by the Borrower without
premium or penalty in minimum amounts to
be agreed upon. Prepayments of the Term
Loans shall be applied to the
installments thereof ratably in
accordance with the then outstanding
amounts thereof.

Mandatory Prepayments and
Commitment Reductions: Unless the Required Lenders (as defined
below) shall otherwise agree, the Term
Loans shall be prepaid and the Revolving
Credit Facility shall be reduced with
100% of the net proceeds of any sale or
other disposition (including as a result
of casualty or condemnation net of
proceeds applied to restoration) by
Holdings or by the Borrower or any of its
subsidiaries of any assets (except for
the sale of inventory in the ordinary
course of business and certain other
permitted dispositions to be set forth in
the Credit Documentation (as defined
below), including any other disposition
in the ordinary course of business the
net proceeds from which do not exceed
$1,000,000); provided that the Borrower
may retain (and not so apply) up to
$35,000,000 of such net proceeds
otherwise required to be applied as
mandatory prepayments.

All such amounts shall be applied, first,
-----
to the prepayment of the Term Loans and,
second, to the permanent reduction of the
-------
Revolving Credit Facility and to the
installments thereof ratably in
accordance with the then outstanding
amounts thereof and may not be
reborrowed. The Revolving Credit Loans
shall be prepaid and the Letters of
Credit shall be cash collateralized or
replaced to the extent such extensions of
credit exceed the amount of the
Revolving Credit Facility.
<PAGE>

5
IV. Certain Conditions
------------------

Initial Conditions: The availability of the Credit Facilities
shall be conditioned upon satisfaction
of, among other things, the following
conditions precedent (the date upon which
all such conditions precedent shall be
satisfied, the "Closing Date") on or
--------------
before December 31, 1996:

(a) Each Credit Party shall have executed
and delivered satisfactory definitive
financing documentation with respect to
the Credit Facilities (the "Credit
Documentation"). --------
--------------
(b) Holdings or the Borrower shall have
received at least $110,000,000 in net
proceeds from the issuance of its common
stock in an initial public offering (the
"IPO") and, if Holdings shall have
---
consummated the IPO, the Borrower shall
have received from the issuance of its
common stock to, or by way of capital
contribution from, Holdings, the
proceeds of the IPO not required by
Holdings as contemplated by paragraph (c)
below or for the payment of fees and
expenses relating to the IPO or the
Refinancing (as defined below). "Net
proceeds" means the gross cash proceeds
of the IPO net only of the underwriting
commission or discount.

(c) Each of Holdings and the Borrower
shall have redeemed, repurchased or
prepaid (the "Refinancing") all of its
-------------
existing indebtedness and accrued
interest thereon (other than any such
indebtedness of not more than $20,000,000
in the aggregate permitted to remain
outstanding); provided that, so long as
--------
the covenants and other terms therein
have been amended if and to the extent
necessary to permit the Credit Facilities
on the terms and conditions hereof,
Holdings shall not be required to have
redeemed, repurchased or prepaid its
senior secured zero coupon notes due July
15, 1998 (the "Zero Coupon Notes").
-------------------
(d) The Lenders, the Administrative
Agent and the Arranger shall have
received all fees required to be paid,
and all expenses for which invoices have
been presented, on or before the Closing
Date.

(e) The Lenders shall have received
unaudited interim consolidated financial
statements of the Borrower for each
fiscal quarterly period ended subsequent
to the date of the
<PAGE>

latest financial statements previously
delivered to the Managing Agents.

(f) The Lenders shall have received
satisfactory projections of the Borrower
and its subsidiaries for the period from
the Closing Date through the final
maturity of the Term Loans, which have
been received by the Agents.

(g) The Lenders shall have received such
legal opinions (including opinions (i)
from counsel to the Borrower and its
subsidiaries and (ii) from such special
and local counsel as may be required by
the Administrative Agent), documents and
other instruments as are customary for
transactions of this type or as they may
reasonably request.

On-Going Conditions: The making of each extension of credit
shall be conditioned upon (a) the
accuracy of all representations and
warranties in the Credit Documentation
(including, without limitation, the
material adverse change and litigation
representations) and (b) there being no
default or event of default in existence
at the time of, or after giving effect to
the making of, such extension of credit.
As used herein and in the Credit
Documentation a "material adverse change"
shall mean any event, development or
circumstance that has had or is
reasonably likely to have a material
adverse effect on (a) the business,
assets, property, condition (financial or
otherwise) or prospects of the Borrower
and its subsidiaries taken as a whole, or
(b) the validity or enforceability of any
of the Credit Documentation or the rights
and remedies of the Administrative Agent
and the Lenders thereunder

V. Certain Documentation Matters
-----------------------------

The Credit Documentation shall contain
representations, warranties, covenants
and events of default customary for
financings of this type and other terms
not inconsistent herewith deemed
reasonably appropriate by the Managing
Agents, including, without limitation:

Representations and
Warranties: Financial statements (including pro forma
financial statements); absence of
undisclosed liabilities; no material
adverse change; corporate existence;
compliance with law; corporate power and
authority; enforceability of Credit
Documentation; no conflict with law or
contractual
<PAGE>

obligations; no litigation; no default;
ownership of property; liens;
intellectual property; no burdensome
restrictions; taxes; Federal Reserve
regulations; ERISA; Investment Company
Act; subsidiaries; environmental matters;
solvency; labor matters; accuracy of
disclosure. Where appropriate, the
representations and warranties shall be
subject to materiality standards.

