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UNITED STATES
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
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2000

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

COMMISSION FILE NUMBER 33-64140

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

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

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

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

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

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------

COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE

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

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

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

As of March 8, 2001, there were 55,725,247 shares of the Registrant's Common
Stock outstanding. The aggregate market value of Common Stock held by
nonaffiliates of the Registrant at March 8, 2001 was $436,367,815 (based on the
closing sale price of the Common Stock on March 8, 2001). This calculation does
not reflect a determination that persons are affiliates for any other purposes.

DOCUMENTS INCORPORATED BY REFERENCE

DOCUMENT PART OF FORM 10-K
-------- INTO WHICH INCORPORATED
PROXY STATEMENT FOR 2001 -----------------------
ANNUAL MEETING OF STOCKHOLDERS PART III

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DAL-TILE INTERNATIONAL INC.

FORM 10-K

TABLE OF CONTENTS

Page
----

PART I

Item 1. Business......................................................................................... 1
Item 2. Properties....................................................................................... 10
Item 3. Legal Proceedings................................................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 11

PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................ 12
Item 6. Selected Financial Data.......................................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................... 20
Item 8. Financial Statements and Supplementary Data...................................................... 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 22

PART III
Item 10. Directors and Executive Officers of the Registrant............................................... 23
Item 11. Executive Compensation .......................................................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 26
Item 13. Certain Relationships and Related Transactions................................................... 26

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................. 27

PART I

ITEM 1. BUSINESS

GENERAL

Dal-Tile International Inc., a Delaware corporation formed in 1987 (the
"Registrant"), believes that it is the largest manufacturer, distributor and
marketer of ceramic tile in the United States and one of the largest in the
world. Unless the context otherwise requires, references herein to the "Company"
and "Dal-Tile" shall refer to Dal-Tile International Inc. and its consolidated
subsidiaries. Dal-Tile International Inc. is a holding company and conducts all
its operations through its subsidiaries. References herein to fiscal year 2000
refer to the fiscal year ended December 29, 2000.

Dal-Tile currently conducts its business in one industry segment, engaging in
the manufacturing, distribution and marketing of tile (wall, floor, quarry and
mosaic), natural stone and related products. The Company operates with a
significant level of vertical integration, combining what it believes to be
North America's largest volume distribution system of ceramic tile with modern
manufacturing facilities located in the United States and Mexico. A full range
of tile and stone products are offered, as well as installation materials and
tools ("allied products") designed to appeal to a broad range of customers for
both residential and commercial applications (new construction as well as
remodeling). Products are sold through a network of 220 Company-operated sales
centers to tile contractors, architects, design professionals, builders,
developers and individual consumers. Products are also sold through a network of
200 independent distributor locations to a variety of commercial and residential
customers. In addition, Dal-Tile is a significant supplier to the do-it-yourself
and buy-it-yourself market by supplying home center retailers, such as The Home
Depot and Lowe's. The Company's manufactured products are marketed under the
names DALTILE-Registered Trademark- and AMERICAN OLEAN-Registered Trademark-. In
addition, the Company resells other manufacturers' products under its own and/or
such other manufacturers' brands.

The Company commenced operations in 1947 as the Dallas Ceramic Company and
established its first wall tile manufacturing facility and corporate
headquarters in Dallas, TX. On January 9, 1990, AEA Investors Inc., a privately
held corporation headquartered in New York ("AEA Investors"), arranged for
Dal-Tile to acquire all the outstanding capital stock of Dal-Tile Corporation,
its affiliated companies and certain related assets (the "AEA Acquisition"). On
December 29, 1995, the Company completed the acquisition of all the issued and
outstanding stock of American Olean Tile Company, Inc. ("AO"), a wholly owned
subsidiary of Armstrong World Industries, Inc. ("AWI"), and certain related
assets of the ceramic tile operations of AWI (the "AO Acquisition").

DISTRIBUTION, SALES AND MARKETING

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

Dal-Tile has three regional distribution centers strategically located in
California, Maryland and Texas to improve customer service in each distribution
channel through shorter lead times, increased order fill rates and improved
on-time deliveries to its customers. In addition, the regional distribution
centers enhance the ability to plan and schedule production and to manage
inventory requirements.

During fiscal year 2000, Dal-Tile opened a state-of-the-art showroom and design
center in Atlanta, GA. The Company had previously opened a showroom in Dallas,
TX in fiscal year 1999. These showrooms are dedicated primarily to the
residential business and provide a place for customers of local builders,
remodelers, architects, designers and contractors to view and select ceramic
tile for their building projects. The showroom is staffed with design
professionals knowledgeable in wall and floor tile applications, as well as
current design and decorating trends.

COMPANY-OPERATED SALES CENTERS

A network of 220 Company-operated sales centers located in the U.S., Canada and
Puerto Rico distributes primarily the DALTILE brand product, serving customers
in all 50 states and portions of Canada and Puerto Rico. For fiscal year 2000, a
majority of the Company's net sales were made through its Company-operated sales
centers.

In addition to sales center staff, this distribution channel is supported by
approximately 129 sales associates servicing both commercial and residential
markets. The DALTILE brand also has a group of 43 sales representatives
dedicated exclusively to the architectural community. The architectural
community exercises significant influence over the specification of products
utilized in commercial applications.

The Company has designed each sales center to serve as a "one-stop" source that
provides customers with one of the ceramic tile industry's broadest product
lines - a complete selection of glazed floor tile, glazed wall tile, glazed and
unglazed ceramic mosaic tile, porcelain tile, quarry tile and stone products, as
well as allied products. In addition to products manufactured by the Company,
the sales centers carry a selection of purchased products to provide customers
with a broader product line. The sales centers generally range in size from
3,000 to 30,000 square feet, with a typical center occupying approximately
12,000 square feet. The sales centers consist of a showroom dedicated to
displaying the product offerings together with office space and a warehouse in
which inventory is stocked. Sales center displays and inventories are designed
to reflect local consumer preferences. The sales centers generally are located
in light industrial areas rather than retail areas and generally occupy
moderately priced lease space under 3 to 5 year leases.

As of December 29, 2000, the sales center distribution system included 218
Dal-Tile sales centers and two American Olean sales centers, three stone slab
operations and two residential showrooms, which provide sales and merchandising
support to the sales centers. In the future, the Company may open additional
sales centers in areas where factors such as population, construction activity,
local economic conditions and usage of tile create an attractive environment for
a sales center. From time to time, sales centers are closed in locations where
economic and competitive conditions have changed.

INDEPENDENT DISTRIBUTOR

The independent distributor channel is serviced through a dedicated business
unit that includes 12 regional sales managers to serve the particular
requirements of its customers. Currently, the AMERICAN OLEAN brand is
distributed through 200 independent distributor locations and two Company-owned
sales centers that service a variety of residential and commercial customers.
The Company's strategy is to increase its presence in the independent
distributor channel, particularly in tile products that are most commonly used
in flooring applications.

Domestic sales within Mexico are made primarily through a network of independent
retailers who are principally supplied by the Monterrey, Mexico manufacturing
facility.

HOME CENTER RETAILERS

The Company believes it is one of the U.S. ceramic tile industry's largest
suppliers to the do-it-yourself and buy-it-yourself markets through home center
retailers, such as The Home Depot and Lowe's, serving more than 1,600 home
center retail outlets nationwide. The home center retailer channel has provided
Dal-Tile with new sources of sales over the past five years and is expected to
continue presenting important growth opportunities.

ESTABLISHED BRANDS AND SPECIAL MARKETING PROGRAMS

The Company believes that it has two of the leading brand names in the U.S.
ceramic tile industry - DALTILE and AMERICAN OLEAN. The roots of the DALTILE and
AMERICAN OLEAN brand names date back approximately fifty and seventy-five years,
respectively.

The Company-operated sales centers distribute primarily the DALTILE brand, which
includes a fully integrated marketing program, emphasizing a focus on fashion.
The product offering is based on the Company's assessment of the needs of
professional installers, designers, architects and builders, as well as a review
of competitive products. The marketing program includes public relations
support, merchandising (displays/sample boards, chip chests),
literature/catalogs and an Internet website.

The AMERICAN OLEAN brand consists of a full product offering and is distributed
primarily through independent distributors. The brand is supported by a fully
integrated marketing program, including public relations efforts, displays,
merchandising (sample boards, chip chests), literature/catalogs and an Internet
website.

The Company also has a special marketing program with Kohler-Registered
Trademark- for bathroom and kitchen fixture color coordination. The program
includes development of ceramic tile products and merchandising programs to
complement this product line.

PRODUCT AND PRODUCT DEVELOPMENT

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

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

During fiscal year 2000, Dal-Tile announced that it had entered into a joint
venture, Dal Italia LLC, with EmilCeramica S.p.A., a leading Italian tile
manufacturer. Dal Italia LLC sells and distributes high quality porcelain tile
for the North American market. This will allow Dal-Tile to offer its customers
specially designed products combining superior Italian technology with
Dal-Tile's unmatched distribution and professional sales services.

CUSTOMERS

Dal-Tile's core customers consist of large and small tile contractors,
architects, design professionals, builders, developers, independent
distributors, floor covering dealers and ceramic specialty retailers. The
Company also sells to the do-it-yourself and buy-it-yourself market through a
relationship with home center retailers, such as The Home Depot and Lowe's, and
is a significant supplier to this channel. The Company has a broad and
diversified customer base of more than 41,000 active accounts in the United
States. In addition, the Company has a program with over 285 accounts where
Dal-Tile products are specified on their projects. These accounts range from
recognized restaurant chains, such as McDonald's, Wendy's, Taco Bell and Burger
King, to other national chain stores, such as Barnes & Noble book stores,
Wal-Mart stores and ExxonMobil service stations.

The Company does not rely on any one customer or group of customers for a
material amount of its net sales. The largest customer for fiscal year 2000
accounted for less than 8 percent of net sales, and the 10 largest customers
accounted for approximately 15 percent of net sales in the same period.

MANUFACTURING

Currently, Dal-Tile operates nine tile manufacturing facilities with an
aggregate annual manufacturing capacity of 488 million square feet. During the
five-year period 1996-2000, approximately $150 million has been invested in
capital expenditures, principally for new plants and state-of-the-art fast-fire
equipment to increase manufacturing capacity, improve efficiency and develop new
capabilities. Operating capacity has expanded from 402 million square feet to
488 million square feet during the same period.

In fiscal year 1996, approximately 22 million square feet of fast-fire wall
tile production capacity was established at the El Paso, TX facility and was
increased to approximately 45 million square feet in fiscal year 1997. During
fiscal year 1998, approximately 22 million square feet of fast-fire wall tile
production capacity was added at the Dallas, TX facility to replace less
efficient production capacity at the location. In fiscal year 1999,
approximately 22 million square feet of fast-fire glazed floor tile capacity
was added in Monterrey, Mexico. Also, approximately 5.6 million square feet
of fast-fire wall tile trim capacity was added in the Dallas, TX facility to
replace less efficient production capacity at the location. In fiscal year
2000, approximately 22 million square feet of fast-fire glazed wall tile
capacity was added in El Paso, TX. Also, approximately 5.0 million square
feet of fast-fire wall tile trim capacity was added in the Dallas, TX
facility to replace less efficient production capacity at the location. Also,
approximately 5.5 million square feet of fast-fire quarry capacity was added
in the Lewisport, KY facility.

The Company commenced operations in Mexico at its Monterrey facility in 1955 and
since then has been manufacturing products at this facility for U.S. and Mexican
consumption. The Monterrey location contains five distinct manufacturing
facilities, three of which produce ceramic tile, one which produces frit (ground
glass) and one which produces refractories. This location is the Company's
largest manufacturing facility.

The Company also has a 49.99 percent interest in Recumbrimientos Interceramic,
S.A. de C.V. ("RISA"), a Mexican joint venture with Interceramic, a leading
Mexican manufacturer, which, pursuant to contractual arrangements, has agreed to
supply the Company, at the Company's option, with up to 25 million additional
square feet of floor tile annually.

Following the AO Acquisition, the Company consolidated wall tile production by
closing the Lansdale, PA and Jackson, TN wall tile facilities and consolidating
a portion of the mosaic tile production in fiscal year 1996. In fiscal year
1997, the Company initiated the process of consolidating a portion of unglazed
floor tile production by closing the Coleman, TX facility. In addition,
production was suspended in late fiscal year 1997 at the Mt. Gilead, NC glazed
floor tile facility, and the facility was closed during fiscal year 1998. As of
December 29, 2000, the Company was pursuing the sale of the Coleman and Mt.
Gilead facilities.

The Company believes that its manufacturing organization offers competitive
advantages due to its ability to manufacture a differentiated product line
consisting of one of the industry's broadest product offerings of colors,
textures and finishes, as well as the industry's largest offering of trim and
angle pieces and its ability to utilize the industry's newest technology. The
Company's manufacturing strategy is to maximize production at its lowest cost
manufacturing facilities, continue ongoing improvements by implementing
demonstrated best practices and continue to invest in manufacturing technology
to lower its costs and develop new capabilities.

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

FACILITY PRODUCT TYPE
- -------- ------------

Fayette, AL............................. Unglazed quarry tile
Lewisport, KY........................... Unglazed quarry tile
Monterrey, Mexico....................... Glazed wall tile, glazed floor tile, glazed mosaic tile
Olean, NY............................... Unglazed mosaic tile
Gettysburg, PA.......................... Unglazed mosaic tile
Jackson, TN............................. Glazed and unglazed mosaic tile
Conroe, TX.............................. Glazed floor tile
Dallas, TX.............................. Glazed wall tile
El Paso, TX............................. Glazed wall tile

While certain of the manufacturing facilities are described above as producing
either "floor" or "wall" tile, tile consumers employ all sizes and varieties of
tile products in all types of applications. The references to "floor" and "wall"
tile serve to identify the most common application for the size and variety in
question.

RAW MATERIALS

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

During the fourth quarter of fiscal year 1999, the Company sold its talc mining
operation, along with the related mineral rights, to Wold Talc Company. In
conjunction with the sale, a long-term supply agreement for talc requirements
was signed between the Company and Wold Talc Company.

Dal-Tile owns long-term clay mining rights in Alabama, Kentucky and Mississippi
that satisfy nearly all clay requirements for producing unglazed quarry tile.
The Company purchases a number of different grades of clay for the manufacture
of its non-quarry tile. Management believes that there is an adequate supply of
all grades of clay and that all are readily available from a number of
independent sources.

