##### Table of Contents

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FORM 10-K



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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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(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 31, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



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ARMSTRONG HOLDINGS, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                        |  |                                     
|-------------------------------------------------------------- |  | ---------------------- |  | ------------------------------------
|Pennsylvania                                                   |  | 000-50408              |  | 23-3033414                          
|(State or other jurisdiction of incorporation or organization) |  | Commission file number |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|P. O. Box 3001, Lancaster, Pennsylvania  |  | 17604     
|(Address of principal executive offices) |  | (Zip Code)



Registrants
telephone number, including area code (717) 397-0611



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Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:



Title of each class

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Common Stock ($1 par value)

Preferred Stock Purchase Rights



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ARMSTRONG WORLD INDUSTRIES, INC.

(Exact name of registrant as specified in
its charter)



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|                                                               |  |                        |  |                                     
|-------------------------------------------------------------- |  | ---------------------- |  | ------------------------------------
|Pennsylvania                                                   |  | 1-2116                 |  | 23-0366390                          
|(State or other jurisdiction of incorporation or organization) |  | Commission file number |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|P. O. Box 3001, Lancaster, Pennsylvania  |  | 17604     
|(Address of principal executive offices) |  | (Zip Code)



Registrants
telephone number, including area code (717) 397-0611



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Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None



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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, and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No ̈



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



Indicate by check mark
whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes ̈No  x



The aggregate market value of the Common Stock of Armstrong Holdings, Inc. held by non-affiliates based on the closing price ($1.33 per share) on the over-the-counter (OTC) Bulletin Board (trading symbol ACKHQ) on June 30, 2004, was
approximately $50.9 million. As of March 16, 2005, the number of shares outstanding of registrants Common Stock was 40,668,892. This amount includes the 1,461,533 shares of Common Stock as of December 31, 2004, held by JPMorgan Chase Bank, as
Trustee for the employee stock ownership accounts of the companys Retirement Savings and Stock Ownership Plan.



Documents Incorporated by Reference



None



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##### Table of Contents

TABLE OF CONTENTS



|           |  |                                                                                                                  |  |      
|---------- |  | ---------------------------------------------------------------------------------------------------------------- |  | -----
|           |  | SECTION                                                                                                          |  | PAGES
|           |  | Cautionary Factors                                                                                               |  | 4    
|           |  |                                                                                                                 
|           |  | PART I                                                                                                           |  |      
|           |  |                                                                                                                 
|Item 1.    |  | Business                                                                                                         |  | 7    
|           |  |                                                                                                                 
|Item 2.    |  | Properties                                                                                                       |  | 15   
|           |  |                                                                                                                 
|Item 3.    |  | Legal Proceedings                                                                                                |  | 16   
|           |  |                                                                                                                 
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                              |  | 16   
|           |  |                                                                                                                 
|           |  | PART II                                                                                                          |  |      
|           |  |                                                                                                                 
|Item 5.    |  | Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 17   
|           |  |                                                                                                                 
|Item 6.    |  | Selected Financial Data                                                                                          |  | 18   
|           |  |                                                                                                                 
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 19   
|           |  |                                                                                                                 
|Item 7A.   |  | Quantitative and Qualitative Disclosures about Market Risk                                                       |  | 47   
|           |  |                                                                                                                 
|Item 8.    |  | Financial Statements and Supplementary Data                                                                      |  | 50   
|           |  | Index to Financial Statements and Schedules                                                                      |  | 50   
|           |  | Quarterly Financial Information                                                                                  |  | 51   
|           |  | Armstrong Holdings, Inc. and Subsidiaries                                                                        |  | 53   
|           |  | Armstrong World Industries, Inc. and Subsidiaries                                                                |  | 108  
|           |  |                                                                                                                 
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                             |  | 164  
|           |  |                                                                                                                 
|Item 9A.   |  | Controls and Procedures                                                                                          |  | 164  
|           |  |                                                                                                                 
|Item 9B.   |  | Other Information                                                                                                |  | 164  
|           |  |                                                                                                                 
|           |  | PART III                                                                                                         |  |      
|           |  |                                                                                                                 
|Item 10.   |  | Directors and Executive Officers of the Registrant                                                               |  | 165  
|           |  |                                                                                                                 
|Item 11.   |  | Executive Compensation                                                                                           |  | 170  
|           |  |                                                                                                                 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                   |  | 177  
|           |  |                                                                                                                 
|Item 13.   |  | Certain Relationships and Related Transactions                                                                   |  | 180  
|           |  |                                                                                                                 
|Item 14.   |  | Principal Accountant Fees and Services                                                                           |  | 181  
|           |  |                                                                                                                 
|           |  | PART IV                                                                                                          |  |      
|           |  |                                                                                                                 
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                                       |  | 182  
|           | 
|Signatures |  | 189                                                                                                             



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Cautionary Factors That May Affect Future Results



This report and other written reports and oral statements made from time to time by the company may contain cautionary or forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.



