SECURITIES AND EXCHANGE COMMISSION


                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)
[X]               Annual Report Pursuant to Section 13 or 15(d)
             of the Securities Exchange Act of 1934 (Fee Required)

                   For the Fiscal Year Ended December 31, 1995

                                       OR

[_]             Transition Report Pursuant to Section 13 or 15(d)
            of the Securities Exchange Act of 1934 (No Fee Required)

                           Commission File No 0-10181

                             ELJER INDUSTRIES, INC.
             (Exact name of registrant as specified in its charter)

           Delaware                                        75-227087
(State or other jurisdiction of                        (I.R.S. Employer
 incorporation or organization)                       Identification No.)

        17120 Dallas Parkway
            Dallas, Texas                                   75248
(Address of principal executive offices)                 (Zip Code)

       Registrant's telephone number, including area code: (214) 407-2600

Securities registered pursuant to Section 12(b) of the Act:
                                                          Name of each exchange
     Title of each class                                   on which registered

Common Stock, $1 par value                               New York Stock Exchange
Common Stock Purchase Rights                             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 5, 1996,  there were  outstanding  7,152,252  shares of the
registrant's  common  stock,  par value $1, which is the only class of common or
voting stock of the registrant.  As of that date, the aggregate  market value of
the shares of common stock held by nonaffiliates of the registrant (based on the
closing  price for the common  stock on the New York Stock  Exchange on March 5,
1996) was approximately $76,112,000.

                       Documents Incorporated by Reference
           The  information  called for by Part III is incorporated by reference
to the definitive  Proxy Statement for the Annual Meeting of Stockholders of the
Company to be held April 16, 1996,  which will be filed with the  Securities and
Exchange Commission not later than 120 days after December 31, 1995.



<PAGE>



Item 1.       BUSINESS

                                   BACKGROUND

General

         Eljer Industries, Inc. through its subsidiaries ("Eljer Industries" or,
together with its subsidiaries, the "Company") is a leading manufacturer of high
quality building products for residential construction,  commercial construction
and repair and remodeling markets. The Company manufactures and markets plumbing
and heating, ventilating and air conditioning ("HVAC") products in North America
and HVAC products in Europe.  The Company markets its products through wholesale
distribution  channels  and, in North  America,  directly  to building  products
retailers.  In North America, Eljer Industries is one of three leading full-line
suppliers of bath and kitchen  fixtures and faucets and is a leading supplier of
registers,  grilles and  venting  systems.  In Europe,  the Company is a leading
manufacturer of prefabricated chimneys and venting systems.  During fiscal years
1995,  1994 and  1993,  revenues  from  sales  of  plumbing  products  comprised
approximately 59%, 61% and 59%,  respectively,  of the Company's net sales, with
the balance derived from the sale of HVAC products.

o         North American Operations

         Eljer  Plumbingware,  a division of Eljer  Manufacturing,  Inc. ("Eljer
Manufacturing"), a wholly-owned subsidiary of Eljer Industries, manufactures and
markets a full line of plumbing  fixtures,  including vitreous china toilets and
lavatories  and enameled  cast iron tubs,  whirlpools  and  lavatories.  It also
markets faucets manufactured by United States Brass Corporation ("U.S.  Brass"),
a wholly-owned subsidiary of Eljer Manufacturing.

         U.S. Brass  manufactures and markets a full range of faucets,  plumbing
supplies,  connectors and flexible plumbing systems in the United States. On May
23, 1994, U.S. Brass filed a voluntary petition for reorganization under Chapter
11 of the Federal  Bankruptcy Code (the "Bankruptcy  Code") in the United States
Bankruptcy Court for the Eastern District of Texas (the "Bankruptcy Court"). See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  in Item 7 and Note 2 to the  Consolidated  Financial  Statements in
Item 8 for further discussion.

         Selkirk  Metalbestos  and Dry  Manufacturing,  each  divisions of Eljer
Manufacturing,  manufacture  and  market  HVAC  products,  including  registers,
grilles, venting systems,  prefabricated chimneys, air diffusers and fireplaces.
Combined,   Selkirk  and  Dry,  along  with  a  Selkirk   subsidiary  in  Canada
("Selkirk/Dry"),  are a market leader for registers, grilles and venting systems
in North America.

         In February 1995, the Company formed  Industrias Eljer de Mexico,  S.A.
de C.V.,  ("Eljer de Mexico") under the laws of Mexico.  Eljer de Mexico engages
in  certain  assembly  and  packaging  operations  on behalf of the  Company  in
Ojinaga, Chihuahua, Mexico.

o         European Operations

         The Company has European subsidiaries operating primarily in the United
Kingdom and Germany ("Selkirk Europe").  Selkirk Europe manufactures and markets
a  full  line  of   prefabricated   chimneys   and  venting   systems  for  both
commercial/industrial  and residential  markets.  These products are used in new
construction,  as well as for  repair and  replacement  uses,  including  energy
conversion.  The energy conversion from coal to oil and gas is a major source of
demand for Selkirk Europe's venting products.  Selkirk Europe is a market leader
for these  products  in Europe,  and also sells its  products  in other  markets
around the world.



                                        1

<PAGE>



History

         The  "Eljer"  business  name  traces its  origin to a  plumbing  supply
manufacturing  business  formed  in 1904.  The  Company's  North  American  HVAC
products  business  originated in 1925, U.S. Brass became a plumbing  company in
1962 and the  Company's  European  business  dates  from 1964.  Through  various
transactions in the 1980's, Household International, Inc. ("Household") acquired
the businesses that now make up Eljer Industries.

         Eljer  Industries  itself was organized  under the laws of the State of
Delaware on January 26, 1989, as a wholly-owned  subsidiary of Household.  Under
Household's  ownership,  various Eljer businesses operated as subsidiaries or as
divisions of subsidiaries  of Household.  On April 14, 1989, all the outstanding
shares of common  stock of Eljer  Industries  were  distributed  to  holders  of
Household  common  stock  (the  "spin-off").  The  Company  has  operated  as  a
publicly-held corporation since that date.

                             DESCRIPTION OF BUSINESS

Products

         Plumbing Fixtures. Eljer Plumbingware manufactures and markets enameled
cast iron and vitreous china plumbing fixtures,  including  toilets,  lavatories
and bathtubs for residential  and commercial  applications.  Eljer  Plumbingware
also markets faucets and acrylic bathtubs and whirlpools for these applications.
Eljer Plumbingware's line of products includes bathroom and kitchen fixtures for
new  and  remodeled  construction.  Eljer  Plumbingware  regularly  updates  its
products  and colors in response  to  changing  style  trends and  develops  new
products  as the  market  demands.  Eljer  Plumbingware  has  been a  leader  in
developing and manufacturing low water consumption 1.6 gallon toilets, which are
statutorily  mandated throughout the United States.  Eljer Plumbingware offers a
broad line of such products.

         Cast  iron and  vitreous  china  fixtures  are  sold  under  the  Eljer
trademark.  The Company  manufactures  vitreous  china  fixtures in two domestic
plants and imports  certain  specialized  fixtures from Thailand.  Enameled cast
iron fixtures are  manufactured at one domestic plant.  See "Properties" in Item
2.

         Faucets,  Plumbing Supplies and Systems. U.S. Brass manufactures a wide
range of faucets,  plumbing  supplies and plumbing  systems for  residential and
commercial construction,  remodeling and do-it-yourself applications. U.S. Brass
markets these products under the Valley, Eastman and Qest trademarks. The Valley
trademark applies to faucets ranging from competitively  priced bathroom faucets
to high-end luxury models (Valley Plus) and also includes kitchen faucets. Eljer
Plumbingware  markets,  under the Eljer trademark,  faucets manufactured by U.S.
Brass that  complement its fixture line.  U.S. Brass also  manufactures  several
private label faucets for large  retailers.  Eastman  plumbing  supplies include
supply  tubes  and  valves,  fittings,  air  gaps  and  flexible  gas and  water
connectors.  Qest plumbing  systems,  incorporating  polybutylene pipe and metal
connective  fittings,  offer ease of  installation,  freeze  tolerance  and cost
reduction to builders and plumbing  contractors.  In 1996, U.S. Brass will begin
manufacturing and marketing QestPEX plumbing systems. QestPEX uses pipe extruded
from cross-linked  polyethylene  ("PEX") resin. The Company believes the QestPEX
system offers the same favorable attributes as the Qest polybutylene system. The
sale of the  Qest  polybutylene  system  will  be  phased  out in 1996 as  Shell
Chemical Company ("Shell Chemical"), a subsidiary of Shell Oil Company, the only
supplier of polybutylene  resin, has announced it will no longer sell this resin
for plumbing applications in the U.S. Polybutylene plumbing systems using acetal
fittings (the "Qest system"),  manufactured and sold for residential  site-built
installations  from 1979 through 1986,  and for other  installations  from about
1975  through  1990,  have been the  subject of  litigation.  See  "Management's
Discussion  and Analysis of Financial  Condition and Results of  Operations"  in
Item 7, and Notes 2 and 13 to the Consolidated Financial Statements in Item 8.

         Heating,  Ventilating  and  Air  Conditioning  Products.  The  Company,
through Selkirk/Dry and Selkirk Europe,  manufactures and markets, in the United
States, Canada and Europe,  prefabricated chimneys, venting systems,  registers,
grilles and other related specialty items.

         The Company believes it is a leading manufacturer of venting systems of
its  type  in  North  America  and  in Europe. These venting systems are used in
residential, commercial and industrial construction primarily to provide venting
of  discharge from a furnace, appliance, boiler or diesel engine to the outside.
Eljer Industries'

                                        2

<PAGE>



brands in North America are sold primarily under the Metalbestos,  Airmate, P.S.
Chimney and Sel-Vent trademarks and in Europe under the Selkirk, Nova, Supra and
Europa trademarks.

         Selkirk/Dry's  products  are  used  primarily  in new  residential  and
commercial  construction and are marketed in the United States under the Airmate
and Sel-Aire  trademarks and in Canada under the Lloydaire  trademark.  They are
also sold in the retail  market under the Showcase  trademark.  The Company also
manufactures   other  specialty   products,   including  gas  and   wood-burning
fireplaces.

Markets and Distribution

         Plumbing.  The Company  markets  plumbing  products  primarily in North
America  through  agents and direct  salesmen.  The Company also sells  plumbing
products  through  wholesale  distributors  in the Far and  Middle  East.  Eljer
Industries  supports its product lines with a variety of advertising,  including
national and trade magazines.  Plumbing products are sold domestically primarily
through two major channels of  distribution:  (1) plumbing  wholesalers  and (2)
retail outlets. Sales through retail channels accounted for approximately 39% of
net plumbing sales in 1995.

         Plumbing  products  sold by the Company are used  primarily in new home
construction and  repair/remodeling;  therefore demand for plumbing  products is
closely related to the rate of new housing starts and fluctuations in remodeling
and repair activities.  The housing market is cyclical and is affected primarily
by interest rates,  consumer  confidence and the availability of mortgage loans.
The repair and  remodeling  markets  are less  cyclical,  providing  a different
source of demand for plumbing  products and reducing the  Company's  reliance on
new home construction.  Both housing starts and the repair and remodeling market
experienced  declines in 1995, and many  published  forecasts  indicate  housing
starts will continue at relatively  low levels in 1996. The other end use of the
Company's plumbing products is the commercial/industrial  market, which consists
of hotels, health care facilities, educational and penal institutions and office
buildings.

         The markets for plumbing products are highly  competitive.  Competition
is based on brand  recognition,  design  and  quality  of the  product,  product
performance,  price and service,  with the relative  importance of these factors
varying among  products and markets.  The Company,  Kohler  Company and American
Standard,  Inc.  are the better  recognized  companies  selling  fixtures in the
United States. The Company believes that overall it has the third largest market
share in the  plumbing  fixtures  market.  The Company also is a supplier in the
faucet   market,   in  which  there  are  numerous  major  domestic  and  import
manufacturers, several of which are substantially larger than the Company.

         HVAC.  The  Company's  HVAC  products  are  used  in  the  residential,
industrial and commercial  construction  markets for new construction and repair
and  remodeling  applications.  HVAC  products  are sold  primarily  to regional
wholesalers and through  retailers and contractors.  Sales of these products are
subject to customer demand and general business  conditions in these markets and
the North  American and European  economies.  The Company  believes that eastern
European  markets,  as they  convert to natural gas,  represent a strong  market
potential in the future, depending on the economic environment.

         In all major HVAC product lines there are a variety of competitors  who
aggressively  compete for market share.  Competition is based primarily on brand
recognition,  product design,  product  quality,  range of product line,  price,
service and  engineering  support.  The Company  believes that it is competitive
with respect to each of these factors.

Raw Materials

         The manufacture of plumbing products requires clay, iron, brass, copper
and plastic,  including polybutylene resin. Other than polybutylene resin, which
is currently produced domestically only by Shell Chemical,  these materials are,
and have been, readily available from several sources.  In the past, the Company
has not  experienced  difficulty  in  obtaining  polybutylene  resin  from Shell
Chemical as needed.  However,  subsequent to yearend,  Shell Chemical  announced
that it will  discontinue  the sale of  polybutylene  resin  effective April 16,
1996. In 1996,  the Company will introduce a new product,  QestPEX,  utilizing a
cross- linked  polyethylene  ("PEX") resin. PEX resin is readily  available from
several sources.


                                        3

<PAGE>



         The major raw materials  used in the  manufacture  of HVAC products are
cold-rolled steel,  galvanized steel,  stainless steel coils and aluminum coils.
These  materials are readily  available from several sources and the Company has
experienced no difficulties with respect to availability of these materials.

                         FOREIGN AND DOMESTIC OPERATIONS

         See  Note 15 to the  Consolidated  Financial  Statements  in Item 8 for
geographic segment financial data.

                                     GENERAL

         Customers.  The Company is not dependent upon any single  customer,  or
upon any  single  group of  customers,  the loss of which  would have a material
adverse effect on the Company.

         Backlog of Orders and  Inventory.  The  backlog  of  unshipped  factory
orders at the end of fiscal years 1995 and 1994 was approximately  $17.1 million
and $19.8  million,  respectively.  The Company  expects  that all the orders in
backlog at the end of fiscal year 1995 will be shipped  during 1996. The Company
must carry inventory of certain products to meet rapid delivery  requirements of
its customers.

         Employees.    The   Company   employs   approximately   3,700   people,
approximately 1,600 of whom are covered by collective bargaining agreements with
various labor unions. The collective  bargaining  agreement at the manufacturing
plant in Nampa,  Idaho,  expired  July 8,  1991.  The  plant has been  operating
without a contract  since that date. A new three year  agreement  was reached at
the Company's Ford City,  Pennsylvania,  plant  effective May 27, 1995,  without
production  interruption.  This was the only  location  for  which an  agreement
expired in 1995.  The Company's  other  collective  bargaining  agreements  have
expiration  dates  in  1996  or  in  1997.  On  March  5, 1996, employees at the
Company's  Salem,  Ohio,  plant  did  not  approve  a  new collective bargaining
agreement  and a strike commenced.  While the Company does not have any means to
predict  the  length  of  the  work  stopage,  it is hopeful an agreement can be
reached quickly.  In general, relations with employees have been satisfactory.

         Patents and  Trademarks.  The Company has a number of United States and
foreign  patents  and also  holds a number  of  patent  applications,  licenses,
trademarks and trade names,  including the trademarks  mentioned herein.  Except
for certain trademarks mentioned herein, none of the foregoing is believed to be
material to the Company.

         Other.  No material  portion of the Company's  operations is subject to
renegotiation  of profits or  termination  of  contracts  at the election of the
federal  government.  The  Company's  operations,  taken  as a  whole,  are  not
significantly seasonal, although many products experience increased sales during
the second and third  quarters  of the year due to larger  housing  construction
activity,  and certain HVAC products often experience higher sales in the autumn
months.



                                        4

<PAGE>



Item 1a.        EXECUTIVE OFFICERS OF THE REGISTRANT

         Set forth below are the names,  ages,  titles with Eljer Industries and
principal  occupations  and  employment for the past five years of the executive
officers of Eljer Industries.


<TABLE>
<CAPTION>
            Name and Age                                              Office and Experience

<S>                                           <C>
Scott G. Arbuckle, 64.........................President and Chief Executive Officer. Mr. Arbuckle has served
                                               in his current position since February 1990. Mr. Arbuckle
                                               previously served as Executive Vice President of Eljer Industries
                                               and President of the HVAC Group. He joined U.S. Brass in 1963.

James A. Harris, 39............................Executive Vice President.  Mr. Harris has served in his
                                               current position since January 1996 and also serves as the
                                               President of Eljer Manufacturing, Inc. Mr. Harris previously served
                                               as Vice President-Sales and Marketing of Eljer Industries from
                                               January 1992 to December 1995. Prior to January 1992, Mr.
                                               Harris served as Vice President-Marketing.

Brooks F. Sherman, 35..........................Vice President-Finance, Chief Financial Officer and Treasurer.  Mr.
                                               Sherman has served in his current position since June 1995.  Mr.
                                               Sherman previously served as Controller, Treasurer and Assistant
                                               Secretary since April 1991 and as Controller and Assistant
                                               Secretary since 1989.

James F. Thomason, 61..........................Vice President-Manufacturing. Mr. Thomason has served in his
                                               current position since April 1991, having previously served as
                                               Group President-Selkirk/Dry N.A. from April 1990 to April 1991.
                                               Prior to joining Eljer Industries, Mr. Thomason served in various
                                               management positions with the Kohler Company, most recently as
                                               Vice President-Operations for Plumbing and Specialty Products,
                                               International.

George W. Hanthorn, 48.........................Vice President-General Counsel and Secretary.  Mr. Hanthorn
                                               has served in this position since October 1994.  Mr. Hanthorn
                                               previously served as Senior Vice President-General Counsel and
                                               Secretary of Greyhound Lines, Inc., Dallas, Texas, a publicly-held
                                               transportation services company, from 1990  to 1994, and as Vice
                                               President, General Counsel and Secretary of Greyhound Lines,
                                               Inc. from 1987 to 1990.

Nancy J. Duricic, 41...........................Vice President-Human Resources.  Ms. Duricic has served in her
                                               current position since January 1996.  Ms. Duricic previously
                                               served as Director-Human Resources from June 1995 to
                                               December 1995, as Director-Compensation and Benefits from
                                               January 1992 to June 1995, and as Manager of Employee
                                               Benefits since September 1990.



                                        5

<PAGE>



Steven M. Rodman, 41...........................Vice President-Sales and Marketing.  Mr. Rodman has served in
                                               his current position since January 1996, having previously served
                                               as Eljer Manufacturing, Inc.'s Vice President-Consumer Sales
                                               since joining the Company in August 1992.  Mr. Rodman
                                               previously served as Director of Sales for Artesian Plumbing
                                               Products, Mansfield, Ohio, a privately-held plumbing fixture
                                               manufacturer.

Gerald J. Morris, 55...........................Controller and Assistant Secretary.  Mr. Morris has served in his
                                               current position since June 1995 and has held a variety of division
                                               controllership positions since joining the Company in February
                                               1981, most recently as Controller-Manufacturing.
</TABLE>

                                        6

<PAGE>



Item 2.         PROPERTIES

         The following table sets forth the location, approximate square footage
and use of each of the principal manufacturing plants of the Company,  separated
by  the  operating  unit  or  subsidiary  which operates the facility. Except as
indicated in the table, all the plants are owned by the Company.

<TABLE>
<CAPTION>
                                           Approximate
             Location                    Square Footage                             Use

<S>                                         <C>               <C>
Eljer Plumbingware:
      Ford City, Pennsylvania.........      736,000           Manufacture of vitreous china products.
      Salem, Ohio.....................      477,000           Foundry-manufacture of enameled cast iron products.
      Tupelo, Mississippi<F1>..........     422,000           Manufacture of vitreous china products.
U.S. Brass:
      Abilene, Texas..................      174,000           Manufacture of faucets.
      Commerce, Texas.................      172,000           Manufacture of flexible plumbing systems and brass
                                                              and copper gas and water connectors.
      Plano, Texas....................       98,000           Manufacture of brass plumbing supplies.
      Elkhart, Indiana................       97,000           Manufacture of flexible plumbing systems.
Selkirk/Dry:
      Winters, Texas..................      337,000           Manufacture of registers, grilles, diffusers and gas
                                                              vents.
      Logan, Ohio.....................      194,000           Manufacture of gas vents and chimney systems.
      Nampa, Idaho....................      154,000           Manufacture of gas vents and chimney systems.
      Coleman, Texas..................      110,000           Manufacture of registers, grilles and fireplaces.
      Brockville, Ontario, Canada.....       75,000           Manufacture of fireplaces and chimney systems.
      Mississauga, Ontario, Canada<F2>       55,000           Manufacture of registers and grilles.
Selkirk Europe:
      Barnstaple, England.............       92,000           Manufacture of gas vents and chimney systems.
      Mullicott Cross, England........       68,000           Manufacture of venting and specialty products.
Eljer de Mexico:
      Ojinaga, Mexico<F3>..............      19,000           Assembly and packaging.
------------
<FN>
<F1>    Leased until 2066
<F2>    Leased until 1999
<F3>    Leased until 1998
</FN>
</TABLE>

         In general,  the manufacturing  facilities for plumbing products are in
good  condition and are operating at capacities  which range from  approximately
45% to 95%.