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

Glazes are used on a significant percentage of manufactured tile, consisting of
frit (ground glass), zircon, stains and other materials, with frit being the
largest ingredient. The Company manufactures approximately 62 percent of its
frit requirements.

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

MANAGEMENT INFORMATION SYSTEMS

During fiscal year 2000, major new systems implemented included a new sales
forecasting system, an eCommerce web site for independent distributors, a
web-based tracking system to track purchase orders for sourced finished goods,
an Oracle general ledger system and a sales data warehouse for comprehensive
sales reporting.

COMPETITION

Sales of the Company's products are made in a highly competitive marketplace.
Management estimates that over 100 tile manufacturers, more than half of
which are based outside the U.S., compete for sales of ceramic tile to
customers located in the U.S. Although the U.S. ceramic tile industry is
highly fragmented at both the manufacturing and distribution levels, the
Company believes that it is the largest manufacturer, distributor and
marketer of ceramic tile in the U.S. and one of the largest in the world. In
addition to competition from domestic and foreign tile manufacturers,
Dal-Tile encounters competition from manufacturers of products that serve as
an alternative to tile. Competition in the tile industry is based on design,
price, customer service and quality. The Company believes that it has a
favorable competitive position as a result of its extensive North American
distribution system and manufacturing capacity, together with its vertically
integrated operations. In fiscal year 1999, approximately 72 percent of
ceramic tile sales (by unit volume) in the U.S. consisted of imports,
including approximately 7 percent manufactured by the Company in Mexico. In
general, the proportion of U.S. ceramic tile sales attributable to imports
has increased in recent years.

Dal-Tile products compete with numerous other wall and flooring coverings for
residential and commercial uses. Among such floor coverings are carpet, wood
flooring and resilient flooring. Among such wall coverings are paint, wallpaper,
laminates and wood paneling. Ceramic tile products compete effectively as to
price with carpeting, wood flooring and vinyl flooring. Although the cost of
installation of ceramic tile is higher than the cost of installation of carpet,
wood flooring and some wall coverings, it is generally believed that ceramic
tile has a lower cost over its useful life, primarily due to ceramic tile's
durability.

EMPLOYEES

At December 29, 2000, the Company employed 7,524 persons, 2,879 of which were
employed by its Mexican subsidiary. Approximately 10 percent of employees in
the U.S. are represented by unions. Approximately 90 percent of the employees
in Mexico are represented by a union under a collective bargaining agreement
effective January 1, 2001. The Company has not experienced a significant work
stoppage in Mexico in over 20 years and experienced only one brief work
stoppage in the U.S. over that period. The Company believes that relations
with its employees are good.

TRADEMARKS

The Company owns rights to certain trademarks and trade names, including
DALTILE, AMERICAN OLEAN, HOME SOURCE AND DAL-MONTE-TM-, which are or have been
used in the marketing of its products. The Company believes that breadth of
product line, customer service and price are important in tile selection and
that the trademarks and tradenames themselves are important as source
identifiers that help differentiate Company product lines from those of
competitors.

ENVIRONMENTAL REGULATION

The Company is subject to various federal, state, local and foreign
environmental laws and regulations, including those governing air emissions,
wastewater discharges, the use, storage, treatment and disposal of solid and
hazardous materials, and the remediation of contamination associated with such
disposal. Because of the nature of its business, the Company has incurred, and
will continue to incur, costs relating to compliance with such laws and
regulations. The Company is involved in various proceedings relating to
environmental matters and is currently engaged in environmental investigation,
remediation and post-closure care programs at certain sites. The Company has
provided reserves for such activities that the Company has determined to be both
probable and reasonably estimable. The Company is entitled to indemnification
with respect to certain expenditures incurred in connection with such
environmental matters and does not expect that the ultimate liability with
respect to such activities will have a material effect on the Company's
liquidity and financial condition.

A number of the Company's facilities have conducted tile manufacturing
operations for many years and in the past have used lead compounds and other
hazardous materials in its glazing operations. The Texas environmental
proceedings discussed below arose principally in connection with the Company's
disposal of waste materials containing lead compounds prior to the AEA
Acquisition. From time to time, the Company also is involved in the remediation
of historic contamination at certain of its other present and former facilities,
as well as at other locations in the U.S.

The Company is involved in Resource Conservation and Recovery Act ("RCRA") Part
B post-closure care permitting projects with respect to two sites near its
Dallas facility, which are proceeding under the oversight of the Texas Natural
Resource Conservation Commission ("TNRCC"). In March 1991, the Company and the
predecessor to the TNRCC agreed to an administrative order (the "1991 Order")
relating to past waste disposal activities conducted prior to the AEA
Acquisition. The 1991 Order related principally to the disposal by the Company
of waste materials containing lead compounds in a gravel pit ("Elam") near the
City of Mesquite's landfill in Dallas County during a period from 1980 to 1987,
and the disposal of miscellaneous solid wastes that were contaminated by lead
compounds at a Company-operated landfill located on Pleasant Run Road ("Pleasant
Run") in Dallas County from 1986 to May of 1990. Pursuant to the 1991 Order, the
Company paid a non-deferred assessed penalty of $350,000 and contributed another
$350,000 to a fund dedicated to environmental enhancement activities in Dallas
County. The Company received notice from the TNRCC terminating the 1991 Order
and releasing the Company from any obligation regarding the payment of deferred
penalties. The Company's closure plans

for Elam and Pleasant Run were approved by the TNRCC, and remediation and
other activities associated with the closures have been completed. The TNRCC
formally issued post-closure care permits for Elam and Pleasant Run in April
of 2000. The Company expects to incur a future cost of approximately $270,000
in connection with post-closure at Elam and Pleasant Run. The Company expects
to recover at least 50 percent of costs relating to these sites (a substantial
portion of which has already been recovered) pursuant to the Settlement
Agreement with two of the former owners of the Company described below, and
the Company believes that any amounts not recovered pursuant to the Settlement
Agreement will not have a material adverse effect on the Company.

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

The Company is involved in an environmental remediation program with respect to
the disposal of hazardous wastes prior to the AEA Acquisition at a third site
near its Dallas facility. In October 1994, the Company, Master-Halco, Inc.
("Master-Halco") (a manufacturing company not affiliated with the Company),
certain third party individuals and the TNRCC agreed to an administrative order
(the "1994 Order") relating to, among other things, investigation and
remediation in connection with the alleged disposal of waste materials
containing lead compounds generated by the Company and others at a gravel pit on
Kleburg Road ("Walton") in Dallas prior to 1980. The Company has agreed to
indemnify such individuals against any costs relating to the disposal of
industrial solid waste at the site. Pursuant to the 1994 Order, among other
things, an administrative penalty of $213,200 assessed against the individuals
has been deferred pending timely and satisfactory completion of the technical
requirements in the 1994 Order. Master-Halco has paid the Company $690,000 to
resolve Master-Halco's share of remediation costs relating to the Walton site.
The Company has completed all required remediation and closure activities and in
November of 2000 submitted a formal closure certificate to the TNRCC. The
Company will submit an application for a post-closure care permit after the
closure certificate is approved. The Company expects to receive approval of the
post-closure care permit prior to the end of fiscal year 2002. In fiscal year
2000, total expenditures at Walton were approximately $1,800,000. The Company
expects to incur future costs of approximately $670,000 in connection with the
Walton site. The Company expects to recover at least 50 percent of its costs
pursuant to the Settlement Agreement with two of the former owners of the
Company described below, and the Company believes that any amounts not recovered
pursuant to the Settlement Agreement will not have a material adverse effect on
the Company.

On May 20, 1993, the Company entered into an agreement with Robert M.
Brittingham and John G. Brittingham, two of the former owners of the Company
(the "Settlement Agreement"), pursuant to which substantially all of the costs
incurred to the date thereof by the Company (approximately $13,600,000) in
respect of the 1991 Order, the three Dallas area sites described above and
certain related matters, including certain of the notices of violation referred
to above, have been repaid to the Company. Such former owners are also
obligated, pursuant to the terms of the Settlement Agreement, to indemnify the
Company against 50 percent of all expenditures incurred in connection with
various environmental violations relating to the Company's U.S. operations
occurring prior to the AEA Acquisition in excess of the approximately
$13,600,000 already paid, until such total excess expenditures reach a formula
amount, and 100 percent of all such expenditures in excess of the formula
amount. The Company's expenditures to date in respect of the matters described
above have been or are expected to be indemnified in accordance with the terms
of the Settlement Agreement (subject to the percentage limitations described
above). Accordingly, the Company believes (taking into account the
indemnification rights referred to above and

the reserves it has established) that its liability for environmental
violations occurring prior to the AEA Acquisition will not have a material
adverse effect on the Company. The Company believes that these two former
owners currently have assets far in excess of their potential liability under
the Settlement Agreement, and, accordingly, the Company believes that they
will be able to satisfy all of their obligations pursuant to their agreement
with the Company. Future events, which cannot be predicted, could affect the
ability of these former owners to satisfy their obligations. Therefore, no
assurance can be given that they will be able to meet their obligations when
they arise.

Under the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") and similar state statutes, regardless of fault or the legality of
original disposal, certain classes of persons, including generators of hazardous
substances, are subject to claims for response costs by federal and state
agencies. Such persons may be held jointly and severally liable for any such
claims. The Company has been named as a potentially responsible party ("PRP")
under CERCLA and similar state statutes with respect to the historic disposal of
certain hazardous substances at various other sites in the United States. With
respect to certain of these sites, the Company has entered into DE MINIMIS
settlements; at certain other sites, the liability of the Company remains
pending. Based on currently available information, the Company believes that its
ultimate allocation of costs associated with the investigation and remediation
of these pending sites will not, in the aggregate, have a material adverse
effect on the Company's financial condition.

In addition, subject to the terms of the Stock Purchase Agreement, dated as of
December 21, 1995 (the "AO Acquisition Agreement"), pursuant to which the
Company acquired AO, AWI agreed to indemnify the Company for various costs and
expenses that may be incurred in the future by the Company arising out of
pre-closing environmental conditions and activities with respect to AO. In
December of fiscal year 2000, AWI filed a voluntary petition for bankruptcy
under Chapter 11 of the bankruptcy code. The Company has filed a proof of claim
in the bankruptcy case with respect to certain pre-closing environmental matters
subject to indemnification pursuant to the AO Acquisition Agreement. There can
be no assurance that the Company will obtain any recovery in connection with its
proof of claim. The Company believes that, based on currently available
information, any liability of AO that is reasonably likely to arise out of any
of the sites at which AO has potential liability as a result of pre-closing
conditions and activities would not result in a material adverse effect on the
Company.

The Company's manufacturing facilities generate wastes regulated under the RCRA
and other U.S. federal and state laws. The Company also generates non-hazardous
wastes and is engaged in recycling and pollution prevention programs. Compliance
with current laws and regulations has not had, and is not expected to have, a
material adverse effect on the Company, including with respect to its capital
expenditures, earnings and competitive position.

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

expenditures in connection with the appropriate handling, treatment, storage
and disposal of such waste.

In addition, in light of the lengthy manufacturing history of the Company's
facilities, it is possible that additional environmental issues and related
matters may arise relating to past activities which the Company cannot now
predict, including tort liability and liability under environmental laws. In
particular, a number of the Company's facilities located in the United States
used lead compounds in glaze materials. The Company's Mexican facilities
continue to use lead compounds in their glaze materials on certain specially
ordered tiles. Significant exposure to lead compounds may have adverse health
effects. Although it is impossible to quantify the Company's liability, if
any, in respect of these matters, including liability to individuals exposed
to lead compounds, no claims relating to its use of lead compounds or waste
disposal matters are pending against the Company except as set forth above.
In addition, it is impossible to predict the effect which future
environmental regulation in the United States, Mexico and Canada could have
on the Company.

GEOGRAPHIC LOCATION

Financial information by geographic location for the three years ended December
29, 2000 is set forth in Note 12 to the Consolidated Financial Statements
included in this report. See also Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources," below in this report.

ITEM 2. PROPERTIES

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

MANUFACTURING, DISTRIBUTION AND OFFICE FACILITIES

The Company owns or leases 12 manufacturing, distribution and office facilities.
The location, use and floor area of such facilities are described as follows:

LOCATION USE SQ. FEET LEASED/OWNED
- -------- --- -------- ------------

Fayette, AL............... Manufacturing 276,467 Owned
Lewisport, KY............. Manufacturing 270,836 Owned
Baltimore, MD............. Distribution 315,000 Leased (1)
Monterrey, Mexico......... Manufacturing, Distribution & Office 1,464,597 Owned
Olean, NY................. Manufacturing 278,417 Owned
Gettysburg, PA............ Manufacturing 218,609 Owned
Jackson, TN............... Manufacturing 655,211 Owned
Conroe, TX................ Manufacturing 208,059 Owned
Dallas, TX................ Manufacturing, Distribution & Office 733,846 Owned
Dallas, TX................ Distribution 472,500 Leased (1)
El Paso, TX............... Manufacturing 366,876 Ground Leased (2)
Los Angeles, CA........... Distribution 410,515 Leased (1)

(1) The leases for the Baltimore, MD; Los Angeles, CA; and Dallas, TX
facilities expire on February 28, 2007, March 31, 2007 and January 31,
2003, respectively, and are subject to renewal options.
(2) The ground lease expires on November 21, 2034.

The Company closed its Coleman, TX manufacturing facility in fiscal year 1997
and closed its Mt. Gilead, NC manufacturing facility in fiscal year 1998. As of
December 29, 2000, the Company was pursuing the sale of the Coleman and Mt.
Gilead facilities.

SALES CENTERS

As of December 29, 2000, the Company owned one sales center in Denver, CO,
totaling approximately 22,500 square feet. In addition, 219 sales centers were
leased as of December 29, 2000 (aggregating approximately 2.6 million square
feet), pursuant to leases that extend for terms on average of 3 to 5 years with
expiration dates primarily from 2001 - 2006.

For a description of aggregate rental expenses with respect to its operating
leases, see Note 10 to the Consolidated Financial Statements included herein
relating to commitments and contingencies.

As of December 29, 2000, the Company leased three stone sales centers totaling
approximately 67,000 square feet and leased two showrooms totaling approximately
16,000 square feet.

