<PAGE>

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                                UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-K/A

                                 AMENDMENT NO. 1

(MARK ONE)
/X/  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                    FOR THE FISCAL YEAR ENDED JANUARY 2, 1998 

                                      OR
/ /  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                     COMMISSION FILE NUMBER   33-64140

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

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


                DELAWARE                             13-3548809
     (STATE OR OTHER JURISDICTION OF              (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)                IDENTIFICATION NO.)


        7834 HAWN FREEWAY, DALLAS, TEXAS                  75217
     (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)           (ZIP CODE)

                                  (214) 398-1411
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

            SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                               NAME OF EACH EXCHANGE
          TITLE OF EACH CLASS                   ON WHICH REGISTERED
          -------------------                   ------------------- 
    COMMON STOCK, $.01 PAR VALUE              NEW YORK STOCK EXCHANGE

        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes /X/    No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

As of March 10, 1998, there were 53,435,101 shares of the Registrant's Common
Stock outstanding.  The aggregate market value of Common Stock held by
nonaffiliates of the Registrant at March 10, 1998 was $71,917,207 (based on
the closing sale price of the Common Stock on March 10, 1998).  This calculation
does not reflect a determination that persons are affiliates for any other
purposes.

                       DOCUMENTS INCORPORATED BY REFERENCE

               DOCUMENT                           PART OF FORM 10-K
               --------                        INTO WHICH INCORPORATED
       PROXY STATEMENT FOR 1998                ------------------------
     ANNUAL MEETING OF STOCKHOLDERS                    PART III

===============================================================================

<PAGE>


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

OVERVIEW

On December 29, 1995, the Company completed its acquisition of American Olean
(the "AO Acquisition").  Following the acquisition, the Company was engaged in
the complex task of integrating the information systems of Dal-Tile and American
Olean.  Delays in the systems integration affected many areas of the Company,
ultimately impacting customer service.  The systems integration was
substantially completed during the fiscal year ended January 2, 1998.  Due to
the unexpected timetable for conversion, the Company incurred additional costs
associated with the completion of this project, and the delays negatively
impacted revenues.  During 1998, the Company will continue to establish and
enhance interfaces between individual accounting and reporting systems modules. 

For the fiscal year ended January 2, 1998, the Company's earnings were
negatively impacted due to the previously discussed conversion of its management
systems, costs to consolidate eleven distribution centers to three
mega-distribution centers and overall restructuring and consolidation of
manufacturing and corporate functions.  In an effort to manage inventories and
improve customer service, the Company incurred higher transportation costs
throughout the year related to movements of inventory between distribution
centers and sales centers.  During the second half of the year, higher per unit
manufacturing costs were incurred as production levels were decreased in order
to reduce inventories to provide better alignment with sales.

During the second and third quarters of 1997, the Company recorded charges of
$24.7 million and $65.4 million, respectively.  These charges were principally
for the write-down of obsolete and slow-moving inventories, uncollectible trade
accounts receivable, other non-productive assets and costs for restructuring of
manufacturing, store operations and corporate administrative functions.  The
charges are comprised of $36.5 million in cost of sales, $3.5 million in
transportation expenses and $50.1 million in selling, general and administrative
expenses.

The write-down of uncollectible trade accounts receivable related to 
increases in receivables balances arising principally as a result of earlier 
sales initiatives that included, among other things, extended credit terms 
and efforts to expand the Company's customer base, and operational and 
systems integration issues that resulted in limited access by sales center 
personnel to certain account information.  In addition, in an effort to 
improve customer service, authority to extend credit was decentralized and 
assigned to management at the retail sales centers.  Sales resulting from 
these initiatives were a result of products being shipped under defined terms 
to customers, with the full expectation of invoiced amounts being paid in 
full within the terms of the sale.  In response to deterioration in the aging 
of the Company's accounts receivable, primarily as a result of the sales 
initiatives and operational and systems integration issues, the Company 
increased collection efforts and undertook detailed reviews of 
collectibility, and subsequently recorded increases in the reserve for 
doubtful accounts of $7.6 million in the second quarter of fiscal year 1997, 
and $13.7 million as of the third quarter of fiscal year 1997.  The sales 
initiatives, which began in the fourth quarter of fiscal year 1996, were 
discontinued by the end of the second quarter of fiscal year 1997.  In 
addition, by the end of the second quarter of fiscal year 1997, the Company 
moved to a more centralized credit approval process and implemented more 
stringent credit policies.

At the end of the second quarter of fiscal year 1997, the Company also 
extensively reviewed its finished product inventories, including the various 
patterns, shapes and sizes of finished product inventories.  Based on this 
analysis, an adjustment of approximately $8.4 million was recorded as of the 
end of the second quarter of fiscal year 1997 to reflect the write-down of 
inventory believed to be slow moving and/or obsolete, or out of balance with 
other related products.  Management believes that delays in systems 
integration resulted in impaired inventory management, and, in particular, 
resulted in an imbalance in inventory mix.  During the third quarter of 
fiscal year 1997, the Company's new management undertook an additional study 
of the business and its operations and determined that it would reduce the 
number of SKU's offered for sale by the Company and would discontinue 
additional patterns.  These actions, coupled with the results of physical 
inventories and the delay in systems integration, resulted in a need to 
record additional inventory provisions of $28.1 million consisting of 
$14.2 million related to results of physical inventories, $7.3 million of 
additional write-down for obsolete inventory, $4.5 million write-down for 
certain other inventory accounts and $2.1 million write-down for raw materials. 
Management believes that progress in its systems integration resulted in 
substantially improved inventory management by the end of the third quarter 
of fiscal year 1997.

The balance of the charges recorded in the second quarter of fiscal year 1997 
consisted of $2.5 million in respect of terminated employees and $6.2 million 
in respect of other charges, primarily related to liabilities incurred for 
lease terminations, executive search fees, and other items.  The balance of 
the charges recorded in the third quarter of fiscal year 1997 consisted of 
$4.2 million in respect of terminated employees, $8.5 million in respect of 
accrued expenses, primarily related to freight and insurance, $5.3 million in 
respect of fixed asset impairment and $5.6 million in respect of other 
charges, primarily related to write-down of notes, non-trade receivables and 
certain other assets.

The Company believes it has taken adequate charges for the expected costs 
associated with its realignment efforts but can give no assurance that 
additional charges will not be incurred.      

The second half of 1997 was marked by significant challenges and a period of
transition as the Company focused on improving cash flows and overall customer
service. In addition, the Company has strengthened its management team and taken
steps to cut costs and streamline the organizational structure.  The Company has
made progress toward its goals with substantial increases to cash flows as
accounts receivable collections increased and improved inventory management
procedures were implemented.  Additionally, the quality of customer service has
been enhanced through substantial completion of the systems integration.  Costs
savings have been realized through improved internal controls and organizational
changes.

                                     -1-
<PAGE>

The following is a discussion of the results of operations for the fiscal year
ended January 2, 1998 compared with the fiscal year ended January 3, 1997.  Due
to the Company's 52/53 week accounting cycle, the year end for fiscal year 1997
was January 2, 1998 and for fiscal year 1996 was January 3, 1997.

Operating results for fiscal years 1997 and 1996 reflect the results of
operations of AO which was acquired on December 29, 1995.  Because results for
the year ended December 31, 1995 do not reflect the AO Acquisition, results for
that period are not directly comparable.

RESULTS OF OPERATIONS

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

<TABLE>
                                                                   YEAR ENDED
                                               -----------------------------------------------------
                                               JANUARY 2, 1998   JANUARY 3, 1997   DECEMBER 31, 1995
                                               ---------------   ---------------   -----------------
<S>                                            <C>               <C>               <C>
Net sales . . . . . . . . . . . . . . . . . .      100.0%           100.0%              100.0%
Cost of goods sold. . . . . . . . . . . . . .       59.8             51.3                47.5
                                                   -----            -----               -----
Gross profit. . . . . . . . . . . . . . . . .       40.2             48.7                52.5
Operating expenses. . . . . . . . . . . . . .       50.5             33.9                36.3
                                                   -----            -----               -----
                                                   (10.3)            14.8                16.2

Non-recurring charges:
Provision for merger integration charges. . .          -              1.2                 4.7
                                                   -----            -----               -----
Operating income (loss) . . . . . . . . . . .      (10.3)            13.6                11.5
Interest expense (net). . . . . . . . . . . .        6.0              6.2                11.4
Other income. . . . . . . . . . . . . . . . .        0.2                -                 0.6
                                                   -----            -----               -----
Income (loss) before income taxes and
  extraordinary item. . . . . . . . . . . . .      (16.1)             7.4                 0.7
Income tax provision. . . . . . . . . . . . .        0.2              2.6                 0.2
                                                   -----            -----               -----
Income (loss) before extraordinary item . . .      (16.3)             4.8                 0.5
Extraordinary item, net of taxes. . . . . . .          -             (4.1)                  -
                                                   -----            -----               -----
Net income (loss) . . . . . . . . . . . . . .      (16.3)%            0.7%                0.5%
                                                   -----            -----               -----
                                                   -----            -----               -----
</TABLE>







                                     -2-
<PAGE>

YEAR ENDED JANUARY 2, 1998 COMPARED TO YEAR ENDED JANUARY 3, 1997

NET SALES

Net sales decreased $43.6 million, or 6.1%, to $676.6 million for fiscal year 
1997 from $720.2 million for fiscal year 1996.  The decrease in net sales was 
due principally to the negative impact on the Company-operated sales centers 
caused by the delay in systems integration and the consolidation throughout 
1996 and into 1997 of redundant sales centers from the AO Acquisition.  Sales 
within the home center services channel decreased approximately 10% compared 
to 1996 due to price concessions and certain large customers working down 
their warehouse inventories. Additionally, net sales were negatively impacted 
by one less week in fiscal year 1997 as compared to fiscal year 1996. These 
decreases were offset by a 4% increase in same store sales in the 
Company-operated sales centers and a 10% increase in sales within the 
independent distributor channel due to the addition of 16 distributor 
locations.

During the year, the Company completed its sales center consolidation and 
substantially completed its information systems integration.  The Company 
believes that continued improvements in supply chain management will provide 
improved product availibility and allow for sales growth opportunities.  

GROSS PROFIT

Gross profit decreased $78.6 million, or 22.4%, to $271.9 million in fiscal 
year 1997 from $350.5 million in fiscal year 1996.  The decrease in gross 
profit was due in part to the 1997 second and third quarter charges for 
obsolete and slow moving inventories.  Sales declines and decreases in 
production levels also adversely impacted gross profit.

Gross margin (excluding the 1997 second and third quarter charges) decreased 
to 45.6% for fiscal year 1997 from 48.7% for fiscal year 1996.  During the 
first half of 1997, gross margin (excluding charges) was 48.4% and decreased 
to 42.7% in the second half of 1997 primarily as a result of higher per unit 
manufacturing costs associated with reduced production levels.  Additionally 
during 1997, gross margin decreased as a result of a higher percentage mix of 
sales within the independent distributor business unit.  Sales through this 
channel carry lower gross margins than sales made through the Company's sales 
service centers, but due to lower operating expense levels comparable 
operating margins are achieved.

EXPENSES

Expenses increased $88.9 million, or 35.2%, to $341.5 million in fiscal year 
1997 from $252.6 million in fiscal year 1996.  The increase was due primarily 
to the second and third quarter charges, increased freight cost associated 
with the consolidation of eleven distribution centers to three 
mega-distribution centers, higher fixed costs for information technology and 
additional expenses to complete the American Olean integration.

Expenses as a percent of sales (excluding 1997 second and third quarter 
charges and the 1996 merger integration charge) increased to 42.6% in fiscal 
year 1997 from 33.9% in fiscal year 1996.  These increases were the result of 
lower sales and the increased expenses described above.

During the fourth quarter of 1997, the Company issued stock units under a 
stock appreciation rights agreement to certain executives which permit the 
holders, upon the satisfaction of certain conditions, to receive value in 
excess of the base price of the unit at the date of grant.  Payment of the 
excess will be in cash, stock, or a combination of cash and stock at the 
discretion of the Board of Directors.  In connection with this agreement, 
non-cash expense of $5.9 million was recorded in the fourth quarter of 1997.