These statements can be identified by the use of words such as anticipate,
estimate, expect, project, intend, plan, believe, and other words of similar meaning. In particular, these include statements relating to intentions, beliefs or current
expectations concerning, among other things, future performance, results of operations, the outcome of contingencies such as legal proceedings, and financial conditions. Forward-looking statements give current expectations or forecasts of future
events. They do not relate strictly to historical or current facts.



Any or all
of the forward-looking statements made in this report and in any other public statements may turn out to be incorrect. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on
circumstances that may or may not occur in the future. We caution you that actual future results of operations may vary materially from forward-looking statements. Any forward-looking statements made in this report speak only as of the date of such
statement. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. However, you should consult any further
disclosures we make on related subjects in Forms 10-Q, 8-K, 10-K or other reports filed with the Securities and Exchange Commission (SEC).



It is not possible to predict or identify all factors that could potentially cause actual results to differ materially from expected and historical results. Some such
factors are:



Chapter 11



| |  | Factors relating to Armstrong World Industries, Inc.s (AWI) Chapter 11 Filing, such as: the possible disruption of relationships with creditors, customers,
suppliers and employees; the ultimate size of AWIs asbestos-related and other liabilities; the ability to confirm and implement a plan of reorganization; the availability of financing and refinancing for both AWI and its subsidiaries that are
not parties to its Chapter 11 Filing; legislation that might affect AWIs liabilities; and AWIs ability to comply with covenants in its debtor-in-possession credit facility (the DIP Facility).
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Factors relating to AWIs emergence from bankruptcy, such as emergence-related costs and AWIs debt service costs for debt to be issued pursuant to the plan of
reorganization. Debt service costs will affect net income and cash flow.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Covenants in the agreements governing our anticipated, emergence-related debt may impose restrictions that limit operating and financial flexibility.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



Business Environment



| |  | Our business is cyclical in nature and is affected by the same economic factors that affect the residential, office, commercial and institutional renovation and construction
industries in general, such as the availability of credit, consumer confidence, changes in interest rates, governmental budgets and general economic conditions. Despite our efforts to foresee and plan for the effects of changes in these
circumstances, we cannot predict their impact with certainty. For example, economic weakness can lead customers to delay or cancel construction plans or could lead to further industry overcapacity. For more information on these matters, see the
discussion of Market Risk in Item 7A of this report.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  | The major markets for our products, particularly in the renovation and construction industries, are highly competitive. Business combinations among our competitors or suppliers
could affect our competitive position in any of our business units. Competition from foreign competitors who have lower cost structures than we have is a threat in the flooring business. Similarly, combinations or alliances among our major customers
could increase their purchasing power in dealing with us. If we should enter into one or more business combinations, our business, finances and capital structure could be affected.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The level of success of our new product introductions, as well as new patents, and those of our competitors will impact our competitive position.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The extent to which we successfully achieve integration of and synergies from acquisitions as well as the impact of divestitures, plant closings, including the ability to derive
cost savings, and other unusual items that may result from evolving business strategies and organizational restructuring will impact our results of operations.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Changes in the stock and bond markets could adversely affect the valuation of assets and projected benefit obligations in the related accounting of, and the funding requirements
for, our pension plans.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Sales Environment



| |  | We have several key customers and the loss of one of these customers could affect our financial performance. Although builders, dealers and other retailers represent other channels
of distribution for our products, the loss of a significant portion of sales from a major customer would have a material adverse impact on our results of operations.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Business decisions made by our major customers and business conditions that affect our major customers and distribution networks may adversely affect our business.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Increased retail trade consolidation, especially in markets such as the United States, could make us more dependent upon key retailers whose relative bargaining strength may
increase.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We are affected by changes in the policies and marketing strategies of our retail trade customers, such as inventory shifts or fluctuations, limitations on access to shelf space and
other conditions. Many of our customers, particularly major home center retailers, have engaged with us in continuous efforts to reduce their inventory levels and improve delivery fulfillment.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Profitability can be affected by changes over time in consumer preferences for one type of product versus another. This may create a shift in demand from products with higher
margins to those with lower margins or to products we do not sell.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We may be unable to increase prices to our customers when our costs increase.
|- |  | -----------------------------------------------------------------------------