         The  manufacturing  facilities  for gas vents and  chimney  systems are
presently  operating at approximately  70% capacity,  except the Canadian plant,
which is  operating  at a lower  capacity  level.  The plants  which are used to
manufacture registers, grilles and other specialty items are presently operating
at approximately 90% capacity except the Canadian plant, which is operating at a
lower capacity level. Each of these facilities is in good condition.

         All Selkirk/Dry and Eljer Plumbingware  properties,  with the exception
of the Salem,  Ohio, plant,  secure the Company's  domestic bank term loans. The
Commerce,  Texas,  location secures certain industrial revenue bond obligations.
All owned  properties in England secure both the revolving  credit agreement and
the term  debt in the  United  Kingdom.  See  Notes 3 and 7 to the  Consolidated
Financial Statements in Item 8 for further discussion.

         In addition to the  foregoing,  the Company  owns or leases a number of
warehouse distribution centers throughout the United States.



                                        7

<PAGE>



Item 3.       LEGAL PROCEEDINGS

         U.S. Brass

         U.S. Brass is involved in  significant  legal  proceedings  including a
number of claims which involve Qest systems manufactured and sold by U.S. Brass.
On May 23, 1994, U.S. Brass filed a voluntary petition for reorganization  under
Chapter 11 of the Bankruptcy Code. See "Liquidity and Capital Resources" in Item
7 and Note 2 to the Consolidated  Financial  Statements in Item 8 for discussion
of the litigation and the related bankruptcy proceeding.

         Household Litigation

         The Company is currently involved in litigation with Household relating
to the spin-off.  See Note 14 to the Consolidated Financial Statements in Item 8
for further discussion.

         Environmental Proceedings

         The  Company   operates   plants  that  may  generate   hazardous   and
non-hazardous  waste,  disposal  of  which  is  subject  to  federal  and  state
regulation.  The past disposal of hazardous and non-hazardous waste generated at
the  Company's  plants  may now be subject to the  requirements  of the  federal
Resource  Conservation and Recovery Act and comparable  state statutes.  Several
Company  facilities  have been  required  to  implement  programs  to remedy the
effects  of  past  waste  disposal.  Not all  plants  have  been  the  focus  of
comprehensive   environmental  studies.   Except   as   described   in   Note 13
to  the  Consolidated   Financial   Statements   in   Item  8,  the  Company  is
not aware of any instances of noncompliance  with currently  applicable  safety,
health and  environmental  laws and  regulations  which might have a significant
adverse  effect on the Company's  financial  condition or results of operations.
With respect to current operating procedures, the Company believes that it is in
material  compliance with such applicable laws and regulations.  The Company has
established  accruals  of  approximately  $15.1  million  at  the  end  of  1995
pertaining  to  environmental,  health  and  safety  matters  which the  Company
believes are adequate. Although the timing of the related payments is uncertain,
the Company  believes  that a  substantial  portion of the payments will be made
over the next three years. See Note 13 to the Consolidated  Financial Statements
in  Item  8  for  discussion  of  individual  sites  and  environmental  related
litigation.

         Additional  information  regarding legal  proceedings of the Company is
set forth herein in Notes 2, 13 and 14 to the Consolidated  Financial Statements
in Item 8, and is incorporated herein by these references.

Item 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of shareholders of Eljer Industries
during the fourth quarter of fiscal year 1995.


                                     PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Market Information for Common Stock

         Eljer  Industries'  common stock is traded  principally on the New York
Stock  Exchange.  The following table reflects the range of high and low selling
prices of Eljer  Industries'  common  stock by quarter  for 1995 and 1994.  This
information  is  based on  selling  prices  as  reported  by the New York  Stock
Exchange.



                                        8

<PAGE>



<TABLE>
<CAPTION>
                                               1995                  1994
                                          ---------------     ------------------
                                           High      Low        High       Low
                                          ------   ------      ------    ------
         <S>                              <C>      <C>         <C>       <C>
         First Quarter....................$6-3/4   $4-1/8      $9-1/4    $6-5/8
         Second Quarter................... 6-1/2    5           8-1/2     5-7/8
         Third Quarter.................... 6-1/4    4-5/8       8-1/2     6-1/2
         Fourth Quarter................... 12       3-3/4       7-3/4     5-1/8
</TABLE>

Holders

         At March 5, 1996, there were  approximately  8,340 holders of record of
common stock.

Dividends

         No  dividends  were  declared  in  fiscal  1995 or 1994.  The  Board of
Directors  intends to review its dividend  policy  regularly  with the intent of
restoring  a cash  dividend  when  appropriate;  however,  Eljer  Industries  is
currently  restricted by certain debt covenants from paying dividends during the
term of its U.S.  term debt  agreement.  See  Notes 3 and 7 to the  Consolidated
Financial Statements in Item 8.

Item 6.       SELECTED FINANCIAL DATA

         The  following  table  presents   selected   financial  data  of  Eljer
Industries.  This  historical  data  should  be read  in  conjunction  with  the
Consolidated  Financial  Statements  and the related notes thereto in Item 8 and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" in Item 7.

<TABLE>
<CAPTION>
                                                               1995      1994        1993         1992       1991
                                                             -------    ------      ------       ------     ------
                                                                      (In millions, except per share amounts)

<S>                                                          <C>        <C>         <C>          <C>        <C>   
Net sales............................................        $397.4     $406.1      $387.6       $397.3     $402.5
Income from operations before unusual
     items...........................................          20.6       22.1        21.1         23.4       19.0

Income (loss) from operations........................          21.3         .3<F3>    21.1         23.4      (33.9)
Income (loss) before income taxes....................           6.8      (12.4)<F3>    6.4          9.4      (47.8)
Income (loss) before extraordinary item
     and cumulative effects of changes in
     accounting principles...........................           4.9      (12.2)<F3>    3.9         (2.1)     (59.7)
Net income (loss)....................................           4.9      (12.2)<F3>    3.9        (57.3)<F2> (59.7)
Earnings (loss) per share before
     extraordinary item and cumulative
     effects of changes in accounting
     principles......................................           .69      (1.72)<F3>    .55         (.30)     (8.46)
Earnings (loss) per share............................           .69      (1.72)<F3>    .55        (8.11)<F2> (8.46)
Total assets.........................................         249.0      257.1       235.4        254.4      239.2
Long-term debt.......................................          81.7       83.0       103.1        114.8       87.7<F1>
Dividends per common share...........................             -          -           -            -          -
---------------------
<FN>
<F1>     Includes long-term debt subject to restructure, included in Current Liabilities at the end of 1991.
<F2>     Includes an extraordinary  charge of $16.0 million ($2.26 per share) and cumulative  effects of changes in accounting
         principles of $39.2 million ($5.55 per share).
<F3>     Includes a $21.9 million unusual charge related to U.S. Brass.  See Note 2 to the Consolidated  Financial  Statements
         in Item 8 for additional discussion.
</FN>
</TABLE>


                                        9

<PAGE>



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

Results of Operations

         Year ended December 31, 1995 ("1995")  compared with year ended January
1, 1995 ("1994")

         Net sales  decreased $8.7 million,  or 2.1%, for 1995 compared to 1994.
The decline is due to an approximate 8% decline in U.S.  housing  starts.  North
American  sales  declined  $13.0  million  or 3.8%.  To offset  the  decline  in
traditional  sales resulting from the depressed new housing market,  the Company
increased sales through retail channels  approximately $2.1 million by expanding
its product line offerings to existing retail accounts. Partially offsetting the
North American decline,  European operations achieved a $4.3 million increase in
net  sales.  The  improved  European  results  were  due  to  multiple  programs
instituted to increase sales combined with favorable  exchange rates.  Published
forecasts indicate that 1996 U.S. housing starts will not improve  significantly
over 1995  levels.  Eljer will  continue  to  evaluate  alternative  markets and
channels of distribution to balance the demand for its products.

         Gross profit  margins  decreased to 25.7% in 1995  compared to 27.8% in
1994.  This decline is primarily  due to  significant  increases in raw material
costs in both North  America and Europe  including  brass,  aluminum,  stainless
steel, copper and polybutylene resin. In response, the Company implemented price
increases on all product lines  containing these materials during the first half
of 1995.  During the last half of 1995 these price  increases began to favorably
impact  results.  Subsequent  to  yearend,  the  Company  was  notified by Shell
Chemical,  the  supplier  of  polybutylene  resin  used  in the  manufacture  of
polybutylene plumbing systems ("Qest"), that effective April 16, 1996, they will
discontinue  the sale of this resin for pipe  applications  in the U.S. In 1996,
the Company will  introduce a new  product,  QestPEX,  utilizing a  cross-linked
polyethylene ("PEX") resin, in the pipe extrusion. Like the Qest system, QestPEX
is a flexible,  freeze  resistant  pipe using metal insert  fittings  with crimp
rings.  This system has been used  effectively in Europe for many years by other
manufacturers.

         In addition,  the gross profit  margins  were  favorably  impacted by a
curtailment gain recorded in connection with a redesign and amendment of certain
of the Company's pension plans covering both salaried and hourly employees.  The
amendments reflect a change in the Company's approach toward employee retirement
plans which includes providing  increased benefits under its 401(k) plan in lieu
of certain of its pension  plans.  The total impact of the  curtailment  gain on
gross profit was $2.2 million.

         Total selling and  administrative  expenses for 1995 were $8.1 million,
or 9.9%, lower than 1994 levels and declined as a percent of sales from 20.1% in
1994 to 18.5% in 1995. The decline is primarily the result of the cost reduction
programs  instituted in each of the Company's  business  units which resulted in
lower  advertising and  administrative  costs.  These  reductions were partially
offset by severance and related costs associated with several management changes
made in mid-1995 to reduce future  expenses and strengthen the management  team.
The Company expects to see the full financial  benefit of these changes in 1996.
Also,  in connection  with the redesign and  amendment of certain  pension plans
discussed above, a curtailment gain was recorded favorably impacting selling and
administrative  expenses by $1.1  million.  Conversely,  the Company  accrued an
additional $1.4 million for environmental  related  liabilities.  See Note 13 to
the Consolidated Financial Statements in Item 8 for further discussion.

         Litigation  costs decreased  approximately  $855,000 in 1995 below 1994
levels primarily as a result of management's  continued efforts to control these
costs in light of the magnitude of the legal matters  facing the Company.  These
costs  include legal fees incurred by both Eljer  Industries  and U.S.  Brass in
connection  with the Chapter 11 bankruptcy  proceeding of U.S. Brass, as well as
the litigation with Household relating to the spin-off.

         As a  result  of  the  uncertainties  related  to the  availability  of
insurance coverage and the ultimate outcome of the bankruptcy  proceeding,  U.S.
Brass recorded a $21.9 million  unusual  charge  against  earnings in 1994 which
reduced  its net book value to zero.  U.S.  Brass  intends to maintain an equity
balance of zero during the course of the bankruptcy.  Accordingly,  in 1995 U.S.
Brass recorded an unusual gain adjustment of approximately  $676,000 to maintain
its equity  balance at zero.  U.S. Brass incurred a net loss in 1995 as a direct
result of $2.1 million in legal fees associated with the bankruptcy.  See Note 2
to the Consolidated Financial Statements in Item 8 for additional discussion.


                                       10

<PAGE>



         Interest expense increased $2.3 million in 1995 over 1994 levels.  This
is due  primarily  to scheduled  rate  increases on debt and an amendment to the
U.S.  term debt  agreement  effected in late 1994. In addition,  prime  interest
rates were higher in 1995.

         Income tax expense  increased to $1.9 million in 1995 from a benefit of
$173,000  in 1994.  The tax  benefit in 1994 was due to  European  and  Canadian
pre-tax losses and the Company's ability to utilize deferred tax benefits in the
United  States.  The Company  continues to utilize  deferred tax benefits in the
United States, but 1995 tax costs were increased by $1.1 million due to payments
associated with unrealizable tax benefits on payments made to Household under an
indemnification  agreement  with  Household.  See  Note  11 to the  Consolidated
Financial Statements in Item 8 for additional discussion.

         1994 compared with year ended January 2, 1994 ("1993")

         Net sales increased 4.8% or $18.5 million over the 1993 level resulting
in the strongest  sales  performance  since 1990. The increase was the result of
strong  performances  in  substantially  all North  American  markets  where the
Company continued to benefit from an improved housing economy and penetration of
its  traditional  channels  of  distribution  and retail  chains.  1994 sales of
products in North America  increased  $27.3 million or 8.7% over the 1993 level.
As anticipated,  European sales continued to decline during 1994,  dropping $8.8
million or 11.8%  despite a $1.6 million  favorable  exchange rate impact due to
the weakening U.S. dollar.

         Gross profit  margins  decreased to 27.8% in 1994  compared to 28.2% in
1993.  The decline  was the result of a  significant  reduction  in the level of
sales of higher margin  products in Europe,  where the market has remained soft,
primarily offset by improved margins on the Company's  plumbing  products due to
increased volume and improved product mix. The Company reengineered the European
operations to reduce costs and  anticipates  the benefits of these  changes,  as
well as expected  modest  economic  strengthening,  should  improve the European
results  in  1995,  although  raw  material  price  increases  will  limit  this
improvement.  The  reengineering  consisted  primarily of the  relocation of the
Company's  operations  in Germany to its  plants in the  United  Kingdom.  Costs
related  to the  restructuring  were  approximately  $867,000  in 1994  and were
covered by accruals established in 1991.

         Gross profit  margins for 1994  improved in North America to 26.5% from
25.6% in 1993. This was primarily  attributable to production  efficiencies  and
better cost absorption associated with increased volume.

         Total  selling and  administrative  expenses for 1994 were  $865,000 or
1.1% higher than the 1993 level ($81.8  million in 1994;  $80.9 million in 1993)
primarily as a result of  increased  sales  incentives  and  commissions  due to
higher sales volume,  partially offset by lower  advertising  costs.  Litigation
costs  continued  to increase in 1994,  rising $1.6 million over the 1993 level.
The higher costs related  primarily to the Chapter 11  bankruptcy  proceeding of
U.S. Brass.  See Note 2 to the Consolidated  Financial  Statements in Item 8 for
additional discussion.

         In December 1994,  U.S.  Brass recorded a $21.9 million  unusual charge
due to uncertainties  related to the availability of insurance  coverage related
to Qest system  claims and its  inability to achieve a prompt  resolution of the
bankruptcy case, reducing its net book value to zero. See additional  discussion
in Note 2 to the Consolidated Financial Statements in Item 8.

         Despite the increased litigation costs, and not considering the unusual
charge  discussed  above,  1994 North American  operating  income increased $6.4
million,  or 40.8%,  over the 1993 level,  more than offsetting the $5.4 million
European decline.

         Interest expense  decreased $2.0 million or 13.6% in 1994 from the 1993
level.  The  decrease  was due  primarily  to the April  1994  expiration  of an
unfavorable  interest  rate swap  agreement  offset  somewhat  by an increase in
interest rates on substantially all North American  borrowings  primarily due to
increases in the prime rate.  Interest expense related to the swap agreement was
approximately $1.3 million and $4.4 million in 1994 and 1993, respectively.

         Income  tax  expense  was  reduced  from $2.5  million in 1993 to a tax
benefit  of  $173,000  in 1994.  This was due to  benefits  realized  related to
certain  European  pretax  losses  in 1994  partially  offset  by the  Company's
inability  to realize  the tax benefit of its loss in the United  States,  which
arose from the unusual charge recorded by U.S. Brass.


                                       11

<PAGE>



         Without  considering the $21.9 million unusual charge  discussed above,
net income  for 1994 would have  increased  $5.7  million  over the 1993  level,
resulting in the Company's best  performance  since its spin-off from Household.
As a result of the unusual  charge,  net income for 1994 decreased $16.1 million
from the 1993 level.

Liquidity and Capital Resources

          The net cash  provided by operating  activities  of $12.3  million was
$1.6 million more than in 1994. In 1994, the cash flow was  negatively  impacted
by a $13.0 million payment to repay all amounts  outstanding under the Company's
prior accounts receivable sales program. Offsetting this payment, cash flow from
operations in 1994 was favorably  impacted by the timing of payments to vendors,
timing of payments under sales incentive programs and higher operating earnings.
The Company has an unfunded  postretirement  benefit obligation of $39.4 million
at the end of 1995. The Company funds its postretirement benefit obligation on a
pay-as-you-go basis. Funding was $1.7 million and $2.9 million in 1995 and 1994,
respectively.

         Capital  expenditures in 1995 were $14.0 million and included  payments
related  to a new  state-of-the-art  kiln and  dryers at the  Company's  Tupelo,
Mississippi,  chinaware plant;  enameling  robots at the Company's Salem,  Ohio,
cast iron plant;  and new welded dual wall chimney  production  equipment at the
Company's  United Kingdom plants,  as well as the replacement and improvement of
capital equipment at various other locations.

         The Company maintains letters of credit securing its casualty insurance
program.  Prior to October 1995, one of these letters of credit was fully cash
collateralized with the financial institution then providing the letter of
credit.  In October 1995, Congress Financial Corp. ("Congress") began providing
this letter of credit and the original financial institution returned the cash
that had been used as collateral.  These funds were then used to reduce the
Company's short-term borrowings.  The letter of credit reduces the amount
available for borrowing under the revolving  credit facility
provided by Congress.  In total, the Company decreased  its short-term
borrowings during 1995 by $4.3 million.  See Note 7 to the Consolidated
Financial Statements  in Item 8 for further discussion of the Company's
financing agreements.

         In total, the Company reduced its long-term  borrowings by $4.4 million
in  1995.  These  payments  were  financed  primarily  with  cash  generated  by
operations and cash on hand.

         In August 1995,  the Company  amended its U.S.  term debt  agreement to
extend the maturity date to January 31, 1997.  Under the terms of the amendment,
a $3.0  million  principal  payment  was made in August  1995 in  addition  to a
$200,000 extension fee. Scheduled principal payments are $2.0 million in January
1996,  $3.0 million in August 1996 and $3.0 million in December  1996,  with the
balance of $67.5 million due at the maturity date of January 31, 1997.  The $3.0
million  December 1996  principal  payment may be  accelerated  to April 1996 if
certain conditions related to the U.S. Brass bankruptcy are not met.

         The Company  intends to explore  some manner of debt  restructuring  or
extension of existing  debt prior to the January 1997 term debt  maturity  date.
Neither the Company nor any of its  subsidiaries has any commitment with respect
to restructuring or other sources of financing or extension of existing debt and
there can be no assurance that any such  commitment or extension can be obtained
prior to the term debt  maturity  date.  Failure to obtain such a commitment  or
extension,  or failure to pay the term debt when due, would  constitute an event
of default thereunder, and would give the lenders the right, if they elect to do
so,  to  foreclose  on the  collateral  which  constitutes  essentially  all the
domestic  assets of the Company  (except  that  pledged  under the  Revolver and
assets  of U.S.  Brass),  including  a  majority  of the  stock  of its  foreign
subsidiaries.  Failure  to pay the term debt when due would  also be an event of
default under the Revolver.

         At yearend  1995,  the Company  was in  compliance  with all  covenants
related  to  its  existing  debt.  See  Note  7 to  the  Consolidated  Financial
Statements in Item 8 for additional discussion of debt.

         As  discussed  in "Legal  Proceedings"  in Item 3 and in Note 13 to the
Consolidated  Financial  Statements in Item 8, after March 31, 1992, the Company
was unable to demonstrate financial responsibility for closure, post-closure and
third  party  liability  with  respect  to its  Salem,  Ohio,  facility  and its
Marysville,  Ohio,  site.  The U.S.  Department  of Justice  (the "DOJ")  sought
payment by the Company  related to the Salem site of a cash  penalty of $175,000
with an additional fine of $912,000 to be held in abeyance pending completion of
the site closure activities without any further violations

                                       12

<PAGE>



of the Company's  financial  assurance  obligations  under Ohio law. The Company
accepted  the DOJ offer and  approved  modification  of a prior  consent  decree
entered  in 1990  relating  to these  issues.  The  modified  consent  decree is
currently  pending  approval by DOJ and entry by the court. The Company believes
it currently meets its financial responsibility requirements regarding the Salem
facility  although the Ohio  Environmental  Protection  Agency  ("Ohio EPA") has
asserted that the Company has not posted sufficient collateral to cover the cost
of  post-closure  care.  The Company  disputes the Ohio EPA's  contention and is
currently negotiating the matter with the Ohio EPA.