Affirmative Covenants: Compliance with the following affirmative
covenants subject, where appropriate, to
a materiality standard: Delivery of
financial statements, reports,
accountants' letters, an annual business
plan, officers' certificates and other
information reasonably requested by the
Lenders; payment of other obligations;
continuation of business and maintenance
of existence and rights and privileges;
compliance with laws and contractual
obligations; maintenance of property and
insurance; maintenance of books and
records; right of the Lenders to inspect
property and books and records; notices
of defaults, litigation and other
material events; compliance with
environmental laws; further assurances.

Financial Covenants: Financial covenants as set forth on Annex
II.

Negative Covenants: Limitations on: indebtedness; liens;
guarantee obligations; mergers,
consolidations, liquidations and
dissolutions; sales of assets; leases;
dividends and other payments in respect
of capital stock; investments, loans and
advances; optional payments and
modifications of other debt instruments;
transactions with affiliates; sale and
leasebacks; changes in fiscal year;
negative pledge clauses; changes in lines
of business; and changes in holding
company status of Holdings. Exceptions to
such limitations shall include (others to
be agreed):

(a) in the case of the indebtedness
covenant, (i) indebtedness outstanding on
the Closing Date, (ii) industrial
development bond, capital leases and
other indebtedness and financings at any
one time outstanding of up to
$20,000,000, (iii) secured, non-recourse
financings at any one time outstanding of
up to 5% of consolidated capitalization
of the Borrower and its subsidiaries and
(iv) indebtedness, which may be secured,
incurred by foreign subsidiaries of the
Borrower of up to $30,000,000 at any one
time outstanding;
<PAGE>

(b) in the case of the sales of assets
covenant, sales of assets of up to
$35,000,000 in any one transaction and of
up to $70,000,000 in the aggregate;

(c) in the case of the dividends
covenant, dividends to Holdings to
redeem, repay and repurchase Zero Coupon
Notes and fees and expenses associated
therewith; and

(d) in the case of the investments
covenant, a basket for joint venture and
similar investments, and for
acquisitions in the same or related
businesses of up to 5% of consolidated
capitalization (net of any repayments of
such investments).

Events of Default: Nonpayment of principal when due;
nonpayment of interest, fees or other
amounts after a grace period to be agreed
upon; material inaccuracy of
representations and warranties; violation
of covenants (subject, in the case of
certain affirmative covenants, to a grace
period to be agreed upon); cross-default
to events of default; bankruptcy events;
certain ERISA events; material judgments;
invalidity of any guarantee, pledge
agreement or security agreement (or any
security interest thereunder); and a
change of control (to be defined as (i)
the occurrence of any event, if as a
result of which AEA and its stockholders
and their respective affiliates (the "AEA
----
Group") at any time beneficially own less
------
than a majority of the outstanding voting
stock of the Borrower, any person or
group (other than the AEA Group or
Armstrong World Industries, Inc.)
acquires beneficial ownership of 25% or
more of the voting stock of the Borrower
or Holdings or Armstrong acquires
beneficial ownership of more than 49% of
the voting stock of the Borrower or
Holdings or (ii) any person or group of
persons (other than the AEA Group) at any
time has the right to designate or elect
a majority of the board of directors of
the Borrower or Holdings).

the rate of interest or any fee or
extensions of any due date thereof, (iii)
increases in the amount or extensions of
the expiry date of any Lender's
commitment and (iv) modifications to the
pro rata provisions of the Credit
Documentation and (b) the consent of 100%
of the Lenders shall be required with
respect to (i) modifications to any of
the voting percentages and (ii) releases
of all or substantially all of the
Guarantors.

Assignments and
Participations: The Lenders shall be permitted to assign
and sell participations in their Loans
and commitments, subject, in the case of
assignments (other than to another Lender
or to an affiliate of a Lender), to the
consent of the Administrative Agent and
the Borrower (which consent in each case
shall not be unreasonably withheld). Non-
pro rata assignments shall be permitted.
In the case of partial assignments (other
than to another Lender or to an affiliate
of a Lender), the minimum assignment
amount shall be $5,000,000, and, after
giving effect thereto, the assigning
Lender shall have commitments and Loans
aggregating at least $5,000,000, in each
case unless otherwise agreed by the
Borrower and the Administrative Agent.
Participants shall have the same benefits
as the Lenders with respect to yield
protection and increased cost provisions.
Voting rights of participants shall be
limited to those matters with respect to
which the affirmative vote of the Lender
from which it purchased its participation
would be required as described under
"Voting" above. Pledges of Loans in
accordance with applicable law shall be
permitted without restriction, provided
that transfers upon or in lieu of
enforcement of such pledges shall be
subject to the consent of the
Administrative Agent and the Borrower
(which shall not be unreasonably
withheld). Promissory notes shall be
issued under the Credit Facilities only
upon request.

Eurodollar Loan (as defined in Annex I)
on a day other than the last day of an
interest period with respect thereto;
provided that the Borrower may, in lieu
of making any required prepayment of any
Eurodollar Loan, cash collateralize it
until the related interest period
expires.

Expenses and
Indemnification: The Borrower shall pay (a) all reasonable
out-of-pocket expenses of the
Administrative Agent and the Arranger
associated with the syndication of the
Credit Facilities and the preparation,
execution, delivery and administration of
the Credit Documentation and any
amendment or waiver with respect thereto
(including the reasonable fees,
disbursements and other charges of
counsel) and (b) all out-of-pocket
expenses of the Administrative Agent and
the Lenders (including the fees,
disbursements and other charges of
counsel) in connection with the
enforcement of the Credit Documentation.

The Administrative Agent, the Arranger
and the Lenders (and their affiliates and
their respective officers, directors,
employees, advisors and agents) will have
no liability for, and will be indemnified
and held harmless against, any loss,
liability, cost or expense incurred in
respect of the financing contemplated
hereby or the use or the proposed use of
proceeds thereof (except to the extent
resulting from the gross negligence or
willful misconduct of the indemnified
party).