International



| |  | We face political, social and economic risks related to our international operations which can negatively affect our business, operating results, profitability and financial
condition. The risk of war and terrorism may adversely affect the economy and the demand for our products.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Various worldwide economic and political factors, such as changes in the competitive structures of the markets, credit risks in emerging markets, variations in residential and
commercial construction rates, and economic growth rates in various areas of the world in which we do business could affect the end-use markets for our products.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Profitability can be affected by margin erosion to the extent that sales shift to developing markets with lower profitability.
|- |  | ------------------------------------------------------------------------------------------------------------------------------



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| |  | Changes in intellectual property legal protections and remedies, trade regulations, tariff classifications or duty rates, and procedures and actions affecting production, pricing
and marketing of products, intergovernmental disputes, possible nationalization and unstable governments and legal systems could impact our business.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Fluctuations in exchange rates can significantly affect our reported results from one period to the next. Tax inefficiencies and currency exchange controls in repatriating cash flow
from non-U.S. subsidiaries could adversely affect us.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Raw Materials and Sourced Products



| |  | The availability of raw materials, energy, water and sourced products due to changes in conditions that impact our suppliers, including environmental conditions, laws and
regulations, litigation involving our suppliers, transportation disruptions, force majeure events and/or business decisions made by our suppliers may have an adverse impact on our results of operations.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We purchase a significant amount of certain raw materials, such as lumber, veneers, PVC resin, plasticizers, mineral fibers and natural gas. Prices of these raw materials, as well
as transportation costs, can change dramatically and can have a significant adverse impact on our manufacturing costs.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Labor Contracts



| |  | A significant portion of our employees in production are represented under collective labor contracts, with a variety of unions both domestic and international, which are generally
multi-year in nature and expire at varying dates. Renewal of collective labor agreements which are expiring involves negotiations, with a potential for work stoppages at affected plants. Should a work stoppage occur, it could adversely affect the
results of operations, at least during the period of the event.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Legal



| |  | Claims of undetermined merit and amount have been asserted against us for various legal matters, including asbestos-related litigation and claims. We could face potential product
liability or warranty claims relating to products we manufacture or distribute. For more information on these matters, see the discussion of Legal Proceedings in Part I, Item 3 in this report.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We are subject to a wide variety of increasingly complex and stringent federal, state and local laws and regulations. Changes in laws and regulations, including accounting
standards, taxation requirements, and environmental and safety regulations, that affect our business could lead to significant, unforeseen expenditures.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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PART I



ITEM 1. BUSINESS



General



Armstrong World Industries, Inc. (AWI) is a Pennsylvania
corporation incorporated in 1891. Armstrong Holdings, Inc. is a Pennsylvania corporation and the publicly held parent holding company of AWI. Armstrong Holdings, Inc.s only significant asset and operation is its indirect ownership, through
Armstrong Worldwide, Inc. (a Delaware Corporation), of all of the capital stock of AWI. We include separate financial statements for Armstrong Holdings, Inc. and its subsidiaries and AWI and its subsidiaries in this report because both companies
have public securities that are registered under the Securities Exchange Act of 1934 (the Securities Exchange Act). The difference between the financial statements of Armstrong Holdings, Inc. and its subsidiaries and AWI and its
subsidiaries is primarily due to transactions that occurred in 2000 related to the formation of Armstrong Holdings, Inc. and to employee compensation-related stock activity. Due to the lack of material differences in the financial statements, when
we refer in this document to Armstrong Holdings, Inc. and its subsidiaries as AHI, Armstrong, we, us, and ourselves, we are also effectively referring to AWI and its subsidiaries. We use
the term AWI when we are referring solely to Armstrong World Industries, Inc.



We maintain a website at http://www.armstrong.com. Information contained on our website is not incorporated into this document. Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, all amendments to those reports and other information about us are available free of charge through this website as soon as reasonably practicable after the reports are electronically filed with the Securities and Exchange Commission
(SEC).



We are a leading global producer of flooring products and
ceiling systems for use primarily in the construction and renovation of residential, commercial and institutional buildings. Through our United States (U.S.) operations and U.S. and international subsidiaries, we design, manufacture and
sell flooring products (resilient, wood, carpeting and sports flooring) and ceiling systems (primarily mineral fiber, fiberglass and metal), around the world. We also design, manufacture and sell kitchen and bathroom cabinets in the U.S.