         In addition,  the Ohio Attorney  General  threatened  commencement of a
lawsuit for the Company's failure to renew financial  assurance  obligations for
the  Marysville  site under Ohio law. On July 7, 1995,  the Company was informed
that the Ohio Attorney  General  intended to assess a $2.5 million civil penalty
for alleged past financial  assurance  violations  for the  Marysville  site. On
October 5, 1995, the Company  agreed to pay a cash penalty of $750,000,  with an
additional  fine of  $500,000  to be  suspended  pending  completion  of closure
activities at the Marysville  site in accordance with a closure plan approved by
the Ohio EPA. The settlement  also requires the Company to begin funding an $8.5
million trust account through the remainder of 1996,  which would be used to pay
for  implementation  of the closure plan at the Marysville site in order to meet
the  financial  assurance  requirements.  The Company  believes it has  adequate
reserves  established to provide for the cash penalty and  sufficient  cash flow
and debt availability to fund the trust account.

         As discussed in Note 2 to the Consolidated Financial Statements in Item
8, on May 23, 1994 (the "Petition Date"),  U.S. Brass filed a voluntary petition
for  reorganization  under Chapter 11 of the  Bankruptcy  Code in the Bankruptcy
Court.  The  purpose  of the  filing is to  resolve  systematically  the  issues
resulting from the Qest system and related  litigation and to seek  confirmation
of a Plan which, among other things, will provide for the payment,  satisfaction
and discharge of all claims  against U.S.  Brass  involving the Qest system.  On
June  28,  1994,  U.S.  Brass  entered  into  a  debtor-in-possession  financing
agreement  (the "DIP  Financing  Agreement")  with  Congress,  who had  provided
secured  financing  for working  capital  purposes  prior to the Petition  Date.
Pursuant to the DIP Financing  Agreement,  Congress  agreed to provide loans and
advances  in an amount not to exceed $20 million  when added to the  outstanding
amount of advances made by Congress prior to the Petition Date. At yearend 1995,
the  outstanding  principal  amount of such  advances  was  approximately  $10.3
million.  The DIP Financing  Agreement  expires June 1996. If U.S. Brass has not
exited  Chapter 11 prior to that time,  U.S. Brass will seek an extension of its
existing DIP Financing Agreement,  with Bankruptcy Court approval.  Congress has
indicated  its intent to extend the DIP  Financing  Agreement  for an additional
year,  subject to approval by the  Bankruptcy  Court.  There can be no assurance
that such an extension will be granted.

         Between  1988 and July 1991 U.S.  Brass,  Shell  Chemical  and  Hoechst
Celanese  participated in a toll-free  consumer hotline for homeowners with Qest
system claims.  U.S. Brass,  Shell Chemical and Hoechst Celanese shared the cost
of repairs and replacements (the "Sharing  Agreement") until July 1991 when U.S.
Brass  withdrew its  participation.  Shell  Chemical and Hoechst  Celanese  have
settled and  continue  to settle  cases and repair or replace  Qest  systems for
which they contend that U.S.  Brass was or is  partially  responsible  under the
Sharing  Agreement.  Shell Chemical and Hoechst  Celanese no longer provide U.S.
Brass or the  Company  with  information  on the  amount  they  claim  they have
expended  on  settlement  of claims on behalf of U.S.  Brass  under the  Sharing
Agreement.  The previously  reported  litigation  filed by Hoechst  Celanese and
Shell Chemical in New Jersey state court against U.S. Brass, Eljer Manufacturing
and  Household  relating to the Qest system and the  Sharing  Agreement  remains
pending  in the  Bankruptcy  Court on a motion  by Shell  Chemical  and  Hoechst
Celanese to sever the claims against  Household and remand the Household  claims
back to New Jersey state court. Any claims arising out of the Sharing  Agreement
and claims  brought in the New Jersey state court  against U.S.  Brass and Eljer
Manufacturing  would be  resolved in  connection  with the  proposed  settlement
discussed below and further in Note 2 to the Consolidated  Financial  Statements
in Item 8.

         The Official  Polybutylene  Creditor's  Committee (the "PB Committee"),
established  in  the  U.S.  Brass   bankruptcy  case,  has  alleged  that  Eljer
Industries,  Eljer  Manufacturing  and  Household  may be liable for Qest system
claims  under  principles  of alter ego and related  theories of  liability.  On
January 30, 1995, the Bankruptcy Court denied the PB Committee's  motion to file
a proposed  complaint on behalf of U.S.  Brass  against the Company to determine
whether the Company  should be held liable for certain debts of U.S. Brass based
on alter ego liability.  The PB Committee has filed a notice of appeal from that
ruling.  Since the filing of U.S. Brass' bankruptcy  petition,  the PB Committee
and certain co-defendants in the Qest system litigation have asserted that Eljer
Industries and Eljer  Manufacturing are also directly liable for damages arising
from the design,  manufacture and marketing of the Qest system.  However, in one
class

                                       13

<PAGE>



action, a Denver,  Colorado  District Court dismissed Eljer Industries and Eljer
Manufacturing  from the case. The court ruled that there were no facts presented
establishing that Eljer Industries or Eljer Manufacturing  directly participated
in the design, manufacture or distribution of the Qest systems.

         On  November  9,  1995,   U.S.  Brass,   Eljer   Industries  and  Eljer
Manufacturing  tentatively  agreed  to  participate  in  a  global  polybutylene
settlement  related to the two certified  national class action lawsuits dealing
with  polybutylene  claims.  As part of the  settlement,  Shell Oil and  Hoechst
Celanese,  who were  suppliers  of the  resins  used in the  manufacture  of the
polybutylene  plumbing systems, have agreed to make up to $950 million available
to repair such systems.  The settlement was approved on November 9, 1995, by the
Chancery Court for Obion County at Union City, Tennessee,  the court hearing one
of two national class actions dealing with polybutylene plumbing systems.

         Eljer's and U.S. Brass'  participation in the settlement is conditioned
on the  confirmation of a plan of  reorganization  in the U.S. Brass  bankruptcy
proceeding  and  finalization  of an  agreement  with the  parties to the global
polybutylene settlement.  Under the terms of its proposed agreement, the Company
will  contribute  an amount  equal to the  proceeds  it  receives  from  certain
insurance  coverage;  75% of the  net  proceeds,  if  any,  resulting  from  the
litigation  with its former parent,  Household (see Note 14 to the  Consolidated
Financial Statements in Item 8 for further discussion);  $3.0 million in cash; a
non-interest  bearing note for $20.0 million payable over 10 years; and 17.5% of
the equity of Eljer Industries.  In addition,  U.S. Brass will continue to be an
indirect,  wholly-owned  subsidiary of Eljer  Industries.  Following an expected
finalization  of an  agreement  with  the  parties  in the  global  polybutylene
settlement, a second amended plan of reorganization  containing the terms of the
tentative agreement will be filed with the Bankruptcy Court. However, the timing
or  likelihood  of approval of such an amended  plan  cannot be  predicted.  The
Company believes it has previously  recorded  adequate accruals for the terms of
this agreement based on the average market price of the Company's stock.

         No  assurances  can be  given  that  the  proposed  agreement  will  be
finalized and a related plan of  reorganization  will be confirmed and agreed to
by the Bankruptcy Court and U.S. Brass creditors. As a result, no assurances can
be given that the  reorganization  of U.S. Brass will  successfully be concluded
or, if it is concluded,  what the effects to U.S.  Brass,  Eljer  Industries and
Eljer  Manufacturing  would be. If the proposed agreement is not finalized,  the
ultimate  resolution  of the U.S.  Brass  bankruptcy  could  involve the Company
losing its control over U.S.  Brass.  As previously  discussed,  the possibility
also exists that  settlement of claims against the Company,  could,  among other
things,  result in a change  in the  Company's  equity  structure.  Until  these
matters are further resolved,  they continue to create a substantial doubt about
the Company's ability to continue as a going concern in its present consolidated
form.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                             ELJER INDUSTRIES, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                                       <C>
Report of Independent Public Accountants..........................           15
Consolidated Statements of Income.................................           16
Consolidated Balance Sheets.......................................           17
Consolidated Statements of Cash Flows.............................           18
Consolidated Statements of Shareholders' Equity...................           19
Notes to Consolidated Financial Statements........................           20
</TABLE>


                                       14

<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Shareholders of Eljer Industries, Inc.:

         We have audited the accompanying  consolidated  balance sheets of Eljer
Industries,  Inc. (a Delaware  corporation)  and subsidiaries as of December 31,
1995 and January 1, 1995,  and the related  consolidated  statements  of income,
shareholders'  equity and cash  flows for each of the three  years in the period
ended December 31, 1995. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

         As  discussed  in  Note 3 to the  accompanying  consolidated  financial
statements,  the  Company  will be  required  to make $8  million  in term  debt
payments  throughout  1996 and the  remaining  $67.5  million  in term debt will
become due on January 31, 1997.  Management's  current projections indicate that
there will not be sufficient cash flows from operations to fund the January 1997
obligation.  The Company intends to explore some manner of debt restructuring or
extension  of existing  debt prior to the January 1997 U.S.  Term Debt  maturity
date.  Neither the Company nor any of its  subsidiaries  has any commitment with
respect to  restructuring or other sources of financing or extension of existing
debt and  management  has indicated that there can be no assurance that any such
commitment  or extension  can be obtained  prior to the U.S.  Term Debt maturity
date.

         In our opinion,  the  financial  statements  referred to above  present
fairly, in all material  respects,  the financial  position of Eljer Industries,
Inc.  and  subsidiaries  as of December  31,  1995 and January 1, 1995,  and the
results of their  operations and their cash flows for each of the three years in
the period  ended  December  31,  1995 in  conformity  with  generally  accepted
accounting principles.

         The accompanying  consolidated  financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed further
in  Note 2 to  the  consolidated  financial  statements,  the  Company  and  its
indirect,  wholly-owned  subsidiary,  United  States  Brass  Corporation  ("U.S.
Brass"),  are  defendants in a number of lawsuits and are the subject of certain
claims which involve the Qest polybutylene plumbing system manufactured and sold
by U.S.  Brass.  In addition,  the nature and extent of the  insurance  coverage
related to potential losses arising from these claims and lawsuits are currently
being contested by several of the insurance carriers. In order to systematically
resolve these matters,  on May 23, 1994,  U.S. Brass filed a voluntary  petition
for  reorganization  under Chapter 11 of the Federal Bankruptcy Code. In 1995, a
tentative global polybutylene  settlement was reached in which U.S. Brass, Eljer
Manufacturing,  Inc.  and  Eljer  Industries  have  agreed to  participate.  The
settlement is conditioned upon, among other things, its approval by the court in
the  U.S.  Brass  bankruptcy.  No  assurances  can be given  that  the  proposed
agreement  will be finalized and a related plan of  reorganization  be confirmed
and agreed to by the Bankruptcy Court and U.S. Brass creditors.  If the proposed
agreement is not finalized, the ultimate resolution of the U.S. Brass bankruptcy
could involve the Company losing its control over U.S.  Brass.  The  possibility
also exists that  settlement of claims against the Company,  could,  among other
things,  result in a change in the  Company's  equity  structure.  The  ultimate
outcome of these  matters is  uncertain  at this time and could have a material,
adverse  impact on the  financial  position  and  results of  operations  of the
Company. These matters create a substantial doubt about the Company's ability to
continue as a going concern in its present consolidated form. Management's plans
in regard to these matters are described in Note 2. The  consolidated  financial
statements do not include any adjustments or reclassifications that might result
from the outcome of these uncertainties.


                                     ARTHUR ANDERSEN LLP
Dallas, Texas,
March 5, 1996

                                       15

<PAGE>


                             ELJER INDUSTRIES, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                      (In thousands, except per share data)




<TABLE>
<CAPTION>
                                                                           1995         1994           1993
                                                                         --------     --------       --------
<S>                                                                      <C>          <C>            <C>     
Net Sales.......................................................         $397,386     $406,063       $387,562

Cost of Sales...................................................          295,180      293,365        278,374
                                                                         --------     --------       --------

Gross Profit....................................................          102,206      112,698        109,188

Selling & Administrative Expenses...............................           73,670       81,767         80,902

Litigation Costs................................................            7,950        8,805          7,215

Unusual Item - Adjustment for Polybutylene/Celcon
         Claims.................................................             (676)      21,857              -
                                                                         --------     --------       --------
Income From Operations..........................................           21,262          269         21,071

Other Expense, net..............................................            1,247        1,687          1,367

Interest Income.................................................            1,722        1,683          1,380

Interest Expense................................................           14,982       12,662         14,647
                                                                         --------     --------       --------

Income (Loss) Before Income Taxes...............................            6,755      (12,397)         6,437

Tax on Repatriation of Foreign Earnings and Loss
         of Tax Benefit on Indemnified Liabilities..............            1,142            -            640

Income Tax (Benefit) Expense....................................              724         (173)         1,899
                                                                         --------     ---------      --------
Net Income (Loss)...............................................         $  4,889     $ (12,224)     $  3,898
                                                                         ========     =========      ========
Net Income (Loss) Per Share.....................................         $    .69     $   (1.72)     $    .55
                                                                         ========     =========      ========

Weighted Average Number of Common Shares........................            7,133         7,120         7,085
                                                                         ========     =========      ========
</TABLE>



           The accompanying notes to consolidated financial statements
                   are an integral part of these statements.

                                       16

<PAGE>


                             ELJER INDUSTRIES, INC.
                           CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)


<TABLE>
<CAPTION>
         ASSETS                                                                1995            1994
         ------                                                                ----            ----
<S>                                                                         <C>              <C>
Current Assets:
    Cash & temporary cash investments.................................      $ 22,957         $ 26,109
    Restricted cash...................................................        10,449           17,266
    Trade accounts receivable, net of reserves of $6,908 and $7,696...        69,038           65,332
    Inventories.......................................................        64,565           68,249
    Other current assets..............................................         4,344            5,603
                                                                            --------         --------

        Total current assets..........................................       171,353          182,559

Properties & Equipment, net...........................................        64,283           59,924
Cost in Excess of Net Tangible Assets Acquired, net...................        10,874           11,281
Other Assets..........................................................         2,449            3,293
                                                                            --------         --------
                                                                            $248,959         $257,057

         LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
   Short-term debt and current maturities of long-term debt...........      $ 35,907        $  43,065
   Trade accounts payable.............................................        17,112           17,705
   Prepetition liabilities subject to compromise......................        31,209           32,868
   Accrued expenses...................................................        60,927           64,675
                                                                            --------         --------

        Total current liabilities.....................................       145,155          158,313

Long-Term Debt........................................................        81,696           83,021
Postretirement Benefits...............................................        39,409           40,353
Other Liabilities.....................................................        15,537           14,067
Deferred Income Taxes.................................................         1,620              882
                                                                            --------         --------

        Total liabilities.............................................       283,417          296,636

Shareholders' Equity (Deficit):
    Common stock, $1 par value, 50,000,000 shares
        authorized; 7,136,652 and 7,129,626 shares outstanding........         7,186            7,186
    Additional capital................................................        78,965           78,936
    Accumulated deficit...............................................      (114,581)        (119,470)
    Foreign currency translation adjustments..........................        (5,978)          (6,174)
    Treasury stock....................................................           (50)             (57)
                                                                            --------         --------

        Total shareholders' deficit...................................       (34,458)         (39,579)
                                                                            --------         --------
                                                                            $248,959         $257,057
                                                                            ========         ========
</TABLE>


           The accompanying notes to consolidated financial statements
                   are an integral part of these statements.

                                       17
<PAGE>





                             ELJER INDUSTRIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                     1995                 1994                 1993
                                                                   --------             --------             --------
<S>                                                               <C>                   <C>                  <C>
Cash Flows From Operating Activities:
    Net income (loss).....................................         $  4,889             $(12,224)            $  3,898
    Adjustments to reconcile net income (loss) to net.....
      cash provided by operating activities -
        Depreciation and amortization.....................            9,360                9,496               11,245
                                                                   --------             --------             --------
        (Gain) loss on disposition of properties
         and equipment....................................               11                  370                 (124)
        Stock issued as compensation......................               36                  273                  180
        Increase in deferred taxes........................              742                    -                    -
        Change in assets and liabilities -
            Trade accounts receivable.....................           (3,532)              (2,165)                (745)
            Inventories...................................            4,104               (7,997)               3,197
            Trade accounts payable and accrued expenses...           (6,908)              26,582                8,290
            Accrued litigation - Kowin Development........             (150)               1,877              (14,021)
            Postretirement  benefits......................             (944)                (390)                  92
            Other assets..................................            3,212                4,746               (3,165)
            Other, net....................................            1,511                3,189               (1,515)
        Reduction of sale of outstanding trade
            accounts receivable...........................                -              (13,000)                   -
                                                                   --------             --------             --------

         Net cash provided by operating activities........           12,331               10,757                7,332


Cash Flows From Investing Activities:
    Investment in properties and equipment................          (13,991)             (11,511)              (7,926)
    Proceeds from disposition of properties and equipment.            1,082                  459                1,936
                                                                   --------             --------             --------

         Net cash used in investing activities............          (12,909)             (11,052)              (5,990)

Cash Flows From Financing Activities:
    Increase (decrease) in short-term debt................           (4,289)              25,506              (14,481)
    Repayments of long-term debt..........................           (4,431)             (20,818)                (816)
    Proceeds from issuance of long-term debt..............                -                    -                1,068
    Collateralization of letters of credit................            5,708               (1,639)              (5,513)
    Taxes paid on dividends from foreign subsidiaries.....                -                    -               (3,974)
                                                                   --------             --------             --------
         Net cash provided by (used in) financing activities         (3,012)               3,049              (23,716)
                                                                   --------             --------             --------

Effects of Exchange Rates on Cash.........................              438                  (84)                (995)
                                                                   --------             --------             --------

Net Increase (Decrease) in Cash & Temporary Cash
   Investments............................................          (3,152)                2,670              (23,369)
Cash & Temporary Cash Investments, Beginning of Period ...          26,109                23,439               46,808
                                                                   --------             --------             --------
Cash & Temporary Cash Investments, End of Period..........         $ 22,957             $ 26,109             $ 23,439
                                                                   ========             ========             ========
</TABLE>



           The accompanying notes to consolidated financial statements
                   are an integral part of these statements.

                                       18

<PAGE>


                             ELJER INDUSTRIES, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (In thousands)



<TABLE>
<CAPTION>
                                                                        Foreign                    Total
                                                                        Currency                Shareholders'
                                 Common     Additional   Accumulated   Translation   Treasury      Equity
                                 Stock      Capital         Defici     Adjustments     Stock     (Deficit)
                                 ---------   ---------    ---------    ---------     ---------   ---------

<S>                              <C>         <C>         <C>          <C>            <C>         <C>
Balance at yearend 1992 ......   $   7,186   $  78,544   $(111,144)   $  (5,433)     $    (118)  $ (30,965)

   Shares issued to directors/
     employees ...............          --         156           --           --            24         180
                                 ---------   ---------    ---------    ---------     ---------   ---------
   Foreign currency
     translation adjustments .          --          --           --       (3,233)           --      (3,233)
   Net income ................          --          --        3,898           --            --       3,898
                                 ---------   ---------    ---------    ---------    ----------   ---------

Balance at yearend 1993 ......       7,186      78,700     (107,246)      (8,666)          (94)    (30,120)
   Shares issued to directors/
     employees ...............          --         236           --           --            37         273
   Foreign currency
     translation adjustments .          --          --           --        2,492            --       2,492
   Net loss ..................          --          --      (12,224)          --            --     (12,224)
                                 ---------   ---------    ---------    ---------    ----------   ---------

Balance at yearend 1994 ......       7,186      78,936     (119,470)      (6,174)          (57)    (39,579)
   Shares issued to directors/        --            29           --           --             7          36
     employees
   Foreign currency
     translation adjustments .        --          --             --          196            --         196
   Net income ................        --          --          4,889           --            --       4,889
                                 ---------   ---------     --------    ---------    ----------   ---------
Balance at yearend 1995 ......   $   7,186   $  78,965    $(114,581)   $  (5,978)   $      (50)  $ (34,458)
                                 =========   =========    =========    =========    ==========   =========
</TABLE>





           The accompanying notes to consolidated financial statements
                   are an integral part of these statements.