ITEM 3. LEGAL PROCEEDINGS

In addition to the proceedings described under Item 1, "Business - Environmental
Regulation," the Company is involved in various lawsuits arising in the normal
course of business. In the opinion of management, the ultimate outcome of these
lawsuits will not have a material adverse effect.

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

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

The information appearing in item 10 hereof under the caption "Directors and
Executive Officers of the Registrant" is incorporated by reference herein.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

MARKET INFORMATION FOR COMMON STOCK

The Company's Common Stock, par value $.01 per share (the "Common Stock"), is
listed on the New York Stock Exchange under the symbol "DTL". The following
table sets forth the high and low sale prices for the common stock as reported
by the New York Stock Exchange from January 2, 1999, through December 29, 2000.

HIGH LOW
---- ---

January 2, 1999 to April 2, 1999 13-1/16 7
April 3, 1999 to July 2, 1999 13 7-1/2
July 3, 1999 to October 1, 1999 13-1/8 6-3/4
October 2, 1999 to December 31, 1999 10-1/2 7-11/16
January 3, 2000 to March 31, 2000 10-1/8 6-1/8
April 1, 2000 to June 30, 2000 10-1/2 8
July 1, 2000 to September 29, 2000 12-13/16 7
September 30, 2000 to December 29, 2000 14-5/16 11

HOLDERS

At March 8, 2001, there were 101 holders of record of Common Stock and
55,725,247 shares of Common Stock outstanding.

DIVIDEND POLICY

The Company has not paid cash dividends on Common Stock during the last three
years. The Company currently intends to retain any earnings for use in its
business and therefore, does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future.

Moreover, the Company is a holding company with no operations or significant
assets other than its investment in Dal-Tile Group Inc. ("Dal-Tile Group") and
its 49.99 percent interest in RISA. The Dal-Tile Group is a separate and
distinct legal entity and has no obligation, contingent or otherwise, to make
funds available to Dal-Tile, whether in the form of loans, dividends or other
cash distributions. The bank credit agreement limits dividends, loans or other
cash distributions from Dal-Tile Group to Dal-Tile, so that profits generated by
Dal-Tile Group may not be available to Dal-Tile to pay cash dividends or repay
indebtedness or otherwise. In light of these limitations, Dal-Tile Group will be
prohibited from making such dividends, loans and other cash distributions, and
Dal-Tile does not believe that Dal-Tile Group will be able to make such
dividends, loans or other cash distributions in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data presented for fiscal years 1996 through
2000 are derived from the Consolidated Financial Statements of the Company for
such period, and should be read in conjunction with Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the Consolidated Financial Statements including the related notes thereto
included elsewhere herein.

FISCAL YEAR ENDED
----------------------------------------------------------------------
DECEMBER 29, DECEMBER 31, JANUARY 1, JANUARY 2, JANUARY 3,
2000 1999 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

OPERATING DATA:
Net sales.............................. $ 952,156 $ 850,568 $ 751,785 $ 676,637 $ 720,236
Cost of goods sold..................... 497,933 440,514 396,112 404,728 369,731
----------- ----------- ----------- ----------- -----------
Gross profit........................... 454,223 410,054 355,673 271,909 350,505
Expenses:
Transportation....................... 64,549 57,124 55,988 58,425 47,125
Selling, general and administrative.. 247,099 232,845 222,790 277,515 190,911
Provisions for merger integration
charges............................ - - - - 9,000
Amortization of goodwill... 5,512 5,607 5,604 5,605 5,605
----------- ----------- ----------- ----------- -----------
Total operating expenses............... 317,160 295,576 284,382 341,545 252,641
----------- ----------- ----------- ----------- -----------
Operating income (loss)................ 137,063 114,478 71,291 (69,636) 97,864
Interest expense....................... 30,102 37,125 45,051 40,649 46,338
Interest income........................ 104 126 128 268 1,685
Other (expense) income ................ (444) 250 1,264 1,220 129
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes
and extraordinary item............... 106,621 77,729 27,632 (108,797) 53,340
Income tax provision................... 5,864 3,966 3,604 1,439 18,914
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary 100,757 73,763 24,028 (110,236) 34,426
item.................................
Extraordinary item - loss on early
retirement of debt, net of taxes..... - - - - (29,072)
----------- ----------- ----------- ----------- -----------
Net income (loss)...................... $ 100,757 $ 73,763 $ 24,028 $ (110,236) $ 5,354
=========== =========== =========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary
item per common share................ $ 1.83 $ 1.36 $ 0.45 $ (2.06) $ 0.71
Extraordinary item per common share.... - - - - (0.60)
----------- ----------- ----------- ----------- -----------
Net income (loss) per common share..... $ 1.83 $ 1.36 $ 0.45 $ (2.06) $ 0.11
=========== =========== =========== =========== ===========
Weighted average common shares......... 54,918 54,103 53,487 53,435 48,473
=========== =========== =========== =========== ===========

DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary
item per common share................ $ 1.82 $ 1.35 $ 0.45 $ (2.06) $ 0.69
Extraordinary item per common share.... - - - - (0.58)
----------- ----------- ----------- ----------- -----------
Net income (loss) per common share..... $ 1.82 $ 1.35 $ 0.45 $ (2.06) $ 0.11
=========== =========== =========== =========== ===========

Weighted average common shares,
assuming dilution.................... 55,396 54,539 53,983 53,435 50,053
=========== =========== =========== =========== ===========

BALANCE SHEET DATA (AT END OF PERIOD):
Working capital........................ $ 116,303 $ 91,791 $ 117,615 $ 154,888 $ 180,819
Total assets........................... 670,520 638,704 640,808 672,069 688,497
Total debt............................. 331,778 410,673 500,432 557,091 465,858
Long-term debt......................... 276,017 353,877 453,923 537,830 433,035
Stockholders' equity................... 212,308 100,944 15,459 3,920 115,569

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

OVERVIEW

For the fiscal year ended December 29, 2000, the Company achieved record sales
and net income. Sales increased approximately 11.9 percent and net income grew
36.6 percent versus the prior year. The growth in sales was realized across all
product teams through significant gains in the residential market and steady
improvement in commercial sales. These improvements were driven by strong market
acceptance of new products and initiatives to improve customer service. In
addition, the Company's emphasis on residential growth included opening its
second state-of-the-art showroom and design center.

Earnings growth was achieved despite significant pressure from foreign
competition, higher energy costs and a strong Mexican peso. During the year, the
Company took steps to partially offset these factors through greater
manufacturing efficiencies, modernization of facilities and reductions of
general and administrative costs. Because of these productivity enhancements and
focus on improved management of working capital, the Company increased operating
cash flow $6.3 million to $110.2 million versus $103.9 million in fiscal year
1999. Day's sales outstanding decreased to 42.9 days in fiscal year 2000 from
44.4 days in fiscal year 1999, while average inventory turns improved to 3.5 in
fiscal year 2000 from 3.2 a year ago. Debt decreased by $78.9 million, which
contributed to a $7.0 million, or 18.9 percent, reduction in interest expense
versus fiscal year 1999. Free cash flow decreased $5.8 million to $73.0 million
due primarily to a $12.1 million increase in capital expenditures over the prior
year for modernization and expansion of the Company's manufacturing facilities.

In September the Company announced the formation of a joint venture with
Emilceramica, S.p.A., an Italian tile manufacturer. The joint venture, Dal
Italia LLC, sells and distributes porcelain tile products for the North American
market. Dal Italia LLC is 80 percent owned by the Company and included in its
consolidated financial statements, and is 20 percent owned by Emilceramica,
S.p.A. Dal Italia LLC has a supply agreement with Emilceramica S.p.A. in which
porcelain tile products are purchased at cost plus transportation charges and
then distributed and sold exclusively through the Company's sales service
centers according to a distribution agreement between Dal Italia LLC and the
Company.

RESULTS OF OPERATIONS

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

FISCAL YEAR ENDED
------------------------------------------
DECEMBER 29, DECEMBER 31, JANUARY 1,
2000 1999 1999
------------ ------------ ----------

Net sales.................................... 100.0% 100.0% 100.0%
Cost of goods sold........................... 52.3 51.8 52.7
------------ ------------ ----------
Gross profit................................. 47.7 48.2 47.3
Operating expenses........................... 33.3 34.7 37.8
------------ ------------ ----------
Operating income ............................ 14.4 13.5 9.5
Interest expense (net)....................... 3.2 4.3 6.0
Other income ................................ - - 0.2
------------ ------------ ----------
Income before income taxes................... 11.2 9.2 3.7
Income tax provision......................... 0.6 0.5 0.5
------------ ------------ ----------
Net income .................................. 10.6% 8.7% 3.2%
============ ============ ==========

FISCAL YEAR ENDED DECEMBER 29, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1999

NET SALES

Net sales increased $101.6 million, or 11.9 percent, to $952.2 million for
fiscal year 2000 from $850.6 million for fiscal year 1999. The increase in sales
related principally to the Company-operated sales centers, which increased
$101.0 million, or 16.6 percent, versus fiscal year 1999. During fiscal year
2000, residential sales grew steadily due primarily to increased market
acceptance of new products. In addition, the Company opened a state-of-the-art
showroom and design center in Atlanta, GA to provide higher levels of customer
service to this market. The Company achieved growth in commercial sales through
improved product availability and overall customer service.

Net sales to independent distributors were up $1.4 million, or 1.2 percent,
versus fiscal year 1999 and the Home Center channel decreased $4.0 million, or
4.2 percent. The Company took steps to improve sales through its distributor
base by introducing new residential products and changing distributors in
selected markets. Home Center sales declined as a result of the Company's
decision to reduce sales of lower margin commodity products. Net sales within
Mexico increased $3.9 million to $32.8 million in fiscal year 2000 from $28.9
million in fiscal year 1999.

GROSS PROFIT

Gross profit increased $44.1 million, or 10.7 percent, to $454.2 million in
fiscal year 2000 from $410.1 million in fiscal year 1999. The increase in gross
profit was due primarily to the growth in sales. Gross margin decreased to 47.7
percent for fiscal year 2000 from 48.2 percent for fiscal year 1999. This
decrease was due primarily to higher natural gas prices and the strong Mexican
peso. These costs were partially offset by the implementation of various process
improvements and a shifting of production to low cost state-of-the-art
manufacturing facilities.

OPERATING EXPENSES

Operating expenses increased $21.6 million, or 7.3 percent, to $317.2 million in
fiscal year 2000 from $295.6 million in fiscal year 1999. This increase was a
result of additional spending for new product introductions and higher costs
associated with the growth in sales.

Operating expenses as a percent of sales decreased to 33.3 percent in fiscal
year 2000 compared to 34.7 percent in fiscal year 1999. This decrease was
primarily related to higher sales volume. In addition, corporate spending was
substantially reduced due to the completion of Y2K efforts in fiscal year 1999.
Freight expense as a percent of sales increased to 6.8 percent for fiscal year
2000 versus 6.7 percent in 1999 due to higher fuel costs and increased service
requirements of the expanding residential market.

OPERATING INCOME

Operating income increased to $137.1 million in fiscal year 2000 from $114.5
million in fiscal year 1999. Operating margin increased to 14.4 percent compared
to 13.5 percent for the previous fiscal year due primarily to increased sales.

INTEREST EXPENSE (NET)

Interest expense (net) decreased $7.0 million, or 18.9 percent, to $30.0 million
in fiscal year 2000 from $37.0 million in fiscal year 1999. Interest expense
decreased due to reduced borrowing requirements on the Company's credit
facility. Also, lower fees and interest rates combined with reduced borrowing

spreads contributed to the reduction in interest expense. The Company's credit
facility contains a pricing mechanism that lowers borrowing spreads as financial
performance improves. During fiscal year 2000, borrowing spreads decreased from
1.25 percent to 0.75 percent on the revolver and Term A Loan borrowings and
remained at 1.75 percent on the Term B Loan borrowings.

INCOME TAXES

The income tax provisions for fiscal years 2000 and 1999 reflect Mexico tax
liabilities and U.S. state and possession income tax based on taxable income
in those jurisdictions. The fiscal year 2000 tax provision includes a U.S.
federal income tax benefit due to the reversal of the remaining valuation
allowance recorded against certain U.S. federal deferred tax assets. The
reversal of the valuation allowance is a result of the Company's analysis of
the likelihood of generating sufficient future taxable income and thus
realizing the future benefit of tax loss carryforwards and other deferred tax
assets. Although realization is not assured, the Company believes that it is
more likely than not that the tax benefits recorded will be realized through
future taxable income. The Company's normalized effective tax rate for fiscal
years 2000 and 1999 was 38.5 percent. The Company expects the effective tax
rate to be approximately 38.5 percent in the near term.

PESO-U.S. DOLLAR EXCHANGE RATE

The Company's Mexican facility is considered an extension of the U.S. parent
and primarily a provider of ceramic tile to the Company's U.S. operations.
Due to the U.S. parent's manufacturing requirements, fiscal year 2000
domestic sales in Mexico were limited to approximately 3.4 percent of the
Company's consolidated net sales. Prior to fourth quarter 1998, translation
gains or losses relating to exchange rate changes were reported as a separate
component of stockholders' equity. Due to the change in functional currency
in Mexico to the U.S. dollar, translation gains or losses and foreign
currency transaction gains or losses are recognized in other income and
expense. During fiscal year 2000, the Company recorded translation and
transaction losses of approximately $0.1 million. The Company uses foreign
currency forward contracts to hedge against currency risk associated with the
Mexican peso and accounts for these contracts as cash flow hedges. In
accordance with Statement of Financial Accounting Standards No. 133 -
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133")
and its amendments, such financial instruments are marked-to-market with the
offset to other comprehensive income and then subsequently recognized as a
component of cost of goods sold in the same period or periods during which
the hedged transaction affects earnings. The Company did not have any forward
contracts outstanding as of December 29, 2000.

FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED JANUARY 1,
1999

NET SALES

Net sales increased $98.8 million, or 13.1 percent, to $850.6 million for fiscal
year 1999 from $751.8 million for fiscal year 1998. The increase in sales
related principally to the Company-operated sales centers, which increased $87.2
million, or 16.7 percent versus fiscal year 1998. During fiscal year 1999, the
Company increased residential sales through new product introductions and the
addition of a dedicated sales force. In addition, a new state-of-the-art
showroom and design center was opened in Dallas, TX to provide higher levels of
customer service to this market. Also, the Company achieved growth in commercial
sales through improved product availability and overall customer service.