Governing Law and Forum: State of New York.

Counsel to the
Administrative Agent
and the Arranger: Simpson Thacher & Bartlett.

Completion of
Documentation: The Credit Documentation shall be
executed and delivered on or prior
to August 31, 1996.
<PAGE>

Annex I
-------
Interest and Certain Fees
-------------------------

Interest Rate Options: The Borrower may elect that the Loans
comprising each borrowing bear interest
at a rate per annum equal to:

the ABR plus the Applicable
Margin; or

the Eurodollar Rate plus the
Applicable Margin.

provided, that all Swing Line Loans
--------
shall bear interest based upon the
ABR.

As used herein:

"ABR" means the highest of (i) the rate
-----
of interest publicly announced by Chase
as its prime rate in effect at its
principal office in New York City (the
"Prime Rate"), (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%.
----

"Applicable Margins" means the rates per
--------------------
annum in accordance with the pricing grid
attached hereto as Annex I-A (the
"Pricing Grid").
------------

"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 the Borrower) are offered to
Chase in the interbank eurodollar market.

Interest Payment Dates: In the case of Loans bearing interest
based upon the ABR ("ABR Loans"),
-------------
quarterly in arrears.

In the case of Loans bearing interest
based upon the Eurodollar Rate
("Eurodollar Loans"), 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.
<PAGE>

Commitment Fees: The Borrower shall pay a commitment fee at a
rate per annum in accordance with the
Pricing Grid on the average daily unused
portion of the Revolving Credit Facility for
the period after the Closing Date, payable
quarterly in arrears. Swing Line Loans
shall, for purposes of the commitment fee
calculations only, not be deemed to be a
utilization of the Revolving Credit
Facility.

Letter of Credit Fees: The Borrower shall pay a commission on all
outstanding Letters of Credit at a per annum
rate equal to the Applicable Margin then in
effect with respect to Revolving Credit
Loans that are Eurodollar Loans on the face
amount of each such Letter of Credit. Such
commission shall be shared ratably among the
Lenders participating in the Revolving
Credit Facility and shall be payable
quarterly in arrears.

A fronting fee equal to 0.25% per annum on
the face amount of each Letter of Credit
shall be payable quarterly in arrears to the
Issuing Lender for its own account. In
addition, customary administrative,
issuance, amendment, payment and negotiation
charges shall be payable to the Issuing
Lender for its own account.

Unreimbursed drawings on Letters of Credit
shall bear interest at the same rate as ABR
Loans that are Revolving Credit Loans.

Default Rate: At any time when the Borrower is in default
in the payment of any amount due under the
Credit Facilities, 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 to
Revolving Credit Loans that are ABR Loans.

Rate and Fee Basis: All per annum rates shall be calculated on
the basis of a year of 360 days (or 365/366
days, in the case of ABR Loans the interest
rate payable on which is then based on the
Prime Rate) for actual days elapsed.

<PAGE>

Annex I-A
---------
Pricing Grid
------------

The following pricing grid is applicable to Term Loans and the Revolving Credit
Facility.

Ratio of Consolidated Total Eurodollar ABR
Debt to Consolidated EBITDA Applicable Margin Applicable Margin Commitment Fee
- ------------------------------------------- ---------------------------- ------------------ ---------------
<S> <C> <C> <C>
greater than or equal to 3.75 to l 1.25% 0.25% 0.375%
greater than or equal to 3.25 to 1 less than 3.75 to 1 1.00% 0% 0.30%
greater than or equal to 3.00 to 1 less than 3.25 to 1 .75% 0% 0.25%
greater than or equal to 2.50 to l less than 3.00 to 1 .625% 0% 0.225%
greater than or equal to 2.00 to l less than 2.50 to l .50% 0% 0.20%
less than 2.00 to l .375% 0% 0.175%

</TABLE>

Definitions to be agreed.

<PAGE>

Financial Covenants ANNEX II (IPO CASE)

- ------------------------------------------------------------------------------------------------------------------------------
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA-CAPEX/ 1.50x 2.00x 2.50x 2.50x 2.50x 3.00x 3.00x 3.00x 3.00x
Total
Interest Expense
- ------------------------------------------------------------------------------------------------------------------------------
Net Worth $100,000,000 + 50% of Net Income
- ------------------------------------------------------------------------------------------------------------------------------
Capital Expenditures 65 65 75 75 80 85 90 95 95
Limitation (In
Millions)/1/
- ------------------------------------------------------------------------------------------------------------------------------
Current Ratio 1.50x 1.50x 1.50x 1.50x 1.50x 1.50x 1.50x 1.50x 1.50x

</TABLE>

Note: The financial covenants will be first tested as at December 31, 1996, and
the new levels will be effective as of December 31 of each fiscal year.
The financial covenants will be determined in accordance with the
following:

(a) EBITDA and Total Interest Expense will be calculated on a rolling four-
quarter basis. For the first test date after the Closing Date, annualize
by multiplying quarterly numbers by 4, and for the second and third test
dates, annualize by multiplying quarterly numbers by 2 and 1-1/3,
respectively.

(b) Exclude non-cash, non-recurring charges (e.g. goodwill write-downs and
restructuring charges) after the Closing Date from each calculation of
EBITDA and Net Worth.

(d) Exclude currency translation adjustments from each Net Worth
calculation.

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

/1/ Covenant will be eliminated when EBITDA-CAPEX/Total Interest Expense GREATER
THAN 5.0x.