                                      -3-
<PAGE>

OPERATING INCOME (LOSS)

Operating income (loss) decreased $167.5 million to a loss of $69.6 million 
in fiscal year 1997 from income of $97.9 million in fiscal year 1996.  
Operating margin (excluding 1997 second and third quarter charges and the 
1996 merger integration charge) decreased to 3.0% from 14.8% for the previous 
fiscal period due primarily to reduced sales, decreased production levels and 
increased expenses.

INTEREST EXPENSE (NET)

Interest expense (net) decreased $4.3 million, or 9.6%, to $40.4 million in 
fiscal year 1997 from $44.7 million in fiscal year 1996.  Interest expense 
(net) decreased due to interest savings from the refinancing of debt 
concurrent with the Company's initial public offering in the third quarter of 
1996.  The decrease was partially offset by increases in debt levels and 
borrowing rates related to the second quarter amendment of the existing 
credit agreement and increases in fees and higher borrowing rates related to 
the third quarter 1997 amendment.  

INCOME TAXES

The income tax provision for fiscal year 1997 represents amounts related to 
income from Mexican operations. Due to the significant loss in fiscal year 
1997 and prior year tax loss carryforwards, a valuation allowance has been 
recorded against the net Federal and State deferred tax asset.  This 
valuation allowance will be reassessed in future reporting periods.

INCOME (LOSS) BEFORE EXTRAORDINARY ITEM

Income (loss) before extraordinary item decreased $144.6 million to a loss of 
$110.2 million in fiscal year 1997 from income of $34.4 million in fiscal 
year 1996.  The decrease was due primarily to the second and third quarter 
charges and reductions in operating income offset by lower interest and 
income tax expense.

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 
fiscal year 1997, domestic sales in Mexico represented approximately 3% of 
consolidated net sales.  These sales are peso-denominated and the majority of 
the Mexican facility's cost of sales and operating expenses are 
peso-denominated.  In fiscal year 1997, peso-denominated cost of sales and 
operating expenses represented approximately 7% of the Company's consolidated 
cost of sales and expenses.  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 operating results.  In addition to the 
effect of exchange rate changes on operating results, foreign currency 
transaction gains or losses are recognized in other income and expense.  
During fiscal year 1997, the Company recorded a transaction gain of 
approximately $0.6 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 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 during fiscal 
years 1997 and 1996.

                                     -4-
<PAGE>

YEAR ENDED JANUARY 3, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1995

NET SALES

Net sales for fiscal year 1996 increased $245.4 million, or 51.7%, to $720.2 
million from $474.8 million in 1995.  The increase in net sales was due 
principally to the inclusion of AO's operations in fiscal year 1996 and 
increased shipments to independent distributors and home center retailers. 
During fiscal year 1996, a primary focus of management was to gain 
marketplace acceptance of the Company's three principal brand names, DALTILE, 
AMERICAN OLEAN and HOME SOURCE.  During the year, the Company concentrated on 
integrating the 61 sales centers acquired as part of the AO Acquisition.  A 
total of 51 sales centers were consolidated into existing sales centers. 
Domestic sales in Mexico decreased to $17.9 million in fiscal year 1996 from 
$23.0 million in 1995. Sales decreased due to a larger allocation of Mexican 
production to distribution in the United States.  

GROSS PROFIT

Gross profit increased $101.1 million, or 40.5%, to $350.5 million in fiscal 
year 1996 from $249.4 million in 1995.  The increase in gross profit was 
principally the result of the increase in net sales.  Gross margin decreased 
to 48.7% in fiscal year 1996 from 52.5% in 1995.  The decrease in gross 
margin was primarily due to production earlier in the year at higher cost 
facilities acquired as part of the AO Acquisition.  These facilities were 
closed in March 1996 and production shifted to lower cost manufacturing 
plants.  This higher cost production negatively impacted gross margins as the 
inventory was sold in the second quarter and to a lesser extent in the third 
quarter.  During the first half of fiscal year 1996, gross margins were 47.8% 
and increased to 49.5% in the second half of fiscal year 1996 primarily as a 
result of shifting production to lower cost manufacturing plants.  Gross 
margins also decreased in fiscal year 1996 as the Company significantly 
increased its presence in the independent distributor channel, as a result of 
the AO Acquisition, and increased sales to home centers.  Sales through these 
channels carry lower gross margins than sales made through sales service 
centers, but due to lower operating expense levels comparable operating 
margins are achieved.

EXPENSES

Expenses increased to $252.6 million in fiscal year 1996 from $194.9 million in
1995, primarily as a result of the inclusion of AO's operations.  Expenses in
fiscal years 1996 and 1995 include, respectively, a $9.0 million and $22.4
million merger integration charge. Expenses, excluding merger integration
charges, as a percentage of sales, decreased to 33.9% in fiscal year 1996 from
36.3% in 1995.  The decrease in expenses as a percentage of sales, excluding
merger integration charges, was due to consolidation savings achieved by
integrating sales forces, closing duplicative sales service centers and
consolidating administrative functions.  These savings were offset in part by
increased transportation costs, increased advertising and sample costs to
increase brand name recognition and increased information systems costs
resulting from the system integration after the AO Acquisition.  Additionally,
sales made to independent distributors and home center retailers require lower
operating expense levels which offset the lower gross margins generated through
this distribution channel.

MERGER INTEGRATION CHARGES

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

                                      -5-
<PAGE>

The 1995 merger integration charge represents a $22.4 million pre-tax merger
integration charge in the fourth quarter of 1995 associated with the revaluation
of certain assets in connection with the AO Acquisition.  The majority of the
$22.4 million was a non-cash charge to write-down less efficient and duplicative
equipment not needed in the combined Company.

OPERATING INCOME

Operating income increased to $97.9 million in fiscal year 1996 from $54.5 
million in 1995. Operating income, excluding merger integration charges, 
increased as a result of the AO Acquisition and related cost savings, but was 
offset in part by lower gross margins.  The operating margin, excluding 
merger integration charges, decreased to 14.8% in fiscal year 1996 as 
compared to 16.2% in 1995 due to the decrease in gross margins as a result of 
the higher cost manufacturing facilities.

INTEREST EXPENSE (NET)

Interest expense (net) decreased $9.5 million to $44.7 million in fiscal year 
1996 from $54.2 million in 1995.  The decrease was due to reduced debt levels 
as a result of the third quarter public offering and private placement whose 
proceeds were used to reduce debt.  Interest expense (net) also decreased as 
a result of lower borrowing rates from the refinancing.

INCOME TAXES

The income tax provision reflects an effective tax rate of 35.5% for fiscal 
years 1996 (prior to the extraordinary charge) and 1995.

EXTRAORDINARY ITEM

In connection with the refinancing and early extinguishment of debt, an 
extraordinary charge of $44.8 million ($29.1 million, net of tax) was 
recorded during the third quarter of 1996.  This charge consists of 
prepayment premiums on certain debt repaid, the write-off of existing 
deferred financing fees and a termination fee paid in connection with the 
termination of the Company's management agreement with AEA Investors.

PESO-U.S. DOLLAR EXCHANGE RATE

In fiscal year 1996, domestic sales in Mexico represented approximately 3% of 
the Company's consolidated net sales.  In fiscal year 1996, peso-denominated 
cost of sales and operating expenses represented approximately 9% of the 
Company's consolidated cost of sales and expenses.  During fiscal year 1996, 
the Company recorded a transaction loss of approximately $0.1 million.

LIQUIDITY AND CAPITAL RESOURCES

Funds available under the Company's bank credit agreement (the "Credit
Facility") provided liquidity and capital resources for working capital
requirements, capital expenditures, expansion and debt service.  Cash used in
operating activities was $52.8 million in fiscal year 1997 and $18.7 million in
fiscal year 1996.  For fiscal year 1997, cash was used primarily to fund
increases in inventory, trade accounts receivable and capital expenditures.  

Trade accounts receivable, prior to charges, increased earlier in 1997 as a
result of extended terms granted to customers and limited access by sales center
personnel to certain account information.  Trade accounts receivable decreased
during the second half of 1997 due to improved collection efforts and the
write-down of uncollectible accounts.  The Company has implemented more
stringent collection policies and a combination of centralized and decentralized
collection responsibilities.  Inventories increased earlier in 1997 due to
delays in systems integration which impaired the management of inventories. 
Inventories 

                                     -6-
<PAGE>

declined during the second half of 1997 due to temporary reductions in 
production levels and the write-down of slow-moving or obsolete inventories. 
The second half of 1997 showed marked improvements in inventory management 
due to completion of the conversion to one fully integrated inventory system 
and increased management focus.

During the second quarter of 1997, the Company completed a new $125 million 
Term B loan facility ("Term B Loan") which made certain modifications to its 
then existing Credit Facility (as amended, the "Amended Credit Facility").  
The proceeds of the Term B Loan were used to repay $50 million of the Term A 
loan and $72 million of the existing revolving Credit Facility.  The Company 
is required to make annual amortization payments in respect to the Term B 
Loan starting in the first quarter of 1998 with final maturity on December 
31, 2003. The Amended Credit Facility is collateralized by certain assets of 
the Company.

During the third quarter of 1997, certain financial covenants were amended to 
provide increased flexibility under the Amended Credit Facility (as amended, 
the "Second Amended Credit Facility").  In connection with the Second Amended 
Credit Facility, the borrowing rate was increased 50 basis points over the 
previously existing rates (which now range from 2 to 2-1/2 over LIBOR).  The 
borrowing rate is based on a pricing grid which provides for reduced 
borrowing rates as certain financial ratios improve.  The Company is 
required, among other things, to maintain certain financial covenants and has 
restrictions on incurring additional debt and limitations on cash dividends.

The Company is required to make quarterly amortization payments on the 
remaining portion of the $275 million Term A loan  through December 31, 2002, 
at various scheduled amounts.  Borrowings under the $250 million revolving 
Credit Facility are payable in full December 31, 2002. 

The Company periodically uses interest rate swap agreements to manage 
exposure to fluctuations in interest rates.  These agreements involve the 
exchange of interest obligations on fixed and floating interest rate debt 
without the exchange of the underlying principal amounts.  The differential 
paid or received on the agreements is recognized as an adjustment to interest 
expense over the term of the underlying swap agreement.  The book value of 
the interest rate swap agreements represents the differential receivable or 
payable with a swap counterparty since the last settlement date. The 
underlying notional amount on which the Company has interest rate swap 
agreements outstanding was $300,000,000 at January 9, 1998.  These agreements 
are in effect for a term of two years at an interest rate of approximately 
5.7%.  There were no interest rate swap agreements at or during fiscal years 
1997 or 1996.

Expenditures for property, plant and equipment were $40.1 million for fiscal 
year 1997.  The expenditures were used to fund expansion in floor tile 
production, routine capital improvements and the integration of management 
information systems.  The Company's ability to improve and expand 
manufacturing facilities in the future will be dependent on cash generated 
from operations and borrowings under the revolving credit facility.  During 
fiscal year 1998, the Company plans to expend approximately $15-20 million to 
complete its Dallas plant expansion and fund routine capital improvements.

Total availability as of January 2, 1998 on the revolving portion of the 
Second Amended Credit Facility was $48.6 million.  The Company believes cash 
flow from operating activities, together with borrowings available under the 
Second Amended Credit Facility, will be sufficient to fund future working 
capital needs, capital expenditures and debt service requirements.  Given its 
capital needs and debt service and other obligations under its Credit 
Facility, the Company expects to seek to refinance its debt in 1999, although 
there can be no assurance that the Company will be able to do so.  Cash 
provided by financing activities was $90.5 million for fiscal year 1997, 
which reflects borrowings under the revolving credit facility and the $125 
million Term B debt facility.  

The peso devaluation and economic uncertainties in Mexico are not expected to 
have a significant impact on liquidity.  Since the Company has no peso-based 
borrowings, high interest rates in Mexico are not 

                                     -7-
<PAGE>

expected to directly affect the Company.   