Net sales to independent distributors were down $1.4 million, or 1.2 percent
versus fiscal year 1998, and the Home Center channel increased $9.0 million, or
10.4 percent. Independent distributor sales were

negatively affected by the Company's continued process of restructuring its
distributor base, while Home Centers sales were favorably affected by the
growth of the residential business and sales to new store locations. Net
sales within Mexico increased $3.7 million to $28.9 million in fiscal year
1999 from $25.2 million in fiscal year 1998.

GROSS PROFIT

Gross profit increased $54.4 million, or 15.3 percent, to $410.1 million in
fiscal year 1999 from $355.7 million in fiscal year 1998. The increase in gross
profit was due primarily to the growth in sales and lower manufacturing costs.
Gross margin increased to 48.2 percent for fiscal year 1999 from 47.3 percent
for fiscal year 1998. This increase was due primarily to lower manufacturing
costs and increased productivity offset by reductions in selling prices caused
by more intense competition. During fiscal year 1999, manufacturing cost
reductions were achieved through shifts in production to low cost
state-of-the-art manufacturing equipment at several facilities. In addition,
efficiencies were gained through the implementation of various process
improvements. Inventory shrink and breakage were significantly reduced due to
better controls at the Company-operated stores and distribution centers.

OPERATING EXPENSES

Operating expenses increased $11.2 million, or 3.9 percent, to $295.6 million in
fiscal year 1999 from $284.4 million in fiscal year 1998. The increase was due
primarily to higher selling and marketing costs associated with the increase in
sales.

Operating expenses as a percent of sales decreased to 34.7 percent in fiscal
year 1999 from 37.8 percent in fiscal year 1998. This decrease was the result of
higher sales and the Company's efforts to reduce general and administrative
costs. Due to improved collection experience, bad debt provisions were lowered
during fiscal year 1999 and consulting expenses were reduced through the
completion of Y2K efforts and other initiatives. In addition, freight expense as
a percent of sales decreased to 6.7 percent for fiscal year 1999 versus 7.4
percent in 1998 due to improved shipment planning, increased efficiencies in
distribution and consolidation of freight carriers.

OPERATING INCOME

Operating income increased to $114.5 million in fiscal year 1999 from $71.3
million in fiscal year 1998. Operating margin increased to 13.5 percent compared
to 9.5 percent for the previous fiscal year due primarily to increased sales and
decreased operating costs.

INTEREST EXPENSE (NET)

Interest expense (net) decreased $7.9 million, or 17.6 percent, to $37.0 million
in fiscal year 1999 from $44.9 million in fiscal year 1998. Interest expense
decreased due to reduced borrowing requirements on the Company's credit
facility. Also, lower fees and interest rates combined with reduced borrowing
spreads contributed to the reduction in interest expense. The Company's credit
facility contains a pricing mechanism that lowers borrowing spreads as financial
performance improves. During fiscal year 1999, borrowing spreads decreased from
2.0 percent to 1.25 percent on the revolver and Term A Loan borrowings and
decreased from 2.5 percent to 1.75 percent on the Term B Loan borrowings.

INCOME TAXES

The income tax provisions for fiscal years 1999 and 1998 reflect Mexico tax
liabilities and U.S. state and possession income tax based on taxable income in
those jurisdictions. No U.S. federal income tax expense

was recorded for fiscal years 1999 and 1998 due to an offsetting reduction in
a valuation allowance recorded against certain U.S. federal deferred tax
assets. The valuation allowance was established in fiscal year 1997 offsetting
any benefit of federal net operating losses and to reflect management's
estimation as to the future utilization of the deferred tax assets.

PESO-U.S. DOLLAR EXCHANGE RATE

ASSET IMPAIRMENT

During fiscal year 1998, the Mt. Gilead, NC glazed floor manufacturing
facility was closed and is currently being held for sale. An aggregate
provision of $6.6 million was recorded in cost of sales in fiscal year 1998
to reduce the carrying value of the facility to its net realizable value. As
of December 29, 2000 its net realizable value was $0.9 million.

LIQUIDITY AND CAPITAL RESOURCES

Funds available under the Company's existing bank credit agreement provided
liquidity and capital resources for working capital requirements, capital
expenditures and debt service. Cash provided by operating activities was $110.2
million in fiscal year 2000 versus $103.9 million in fiscal year 1999.

Net expenditures for property, plant and equipment were $37.2 million for fiscal
year 2000, which included approximately $23.8 million for manufacturing process
improvements and the expansion and modernization of various manufacturing
facilities. In addition, the Company incurred expenditures for enhancements to
distribution and information systems and routine capital improvements. In July
2000, the Company amended its existing bank credit agreement (as amended, the
"Fourth Amended Credit Facility") primarily to increase capital spending and
lease limitations in support of expansion efforts.

Cash used in financing activities was $72.7 million for fiscal year 2000. Cash
outflows for revolver repayments of $22.1 million, term debt amortization of
$51.0 million and additional debt and fees of approximately $5.8 million were
partially offset by cash inflows of approximately $6.2 million primarily related
to the exercise of options of common stock and purchases of stock pursuant to
the Employee Stock Purchase Plan. Total availability as of December 29, 2000
under the Fourth Amended Credit Facility was $150.0 million. The Company
believes cash flow from operating activities, together with borrowings available
under its Fourth Amended Credit Facility will be sufficient to fund future
working capital needs, capital expenditures and debt service requirements.

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

The U.S. is a party to the General Agreement on Tariffs and Trade ("GATT").
Under GATT, the U.S. currently imposes import duties on ceramic tile from
non-North American countries at no more than 14 percent, to be reduced ratably
to no less than 8 1/2 percent by 2004. Accordingly, GATT may stimulate
competition from non-North American manufacturers who now export, or who may
seek to export, ceramic tile to the U.S. The Company cannot predict with
certainty the effect that GATT may have on the Company's operations.

In 1993, Mexico, the U.S. and Canada approved the North American Free Trade
Agreement ("NAFTA"). NAFTA has, among other things, removed and will continue to
remove, over a transition period, most normal customs duties imposed on goods
traded among the three countries. In addition, NAFTA will remove or limit many
investment restrictions, liberalize trade in services, provide a specialized
means for settlement of, and remedies for, trade disputes arising thereunder and
will result in new laws and regulations to further these goals. Although NAFTA
lowers the tariffs imposed on the Company's ceramic tile manufactured in Mexico
and sold in the U.S., it also may stimulate competition in the U.S. and Canada
from manufacturers located in Mexico. The U.S. currently imposes import duties
on glazed ceramic tile from Mexico of approximately 10.1 percent, although these
duties on imports from Mexico are being phased out ratably under NAFTA by 2008.
It is uncertain what ultimate effect NAFTA will have on the Company's results of
operations.

EFFECTS OF INFLATION

The Company believes it has generally been able to enhance productivity to
offset increases in costs resulting from inflation in the U.S. and Mexico.
During fiscal year 2000, the Company's results were negatively affected by the
increase of the inflation rate in Mexico that was not offset by devaluation of
the peso. Any future increases in the Mexican inflation rate which are not
offset or increases in the U.S. inflation rate, which affect financing costs,
may negatively affect the Company's results of operations.

NEW ACCOUNTING STANDARDS

Effective September 30, 2000, the Company adopted SFAS 133 and its amendments,
which require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in its fair value are either offset against the change in fair
value of assets, liabilities or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.

The Company formally documents all hedging instruments and hedging items, as
well as its risk management objective and strategy for undertaking various hedge
items. This process includes linking all derivatives that are designated as fair
value and cash flow hedges to specific assets or liabilities on the balance
sheet or to forecasted transactions. The Company also formally assesses, both at
inception and on an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in fair value or
cash flows of hedged items. When it is determined that a derivative is

not highly effective, the derivative expires, is sold, terminated, exercised
or the derivative is discontinued because it is unlikely that a forecasted
transaction will occur, the Company discontinues hedge accounting for that
specific hedge instrument.

In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, - "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25." The Interpretation,
which was adopted prospectively as of July 1, 2000, requires that stock options
that have been modified to reduce the exercise price be accounted for as
variable. The adoption of this interpretation did not affect the Company's
results for the fiscal year ended December 29, 2000, and is not expected to have
a material impact on future results.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements". SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. The adoption of SAB 101
during the fourth quarter of fiscal year 2000 did not affect the Company's
financial statements for the fiscal year ended December 29, 2000 and is not
expected to materially affect future financial results.

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company engages in activities that expose it to various market risks,
including the effects of changes in foreign currency exchange rates, interest
rates and natural gas prices. The financial exposure is managed as an integral
part of the Company's risk management program, which seeks to reduce the
potentially adverse effects that the volatility of the markets may have on
operating results. The Company does not regularly engage in speculative
transactions, nor does it regularly hold or issue financial instruments for
trading purposes. The Company maintains a foreign currency risk management
strategy that uses derivative instruments to protect its interests from
unanticipated fluctuations in earnings and cash flows caused by volatility in
currency exchange rates. The Company maintains an interest rate risk management
strategy that uses derivative instruments, currently interest rate swaps, to
minimize significant, unanticipated earnings fluctuations caused by volatility
in interest rates. In addition, the Company maintains a natural gas pricing
strategy to minimize significant fluctuations in earnings caused by the
volatility of gas prices.

INTEREST RATE RISK MANAGEMENT

To mitigate the impact of fluctuations in U.S. interest rates, the Company
currently maintains approximately 60 percent of its debt as fixed rate by
entering into interest rate swap agreements. Interest rate swap agreements are
designated with a portion of the principal balance and term of a specific debt
obligation.

INTEREST RATE SENSITIVITY TABLE AS OF DECEMBER 29, 2000:

FAIR VALUE
DECEMBER 29,
EXPECTED MATURITY DATES 2001 2002 2003 2004 2000
---------- ----------- ----------- ----------- ----------------
(IN THOUSANDS)

Total debt:
Fixed rate................... $ 2,886 $ 879 $ - $ - $ 3,764
Average interest rate........ 8.5% 8.3% - - -

Variable rate................ $52,875 $154,038 $120,800 $ 300 $328,013
Average interest rate (a).... 6.3% 6.5% 7.5% 7.5% -

Interest rate swaps:
Pay fixed/receive variable... $ 74 $ - $ - $ - $ 74
Average pay ................. 5.7% - - - -
Average receive.............. 6.7% - - - -

(a) The Term loans, revolver borrowings and other debt bear interest at
weighted average variable rates based on implied forward rates in the
yield curve at the reporting date plus an applicable margin ranging
from 0 percent to 1.75 percent depending upon the Company's leverage
ratio (as defined under the Fourth Amended Credit Facility). The
variable rate is equal to the London Interbank Offered Rate ("LIBOR")
or the prime rate as announced from time to time. At December 29, 2000,
the LIBOR interest rate in effect was 6.6 percent and applicable
margins were .75 percent and 1.75 percent for the Term A Loan /
revolver borrowings and Term B Loan, respectively. The prime rate in
effect was 9.5 percent and the applicable margin was 0 percent.

INTEREST RATE SENSITIVITY TABLE AS OF DECEMBER 31, 1999:

FAIR VALUE
DECEMBER 31,
EXPECTED MATURITY DATES 2000 2001 2002 2003 2004 1999
----------- ---------- ----------- ----------- ----------- ----------------
(IN THOUSANDS)

Total debt:
Fixed rate................... $ 3,921 $ 2,885 $ 879 $ - $ - $ 7,685
Average interest rate........ 8.4% 8.5% - - -
8.3%

Variable rate................ $52,875 $52,875 $176,138 $120,800 $ 300 $402,988
Average interest rate (a).... 7.7% 8.6% 8.7% 9.4% 9.4% -

Interest rate swaps:
Pay fixed/receive variable... $ 2,050 $ 152 $ - $ - $ - $ 1,501
Average pay ................. 5.7% 5.7% - - - -
Average receive.............. 6.7% 7.4% - - - -

(a) The Term loans, revolver borrowings and other debt bear interest at
weighted average variable rates based on implied forward rates in the yield
curve at the reporting date plus an applicable margin ranging from 0.25
percent to 2.75 percent depending upon the Company's leverage ratio (as
defined under the Third Amended Credit Facility). The variable rate is equal
to LIBOR or the prime rate as announced from time to time. At December 31,
1999, the LIBOR interest rate in effect was 5.8 percent and applicable
margins were 1.25 percent and 1.75 percent for the Term A Loan / revolver
borrowings and Term B Loan, respectively. The prime rate in effect was 8.5
percent and the applicable margin was 0.25 percent.

NATURAL GAS RISK MANAGEMENT

The Company uses a combination of natural gas futures contracts and long-term
supply agreements to manage unanticipated fluctuations in natural gas prices.
The instruments generally cover a period of one to three years on forecasted
usage of natural gas measured in Million British Thermal Units ("MMBTU"). As of
December 29, 2000, the Company held natural gas futures contracts with an
aggregate notional amount of approximately 4.2 million MMBTU and an aggregate
fair value of approximately $8.6 million. The weighted average strike price per
contract was $3.75. The Company did not have material futures contracts
outstanding as of December 31, 1999.

FOREIGN CURRENCY EXCHANGE RISK MANAGEMENT

The Company uses foreign currency forward contracts to hedge against foreign
currency exchange rate risk. As of December 29, 2000 and December 31, 1999 the
Company did not have any outstanding instruments that were sensitive to foreign
currency exchange rates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this item are set forth on pages F-1
through F-22 below and the related financial statement schedule is set forth on
page S-1 below.