Our business strategy focuses on product innovation, product quality and customer service.
In our businesses, these factors are the primary determinants of market share gain or loss. Our objective is to ensure that anyone buying a floor or ceiling can find an Armstrong product that meets his or her needs. Our cabinet strategy is more
focused  on stock cabinets in select geographic markets. In these segments, we have the same objectives: high quality, good customer service and products that meet our customers needs. Our markets are very competitive, which limits our
pricing flexibility. This requires that we increase our productivity each year  both in our plants and in our administration of the businesses.



Chapter 11 Proceeding



On December 6, 2000, AWI filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware (the Bankruptcy Court) in order to use the court-supervised reorganization process to achieve a resolution of its asbestos liability. Also filing under Chapter 11 were two of AWIs wholly-owned subsidiaries, Nitram
Liquidators, Inc. and Desseaux Corporation of North America, Inc. The Chapter 11 cases are being jointly administered under case number 00-4471 (the Chapter 11 Case). AWI is operating its business and managing its properties as a
debtor-in-possession subject to the provisions of the Bankruptcy Code. See Note 1 of the Consolidated Financial Statements for information on the Chapter 11 Case and Note 32 of the Consolidated Financial Statements for information on asbestos
litigation.



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##### Table of Contents

Reportable Segments



Resilient Flooring  produces a broad range of floor coverings for homes and commercial and institutional buildings. Resilient
Flooring products include vinyl sheet, vinyl tile, linoleum flooring and luxury vinyl tile. In addition, our Resilient Flooring segment sources and sells laminate flooring products, ceramic tile products, adhesives, installation and maintenance
materials and accessories. Resilient Flooring products are offered in a wide variety of types, designs and colors. Many products offer reduced maintenance (no-wax). We sell these products to wholesalers, large home centers, retailers, contractors
and to the manufactured homes industry.



Wood Flooring 
produces and sources wood flooring products for use in new residential construction and renovation, with some commercial applications in stores, restaurants and high-end offices. The product offering includes solid wood (pre-finished or unfinished),
engineered wood floors in various wood species (with oak being the primary species of choice) and related accessories. Virtually all of our Wood Floorings sales are in North America. Our Wood Flooring products are generally sold to independent
wholesale flooring distributors and large home centers under the brand names Bruce®, Hartco®
and Robbins®.



Textiles and Sports Flooring (TSF)  produces carpeting and sports
flooring products that are sold mainly in Europe. Carpeting products consist principally of carpet tiles and broadloom used in commercial applications and in the leisure and travel industry. Sports flooring products include artificial turf and other
sports surfaces. Our TSF products are sold primarily through retailers, contractors, distributors and other industrial businesses.



Building Products  produces suspended mineral fiber, soft fiber and metal ceiling systems for use in commercial, institutional and residential settings. In
addition, our Building Products segment sources and sells wood ceiling systems. The products are available in numerous colors, performance characteristics and designs, and offer attributes such as acoustical control, rated fire protection and
aesthetic appeal. Commercial ceiling materials and accessories are sold to ceiling systems contractors and to resale distributors. Residential ceiling products are sold through wholesalers and retailers (including large home centers), primarily in
North America. Suspension system (grid) products manufactured by WAVE are sold by both Armstrong and our WAVE joint venture.



Cabinets  produces kitchen and bathroom cabinetry and related products, which are used primarily in the U.S. residential new construction and renovation
markets. Through our system of company-owned and independent distribution centers and through direct sales to builders, our Cabinets segment provides design, fabrication and installation services to single and multi-family homebuilders, remodelers
and consumers under the brand names Armstrong and
Bruce®.



Unallocated Corporate  includes assets and expenses that have not been allocated
to the business units. Unallocated Corporate assets are primarily deferred tax assets, cash and the U.S. prepaid pension cost. The most significant of the Unallocated Corporate expenses relates to asbestos charges as described in Note 32 of the
Consolidated Financial Statements. Other expenses included in Unallocated Corporate are corporate departments expenses that have not been allocated to other reportable segments, and the U.S. pension credit. Unallocated Corporate also includes
assets and equity earnings related to a corporate equity investment in Interface Solutions, Inc. Expenses for our corporate departments (including computer services, human resources, legal, finance and other) are allocated to the reportable segments
when the departments provide specific work to the reportable segment and the expense allocation can be based on known metrics, such as time reporting, headcount or square-footage. The remaining expenses, which cannot be attributable to the
reportable segments without a high degree of generalization, are reported in Unallocated Corporate.



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The following chart illustrates the breakdown of our consolidated net sales for the year ended December 31, 2004 by
segment:



LOGO



See Note 3 of the Consolidated Financial
Statements and Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K for additional financial information on our reportable segments.