The Company is involved in various proceedings relating to environmental 
matters.  The Company is currently engaged in environmental investigation and 
remediation programs at certain sites.  The Company has provided reserves for 
remedial investigation and cleanup activities that the Company has determined 
to be both probable and reasonably estimable.  The Company is entitled to 
indemnification with respect to certain expenditures incurred in connection 
with such environmental matters and does not expect that the ultimate 
liability with respect to such investigation and remediation activities will 
have a material effect on the Company's liquidity and financial condition.  

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 10% 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. 

EFFECTS OF INFLATION

The Company believes it has generally been able to enhance productivity to 
offset increases in costs resulting from inflation in the U.S. and Mexico. 
Inflation has not had a material impact on the results of operations for 
fiscal years 1997, 1996 and 1995.  Approximately 84% of 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 has not had a significant impact on fiscal years 1997, 
1996 and 1995 operating results; however, the future impact is uncertain at 
this time. 

IMPACT OF YEAR 2000

Some of the Company's computer programs were written using two digits rather 
than four to define the applicable year.  As a result, those computer 
programs have time-sensitive software that recognize a date using "00" as the 
year 1900 rather than the year 2000.  This could cause a system failure or 
miscalculations causing disruptions of operations, including, among other 
things, a temporary inability to process transactions, send invoices or 
engage in similar normal business activities.

The Company has completed an assessment and will have to modify or replace 
portions of its software so that its computer systems will function properly 
with respect to dates in the year 2000 and thereafter.  The total Year 2000 
project cost is estimated at approximately $7.0 million that will be expensed 
as incurred.  To date, the Company has incurred minimal expenses, primarily 
for assessment of the Year 2000 issue and the development of a modification 
plan.

The project is estimated to be completed no later than April 2, 1999, which 
is prior to any anticipated impact on the Company's operating systems.  The 
Company believes that with modifications to existing software and conversions 
to new software, the Year 2000 issue will not pose significant operational 
problems for its computer systems.  However, if such modifications and 
conversions are not made, or are not completed timely, the Year 2000 issue 
could have a material impact on operations.

The costs of the project and the date which the Company believes it will 
complete the Year 2000 modifications are based on management's best 
estimates, which were derived utilizing numerous assumptions of future 
events, including the continued availability of certain resources and other 
factors.  However, there can be no guarantee that these estimates will be 
achieved and actual results could differ materially from those anticipated.  
Specific factors that might cause such material differences include, but are 
not limited to, the availability and cost of personnel trained in this area, 
the ability to locate and 

                                      -8-
<PAGE>

correct all relevant computer codes, and similar uncertainties.

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements contained in this filing are "forward-looking statements" 
within the meaning of the Private Securities Litigation Reform Act of 1995. 
Such statements are subject to risks, uncertainties and other factors which 
could cause actual results to differ materially from future results expressed 
or implied by such forward-looking statements.  Potential risks and 
uncertainties include, but are not limited to, the impact of competitive 
pressures and changing economic conditions on the Company's business and its 
dependence on residential and commercial construction activity, the fact that 
the Company is highly leveraged, currency fluctuations and other factors 
relating to the Company's foreign manufacturing operations, the impact of 
pending reductions in tariffs and custom duties and environmental laws and 
other regulations.


                                     -9-

<PAGE>


                              PART IV

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

     (a)  DOCUMENTS TO BE FILED AS PART OF THIS REPORT:

     1.   Financial statements under Item 8:

See Index to Consolidated Financial Statements and Financial Statement 
Schedule included on page F-1 below in this report.

     2.   Financial Statement Schedule filed herewith:

See Index to Consolidated Financial Statements and Financial Statement 
Schedule included on page F-1 below in this report.

All other schedules are omitted either because they are not required or 
because the required information is included in the financial statements and 
notes thereto included herein.  See Index to Consolidated Financial 
Statements and Financial Statement Schedule included on page F-1 below in 
this report.

     3.   List of Exhibits.  Each management contract or compensatory plan
          or arrangement required to be filed as an Exhibit to this Form 
          10-K pursuant to Item 14(c) of this report is identified with an 
          asterisk (*).

EXHIBIT
  NO.  
-------
   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    Agreement and Plan of Merger among Dal-Tile International Inc., DTI
          Investors LLC and DTI Merger Company, dated as of August 7, 1996
          (Filed as Exhibit 2.1 to the Registrant's Form 10-Q filed on
          November 7, 1996 and incorporated herein by reference.)

                                     -10-
<PAGE>

EXHIBIT
  NO.  
-------
   3.1    Second Amended and Restated Certificate of Incorporation of the
          Company.  (Filed as Exhibit 3.1 to the Registrant's Form 10-Q filed on
          November 7, 1996 and incorporated herein by reference).

   3.2    Amended and Restated By-laws of the Company.  (Filed as Exhibit 3.2 to
          the Registrant's Registration Statement on Form S-1 (No. 333-5069) and
          incorporated herein by reference.)

   4.1    Specimen form of certificate for Common Stock.  (Filed as Exhibit 4.1
          to the Registrant's Registration Statement on Form S-1 (No. 333-5069)
          and incorporated herein by reference.)

  10.1    Dal-Tile International Inc. 1996 Amended and Restated Stock Option
          Plan.  (Filed as Exhibit 10.1 to the Registrant's Registration
          Statement on Form S-1 (No. 333-5069) and incorporated herein by
          reference.)

 *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.  (Filed as Exhibit 10.2 to the
          Registrant's Registration Statement on Form S-1 (No. 333-5069) and
          incorporated herein by reference.)

 *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 (No. 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 (No. 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    First Supplemental Indenture dated as of August 1, 1996 between
          Dal-Tile International Inc. and Citibank, N.A., as trustee, relating
          to the Zero Coupon Notes.

  10.8    Credit and Guarantee Agreement, dated August 14, 1996 among Dal-Tile
          International Inc., Dal-Tile Group Inc., the several banks, financial
          institutions and other entities from time-to-time party thereto,
          Credit Suisse, as Documentation Agent, Goldman Sachs Credit Partners
          L.P., as Syndication Agent, and The Chase Manhattan Bank, as
          Administrative Agent.  (Filed as Exhibit 10.1 to the Registrant's Form
          10-Q filed on November 7, 1996 and incorporated herein by reference.)

                                     -11-
<PAGE>

EXHIBIT
  NO.  
-------
  10.9    Pledge Agreement dated as of October 4, 1996, made by Dal-Tile Group
          Inc. in favor of The Chase Manhattan Bank, as Administrative Agent,
          relating to the pledge of Common Stock of Dal-Tile Mexico, S.A. de
          C.V.  (Filed as Exhibit 10.2 to the Registrant's Form 10-Q filed on
          November 7, 1996 and incorporated herein by reference.)  

  10.10   Pledge Agreement dated as of August 14, 1996, made by Dal-Tile
          International Inc. in favor of The Chase Manhattan Bank, as
          Administrative Agent, relating to the pledge of common stock of
          Dal-Tile Group Inc. (Filed as Exhibit 10.3 to the Registrant's Form
          10-Q filed on November 7, 1996 and incorporated herein by reference.) 

  10.11   Pledge Agreement dated as of August 14, 1996 made by Dal-Tile Group
          Inc. in favor of The Chase Manhattan Bank, as Administrative Agent,
          relating to the pledge of common stock of Dal-Tile Corporation (Filed
          as Exhibit 10.4 to the Registrant's Form 10-Q filed on November 7,
          1996 and incorporated herein by reference.)

  10.12   Pledge Agreement dated as of October 4, 1996, made by Dal-Tile Group
          Inc. in favor of The Chase Manhattan Bank, as Administrative Agent,
          relating to the pledge of common stock of Dal-Tile Mexico, S.A. de
          C.V. (Filed as Exhibit 10.2 to the Registrant's Form 10-Q filed on
          November 7, 1996 and incorporated herein by reference.)  

  10.13   Form of Indemnification Agreement between Dal-Tile International
          Inc. and its directors and officers.  (Filed as Exhibit 10.4 to the
          Registrant's Registration Statement on Form S-1 (No. 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 (No. 33-64140) and incorporated herein by
          reference.)

  10.15   Stockholders 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 15, 1996, among Dal-Tile International Inc., AEA
          Investors Inc., DTI Investors LLC, Armstrong World Industries, Inc.,
          Armstrong Enterprises, Inc. and Armstrong Cork Finance Corporation. 
          (Filed as Exhibit 10.17 to the Registrant's Registration Statement on
          Form S-1 (No. 333-5069) and incorporated herein by reference.)

+*10.17   Employment Agreement, dated as of June 13, 1997, and amended as of
          October 10,1997 between Dal-Tile International Inc. and Jacques R.
          Sardas.

+*10.18   Employment Agreement, dated as of August 25, 1997, and amended October
          10, 1997, between Dal-Tile International Inc. and William C. Wellborn.

+*10.19   Stock Appreciation Rights Agreements, dated as of October 10, 1997,
          and amended February 20, 1998, between Dal-Tile International Inc. and
          each of Jacques R. Sardas, William C. 

                                     -12-
<PAGE>

EXHIBIT
  NO.  
-------
          Wellborn, Dan L. Cooke, Marc Powell, and David F. Finnigan.

  10.20   First Amendment, dated as of June 19, 1997, to the Credit and
          Guarantee Agreement (filed as Exhibit 10.1 to the Registrant's Form
          10-Q filed on November 17, 1997 and incorporated herein by reference).

  10.21   Second Amendment, dated as of September 30, 1997, to the Credit and
          Guarantee Agreement (filed as Exhibit 10.2 to the Registrant's Form
          10-Q filed on November 17, 1997 and incorporated herein by reference).

 +10.22   Collateral Agreement, dated as of June 19, 1997, made by Dal-Tile
          Group Inc. and certain of its subsidiaries in favor of the Chase
          Manhattan Bank, as Administration Agent.

 +10.23   Dal-Tile International Inc. 1997 Amended and Restated Stock Option
          Plan

 +21.1    List of subsidiaries of Dal-Tile International Inc.

  23.1    Consent of Ernst & Young LLP

 +27.1    Financial Data Schedule

+    Previously filed.

(b)  Reports on Form 8-K:
     None.
(c)  Exhibits:
     See Item 14(a) above.
(d)  Financial Statement Schedule
     See Item 14(a) above.




                                     -13-
<PAGE>

                                  SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) THE SECURITIES EXCHANGE 
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS 
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 23rd Day of June
1998.

                              DAL-TILE INTERNATIONAL INC.


                              By:         /s/ Jacques R. Sardas
                                  ------------------------------------------
                                              JACQUES R. SARDAS
                                    President, Chief Executive Officer and 
                                      Chairman of the Board of Directors

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS 
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND 
ON THE DATES INDICATED.

        SIGNATURE                        TITLE                   DATE
        ---------                        -----                   ----

 /s/ Jacques R. Sardas        President, Chief Executive     June 23, 1998
---------------------------   Officer and Chairman of 
 JACQUES R. SARDAS            the Board of Directors    


 /s/ William C. Wellborn      Executive Vice President,      June 23, 1998
---------------------------   Chief Financial Officer,  
 WILLIAM C. WELLBORN          Treasurer and Assistant   
                              Secretary (Principal 
                              Financial and Accounting 
                              Officer)                  


 /s/ John M. Goldsmith        Director                       June 23, 1998
---------------------------
 JOHN M. GOLDSMITH            


 /s/ Charles J. Pilliod, Jr.  Director                       June 23, 1998
---------------------------
 CHARLES J. PILLIOD, JR.      


 /s/ Henry F. Skelsey         Director                       June 23, 1998
---------------------------
 HENRY F. SKELSEY             


                                      -14-
<PAGE>


        SIGNATURE                        TITLE                   DATE
        ---------                        -----                   ----

 /s/ Douglas D. Danforth      Director                       June 23, 1998
---------------------------
 DOUGLAS D. DANFORTH          


 /s/ Vincent A. Mai           Director                       June 23, 1998
---------------------------
 VINCENT A. MAI               


 /s/ Norman E. Wells, Jr.     Director                       June 23, 1998
---------------------------
 NORMAN E. WELLS, JR.         