                                       19


<PAGE>



                             ELJER INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         Basis of Consolidation

         The Consolidated Financial Statements include the assets,  liabilities,
revenues and expenses of Eljer Industries, Inc., a Delaware corporation, and all
wholly-owned   subsidiaries   ("Eljer   Industries"   or,   together   with  its
subsidiaries, the "Company"). Prior to April 14, 1989 (the "Distribution Date"),
the entities now comprising Eljer Industries were  subsidiaries and divisions of
Household  Manufacturing,  Inc.  ("HMI") or  Household  Manufacturing,  Limited,
wholly-owned  subsidiaries of Household International,  Inc. ("Household").  The
Company operates in a single business segment -- the manufacturing and marketing
of building products for commercial and residential construction and remodeling.
All significant intercompany accounts and transactions have been eliminated.

         Use of Estimates

         Generally  accepted  accounting  principles  require management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure 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
and in some  cases,  including  the  contingencies  discussed  in Note  13,  the
differences could be material.

         Fiscal Year

         The  Company  reports on a 52-53 week  fiscal year ending on the Sunday
nearest to December 31.  Fiscal years 1995,  1994 and 1993 each had 52 weeks and
ended on December 31, 1995, January 1, 1995 and January 2, 1994, respectively.

         Temporary Cash Investments

         Temporary cash  investments  are primarily  bank  deposits,  commercial
paper,  treasury  bills and bankers'  acceptances,  with original  maturities of
three months or less. These investments are carried at cost, which  approximates
market.

         Restricted Cash

         Restricted  cash is  comprised of  insurance  reimbursements  and funds
securing  letters  of  credit  which  are  legally  restricted  as to  use.  The
restricted  funds are  either  related  to current  liabilities  or the  Company
anticipates that the funds will become unrestricted within a 12-month period.

         Inventories

         Inventories  are stated at the lower of cost or market and  include the
appropriate  elements of material,  labor and manufacturing  overhead  expenses.
Cost  is  determined   using  the  last-in,   first-out   ("LIFO")   method  for
substantially  all domestic  inventories  and the first-in,  first-out  ("FIFO")
method for all foreign inventories.

         Properties and Equipment

         Properties and equipment,  including  items  financed  through  capital
leases,  are recorded at cost and depreciated over their estimated useful lives,
using principally the straight-line  method for financial reporting purposes and
accelerated methods for tax reporting purposes. Useful lives range from 20 to 40
years, or lease terms, for buildings and leasehold improvements and from 3 to 12
years, or lease terms, for machinery, fixtures and equipment.

         Impairment of Long-Lived Assets

         The Financial  Accounting  Standards Board ("FASB") issued Statement of
Financial  Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", effective for
financial  statements issued for fiscal years beginning after December 15, 1995.
In  accordance  with SFAS No.  121,  in the event that  facts and  circumstances
indicate  that the  carrying  amount  of an  asset  may not be  recoverable,  an
evaluation of recoverability  would be performed.  If an evaluation is required,
the estimated future  undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine

                                       20

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



if a write-down  to market value or  discounted  cash flow is required.  Current
facts and circumstances do not indicate that an impairment has occurred.

         Fair Value of Financial Instruments

         SFAS No. 107,  "Disclosure about Fair Value of Financial  Instruments",
requires the  disclosure  of the fair market value of off- and  on-balance-sheet
financial  instruments.   The  carrying  value  of  all  financial  instruments,
including long-term and short-term debt, cash and temporary cash investments and
restricted cash, approximates their fair value at yearend.

         Cost of Businesses Acquired

         Cost  in  excess  of  net  tangible  assets  acquired  ("goodwill")  is
amortized using the straight-line  method over 40 years. The Company continually
evaluates  whether  events and  circumstances  have  occurred  that indicate the
remaining  useful life of goodwill  may warrant  revision or that the  remaining
balance of goodwill may not be recoverable.  When factors indicate that goodwill
should be evaluated for possible impairment, the Company uses an estimate of the
related  operating  income over the remaining  life of the goodwill in measuring
whether the goodwill is recoverable.  The  amortization  recorded for 1995, 1994
and 1993 was  $433,000,  $433,000  and  $443,000,  respectively.  The  amount of
accumulated  amortization  was $6.5  million and $6.0 million at the end of 1995
and 1994, respectively.

         Revenue Recognition

         The Company  recognizes  revenues from the sale of products at the time
the products are shipped.

         Concentrations of Credit Risk

         Financial   instruments  which   potentially   expose  the  Company  to
concentrations  of credit  risk,  as defined  by SFAS No.  105,  "Disclosure  of
Information  about  Financial  Instruments  with   Off-Balance-Sheet   Risk  and
Financial  Instruments with Concentrations of Credit Risk", consist primarily of
trade accounts receivable and temporary cash investments.

         The Company's  customer base for plumbing products consists of plumbing
wholesalers and retail chains and outlets  primarily in North America.  Heating,
ventilating  and air  conditioning  products  are  sold  primarily  to  regional
distributors,  as well as through retail  channels of distribution in the United
States,  Canada and  Europe.  As of  December  31,  1995,  the Company had $10.9
million in receivables with two customers,  which represent 16% of the Company's
trade  accounts  receivable  (net of  reserves)  balance.  The Company  performs
ongoing credit  evaluations of its customers'  financial  condition but does not
require collateral to support customer  receivables.  The Company establishes an
allowance for doubtful  accounts based upon factors  surrounding the credit risk
of specific  customers,  historical trends and other  information.  Although the
Company  is  directly  affected  by  the  well-being  of  the  construction  and
remodeling and repair industries,  and the North American and European economies
in general,  management does not believe  significant  credit risk exists at the
end of 1995.

         The  Company  places its  temporary  cash  investments  with  financial
institutions it considers creditworthy,  and does not believe significant credit
risk exists with respect to these securities at the end of 1995.

         Financial Instruments with Off-Balance Sheet Risks

         The Company selectively uses derivative financial instruments to manage
its exposure to foreign  currency  volatility  at the  transactional  level.  At
December 31, 1995, the Company had one outstanding forward exchange contract for
$483,000  and there were no  outstanding  contracts  at  January 1, 1995.  These
contracts  relate to major  currencies,  such as the British pound  sterling and
German  deutsche  mark. The exposure to credit risk is minimal since the counter
parties  are  major  financial   institutions.   The  market  risk  exposure  is
essentially limited to currency rate movements. The gains or losses arising from
these financial  instruments  are used to offset  exchange  gains and  losses on
related  hedge   exposures.   Realized  and  unrealized  gains  or  losses  from
derivatives  in 1995 and 1994 were not  material  to the  Company's  results  of
operations.



                                       21

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



         Foreign Currency Translation

         The Company has foreign subsidiaries operating primarily in Canada, the
United Kingdom and Germany.  Assets and liabilities of the foreign  subsidiaries
are translated into United States dollars at the exchange rate prevailing at the
balance  sheet date.  Revenue and expense  accounts for these  subsidiaries  are
translated  using the weighted  average  exchange rate during the period.  These
translation  methods  give  rise  to  cumulative  foreign  currency  translation
adjustments which are a component of Shareholders' Equity.

         In 1995,  1994 and 1993,  the  Company  also had net  foreign  currency
transaction   gains  (losses)  which   approximated   $(767,000),   $78,000  and
$(120,000), respectively, and which are included in Other Expense, net.

         Environmental Matters

         The Company  records a liability for  environmental  matters when it is
probable  that a liability  has been  incurred and the amount can be  reasonably
estimated.  With  the  exception  of  applicable  amounts  representing  current
liabilities,  these  amounts  are  recorded  as Other  Liabilities.  The amounts
recorded  represent the  estimated  costs of  remediation.  The Company does not
discount  environmental  liabilities for a specific clean-up site to reflect the
time value of money unless the aggregate amount of the obligation and the amount
and timing of the cash payments for that site are fixed or reliably  determined.
The litigation expenses relating to environmental matters are accrued separately
as incurred. At the time a liability is recorded, amounts recoverable from third
parties,  if any, would be recorded as an asset. When required,  the Company may
make capital improvements to establish or maintain compliance with environmental
regulations.  Such capital  expenditures would be subject to the same accounting
policies  as all other  Properties  and  Equipment.  The costs  associated  with
investigation  and  assessment  of  environmental  compliance  are  expensed  as
incurred. See Note 13 for discussion of Environmental Matters.

         Prior Year Reclassifications

         Certain reclassifications to the prior years' financial statements have
been made to conform to the 1995 presentation.

(2)      BANKRUPTCY OF UNITED STATES BRASS CORPORATION:

         On  May  23,  1994,  (the  "Petition  Date")  the  Company's  indirect,
wholly-owned subsidiary,  United States Brass Corporation ("U.S. Brass") filed a
voluntary petition for reorganization under Chapter 11 of the Federal Bankruptcy
Code (the  "Bankruptcy  Code") in the  United  States  Bankruptcy  Court for the
Eastern District of Texas (the "Bankruptcy Court"). The purpose of the filing is
to  resolve  systematically  the  issues  resulting  from the Qest  polybutylene
plumbing systems (the "System" or the "Qest system") and related  litigation and
to seek confirmation of a plan of reorganization (the "Plan") which, among other
things,  provides  for the  payment,  satisfaction  and  discharge of all claims
against U.S.  Brass  involving the Qest system.  U.S.  Brass is  conducting  its
business and managing its  properties  as a  debtor-in-possession  under Section
1108 of the  Bankruptcy  Code  subject  to the  supervision  and  orders  of the
Bankruptcy Court.

         Qest System Litigation

         Since  1975,  U.S.  Brass  or  its  predecessor Qest Products, Inc. has
manufactured and sold Qest systems.  U.S. Brass is a defendant (together in some
cases with Eljer Industries, Eljer Manufacturing,  Inc. ("Eljer Manufacturing"),
Qest  Products , Inc. and Household), in a number of lawsuits arising out of the
manufacture and sale of the Qest system. Eljer Industries or Eljer Manufacturing
has never engaged in the manufacture and sale of the Qest system.

         Other defendants in the Qest system lawsuits are Shell Chemical Company
("Shell  Chemical"),  a subsidiary  of Shell Oil Company,  the  manufacturer  of
polybutylene  resin from which U.S.  Brass extrudes the pipe used in the System,
Celanese Specialty Resins  ("Celanese"),  a unit of Hoechst Celanese Corporation
("Hoechst  Celanese")  and the  manufacturer  of a resin from  which U.S.  Brass
molded the Celcon acetal  fittings  formerly used in the System,  other pipe and
fittings manufacturers, and builders, developers and plumbing contractors. These
lawsuits  allege  that  the  Qest  system  leaked  and  seek  recovery  based on
negligence,  breach of warranty, strict tort liability and, in some cases, fraud
or misrepresentation.


                                       22

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



         As of the Petition Date, U.S. Brass had judgments against it related to
these lawsuits of approximately  $3.2 million,  which were covered by previously
established  accruals.  These accruals  remain at the end of 1995 since all Qest
system litigation  against U.S. Brass has been stayed pending the outcome of the
bankruptcy proceeding.

         U.S.  Brass does not know how many Qest systems  exist because it sells
components  of its Qest  system  to  wholesalers  and  distributors  who sell to
contractors.  The  contractors use Qest system  components,  alone or mixed with
components  manufactured by others,  to construct  plumbing systems in homes and
other buildings.

         Similarly,  data is not  currently  available  to permit U.S.  Brass to
estimate  accurately the number of installations  that have failed or the number
of claims regarding  installations  that have been settled to date.  Settlements
have been entered into by a number of parties,  including U.S.  Brass.  However,
U.S.  Brass does not have  access to all of the  settlement  data.  Through  the
Petition Date,  approximately 109 Qest system lawsuits  involving  approximately
30,000  residential  claims,  remained  pending,  not including  purported class
members in certain  class action  lawsuits  pending in Arizona,  California  and
Nevada.  Through this same period, U.S. Brass had paid approximately $63 million
in settlements related to its Qest system of which approximately $50 million has
been reimbursed by the Company's primary and excess insurance carriers.  Some of
the  insurance  reimbursements  made  to  U.S.  Brass  have  been  paid  under a
reservation of rights (see Insurance Coverage below).

         Between  1988 and July 1991,  U.S.  Brass,  Shell  Chemical and Hoechst
Celanese  participated in a toll-free  consumer hotline for homeowners with Qest
system claims.  U.S. Brass,  Shell Chemical and Hoechst Celanese shared the cost
of repairs and replacements (the "Sharing  Agreement") until July 1991 when U.S.
Brass  withdrew its  participation.  Shell  Chemical and Hoechst  Celanese  have
settled and  continue  to settle  cases and repair or replace  Qest  systems for
which they contend that U.S.  Brass was or is  partially  responsible  under the
Sharing  Agreement.  Shell Chemical and Hoechst  Celanese no longer provide U.S.
Brass or the  Company  with  information  on the  amount  they  claim  they have
expended  on  settlement  of claims on behalf of U.S.  Brass  under the  Sharing
Agreement.  The previously  reported  litigation  filed by Hoechst  Celanese and
Shell Chemical in New Jersey state court against U.S. Brass, Eljer Manufacturing
and  Household  relating to the Qest system and the  Sharing  Agreement  remains
pending  in the  Bankruptcy  Court on a motion  by Shell  Chemical  and  Hoechst
Celanese to sever the claims against  Household and remand the Household  claims
back to New Jersey state court. Any claims arising out of the Sharing  Agreement
and claims  brought in the New Jersey state court  against U.S.  Brass and Eljer
Manufacturing  would be  resolved in  connection  with the  proposed  settlement
discussed below (see Status of U.S. Brass Bankruptcy Proceeding).

         As discussed above, an estimate of additional liability related to Qest
system  litigation  cannot be made.  However,  as a result of the  uncertainties
related to the  availability of insurance  coverage and the ultimate  outcome of
the bankruptcy  proceeding,  U.S. Brass recorded a $21.9 million  unusual charge
against earnings in 1994 which reduced its net book value to zero. In 1995, U.S.
Brass  recorded an unusual  gain of  $676,000 to maintain  its net book value at
zero.  U.S. Brass incurred a net loss in 1995 as a direct result of $2.1 million
in legal fees  associated with the  bankruptcy.  Additional  descriptions of the
insurance  coverage,  the U.S. Brass  bankruptcy and its potential impact on the
Company are discussed below.

         Insurance Coverage

         Although  insurance  carriers  have paid a  substantial  portion of the
claims made to date by U.S.  Brass,  since 1985 the Company has been involved in
litigation  with its  insurance  carriers  concerning  coverage  for Qest system
litigation.  In 1992, the United States Court of Appeals for the Seventh Circuit
issued an opinion  holding  that the policy  period of coverage of a Qest system
claim is triggered by the date of  installation  of the System as opposed to the
date when the leak occurs.  The 1992 favorable  decision is significant  because
most of the Company's  insurance policies purchased after 1987 generally exclude
coverage for certain Qest system claims. However, significant insurance coverage
litigation  remains  pending and the Seventh  Circuit opinion is not necessarily
binding on all insurance carriers issuing coverage to the Company.  In addition,
some reimbursement of insurance payments may be ultimately required for payments
made  under  reservations  of  rights,   retrospective  premium  adjustments  or
indemnification  agreements.  An estimate of this amount cannot be made as it is
dependent on the outcome of the litigation described below.

         Various   insurance   carriers   filed  state  court  actions   seeking
declaratory relief that they are not obligated to provide insurance coverage for
Qest system  litigation.  These actions were removed to the Bankruptcy Court for
the Northern District of Illinois (the "Illinois  Bankruptcy  Court").  Although
the Illinois Bankruptcy Court denied U.S. Brass' motion to transfer venue to the
U.S.  District Court for the Eastern District of Texas and granted the insurer's
motion

                                       23

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



to abstain from hearing the case and to remand to the state courts, the Illinois
Bankruptcy  Court has  suspended  the  operation of the remand order pending the
resolution of the appeal filed by U.S.  Brass.  The U.S.  District Court for the
Eastern District of Texas has not ruled on U.S. Brass' appeal from the dismissal
of an adversary  action filed by U.S. Brass in the Bankruptcy  Court against all
insurance  companies involved in the Illinois state court actions as well as one
additional  carrier.  Because this litigation is in the early stages and because
it is not possible to predict the outcome of its appeals,  it is not possible to
estimate  the  amount  of  insurance  proceeds,  if any,  that U.S.  Brass  will
ultimately recover for Qest system claims.

         Other Litigation

         U.S.  Brass filed an appeal with the United States Court of Appeals for
the Tenth  Circuit of the $1.2 million  judgment  against U.S.  Brass entered in
1993  involving a modified  crimping tool used in the  installation  of the Qest
system.  In November  1995,  the  plaintiffs and U.S. Brass agreed to settle the
litigation  and the  appeal.  The  plaintiffs  will  receive an allowed  general
unsecured  claim in the amount of $900,000 which will be paid in accordance with
the  provisions  of the Plan.  The  settlement  is subject to  Bankruptcy  Court
approval.

         Status of U.S. Brass Bankruptcy Proceeding

         The filing of its voluntary  Chapter 11 petition  acted as an automatic
stay of certain litigation and other actions against U.S. Brass or its property.
Among  other  things,   the  automatic  stay  applies  to  the  commencement  or
continuation of federal,  administrative or other actions or proceedings against
U.S. Brass that were or could have been commenced before the Chapter 11 case was
filed or to recover a claim  against  U.S.  Brass that arose before the case was
filed.  Consequently,  U.S.  Brass'  creditors are prohibited from attempting to
collect  prepetition  debts  without the consent of the  Bankruptcy  Court.  Any
creditor  may seek  relief  from the stay by making a motion  to the  Bankruptcy
Court.  U.S.  Brass  believes the automatic  stay extends also to claims made in
those  lawsuits  filed  against  Eljer  Industries,   Eljer   Manufacturing  and
Household,  based upon alter ego and related  theories of liability  (see Claims
Against the Company discussion below). U.S. Brass contends that under bankruptcy
law, such claims are property of U.S. Brass by reason of its Chapter 11 filing.

         On March 22, 1995,  Eljer  Industries,  Eljer  Manufacturing,  and U.S.
Brass  filed with the  Bankruptcy  Court a proposed  Plan for U.S.  Brass  under
Chapter 11 of the Bankruptcy  Code.  The Bankruptcy  Court rejected the March 22
Plan  on the  basis  that  it  was  not  confirmable.  Eljer  Industries,  Eljer
Manufacturing and U.S. Brass have appealed the ruling and the appeal is pending.
Eljer Industries,  Eljer  Manufacturing and U.S. Brass filed with the Bankruptcy
Court an  Amended  Plan of  Reorganization  (the  "Amended  Brass  Plan") and an
Amended  Disclosure  Statement (the "Amended Brass Disclosure  Statement").  The
Amended Brass Plan contains proposed  settlements with Eljer  Industries,  Eljer
Manufacturing  and Shell  Chemical.  A hearing was held on  objections  filed by
various  parties to the Amended Brass  Disclosure  Statement on August 22, 1995.
The  Bankruptcy  Court  has  given  no  indication  of when it will  rule on the
objections.

         The Official  Polybutylene  Claimants Committee (the "PB Committee") in
the U.S.  Brass  Bankruptcy  has filed a  proposed  plan of  reorganization  and
proposed  disclosure  statement  (the "PB Committee  Disclosure  Statement").  A
hearing was held on June 20, 1995, by the Bankruptcy  Court on objections  filed
by various parties to the PB Committee Disclosure Statement,  but the Bankruptcy
Court has given no indication of when it will rule on those objections.

         In  connection  with  settlements  reached  by  various  parties in two
national class actions dealing with polybutylene  plumbing systems,  Tina Cox et
al. v.  Shell Oil  Company  et al.,  and  Garria  Spencer,  et al. v.  Shell Oil
Company,  et  al.  (the  "Cox-Spencer  Agreement"),   Eljer  Industries,   Eljer
Manufacturing and U.S. Brass entered into a tentative settlement contingent upon
confirming a plan of reorganization  in the U.S. Brass bankruptcy  embodying the
terms of the tentative  settlement  and  finalization  of an agreement  with the
parties to the Cox-Spencer  Agreement.  The tentative  settlement  provides that
Eljer  Manufacturing  and U.S.  Brass  will  contribute  an amount  equal to any
proceeds of their insurance policies;  the Company will contribute 75 percent of
the net  proceeds  of the  Household  litigation  (subject  to  approval  of the
Company's bank group);  $3 million in cash; a non-interest  bearing note for $20
million  payable  over 10  years;  and  17.5  percent  of the  equity  of  Eljer
Industries in exchange for which Eljer Industries,  Eljer Manufacturing and U.S.
Brass  will  receive  relief  satisfactory  to them  from  claims  arising  from
polybutylene sales to date and U.S. Brass will remain an indirect,  wholly-owned
subsidiary  of Eljer  Industries.  The Company has provided to the PB Committee,
Shell Chemical and Hoechst  Celanese a term sheet for a proposed  second amended
Plan which would include the terms of the tentative  settlement discussed above.
Although discussions concerning

                                       24

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



the term sheet have taken place,  no final  agreements have been reached and the
second amended Plan has not been filed.  The timing or likelihood of approval of
such a second  amended Plan can not be  predicted.  The Company  believes it has
previously  made  adequate  accruals for the terms of this  settlement.  Until a
second amended Plan is filed,  the Amended Brass Plan discussed  above,  remains
pending with the Bankruptcy Court.