Markets



The major markets in which we compete are:



North American Residential markets. The North American Residential markets account for nearly one-half of our total consolidated net sales. Our Resilient Flooring,
Wood Flooring, Building Products and Cabinets segments sell products for use in the home. Homeowners have a multitude of finishing solution options for every room in their house. For flooring, they can choose from our vinyl and wood products, for
which we are the markets largest provider, or from our laminate and ceramic products. We compete directly with other domestic and international suppliers of these products. Our flooring products also compete with carpet, which we do not offer
in this market. Our ceiling products compete against mineral fiber and fiberglass products from other manufacturers, as well as drywall installations. In the kitchen and bath areas, we compete with thousands of other cabinet manufacturers that
include large diversified corporations as well as small local craftsmen.



Our
products are used in new home construction and existing home renovation work. Industry estimates are that existing home renovation (also known as replacement / remodel) work represents approximately two-thirds of the total North American residential
market opportunity. Key U.S. statistics that indicate market opportunity include existing home sales (a key indicator for renovation opportunity), housing starts, housing completions, interest rates and consumer confidence. For our Resilient
Flooring and Wood Flooring products, we believe there is some longer-term correlation between these statistics and our revenue, especially with the new construction statistics, after reflecting a lag period between change in construction activity
and our operating results of approximately several months. However, we believe that consumers preferences for product type, style, color, availability and affordability also significantly impact our revenue. Further, changes in inventory
levels and product focus at national home centers, which are our largest customers, can also significantly impact our revenue. Sales of our ceiling products in this market appear to follow the trend of existing home sales, with a several month lag
period between change in existing home sales and our operating results.



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##### Table of Contents

North American Commercial markets. The North American Commercial markets account for approximately one-fourth of
our total consolidated net sales. Many of our products, primarily ceilings and Resilient Flooring, are used in commercial and institutional buildings. Our revenue opportunities come from new construction as well as renovation of existing buildings.
Renovation work is estimated to represent more than two-thirds of the total North American commercial market opportunity. We focus on four major segments of commercial building  office, education, retail and healthcare, as most of our revenue
in these markets comes from these building segments. We monitor U.S. construction starts (an indicator of U.S. monthly construction activity that provides us a reasonable indication of upcoming opportunity) and follow new projects. We have found
that our revenue from new construction can lag behind construction starts by as much as one year. We also monitor office vacancy rates and general employment levels, which can indicate movement in renovation and new construction opportunities. We
believe that these statistics, taking into account the time-lag effect, provide a reasonable indication of our future revenue opportunity from these markets.



Non-North American markets. The non-North American markets account for approximately one-fourth of our total consolidated net sales. The vast majority of our
revenues generated outside of North America are in Europe and are commercial in nature. For the countries in which we have significant revenue, we monitor various national statistics (such as GDP) as well as known new projects. Revenues come
primarily from new construction and renovation work.



The following table
provides an estimate of our segments 2004 net sales, by major markets.



|                                                      |  |                           |   |  |                         |   |  |                   |   |  |       |  
|----------------------------------------------------- |  | ------------------------- | - |  | ----------------------- | - |  | ----------------- | - |  | ----- | -
|(Estimated percentages of individual
segments sales) |  | NorthAmerican Residential |   |  | NorthAmericanCommercial |   |  | Non-NorthAmerican |   |  | Total |  
|Resilient Flooring                                    |  | 50                        | % |  | 30                      | % |  | 20                | % |  | 100   | %
|Wood Flooring                                         |  | 95                        | % |  | 5                       | % |  |                  |   |  | 100   | %
|Textiles & Sports Flooring                            |  |                          |   |  | 5                       | % |  | 95                | % |  | 100   | %
|Building Products                                     |  | 10                        | % |  | 50                      | % |  | 40                | % |  | 100   | %
|Cabinets                                              |  | 100                       | % |  |                        |   |  |                  |   |  | 100   | %



Geographic Areas



We sell our products in more than 80 countries. Approximately 73% of
our 2004 revenue was derived from sales in the Americas, the vast majority of which came in North America (primarily the United States and Canada). The following chart illustrates the breakdown of our consolidated net sales for the year ended
December 31, 2004 by region, based on where the sale was made:



LOGO



See Note 3 of the Consolidated Financial
Statements and Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K for financial information by geographic areas.