<PAGE>

EXHIBIT B
---------
SENIOR CREDIT FACILITIES

Summary of Terms and Conditions
[Non-IPO Version]
June 26, 1996

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

I. Parties
-------

Borrower: Dal-Tile Group Inc. (the "Borrower").
----------
Guarantors: Dal-Tile International Inc. ("Holdings") and each of the
------------
Borrower's direct and indirect material domestic
subsidiaries (the "Guarantors"; the Borrower and the
-------------
Guarantors, collectively, the "Credit Parties"). In
-----------------
connection with the IPO (as defined below), Holdings may
be merged with the Borrower.

Arranger: Chase Securities Inc. (in such capacity, the
"Arranger").
-----------
Co-Arrangers: Credit Suisse and Goldman, Sachs & Co. (in such
capacities, the "Co-Arrangers").
--------------
Administrative Agent: The Chase Manhattan Bank, N.A. ("Chase" and, in such
-------
capacity, the "Administrative Agent").
-----------------------
Documentation Agent: Credit Suisse (in such capacity, the "Documentation
--------------
Agent").
-------
Syndication Agent: Goldman, Sachs & Co. (in such capacity, the "Syndication
-----------
Agent" and, together with the Administrative Agent and
------
the Documentation Agent, the "Managing Agents").
-----------------
Lenders: A syndicate of banks, financial institutions and other
entities, including the Managing Agents, arranged by the
Arranger (collectively, the "Lenders").
---------

II. Types and Amounts of
--------------------
Credit Facilities
-----------------

1. Term Loan Facility
------------------
The Term Loan Facilities shall comprise two separate
tranches as discussed below, the Tranche A Facility and
the Tranche B Facility (collectively, the "Term Loan
----------
Facility").
----------
<PAGE>

Tranche A
-------
Type and Amount of
Facility: Term loan facility (the "Tranche A FacilitY") in the
------------------
amount of $300,000,000 (the loans thereunder,
the "Tranche A Term
--------------
Loans").
-------

Availability: The Tranche A Term Loans shall be made in a single
drawing on the Closing Date (as defined below).

Amortization: The Tranche A Term Loans shall 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):

Aggregate
Year Amount
---- -----------

1997 $30,000,000
1998 $40,000,000
1999 $50,000,000
2000 $60,000,000
2001 $60,000,000
2002 $60,000,000

Purpose: The proceeds of the Tranche A Term Loans shall be used
to refinance and repurchase existing indebtedness of the
Borrower, Holdings and their subsidiaries, and for
general corporate purposes.

Tranche B
-------
Type and Amount of
Facility: Term loan facility (the "Tranche B Facility") in the
------------------
amount
of $200,000,000 (the loans thereunder, the "Tranche
-------
B Term Loans ).
---------------

Availability: The Tranche B Term Loans shall be made in a single
drawing on the Closing Date.

Amortization: The Tranche B Term Loans shall be repayable in
consecutive quarterly installments commencing on March
31, 1997, and ending on June 30, 2004, in aggregate
<PAGE>

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 $ 2,000,000
1998 $ 2,000,000
1999 $ 2,000,000
2000 $ 2,000,000
2001 $20,000,000
2002 $30,000,000
2003 $90,000,000
2004 $52,000,000
</TABLE>
Purpose: The proceeds of the Tranche B Term Loans shall be
used to refinance and repurchase existing
indebtedness of the Borrower, Holdings and their
subsidiaries, and for general corporate purposes.

2. Revolving Credit Facility
-------------------------

Type and Amount of
Facility: Revolving credit facility (the "Revolving Credit
-----------------
Facility"; together with the Term Loan
--------
Facility, the "Credit Facilities") in the amount of
--------------------
$175,000,000 (the loans thereunder, the "Revolving
---------
Credit Loans").
-------------

Availability: The Revolving Credit Facility shall be available on
a revolving basis during the period commencing on
the Closing Date and ending on December 31, 2002
(the "Revolving Credit Termination Date").
------------------------------------
Reservation of
Portion of Revolving
Credit Facility: To the extent that any Zero Coupon Notes (as
defined below) are outstanding at any time, a
portion of the Revolving Credit Facility equal to
the then accreted amount of such Zero Coupon Notes
shall be reserved for the redemption, payment or
repurchase thereof.

respect to Letters of Credit in an aggregate face
amount at any time of up to $10,000,000, two
years) after the date of issuance and (b) five
business days prior to the Revolving Credit
Termination Date, provided that any Letter of
--------
Credit with a one-year tenor may provide for the

renewal thereof for additional one-year periods
(which shall in no event extend beyond the date
referred to in clause (b) above).

Drawings under any Letter of Credit shall be
reimbursed by the Borrower (whether with its own
funds or with the proceeds of Revolving Credit
Loans) on the next business day. To the extent
that the Borrower does not so reimburse the
Issuing Lender, the Lenders under the Revolving
Credit Facility shall be irrevocably and
unconditionally obligated to reimburse the
Issuing Lender on a pro rata basis. Any drawing
--- ----
not reimbursed on the same business day shall
bear interest until reimbursed in full.

Swing Line Loans: A portion of the Revolving Credit Facility not in
excess of $25,000,000 shall be available for
swing line loans (the "Swing Line Loans") from
-------------------
Chase (in such capacity, the "Swing Line Lender")
-----------------
on same-day notice. Any such Swing Line Loans
will reduce availability under the Revolving
Credit Facility on a dollar-for-dollar basis.
Each Lender under the Revolving Credit Facility
shall acquire, under certain circumstances, an
irrevocable and unconditional pro rata
--- ----
participation in each Swing Line Loan.

Maturity: The Revolving Credit Termination Date.

Purpose: The proceeds of the Revolving Credit Loans shall
be used to refinance and repurchase existing
indebtedness of the Borrower, Holdings and their
subsidiaries, and for general corporate purposes.

III. Certain Payment Provisions
--------------------------

Fees and Interest Rates: As set forth on Annex I.