                                     -15-

<PAGE>

                           DAL-TILE INTERNATIONAL INC.

                    ITEM 14(A)-INDEX TO CONSOLIDATED FINANCIAL

                    STATEMENTS AND FINANCIAL STATEMENT SCHEDULE


         YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 31, 1995


                                    CONTENTS

Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . .F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at January 2, 1998 and January 3, 1997 . . . . .F-3
Consolidated Statements of Operations for each of the 
three years in the period ended January 2, 1998. . . . . . . . . . . . . . .F-4
Consolidated Statements of Stockholders' Equity for each of 
the three years in the period ended January 2, 1998. . . . . . . . . . . . .F-5
Consolidated Statements of Cash Flows for each of the three 
years in the period ended January 2, 1998. . . . . . . . . . . . . . . . . .F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . .F-7
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II-Valuation and Qualifying Accounts. . . . . . . . . . . . . . . .S-1

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.








                                      F-1
<PAGE>


                          REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Dal-Tile International Inc.


We have audited the accompanying consolidated balance sheets of Dal-Tile 
International Inc. as of January 2, 1998 and January 3, 1997, and the related 
consolidated statements of operations, stockholders' equity and cash flows 
for each of the three years in the period ended January 2, 1998.  Our audits 
also included the financial statement schedule listed in the Index at Item 
14(a).  These financial statements and schedule are the responsibility of the 
Company's management.  Our responsibility is to express an opinion on these 
financial statements and schedule 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 January 2, 1998 and January 3, 1997, and 
the consolidated results of its operations and its cash flows for each of the 
three years in the period ended January 2, 1998, in conformity with generally 
accepted accounting principles.  Also, in our opinion, the related financial 
statement schedule, when considered in relation to the basic financial 
statements taken as a whole, presents fairly in all material respects the 
information set forth therein.


                                             /s/ ERNST & YOUNG LLP

Dallas, Texas
February 16, 1998



                                      F-2
<PAGE>

                         DAL-TILE INTERNATIONAL INC.

                         CONSOLIDATED BALANCE SHEETS

<TABLE>
                                                    JANUARY 2,   JANUARY 3,
                                                       1998         1997
                                                    ----------   ----------
                                                         (IN THOUSANDS)
                     ASSETS
<S>                                                 <C>          <C>
Current assets:
  Cash. . . . . . . . . . . . . . . . . . . . . . .  $   7,488    $   9,999
  Trade accounts receivable . . . . . . . . . . . .     96,296      123,586
  Inventories . . . . . . . . . . . . . . . . . . .    130,747      142,413
  Prepaid expenses. . . . . . . . . . . . . . . . .      3,120        3,186
  Other current assets. . . . . . . . . . . . . . .     18,438       15,132
                                                     ---------    --------- 
      Total current assets. . . . . . . . . . . . .    256,089      294,316

Property, plant and equipment, at cost:
  Land. . . . . . . . . . . . . . . . . . . . . . .     17,205       17,403
  Leasehold improvements. . . . . . . . . . . . . .     11,067       10,347
  Buildings . . . . . . . . . . . . . . . . . . . .     75,134       78,360
  Machinery and equipment . . . . . . . . . . . . .    183,806      126,830
  Construction in process . . . . . . . . . . . . .     12,020       29,036
                                                     ---------    --------- 
                                                       299,232      261,976
Accumulated depreciation. . . . . . . . . . . . . .     71,547       58,350
                                                     ---------    --------- 
                                                       227,685      203,626
Goodwill, net of amortization . . . . . . . . . . .    152,560      157,251
Finance costs, net of amortization. . . . . . . . .      6,599        3,683
Tradename and other assets. . . . . . . . . . . . .     29,136       29,621
                                                     ---------    --------- 
      Total assets. . . . . . . . . . . . . . . . .  $ 672,069    $ 688,497
                                                     ---------    --------- 
                                                     ---------    --------- 
        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Trade accounts payable. . . . . . . . . . . . . .  $  18,231    $  38,827
  Accrued expenses. . . . . . . . . . . . . . . . .     55,043       27,809
  Accrued interest payable. . . . . . . . . . . . .      2,287        3,293
  Current portion of long-term debt . . . . . . . .     19,261       32,823
  Income taxes payable. . . . . . . . . . . . . . .        801        2,342
  Deferred income taxes . . . . . . . . . . . . . .        863        1,367
  Other current liabilities . . . . . . . . . . . .      4,715        7,036
                                                     ---------    --------- 
      Total current liabilities . . . . . . . . . .    101,201      113,497

Long-term debt. . . . . . . . . . . . . . . . . . .    537,830      433,035
Other long-term liabilities . . . . . . . . . . . .     27,230       24,369
Deferred income taxes . . . . . . . . . . . . . . .      1,888        2,027
Commitments and contingencies
Stockholders' equity:
  Common stock. . . . . . . . . . . . . . . . . . .        534          534
  Additional paid-in capital. . . . . . . . . . . .    436,100      436,100
  Accumulated deficit . . . . . . . . . . . . . . .   (370,886)    (260,650)
  Currency translation adjustment . . . . . . . . .    (61,828)     (60,415)
                                                     ---------    --------- 
      Total stockholders' equity. . . . . . . . . .      3,920      115,569
                                                     ---------    --------- 
      Total liabilities and stockholders' equity. .  $ 672,069    $ 688,497
                                                     ---------    --------- 
                                                     ---------    --------- 
</TABLE>
                              See accompanying notes.


                                        F-3

<PAGE>

                             DAL-TILE INTERNATIONAL INC.

                       CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
                                                                     YEAR ENDED
                                                      --------------------------------------
                                                       JANUARY 2,   JANUARY 3,  DECEMBER 31, 
                                                          1998         1997         1995
                                                      -----------   ----------  ------------
                                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                   <C>            <C>          <C>
Net sales . . . . . . . . . . . . . . . . . . . . .   $ 676,637      $720,236     $474,812
Cost of goods sold. . . . . . . . . . . . . . . . .     404,728       369,731      225,364
                                                      ---------      --------     -------- 
                                                        271,909       350,505      249,448
Operating expenses:
  Transportation. . . . . . . . . . . . . . . . . .      58,425        47,125       33,535
  Selling, general and administrative . . . . . . .     277,515       190,911      134,193
  Provision for merger integration charges. . . . .           -         9,000       22,430
  Amortization of goodwill and tradename. . . . . .       5,605         5,605        4,765
                                                      ---------      --------     -------- 
Total expenses. . . . . . . . . . . . . . . . . . .     341,545       252,641      194,923
                                                      ---------      --------     -------- 
Operating income (loss) . . . . . . . . . . . . . .     (69,636)       97,864       54,525

Interest expense. . . . . . . . . . . . . . . . . .      40,649        46,338       55,453
Interest income . . . . . . . . . . . . . . . . . .         268         1,685        1,250
Other income. . . . . . . . . . . . . . . . . . . .       1,220           129        2,994
                                                      ---------      --------     -------- 
Income (loss) before income taxes 
  and extraordinary item. . . . . . . . . . . . . .    (108,797)       53,340        3,316
Income tax provision. . . . . . . . . . . . . . . .       1,439        18,914        1,176
                                                      ---------      --------     -------- 
Income (loss) before extraordinary item . . . . . .    (110,236)       34,426        2,140
Extraordinary item - loss on early 
  retirement of debt, net of taxes. . . . . . . . .           -       (29,072)           - 
                                                      ---------      --------     -------- 
Net income (loss) . . . . . . . . . . . . . . . . .   $(110,236)     $  5,354     $  2,140
                                                      ---------      --------     -------- 
                                                      ---------      --------     -------- 
BASIC EARNINGS PER SHARE
Income (loss) before extraordinary item 
  per common share. . . . . . . . . . . . . . . . .    $  (2.06)     $   0.71     $   0.07
Extraordinary item. . . . . . . . . . . . . . . . .           -         (0.60)           - 
                                                      ---------      --------     -------- 
Net income (loss) per common share. . . . . . . . .   $   (2.06)     $   0.11     $   0.07
                                                      ---------      --------     -------- 
                                                      ---------      --------     -------- 
Average outstanding common shares . . . . . . . . .      53,435        48,473       28,743
                                                      ---------      --------     -------- 
                                                      ---------      --------     -------- 
DILUTED EARNINGS PER SHARE
Income (loss) before extraordinary item 
  per common share. . . . . . . . . . . . . . . . .   $   (2.06)     $   0.69     $   0.07
Extraordinary item. . . . . . . . . . . . . . . . .           -         (0.58)           - 
                                                      ---------      --------     -------- 
Net income (loss) per common share. . . . . . . . .   $   (2.06)     $   0.11     $   0.07
                                                      ---------      --------     -------- 
                                                      ---------      --------     -------- 
Average outstanding common and equivalent shares. .      53,435        50,053       29,668
                                                      ---------      --------     -------- 
                                                      ---------      --------     -------- 
</TABLE>
                              See accompanying notes.


                                        F-4

<PAGE>
                          DAL-TILE INTERNATIONAL INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                (IN THOUSANDS)
<TABLE>
                                                                           COMMON STOCK
                                                   --------------------------------------------------------------
                                                                                                        CONVERTED
                                                   CLASS    CLASS    CLASS    CLASS    CLASS    CLASS    COMMON
                                                     A        B        C        D        E        F       STOCK
                                                   -----    -----    -----    -----    -----    -----   ---------
<S>                                                <C>      <C>      <C>      <C>      <C>      <C>     <C>
Balance at December 31, 1994.................      $ 10      $ -      $ 3     $ 10      $ 1      $ 1      $  -
Net income...................................         -        -        -        -        -        -         -
Stock issued in connection with                             
  the AO Acquisition.........................         6        -        2        6        1        1         -
Currency translation adjustment..............         -        -        -        -        -        -         -
                                                    ---      ---      ---      ---      ---      ---      ----
Balance at December 31, 1995.................        16        -        5       16        2        2         -
Net income...................................         -        -        -        -        -        -         -
Stock conversion.............................       (16)       -       (5)     (16)      (2)      (2)      454
Proceeds from AWI in connection                             
  with the AO Acquisition....................         -        -        -        -        -        -         -
Stock issued in connection with the                         
   Initial Public Offering...................         -        -        -        -        -        -        80
Currency translation adjustment..............         -        -        -        -        -        -         -
                                                    ---      ---      ---      ---      ---      ---      ----
Balance at January 3, 1997...................         -        -        -        -        -        -       534
Net loss.....................................         -        -        -        -        -        -         -
Currency translation adjustment..............         -        -        -        -        -        -         -
                                                    ---      ---      ---      ---      ---      ---      ----
Balance at January 2, 1998...................       $ -      $ -      $ -      $ -      $ -      $ -      $534
                                                    ---      ---      ---      ---      ---      ---      ----
                                                    ---      ---      ---      ---      ---      ---      ----
</TABLE>

<TABLE>
                                                  ADDITIONAL                 CURRENCY  
                                                   PAID-IN    ACCUMULATED  TRANSLATION 
                                                   CAPITAL      DEFICIT     ADJUSTMENT     TOTAL
                                                  ----------  -----------  -----------   ---------
<S>                                               <C>         <C>          <C>           <C>
Balance at December 31, 1994.................      $200,475    $(268,144)    $(36,179)   $(103,823)
Net income...................................             -        2,140            -        2,140
Stock issued in connection with the                                                    
  AO Acquisition.............................       133,560            -            -      133,576
Currency translation adjustment..............             -            -      (22,254)     (22,254)
                                                   --------    ---------     --------    ---------
Balance at December 31, 1995.................       334,035     (266,004)     (58,433)       9,639
Net income...................................             -        5,354            -        5,354
Stock conversion.............................          (413)           -            -            -
Proceeds from AWI in connection                                                        
  with the AO Acquisition....................           650            -            -          650
Stock issued in connection with the                                                    
Initial Public Offering......................       101,828            -            -      101,908
Currency translation adjustment..............             -            -       (1,982)      (1,982)
                                                   --------    ---------     --------    ---------
Balance at January 3, 1997...................       436,100     (260,650)     (60,415)     115,569
Net loss.....................................             -     (110,236)           -     (110,236)
Currency translation adjustment..............             -            -       (1,413)      (1,413)
                                                   --------    ---------     --------    ---------
Balance at January 2, 1998...................      $436,100    $(370,886)    $(61,828)   $   3,920
                                                   --------    ---------     --------    ---------
                                                   --------    ---------     --------    ---------
</TABLE>

                            See accompanying notes.