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

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

NAME AGE POSITION OR OFFICE HELD
---- --- -----------------------

Jacques R. Sardas....................... 70 President, Chief Executive Officer and Chairman of the
Board of Directors
Douglas D. Danforth..................... 78 Director
John F. Fiedler......................... 62 Director
Vincent A. Mai.......................... 60 Director
Martin C. Murrer........................ 43 Director
Charles J. Pilliod, Jr.................. 82 Director
Norman E. Wells, Jr..................... 52 Director
W. Christopher Wellborn................. 45 Executive Vice President, Chief Financial Officer and
Assistant Secretary
Scot B. Bernstein....................... 35 Vice President, Supply Chain Planning
D. Curtis Cook.......................... 50 Vice President, American Olean Distribution
Dan L. Cooke............................ 59 Vice President, Information Technology
Silvano Cornia.......................... 41 Vice President, Research and Development
David F. Finnigan....................... 44 Vice President, Home Center Sales and Business
Development
William R. Hanks........................ 47 Vice President, Manufacturing
Andrew D. Hiduke........................ 53 Vice President, Human Resources
Matthew J. Kahny........................ 39 Vice President, Marketing
H. Clay Orme............................ 61 Vice President, Operations
Javier Eugenio Martinez Serna........... 49 Vice President, Mexico Operations
Mark A. Solls........................... 44 Vice President, General Counsel and Secretary
Harold G. Turk.......................... 54 Vice President, Sales Centers Operations
John C. Turner, Jr...................... 32 Vice President, Distribution and Customer Service
Scott R. Veldman........................ 44 Treasurer

JACQUES R. SARDAS, President, Chief Executive Officer and Chairman of the Board
of Directors - Mr. Sardas has been President and Chief Executive Officer of the
Registrant since July 1997 and Chairman of the Board of Directors since
September 1997. Prior to joining the Company, Mr. Sardas was Chairman and Chief
Executive Officer of Sudbury, Inc. from 1992 to 1997. Prior to that, he spent 34
years at Goodyear Tire & Rubber Company, concluding as President of Goodyear
Worldwide Tire.

DOUGLAS D. DANFORTH, Director - Mr. Danforth has been a Director of the
Registrant since February 1997. He was Chairman and Chief Executive Officer of
Westinghouse Corporation from December 1983 to December 1987. Mr. Danforth is
also a Director of Sola International, Inc. and of Atlantic Express
Transportation Corporation.

JOHN F. FIEDLER, Director - Mr. Fiedler has been a Director of the Registrant
since July 1998. He is Chairman and Chief Executive Officer of Borg-Warner
Automotive, Inc. Prior to joining Borg-Warner in June of 1994, he was Executive
Vice President of Goodyear Tire & Rubber Company, where he was responsible for
North American Tires. Mr. Fiedler's 29-year career with Goodyear included
numerous sales, marketing and manufacturing positions in the U.S. and Far East.
Mr. Fiedler is also a director of Roadway Express, Inc.

VINCENT A. MAI, Director - Mr. Mai has been a Director of the Registrant since
October 1989. Mr. Mai was the President, Chief Executive Officer and a Director
of AEA Investors (the managing member of DTI Investors LLC, a beneficial owner
of Common Stock of the Registrant) from April 1989 to December 1998, which
included appointment to Chairman in January 1998. From January 1999 to December
1999, Mr. Mai served as Chairman and Chief Executive Officer and currently
serves as Chairman of AEA Investors. For the preceding 15 years, he was a
Managing Director of Lehman Brothers, Inc., an investment banking firm. Mr. Mai
is also a Director of the Federal National Mortgage Association.

MARTIN C. MURRER, DIRECTOR - Mr. Murrer has been a Director of the Registrant
since February 2000. Mr. Murrer has been a Managing Director of AEA Investors
(the managing member of DTI Investors LLC, a beneficial owner of Common Stock of
the Registrant) since February 1999. From 1995 through 1999, Mr. Murrer was a
Managing Director at Donaldson, Lufkin & Jenrette. From 1990 through 1995, he
was a Vice President at Goldman Sachs. Mr. Murrer is also a Director of PC
Connection, Inc.

CHARLES J. PILLIOD, JR., Director - Mr. Pilliod has been a Director of the
Registrant since March 1990 and served as Chairman of the Board of Directors
from October 1993 through September 1997. From October 1993 through April 1994,
Mr. Pilliod also served as President and Chief Executive Officer of the
Registrant. Mr. Pilliod served as U.S. Ambassador to Mexico from 1986 to 1989.
Prior to that, he was the Chairman and Chief Executive Officer of Goodyear Tire
& Rubber Company. Mr. Pilliod is also a director of Marvin & Palmer Associates,
Inc.

NORMAN E. WELLS, JR., Director - Mr. Wells has been a Director of the
Registrant since December 1997. Mr. Wells joined Rand McNally and Company in
July 2000 as Chief Operating Officer and became Chief Executive Officer in
December, 2000. Mr. Wells was President and Chief Executive Officer of Easco,
Inc. from November 1996 to September 1999. From March 1993 to November 1996,
he was President and Chief Executive Officer of CasTech Aluminum Group, Inc.
Mr. Wells is also a director of Sovereign Specialty Chemicals, Inc.

W. CHRISTOPHER WELLBORN, Executive Vice President, Chief Financial Officer and
Assistant Secretary - Mr. Wellborn has been Executive Vice President, Chief
Financial Officer and Assistant Secretary of the Registrant since August 1997.
From June 1993 to August 1997, Mr. Wellborn was Senior Vice President and Chief
Financial Officer of Lenox, Inc. Prior to Lenox, he was Vice President and Chief
Financial Officer of Grand Metropolitan PLC's Alpo Pet Food Division.

SCOT B. BERNSTEIN, Vice President, Supply Chain Planning - Mr. Bernstein has
been Vice President, Supply Chain Planning since July 2000. He has been with the
Company since April 1997 and prior to July 2000 served as Director of Resource
Planning. Prior to joining the Company, Mr. Bernstein was Director, Supply Chain
Planning for Black & Decker. Prior to that Mr. Bernstein held various
manufacturing and management positions with GTE and Sylvania, a division of GTE.

D. CURTIS COOK, Vice President, American Olean Distribution - Mr. Cook has been
Vice President, American Olean Distribution of the Company since January 2000.
From January 1996 until December 1999, Mr. Cook was General Manager, Independent
Distributor Operations. From December 1979 through December 1995, he served at
American Olean, then a subsidiary of AWI, where he became Regional Sales
Manager, Southern Region.

DAN L. COOKE, Vice President, Information Technology - Mr. Cooke has been Vice
President, Information Technology of the Registrant since January 1997. From
1982 to 1996, he held various positions with PepsiCo in the Frito-Lay and Pizza
Hut divisions, most recently, as Pizza Hut Vice President, Information
Technology. Prior to that, Mr. Cooke spent 17 years with IBM in sales and
systems engineering management.

SILVANO CORNIA, Vice President, Research and Development - Mr. Cornia has been
Vice President, Research and Development of the Registrant since January 1994.
Since July 1984, he has held various positions at the Company.

DAVID F. FINNIGAN, Vice President, Home Center Sales and Business Development -
Mr. Finnigan has been Vice President, Home Center Sales and Business Development
since January 2000. Mr. Finnigan was Vice President, Independent Distributor and
Home Center Services from April 1998 through December 1999. From August 1997
through April 1998, Mr. Finnigan was Vice President, Independent Distributor
Operations of the Company. From January 1996 through January 1997, Mr. Finnigan
held the position of Vice President, Sales Center Operations of the Company.
Prior to the AO Acquisition, he held various executive marketing positions with
AO, AWI and Evans and Black.

WILLIAM R. HANKS, Vice President, Manufacturing - Mr. Hanks has been Vice
President, Manufacturing of the Registrant since February 1994. He has been with
the Company since March 1985, and prior to 1994, served as General Manager,
Assistant Plant Manager and Vice President, Manufacturing of one of the
Company's floor tile facilities.

ANDREW D. HIDUKE, Vice President, Human Resources - Mr. Hiduke has been Vice
President, Human Resources of the Company since September 1999. From January
1998 to September 1999, Mr. Hiduke was a human resources consultant for various
corporate clients. From February 1990 through January 1998, Mr. Hiduke was
Senior Vice President for All First Financial (formerly First Maryland Bank
Corp.) where he was responsible for retail delivery. Mr. Hiduke's 20-year career
in banking included numerous senior level human resources management and
operational positions.

MATTHEW J. KAHNY, Vice President, Marketing - Mr. Kahny has been Vice President,
Marketing since August 1997. From January 1996 to July 1997, Mr. Kahny was Vice
President, Independent Distributor Operations. From July 1983 through December
1995, he served at AO, then a subsidiary of AWI, where he became Business Team
Manager, Floor Tile Products.

H. CLAY ORME, Vice President, Operations - Mr. Orme has been Vice President,
Operations of the Registrant since March 1999. Prior to joining the Company, Mr.
Orme spent 36 years at Goodyear Tire & Rubber Company, concluding as Vice
President, Product Supply for Goodyear's Global Operations. His responsibilities
included the supervision of 85 plants located in twenty-six countries and
corporate facilities planning.

JAVIER EUGENIO MARTINEZ SERNA, Vice President, Mexico Operations - Mr. Martinez
has been Vice President, Mexico Operations of the Registrant since August 1995.
Prior to August 1995, he was a Managing Director of Materiales Ceramicos S.A. de
C.V., a prior subsidiary of the Registrant, since December 1985. From 1980 to
1985, Mr. Martinez was Vice President of Strategic Planning and Business
Diversification of the food division of Protexa, a diversified oil services,
construction and food products company in Monterrey, Mexico.

MARK A. SOLLS, Vice President, General Counsel and Secretary - Mr. Solls has
been Vice President, General Counsel and Secretary of the Registrant since
January 1998. From December 1994 to December 1997, he was Vice President and
General Counsel for ProNet, Inc. Additionally, Mr. Solls has owned a private
practice and worked as counsel for various national health care companies. He is
a Certified Mediator and a member of numerous legal associations.

HAROLD G. TURK, Vice President, Sales Center Operations - Mr. Turk has been Vice
President, Sales Center Operations of the Registrant since January 1997. In
1996, Mr. Turk was Vice President, Home Center Services of the Company. In 1995,
Mr. Turk was Executive Vice President of Field Operations of the Company. In
1994, he was Executive Vice President of Marketing of the Company. From April
1991 through 1993, Mr. Turk was Executive Vice President of Sales and Marketing,
Western Region of the Company. Mr. Turk was a Vice President of Warehouse
Administration of the Company from 1976 to 1991.

JOHN C. TURNER, JR., Vice President, Distribution and Customer Service - Mr.
Turner has been Vice President, Distribution and Customer Service since July
2000. He has been with the Company since June 1990 and prior to July 2000 served
as Dal SBU GM of SSC Operations, HCS GM of Operations, HCS National Account
Manager, SSC Manager and as an Architectural Representative.

SCOTT R. VELDMAN, Treasurer - Mr. Veldman has been Treasurer of the Registrant
since December 1998. From October 1997 to December 1998, he was Assistant
Treasurer. Prior to that, Mr. Veldman worked with Borg-Warner Security
Corporation for 11 years, most recently as Assistant Treasurer.

ITEM 11. EXECUTIVE COMPENSATION

The information appearing in the sections captioned "Directors' Compensation",
"Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation" in the Company's Proxy Statement for the 2001 Annual Meeting of
the Stockholders (the "2001 Proxy Statement") is incorporated by reference
herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The information appearing in the section "Principal Stockholders" in the 2001
Proxy Statement is incorporated by reference herein.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information appearing in the section captioned "Certain Transactions" in the
2001 Proxy Statement is incorporated by reference herein.

PART IV

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

(a) Documents to be filed as part of this report:

1. Financial statements under Item 8:

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

2. Financial Statement Schedule Filed herewith:

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

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

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

EXHIBIT
NO.
- -------

2.1 Stock Purchase Agreement, dated as of December 21, 1995, by and among
Dal-Tile International Inc., Armstrong Enterprises, Inc., Armstrong
Cork Finance Corporation and Armstrong World Industries, Inc. (Filed
as Exhibit 2 to the Registrant's Current Report on Form 8-K filed on
January 19, 1996 and incorporated herein by reference.)

2.2 Agreement and Plan of Merger among Dal-Tile International Inc.,
Dal-Tile International Inc. Investors LLC and Dal-Tile International
Inc. Merger Company, dated as of August 7, 1996. (Filed as Exhibit 2.1
to the Registrant's Form 10-Q filed on January 16, 1996 and
incorporated herein by reference.)

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

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

4.1 Specimen form of certificate for Common Stock. (Filed as Exhibit 4.1
to the Registrant's Form 10-K filed on March 17, 1999 and incorporated
herein by reference.)

*4.2 Dal-Tile International Inc. 1990 Stock Option Plan. (As Amended and
Restated) (Filed as Exhibit 4.4 to the Registrant's Registration
Statement on Form S-8 (No. 333-70879) and incorporated herein by
reference.)

*10.1 Amended and Restated Employment Agreement dated June 7, 1993, between
Dal-Tile Corporation and Harold G. Turk. (Filed as Exhibit 10.2.3 to
the Registrant's Registration Statement on Form S-1 (No. 33-64140) and
incorporated herein by reference.)

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

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

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

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

EXHIBIT
NO.
- -------

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

10.7 Settlement Agreement dated as of May 20, 1993, among AEA Investors
Inc., DTM Investors Inc., Dal-Tile Group Inc., Dal-Tile
Corporation, Dal-Minerals Company and Robert M. Brittingham and
John G. Brittingham. (Filed as Exhibit 10.5 to the Registrant's
Registration Statement on Form S-1 (No. 33-64140) and
incorporated herein by reference.)

*10.8 Stock Appreciation Rights Agreements, dated as of October 10, 1997,
and amended February 20, 1998, between Dal-Tile International
Inc. and each of Jacques R. Sardas, W. Christopher Wellborn, Dan
L. Cooke, Marc Powell and David F. Finnigan. (Filed as Exhibit
10.19 to the Registrant's Form 10-K for fiscal year 1997 and
incorporated herein by reference.)

10.9 Collateral Agreement, dated as of June 19, 1997, made by Dal-Tile
Group Inc. and certain of its subsidiaries in favor of Chase
Manhattan Bank, as Administration Agent. (Filed as Exhibit 10.22 to
the Registrant's Form 10-K for fiscal year 1997 and incorporated
herein by reference.)

10.10 Supply Agreement dated as of December 29, 1999, between Dal-Tile
Corporation and Wold Talc Company. (Filed as Exhibit 10.18 to the
Registrant's Form 10-K for fiscal year 1999 and incorporated herein
by reference.)

10.11 Fourth Amendment dated as of July 14, 2000, to the Credit and
Guarantee Agreement. (Filed as Exhibit 10.1 to the Registrant's
Form 10-Q filed on August 11, 2000 and incorporated herein by
reference.)

+10.12 Joint Venture Agreement dated as of September 14, 2000, between
Dal-Tile I LLC and Emilamerica, Inc.

*+10.13 Amended and Restated Employment Agreement, dated as of November 22,
2000 between Dal-Tile International Inc. and Jacques R. Sardas.

*+10.14 Amended and Restated Employment Agreement, dated as of December 14,
2000 between Dal-Tile International Inc. and W. Christopher Wellborn.