         If the tentative  settlement reached in connection with the Cox-Spencer
Agreement  does not result in a  confirmed  Plan of  Reorganization  in the U.S.
Brass bankruptcy on the terms described  above, it is not presently  possible to
predict  the outcome of the U.S.  Brass  bankruptcy.  While under the  tentative
settlement  Eljer  Industries,   Eljer  Manufacturing,   and  U.S.  Brass  would
contribute  various  assets  with known and unknown  value and U.S.  Brass would
remain a  wholly-owned  subsidiary  of  Eljer  Manufacturing,  if the  tentative
settlement  does not result in a  confirmed  Plan of  Reorganization,  it is not
presently  possible  to estimate  the  ultimate  number or dollar  value of Qest
system  claims  that  may be filed  and  allowed  in the  bankruptcy  case  (see
discussion of Claims Filed in the U.S. Brass Bankruptcy  Proceeding  below).  In
addition,  because of the uncertainties related to the insurance litigation,  it
is not  presently  possible  to  estimate  the value of the  assets  that may be
available  to  satisfy  any  claims  that  may  be  filed  and  allowed,  absent
finalization of the tentative  settlement.  There is a possibility  that, if the
tentative settlement is not finalized, the Company would lose all or some of its
equity  interest in U.S. Brass if the  Bankruptcy  Court does not determine that
claimants will receive 100%  satisfaction of their allowed claims.  In the event
the Company loses all or some of its equity interest in U.S. Brass,  the Company
might be able to  repurchase  its equity  interest  in U.S.  Brass  through  the
payment of additional  consideration,  although there can be no assurances  that
other  bidders for U.S.  Brass  would not emerge or that the Company  would have
sufficient  resources  with  which  to pay  for  U.S.  Brass.  Accordingly,  the
resolution of the U.S.  Brass  bankruptcy  could involve the Company  losing its
control over U.S. Brass.  The possibility  also exists that settlement of claims
against the Company (see Claims  Against the Company  discussion  below)  could,
among other things, result in a change in the Company's equity structure.  These
matters create a substantial  doubt about the Company's ability to continue as a
going concern in its present consolidated form.

         Claims Filed in the U.S. Brass Bankruptcy Proceeding

         In a bankruptcy proceeding,  the Bankruptcy Court establishes a date by
which all claims against the debtor must be filed (the "Bar Date"). The Bar Date
for non-Qest  system  creditors of U.S.  Brass was May 15, 1995.  U.S.  Brass or
other  parties may seek  extensions of this Bar Date.  Under the proposed  Plan,
there is no Bar Date for creditors who hold claims relating to the Qest system.

         As of February 15, 1996, approximately 1,500 claims had been filed with
the  Bankruptcy  Court,  asserting the aggregate  amount of  approximately  $2.1
billion, consisting primarily of alleged Qest system related damages. Additional
claims may be filed.  Many claims are  disputed or based on  contingencies  that
have not  occurred.  Additional  claims  have been made which do not specify the
amount of damages. Any party to the bankruptcy, including U.S. Brass, may object
to a filed claim. Following such an objection, the claim will be allowed only in
an amount as determined by the Bankruptcy Court. U.S. Brass has not yet reviewed
all of the claims filed, but expects that it will file objections to many of the
claims.  The outcome of such  objections  cannot be predicted  and the number or
value of claims that may be allowed by the Bankruptcy  Court cannot be estimated
at this time. As discussed above, an estimate of additional liability related to
Qest system litigation cannot be made.

         Claims Against The Company

         Certain   parties  have  alleged  that  claims  exist   against   Eljer
Manufacturing and Eljer Industries relating to the Qest system. Approximately 54
lawsuits  representing  approximately  30,000  homes have been filed in state or
federal  courts in 8 different  states that name Eljer  Industries  and/or Eljer
Manufacturing  (or its  predecessor  HMI),  in  addition  to other  parties,  as
defendants.  These claims include allegations of direct and alter ego liability.
It is not  known  what  effect  the  Cox-Spencer  Agreement  will  have on these
lawsuits,  although it is expected that some of them may be dismissed  following
finalization  of the  Cox-Spencer  Agreement.  The Company does not believe that
these claims have merit and will  vigorously  defend such  charges,  although no
assurances  can be given that the  Company  will  prevail if such  lawsuits  are
ultimately  tried. As such, the Company cannot estimate the amount,  if any, for
which it may ultimately be liable. The tentative  settlement entered into by the
Company  described  above  contemplates  the  contribution  of cash, a note, the
proceeds of certain  litigation and 17.5% of the equity of the Company to settle
such claims  against  Eljer  Manufacturing  and Eljer  Industries  and to retain
ownership of U.S. Brass.  However, no assurances can be given that the tentative
settlement  will become a final  agreement  nor can estimates be given as to the
value of any  additional  consideration  that might  ultimately be offered in an
attempt to settle those claims. If the

                                       25

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



Company is not successful in resolving these claims in the U.S. Brass bankruptcy
proceeding,  it will be required to litigate those claims in the forums in which
they may be brought.

         Selected Financial Data

         Under the Bankruptcy Code, claims against U.S. Brass that were or could
have been  commenced  prior to the  Petition  Date are stayed  while U.S.  Brass
continues business operations as a debtor-in-possession. Certain of these claims
are  reflected  as  Prepetition   liabilities   subject  to  compromise  on  the
Consolidated   Balance  Sheets.   Additional  claims  (liabilities   subject  to
compromise)  may arise  subsequent to the Petition Date resulting from rejection
of executory  contracts or unexpired  leases,  and from the determination by the
Bankruptcy Court, or from the agreement of parties in interest,  to allow claims
for  contingencies  and other  disputed  amounts.  U.S.  Brass will  continue to
evaluate the claims filed in the bankruptcy  proceeding and may make adjustments
in Prepetition  liabilities subject to compromise.  U.S. Brass received approval
from the Bankruptcy  Court to pay or otherwise  honor certain of its prepetition
obligations,  including its secured  working capital  facility,  employee wages,
commissions,   sales  incentive   programs,   existing  product  warranties  and
outstanding checks. U.S. Brass participates in various intercompany transactions
with its parent,  Eljer Manufacturing and an affiliated Canadian company and, at
the end of 1995, U.S.
Brass had a net affiliate receivable of approximately $2.2 million.

         Selected financial data for U.S. Brass are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                       For the Fiscal Year Ended
                                                                   December      January      January
                                                                    31,1995      1, 1995      2, 1994
                                                                   --------      --------     -------
<S>                                                                 <C>          <C>          <C>    
Net Sales to Nonaffiliate Customers.....................            $78,060      $83,214      $74,080
Sales to Affiliates.....................................             18,838       16,740       16,688
Reorganization Expenses ................................              2,050        2,776           --
Income from Operations Before Unusual Items.............                794        1,377        5,457
Income (Loss) from Operations...........................              1,470      (20,480)       5,457
Income (Loss) Before Income Taxes.......................                 --      (21,628)       4,191
Net Income (Loss).......................................                 --      (21,801)       2,472

Cash (Used in) Provided by Operating Activities.........                (59)      (2,239)       9,131
Cash Used in Investing Activities.......................             (1,485)      (2,341)        (994)
Cash Provided by (Used in) Financing Activities.........              2,466        3,708       (6,767)
Total Cash Flow.........................................                922         (872)       1,370
</TABLE>

<TABLE>
<CAPTION>
                                                                 As of December       As of January
                                                                    31, 1995             1, 1995
                                                                 --------------       -------------
<S>                                                                  <C>                <C>   
Total Current Assets....................................             36,826                35,966
Total Assets............................................             53,210                52,725
Total Liabilities.......................................             53,210                52,725
Total Shareholders' Equity..............................                 --                    --
</TABLE>

Cash  payments of  reorganization  items made since the Petition Date and during
1995 are $2.1 million and $2.0 million, respectively.

(3)      LIQUIDITY AND CAPITAL RESOURCES:

         Financing Agreements

         On October  17,  1994,  Eljer  Manufacturing  entered  into a revolving
credit facility (the  "Revolver")  with Congress  Financial Corp.  ("Congress").
Under the terms of the Revolver, Congress may advance up to $35 million to Eljer
Manufacturing  based upon a  percentage  of  eligible  accounts  receivable  and
subject to certain  criteria.  Advances by Congress are secured primarily by the
accounts receivable of Eljer Manufacturing.  The expiration date of the Revolver
is  October  17,  1997.  The  Revolver  may  be  renewed  annually   thereafter.
Approximately  $13.0  million of the  borrowings  from the  Revolver was used to
repay all amounts outstanding under the Company's prior accounts receivable sale
program.  An  additional  $7.5  million  of the  borrowings  was used to repay a
portion of the Company's

                                       26

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



U.S. term debt agreement (the "U.S.  Term Debt")  pursuant to an amendment which
allowed Eljer Manufacturing to enter into the Revolver. Eljer Manufacturing also
was required to accelerate a $4.0 million principal  repayment of U.S. Term Debt
which was  originally  scheduled  for  December 30,  1994.  In August 1995,  the
Company again  amended its U.S. Term Debt  agreement to extend the maturity date
to January 31, 1997. Under the terms of the amendment,  a $3.0 million principal
payment  was made in  August  1995 in  addition  to a  $200,000  extension  fee.
Scheduled  principal  payments are $2.0 million in January 1996, $3.0 million in
August 1996 and $3.0 million in December 1996, with the balance of $67.5 million
due at the maturity  date of January 31, 1997.  The $3.0 million  December  1996
principal payment may be accelerated to April 1996 if certain conditions related
to the U.S. Brass  bankruptcy are not met. The U.S. Term Debt balance at the end
of 1995 and 1994 was $75.5 million and $78.5 million, respectively. The interest
rate  under the U.S.  Term Debt was the  prime  rate,  plus a margin of 4.0% (or
12.5%) at the end of 1995 and will be increased  by 0.5% at six month  intervals
to maturity.

         The Company  intends to explore  some manner of debt  restructuring  or
extension  of existing  debt prior to the January 1997 U.S.  Term Debt  maturity
date.  Neither the Company nor any of its  subsidiaries  has any commitment with
respect to  restructuring or other sources of financing or extension of existing
debt and there can be no assurance that any such  commitment or extension can be
obtained  prior to the U.S.  Term Debt maturity  date.  Failure to obtain such a
commitment  or  extension  or  failure  to pay the  term  debt  when  due  would
constitute an event of default thereunder, and would give the lenders the right,
if they  elect  to do so,  to  foreclose  on the  collateral  which  constitutes
essentially  all the domestic  assets of the Company  (except that pledged under
the Revolver and assets of U.S. Brass), including a majority of the stock of its
foreign subsidiaries.  Failure to pay the U.S. Term Debt when due would also  be
an event of default under the Revolver.

         U.S. Brass

         As discussed extensively in Note 2, on May 23, 1994, U.S. Brass filed a
voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in
the   Bankruptcy   Court.   On  June  28,  1994,   U.S.  Brass  entered  into  a
debtor-in-possession  financing  agreement ("the DIP Financing  Agreement") with
Congress,  who had provided secured financing for working capital purposes prior
to the Petition Date. Pursuant to the DIP Financing  Agreement,  Congress agreed
to provide  loans and advances in an amount not to exceed $20 million when added
to the  outstanding  amount of advances  made by Congress  prior to the Petition
Date. At yearend 1995,  the  outstanding  principal  amount of such advances was
approximately $10.3 million.  Unused availability was approximately $3.3 million
with an additional  $2.5 million  available for  professional  fees,  payment of
which is subject to  Bankruptcy  Court  approval.  The DIP  Financing  Agreement
expires June 1996. If U.S.  Brass has not exited  Chapter 11 prior to that time,
U.S. Brass will seek an extension of its existing DIP Financing Agreement,  with
Bankruptcy  Court approval.  Congress has indicated its intent to extend the DIP
Financing  Agreement  for  an  additional  year,  subject  to  approval  by  the
Bankruptcy  Court.  There can be no  assurance  that such an  extension  will be
granted.

         Restricted Cash

         Restricted  cash relates to cash that is legally  restricted  as to its
use. At yearend 1995 and 1994, the Company had several  components of restricted
cash. At the end of 1995 and 1994,  approximately $6.0 million of the restricted
cash balance  relates to the  reimbursement,  from an insurance  carrier under a
reservation of rights, of certain settlement and litigation  payments previously
made by or on behalf of U.S. Brass.  The cash is restricted as to its use by the
U.S. Term Debt and is only to be used for the payment of settlements, judgments,
appeal bonds and deposits,  attorneys'  fees,  and related  expenses in the Qest
system and other litigation. In addition, the Company maintained restricted cash
balances of  approximately  $4.5  million and $11.3  million at yearend 1995 and
1994, respectively, to secure letters of credit.



                                       27

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



(4)      INVENTORIES:

         Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                        1995          1994
                                                                       -------       -------
           <S>                                                         <C>           <C>    
           Finished goods.......................................       $32,887       $35,105
           Work in process......................................         9,201         9,617
           Raw materials........................................        22,477        23,527
                                                                       -------       -------

                 Total inventories................................     $64,565       $68,249
                                                                       =======       =======
</TABLE>

         Included  in finished  goods,  work in process  and raw  materials  are
inventories  valued on the LIFO method of $52.3 million and $57.6 million at the
end of 1995 and 1994, respectively. If inventories valued on the LIFO method had
been valued at their current cost,  they would have been $14.2 million and $10.2
million higher at the end of 1995 and 1994, respectively.

         In 1995 and 1994, costs of goods sold was increased by $4.0 million and
$1.8 million,  respectively, as a result of using the LIFO method as compared to
using  the  current  cost.  During  1993,  costs  of goods  sold  was  decreased
approximately $724,000, as a result of using the LIFO method.

         In 1995 and 1993, certain LIFO inventory quantities were reduced, which
resulted in a liquidation of LIFO inventory  layers carried at lower costs which
prevailed in prior years. The effect of the liquidations was to decrease cost of
goods sold approximately $393,000 and $732,000 in 1995 and 1993, respectively.

(5)      PROPERTIES AND EQUIPMENT:

         Properties  and  equipment,  net,  consisted of assets owned and leased
under capital lease arrangements and were as follows (in thousands):

<TABLE>
<CAPTION>
                                                         1995            1994
                                                       ---------      ---------
<S>                                                    <C>            <C>      
Land .............................................     $   3,417      $   3,417
Buildings and leasehold improvements .............        37,340         36,419
Machinery, fixtures and equipment ................       132,303        121,416
Accumulated depreciation and amortization ........      (108,777)      (101,328)
                                                       ---------      ---------

    Properties and equipment, net ................     $  64,283      $  59,924
                                                       =========      =========
</TABLE>


(6)      ACCRUED EXPENSES:

         Accrued expenses consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                            1995           1994
                                                           -------       -------
<S>                                                        <C>           <C>    
Accrued income taxes ...............................       $ 6,640       $ 6,779
Accrued payroll and employee benefits ..............        12,088        14,155
Insurance related accruals .........................        13,339        12,971
Litigation and related reserves ....................        12,074         9,638
Accrued rebates ....................................         6,640         8,428
Other current liabilities ..........................        10,146        12,704
                                                           -------       -------

    Total accrued expenses .........................       $60,927       $64,675
                                                           =======       =======
</TABLE>



                                       28

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



(7)      DEBT:

         Short-Term Facilities

         Eljer  Manufacturing  entered into the Revolver  with  Congress  during
1994,  for up to $35 million  based upon a  percentage  of accounts  receivable,
subject to certain criteria.  The expiration date of the Revolver is October 17,
1997.  The  Revolver  requires  maintenance  of  various  covenants  related  to
information   requests,   additional   indebtedness,   and  other  non-financial
requirements.  Eljer  Manufacturing was in compliance with all such covenants at
yearend 1995. At the end of 1995 and 1994, the outstanding  principal amounts of
advances were approximately $15.2 million and $22.1 million,  respectively,  and
unused  availability at yearend 1995 was approximately $6.8 million.  Additional
restrictive  covenants  are placed on the  Company  if the  unused  availability
amount falls below $3.5 million. Interest is calculated based upon the beginning
of the  month's  prime  rate  per  annum  plus an  additional  1%  unless  Eljer
Manufacturing  elects to convert a portion of the prime rate loans to Eurodollar
rate loans,  which have an interest rate of LIBOR plus an additional 3%. Yearend
1995 interest rates were approximately  8.94% on approximately  $15.0 million of
Eurodollar rate based loans, and 9.75% on  approximately  $200,000 of prime rate
based loans,  while  yearend 1994  interest  rates were  approximately  9.19% on
approximately  $9.0  million  of  Eurodollar  rate  based  loans,  and  9.5%  on
approximately $13.1 million of prime rate based loans.

         As  discussed  in Notes 2 and 3, on May 23,  1994,  U.S.  Brass filed a
voluntary petition for  reorganization  under Chapter 11 of the Bankruptcy Code,
and on June 28, 1994, entered into the DIP Financing Agreement with Congress for
up to $20 million  borrowings  based on a percentage of accounts  receivable and
inventories and subject to certain criteria. As security for the financing under
the DIP Financing  Agreement,  which expires in June 1996, the Bankruptcy  Court
authorized  U.S. Brass to grant first  priority liens and security  interests to
Congress over certain  present and future  accounts  receivable and inventory of
U.S.  Brass  generated on and after the Petition  Date and certain other assets.
The DIP  Financing  Agreement  requires  the  maintenance  of certain  financial
covenants, including tangible net worth, working capital and capital expenditure
requirements.  At the  end of  1995,  U.S.  Brass  was in  compliance  with  all
covenants under the DIP Financing Agreement. The total principal amounts owed by
U.S. Brass related to the DIP Financing  Agreement at yearend 1995 and 1994 were
approximately  $10.3  million  and  $7.9  million,  respectively.   Interest  is
calculated  based upon the beginning of the month's prime rate per annum plus an
additional  2%, or 10.75% and 10.5% at yearend 1995 and 1994,  respectively.  In
addition,  $100,000 and $300,000 in facility fees and closing costs were paid in
1995 and 1994, respectively. See Note 3 for additional discussion.

         The Company's  Selkirk  subsidiary in the United  Kingdom is party to a
credit  agreement with a bank which includes a revolving credit facility whereby
the  subsidiary  may borrow the British pound  sterling or German  deutsche mark
equivalent  of  approximately  $8.5  million.  The  revolver,  which  expires in
September 1997, is secured by substantially all the Selkirk  subsidiary's assets
as  defined in the  facility  agreement  between  the  subsidiary  and the bank.
Financial  covenants are consistent  with the long-term  U.K.  foreign bank term
debt  discussed  below.  There were no balances  outstanding at yearend 1995 and
1994 under this  facility.  Commitment  fees are  calculated  at 0.75% per annum
payable  quarterly and in arrears on any undrawn portion of the revolving credit
facility. In addition, the Company's Selkirk subsidiary in Germany had unsecured
credit lines with German banks  totaling  approximately  $3.8 million,  of which
approximately $2.9 million was available at yearend 1995. There are no scheduled
expiration dates on these lines; however they are reviewed annually by the banks
for renewal.  The total amount outstanding  related to these credit lines at the
end of 1995 and 1994 was  approximately  $977,000  and  $780,000,  respectively.
Yearend interest rates on debt outstanding  ranged from 7.0% to 8.0% in 1995 and
8.5% to 9.5% in 1994.

         At  yearend  1995 and 1994,  the  weighted  average  interest  rates on
outstanding   short-term   borrowings   were   approximately   9.6%  and   9.7%,
respectively.