                                     F-5
<PAGE>
                          DAL-TILE INTERNATIONAL INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
                                                                   YEAR ENDED
                                                     ----------------------------------------
                                                     JANUARY 2,    JANUARY 3,    DECEMBER 31,
                                                       1998           1997           1995
                                                     ----------    ----------    ------------
                                                                 (IN THOUSANDS)
<S>                                                  <C>           <C>           <C>
OPERATING ACTIVITIES
Net income (loss)..................................  $(110,236)     $   5,354      $  2,140
Adjustments to reconcile net income
 (loss) to net cash provided by
 (used in) operating activities:
  Depreciation and amortization....................     24,543         24,017        17,164
  Extraordinary loss...............................          -         29,072             -
  Provision for losses on accounts receivable .....     27,805          5,781         5,111
  Merger integration reserve.......................          -              -        22,430
  Foreign exchange transaction (gain) loss.........        339            (59)       (6,067)
  Zero coupon notes interest expense...............          -              -        10,899
  Deferred income tax provision (benefit)..........       (475)        13,539        (3,088)
  Changes in operating assets and
   liabilities, net of assets and
   liabilities of business acquired:
    Trade accounts receivable......................       (688)       (25,752)        3,470
    Inventories....................................     10,845        (39,607)       (3,580)
    Other assets...................................     (7,420)           217        (5,754)
    Trade accounts payable and accrued expenses ...      4,442          6,854        12,371
    Accrued interest payable.......................     (1,004)       (14,105)          354
    Other liabilities..............................       (958)       (23,995)      (14,787)
                                                     ---------      ---------      --------
Net cash provided by (used in) 
 operating activities..............................    (52,807)       (18,684)       40,663

INVESTING ACTIVITIES
Expenditures for property, 
 plant and equipment, net..........................    (40,074)       (42,039)      (29,392)

FINANCING ACTIVITIES
Borrowings under long-term debt....................    111,007        451,000             -
Borrowings under Term B loan.......................    125,000              -             -
Borrowings under previous 
 bank credit facility..............................          -         63,723        46,702
Repayment of long-term debt........................    (19,968)      (576,679)      (22,538)
Repayment of long-term debt 
 from Term B loan..................................   (122,000)             -             -
Fees and expenses associated 
 with debt refinancing.............................     (3,576)       (42,765)            -
Proceeds from issuance of 
 common stock......................................          -        102,558        27,575
                                                     ---------      ---------      --------
Net cash provided by (used in) 
 financing activities..............................     90,463         (2,163)       51,739

Effect of exchange rate changes on cash............        (93)           (80)       (3,022)
                                                     ---------      ---------      --------
Net increase (decrease) in cash....................     (2,511)       (62,966)       59,988
Cash at beginning of year..........................      9,999         72,965        12,977
                                                     ---------      ---------      --------
Cash at end of year................................  $   7,488      $   9,999      $ 72,965
                                                     ---------      ---------      --------
                                                     ---------      ---------      --------
</TABLE>
                            See accompanying notes.

                                     F-6
<PAGE>
                                       
                          DAL-TILE INTERNATIONAL INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               JANUARY 2, 1998


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.  
Dal-Tile International Inc., as a stand-alone holding company, has no 
operations (see Note 17).

The Group is a multinational manufacturing and distribution company operating 
in the United States, Mexico and Canada.  The Group offers a full range of 
glazed and unglazed 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.

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.  The statement of operations excludes the results of 
operations of AO for the year ended December 31, 1995, as the acquisition 
occurred on December 29, 1995.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

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>
                                                     FORM OF ENTITY
                                                     --------------
<S>                                               <C>
           Dal-Tile Group Inc. . . . . . . . .         U.S. Corporation
           Dal-Tile Corporation. . . . . . . .         U.S. Corporation
           Tileways, Inc.. . . . . . . . . . .         U.S. Corporation
           DTM/CM Holdings, Inc. . . . . . . .         U.S. Corporation
           R&M Supplies, Inc.. . . . . . . . .         U.S. Corporation
           Dal-Minerals Company. . . . . . . .         U.S. Corporation
           Dal-Tile Mexico, 
             S.A. de C.V. ("Dal-Tile Mexico").      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.

                                      F-7
<PAGE>

                          DAL-TILE INTERNATIONAL INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with maturities of three 
months or less 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>
                                                   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 January 2, 1998 and 
January 3, 1997 was $61,890,000 and $57,125,000, respectively.  The carrying 
value of goodwill and other long-lived assets is reviewed periodically to 
determine whether 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.

FINANCE COSTS

Finance costs incurred in connection with financings are being amortized over 
the term of the related debt on a straight-line basis.  Accumulated 
amortization at January 2, 1998 and January 3, 1997 was approximately 
$1,112,000 and $205,000, respectively.

                                      F-8
<PAGE>

                          DAL-TILE INTERNATIONAL INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ADVERTISING EXPENSES

Advertising and promotion expenses are charged to income during the period in 
which they are incurred.  Advertising and promotion expenses incurred for the 
years ended January 2, 1998, January 3, 1997 and December 31, 1995 amounted 
to $16,722,000, $14,627,000 and $7,566,000, respectively.

STOCK OPTIONS

The Company grants stock options for a fixed number of shares to employees 
with an exercise price equal to the fair value of the underlying common stock 
at the date of grant.  The Company has elected to follow Accounting 
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" 
("APB 25"), and related interpretations in accounting for its employee stock 
options because the alternative fair value accounting provided for under 
Statement of Financial Accounting Standards No. 123, "Accounting for 
Stock-Based Compensation" ("SFAS 123"), requires use of option valuation 
models that were not developed for use in valuing employee stock options.  
Under APB 25, no compensation expense is recognized because the exercise 
price of the Company's employee stock options equals the market price of the 
underlying stock on the date of grant.

RETIREMENT PLANS

The Company maintains a defined contribution 401(k) plan for eligible 
employees. A participant may contribute up to 15% of his total annual 
compensation (annual base pay for union participants) to the plan.  
Contributions by the Company to the plan are at the discretion of its Board 
of Directors.  Currently, the Company matches 50% of any non-union 
participant's contribution to the plan up to 6% of the employee's total 
annual compensation.  Dal-Tile Mexico and Materiales maintain defined benefit 
plans for eligible employees with funding policies based on local statutes.

FOREIGN CURRENCY TRANSLATION

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 (losses) of $558,000, ($80,000) and $4,100,000 for 
the years ended January 2, 1998, January 3, 1997 and December 31, 1995,  
respectively.

CONCENTRATIONS OF CREDIT RISK

The Company is engaged in the manufacturing and distribution of glazed and 
unglazed ceramic tile products and accessories in the United States and 
Mexico and the distribution of such 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 periodically 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.  

                                      F-9
<PAGE>

                          DAL-TILE INTERNATIONAL INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Trade accounts receivable are net of an allowance for losses from 
uncollectible accounts of $13,160,000 and $12,750,000 at January 2, 1998 and 
January 3, 1997, respectively.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the 1997 
presentation.

NET INCOME (LOSS) PER SHARE

In 1997, the Financial Accounting Standards Board ("FASB") issued Statement 
No. 128, "Earnings Per Share" ("SFAS 128").  SFAS 128 replaced the 
calculation of primary and fully diluted earnings per share with basic and 
diluted earnings per share.  Unlike primary earnings per share, basic 
earnings per share excludes any diluted effects of options, warrants and 
convertible securities.  Diluted earnings per share is very similar to the 
previously reported fully diluted earnings per share.  All earnings per share 
amounts for all periods have been presented, and where appropriate, restated 
to conform to SFAS 128 requirements.

Options to purchase 6,597,371 shares of common stock at prices ranging from 
$9.01 to $13.75 per share were outstanding at January 2, 1998, but were not 
included in the computation of earnings per share for 1997.  Due to the 
Company's net loss for the year, these options would have had an antidilutive 
effect on earnings per share.

<TABLE>
                                            FOR THE YEAR ENDED JANUARY 3, 1997
                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                         ----------------------------------------
                                           INCOME          SHARES       PER SHARE 
                                         (NUMERATOR)    (DENOMINATOR)     AMOUNT
                                         -----------    -------------   ---------
<S>                                      <C>            <C>             <C>
BASIC EARNINGS PER SHARE
Income before extraordinary item
available to common stockholders. . .      $34,426          48,473         $0.71

EFFECT OF DILUTIVE SECURITIES
Stock options . . . . . . . . . . . .            -           1,580             -
                                           -------          ------         -----

DILUTED EARNINGS PER SHARE
Income available to common stockholders
plus assumed conversion . . . . . . .      $34,426          50,053         $0.69
                                           -------          ------         -----
                                           -------          ------         -----
</TABLE>

Options to purchase 50,000 shares of common stock at $19.75 per share were 
outstanding during the fourth quarter of 1996 but were not included in the 
computation of diluted earnings per share because the options' exercise price 
was greater than the average market price of the common shares.  The options, 
which expire January 2, 2007, were still outstanding at the end of 1996.

                                      F-10
<PAGE>

                          DAL-TILE INTERNATIONAL INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
                                           FOR THE YEAR ENDED DECEMBER 31, 1995
                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                          --------------------------------------
                                            INCOME        SHARES        PER SHARE 
                                          (NUMERATOR)  (DENOMINATOR)      AMOUNT
                                          -----------  -------------    ---------
<S>                                       <C>          <C>              <C>
BASIC EARNINGS PER SHARE
Income before extraordinary item 
available to common stockholders. . . .     $2,140         28,743          $0.07

EFFECT OF DILUTIVE SECURITIES
Stock options . . . . . . . . . . . . .          -            925              -
                                            ------         ------          -----

DILUTED EARNINGS PER SHARE
Income available to common stockholders 
plus assumed conversion . . . . . . . .     $2,140         29,668          $0.07
                                            ------         ------          -----
                                            ------         ------          -----
</TABLE>

NEW ACCOUNTING STANDARDS

In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive 
Income," which establishes rules for reporting and displaying comprehensive 
income.  The Company intends to adopt this statement, as required, for fiscal 
year 1998.  When adopted, the Company has elected to display comprehensive 
income and its components in the Statement of Stockholders' Equity.  Adoption 
of this statement is not expected to have an effect on the financal 
statements.  

3.   INVENTORIES

Inventories consist of the following:

<TABLE>
                                              JANUARY 2,     JANUARY 3,
                                                 1998           1997
                                              ----------     ----------
                                                   (IN THOUSANDS)
<S>                                           <C>            <C>
     Finished products in U.S. . . . . . . .   $110,323       $118,823
     Finished products in Mexico . . . . . .      4,307          3,690
     Finished products in Canada . . . . . .      2,266          3,724
     Goods-in-process. . . . . . . . . . . .      3,960          3,516
     Raw materials . . . . . . . . . . . . .      9,891         12,660
                                               --------       --------
     Total inventories . . . . . . . . . . .   $130,747       $142,413
                                               --------       --------
                                               --------       --------
</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 $2,200,000 higher and $8,200,000 lower than reported at January 2, 
1998 and January 3, 1997, respectively.
     
During 1997, inventory quantities in three of the Company's LIFO pools were 
reduced.  This reduction resulted in the liquidation of LIFO inventory 
quantities carried at higher costs prevailing in prior years as compared with 
the 1997 costs, the effect of which decreased net income by approximately 
$691,000, or $0.01 per share (basic and diluted).

                                      F-11
<PAGE>

                          DAL-TILE INTERNATIONAL INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During 1996, inventory quantities in three of the Company's LIFO pools were 
reduced.  This reduction resulted in the liquidation of LIFO inventory 
quantities carried at lower costs prevailing in prior years as compared with 
the 1996 costs, the effect of which increased net income by approximately 
$493,000, or $0.01 per share (basic and diluted).