*+10.15 Change of Control Agreement, dated as of October 1, 2000 between
Dal-Tile International Inc. and Jacques R. Sardas.

*+10.16 Change of Control Agreement, dated as of October 1, 2000 between
Dal-Tile International Inc. and W. Christopher Wellborn.

*+10.17 Change of Control Agreement, dated as of October 1, 2000 between
Dal-Tile International Inc. and 13 Executive Officers.

EXHIBIT
NO.
- -------
+21.1 List of subsidiaries of Dal-Tile International Inc.

+23.1 Consent of Ernst and Young LLP

+24.1 Power of Attorney (on the signature page hereof)

........................................................

+ Included herewith

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

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, ON THE 15TH DAY OF MARCH,
2001.

DAL-TILE INTERNATIONAL INC.

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

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW HEREBY CONSTITUTES AND APPOINTS JACQUES R. SARDAS AND/OR W. CHRISTOPHER
WELLBORN AS HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT, WITH FULL POWER OF
SUBSTITUTION AND RESUBSTITUTION, FOR HIM IN HIS NAME, PLACE AND STEAD, IN ANY
AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS TO THIS REPORT AND ANY AND
ALL DOCUMENTS IN CONNECTION THEREWITH, AND FILE THE SAME WITH ALL EXHIBITS
THERETO, AND ALL DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND
EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEY-IN-FACT AND AGENT FULL POWER
AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND
NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND
PURPOSES AS HE MIGHT OR COULD DO IN PERSON, AND HEREBY RATIFIES, APPROVES AND
CONFIRMS ALL THAT HIS SAID ATTORNEY-IN-FACT AND AGENT, OR HIS SUBSTITUTE OR
SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.

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

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

/s/ Jacques R. Sardas President, Chief Executive March 15, 2001
- ------------------------------ Officer and Chairman of the
Jacques R. Sardas Board of Directors

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

/s/ W. Christopher Wellborn Executive Vice President, Chief March 15, 2001
- ------------------------------ Financial Officer and Assistant
W. CHRISTOPHER WELLBORN Secretary (Principal Financial and
Accounting Officer)

/s/ Charles J. Pilliod, Jr. Director March 15, 2001
- -----------------------------
CHARLES J. PILLIOD, JR.

/s/ Douglas D. Danforth Director March 15, 2001
- -----------------------------
DOUGLAS D. DANFORTH

/s/ John F. Fiedler Director March 15, 2001
- -----------------------------
JOHN F. FIEDLER

/s/ Vincent A. Mai Director March 15, 2001
- -----------------------------
VINCENT A. MAI

/s/ Norman E. Wells, Jr. Director March 15, 2001
- -----------------------------
NORMAN E. WELLS, JR.

/s/ Martin C. Murrer Director March 15, 2001
- -----------------------------
MARTIN C. MURRER

DAL-TILE INTERNATIONAL INC.

ITEM 14(A) - INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

FISCAL YEARS ENDED DECEMBER 29, 2000, DECEMBER 31, 1999 AND JANUARY 1, 1999

CONTENTS

Report of Independent Auditors.......................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 29, 2000 and December 31, 1999.. F-3
Consolidated Statements of Operations for each of the three years in
the period ended December 29, 2000...................................... F-5
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 29, 2000............................. F-6
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 29, 2000...................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
CONSOLIDATED FINANCIAL STATEMENTS SCHEDULE
Schedule II - Valuation and Qualifying Accounts......................... S-1

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

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Dal-Tile International Inc.

We have audited the accompanying consolidated balance sheets of Dal-Tile
International Inc. as of December 29, 2000 and December 31, 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 29, 2000. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Dal-Tile International Inc. at December 29, 2000 and December 31, 1999,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 29, 2000, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

/s/ Ernst & Young

Dallas, Texas
January 22, 2001

F-2

DAL-TILE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

DECEMBER 29, DECEMBER 31,
2000 1999
----------- -----------

ASSETS

Current Assets:
Cash .................................................... $ 1,477 $ 1,193
Trade accounts receivable, net of allowance of
$3,271 in 2000 and $5,186 in 1999 ..................... 104,352 94,915
Inventories ............................................. 140,246 140,153
Prepaid expenses ........................................ 5,702 4,884
Other current assets .................................... 25,222 14,819
----------- -----------

Total current assets ................................ 276,999 255,964

Property, plant and equipment, at cost:

Land .................................................... 11,553 11,456
Leasehold improvements .................................. 13,134 11,407
Buildings ............................................... 81,808 76,969
Machinery and equipment ................................. 214,783 190,195
Construction in progress ................................ 22,754 19,702
----------- -----------

344,032 309,729
Accumulated depreciation .................................. 119,343 102,405
----------- -----------

224,689 207,324

Goodwill, net of accumulated amortization of
$76,202 in 2000 and $71,421 in 1999 ..................... 138,260 143,041
Tradename and other assets, net of accumulated
amortization of $9,373 in 2000 and $7,179 in 1999 ....... 30,572 32,375
----------- -----------

Total assets ........................................ $ 670,520 $ 638,704
=========== ===========

See accompanying notes.

F-3

DAL-TILE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)

DECEMBER 29, DECEMBER 31,
2000 1999
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Trade accounts payable ................................. $ 32,766 $ 36,388
Accrued expenses ....................................... 66,848 67,375
Current portion of long-term debt ...................... 55,761 56,796
Income taxes payable ................................... 542 1,153
Deferred income taxes .................................. 4,779 2,461
----------- -----------
Total current liabilities .......................... 160,696 164,173

Long-term debt ........................................... 276,017 353,877
Other long-term liabilities .............................. 17,968 17,671
Deferred income taxes .................................... 3,531 2,039
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $ .01 par value, 11,100,000 shares
authorized; no shares issued and outstanding
at December 29, 2000 or December 31, 1999 ........... - -
Common stock, $ .01 par value, 200,000,000
shares authorized; issued and outstanding shares -
55,252,695 at December 29, 2000 and
54,669,255 at December 31, 1999 ...................... 553 547
Additional paid-in capital ............................. 453,144 447,738
Accumulated deficit .................................... (172,338) (273,095)
Accumulated other comprehensive loss ................... (69,051) (74,246)
----------- -----------

Total stockholders' equity ......................... 212,308 100,944
----------- -----------
Total liabilities and stockholders' equity ............... $ 670,520 $ 638,704
=========== ===========

See accompanying notes.

F-4

DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

FISCAL YEAR ENDED
--------------------------------------------------------------
DECEMBER 29, DECEMBER 31, JANUARY 1,
2000 1999 1999
------------------ ------------------ ------------------

Net sales................................................ $ 952,156 $ 850,568 $ 751,785
Cost of goods sold....................................... 497,933 440,514 396,112
------------------ ----------------- ------------------
454,223 410,054 355,673

Operating expense:
Transportation....................................... 64,549 57,124 55,988
Selling, general and administrative.................. 247,099 232,845 222,790
Amortization of goodwill and tradename............... 5,512 5,607 5,604
------------------ ----------------- ------------------
Total operating expense.................................. 317,160 295,576 284,382
------------------ ----------------- ------------------
Operating income......................................... 137,063 114,478 71,291

Interest expense......................................... 30,102 37,125 45,051
Interest income.......................................... 104 126 128
Other (expense) income................................... (444) 250 1,264
------------------ ----------------- ------------------
Income before income taxes............................... 106,621 77,729 27,632
Income tax provision..................................... 5,864 3,966 3,604
------------------ ----------------- ------------------
Net income............................................... $ 100,757 $ 73,763 $ 24,028
================== ================= ==================

BASIC EARNINGS PER SHARE
Net income per common share.............................. $ 1.83 $ 1.36 $ 0.45
================== ================= ==================
Weighted average common shares........................... 54,918 54,103 53,487
================== ================= ==================

DILUTED EARNINGS PER SHARE
Net income per common share.............................. $ 1.82 $ 1.35 $ 0.45
================== ================= ==================
Weighted average common shares assuming dilution......... 55,396 54,539 53,983
================== ================= ==================

See accompanying notes.

F-5

DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT LOSS TOTAL
-------------- --------------- ------------ ------------------- ---------------

BALANCE AT JANUARY 2, 1998.......... $ 534 $ 436,100 $ (370,886) $ (61,828) $ 3,920
Common stock registration........... - (1,030) - - (1,030)
Proceeds from issuance of
common stock....................... 1 1,112 - - 1,113

COMPREHENSIVE INCOME:
Net income.......................... - - 24,028 - 24,028
Currency translation adjustment..... - - - (12,572) (12,572)
---------------
Total comprehensive income.......... - - - - 11,456
-------------- --------------- ------------ ------------------- ---------------

BALANCE AT JANUARY 1, 1999.......... 535 436,182 (346,858) (74,400) 15,459
Stock option compensation........... - 255 - - 255
Exercise of stock options
and other.......................... 12 11,301 - - 11,313

COMPREHENSIVE INCOME:
Net income.......................... - - 73,763 - 73,763
Currency translation adjustment..... - - - 154 154
---------------
Total comprehensive income.......... - - - - 73,917
-------------- --------------- ------------ ------------------- ---------------

BALANCE AT DECEMBER 31, 1999........ 547 447,738 (273,095) (74,246) 100,944
Exercise of stock options and
other.............................. 6 5,406 - - 5,412

COMPREHENSIVE INCOME:
Net income.......................... - - 100,757 - 100,757
Unrealized gain on hedge
instrument, net of tax............. - - - 5,282 5,282
Currency translation adjustment..... - - - (87) (87)
---------------
Total comprehensive income.......... - - - - 105,952
-------------- --------------- ------------ ------------------- ---------------

BALANCE AT DECEMBER 29, 2000........ $ 553 $ 453,144 $ (172,338) $ (69,051) $ 212,308
============== =============== ============ =================== ===============

See accompanying notes.

F-6

DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

DECEMBER 29, DECEMBER 31, JANUARY 1,
2000 1999 1999
------------ ------------ ------------

OPERATING ACTIVITIES
Net income....................................... $ 100,757 $ 73,763 $ 24,028
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................. 26,782 26,889 27,873
Impairment of long-lived assets................ - - 6,625
Provision for losses on accounts receivable.... 2,126 2,199 7,024
Other.......................................... 138 153 (2,407)
Deferred income tax provisions (benefit)....... 553 (1,717) 1,995

Changes in operating assets and liabilities:
Trade accounts receivable...................... (11,706) (3,673) (5,091)
Inventories.................................... (276) (1,388) (14,956)
Other assets................................... (3,063) 3,474 (3,194)
Trade accounts payable and accrued expenses.... (5,353) 14,594 14,955
Accrued interest payable....................... 1,436 94 (1,797)
Other liabilities.............................. (1,167) (10,444) 1,901
------------ ------------ ------------
Net cash provided by operating activities........ 110,227 103,944 56,956

INVESTING ACTIVITIES
Expenditures for property, plant and
equipment, net............................... (37,180) (25,129) (5,776)

FINANCING ACTIVITIES
Borrowings under long-term debt.................. 241,900 255,600 149,808
Repayment of long-term debt...................... (320,796) (345,359) (206,467)
Fees associated with debt refinancing and stock
registration................................. - (176) (1,118)
Proceeds from issuance of common stock........... 6,184 10,640 1,113
------------ ------------ ------------
Net cash used in financing activities............ (72,712) (79,295) (56,664)

Effect of exchange rate on cash.................. (51) 127 (458)
------------ ------------ ------------
Net increase (decrease) in cash.................. 284 (353) (5,942)
Cash at beginning of year........................ 1,193 1,546 7,488
------------ ------------ ------------
Cash at end of year.............................. $ 1,477 $ 1,193 $ 1,546
============ ============ ============

See accompanying notes.

F-7

DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2000

1. ORGANIZATION

Dal-Tile International Inc. (the "Company"), a holding company, owns the
outstanding capital stock of its sole direct subsidiary, Dal-Tile Group Inc.
(the "Group"), and conducts its operations through the Group. The Group also
conducts substantially all of its operations through its subsidiaries. Dal-Tile
International Inc., as a stand-alone holding company, has no operations (see
Note 13).

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements reflect the consolidation of all
accounts of the Company, including a majority owned joint venture. Significant
intercompany transactions and balances have been eliminated in consolidation.

The Company's 49.99 percent investment in Recumbrimientos Interceramic, S.A.
de C.V. ("RISA") is accounted for under the cost method as the Company does
not exercise significant influence over the operations. Such investment
amounted to less than 2 percent of total assets at December 29, 2000 and
December 31, 1999.

USE OF ESTIMATES

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

REVENUE RECOGNITION

The Company recognizes revenue from product sales upon shipment.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with maturities of three
months or less to be cash equivalents.

INVENTORIES

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

F-8

DEPRECIATION

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

YEARS
-------------

Leasehold improvements................. Life of lease
Buildings.............................. 20 - 30
Machinery and equipment................ 3 - 15

INTANGIBLE ASSETS

Goodwill and tradename, which represent the excess cost over the fair value of
net assets acquired, are amortized on a straight-line basis over the expected
period to be benefited of 40 years and 25 years, respectively. The Company
assesses the recoverability of intangible assets by determining whether the
amortization of the balances over their remaining lives can be recovered through
undiscounted future operating cash flows of the acquired operations.
Recoverability is reviewed when events or changes in circumstances indicate that
the carrying amount may exceed such cash flows.

ADVERTISING EXPENSE

Advertising and promotion expenses are charged to income during the period in
which they are incurred. Advertising and promotion expenses incurred for the
fiscal years 2000, 1999, and 1998 amounted to $21,617,000, $20,572,000, and
$14,353,000, respectively.

STOCK OPTIONS

The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the underlying common stock at the
date of grant. The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
related interpretations in accounting for its employee stock options. Under APB
25, no compensation expense is recognized if the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant.

RETIREMENT PLANS

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

FOREIGN CURRENCY TRANSLATION

The Company's Mexican operations use the U.S. dollar as their functional
currency. Translation gains or losses are reflected in the consolidated
statements of operations. Gains and losses resulting from foreign currency
transactions are reflected currently in the consolidated statements of
operations. The Company recorded a foreign currency transaction loss of $82,000
for the fiscal year ended December 29, 2000 and foreign currency transaction
gains of $137,000 and $1,727,000 for the fiscal years ended December 31, 1999
and January 1, 1999, respectively. The cumulative foreign currency translation
adjustment as of December 29, 2000 was approximately $74,330,000.