                                       29

<PAGE>


                             ELJER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



         Long-Term Facilities

         Long-term debt consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                   1995      1994
                                                                  -------   -------
<S>                                                               <C>       <C>
Domestic:
    U.S. Term Debt, secured ...................................   $75,513   $78,513
    Industrial revenue bonds, secured by letters of
       credit and certain fixed assets of the Company,
       bearing interest at varying rates between
       6.75% and 14.00% .......................................     9,698     9,755
    Capital lease obligations, secured by letters of credit and
       certain fixed assets of the Company, bearing interest
       at 8.50% ...............................................      --         223
Foreign:
    Bank Term Debt, secured ...................................     5,883     6,862
                                                                  -------   -------

Subtotal ......................................................    91,094    95,353
Less: Current maturities of long-term debt ....................     9,398    12,332
                                                                  -------   -------
                                                                  $81,696   $83,021
                                                                  =======   =======
</TABLE>

         The Company's U.S. Term Debt and related agreements were amended in
August 1995. See Note 3 for discussion.

         As discussed  above,  the  Company's  Selkirk  subsidiary in the United
Kingdom is party to financing arrangements with a European bank which includes a
revolving credit facility  (discussed  above) and a term debt portion.  The term
debt matures on June 30, 1999, and provides for scheduled  semiannual  principal
payments. This facility bears interest at varying rates based upon LIBOR plus an
additional  margin of between  1.5% to 1.75%  based upon the ratio of  operating
cash flows to debt  servicing  payments.  Borrowings  are made in either British
pounds  sterling or German deutsche marks and are secured by  substantially  all
the assets of the Company's subsidiaries in the United Kingdom as defined in the
facility agreement.

         Both the  foreign  and  domestic  term  debt  are  subject  to  certain
financial  covenants  with which the Company was in  compliance at yearend 1995.
These  covenants  include  tangible net worth,  operating  cash flow and various
other debt service,  fixed charge and current ratio  requirements.  In addition,
the Company is restricted by certain covenants from paying shareholder dividends
during the term of its U.S. Term Debt.

         Aggregate  maturities of long-term  debt and capital lease  obligations
for each of the next five years and thereafter are as follows (in thousands):

<TABLE>
              <S>                                                       <C>
              1996.................................................     $ 9,398
              1997.................................................      69,960
              1998.................................................       1,622
              1999.................................................       1,414
              2000.................................................          --
              Thereafter...........................................       8,700
                                                                        -------

                  Total............................................     $91,094
                                                                        =======
</TABLE>
         Cash paid for interest  during 1995,  1994 and 1993 was $15.0  million,
$14.2 million and $14.2 million, respectively.

(8)      EMPLOYEE BENEFIT PLANS:

         Substantially all of the Company's  employees are covered under various
defined benefit pension plans  maintained by the Company and by Household.  Plan
benefits  are based  primarily  on years of service.  Under a Labor and Benefits
Agreement  between  Household  and the  Company,  on March 31,  1989,  Household
assumed the assets and  liabilities  in connection  with pension plans  covering
Company employees prior to that date, and Household is

                                       30

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



responsible for all pension  benefits  accrued as of and prior to that date. All
employees  became 100% vested in the Household  plans at that time.  The Company
established new employee benefit plans similar to those previously in effect and
is  responsible  for all funding  subsequent  to March 31, 1989.  The  Company's
funding policy is based on an actuarially determined cost method allowable under
Federal tax law. Since Household  retained all assets from the previous  benefit
plans,  the Company  has  incurred  pension  expense for the new plans since the
Distribution Date.

         The  Company's  net  periodic   pension  cost  includes  the  following
components (in thousands):

<TABLE>
<CAPTION>
                                                  1995       1994       1993
                                                -------    -------    -------
<S>                                             <C>        <C>        <C>    
Service cost during the period ..............   $ 3,053    $ 3,273    $ 2,851
Interest cost on projected benefit obligation     2,076      1,833      1,541
Actual return on plan assets ................    (2,661)       611     (2,252)
Net amortization and deferral ...............     1,568     (1,563)     1,507
                                                -------    -------    -------

    Net periodic pension cost ...............   $ 4,036    $ 4,154    $ 3,647
                                                =======    =======    =======
</TABLE>


         The projected  benefit  obligations  assumed an annual discount rate of
7.25% (U.S.  plans) to 8.5% in 1995 and 8.0% (U.S.  plans) to 8.5% in 1994.  The
annual rate of compensation  increase  ranged from 4.0% (U.S.  plans) to 7.0% in
1995 and 1994.  The  expected  long-term  annual rate of return on plan  assets,
which  consists  primarily of mutual funds,  was 9.0% to 10.0% in 1995,  8.5% to
9.5% in 1994  and  8.5% to 10.0% in 1993.  The  amortization  period  for  prior
service cost is 14 to 18 years,  depending on the plan,  which  approximates the
average  remaining  service period of the employee work force. The funded status
of the plans is as follows (in thousands):

<TABLE>
<CAPTION>
                                                           1995        1994
                                                         --------    --------
<S>                                                     <C>         <C>
Actuarial present value of benefit obligations:
    Vested benefit obligations .......................   $ 19,480    $ 14,577
                                                         ========    ========

    Accumulated benefit obligations ..................   $ 22,263    $ 16,745
                                                         ========    ========

    Projected benefit obligations ....................   $ 25,420    $ 25,065

Plan assets at fair value ............................     21,618      18,009
                                                         --------    --------

Projected benefit obligations in excess of plan assets      3,802       7,056
Unrecognized net loss ................................     (2,442)       (415)
Unrecognized prior service cost ......................       (630)     (4,302)
                                                         --------    --------

Pension liability included in accrued expenses .......   $    730    $  2,339
                                                         ========    ========
</TABLE>

         During 1995, the Company  recognized  curtailment gains of $3.3 million
resulting from the redesign and amendment of certain domestic  retirement plans.
The plans were amended effective  December 31, 1995, to freeze  compensation for
benefit purposes at 1995 levels.  In addition,  benefit service for participants
under age 50 as of December 31, 1995,  has been frozen;  participants  age 50 or
over continue to accrue service for benefits purposes. All employees affected by
the  curtailment,  including those over 50, will be eligible to receive expanded
benefits in the Company's defined contribution plan as of January 1, 1996.

         The  Company's  defined  contribution  plan  is  available  to  certain
domestic employees in which each  participant's  contribution is matched in part
by the  Company up to a maximum  of 3% of the  participant's  compensation.  The
Company's matching  contributions for this plan were  approximately  $784,000 in
1995,  $742,000  in 1994 and  $715,000  in 1993.  In lieu of  pension  benefits,
beginning  in 1996 the  Company  will  also  make a  contribution  on  behalf of
eligible  domestic  employees  ranging from 2% to 9% of  compensation,  based on
years of service.


                                       31

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)




(9)      OTHER POSTRETIREMENT BENEFITS:

         The Company  sponsors a welfare benefit plan which provides for certain
health  care and life  insurance  postretirement  benefits  to  certain  retired
employees  in the  United  States.  Life  insurance  and  comprehensive  medical
benefits  are  available  to certain  active  employees  who,  immediately  upon
retirement,   receive  a   pension   under  the   Company's   retirement   plan.
Postretirement  benefits are also continued for certain former employees who are
currently  receiving  Company pension benefits.  Generally,  the medical program
covers  dependents  of  retirees  in  addition  to  former  employees.   Retiree
contributions are required in the case of medical benefits for most retirees and
their eligible surviving spouses.

         The  following  table  sets  forth the plan's  combined  funded  status
reconciled  with  the  amount shown in the Company's financial statements at the
end of 1995 and 1994 (in  thousands).  Since the  Company  funds  the  plan on a
"pay-as-you-go"  basis,  the  Company's   postretirement  health  care  plan  is
underfunded.


<TABLE>
<CAPTION>
                                                    1995      1994
                                                   -------   -------
<S>                                                <C>       <C>
Accumulated postretirement benefit obligation:
    Retirees ...................................    $24,429  $25,796
    Fully eligible active plan participants ....     3,555     3,467
    Other active plan participants .............     4,192     6,323
                                                   -------   -------
                                                    32,176    35,586
Plan assets at fair value ......................      --        --
                                                   -------   -------
Accumulated postretirement benefit obligation in
       excess of plan assets ...................    32,176    35,586
Unrecognized actuarial gain ....................     1,167     2,831
Unrecognized prior service cost ................     6,066     1,936
                                                   -------   -------

Accrued postretirement benefit cost ............   $39,409   $40,353
                                                   =======   =======
</TABLE>

         Net  periodic  postretirement  benefit  cost  for  1995,  1994 and 1993
included the following components (in thousands):

<TABLE>
<CAPTION>
                                                1995       1994       1993
                                              -------    -------    -------

<S>                                           <C>        <C>        <C>    
Service cost during the period ............   $   470    $   626    $   462
Interest cost on accumulated postretirement
    benefit obligation ....................     2,510      2,715      2,900
Amortization of (gains) losses ............       (63)        40       --
Amortization of prior service cost ........    (2,170)      (964)      (840)
                                              -------    -------    -------

Net periodic postretirement benefit cost ..   $   747    $ 2,417    $ 2,522
                                              =======    =======    =======
</TABLE>


         For  measurement  purposes,  health  care cost trend  rates for various
services  varied from 8.5% in 1995,  decreasing  gradually to 4.5% by 2007,  and
remain at that level thereafter.  Increasing the health care cost trend rates by
one percentage point in each year would increase the accumulated  postretirement
benefit obligation at the end of 1995 by $4.1 million,  and the aggregate of the
service and interest cost components of net postretirement  health care cost for
1995 by $439,000.  The  weighted-average  discount rate used in determining  the
accumulated  postretirement  benefit  obligation at the end of 1995 and 1994 was
7.25% and 8.25%, respectively. There were no plan assets at yearend.

         During 1995, the Company amended certain of its  postretirement  health
care programs, principally to adjust the cost-sharing provisions. The amendments
resulted in a reduction  of the  Company's  accumulated  postretirement  benefit
obligation of $6.3 million, which created an unrecognized prior service benefit.
The  unrecognized  prior service  benefits are being amortized over three to six
years, based on the term of the underlying programs.



                                       32

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



(10)     SHAREHOLDERS' EQUITY:

         Common Stock

         The  Company  has  50,000,000  shares  of $1  par  value  common  stock
authorized  with  7,186,875  shares issued and 7,136,652  shares  outstanding at
yearend 1995. Treasury stock totaled 50,223 and 57,249 shares at the end of 1995
and 1994, respectively, and is accounted for under the par value method.

         Preferred Stock

         The  Company  has  10,000,000  shares of $1 par value  preferred  stock
authorized, of which none are issued or outstanding.

         Stock Rights

         Pursuant to a  Stockholder  Rights  Plan  adopted by the Company on the
Distribution Date and amended on July 31, 1989,  January 4, 1990 and November 5,
1991,  each  outstanding  share of the Company's  common stock carries with it a
common stock purchase  right (the "Right").  In the event of an acquisition by a
person or group of 15% or more of the Company's common stock,  each Right (other
than Rights owned by the person or group triggering the event, which will become
void) will become  exercisable  to purchase  one share of the  Company's  common
stock at 50% of its then market value.  The Rights will not become  exercisable,
however,  if the person or group  meeting the 15%  threshold  does so through an
all-cash  tender  offer in which it  becomes  the  owner of at least  80% of the
Company's  stock.  The Rights are subject to  adjustment in the event of certain
changes in the Company or its common stock,  including the merger of the Company
with  another  entity.  If the  tentative  settlement  discussed in Note 2 above
becomes  final,  the  Company  expects to amend its  Stockholder  Rights Plan to
permit the issuance of equity without  triggering  Rights under the  Stockholder
Rights Plan. The Rights will expire on May 1, 1999, unless previously  exercised
or redeemed, or unless the Company extends the expiration date.

         Stock Options

         The Company has a Long-Term Executive Incentive  Compensation Plan (the
"Incentive Plan") whereby awards,  including stock options (the "Options"),  can
be granted to key employees.  The Options are exercisable in 25% increments over
a  four-year  period  beginning  one year after the date of grant.  Options  are
generally granted for a term of no more than ten years and one day from the date
of grant.  The Options exercise price per share is not less than the fair market
value of the  Company's  common  stock at the date of  grant.  However,  certain
Options were granted in 1989 to employees in exchange for options for  Household
common  stock  which  they  forfeited  as a result  of the  distribution  of the
Company's stock to holders of Household's  stock in April 1989 (the "spin-off").
These Options have special terms as to exercisability  and purchase prices based
on the value of the Options forfeited.

         The following table summarizes the Options activity:

<TABLE>
<CAPTION>
                                                        SHARES         RANGE OF OPTION PRICES

<S>                                                   <C>              <C>
Options outstanding at yearend 1992...............     429,527           $ 8.25   -   $28.63
Options granted...................................     106,000           $ 8.13   -   $ 8.94
Options forfeited.................................     (46,695)          $ 8.25   -   $14.69
                                                      --------

Options outstanding at yearend 1993...............     488,832           $ 8.13   -   $28.63
Options granted...................................     140,000           $ 7.13   -   $ 7.69
Options forfeited.................................     (68,925)          $ 7.69   -   $28.63
                                                      --------

Options outstanding at yearend 1994...............     559,907           $ 7.13   -   $28.63
Options granted...................................     112,000                        $ 5.88
Options forfeited.................................     (86,000)          $ 5.88   -   $28.63
                                                      --------
Options outstanding at yearend 1995     ..........     585,907           $ 5.88   -   $28.63
                                                      ========

Options exercisable at yearend 1995...............     363,407
                                                      ========
</TABLE>


                                       33

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



         At the  Distribution  Date, the Company had reserved  500,000 shares of
common stock to cover  grants under the  Incentive  Plan.  During 1993,  350,000
additional shares were made available.  As of the end of 1995 there were 214,688
shares available for grant under the Incentive Plan.

         Phantom Stock

         Under a three-year  incentive  program  beginning in 1995,  certain key
employees  of the Company are granted  phantom  shares of the  Company's  Common
Stock.  The value of the phantom shares is a function of the amount,  if any, by
which the  market  value of the  Company's  Common  Stock  increases  during the
performance  period of  approximately  three years. The increase in the value of
these phantom shares is accrued and expensed over the performance period. During
1995,  338,000  phantom  shares  were  granted to  employees  and  $435,000  was
expensed. The related liability was $435,000 at December 31, 1995.

(11)     INCOME TAXES:

         Income (Loss)  Before Income Taxes and Income Tax (Benefit)  Expense in
1995, 1994 and 1993 are shown below (in thousands):


<TABLE>
<CAPTION>
                                         1995        1994            1993
                                       --------    --------        --------
<S>                                    <C>         <C>             <C>
Income (loss) before income taxes:
     Domestic operations ...........   $  3,212    $(11,286)       $  1,823
     Foreign operations ............      3,543      (1,111)          4,614
                                       --------    --------        --------

         Total consolidated ........   $  6,755    $(12,397)       $  6,437
                                       ========    ========        ========

Income taxes:
     Domestic operations
         Current ...................   $    471    $    750        $  1,236
         Deferred ..................       --          --              --
                                       --------    --------        --------

             Total domestic ........   $    471    $    750        $  1,236
                                       ========    ========        ========

     Foreign operations
         Current ...................   $   (485)   $   (923)       $    663
         Deferred ..................        738        --              --
                                       --------    --------        --------

             Total foreign .........   $    253    $   (923)       $    663
                                       --------    --------        --------

                  Total consolidated   $    724    $   (173)       $  1,899
                                       ========    ========        ========
</TABLE>


         Deferred  income taxes  reflect the impact of  "temporary  differences"
between  amounts of assets  and  liabilities  for  financial  reporting  and tax
purposes  as  measured  using  enacted  tax  rates.  Temporary  differences  and
carryforwards  which give rise to a  significant  portion of deferred tax assets
and liabilities for 1995 and 1994 are as follows:


                                       34

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)




<TABLE>
<CAPTION>
                                                           Tax Effect
                                                         (In thousands)
                                                       1995        1994
                                                     --------    --------
<S>                                                 <C>          <C>
Deferred tax liabilities:
     Depreciation and amortization ...............   $  6,095    $  5,738
     Inventory ...................................      4,040       3,749
                                                     --------    --------

     Total deferred tax liabilities ..............     10,135       9,487
                                                     --------    --------

Deferred tax assets:
     Sales and product allowances ................      2,040       2,332
     Self insurance ..............................      8,664       8,702
     Litigation and legal ........................      9,214       9,190
     Postretirement and pension benefits .........     13,336      14,489
     EPA .........................................      4,922       4,461
     Net operating loss carryforwards ............      2,576         209
     Other .......................................      2,722       4,264
                                                     --------    --------
     Total deferred tax assets ...................     43,474      43,647
     Valuation allowance .........................    (34,959)    (35,042)
                                                     --------    --------
     Deferred tax assets after valuation allowance      8,515       8,605
                                                     --------    --------

Net deferred tax liabilities .....................   $  1,620    $    882
                                                     ========    ========
</TABLE>


         At the end of 1995 and 1994, valuation allowances were provided for the
net deferred tax assets as required under SFAS No. 109. The valuation  allowance
decreased  approximately  $83,000  during 1995 and increased $4.1 million during
1994. In the U.S., the Company has  established a full  valuation  allowance for
net deferred tax assets due to the uncertainty of ultimate realization.

         The Company had a tax basis alternative minimum tax credit carryforward
of  approximately  $1.0  million at yearend  1995,  which is available to reduce
future  federal  income  taxes  and has no  expiration.  The  Company  had a net
operating loss  carryforward  of $7.6 million at yearend 1995 for federal income
tax purposes which will partially  expire in year 2009 and the remainder in year
2010.

         The difference between the provisions for income taxes and income taxes
computed using the statutory  federal income tax rate at yearend were as follows
(in thousands):

<TABLE>
<CAPTION>
                                                                      1995       1994       1993
                                                                     -------    -------    -------

<S>                                                                  <C>        <C>        <C>    
Federal Income Tax Expense (Benefit) at Statutory Rate ...........   $ 2,297    $(4,215)   $ 2,189
Increase (decrease) resulting from:
     Effects of valuation allowances on deferred tax assets ......    (1,115)     4,055        674
     Excess of expenses for financial reporting purposes over
         tax basis caused by permanent differences ...............       524        515        418
     Effects of alternative minimum tax ..........................      --         (202)      (606)
     Foreign tax effects .........................................      (951)      (545)      (130)
     Tax effects of distributable earnings in foreign subsidiaries      --         --         (776)
     Other .......................................................       (31)       219        130
                                                                     -------    -------    -------

         Total Income Tax Expense (Benefit) ......................   $   724    $  (173)   $ 1,899
                                                                     =======    =======    =======
</TABLE>


         In  1993,  the  Company  provided  for  $640,000  of  tax  expense  for
repatriating   those  earnings  which  are  no  longer  considered   permanently
reinvested in foreign subsidiaries.  In accordance with the Company's accounting
policy,  U.S.  deferred  taxes have not been  provided  on  approximately  $13.3
million of undistributed earnings of foreign subsidiaries at the end of 1995, as
the  Company  intends to  reinvest  these  earnings  permanently  in the foreign
operations  or to  repatriate  such  earnings  only  when to do so  would be tax
effective. The amount of the unrecognized

                                       35

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



tax liability for these undistributed earnings is not material at the end of
1995 due to the availability of foreign tax credits.

         Under an agreement with  Household,  the Company is entitled to the tax
deduction, if it can be utilized,  associated with certain liabilities which are
indemnified by Household. The Company, in turn, contributes an amount equivalent
to the tax benefit of such items when paid, regardless of whether the Company is
in a tax paying  position.  An estimate of  approximately  $16.9  million of the
liabilities  for which the Company may receive a benefit remain at yearend 1995.
The Company's  portion of these liabilities at the end of 1995 approximates $6.5
million.  These  payments  would have no impact on the financial  results of the
Company if it were subject to statutory tax rates;  however, an impact did occur
due to the  Company's  alternative  minimum tax or taxable loss  position in the
years presented.  A total of $1.7 million, $1.2 million and $1.3 million of such
payments were made in 1995,  1994 and 1993,  respectively.  The impact of future
payments  will be  dependent  on the tax paying  position  of the  Company.  The
Company  recorded  expense of $1.1 million in 1995 which included an estimate of
future payments for which the Company will not receive tax benefit.

         Net cash refunds related to income taxes in 1995 and 1994 were $517,000
and $4.0  million,  respectively.  Cash paid for  income  taxes in 1993 was $3.6
million.

(12)     LEASES:

         Rental expense under operating leases was $5.6 million,  $5.6 million
and $6.2 million in 1995, 1994 and 1993, respectively.