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##### Table of Contents

Customers



We use our market positions and brand recognition to develop long-standing relationships with our customers. We principally sell products through building materials
distributors, who re-sell our products to retailers, builders, contractors, installers and others. In the North American retail market, which sells to end-users in the light commercial and residential segments, we have important relationships with
major national retailers such as The Home Depot, Inc. and Lowes Companies, Inc. In the residential market, we have important relationships with major homebuilders and buying groups. In the commercial market, we sell to several contractors and
subcontractors alliances.



Net sales in excess of 10% of our consolidated
net sales for 2004, 2003 and 2002 were:



|                       |  |      |       |   |      |   |       |  |   |       |  
|---------------------- |  | ---- | ----- | - | ---- | - | ----- |  | - | ----- | -
|Customer               |  | 2004 |       |   | 2003 |   | 2002  | 
|The Home Depot, Inc.   |  | $    | 393.4 |   |      | $ | 400.0 |  | $ | 380.3 |  
|Lowes Companies, Inc. |  |      | (1    | ) |      |   | 318.7 |  |   | (1    | )

---

|(1) | Net sales to Lowes Companies, Inc. were less than 10% of consolidated net sales.
|--- | ---------------------------------------------------------------------------------



Net sales to these customers were recorded in our Resilient Flooring, Wood Flooring and Building Products segments. No other customers
accounted for 10% or more of our total consolidated net sales.



The following
charts illustrate the estimated breakdown of our 2004 consolidated net sales geographically by distribution channel:



LOGO



Competition



There is strong competition in all of the reportable segments in which we do business.
Principal methods of competition include product performance, product styling, service and price. Competition in the U.S. markets comes from both domestic manufacturers and international producers. Additionally, some of our products compete with
alternative products in certain markets, such as our resilient, laminate and wood flooring products competing with carpet products, and our ceiling products competing with drywall. Over recent years, there has continued to be excess industry
capacity in many geographic markets, which tends to increase price competition. The following companies are our primary competitors, none of which we view as dominant in their respective markets:



Flooring segments  Congoleum Corporation, Forbo Holding AG, Gerflor Group, Mannington
Mills, Inc., Mohawk Industries, Inc., Pergo AB, Shaw Industries, Inc., Tarkett AG and Wilsonart International.



Building Products  Celotex Limited, Chicago Metallic Corporation, Knauf AMF GmbH & Co. KG, Odenwald Faserplattenwerk GmbH, Rockfon A/S and USG Corporation.



Cabinets  American Woodmark Corporation, Fortune Brands, Inc. and Masco Corporation.



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##### Table of Contents

Raw Materials



Raw materials essential to our businesses are purchased worldwide in the ordinary course of business from numerous suppliers. The principal raw materials used in each
business include the following:



|                             |  |                                                                                                                                                                     
|---------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Business                     |  | Principal Raw Materials                                                                                                                                             
|Resilient Flooring           |  | Polyvinylchloride (PVC) resins and films, plasticizers, backings, limestone, pigments, linseed oil, inks and stabilizers                                          
|                             | 
|Wood Flooring                |  | Hardwood lumber, veneer, coatings, and stains                                                                                                                       
|                             | 
|Textiles and Sports Flooring |  | Yarn, latex, bitumen and wool                                                                                                                                       
|                             | 
|Building Products            |  | Mineral fibers, perlite, waste paper, clays, starches, and steel used in the production of metal ceilings and for our joint ventures manufacturing of ceiling grids
|                             | 
|Cabinets                     |  | Lumber, veneer, plywood, particleboard, fiberboard and components, such as doors and hardware                                                                       



We also purchase significant amounts
of packaging materials for all products and use substantial amounts of energy, such as electricity and natural gas, and water in our manufacturing operations.



In general, adequate supplies of raw materials are available to all of our businesses. However, availability can change for a number of reasons, including
environmental conditions, laws and regulations, shifts in demand by other industries competing for the same materials, transportation disruptions and/or business decisions made by, or events that affect, our suppliers. There is no assurance that a
significant shortage of raw materials will not occur.



Prices for certain high
usage raw materials can fluctuate dramatically. Cost increases for these materials can have a significant adverse impact on our manufacturing costs. Given the competitiveness of our markets, we may not be able to recover the increased manufacturing
costs through increasing selling prices to our customers.



12



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##### Table of Contents

Sourced Products



Some of the products that we sell are sourced from third parties. The primary sourced products include laminate, wood flooring, vinyl tile and ceramic products,
specialized ceiling products, and installation-related products and accessories for some of our manufactured products. For certain sourced products, the majority of our purchases come from one supplier. Sales of sourced products represented between
10% and 15% of our total consolidated revenue in 2004, 2003 and 2002.