4.   INITIAL PUBLIC OFFERING

During the third quarter of 1996, the Company completed an initial public 
offering (the "Offering") of its common stock and a concurrent private 
placement of its common stock to a subsidiary of AWI (the "Private 
Placement").  The Offering of 7,316,343 shares of common stock, including the 
underwriter over allotment, raised $102,428,802 of gross proceeds with net 
proceeds, after underwriting commission and expenses, amounting to 
$92,557,930.  The Private Placement of 714,286 shares of common stock raised 
$10,000,000 of proceeds with total net proceeds from the Offering and Private 
Placement amounting to $102,557,930.  In connection with the Offering and 
Private Placement, the Company effected a recapitalization of its capital 
stock.  Pursuant to a common stock conversion, all of the classes of the 
Company's previously outstanding common stock were converted into 45,404,472 
shares of a single class of common stock.  In addition, all outstanding 
options to purchase Dal-Tile's capital stock were converted into options to 
purchase 4,204,747 shares of Common Stock.

5.  LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
                                                          JANUARY 2,    JANUARY 3,
                                                             1998          1997
                                                          ----------    ----------
                                                              (IN THOUSANDS)
<S>                                                       <C>           <C>
Term A Loan, interest due quarterly at LIBOR plus 2% 
 (approximately 7.8% at January 2, 1998), principal 
 due in variable quarterly installments through 
 December 31, 2002, collateralized by certain assets 
 of the Company . . . . . . . . . . . . . . . . . . . . .  $217,500      $275,000
Term B Loan, interest due quarterly at LIBOR plus 2-1/2% 
 (approximately 8.3% at January 2, 1998), principal due 
 in variable quarterly installments through December 31, 
 2003, collateralized by certain assets of the 
 Company. . . . . . . . . . . . . . . . . . . . . . . . .   125,000            --
Revolving line of credit, interest due quarterly at LIBOR 
 plus 2% (approximately 7.8% at January 2, 1998), 
 principal due December 31, 2002, collateralized by
 certain assets of the Company. . . . . . . . . . . . . .   190,000       176,000
Other, principally borrowings to fund capital 
 additions. . . . . . . . . . . . . . . . . . . . . . . .    24,591        14,858
                                                           --------      --------
                                                            557,091       465,858
Less current portion. . . . . . . . . . . . . . . . . . .    19,261        32,823
                                                           --------      --------
                                                           $537,830      $433,035
                                                           --------      --------
                                                           --------      --------
</TABLE>

                                     F-12
<PAGE>

                         DAL-TILE INTERNATIONAL INC.

       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Concurrent with the Offering, the Company entered into a new bank credit 
agreement (the "New Bank Credit Agreement") which, along with the proceeds 
from the Offering and Private Placement, were used to repay substantially all 
of the Company's debt. The New Bank Credit Agreement included a term loan of 
$275,000,000 ("Term A Loan") and a revolving line of credit of $250,000,000.

During the second quarter of 1997, the Company completed a new $125,000,000 
Term B loan facility which made certain modifications to the New Bank Credit 
Agreement (the "Amended Credit Facility").  The proceeds of the Term B loan 
were used to repay $50,000,000 of the Term A Loan and $72,000,000 of the 
existing revolving line of credit.  The Amended Credit Facility did not 
modify the Term A Loan amortization schedule.

During the third quarter of 1997, the Company amended certain financial 
covenants to provide increased flexibility under the Amended Credit Facility 
(as amended, the "Second Amended Credit Facility").  In connection with the 
Second Amended Credit Facility, the Company's borrowing rate was increased 50 
basis points over the previously existing rates (which now range from 2 to 
2-1/2 over LIBOR).  Under the Second Amended Credit Facility, the Company is 
required, among other things, to maintain certain financial covenants and has 
restrictions on incurring additional debt and limitations on cash dividends.  
The Company was in compliance with such covenants at January 2, 1998.  A 
commitment fee at a rate per annum based on a pricing grid is payable 
quarterly.

As of January 2, 1998, the Company had availability of approximately 
$48,600,000 on the revolving line of credit.  The availability is net of 
$11,448,526 in letters of credit for foreign inventory purchases and 
industrial revenue bond financing transactions.

The Company periodically uses interest rate swap agreements to manage exposure
to fluctuations in interest rates.  These agreements involve the exchange of 
interest obligations on fixed and floating interest rate debt without the 
exchange of the underlying principal amounts.  The differential paid or 
received on the agreements is recognized as an adjustment to interest expense 
over the term of the underlying swap agreement.  The book value of the 
interest rate swap agreements represents the differential receivable or 
payable with a swap counterparty since the last settlement date.  The 
underlying notional amounts on which the Company has interest rate swap 
agreements outstanding was $300,000,000 at January 9, 1998.  These agreements 
are in effect for a term of two years at an interest rate of approximately 5.7%.
There were no interest rate swap agreements at or during the years ended 
January 2, 1998 or January 3, 1997.

Aggregate maturities of long-term debt for the five years subsequent to 
January 2, 1998 (in thousands) are:

<TABLE>
          <S>                                        <C>
          1998 . . . . . . . . . . . . . . . . . . . $ 19,261
          1999 . . . . . . . . . . . . . . . . . . .   46,144
          2000 . . . . . . . . . . . . . . . . . . .   56,148
          2001 . . . . . . . . . . . . . . . . . . .   55,684
          2002 . . . . . . . . . . . . . . . . . . .  258,615
</TABLE>


                                      F-13

<PAGE>

                         DAL-TILE INTERNATIONAL INC.

       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Total interest cost incurred for the years ended January 2, 1998, January 3, 
1997 and December 31, 1995 amounted to approximately $41,817,000, $47,706,000 
and $56,699,000, respectively, of which approximately $1,168,000, $1,368,000 
and $1,246,000, respectively, was capitalized to property, plant and 
equipment.  Total interest paid, net of interest received, was $41,899,000, 
$52,857,000 and $43,460,000 for the years ended January 2, 1998, January 3, 
1997 and December 31, 1995, respectively.

6.   EXTRAORDINARY ITEM

In connection with the refinancing and early extinguishment of debt during 
the year ended January 3, 1997, the Company recorded an extraordinary charge 
of $44,800,000 ($29,072,000, net of tax) for prepayment premiums on certain 
debt repaid, the write-off of existing deferred financing fees and a 
termination fee paid in connection with the termination of the Company's 
management agreement with AEA Investors.

7.   CAPITAL STRUCTURE

Common stock consists of the following:

<TABLE>
                                                                     JANUARY 2,  JANUARY 3,
                                                                        1998        1997
                                                                     ----------  ---------- 
                                                                         (IN THOUSANDS)
     <S>                                                             <C>         <C>
     Common stock, $0.01 par value--authorized shares--
      200,000,000, issued and outstanding shares--53,435,101 at 
      January 2, 1998 and January 3, 1997 . . . . . . . . . . . . . .   $534       $534
                                                                        ----       ---- 
                                                                        ----       ---- 
</TABLE>


At January 2, 1998, the Company has authorized 11,100,000 shares of preferred 
stock, none of which were outstanding.  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 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 the Company's long-term debt.  In the event of the 
liquidation, dissolution or winding up of the Company, 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 the 
Company.

8.   PROVISION FOR MERGER INTEGRATION CHARGE -- YEAR ENDED JANUARY 3, 1997

In the first quarter of 1996, the Company recorded an integration charge of
$9,000,000 in connection with the AO Acquisition and the Company's merger
integration plan.  The charge was for closings of duplicative sales centers,
duplicative distribution centers, elimination of overlapping positions and the
closing of a manufacturing facility.  The Company completed these actions during
1997.  The primary components of the charge were $7,400,000 for lease 
commitments, $1,300,000 for severance and 

                                    F-14

<PAGE>

                         DAL-TILE INTERNATIONAL INC.

       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


employee contracts and $300,000 for shut down costs of the closed facilities. 
The leases were primarily associated with sales centers that closed during 
the first half of 1997 and expire over the next two to four years.

9.   PROVISION FOR MERGER INTEGRATION CHARGES -- YEAR ENDED DECEMBER 31, 1995

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.  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 has combined two independent 
systems into one system.  The operating leases related to such software will 
expire over the next two years.  In addition, the Company has recorded a 
charge of $5,400,000 for inventory revaluation as a result of the elimination 
of product lines discontinued as a result of the AO Acquisition, as well as a 
general stock keeping unit reduction that occurred in 1996.  The Company 
recorded a charge of $1,280,000 in connection with the closure of certain 
duplicative sales service centers.  The Company completed its sales centers 
consolidation during the first half of 1997.  The noncash portion of the 
charge, $20,200,000, represents the write-down of certain equipment and the 
revaluation of inventory.  The cash portion of the merger integration charge 
is $2,230,000 which primarily consists of leasehold commitments on equipment.

10.  INCOME TAXES

Income (loss) before income taxes and extraordinary items relating to 
operations is as follows:

<TABLE>
                                                  YEAR ENDED
                                  -------------------------------------------
                                   JANUARY 2,      JANUARY 3,    DECEMBER 31,
                                      1998            1997          1995
                                  -----------      ---------     ------------ 
                                               (IN THOUSANDS)
<S>                               <C>              <C>            <C>
UNITED STATES . . . . . . . .     $  (116,249)     $  45,812      $  (4,100)
MEXICO. . . . . . . . . . . .           7,879          7,603          7,754
OTHER . . . . . . . . . . . .            (427)           (75)          (338) 
                                  -----------      ---------       -------- 
                                  $  (108,797)     $  53,340       $  3,316
                                  -----------      ---------       -------- 
                                  -----------      ---------       -------- 
</TABLE>


                                    F-15

<PAGE>

                         DAL-TILE INTERNATIONAL INC.

       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>

                                                    YEAR ENDED
                                       ------------------------------------- 
                                       JANUARY 2,   JANUARY 3,  DECEMBER 31,
                                          1998         1997        1995
                                       ----------   ----------  ------------ 
                                                   (IN THOUSANDS)
<S>                                     <C>          <C>          <C>
U.S. state - current . . . . . . . . .  $  -         $ 3,060      $ 2,179 
U.S. deferred. . . . . . . . . . . . .     -          (1,590)         -
                                        ------       -------      ------- 
                                           -           1,470        2,179 

Mexico - current . . . . . . . . . . .   2,082         1,716        1,471 
Mexico - deferred. . . . . . . . . . .    (643)          -         (2,474)
                                        ------       -------      ------- 
                                         1,439         1,716       (1,003)
                                        ------       -------      ------- 
Total with extraordinary item. . . . .   1,439         3,186        1,176 
Tax effect of extraordinary item . . .     -          15,728          -
                                        ------       -------      ------- 
    Total before extraordinary item. .  $1,439       $18,914      $ 1,176 
                                        ------       -------      ------- 
                                        ------       -------      ------- 
</TABLE>

Principal reconciling items from income tax provision (benefit) computed at 
the U.S. statutory rate of 35% and the provision for income taxes for the 
years ended January 2, 1998, January 3, 1997 and December 31, 1995 are as 
follows:

<TABLE>

                                                    YEAR ENDED
                                       ------------------------------------- 
                                       JANUARY 2,   JANUARY 3,  DECEMBER 31,
                                          1998         1997        1995
                                       ----------   ----------  ------------ 
                                                   (IN THOUSANDS)
<S>                                     <C>          <C>          <C>
Provision (benefit) at 
  statutory rate . . . . . . . . . . .  $(37,958)   $  2,989      $ 1,161
Amortization of goodwill . . . . . . .     1,668       1,668        1,668
State income tax . . . . . . . . . . .    (5,489)      3,751        1,416
Foreign loss not benefited . . . . . .       149          26        1,436
Difference between U.S. and Mexico
  statutory rate . . . . . . . . . . .    (1,319)       (945)      (4,106)
Valuation allowance. . . . . . . . . .    44,107     (10,134)         -
Non-Permanently reinvested 
  foreign earnings . . . . . . . . . .       -         5,571          -
Other. . . . . . . . . . . . . . . . .       281         260         (399)
                                        --------    --------      ------- 
                                        $  1,439    $  3,186      $ 1,176
                                        --------    --------      ------- 
                                        --------    --------      ------- 
</TABLE>


                                    F-16

<PAGE>

                         DAL-TILE INTERNATIONAL INC.