Optional Prepayments and Loans may be prepaid and commitments may be
Commitment Reductions: reduced by the Borrower without premium or
penalty in minimum amounts to be agreed upon.
Optional prepayments of the Term Loans shall be
applied to the Tranche A Term Loans
<PAGE>

<PAGE>
5

and to the Tranche B Loans ratably and to the
installments of each thereof ratably in
accordance with the then outstanding amounts
thereof and may not be reborrowed.
Notwithstanding the foregoing, so long as any
Tranche A Term Loans are outstanding, each
holder of Tranche B Term Loans shall have the
right to refuse all or any portion of any
optional prepayment allocable to its Tranche B
Term Loans, and the amount so refused shall be
applied to prepay the Tranche A Term Loans.

Mandatory Prepayments
Commitment Reductions: The following amounts shall be applied to
prepay the Term Loans and reduce the Revolving
Credit Facility, unless in each case the
Required Lenders (as defined below) shall
otherwise agree:

(a)(i) 100% of the first $110,000,000 of net
proceeds of any sale or issuance of equity by
Holdings or the Borrower (including in the
initial public offering of the common stock of
Holdings or the Borrower (the "IPO"; any such
-----
offering or any series of public offerings or
private placements resulting in $110,000,000 of
such net proceeds, the "Qualifying IPO")). "Net
---------------- ----
proceeds" means the gross cash proceeds of the
--------
IPO net only of the underwriting commission or
discount.

(b) 100% of the net proceeds of any sale or
other disposition (including as a result of
casualty or condemnation net of proceeds applied
to restoration) by Holdings or by the Borrower
or any of its subsidiaries of any assets (except
for the sale of inventory in the ordinary course
of business and certain other permitted
dispositions to be set forth in the Credit
Documentation (as defined below), including any
other disposition in the ordinary course of
business the net proceeds from which do not
exceed $1,000,000); provided that the Borrower
may retain (and not so apply) up to $35,000,000
of such net proceeds otherwise required to be
applied as mandatory prepayments; and

(c) 50% of excess cash flow (to be defined as
EBITDA less the sum of capital expenditures,
principal repayments of the Term Loans and other
non-revolving indebtedness, interest expense,
the amount of liabilities paid in cash to the
extent such liabilities were reserved for in
accordance with GAAP on the most recent audited
balance sheet of the Borrower prior to the
Closing Date, management fees payable to AEA
<PAGE>

<PAGE>

Investors Inc. ("AEA"), changes in working
-------
capital (other than cash and cash equivalents),
cash taxes and permitted cash dividends paid to
Holdings and other uses of cash to be agreed
upon) for each fiscal year of the Borrower
(commencing with the fiscal year ending
December 31, 1997) until the Qualifying IPO or
until a leverage test to be agreed upon has
been met.

All such amounts shall be applied, first, to
-----
the prepayment of the Term Loans and, second,
------
to the permanent reduction of the Revolving
Credit Facility. Each such prepayment of the
Term Loans (other than, at the option of the
Borrower, such a prepayment with the net
proceeds of an IPO (such prepayment at such
option, an "IPO Prepayment")) shall be applied
---------------
to the Tranche A Term Loans and the Tranche B
Term Loans ratably and to the installments
thereof ratably in accordance with the then
outstanding amounts thereof. Any such IPO
Prepayment shall be applied, first, to the
-----
Tranche B Term Loans and, second, to the
------
Tranche A Term Loans, and to the installments
of each ratably in accordance with the then
outstanding amounts thereof. Prepayments of
the Term Loans may not be reborrowed. The
Revolving Credit Loans shall be prepaid and
the Letters of Credit shall be cash
collateralized or replaced to the extent such
extensions of credit exceed the amount of the
Revolving Credit Facility.

IV. Collateral The obligations of each Credit Party in respect
---------- of the Credit Facilities shall be secured by a
perfected first priority security interest
(subject to customary permitted encumbrances
agreed to by the Administrative Agent) in all
of its tangible and intangible assets
(including, without limitation, intellectual
property, real property and the capital stock
of the Borrower), unless Zero Coupon Notes (as
defined below) are outstanding and the terms
thereof do not permit such pledge of the
capital stock of the Borrower, and the capital
stock of each of its direct and indirect
material domestic subsidiaries and 65% of the
capital stock of each of its first-tier
material foreign subsidiaries, except for those
assets as to which the Administrative Agent
shall determine in its sole discretion that the
costs of obtaining such a security interest are
excessive in relation to the value of the
security to be afforded thereby, provided that
--------
(a) if Holdings and the Borrower are merged in
connection with the IPO, the security
interest in the capital stock of the Borrower
shall be released and (b) upon the occurrence
of the
<PAGE>

<PAGE>

Qualifying IPO and the reduction of the Term
Loans to $350,000,000, all such collateral
shall be released other than the capital stock
of the Borrower and its subsidiaries.

V. Certain Conditions The availability of the Credit Facilities shall
------------------ be conditioned upon satisfaction of, among
other things, the following conditions
precedent (the date upon which all such
conditions precedent shall be satisfied, the
"Closing Date") on or before December 31, 1996:
---------------

Initial Conditions: (a) Each Credit Party shall have executed and
delivered satisfactory definitive financing
documentation with respect to the Credit
Facilities (the "Credit Documentation").
---------------------
(b) Each of Holdings and the Borrower shall have
redeemed, repurchased or prepaid (the
"Refinancing") all of its existing indebtedness
-------------
and accrued interest thereon (other than any
such indebtedness of not more than $20,000,000
in the aggregate permitted to remain
outstanding) on terms and conditions not
requiring the payment of any net premiums in
excess of an amount to be agreed;
provided that, so long as the covenants and
--------
other terms therein have been
amended if and to the extent necessary to permit
the Credit Facilities on the terms and
conditions hereof, Holdings shall not be
required to have redeemed, repurchased or
prepaid its senior secured zero coupon notes due
July 15, 1998 (the "Zero Coupon Notes").
---- -------------

(c) The Lenders, the Administrative Agent and
the Arranger shall have received all fees
required to be paid, and all expenses for which
invoices have been presented, on or before the
Closing Date.