We purchase some of our sourced products from suppliers that are located outside of the U.S. The costs for these products are exposed to changes in foreign currency exchange rates, which can adversely affect our reported results from one
period to the next. Our largest foreign currency exposure for sourced products is to the Euro.



In general, we believe we have adequate supplies of sourced products. We cannot guarantee that a significant shortage will not occur.



Hedging



We use financial instruments to hedge currency exposures, for raw material and sourced product purchases and cross-currency intercompany loans, and commodity exposures
for natural gas. We use derivative financial instruments as risk management tools and not for speculative trading purposes. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk of this Form 10-K for more information.



Patent and Intellectual Property Rights



Patent protection is important to our business in the U.S. and other markets. Our
competitive position has been enhanced by U.S. and foreign patents on products and processes developed or perfected within Armstrong or obtained through acquisitions and licenses. In addition, we also benefit from our trade secrets for certain
products and processes.



Patent protection extends for varying periods
according to the date of patent filing or grant and the legal term of a patent in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of
patent, the scope of its coverage, and the availability of legal remedies. Although we consider that, in the aggregate, our patents, licenses and trade secrets constitute a valuable asset of material importance to our business, we do not regard any
of our businesses as being materially dependent upon any single patent or trade secret, or any group of related patents or trade secrets.



Certain of our trademarks, including without limitation, house marks LOGO, Armstrong, Bruce®, Hartco®, Robbins®, and DLW, and product line marks Allwood, Arteffects, Cirrus®, Corlon®, Cortega®, Designer
Solarian®, Excelon®, Fundamentals® , Medintech®, Natural Inspirations, Natures Gallery, Second Look®, Solarian®, SuperLock,
ToughGuard® and Ultima are important to our business because of their significant brand name
recognition. Trademark protection continues in some countries as long as the mark is used, and continues in other countries, as long as the mark is registered. Registrations are generally for fixed, but renewable, terms.



Employees



As of December 31, 2004, we had approximately 15,500 full-time and part-time employees worldwide, with approximately 10,900 employees
located in the United States. Approximately 10,300 of the 15,500 are production and maintenance employees, of whom approximately 7,700 are located in the U.S. and 2,600 located outside the U.S. Approximately 70% of the production and maintenance
employees in the U.S. are represented by labor unions. This percentage includes all production and maintenance employees at our plants and warehouses where labor unions exist, regardless of whether or not the employees actually pay union dues.
Approximately 70% of our total international employees are represented by labor unions.



13



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##### Table of Contents

Research & Development



Research and development (R&D) activities are important and necessary in helping us improve our products
competitiveness. Principal R&D functions include the development and improvement of products and manufacturing processes. We spent $46.6 million in 2004, $45.3 million in 2003 and $50.1 million in 2002 on R&D activities worldwide.



Environmental Matters



Most of our manufacturing and certain of our research facilities are affected by various
federal, state and local environmental requirements relating to the discharge of materials or the protection of the environment. We have made, and intend to continue to make, necessary expenditures for compliance with applicable environmental
requirements at our operating facilities.



We are involved in proceedings under
the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), and similar state Superfund laws at approximately 28 sites. We have also been remediating environmental contamination resulting from past
industrial activity at certain of our former plant sites. Certain of AWIs environmental liabilities are subject to discharge through its Chapter 11 Case while others are not. Those environmental obligations that AWI has with respect to
property that it owns or operates are likely to be unaffected by the Chapter 11 Case. Therefore, AWI will be required to continue meeting its ongoing environmental compliance obligations at the properties that AWI owns or operates.



See Note 32 of the Consolidated Financial Statements for a full description of our
environmental matters.



Information Filed With the Bankruptcy Court



Under applicable bankruptcy law, AWI is required to file periodically
with the Bankruptcy Court various documents, including certain financial information on an unconsolidated basis. This information includes statements, schedules, and monthly operating reports in forms prescribed by Federal Bankruptcy Law. We caution
that such materials are prepared according to requirements under Federal Bankruptcy Law. While they accurately provide then-current information required under Federal Bankruptcy Law, they are nonetheless unconsolidated, unaudited, and are prepared
in a format different from that used in our consolidated financial statements filed under the securities laws. Accordingly, we believe the substance and format do not allow meaningful comparison with our regular publicly disclosed consolidated
financial statements. The materials filed with the Bankruptcy Court are not prepared for the purpose of providing a basis for an investment decision relating to the stock of AHI or the debt securities of AWI, or for comparison with other financial
information filed with the SEC.