       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


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>
                                                   JANUARY 2,    JANUARY 3,
                                                      1998           1997
                                                   ----------    ---------- 
                                                         (IN THOUSANDS)
     <S>                                           <C>           <C>
     Deferred tax liabilities:
     Book basis of property, plant and 
       equipment over tax . . . . . . . . . . .    $ 18,707       $ 16,324
     Book basis of inventories over tax . . . .         --           1,367
     Book basis of other assets over tax. . . .      10,640         14,513
     Other, net . . . . . . . . . . . . . . . .       6,983          7,055
                                                   --------       -------- 
        Total deferred tax liabilities. . . . .      36,330         39,259
                                                   --------       -------- 
     Deferred tax assets:
     Tax basis of inventories over book . . . .       5,519           --  
     Tax basis of other assets over book. . . .       1,325            210
     Net operating loss carryforwards . . . . .      52,518         23,465
     Expenses not yet deductible for tax. . . .      18,324         12,190
                                                   --------       -------- 
        Total deferred tax assets . . . . . . .      77,686         35,865
     Valuation allowance for 
       deferred tax assets. . . . . . . . . . .     (44,107)          --  
                                                   --------       -------- 
     Net deferred tax assets. . . . . . . . . .      33,579         35,865
                                                   --------       -------- 
     Net deferred tax liabilities . . . . . . .    $  2,751       $  3,394
                                                   --------       -------- 
                                                   --------       -------- 
</TABLE>


Total income tax payments, net of refunds received, during the years ended 
January 2, 1998, January 3, 1997 and December 31, 1995 were $3,206,000, 
$1,989,000 and $6,145,000, respectively.  The Company has U.S. net operating 
loss carryforwards of approximately $138,000,000 which expire in the years 
2008 - 2012.  The net operating loss carryforwards will be available to 
offset regular U.S. taxable income during the carryforward period.

Deferred tax assets are required to be reduced by a valuation allowance if it 
is more likely than not that some portion or all of the deferred tax assets 
will not be realized.  Realization of the future benefits related to the 
deferred tax assets is dependent on many factors, including the Company's 
ability to generate U.S. taxable income within the near to medium term.  
Management has considered these factors in determining the valuation 
allowance recorded in 1997.

U.S. tax rules impose limitations on the use of net operating loss 
carryforwards following certain changes in ownership.  If such a change were 
to occur with respect to the Company, the limitation could reduce the amount 
of deductions that would be available to offset future taxable income each 
year, starting with the year of the ownership change.

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 the fiscal years ended January 2, 1998, January 3, 1997 and December 
31, 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 


                                    F-17

<PAGE>

                         DAL-TILE INTERNATIONAL INC.

       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


amounted to approximately $327,000, $390,000 and $1,500,000 for the years 
ended January 2, 1998, January 3, 1997 and December 31, 1995, respectively.

11.  RELATED PARTY TRANSACTIONS

AEA Investors Inc., a majority stockholder, previously provided management, 
consulting and financial services to the Company for fees and expenses.  The 
Company incurred fees and expenses for such services of $485,000 and $991,000 
for the years ended January 3, 1997 and December 31, 1995, respectively.  
Such services included, but were not necessarily limited to, advice and 
assistance concerning the strategy, planning and financing of the Company, as 
needed from time to time.  The management arrangement was terminated during 
1996, and AEA Investors was paid a termination fee of $4,000,000 in 
connection therewith.  Certain directors and officers of the Company also 
serve as officers of AEA Investors Inc.

During 1996, the Company entered into an agreement with AWI to provide 
mainframe data processing services.  The agreement expires on May 31, 1999. 
Payments made under this agreement were $6,147,000 and $2,549,000 for the 
years ended January 2, 1998 and January 3, 1997, respectively.

12.  STOCK PLANS

The Company has a stock option plan (the "Plan") that provides for the 
granting of options for up to 7,836,425 shares of its common stock to key 
employees of the Company.  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 on or 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 (option data shown
below is after giving effect to the Company's options conversion):

<TABLE>

                                                                                WEIGHTED AVERAGE
                                        NUMBER OF SHARES   TOTAL OPTION PRICE    EXERCISE PRICE  
                                        ----------------   ------------------   ---------------- 
     <S>                                <C>                <C>                 <C>
     Outstanding at December 31, 1994. .   3,021,120           $27,217,300           $   9.01
        Granted. . . . . . . . . . . . .      61,050               550,000               9.01
        Canceled . . . . . . . . . . . .    (486,823)           (4,385,800)              9.01
                                           ----------          -----------           -------- 
     Outstanding at December 31, 1995. .   2,595,347            23,381,500               9.01
        Granted. . . . . . . . . . . . .   1,695,535            17,294,604              10.20
        Canceled . . . . . . . . . . . .    (185,048)           (1,667,100)              9.01
                                           ----------          -----------           -------- 
     Outstanding at January 3, 1997. . .   4,105,834            39,009,004               9.50
        Granted. . . . . . . . . . . . .   3,215,174            43,123,573              13.41
        Canceled . . . . . . . . . . . .    (723,637)           (7,556,083)             10.44
                                           ----------          -----------           -------- 
     Outstanding at January 2, 1998. . .   6,597,371           $74,576,494           $  11.30
                                           ----------          -----------           -------- 
                                           ----------          -----------           -------- 
</TABLE>


The Company has reserved 7,836,425 shares of common stock for options, 
1,239,054 of which are ungranted at January 2, 1998 and are for future 
issuance under the Plan.


                                     F-18

<PAGE>
                                       
                          DAL-TILE INTERNATIONAL INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At January 2, 1998, January 3, 1997 and December 31, 1995, there were 
4,200,159 options exercisable at a weighted average exercise price of $10.07, 
2,986,372 options exercisable at a weighted average exercise price of $9.30 
and 2,128,436 options exercisable at a weighted average exercise price of 
$9.01, respectively.

The following table summarizes information with regard to stock options 
outstanding at January 2, 1998:

<TABLE>
                                                          WEIGHTED AVERAGE
EXERCISE                                       OPTIONS       REMAINING
PRICE                                        OUTSTANDING  CONTRACTUAL LIFE
--------                                     -----------  ----------------
<S>                                          <C>          <C>
$9.01 . . . . . . . . . . . . . . . . .       2,441,202      3.56 years
 9.91 . . . . . . . . . . . . . . . . .       1,113,169      8.00 years
12.63 . . . . . . . . . . . . . . . . .         106,000      9.95 years
13.69 . . . . . . . . . . . . . . . . .       2,837,000      9.78 years
13.75 . . . . . . . . . . . . . . . . .         100,000      9.30 years
</TABLE>

In accordance with the provisions of SFAS 123, the Company applies APB 25 and 
related interpretations in accounting for its stock option plan, and, 
accordingly, does not recognize compensation cost.  If the Company had 
elected to recognize compensation cost based on the fair value of the options 
granted at grant date as prescribed by SFAS 123, net income (loss) and 
earnings (loss) per share would have been reduced to the pro forma amounts 
indicated in the table below (in thousands, except per share data):

<TABLE>
                                                         YEAR ENDED
                                           ---------------------------------------
                                           JANUARY 2,     JANUARY 3,  DECEMBER 31,
                                              1998           1997         1995
                                           ----------     ---------   ------------
<S>                                        <C>            <C>         <C>
Net income (loss) -- as reported . . . .   $(110,236)      $5,354        $2,140
Net income (loss) -- pro forma . . . . .    (112,150)       3,827         2,088
Earnings (loss) per share (basic 
 and diluted) -- as reported . . . . . .       (2.06)        0.11          0.07
Earnings (loss) per share (basic
 and diluted) -- pro forma . . . . . . .       (2.10)        0.08          0.07
</TABLE>

The pro forma effects on net income (loss) for the years ended January 2, 
1998, January 3, 1997 and December 31, 1995 are not representative of the pro 
forma effect on net income (loss) in future years because they do not take 
into consideration pro forma compensation expense related to grants made 
prior to 1995.

The weighted average fair value at date of grant for options granted during 
the years ended January 2, 1998, January 3, 1997 and December 31, 1995 was 
$5.62, $2.93 and $3.38 per option, respectively.  The 

                                     F-19
<PAGE>

                          DAL-TILE INTERNATIONAL INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

fair value of the options at the date of grant was estimated using the 
binomial model with the following weighted average assumptions:

<TABLE>
                                                           YEAR ENDED
                                            ----------------------------------------
                                            JANUARY 2,     JANUARY 3,   DECEMBER 31,
                                              1998           1997          1995
                                            ----------     ----------   ------------
<S>                                         <C>            <C>          <C>
    Expected life (years). . . . .              3              3             4
    Interest rate. . . . . . . . .            5.96%          5.08%         7.52%
    Volatility . . . . . . . . . .            53.5%          33.6%         33.6%
    Dividend yield . . . . . . . .            0.00%          0.00%         0.00%
</TABLE>

The Company has issued stock units under a stock appreciation rights 
agreement to certain executives which permit the holders to receive value in 
excess of the base price of the unit at the date of grant.  Payment of the 
excess will be in cash, stock or a combination of cash and stock at the 
discretion of the Board of Directors.  The total value to be received is 
subject to a ceiling.  During the fourth quarter of 1997, the Company granted 
2,710,000 stock units at a base price of $9.01 per unit.  These stock units 
vest at various dates through fiscal year 2000 provided certain conditions 
are met. The Company has recorded compensation expense of approximately 
$5,900,000 during the fourth quarter of 1997 in respect of these stock units.

13.   COMMITMENTS AND CONTINGENCIES

The Company leases substantially all of its sales service centers and various 
distribution, manufacturing and transportation equipment under terms of 
noncancelable operating leases.  Certain leases contain escalation charges.  
The minimum aggregate annual lease payments subsequent to January 2, 1998 are 
as follows (in thousands):

<TABLE>
<S>                                                               <C>
               1998. . . . . . . . . . . . . . . . . . . . .      $27,797
               1999. . . . . . . . . . . . . . . . . . . . .       21,769
               2000. . . . . . . . . . . . . . . . . . . . .       14,379
               2001. . . . . . . . . . . . . . . . . . . . .       10,679
               2002. . . . . . . . . . . . . . . . . . . . .        8,141
               Thereafter. . . . . . . . . . . . . . . . . .       17,119
                                                                  -------
                                                                  $99,884
                                                                  -------
                                                                  -------
</TABLE>

Rental expense amounted to approximately $31,075,000, $24,166,000 and 
$16,427,000 for the years ended January 2, 1998, January 3, 1997 and December 
31, 1995, respectively. 

The Company is subject to federal, state, local and foreign 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 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 

                                     F-20
<PAGE>

                          DAL-TILE INTERNATIONAL INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 probable and estimable liabilities of the Company with respect to such 
investigations and cleanup activities, taking into account currently 
available information and the Company's 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, the scope of contamination of such sites, the 
allocation of costs among other potentially responsible parties with respect 
to any such sites and the ability of such parties to satisfy their share of 
liability.  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 or liquidity.

14.  GEOGRAPHIC AREA OPERATIONS

The Company currently conducts its business in one industry segment, engaging 
in the manufacturing and distribution of glazed and unglazed ceramic tile 
products and accessories.  The Company operates manufacturing facilities in 
the United States and Mexico and distributes products through wholly owned 
sales service centers in the United States and Canada and nonaffiliated 
distributors in the United States and 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. 