(d) The Lenders shall have received unaudited
interim consolidated financial statements of the
Borrower for each fiscal quarterly period ended
subsequent to the date of the latest financial
statements previously delivered to the Managing
Agents.

(e) The Lenders shall have received satisfactory
projections of the Borrower and its subsidiaries
for the period from the Closing Date through the
final maturity of the Term Loans, which have
been received by the Agents.
<PAGE>

<PAGE>
8

(f) The Lenders shall have received the results
of a recent lien search in each relevant
jurisdiction with respect to the Borrower and
its subsidiaries, and such search shall reveal
no liens (other than non-material liens) on any
of the assets of the Borrower or its
subsidiaries except for liens permitted by the
Credit Documentation or liens to be discharged
on or prior to the Closing Date pursuant to
documentation satisfactory to the
Administrative Agent.

(g) The Lenders shall have received such legal
opinions (including opinions (i) from counsel to
the Borrower and its subsidiaries and (ii) from
such special and local counsel as may be
required by the Administrative Agent), documents
and other instruments as are customary for
transactions of this type or as they may
reasonably request.

On-Going Conditions: The making of each extension of credit shall be
conditioned upon (a) the accuracy of all
representations and warranties in the Credit
Documentation (including, without limitation,
the material adverse change and litigation
representations) and (b) there being no default
or event of default in existence at the time of,
or after giving effect to the making of, such
extension of credit. As used herein and in the
Credit Documentation a "material adverse change"
shall mean any event, development or
circumstance that has had or is reasonably
likely to have a material adverse effect on (a)
the business, assets, property, condition
(financial or otherwise) or prospects of the
Borrower and its subsidiaries taken as a whole,
or (b) the validity or enforceability of any of
the Credit Documentation or the rights and
remedies of the Administrative Agent and the
Lenders thereunder.

VI. Certain Documentation Matters
-----------------------------

The Credit Documentation shall contain
representations, warranties, covenants and
events of default customary for financings of
this type and other terms not inconsistent
herewith reasonably deemed appropriate by the
Managing Agents, including, without limitation:

Representations and
Warranties: Financial statements (including pro forma
financial statements); absence of undisclosed
liabilities; no material adverse change;
corporate existence; compliance with law;
corporate power and authority; enforceability of
Credit
<PAGE>

<PAGE>
9

Documentation; no conflict with law or
contractual obligations; no litigation; no
default; ownership of property; liens;
intellectual property; no burdensome
restrictions; taxes; Federal Reserve
regulations; ERISA; Investment Company Act;
subsidiaries; environmental matters; solvency;
labor matters; accuracy of disclosure; and
creation and perfection of security interests.
Where appropriate, the representations and
warranties shall be subject to materiality
standards.

Affirmative Covenants: Compliance with the following affirmative
covenants subject, where appropriate, to a
materiality standard: Delivery of financial
statements, reports, accountants' letters, an
annual business plan, officers' certificates
and other information reasonably requested by
the Lenders; payment of other obligations;
continuation of business and maintenance of
existence and rights and privileges; compliance
with laws and contractual obligations;
maintenance of property and insurance;
maintenance of books and records; right of the
Lenders to inspect property and books and
records; notices of defaults, litigation and
other material events; compliance with
environmental laws; further assurances
(including, without limitation, with respect to
security interests in after-acquired property);
agreement to obtain within 90 days after the
Closing Date interest rate protection for at
least 25% of the Term Loan Facility on terms
and conditions satisfactory to the
Administrative Agent and the Borrower.

Financial Covenants: Fianacial covenants as set forth on Annex II.

Negative Covenants: Limitations on: indebtedness; liens; guarantee
obligations; mergers, consolidations,
liquidations and dissolutions; sales of assets;
leases; dividends and other payments in respect
of capital stock; investments, loans and
advances; optional payments and modifications
of subordinated and other debt instruments;
transactions with affiliates; sale and
leasebacks; changes in fiscal year; negative
pledge clauses; changes in lines of business;
and changes in holding company status of
Holdings. Exceptions to such limitations shall
include (others to be agreed):

(a) in the case of the indebtedness covenant,
(i) indebtedness outstanding on the Closing
Date, (ii) industrial development bond, capital
leases and other indebtedness and

<PAGE>

financings at any one time outstanding of up to
$20,000,000, (iii) secured, non-recourse
financings at any one time outstanding of up to
5% of consolidated capitalization of the
Borrower and its subsidiaries, (iv)
indebtedness, which may be secured, incurred by
foreign subsidiaries of the Borrower of up to
$30,000,000 at any one time outstanding and (v)
from and after the Revolving Credit Termination
Date, replacement revolving credit financing in
an aggregate amount not to exceed $175,000,000,
which may rank pari passu with the Credit
Facilities and may be secured, on a pari passu
basis with the Lenders, by the Collateral;

(b) in the case of the sales of assets
covenant, sales of assets of up to $35,000,000
in any one transaction and of up to $70,000,000
in the aggregate;

(c) in the case of the dividends covenant,
dividends to Holdings to redeem, repay and
repurchase Zero Coupon Notes and fees and
expenses associated therewith; and

(d) in the case of the investments covenant, a
basket for joint venture and similar
investments, and for acquisitions in the same or
related businesses, of up to 5% of consolidated
capitalization (net of repayments of such
investments).