         Future minimum lease commitments under  noncancelable  operating leases
at the end of 1995 were as follows (in thousands):

          1996........................................         $ 3,546
          1997........................................           3,076
          1998........................................           2,317
          1999........................................           1,191
          2000........................................             332
          Thereafter..................................           3,900
                                                               -------
              Total minimum lease commitments.........         $14,362
                                                               =======

(13)     CONTINGENCIES:

         Qest System Litigation

         The  Company  is  involved  in  certain   litigation  related  to  Qest
polybutylene plumbing systems. See Note 2 for discussion.

         Environmental Matters

         The  Company   operates   plants  that  may  generate   hazardous   and
non-hazardous  waste,  disposal  of  which  is  subject  to  federal  and  state
regulation.  The past disposal of hazardous and non-hazardous waste generated at
the  Company's  plants  may now be subject to the  requirements  of the  federal
Resource  Conservation and Recovery Act and comparable  state statutes.  Several
Company  facilities  have been  required  to  implement  programs  to remedy the
effects  of  past  waste  disposal.  Not all  plants  have  been  the  focus  of
comprehensive  environmental studies.  Except as described below, the Company is
not aware of any instances of noncompliance  with currently  applicable  safety,
health and  environmental  laws and  regulations  which might have a significant
adverse  effect on the Company's  financial  condition or results of operations.
With respect to current operating procedures, the Company believes that it is in
material  compliance with such applicable laws and regulations.  The Company has
established  accruals  of  approximately  $15.1  million at the end of 1995 (see
discussion of individual  sites  provided  below)  pertaining to  environmental,
health and safety matters which the Company believes are adequate.  Although the
timing of the  related  payments  is  uncertain,  the  Company  believes  that a
substantial portion of the payments will be made over the next three years.

                                       36

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



         Marysville, Ohio, Facility

         (a)    Closure Plan.

         The  Marysville,  Ohio,  facility  operated as a brass  foundry and was
closed in 1987. The Company has submitted a closure plan for the facility to the
Ohio Environmental  Protection Agency ("Ohio EPA"). The Company's  environmental
consultants  are working with the Ohio EPA to revise,  and obtain final approval
of the closure plan. The Company  anticipates  submittal of the revised  closure
plan later this year.

         If  approved  in  its  current  form,   the   Company's   environmental
consultants  estimate that the cost of implementing the closure plan,  including
post-closure  care, will be approximately  $9.4 million.  However,  the ultimate
cost to complete closure and post-closure activities at the facility will depend
to a large extent on the remediation  technology  ultimately  agreed upon by the
Ohio EPA. The Company has previously  established accruals of $9.4 million which
it believes  will be adequate to provide for the cost to  implement  its closure
plan.  However,  there is no  assurance  that the plan will be approved  without
making additional revisions or modifications.  Although no estimate can be made,
in the event the closure plan is not  approved,  the cost of  remediation  could
have a material impact on the Company's  future  operating  results or financial
position.   The  accrual  of  $9.4  million  at  yearend  1995  includes   total
post-closure  costs of $1.4  million  discounted  over a 20-year  period using a
discount rate of 5%. The Company's  environmental  consultants estimate that the
annual payments  associated with these  post-closure costs will be approximately
$72,000 per year, over a 20-year period.

         (b)    Financial Assurance.

         In March  1995,  the Company  was  successful  in its efforts to obtain
third party liability  insurance for the Marysville  site.  Despite meeting this
aspect of financial assurance requirements,  the Company received correspondence
from the Ohio Attorney General threatening commencement of a lawsuit for failure
of the Company to meet the remainder of its financial assurance  obligations for
the  Marysville  site as  required by Ohio law.  On July 7, 1995,  the  Attorney
General  informed the Company  that it intended to assess a $2.5  million  civil
penalty for financial  assurance  violations  regarding this site.  Although the
Company believes it had legitimate defenses to the Attorney General's claims and
to the  threat  of  imposition  of any  fines  or  penalties,  it  entered  into
negotiations  with the  Attorney  General in an effort to avoid the  expense and
uncertainty of protracted litigation.

         On October 5, 1995, a settlement was negotiated  with the Ohio Attorney
General  wherein the Company  agreed to pay a cash penalty of $750,000,  with an
additional  fine of  $500,000  to be  suspended  pending  completion  of closure
activities at the Marysville  site in accordance with a closure plan approved by
the Ohio EPA. To meet the Company's remaining  financial assurance  obligations,
the  settlement  also requires the Company to fund an $8.5 million trust account
during 1996 to be used to pay for implementation of the Marysville closure plan.
The Company believes it has adequate reserves established to provide for payment
of the cash  penalty and  sufficient  cash flow and debt  available  to fund the
trust account.

         Salem, Ohio, Facility.

         (a)     Closure Plan.

         The  Company  submitted  a plan  for  closure  of the  hazardous  waste
management unit at its Salem, Ohio,  facility to the Ohio EPA on April 30, 1993.
Comments  received from the Ohio EPA indicate that the closure plan will require
modifications.  The Company's environmental consultants are currently working on
revisions to the closure  plan,  which may  increase  the cost to implement  the
closure plan excluding  post-closure care from $1.3 million to $2.0 million.  In
connection  with the  anticipated  closure  plan  revisions,  the  Company  also
submitted  a proposal to the Ohio EPA for the  reduction  of  post-closure  care
costs at the Salem  facility.  If accepted by the Ohio EPA,  post-closure  costs
could be reduced from $1.9 million to $1.0 million.

                                       37

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



         Through  1993,  the  Company  paid $1.6  million to complete an interim
closure of the subject  area and  accruals  of  approximately  $2.5  million for
additional  closure  and  post-closure  costs  expected in future  periods  were
recorded at yearend 1995, which the Company  believes are adequate.  The yearend
1995 accrual includes total post-closure costs of $1.9 million discounted over a
30-year  period  using  a  discount  rate  of 5%.  The  Company's  environmental
consultants estimate that the annual payments associated with these post-closure
costs will range from $60,000 to $105,000 per year, over a 30-year period.

         (b)    Financial Assurance.

         After March 1992 the Company was unable to meet its financial assurance
obligations with respect to the Salem site. The U.S.  Department of Justice (the
"DOJ")  sought  payment by the Company of a cash  penalty of  $175,000,  with an
additional  fine of $912,000 to be held in abeyance  pending  completion  of the
site  closure  activities  without  any  further  violations  of  the  Company's
financial  assurance  obligations under Ohio law. The Company accepted the DOJ's
offer and  approved  modification  of a prior  consent  decree  entered  in 1990
relating to these  issues.  The modified  consent  decree is  currently  pending
approval by DOJ and entry by the U.S.  District Court for the Northern  District
of Ohio. The Company  believes that it currently  meets its financial  assurance
requirements  regarding  the Salem  site and has  established  accruals  for the
$175,000 cash penalty.

         On March 20,  1995,  the Ohio EPA  notified  the Company that the Salem
facility was in violation of Ohio's financial  assurance laws as a result of the
Company  calculating  its  post-closure  care estimate  based on present  value.
Although the Company disputes Ohio EPA's contention and believes it has complied
with Ohio law, it is currently  negotiating the matter with the Ohio EPA and the
Ohio Attorney  General.  The Company  intends to resolve this issue prior to the
entry of the modified consent decree discussed above. Any reduction of the costs
of post-  closure care at the Salem site,  as  discussed  above,  will  directly
reduce the Company's financial assurance obligations for post-closure care.

         (c)     Clean Water Act.

         The  Company  negotiated  a  settlement  with  the  DOJ  and  the  U.S.
Environmental  Protection Agency (the "U.S. EPA") for alleged past violations of
the Clean  Water Act for  unpermitted  discharge  of  wastewater  streams at the
Salem, Ohio, facility.  The settlement called for the payment of a $300,000 cash
penalty and  performance of certain  remedial work at the facility  estimated to
cost approximately  $690,000.  On December 8, 1995, a Consent Decree was entered
by the U.S.  District  Court for the Northern  District of Ohio,  approving  the
previously  negotiated  settlement.  On January 8, 1996,  the  Company  paid the
$300,000 civil penalty. The Company's environmental consultants are currently in
the  process of  initiating  implementation  of the  remedial  work at the Salem
facility,  which the Company  anticipates will be completed later this year. The
Company has  previously  established  accruals which it believes are adequate to
cover these costs.

         (d)     Clear Air Act.

         On April 11, 1995, the Ohio Attorney  General  initiated an enforcement
action against Eljer  Manufacturing's  Salem,  Ohio,  facility for air emissions
violations  that  allegedly  occurred  in 1989 and 1990.  The  Attorney  General
threatened  to pursue  litigation  against  the  Company  to impose a  permanent
injunction that three identified sources of emissions would remain in compliance
with the Ohio  Administrative  Code,  and to recover  civil  penalties  for past
emission  violations.  In October 1995, the Company negotiated a settlement with
the Attorney  General for the alleged air emission  violations.  The  settlement
calls for the payment of a $75,000  cash  penalty and entry of a consent  decree
which requires the Salem,  Ohio,  facility to maintain  compliance over the next
two years.  On December 8, 1995, a consent  decree was entered by the Ohio Court
of Common  Pleas,  and on January 18,  1996,  the Company  paid the $75,000 cash
penalty which was accrued at yearend 1995.



                                       38

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



         Superfund Sites.

         The federal  Comprehensive  Environmental  Response,  Compensation  and
Liability Act (commonly  referred to as "Superfund" or the "Superfund  Act") and
similar  state laws subject  certain  parties to  liability  for the clean-up of
contaminated  waste treatment or disposal  sites.  Liability under the Superfund
Act is considered  "joint and several",  meaning that any one responsible  party
theoretically   could  be  liable  for  all  clean-up  costs,  which  are  often
substantial. However, the Superfund Act provides for the allocation of liability
in an equitable  manner among  responsible  parties and for  contribution  among
them.

         Certain of the  Company's  plants may have  disposed  of waste at sites
which have or may become a part of federal Superfund  clean-up efforts.  Through
notifications  from the U.S.  EPA, the Company  believes  its total  liabilities
related  to Superfund  sites are immaterial  (approximately  $160,000 at yearend
1995) if liability and  contributions  are assessed in an equitable manner among
all responsible  parties. The Company has established accruals which it believes
are  adequate to provide for any  liabilities  it may have with respect to these
sites.

         Atlanta, Georgia, Site.

         In  October  1991,  Eljer  Manufacturing  sold a  facility  located  in
Atlanta,  Georgia,  to joint venture partners Toto Ltd.,  Mitsui & Co., Ltd. and
Mitsui & Co.  (USA),  Inc.  ("Toto and  Mitsui").  Toto and Mitsui  subsequently
asserted  that Eljer  Manufacturing  is  responsible  under the  indemnification
provisions  included in the  Purchase and Sale  Agreement  to remediate  alleged
contamination at the sold facility.  Under the agreement,  Eljer Manufacturing's
liability for remediation costs is limited to $750,000.  Eljer Manufacturing has
notified the prior owner of the facility, JP Industries, Inc., ("JP Industries")
that it may be liable to Eljer  Manufacturing for indemnity under the provisions
of  Eljer   Manufacturing's   purchase  agreement  with  JP  Industries.   Eljer
Manufacturing  does not believe  that any  remediation  at the  Atlanta  site is
necessary  and no estimate of a liability,  if any, can be made at this time. In
addition,   no  estimate  can  be  made  of  the  amount,  if  any,  that  Eljer
Manufacturing may receive from JP Industries.

         Wilson, North Carolina, Site.

         In  anticipation  of the  1994  sale  of the  Company's  Wilson,  North
Carolina,  manufacturing plant, an environmental  investigation was performed of
that plant.  One monitoring  well on the property showed the presence of benzene
and methylene chloride. This finding was reported to the State of North Carolina
and a follow-up  investigation  was performed.  Another well on the property was
found to contain  trichloroethene,  another  hazardous  substance.  Based on the
location  of the well,  the  direction  of  groundwater  flow and the  Company's
understanding  that  trichloroethene  has never  been used at the  plant,  it is
presently  the  Company's  belief  that  any  trichloroethene  on  the  property
originated from off-site sources. The Company does not believe it is responsible
for  remediation  of any  trichloroethene  which  may be  present  at the  site.
However, the Company retains responsibility under the indemnification provisions
included in the Purchase and Sale  Agreement to remediate  benzene and methylene
chloride that exceed  maximum  levels allowed by North Carolina law. The Company
continues to await a response to its comprehensive site assessment  submitted in
March 1994. While the cost to comply with the Company's indemnity obligations is
estimated at $509,000 based on the use of traditional  remediation  methods, the
Company  hopes to receive  approval  from the state of North  Carolina to pursue
alternative  remediation methods which would  substantially  reduce these costs.
The Company has  established  accruals which it believes are adequate to provide
for the costs of investigation and remediation, if any.



                                       39

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



         Proposition 65.

         Eljer Industries, Eljer Manufacturing,  U.S. Brass and approximately 15
other manufacturers and sellers of residential and commercial brass faucets were
named as defendants in two lawsuits;  one brought by the Attorney General of the
State of  California  and the other by the  Natural  Resources  Defense  Council
("NRDC") and the  Environmental  Law Foundation  ("ELF") alleging  violations of
California's Safe Drinking Water and Toxic Enforcement Act of 1986 ("Proposition
65"). The lawsuits alleged that U.S. Brass and Eljer Manufacturing did not label
their faucets in conformity with  Proposition  65. The lawsuits  further alleged
that U.S. Brass and Eljer  Manufacturing  knowingly  discharged or released lead
into drinking water in violation of  Proposition  65. The discharge and exposure
allegedly  arose out of leaching of lead into  drinking  water from leaded brass
faucets  manufactured by the defendants.  Settlements were reached wherein Eljer
Manufacturing  paid $30,000 to the NRDC and ELF, and U.S.  Brass agreed to allow
the  Attorney  General a  general,  unsecured  $30,000  claim in the U.S.  Brass
bankruptcy.  Both  settlements  call for the dismissal of Eljer  Industries as a
named   defendant.   Also,  over  the  course  of  the  next  four  years  Eljer
Manufacturing  and U.S.  Brass will phase out the sale in  California of leaded,
brass  faucets that exceed  specified  National  Sanitation  Foundation  ("NSF")
standards,  and, in the  interim,  warning  tags will be placed on faucets  that
exceed the specified NSF protocol. Under the proposed settlements, neither Eljer
Manufacturing   nor  U.S.  Brass  has  any  affirmative   obligation  to  market
alternative brass faucets.

         On October 6, 1995,  a motion to  approve  settlement  in the  Attorney
General's  case was granted and a Consent  Judgment  documenting  the settlement
terms was entered by the court.  On October  24,  1995,  NRDC and ELF  dismissed
their lawsuit against Eljer Manufacturing and U.S. Brass.

         Insurance.

         The Company has made claims to its applicable  insurance carriers under
certain insurance  policies for any amounts paid in the past or for which it may
become  obligated to pay in the future in connection with various  environmental
matters.  The Company cannot predict the amount,  if any, of insurance  proceeds
that may be received as a result of these  environmental  claims.  No receivable
from insurance carriers has been recorded related to environmental matters.



                                       40

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



         Following is a summary of environmental contingencies (in thousands):

<TABLE>
<CAPTION>
                                                                Accrual    Charge Against        Cash
                                                  Estimated     Balance         1995             Paid
Contingency                                       Liability    @12/31/95      Earnings          In 1995
-----------                                     ------------  ----------   --------------      ---------


<S>                                        <C>                 <C>           <C>               <C>
Marysville closure & post-
closure ...............................             $ 9,351    $ 9,351       $     0           $    49
Marysville financial
assurance .............................                 750        750           750                 0
Salem closure,
post-closure and
financial assurance ...................       2,375 - 2,692      2,692           317                 0

Salem Clean Water Act
settlement ............................                 990        990             0                 0
All other (individually less
than $1 million)
                                                568 - 2,072      1,327           366                55
                                          -----------------    -------       -------           -------

Total .................................   $14,034 - $15,855    $15,110   $ 1,433   $   104
                                          =================    =======   =======   =======
</TABLE>


         Kowin and Related Litigation

         On June 10, 1994,  the United States  Supreme Court denied the petition
for certiorari filed by Eljer  Manufacturing  in the previously  disclosed Kowin
Development Company ("Kowin") litigation.  The litigation resulted from a failed
manufacturing  joint  venture in the People's  Republic of China (the "PRC Joint
Venture") in which Kowin held a 25% interest. On June 30, 1994, a final judgment
was entered and Kowin was paid approximately  $11.6 million of the $13.2 million
cash  bond  previously  posted  by  Eljer  Manufacturing  for  this  litigation.
Approximately  $1.6 million of related  amounts  previously  paid, plus interest
thereon,  was  returned to the  Company.  The amount of the judgment and related
costs were included in an extraordinary charge against earnings in 1992.

         The  approximately  $1.2 million judgment  against Eljer  Manufacturing
entered in the  People's  Republic of China and  previously  disclosed,  remains
subject  to an appeal,  but is  outstanding  and  unpaid.  Based upon  advice of
counsel, Eljer Manufacturing  continues to believe it has substantial procedural
defenses against any effort to enforce this judgment in the United States. Eljer
Manufacturing  believes its $1.2 million  accrual is adequate to provide for any
liability  ultimately  incurred in this matter.  Additionally,  in 1988, Simonds
Industries,  Inc. purchased HMI's interest in the PRC Joint Venture and may have
liability for a portion of the amount awarded;  however, no estimate can be made
of the  amount,  if any,  that Eljer  Manufacturing  may  receive  from  Simonds
Industries, Inc.

         On October  24,  1994,  Winston and Dorothy Ko, the owners of Kowin and
Croft Investments, Ltd., an affiliate of Kowin in the PRC Joint Venture, filed a
complaint  in the Circuit  Court of Cook  County,  Illinois, seeking  individual
damages in an action  entitled  Winston Ko and  Dorothy Ko v. Eljer  Industries,
Inc., et al.  Plaintiffs have claimed  approximately  $24 million in damages for
alleged  losses on their  real  estate  investments,  and also seek  unspecified
exemplary and punitive  damages,  and unspecified  damages for alleged injury to
their  reputations,  for  emotional  distress and for lost profits on their real
estate investments. Eljer Industries, Eljer Manufacturing and related individual
defendants filed a motion to dismiss the complaint which was granted by order on
August 1, 1995. The Circuit Court

                                       41

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



concluded  that the action  brought by the Kos was time barred and dismissed the
action.  The Kos have appealed the ruling. If the case is ultimately  litigated,
the Company believes that it has adequate defenses and should prevail.
Accordingly, no additional accrual has been established for this contingency.

         Other Matters

         High Temperature Plastic Vent ("HTPV") Pipe

         The  Consumer  Product  Safety  Commission  ("CPSC")  has  initiated an
investigation under Section 15 of the Consumer Product Safety Act (the "Act") as
to whether a HTPV  product  ("Plexvent")  manufactured  using  Ultem  resin from
Chevron Chemical  Company's Plexco Performance Pipe Division poses a substantial
product hazard under the Act. The HTPV pipe is used to exhaust  combustion gases
from mid-and  high-efficiency  small water boilers and central heating furnaces.
Eljer Manufacturing's  Selkirk Metalbestos division ("Selkirk")  distributed the
Plexco  HTPV  pipe  from  mid-1990   until  the  end  of  1993.   Selkirk  began
manufacturing  and selling its own Ultem resin HTPV  product  ("Sel-Vent  I") in
January  1994 and  discontinued  the  manufacture  of  Sel-Vent  I in June 1994.
Beginning in September 1994, Selkirk began manufacturing and selling a vent pipe
manufactured from Radel resin ("Sel-Vent II"). Sel-Vent II is not the subject of
the CPSC investigation.

         In the U.S., Selkirk has responded to informal requests for information
from the CPSC and has also sent samples,  as  requested,  of Sel-Vent I. By law,
the CPSC may  direct  repair,  replacement  or  refund  of any  product  that it
believes poses a substantial product hazard.  Selkirk has received no reports of
product  defects or failures for Sel- Vent I and believes  that  Sel-Vent I does
not exhibit the same  characteristics as the Plexco product because of different
manufacturing  process control and joint design.  Nevertheless,  the Company has
advised the CPSC that it desires to  voluntarily  conduct a recall and  retrofit
program for Sel-Vent I. If the CPSC approves  Selkirk's  proposal,  Selkirk will
replace Sel-Vent I with Sel-Vent II. The Company estimates that, if approved, it
will  replace  between  1,000 and  1,700  installations  in the U.S.,  at a cost
ranging  from  $200 to $250  per  installation,  depending  upon the size of the
installation.