                                     F-21
<PAGE>

                          DAL-TILE INTERNATIONAL INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Financial information by geographical area is summarized below:

<TABLE>
                                                             YEAR ENDED
                                                 -------------------------------------
                                                 JANUARY 2,   JANUARY 3,  DECEMBER 31,
                                                    1998         1997         1995
                                                 ----------   ----------  ------------
                                                            (IN THOUSANDS)
<S>                                              <C>          <C>         <C>
Consolidated revenue:
Unaffiliated customers:
    United States. . . . . . . . . . . . . .      $648,529     $695,532     $446,323
    Mexico . . . . . . . . . . . . . . . . .        18,533       17,927       23,012
    Other. . . . . . . . . . . . . . . . . .         9,575        6,777        5,477
                                                  --------     --------     --------
      Total consolidated revenues from 
        unaffiliated customers . . . . . . .       676,637      720,236      474,812
                                                  --------     --------     --------
Intercompany revenue:
    United States. . . . . . . . . . . . . .         4,348        4,057        3,174
    Mexico . . . . . . . . . . . . . . . . .        71,802       61,526       43,109
    Eliminations . . . . . . . . . . . . . .       (76,150)     (65,583)     (46,283)
                                                  --------     --------     --------
      Total consolidated revenue . . . . . .      $676,637     $720,236     $474,812
                                                  --------     --------     --------
                                                  --------     --------     --------
Consolidated operating income (loss):
    United States. . . . . . . . . . . . . .      $(76,686)    $ 90,175     $ 48,874
    Mexico . . . . . . . . . . . . . . . . .         7,508        7,339        6,120
    Eliminations/other . . . . . . . . . . .          (458)         350         (469)
                                                  --------     --------     --------
      Total consolidated operating 
        income (loss). . . . . . . . . . . .      $(69,636)    $ 97,864     $ 54,525
                                                  --------     --------     --------
                                                  --------     --------     --------
Consolidated identifiable assets:
    United States. . . . . . . . . . . . . .      $613,882     $623,444     $618,328
    Mexico . . . . . . . . . . . . . . . . .        53,637       54,889       38,585
    Eliminations/other . . . . . . . . . . .         4,550       10,164       15,480
                                                  --------     --------     --------
      Total consolidated identifiable 
        assets . . . . . . . . . . . . . . .      $672,069     $688,497     $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.  

16.  CHANGE IN FISCAL YEAR

During 1996, the Company changed its fiscal year end from December 31 to a 52 
or 53 week year ending on the Friday nearest December 31.  Accordingly, the 
1996 fiscal year ended on January 3, 1997 (and included 53 weeks) whereas the 
previous fiscal year ended on December 31 (and included 52 weeks).  The 
change was made to help facilitate the financial closing process.  The effect 
of the change was to increase net sales for 1996 by approximately $6,000,000. 
The impact of the change on net income for fiscal year 1996 was not material.

                                     F-22
<PAGE>
                                       
                          DAL-TILE INTERNATIONAL INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17.  CONDENSED UNCONSOLIDATED FINANCIAL STATEMENTS

Provided below are the condensed unconsolidated financial statements of 
Dal-Tile International Inc.:

<TABLE>
                                                   JANUARY 2,  JANUARY 3,
                                                     1998         1997
                                                   ----------  ----------
                                                      (IN THOUSANDS)
<S>                                                <C>         <C>
Condensed balance sheets:
    Cash. . . . . . . . . . . . . . . . . .         $   59      $     97 
    Other assets. . . . . . . . . . . . . .          9,151         8,286 
    Investment in Dal-Tile Group Inc., 
      net of accumulated losses . . . . . .              -       108,507 
                                                    ------      --------
                                                    $9,210      $116,890 
                                                    ------      --------
                                                    ------      --------

Senior secured zero coupon notes. . . . . .         $  157      $    140 

Other liabilities . . . . . . . . . . . . .          1,232         1,181 

Accumulated losses, net of investment 
in Dal-Tile Group Inc.. . . . . . . . . . .          3,901             -
Stockholders' equity. . . . . . . . . . . .          3,920       115,569 
                                                    ------      --------
                                                    $9,210      $116,890 
                                                    ------      --------
                                                    ------      --------
</TABLE>

<TABLE>
                                                                   YEAR ENDED
                                                      ----------------------------------------
                                                      JANUARY 2,    JANUARY 3,    DECEMBER 31,
                                                         1998          1997          1995
                                                      ----------    ----------    ------------
                                                                 (IN THOUSANDS)
<S>                                                   <C>           <C>           <C>
Condensed statements of operations:
   Equity in net income (loss) 
     of Dal-Tile Group Inc.  . . . . . . .            $(110,739)     $ 11,841       $14,125
   Other expense (income). . . . . . . . .                 (520)         (511)          450
   Interest income . . . . . . . . . . . .                   --           921           142
   Interest expense  . . . . . . . . . . .                   17         7,919        11,677
                                                      ---------      --------       -------
   Net income (loss) . . . . . . . . . . .            $(110,236)     $  5,354       $ 2,140
                                                      ---------      --------       -------
                                                      ---------      --------       -------
Condensed statements of cash flows:
   Cash flow used in operating 
    activities . . . . . . . . . . . . . .            $    (129)     $ (6,303)      $  (687)
   Financing activities:
   Proceeds from sale of stock and 
    equity infusion  . . . . . . . . . . .                   --       102,558        27,575
   Investment in Dal-Tile Group Inc. . . .                   91       (18,134)           --
   Fees and expenses incurred in debt 
    refinancing. . . . . . . . . . . . . .                   --        (9,457)           --
   Repayment of long-term debt at time of 
    refinancing. . . . . . . . . . . . . .                   --       (98,938)           --
                                                      ---------      --------       -------
   Net increase (decrease) in cash . . . .                  (38)      (30,274)       26,888
   Cash at beginning of period . . . . . .                   97        30,371         3,483
                                                      ---------      --------       -------
     Cash at end of period . . . . . . . .            $      59      $     97       $30,371
                                                      ---------      --------       -------
                                                      ---------      --------       -------
</TABLE>

                                     F-23
<PAGE>
                                       
                          DAL-TILE INTERNATIONAL INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

18.  SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a tabulation of the unaudited quarterly results of 
operations for the years ended January 2, 1998 and January 3, 1997:

<TABLE>
                                                   FIRST         SECOND          THIRD         FOURTH
                                                  QUARTER        QUARTER        QUARTER        QUARTER
                                                  -------        -------        -------        -------
                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                               <C>            <C>            <C>            <C>
Year ended January 2, 1998:
  Net sales  . . . . . . . . . . . . . . . . . .  $167,409       $173,742       $177,731       $157,755
  Gross profit . . . . . . . . . . . . . . . . .    83,188         73,609         46,270         68,842
  Operating income (loss)  . . . . . . . . . . .    17,303        (11,891)       (64,675)       (10,373)
  Net income (loss)  . . . . . . . . . . . . . .     6,527        (13,803)       (80,939)       (22,021)
  Per share:
      Net income (loss) - basic  . . . . . . . .      0.12          (0.25)         (1.51)         (0.41)
                        - assuming dilution. . .      0.12          (0.25)         (1.51)         (0.41)
Year ended January 3, 1997
  Net sales. . . . . . . . . . . . . . . . . . .  $170,674       $180,849       $184,386       $184,327
  Gross profit . . . . . . . . . . . . . . . . .    82,734         85,334         90,602         91,835
  Operating income . . . . . . . . . . . . . . .    14,224         21,927         31,072         30,641
  Income before extraordinary item . . . . . . .       930          4,889         13,175         15,432
  Extraordinary item . . . . . . . . . . . . . .         -              -        (29,072)             -
  Net income (loss). . . . . . . . . . . . . . .       930          4,889        (15,897)        15,432
  Per share:
    Income before extraordinary
                  item - basic  . . . . . . . .       0.02           0.11           0.27           0.29
                       - assuming dilution. . .       0.02           0.10           0.26           0.28

    Extraordinary item - basic. . . . . . . . .          -              -          (0.59)             -
                       - assuming dilution. . .          -              -          (0.57)             -
    Net income (loss)  - basic. . . . . . . . .       0.02           0.11          (0.32)          0.29
                       - assuming dilution. . .       0.02           0.10          (0.31)          0.28
</TABLE>

The 1996 and first three quarters of 1997 earnings per share amounts have 
been restated to comply with SFAS 128.

The sum of quarterly per share amounts does not necessarily equal the annual 
amount reported, as per share amounts are computed separately for each 
quarter and the full year based on respective weighted average of common and 
common equivalent shares outstanding.  Share amounts used in the calculation 
of net income (loss) per share amounts above are after giving effect to the 
Company's common stock conversion in August 1996.

During the second quarter of 1997, the Company recorded charges of 
$24,700,000 primarily for the write-down of trade accounts receivable and 
inventories.  The charge is comprised of $8,400,000 in cost of sales and 
$16,300,000 in selling, general and administrative expenses.

During the third quarter of 1997, the Company recorded charges of $65,400,000 
primarily for the write-down of obsolete and slow-moving inventories, 
uncollectible trade accounts receivable, other non-productive assets and 
costs for restructuring manufacturing, store operations and corporate 
administrative functions.  The charge is comprised of $28,100,000 in cost of 
sales, $3,500,000 in transportation expense and $33,800,000 in selling, 
general and administrative expenses.

The write-down of uncollectible trade accounts receivable related to 
increases in receivables balances arising principally as a result of earlier 
sales initiatives that included, among other things, extended credit terms 
and efforts to expand the Company's customer base, and operational and 
systems integration issues that resulted in limited access by sales center 
personnel to certain account information.  In addition, in an effort to 
improve customer service, authority to extend credit was decentralized and 
assigned to management at the retail sales centers.  Sales resulting from 
these initiatives were a result of products being shipped under defined terms 
to customers, with the full expectation of invoiced amounts being paid in 
full within the terms of the sale.  In response to deterioration in the aging 
of the Company's accounts receivable, primarily as a result of the sales 
initiatives and operational and systems integration issues, the Company 
increased collection efforts and undertook detailed reviews of 
collectibility, and subsequently recorded increases in the reserve for 
doubtful accounts of $7,600,000 in the second quarter of fiscal year 1997, 
and $13,700,000 as of the third quarter of fiscal year 1997.  The sales 
initiatives, which began in the fourth quarter of fiscal year 1996, were 
discontinued by the end of the second quarter of fiscal year 1997.  In 
addition, by the end of the second quarter of fiscal year 1997, the Company 
moved to a more centralized credit approval process and implemented more 
stringent credit policies.

At the end of the second quarter of fiscal year 1997, the Company also 
extensively reviewed its finished product inventories, including the various 
patterns, shapes and sizes of finished product inventories.  Based on this 
analysis, an adjustment of approximately $8,400,000 was recorded as of the 
end of the second quarter of fiscal year 1997 to reflect the write-down of 
inventory believed to be slow moving and/or obsolete, or out of balance with 
other related products.  Management believes that delays in systems 
integration resulted in impaired inventory management, and, in particular, 
resulted in an imbalance in inventory mix.  During the third quarter of 
fiscal year 1997, the Company's new management undertook an additional study 
of the business and its operations and determined that it would reduce the 
number of SKU's offered for sale by the Company and would discontinue 
additional patterns.  These actions, coupled with the results of physical 
inventories and the delay in systems integration, resulted in a need to 
record additional inventory provisions of $28,100,000 consisting of 
$14,200,000 related to results of physical inventories, $7,300,000 of 
additional write-down for obsolete inventory, $4,500,000 write-down for 
certain other inventory accounts and $2,100,000 write-down for raw materials. 
Management believes that progress in its systems integration resulted in 
substantially improved inventory management by the end of the third quarter 
of fiscal year 1997.

The balance of the charges recorded in the second quarter of fiscal year 1997 
consisted of $2,500,000 in respect of terminated employees and $6,200,000 
in respect of other charges, primarily related to liabilities incurred for 
lease terminations, executive search fees, and other items.  The balance of 
the charges recorded in the third quarter of fiscal year 1997 consisted of 
$4,200,000 in respect of terminated employees, $8,500,000 in respect of 
accrued expenses, primarily related to freight and insurance, $5,300,000 in 
respect of fixed asset impairment and $5,600,000 in respect of other 
charges, primarily related to write-down of notes, non-trade receivables and 
certain other assets.

                                     F-24