Events of Default: Nonpayment of principal when due; nonpayment of
interest, fees or other amounts after a grace
period to be agreed upon; material inaccuracy of
representations and warranties; violation of
covenants (subject, in the case of certain
affirmative covenants, to a grace period to be
agreed upon); cross-default to events of
default; bankruptcy events; certain ERISA
events; material judgments; invalidity of any
guarantee, pledge agreement or security
agreement (or any security interest thereunder);
and a change of control (to be defined as (i)
AEA and its stockholders and their respective
affiliates (the "AEA Group") at any
-----------
time before an IPO ceases to own, directly or
indirectly, beneficially at least 51% of the
voting common stock of the Borrower, (ii) after
an IPO, the occurrence of any event, if as a
result of which the AEA Group beneficially owns
less than a majority of the outstanding voting
stock of the Borrower, any person or group
(other than the AEA Group or Armstrong World
Industries, Inc. ("Armstrong")) acquires
-------------
beneficial ownership of 25% or more of the
voting stock of the Borrower or
Holdings or Armstrong acquires beneficial
ownership of more than 49% of the voting stock
of the Borrower or
<PAGE>

<PAGE>

Holdings or (iii) any person or group of
persons (other than the AEA Group) at any time
has the power to designate or elect a majority
of the board of directors of the Borrower or
Holdings).

Voting: Amendments and waivers with respect to the
Credit Documentation shall require the approval
of Lenders holding not less than a majority of
the aggregate amount of the Term Loans,
Revolving Credit Loans, participations in
Letters of Credit and Swing Line Loans and
unused commitments under the Credit Facilities
(the "Required Lenders"), except that (a) the
-------------------
consent of each Lender affected thereby
shall be required with respect to (i)
reductions in the amount or extensions of the
scheduled date of amortization or maturity of
any Loan, (ii) reductions in the rate of
interest or any fee or extensions of any due
date thereof, (iii) increases in the amount or
extensions of the expiry date of any Lender's
commitment and (iv) modifications to the pro
rata provisions of the Credit Documentation and
(b) the consent of 100% of the Lenders shall be
required with respect to (i) modifications to
any of the voting percentages and (ii) releases
of all or substantially all of the Guarantors
or all or substantially all of the collateral.
In addition, the consent of Lenders holding a
majority of the aggregate amount of the Tranche
A Term Loans or the Tranche B Term Loans, as
the case may be, shall be required with respect
to modifications affecting the application of
(but not the requirement for) prepayments of
the Term Loan Facility.

Assignments The Lenders shall be permitted to assign and
and Participations: sell participations in their Loans and
commitments, subject, in the case of
assignments (other than to another Lender or to
an affiliate of a Lender), to the consent of
the Administrative Agent and the Borrower
(which consent in each case shall not be
unreasonably withheld). Non-pro rata
assignments shall be permitted. In the case of
partial assignments (other than to another
Lender or to an affiliate of a Lender), the
minimum assignment amount shall be $5,000,000,
and, after giving effect thereto, the assigning
Lender shall have commitments and Loans
aggregating at least $5,000,000, in each case
unless otherwise agreed by the Borrower and the
Administrative Agent. Participants shall have
the same benefits as the Lenders with respect
to yield protection and increased cost
provisions. Voting rights
<PAGE>

<PAGE>

of participants shall be limited to those
matters with respect to which the affirmative
vote of the Lender from which it purchased its
participation would be required as described
under "Voting" above. Pledges of Loans in
accordance with applicable law shall be
permitted without restriction, provided that
transfers upon or in lieu of enforcement of
such pledges shall be subject to the consent of
the Administrative Agent and the Borrower
(which shall not be unreasonably withheld).
Promissory notes shall be issued under the
Credit Facilities only upon request.

Yield Protection: The Credit Documentation shall contain
customary provisions (a) protecting the Lenders
against increased costs or loss of yield
resulting from changes in reserve, tax, capital
adequacy and other requirements of law and from
the imposition of or changes in withholding or
other taxes (including gross-up provisions for
foreign Lenders who deliver appropriate tax
forms) other than taxes based on the net income
of a Lender and other than franchise taxes, and
(b) indemnifying the Lenders for "breakage
costs" incurred in connection with, among other
things, any prepayment of a Eurodollar Loan (as
defined in Annex I) on a day other than the
last day of an interest period with respect
thereto; provided that the Borrower may, in
lieu of making any required prepayment of any
Eurodollar Loan, cash collateralize it until
the related interest period expires.

Expenses and The Borrower shall pay (a) all reasonable out-
Indemnification: of-pocket expenses of the Administrative Agent
and the Arranger associated with the
syndication of the Credit Facilities and the
preparation, execution, delivery and
administration of the Credit Documentation
and any amendment or waiver with respect
thereto (including the reasonable fees,
disbursements and other charges of counsel) and
(b) all out-of-pocket expenses of the
Administrative Agent and the Lenders (including
the fees, disbursements and other charges of
counsel) in connection with the enforcement of
the Credit Documentation.

The Administrative Agent, the Arranger and the
Lenders (and their affiliates and their
respective officers, directors, employees,
advisors and agents) will have no liability
for, and will be indemnified and held harmless
against, any loss, liability, cost or expense
incurred in respect of the financing
contemplated hereby or the use or the proposed
use of
<PAGE>

<PAGE>
13

proceeds thereof (except to the extent
resulting from the gross negligence or willful
misconduct of the indemnified party).

Governing Law and Forum: State of New York.

Counsel to the
Administrative Agent
and the Arranger: Simpson Thacher & Bartlett.

Completion of The Credit Documentation shall be executed and
Documentation: delivered on or prior to December 31, 1996.