         In Engel et al. v. Chevron Corporation,  Inc., Civil Action No. L-1989,
filed  February  16,  1996,  Circuit  Court  for  Blount  County,  Tennessee  at
Maryville,  plaintiffs  purportedly on behalf of a national class,  seek damages
and injunctive relief against Chevron Corporation, Inc. allegedly arising out of
Chevron's  manufacture  of Plexvent.  Eljer  Industries is listed as an "unnamed
party",  but  not  as  a  defendant.   This  matter  is  in  very  early  stages
substantively and the Company is not currently a party to this litigation.

          In Canada,  use of Plexvent and similar vent pipe has been  prohibited
by  provincial  authorities  pending  further  investigation.  In  the  Canadian
province of Ontario, homeowners have been ordered to remove HTPV pipe from their
homes. The Ontario Home Warranty  Program is expected to reimburse  covered home
owners for the  replacement  cost,  although  not all  affected  homeowners  are
covered by the Ontario Home Warranty Program.  In February 1996, the Company was
informed that it had been named in a purported class action suit in Canada filed
on behalf of the Ontario  Home  Warranty  Program and  affected  homeowners  not
covered by the Ontario Home Warranty Program to recover  replacement  costs. The
Company has not yet been served with this litigation.  The Company believes that
Sel-Vent I was used in approximately  700 to 1,000 Canadian  installations,  and
that replacement cost ranges from $200 to $1,000 per installation,  depending on
the replacement material ultimately used.

         Based on the  estimates  described  above,  the  amount to  voluntarily
replace the Sel-Vent I in North America could range from $340,000 to $1,425,000.
The Company has established an accrual of $500,000 for this contingency.



                                       42

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



         Nampa Employment Litigation

         In Ybarra, et al. v. Eljer Manufacturing, Inc., filed July 11, 1995, in
the United States  District  Court for the District of Idaho,  approximately  20
current or former  employees  at Eljer  Manufacturing's  Nampa plant allege that
they have been the  subject  of sexual and racial  discrimination.  The  lawsuit
seeks damages against Eljer Manufacturing,  and, in some cases, reinstatement or
promotions.  The case is in very early stages of discovery  and has been set for
mediation  beginning  in March  1996.  A  tentative  trial date has been set for
February 1997. Because the case is in early substantive stages, it is impossible
to give any  opinion  concerning  the  possible  outcome  or the  likelihood  of
success. The Company intends to vigorously defend the litigation.

(14)     RELATIONSHIP WITH HOUSEHOLD:

         The Company is currently involved in litigation with Household relating
to the spin-off.  Household  filed an action in the Delaware  Chancery  Court on
February 5, 1993, against Eljer Industries,  Eljer  Manufacturing and U.S. Brass
seeking  declaratory  relief. U.S. Brass has since been dismissed from the case.
Following a finding by the Delaware Chancery Court that it had no subject matter
jurisdiction,  that action was  transferred  to the Delaware  Superior Court for
trial on the merits, where it remains pending.

         On February 11, 1993, Eljer Industries and Eljer  Manufacturing filed a
breach of contract  action  against  Household in the  District  Court of Dallas
County,  Texas,  based  upon  Household's  alleged  breach of the  Reimbursement
Agreement,  dated as of April 14, 1989, and the  Reorganization and Distribution
Agreement, dated as of March 15, 1989, executed in connection with the spin-off.
On June 19, 1995,  the Delaware  Chancery  Court  enjoined the Company and Eljer
Manufacturing  from proceeding with  litigation  against  Household in any court
other than the Superior  Court in Delaware.  As a result,  the Company and Eljer
Manufacturing  may not proceed with their litigation  against Household in Texas
District Court. The Company did not appeal the Delaware Chancery Court ruling.

         On July 26,  1995,  the  Delaware  Superior  Court heard  arguments  on
Household's  motions for complete and partial summary judgment in the litigation
between Household, the Company and Eljer Manufacturing. On October 16, 1995, the
Delaware  Superior  Court denied all of  Household's  motions,  except one claim
which the Company  elected  not to pursue.  On January 19,  1996,  the  Delaware
Superior Court denied  Household's  motion for summary  judgment which sought to
limit damages the Company could recover to approximately $32 million.  Household
has filed additional motions for summary judgment on certain claims it has filed
against the Company,  but  briefing is not  complete  and the Delaware  Superior
Court has not ruled on the motions. Pre-trial discovery is continuing, and trial
is set to begin on May 20, 1996, in Delaware. As disclosed in Note 2, the
Company has entered into a tentative settlement with Qest system claimants
whereby 75% of any proceeds received from Household will be used to fund the
settlement.



                                       43

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



(15)     GEOGRAPHIC SEGMENTS:

         Data on the Company's  geographic  segments,  based on the locations of
the Company's operations, are as follows (in thousands):

<TABLE>
<CAPTION>
                                      1995           1994           1993
                                   ---------      ---------      ---------
<S>                                <C>            <C>            <C>
Sales to unaffiliated customers-
     North America .............   $ 327,637      $ 340,628      $ 313,376
     Europe ....................      69,749         65,435         74,186
                                   ---------      ---------      ---------
         Total .................   $ 397,386      $ 406,063      $ 387,562
                                   =========      =========      =========

Income (loss) from operations-
     North America .............   $  16,482<F2>        334<F1>    $15,765
     Europe ....................       4,780            (65)         5,306
                                   ---------      ---------      ---------
         Total .................   $  21,262<F2>        269<F1>  $  21,071
                                   =========      =========      =========

Identifiable assets-
     North America .............   $ 199,035      $ 210,207    $ 187,814
     Europe ....................      49,924         46,850       47,609
                                   ---------      ---------    ---------
         Total .................   $ 248,959      $ 257,057    $ 235,423
                                   =========      =========    =========
<FN>
<F1>  This includes a $21.9 million  unusual  charge  related to U.S.  Brass (see
      Note 2 for additional  discussion).  Not  considering  the unusual  charge,
      North  American  and Total  Income  from  Operations  would have been $22.2
      million and $22.1 million, respectively in 1994.
<F2>  This includes a $676,000 unusual gain related to U.S. Brass (see Note 2 for
      additional  discussion).  Not considering the unusual gain,  North American
      and Total Income from  Operations  would have been $15.8  million and $20.6
      million, respectively in 1995.
</FN>
</TABLE>

(16)     QUARTERLY FINANCIAL DATA (unaudited and in thousands except per share
amounts):

<TABLE>
<CAPTION>
                                                            First       Second        Third       Fourth
                                                           Quarter      Quarter      Quarter      Quarter
                                                           -------      -------      --------     --------
<S>                                                        <C>            <C>         <C>         <C>     
1995
Net sales............................................      $99,055        $92,416     $102,752    $103,163
Gross profit.........................................       23,398         22,810       28,736      27,262
Net income (loss)....................................         (882)        (1,206)       4,522       2,455
Earnings (loss) per share............................         (.12)          (.17)         .63         .35

1994
Net sales............................................      $90,875       $103,356     $107,872    $103,960
Gross profit.........................................       24,268         27,435       32,022      28,973
Net income (loss)....................................          360          2,386        4,265     (19,235)
Earnings (loss) per share............................          .05            .34          .60       (2.71)

1993
Net sales............................................      $95,648        $84,507     $102,965    $104,442
Gross profit.........................................       25,860         23,862       29,160      30,306
Net income (loss)....................................          874         (1,446)       3,136       1,334
Earnings (loss) per share............................          .12           (.20)         .44         .19
</TABLE>



                                       44

<PAGE>


                             ELJER INDUSTRIES, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



         The unaudited  quarterly  financial  data above have been restated from
the  Company's   previously  filed  Forms  10-K  and  10-Q  to  reflect  certain
reclassifications from cost of sales to selling and administrative costs.

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

         None.


                                    PART III

Item 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  section  entitled   "Election  of  Directors"   appearing  in  the
Registrant's  proxy  statement for the annual meeting of stockholders to be held
on April 16, 1996, sets forth certain  information with respect to the directors
of the Registrant and is incorporated  herein by reference.  Certain information
with respect to persons who are or may be deemed to be executive officers of the
Registrant is set forth under the caption "Executive Officers of the Registrant"
in Part I of this report.

Item 11.      EXECUTIVE COMPENSATION

         The section entitled "Executive  Compensation and Certain Transactions"
appearing  in the  Registrant's  proxy  statement  for  the  annual  meeting  of
stockholders to be held on April 16, 1996, sets forth certain  information  with
respect to the  compensation of management of the Registrant and is incorporated
herein by reference.

Item 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The sections  entitled "Voting  Securities and Principal  Stockholders"
and "Election of Directors"  appearing in the  Registrant's  proxy statement for
the  annual  meeting of  stockholders  to be held on April 16,  1996,  set forth
certain  information  with respect to the ownership of the  Registrant's  Common
Stock and are incorporated herein by reference.

Item 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The section entitled "Executive  Compensation and Certain Transactions"
appearing  in the  Registrant's  proxy  statement  for  the  annual  meeting  of
stockholders to be held on April 16, 1996, sets forth certain  information  with
respect  to  certain  business   relationships  and  transactions   between  the
Registrant  and  its  directors  and  officers  and is  incorporated  herein  by
reference.




                                       45

<PAGE>



                                     PART IV

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



(1)      Financial Statements

         The financial statements filed as part of this report are listed on the
Index to Consolidated Statements on page 14.

(2)      Financial Statement Schedules

         Index to Consolidated Financial Statement Schedules

                                                                    Page
                                                                    ----
         Report of Independent Public Accountants                    50

         For the three years 1995, 1994 and 1993:
              Schedule II      -Valuation and Qualifying Accounts    51

         All other Schedules have been omitted because the required  information
is shown in the consolidated  financial  statements or notes thereto or they are
not applicable.


                                                        46

<PAGE>



(3)      Exhibits

<TABLE>
<CAPTION>
    Exhibit
    Number                                             Description
------------               ---------------------------------------------------------------------
<S>                        <C>
     3A(1)                 Form of Restated Certificate of Incorporation of the Registrant.

     3B                    Form of Amended Bylaws of the Registrant.

     4A(1)                 Form of Restated Certificate of Incorporation of the Registrant (see Exhibit 3A).

     4B                    Form of Amended Bylaws of the Registrant (see Exhibit 3B).

     4C(1)                 Form of Common Stock Certificate.

     4D(1)                 Form of Rights Agreement between the Registrant and Harris Trust & Savings Bank, as
                           Rights Agent ("Rights Agreement").

     4E(1)                 Amendment and Amendment No. 2 to Rights Agreement dated as of July 31, 1989 and
                           January 4, 1990, respectively.

     4F(3)                 Amendment No. 3 to Rights Agreement dated as of November 5, 1991.

                           Instruments  with respect to long-term  debt which do
                           not  exceed 10  percent  of the  total  assets of the
                           Registrant and its consolidated subsidiaries have not
                           been filed.  The Registrant  agrees to furnish a copy
                           of such instruments to the Commission upon request.

     4G(4)                 Amended and  Restated  Credit  Agreement  dated as of
                           December 11, 1992 among Eljer Manufacturing, Inc., as
                           Borrower,   Eljer   Industries,   Inc.,   as   Parent
                           Guarantor,  the Banks listed therein, and NationsBank
                           of Texas, N.A., as Administrative Agent and Co-Agent,
                           and Morgan  Guaranty  Trust  Company of New York,  as
                           Co-Agent  and,  for  limited   purposes,   The  First
                           National Bank of Chicago, as "First Chicago".

     4H(6)                 Form of First Amendment to Amended and Restated Credit Agreement dated as of March
                           25, 1994.

     4I(7)                 Form of Second Amendment to Amended and Restated Credit Agreement dated as of
                           October 17, 1994.

     4J(9)                 Form of  Third  Amendment  to  Amended  and  Restated
                           Credit Agreement dated as of August 15, 1995.

     4K(7)                 Loan and Security Agreement by and among Congress Financial Corporation
                           (Southwest) as Lender and Eljer Manufacturing, Inc. as Borrower and Eljer Industries, Inc.
                           as Guarantor dated October 17, 1994.

    10A(1)                 Form of Reorganization and Distribution Agreement.

    10B(1)                 Form of Employee Benefits and Labor Agreement.

    10C(1)                 Form of Tax Sharing Agreement.

    10D(1)                 Form of Transition Management Services Agreement.

    10E(1)                 Form of Standstill Agreement between the Registrant & Household
                           International, Inc.

    10F(2)                 Form of Employment Agreement with Scott G. Arbuckle.

    10G(2)                 Form of Employment Agreement with James F. Thomason.

    10H(2)                 Form of Employment Agreement with James A. Harris and Brooks F. Sherman.

    10I(8)                 Form of Employment Agreement with George W. Hanthorn.
</TABLE>

                                       47

<PAGE>


<TABLE>
<CAPTION>
    Exhibit
    Number                                             Description
------------               ---------------------------------------------------------------------
<S>                        <C>

    10J                    Form of Employment Agreement with Nancy J. Duricic.

    10K                    Form of Employment Agreement with Steven M. Rodman.

    10L                    Form of Employment Agreement with Gerald J. Morris.

    10M                    Salaried Pension Plan for Eljer Manufacturing, Inc.

    10N(10)                Amendment No. 1 to the Salaried Pension Plan of Eljer Manufacturing, Inc.

    10O                    Tax Reduction Investment Plan.

    10P(1)                 Long-Term Executive Incentive Compensation Plan of the Registrant.

    10Q(2)                 1991 Long-Term Incentive Plan.

    10R                    1995 Long-Term Incentive Plan

    10S(2)                 Form of Executive Severance Agreement with Scott G. Arbuckle.

    10T(8)                 Form of Amendment to Executive Severance Agreement with Scott G. Arbuckle.

    10U(2)                 Form of Executive Severance Agreement with James F. Thomason, James A. Harris,
                           Brooks F. Sherman and George W. Hanthorn.

    10V(8)                 Form of Amendment to Executive Severance Agreement with James F. Thomason,
                           James A. Harris, Brooks F. Sherman and George W. Hanthorn.

    10W                    Form of Severance Agreement with Nancy J. Duricic and Gerald J. Morris.

    10X(3)                 Eljer Supplemental Benefit Plan.

    10Y(3)                 Eljer Excess Benefit Plan.

    10Z(5)                 Eljer Industries, Inc. Stock Payment Plan for Non-Employee Directors.

    21                     Subsidiaries of the Registrant.

    23                     Consent of Arthur Andersen, LLP, independent certified public accountants.

    27                     Financial Data Schedule.
----------
     (1)                   Incorporated by reference to the Registrant's Registration Statement on Form 10 filed
                           February 14, 1989, as amended by Forms 8 filed March 14, 1989, March 23, 1989, March
                           27, 1989, August 3, 1989, January 10, 1990, May 2, 1990 and November 19, 1991 (File
                           No. 0-10181).

     (2)                   Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the
                           Quarterly Period Ended March 31, 1991 filed May 14, 1991.

     (3)                   Incorporated   by  reference   to  the   Registrant's
                           Quarterly  Report  on Form  10-Q  for  the  Quarterly
                           Period Ended  September  29, 1991 filed  November 12,
                           1991.

     (4)                   Incorporated by reference to the Registrant's Annual Report on Form 10-K for the Fiscal
                           Year Ended January 3, 1993, filed April 1, 1993.

     (5)                   Incorporated by reference to the Registrant's Registration Statement on Form S-8 filed
                           December 16, 1993 (registration no. 33-51527).

     (6)                   Incorporated by reference to the Registrant's Annual Report on Form 10-K for the Fiscal
                           Year Ended January 2, 1994, filed March 31, 1994.
</TABLE>


                                       48

<PAGE>



     (7)                   Incorporated   by  reference   to  the   Registrant's
                           Quarterly  Report  on Form  10-Q  for  the  Quarterly
                           Period Ended October 2, 1994 filed November 16, 1994.

     (8)                   Incorporated by reference to the Registrant's Annual
                           Report on Form 10-K for the Fiscal Year Ended
                           January 1, 1995, filed March 29, 1995.

     (9)                   Incorporated by reference to the Registrant's
                           Quarterly Report on Form 10-Q for the Quarterly
                           Period Ended July 2, 1995 filed August 16, 1995.

     (10)                  Incorporated   by  reference   to  the   Registrant's
                           Quarterly  Report  on Form  10-Q  for  the  Quarterly
                           Period Ended October 1, 1995 filed November 15, 1995.


(4)      Reports on Form 8-K

         None.




                                       49

<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Shareholders of Eljer Industries, Inc.:

          We  have  audited  in  accordance  with  generally  accepted  auditing
standards,  the consolidated financial statements of Eljer Industries,  Inc. and
subsidiaries  included  in this Form 10-K,  and have  issued our report  thereon
dated  March 5,  1996.  Our  report  on the  consolidated  financial  statements
includes an explanatory  paragraph with respect to the  substantial  doubt about
the Company's ability to continue as a going concern in its present consolidated
form due to the  issues  arising  from the Qest  polybutylene  plumbing  systems
manufactured and sold by the Company's indirect, wholly-owned subsidiary, United
States Brass Corporation.  Our report on the consolidated  financial  statements
also includes an emphasis of matter paragraph regarding the Company's term debt,
which expires on January 31, 1997.  These matters are discussed in Notes 2 and 3
to the consolidated  financial statements.  Our audits were made for the purpose
of forming an opinion on the basic consolidated  financial statements taken as a
whole. The schedule listed in the index to Item 14 is the  responsibility of the
Company's  management  and is  presented  for  purposes  of  complying  with the
Securities  and  Exchange  Commission's  rules  and is  not  part  of the  basic
consolidated  financial  statements.  This  schedule  has been  subjected to the
auditing  procedures applied in the audits of the basic  consolidated  financial
statements  and, in our opinion,  fairly  states in all material  respects,  the
financial  data  required  to be set  forth  therein  in  relation  to the basic
consolidated financial statements taken as a whole.



                                          ARTHUR ANDERSEN LLP

Dallas, Texas,
March 5, 1996


                                       50

<PAGE>



                             ELJER INDUSTRIES, INC.
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                                 Additions
                                                                       ---------------------------
                                                      Balance at       Charged to         Charged                           Balance
                                                      Beginning         Costs/            to Other                           at End
         Description                                  of Period        Expenses           Accounts        Deduction        of Period
         -----------                                  ---------        ----------         --------        ---------        ---------

<S>                                                   <C>              <C>                <C>            <C>               <C>
1993
   Accounts receivable reserves....................    $10,068           $1,378           $  (207)       $(2,349)<F1>       $8,890
                                                       =======           =======          =======        =======            ======

   Reserve for receivables from
     insurance carriers............................    $13,455           $    --          $    --        $(6,005)<F2>       $7,450
                                                       =======           =======          =======        =======            ======

1994
   Accounts receivable reserves....................    $ 8,890           $    61          $    --        $(1,255)<F1>       $7,696
                                                       =======           =======          =======        =======            ======

   Reserve for receivables from
     insurance carriers............................    $ 7,450           $    --          $(7,198)<F3>   $  (252)<F2>       $   --
                                                       =======           =======          =======        =======            ======

1995
   Accounts receivable reserves....................    $ 7,696           $   119          $    --        $  (907)<F1>       $6,908
                                                       =======           =======          =======        =======            ======


<FN>
<F1>  Includes primarily write-offs of uncollectible accounts and net customer discounts taken.
<F2>  Includes primarily collection of proceeds from insurance carriers.
<F3>  Represents write-off against related asset.
</FN>
</TABLE>

                                       51

<PAGE>



                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated: March 7, 1996                       ELJER INDUSTRIES, INC.



                                           By:     /s/Brooks F. Sherman
                                              -----------------------------
                                                     Brooks F. Sherman
                                                  Vice President-Finance,
                                                  Chief Financial Officer
                                                        and Treasurer

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

<TABLE>
<CAPTION>
          Signature                                      Title                           Date

<S>                                              <C>                                 <C>    
     /s/Frank J. Morgan                          Chairman of the Board               March 7, 1996
-------------------------------
     Frank J. Morgan



     /s/Scott G. Arbuckle                         Director, President                March 7, 1996
-------------------------------                     and Chief Executive Officer
     Scott G. Arbuckle                              (Principal Executive Officer)
                                                  

     /s/Brooks F. Sherman                         Vice President-Finance,            March 7, 1996
-------------------------------                     Chief Financial Officer
     Brooks F. Sherman                              and Treasurer (Principal
                                                    Financial and Accounting Officer)
                                                    


     /s/John H. Deininger                         Director                           March 7, 1996
-------------------------------
     John H. Deininger


     /s/Paul E. Price                             Director                           March 7, 1996
-------------------------------
     Paul E. Price


     /s/C. A. Rundell, Jr.                        Director                           March 7, 1996
-------------------------------
     C. A. Rundell, Jr.


     /s/Walter C. Minnick                         Director                           March 7, 1996
-------------------------------
     Walter C. Minnick
</TABLE>

                                       52