F-9

FINANCIAL INSTRUMENTS

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

CONCENTRATIONS OF CREDIT RISK

The Company is engaged in the manufacturing and distribution of glazed and
unglazed ceramic tile products and accessories in the United States and Mexico
and the distribution of such manufactured products in Canada. The Company grants
credit to customers, substantially all of whom are dependent upon the
construction economic sector. The Company continuously evaluates its customers'
financial condition and periodically requires payments to its customers to be
issued on behalf of the customer and the Company. In addition, the Company
frequently obtains liens on property to secure accounts receivable.

DERIVATIVE FINANCIAL INSTRUMENTS

Effective September 30, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133 - "Accounting for Derivative Instruments and
Hedging Activities," ("SFAS 133") and its amendments which require the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in its
fair value are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings.

The Company engages in activities that expose it to various market risks,
including the effects of changes in foreign currency exchange rates, interest
rates and natural gas prices. These financial exposures are managed as an
integral part of the Company's risk management program, which seeks to reduce
the potentially adverse effects that the volatility of the markets may have on
operating results. The Company does not regularly engage in speculative
transactions, nor does it regularly hold or issue financial instruments for
trading purposes. The Company maintains a foreign currency risk management
strategy that uses derivative instruments to protect its interests from
unanticipated fluctuations in earnings and cash flows caused by volatility in
currency exchange rates. The Company maintains an interest rate risk management
strategy that uses derivative instruments, currently interest rate swaps, to
minimize significant, unanticipated earnings fluctuations caused by volatility
in interest rates. In addition, the Company maintains a natural gas pricing
strategy to minimize significant fluctuations in earnings caused by the
volatility of gas prices.

RECLASSIFICATION

Certain prior year amounts have been reclassified to conform to the 2000
presentation.

F-10

NET INCOME PER SHARE

Computations of basic and diluted earnings per share are presented in the table
below.

FISCAL YEAR ENDED
--------------------------------------------
DECEMBER 29, DECEMBER 31, JANUARY 1,
2000 1999 1999
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

BASIC EARNINGS PER SHARE
Net income................................... $ 100,757 $ 73,763 $ 24,028
============ ============ ===========

Weighted average common shares............... 54,918 54,103 53,487

Net income per common share.................. $ 1.83 $ 1.36 $ 0.45
============ ============ ===========

DILUTED EARNINGS PER SHARE
Net income................................... $ 100,757 $ 73,763 $ 24,028
============ ============ ===========

Weighted average common shares............... 54,918 54,103 53,487
Effect of dilutive stock options............. 478 436 496
------------ ------------ -----------
Weighted average common shares
assuming dilution............................ 55,396 54,539 53,983

Net income per common share.................. $ 1.82 $ 1.35 $ 0.45
============ ============ ===========

Options to purchase 3,000,000 shares of common stock were outstanding during
fiscal year 2000, but were not included in the computation of diluted earnings
per share because the options' exercise price was greater than the average
market price of the common shares during the year.

Options to purchase 2,472,000 shares of common stock were outstanding during
fiscal year 1999, but were not included in the computation of diluted earnings
per share because the options' exercise price was greater than the average
market price of the common shares during the year.

Options to purchase 1,694,000 shares of common stock were outstanding during
fiscal year 1998 but were not included in the computation of diluted earnings
per share because the options' exercise price was greater than the average
market price of the common shares during the year.

3. INVENTORIES

Inventories consist of the following:

DECEMBER 29, DECEMBER 31,
2000 1999
------------ ------------
(IN THOUSANDS)

Finished products in U.S........................... $ 117,272 $ 118,877
Finished products in Mexico........................ 5,671 4,828
Finished products in Canada........................ 2,500 2,166
Goods-in-process................................... 5,204 4,316
Raw materials...................................... 9,599 9,966
------------ ------------
Total inventories.................................. $ 140,246 $ 140,153
============ ============

F-11

If U.S. finished products inventories were shown at current costs (approximating
the FIFO method) rather than at LIFO values, inventories would have been
$1,700,000 lower and $2,700,000 lower than reported at December 29, 2000 and
December 31, 1999, respectively.

During fiscal year 2000, inventory quantities in four LIFO pools were reduced.
This reduction resulted in the liquidation of LIFO inventory quantities carried
at higher costs prevailing in prior years as compared with the fiscal year 2000
costs, the effect of which decreased net income by approximately $757,000, or
$0.01 per share (basic and diluted).

During fiscal year 1999, inventory quantities in six LIFO pools were reduced.
This reduction resulted in the liquidation of LIFO inventory quantities carried
at higher costs prevailing in prior years as compared with the fiscal year 1999
costs, the effect of which decreased net income by approximately $1,713,000, or
$0.03 per share (basic and diluted).

During fiscal year 1998, inventory quantities in six LIFO pools were reduced.
This reduction resulted in the liquidation of LIFO inventory quantities carried
at higher costs prevailing in prior years as compared with the fiscal year 1998
costs, the effect of which decreased net income by approximately $772,000, or
$0.01 per share (basic and diluted).

4. LONG-TERM DEBT

Long-term debt consists of the following:

DECEMBER 29, DECEMBER 31,
2000 1999
------------------ ------------------
(IN THOUSANDS)

Term A Loan, interest due quarterly at LIBOR plus .75% or Prime (approximately
7.4% at December 29, 2000), principal due in variable quarterly installments
through December 31, 2002 (1).................................................... $ 115,000 $ 165,000
Term B Loan, interest due quarterly at LIBOR plus 1.75% (approximately 8.4% at
December 29, 2000), principal due in variable quarterly installments through
December 31, 2003 (1)............................................................ 122,000 123,000
Revolving line of credit, interest due quarterly at blended LIBOR rates plus .75%
or Prime (approximately 7.4% at December 29, 2000), principal due December 31,
2002 (1)......................................................................... 86,700 108,800
Other, principally borrowings to fund capital additions............................. 8,078 13,873
------------------ ------------------
331,778 410,673
Less current portion................................................................ 55,761 56,796
------------------ ------------------
$ 276,017 $ 353,877
================== ==================

(1) Substantially all of the Company's assets are pledged on the debt.

During the third quarter of fiscal year 2000, the Company amended certain
financial covenants to provide increased operating flexibility under the Third
Amended Credit Facility (as amended, the "Fourth Amended Credit Facility").
Under the Fourth Amended Credit Facility, the Company is required, among other
things, to maintain certain financial covenants and has restrictions on
incurring additional debt and limitations on cash dividends. The Company was in
compliance with such covenants at December 29, 2000. A commitment fee at a rate
per annum based on a pricing grid is payable quarterly.

F-12

As of December 29, 2000, the Company had availability of approximately
$150,002,000 on the revolving line of credit. The availability is net of
$13,298,000 in letters of credit for foreign inventory purchases, insurance
programs and industrial revenue bond financing transactions.

Aggregate maturities of long-term debt for the four years subsequent to December
29, 2000 (in thousands) are:

2001..................... $ 55,761
2002..................... 154,917
2003..................... 120,800
2004..................... 300

Total interest cost incurred for the fiscal years 2000, 1999 and 1998 amounted
to approximately $30,915,000, $37,508,000 and $45,173,000, respectively, of
which approximately $813,000, $383,000 and $122,000, respectively, was
capitalized to property, plant and equipment. Total interest paid was
$28,017,000, $35,952,000 and $45,712,000 for fiscal years ended December 29,
2000, December 31, 1999 and January 1, 1999, respectively.

5. ASSET IMPAIRMENT

During fiscal year 1998, the Mt. Gilead, NC glazed floor manufacturing
facility was closed and is currently being held for sale. An aggregate
provision of $6,625,000 was recorded in cost of sales in fiscal year 1998 to
reduce the carrying value of the facility to its net realizable value. As of
December 29, 2000 its net realizable value was $900,000.

6. INCOME TAXES

Income before income taxes relating to operations is as follows:

FISCAL YEAR ENDED
---------------------------------------------------------------
DECEMBER 29, DECEMBER 31, JANUARY 1,
2000 1999 1999
------------------- ----------------- -------------------
(IN THOUSANDS)

United States..................... $ 100,103 $ 65,430 $ 12,905
Mexico............................ 6,150 11,502 14,827
Other............................. 368 797 (100)
------------------- ----------------- -------------------

$ 106,621 $ 77,729 $ 27,632
=================== ================= ===================

F-13

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

FISCAL YEAR ENDED
-----------------------------------------------------------
DECEMBER 29, DECEMBER 31, JANUARY 1,
2000 1999 1999
------------------- ----------------- ---------------
(IN THOUSANDS)

U.S. state - current............. $ 1,024 $ 334 $ 262
U.S. - deferred.................. 3,316 1,247 1,286
------------------- ----------------- ---------------
4,340 1,581 1,548

Mexico - current................. 1,300 2,289 1,876
Mexico - deferred................ 224 96 180
------------------- ----------------- ---------------
1,524 2,385 2,056
------------------- ----------------- ---------------
Total............................ $ 5,864 $ 3,966 $ 3,604
=================== ================= ===============

Principal reconciling items from income tax provision computed at the U.S.
statutory rate of 35 percent and the provision for income taxes for the
fiscal years ended December 29, 2000, December 31, 1999 and January 1, 1999
are as follows:

FISCAL YEAR ENDED
-------------------------------------------------------------
DECEMBER 29, DECEMBER 31, JANUARY 1,
2000 1999 1999
----------------- ---------------- -----------------
(IN THOUSANDS)

Provision at U.S. statutory rate.......... $ 37,316 $ 27,205 $ 9,671
Amortization of goodwill.................. 1,673 1,667 1,667
State income tax.......................... 4,040 1,028 1,006
Foreign loss not benefited................ (128) (279) 35
Difference between U.S. and Mexico
statutory rate.......................... - 915 884
Mexico inflationary indexing and other.... (628) (2,556) (2,267)
Valuation allowance....................... (36,739) (24,285) (7,679)
Other..................................... 330 271 287
----------------- ----------------- -----------------
Total..................................... $ 5,864 $ 3,966 $ 3,604
================= ================= =================

F-14

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

DECEMBER 29, DECEMBER 31,
2000 1999
------------------- -------------------
(IN THOUSANDS)

Deferred tax liabilities:
Book basis of property, plant and equipment over tax.......... $ 19,636 $ 18,394
Book basis of other assets over tax......................... 9,951 9,319
Unrealized gain on hedging instruments...................... 3,306 -
Other, net ................................................. 10,206 9,592
------------------- -------------------
Total deferred tax liabilities........................ 43,099 37,305
------------------- -------------------
Deferred tax assets:
Tax basis of inventories over book.......................... 2,326 922
Tax basis of other assets over book......................... 2,003 741
Net operating loss carryforwards............................ 22,311 56,530
Expenses not yet deductible for tax......................... 8,149 11,351
------------------- -------------------
Total deferred tax assets............................. 34,789 69,544
Valuation allowance for deferred tax assets................. - (36,739)
------------------- -------------------
Net deferred tax assets..................................... 34,789 32,805
------------------- -------------------
Net deferred tax liabilities................................ $ 8,310 $ 4,500
=================== ===================

Total income tax payments, net of refunds received, during the years ended
December 29, 2000, December 31, 1999 and January 1, 1999 were $3,777,000,
$1,680,000 and $1,836,000, respectively. The Company has a U.S. federal net
operating loss carryforward of approximately $57,000,000, which expires in
2008-2019. The net operating loss carryforwards will be available to offset
regular U.S. taxable income during the carryforward period. In addition, the
Company has state net operating loss carry forwards with a tax benefit of
approximately $2,500,000 which expire between 2001 and 2019.

The valuation allowance for net deferred tax assets decreased by $36,739,000 in
fiscal year 2000. This decrease is a result of the Company's analysis of the
likelihood of generating sufficient future taxable income and thus realizing the
future benefit of tax loss carryforwards and other deferred tax assets.
Although realization is not assured, the Company believes it is more likely
than not that the tax benefits recorded will be realized through future
taxable income.

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

7. DERIVATIVE FINANCIAL INSTRUMENTS

FOREIGN CURRENCY EXCHANGE RISK MANAGEMENT
The Company uses foreign currency forward contracts to hedge against foreign
currency risk and accounts for these contracts as cash flow hedges. Such
financial instruments are marked-to-market with the offset to other
comprehensive income and deferred taxes and then subsequently recognized as a
component of cost of goods sold in the same period or periods during which the
hedged transaction affects earnings. These hedges are designed to be perfectly
effective at inception and throughout the hedge. The Company did not have any
forward contracts outstanding as of December 29, 2000 and foreign currency
contracts did not materially effect earnings for fiscal year 2000.

F-15

INTEREST RATE RISK MANAGEMENT
The Company uses interest rate swap contracts to adjust the proportion of
total debt that is subject to variable and fixed interest rates. Under an
interest rate swap contract, the Company agrees to pay an amount equal to a
fixed-rate of interest times a notional principal amount, and to receive in
return an amount equal to a specified variable-rate of interest times the same
notional principal amount. The notional amounts of the contracts are not
exchanged, and no other cash payments are made. The contract fair value is
reflected on the balance sheet and related gains or losses are deferred in
other comprehensive income. These deferred gains and losses are recognized in
income as an adjustment to interest expense over the same period in which the
related interest payments being hedged are recognized in income. However, to
the extent that any of these contracts are not considered to be perfectly
effective in offsetting the change in the value of the interest payments being
hedged, any changes in fair value relating to the ineffective portion of these
contracts is immediately recognized in income. As of December 29, 2000, the
Company had an interest rate swap agreement outstanding for $200,000,000,
which will be in effect until January 16, 2001. Under the terms of the swap
agreement, the Company pays a fixed interest rate of 5.7 percent. As of
December 29, 2000, the cumulative net gain and fair value of the swap
agreement was immaterial. At December 29, 2000, the Company held four
$50,000,000 interest rate swap contracts which become effective January 16,
2001. The fair value of these contracts was not material at December 29, 2000,
and the contracts expire on December 31, 2001 and December 31, 2002.