<PAGE>

Annex I
-------
Interest and Certain Fees
-------------------------

Interest Rate Options: The Borrower may elect that the Loans
comprising each borrowing bear interest
at a rate per annum equal to:

the ABR plus the Applicable
Margin; or

the Eurodollar Rate plus the
Applicable Margin.

provided, that all Swing Line Loans
--------
shall bear interest based upon the
ABR.

As used herein:

"Applicable Margins" means (a) in the
--------------------
case of Tranche A Term Loans and
Revolving Credit Loans the rates per
annum in accordance with the pricing grid
attached hereto as Annex I-A (the
"Pricing Grid"), and (b) in the case of
--------------
Tranche B Term Loans, (i) 2.00% in the
case of ABR Loans and (ii) 3.00% in the
case of Eurodollar Loans.

Interest Payment Dates: In the case of Loans bearing interest
based upon the ABR ("ABR Loans"),
-------------
quarterly in arrears.

<PAGE>

period longer than three months, on each
successive date three months after the first
day of such interest period.

Commitment Fees: The Borrower shall pay a commitment fee at a
rate per annum in accordance with the Pricing
Grid on the average daily unused portion of
the Revolving Credit Facility for the period
after the Closing Date, payable quarterly in
arrears. Swing Line Loans shall, for purposes
of the commitment fee calculations only, not
be deemed to be a utilization of the Revolving
Credit Facility.

Letter of Credit Fees: The Borrower shall pay a commission on all
outstanding Letters of Credit at a per annum
rate equal to the Applicable Margin then in
effect with respect to Revolving Credit Loans
that are Eurodollar Loans on the face amount
of each such Letter of Credit. Such commission
shall be shared ratably among the Lenders
participating in the Revolving Credit Facility
and shall be payable quarterly in arrears.

A fronting fee equal to 0.25% per annum on the
face amount of each Letter of Credit shall be
payable quarterly in arrears to the Issuing
Lender for its own account. In addition,
customary administrative, issuance, amendment,
payment and negotiation charges shall be
payable to the Issuing Lender for its own
account.

Unreimbursed drawings on Letters of Credit
shall bear interest at the same rate as ABR
Loans that are Revolving Credit Loans.

Default Rate: At any time when the Borrower is in default in
the payment of any amount due under the Credit
Facilities, 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 to Revolving Credit Loans
that are ABR Loans.

Rate and Fee Basis: All per annum rates shall be calculated on the
basis of a year of 360 days (or 365/366 days,
in the case of ABR Loans the interest rate
payable on which is then based on the Prime
Rate) for actual days elapsed.

<PAGE>

Annex I-A
---------
Pricing Grid
------------

The following pricing grid is applicable to Tranche A Term Loans and the
Revolving Credit Facility.

Ratio of Consolidated Senior Eurodollar ABR
Debt to Consolidated EBITDA Applicable Margin Applicable Margin Commitment Fee
- ------------------------------------------- ---------------------------- ------------------ ---------------
<S> <C> <C> <C>
greater than or equal to 4.0 to 1 2.50% 1.50% 0.50%
greater than or equal to 3.5 to 1 less than 4.0 to 1 2.00% 1.00% 0.50%
greater than or equal to 3.0 to 1 less than 3.5 to 1 1.50% 0.50% 0.50%
greater than or equal to 2.5 to l less than 3.0 to 1 1.25% 0.25% 0.375%
less than 2.5 to 1 1.00% 0% 0.30%
less than 2.0 to 1 0.75% 0% 0.30%
less than 1.75 to 1 0.50% 0% 0.30%

</TABLE>

Definitions to be agreed.

<PAGE>

Financial Covenants ANNEX II (NON-IPO)

- ------------------------------------------------------------------------------------------------------------------------------
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA-CAPEX/ 1.25x 1.50x 1.75x 2.00x 2.50x 3.00x 3.00x 3.00x 3.00x
Total
Interest Expense
- ------------------------------------------------------------------------------------------------------------------------------
EBITDA-CAPEX/ 1.0x 1.25x/2/ 1.25x 1.25x 1.25x 1.25x 1.25x 1.25x 1.25x
Total
Interest & Principal
Payments/1/
- ------------------------------------------------------------------------------------------------------------------------------
Leverage Ratio 4.50x 4.00x 3.75x 3.50x 3.25x 3.00x 3.00x 3.00x 3.00x
- ------------------------------------------------------------------------------------------------------------------------------

Net Worth $0 + 50% of Net Income
- ------------------------------------------------------------------------------------------------------------------------------
Capital Expenditures 65 65 75 75 80 85 90 95 95
Limitation (in
millions)/3/
- ------------------------------------------------------------------------------------------------------------------------------
Current Ratio 1.50x 1.50x 1.50x 1.50x 1.50x 1.50x 1.50x 1.50x 1.50x

</TABLE>

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

/1/ Convenant will be eliminated on the first date after a Qualifying IPO, when
the Term Loans have been reduced to $350,000,000 and the Borrower is in
compliance with all its convenants.

/2/ This value steps up at 9/30/97

/3/ Convenant will be eliminated when EBITDA-CAPEX/Total interest expense >5.0X.

<PAGE>

3
(b) Exclude non-cash, non-recurring charges (e.g. goodwill write-downs and
restructuring charges) after the Closing Date from each calculation of EBITDA
and Net Worth.

(d) Exclude currency translation adjustments from each Net Worth calculation.

<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

July , 1996

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

The foregoing consent is in the form that will be signed upon the completion
of the recapitalization described in Note 18 to the Consolidated Financial
Statements.

/s/ Ernst & Young LLP

Dallas, Texas

July 16, 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

July 16, 1996