NATURAL GAS RISK MANAGEMENT
The Company uses a combination of natural gas futures contracts and long-term
supply agreements to manage unanticipated fluctuations in natural gas prices.
These instruments generally cover a period of one to three years on forecasted
usage of natural gas measured in Million British Thermal Units ("MMBTU"). The
long-term supply agreements do not have net settlement provisions and are
accounted for as normal purchases, which are excluded from hedge accounting
consideration under SFAS 133 and its amendments. The Company accounts for
natural gas futures contracts as cash flow hedges. Such financial instruments
are marked-to-market using futures prices with the offset to other comprehensive
income, net of applicable income taxes and hedge ineffectiveness. Subsequently,
the gain or loss is recognized as a component of cost of goods sold in the same
period or periods during which the hedged transaction affects earnings. For the
fiscal year ended December 29, 2000, the Company recognized approximately
$905,000 in net gain on its natural gas hedge program.

At December 29, 2000 the Company had natural gas futures contracts outstanding
with an aggregate notional amount of approximately 4,210,000 MMBTU. These
contracts had a fair value of approximately $8,588,000 of which $7,249,000 was
recorded in other current assets and $1,339,000 was recorded in long-term assets
with the offset to other comprehensive income, net of applicable income taxes.
The hedge instruments were considered perfectly effective at December 29, 2000
and expire at various dates through August 2002.

8. EMPLOYEE STOCK PURCHASE PLAN

In March 1999, the Company's Stockholders approved the Company's Employee Stock
Purchase Plan ("ESPP"). Pursuant to the ESPP, employees can purchase Common
Stock at a specified price through payroll deductions during an offering period,
currently established on a semi-annual basis beginning on January 1 and July 1
of each year. Pursuant to the ESPP, 63,181 shares were issued in January 2000,
and 65,382 shares were issued in July 2000. The Company reserved 500,000 shares
for issuance, 371,437 of which were available for issue at December 29, 2000.

9. STOCK PLAN

The Company has a stock option plan (the "Plan") that provides for the
granting of options for up to 14,063,494 shares of its common stock to key
employees of the Company. Options granted under the Plan prior to January 1,
1996 vest 20 percent at the date of the grant and 20 percent on each
successive anniversary of the date of the grant until fully vested.
Generally, options granted on or after January 1, 1996 vest 25 percent at the
date of the grant and 25 percent on each successive anniversary of the date
of the grant until fully vested. In each case, the options expire on the
tenth

F-16

anniversary of the date of the grant. The terms of the stock option plan may
be modified on an individual grant basis at the discretion of the Company's
Board of Directors.

Stock option activity under the Plan is summarized as follows (option data shown
below is after giving effect to the Company's options conversion):

WEIGHTED
AVERAGE
NUMBER OF RANGE OF EXERCISE EXERCISE
SHARES PRICES PRICE
---------------- --------------------- ------------------

Outstanding at January 2, 1998.................. 6,597,371 $ 9.01 - 13.75 $ 11.30
Granted..................................... 3,770,000 8.69 - 11.31 8.92
Cancelled................................... (110,024) 9.01 - 13.69 11.26
---------------- --------------------- ------------------

Outstanding at January 1, 1999.................. 10,257,347 $ 8.69 - 11.94 $ 9.73
Granted..................................... 475,000 8.44 - 11.25 9.03
Exercised................................... (975,094) 8.69 - 9.91 9.33
Cancelled................................... (522,359) 8.69 - 11.94 9.44
---------------- --------------------- ------------------

Outstanding at December 31, 1999................ 9,234,894 $ 8.44 - 11.94 $ 9.77
Granted..................................... 3,557,000 7.38 - 13.89 12.39
Exercised................................... (364,765) 7.38 - 9.19 8.96
Cancelled................................... (438,007) 7.38 - 9.91 9.46
---------------- --------------------- ------------------

Outstanding at December 29, 2000............... 11,989,122 $ 7.38 - 13.89 $ 10.58
================ ===================== ==================

The Company has reserved 14,063,494 shares of common stock for options, of which
2,074,372 had not been granted at December 29, 2000, and are available for
future issuance under the Plan. At December 29, 2000, December 31, 1999 and
January 1, 1999, there were 7,950,705 options exercisable at a weighted average
exercise price of $11.43, 5,415,212 options exercisable at a weighted average
exercise price of $10.03, and 5,051,347 options exercisable at a weighted
average exercise price of $9.84, respectively. The following table summarizes
information with regard to stock options outstanding at December 29, 2000:

WEIGHTED AVERAGE
EXERCISE OPTIONS REMAINING
PRICE OUTSTANDING CONTRACTUAL LIFE
-------------------- ------------------------ -----------------------

$ 7.38 266,000 9.05 years
8.13 34,000 9.51 years
8.44 100,000 8.70 years
8.69 944,000 7.94 years
8.81 100,000 8.16 years
8.94 51,000 9.55 years
9.01 4,616,122 5.52 years
9.13 80,000 9.05 years
9.19 206,000 8.82 years
9.44 32,000 8.96 years
11.25 15,000 8.51 years
11.94 2,425,000 6.77 years
12.19 120,000 9.95 years
12.63 2,000,000 9.89 years
13.89 1,000,000 9.89 years

F-17

If the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date, net income and earnings per share
would have been reduced to the pro forma amounts indicated in the table below:

FISCAL YEAR ENDED
-----------------------------------------------------------
DECEMBER 29, DECEMBER 31, JANUARY 1,
2000 1999 1999
----------------- ----------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income - as reported............................... $ 100,757 $ 73,763 $ 24,028
Net income - pro forma................................. 90,506 62,609 14,929
Earnings per share as reported - basic................. 1.83 1.36 0.45
- diluted............... 1.82 1.35 0.45
Earnings per share pro forma - basic................. 1.65 1.16 0.28
- diluted............... 1.63 1.15 0.28

The weighted average fair value at date of grant for options granted during the
fiscal years ended December 29, 2000, December 31, 1999 and January 1, 1999 was
$5.01, $3.80 and $4.03 per option, respectively. The fair value of the options
at the date of grant was estimated using the Black Scholes model with the
following weighted average assumptions:

FISCAL YEAR ENDED
-------------------------------------------------------------
DECEMBER 29, DECEMBER 31, JANUARY 1,
2000 1999 1999
-------------------- ----------------- ----------------

Expected life (years)........... 3 3 3
Interest rate................... 5.66% 5.83% 5.25%
Volatility...................... 52.4% 55.0% 61.9%
Dividend yield.................. 0.00% 0.00% 0.00%

During 1997, the Company issued stock units under a stock appreciation rights
agreement to certain executives which permitted the holders to receive values in
excess of the base price of the unit at the date of grant. Payment of the excess
was made in cash, stock or a combination of cash and stock at the discretion
of the Board of Directors. The total value to be received was subject to a
ceiling. During the fourth quarter of fiscal year 1997, 2,710,000 stock units
were granted at a base price of $9.01 per unit. The stock units vested at
various dates through fiscal year 2000. As of December 29, 2000, all of the
units were either exercised or expired. The Company recorded compensation
expense of approximately $58,000, $710,000 and $1,770,000 for the fiscal years
ended December 29, 2000, December 31, 1999 and January 1, 1999, respectively.

F-18

10. COMMITMENTS AND CONTINGENCIES

The Company leases substantially all of its sales centers and various
distribution, manufacturing and transportation equipment under noncancelable
operating leases. Certain leases contain escalation provisions and renewal
options. The minimum aggregate annual lease payments subsequent to December 29,
2000 are as follows (in thousands):

2001............................ $ 25,520
2002............................ 21,953
2003............................ 16,888
2004............................ 13,216
2005............................ 9,624
Thereafter...................... 16,798
----------------
$ 103,999
================

Rental expense amounted to approximately $33,853,000, $34,040,000 and
$33,269,000 for the fiscal years ended December 29, 2000, December 31, 1999 and
January 1, 1999, respectively.

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

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

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

11. JOINT VENTURE

In September of fiscal year 2000, the Company announced the formation of a joint
venture with Emilceramica, S.p.A., an Italian tile manufacturer. The joint
venture, Dal Italia LLC, sells and distributes porcelain tile products for the
North American market. Dal Italia LLC is 80 percent owned by the Company and
included in its consolidated financial statements, and is 20 percent owned by
Emilceramica, S.p.A. Dal Italia LLC has a supply agreement with Emilceramica
S.p.A. in which porcelain tile products are purchased at cost plus
transportation charges and then distributed and sold exclusively through the
Company's sales service centers according to a

F-19

distribution agreement between Dal Italia LLC and the Company. For the fiscal
year ended December 29, 2000 transactions between Dal-Italia LLC and the
Company were immaterial.

12. GEOGRAPHIC AREA OPERATIONS

The Company currently conducts its business in one industry segment, engaging in
the manufacturing, distribution and marketing of tile (wall, floor, quarry and
mosaic), natural stone and related products. The Company operates manufacturing
facilities in the United States and Mexico and distributes products through
wholly owned sales centers in the United States, Canada and Puerto Rico and
nonaffiliated distributors in the United States and Mexico. Intercompany sales
between geographic areas are accounted for at amounts that are generally above
cost and in compliance with rules and regulations governing tax authorities.
Such intercompany sales are eliminated in the consolidated financial statements.

Financial information by geographical area is summarized below:

FISCAL YEAR ENDED
-----------------------------------------------------------------
DECEMBER 29, DECEMBER 31, JANUARY 1,
2000 1999 1999
------------------ ------------------ -------------------
(IN THOUSANDS)

Consolidated revenue:
Unaffiliated customers:
United States............................. $ 905,426 $ 811,359 $ 716,075
Mexico.................................... 32,554 28,936 25,242
Other..................................... 14,176 10,273 10,468
------------------ ------------------ -------------------
Total consolidated revenue
from unaffiliated customers...... $ 952,156 $ 850,568 $ 751,785
================== ================== ===================
Intercompany revenue:
United States............................. $ 5,802 $ 3,847 $ 5,462
Mexico.................................... 86,734 85,102 74,533
Other..................................... 84 43 -
Eliminations.............................. (92,620) (88,992) (79,995)
------------------ ------------------ -------------------
Total consolidated revenue........... $ 952,156 $ 850,568 $ 751,785
================== ================== ===================
Consolidated operating income
United States............................. $ 130,473 $ 102,641 $ 60,558
Mexico.................................... 6,161 11,167 10,608
Eliminations/other........................ 429 670 125
------------------ ------------------ -------------------
Total consolidated operating
income ...................... $ 137,063 $ 114,478 $ 71,291
================== ================== ===================
Consolidated identifiable assets:
United States............................. $ 588,905 $ 568,374 $ 576,037
Mexico.................................... 72,182 61,347 56,435
Eliminations/other........................ 9,433 8,983 8,336
------------------ ------------------ -------------------
Total consolidated identifiable
assets ........................... $ 670,520 $ 638,704 $ 640,808
================== ================== ===================

F-20

13. CONDENSED UNCONSOLIDATED FINANCIAL STATEMENTS

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

DECEMBER 29, DECEMBER 31,
2000 1999
------------------ ------------------
(IN THOUSANDS)

Condensed balance sheets:
Cash...................................................... $ 59 $ 59
Other assets.............................................. 24,644 21,459
Investment in Dal-Tile Group Inc., net
of accumulated losses.................................. 188,609 80,289
------------------ ------------------
Total assets.............................................. $ 213,312 $ 101,807
================== ==================

Other liabilities......................................... $ 1,004 $ 863
Stockholders' equity...................................... 212,308 100,944
------------------ ------------------
Total liabilities and stockholders' equity................ $ 213,312 $ 101,807
================== ==================

FISCAL YEAR ENDED
-------------------------------------------------------------
DECEMBER 29, DECEMBER 31, JANUARY 1,
2000 1999 1999
----------------- ---------------- ------------------
(IN THOUSANDS)

Condensed statements of operations:
Equity in net income of Dal-Tile Group Inc. ..... $ 103,124 $ 72,468 $ 24,140
Other expense (income)........................... 2,367 (1,295) 99
Interest expense................................. - - 13
----------------- ---------------- ------------------
Net income ...................................... $ 100,757 $ 73,763 $ 24,028
================= ================ ==================
Condensed statements of cash flows:
Cash flow used in operating activities.......... $ (6,184) $ (10,464) $ (80)
Financing activities:
Proceeds from issuance of stock................. 6,184 10,640 1,113
Fees associated with stock registration......... - (176) (876)
Repayment of long-term debt..................... - - (157)
----------------- ---------------- ------------------
Net increase (decrease) in cash................. - - -
Cash at beginning of period..................... 59 59 59
----------------- ---------------- ------------------
Cash at end of period...................... $ 59 $ 59 $ 59
================= ================ ==================

F-21

14. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a tabulation of the unaudited quarterly results of operations
for the fiscal years ended December 29, 2000 and December 31, 1999:

FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------------- -------------- ------------ ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Fiscal year ended December 29, 2000:
Net sales.................................... $ 230,113 $ 244,981 $ 247,852 $ 229,210
Gross profit................................. 110,684 117,522 117,857 108,160
Operating income............................. 30,531 35,799 36,424 34,309
Net income................................... 21,325 25,539 27,685 26,208
Per share:
Net income
basic................................ 0.39 0.47 0.50 0.48
assuming dilution.................... 0.39 0.46 0.50 0.47

Fiscal year ended December 31, 1999:
Net sales.................................... $ 200,692 $ 219,303 $ 219,500 $ 211,073
Gross profit................................. 96,682 105,651 107,220 100,501
Operating income............................. 22,385 29,947 34,145 28,001
Net income................................... 11,138 19,491 23,777 19,357
Per share:
Net income
basic................................ 0.21 0.36 0.44 0.35
assuming dilution.................... 0.21 0.36 0.43 0.35

The sum of quarterly per share amounts does not necessarily equal the annual
amount reported, as per share amounts are computed separately for each quarter
and the full year based on respective weighted average basic common shares
outstanding and weighted average common shares outstanding assuming dilution.

F-22

SCHEDULE II

DAL-TILE INTERNATIONAL INC.

VALUATION AND QUALIFYING ACCOUNTS

FISCAL YEARS ENDED DECEMBER 29, 2000, DECEMBER 31, 1999 AND JANUARY 1, 1999

(IN THOUSANDS)

Allowance for Losses from Uncollectible Accounts and customer credits:

Balance at Additions
Beginning of Charged to Costs (a) Balance at End of
Period and Expenses Deductions Period
------------------ --------------------- ---------------- ---------------------

2000 $ 5,186 $ 2,126 $ 4,041 $ 3,271
1999 9,581 2,199 6,594 5,186
1998 13,160 7,024 10,603 9,581

(a) Net of recoveries.

S-1