Notwithstanding the foregoing, most of
AWIs filings with the Bankruptcy Court are available to the public at the office of the Clerk of the Bankruptcy Court. Those filings may also be obtained through private document retrieval services. We undertake no obligation to make any
further public announcement with respect to the documents filed with the Bankruptcy Court or any matters referred to in them.



See Note 1 of the Consolidated Financial Statements for discussion of certain items filed with the Bankruptcy Court, and www.armstrongplan.com for documents
related to AWIs Plan of Reorganization.





14



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##### Table of Contents

ITEM 2. PROPERTIES



Our world headquarters are
in Lancaster, Pennsylvania. We own a 100-acre, multi-building campus comprising the site of our corporate headquarters, most operational headquarters, our U.S. R&D operations and marketing, and customer service headquarters. Altogether, our
headquarters operations occupy approximately one million square feet of floor space.



We produce and market Armstrong products and services throughout the world, operating 42 manufacturing plants in 12 countries as of December 31, 2004. Three of our plants are leased and the remaining 39 are owned. We
have 24 plants located throughout the United States. In addition, Armstrong has an interest through its WAVE joint venture in seven additional plants in five countries.



|                             |  |                 |  |                                                                                                                  
|---------------------------- |  | --------------- |  | -----------------------------------------------------------------------------------------------------------------
|Business Segment             |  | Numberof Plants |  | Location of Principal Facilities                                                                                 
|Resilient Flooring           |  | 13              |  | US: California, Illinois, Mississippi, Oklahoma, Pennsylvania and Australia, Canada, Germany, Sweden and the U.K.
|                             |  |                
|Wood Flooring                |  | 9               |  | US: Arkansas, Kentucky, Missouri, Tennessee, Texas and West Virginia                                             
|                             |  |                
|Textiles and Sports Flooring |  | 3               |  | Belgium, Germany and The Netherlands                                                                             
|                             |  |                
|Building Products            |  | 15              |  | US: Alabama, Florida, Georgia, Oregon, Pennsylvania and China, France, Germany and the U.K.                      
|                             |  |                
|Cabinets                     |  | 2               |  | US: Nebraska and Pennsylvania                                                                                    



Sales and administrative offices are
leased and/or owned worldwide, and leased facilities are utilized to supplement our owned warehousing facilities.



For information on consolidation of production and related plant closures in 2004, see Note 15 of the Consolidated Financial Statements and Cost Reduction
Initiatives in Item 7 - Management Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.



Production capacity and the extent of utilization of our facilities are difficult to quantify with certainty. In any one facility, maximum capacity and utilization vary
periodically depending upon demand for the product that is being manufactured. We believe our facilities are adequate and suitable to support the business. Additional incremental investments in plant facilities are made as appropriate to balance
capacity with anticipated demand, improve quality and service, and reduce costs.



15



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##### Table of Contents

ITEM 3. LEGAL PROCEEDINGS



See Note 32 of the
Consolidated Financial Statements, which is incorporated herein by reference, for a full description of our legal proceedings.



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



No matters were submitted to a vote of stockholders during the fourth quarter of 2004.



16



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##### Table of Contents

PART II



ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



As a result of filing the POR on November 4, 2002, the New York Stock Exchange stopped trading on the Exchange of the common stock of AHI (traded under the ticker
symbol ACK). As of November 14, 2002, Armstrong Holdings common stock trades on the over-the-counter (OTC) Bulletin Board under the ticker symbol (ACKHQ). As of March 16, 2005, there were approximately 6,882 holders of record of
Armstrong Holdings Common Stock.



|                                 |  |       |      |        |   |       |  |        |      |            |   |      |  |   |     
|-------------------------------- |  | ----- | ---- | ------ | - | ----- |  | ------ | ---- | ---------- | - | ---- |  | - | ----
|                                 |  | First |      | Second |   | Third |  | Fourth |      | Total Year
|2004                             |  |       |      |        |   |       |  |        |      |            |   |      |  |   |     
|Price range of common stockhigh |  | $     | 1.39 |        | $ | 1.55  |  | $      | 2.30 |            | $ | 3.51 |  | $ | 3.51
|Price range of common stocklow  |  | $     | 0.95 |        | $ | 0.76  |  | $      | 1.16 |            | $ | 1.20 |  | $ | 0.76
|                                 |  |       |      |        |  
|2003                             |  |       |      |        |   |       |  |        |      |            |   |      |  |   |     
|Price range of common stockhigh |  | $     | 0.83 |        | $ | 2.33  |  | $      | 3.04 |            | $ | 2.00 |  | $ | 3.04
|Price range of common stocklow  |  | $     | 0.37 |        | $ | 0.53  |  | $      | 1.26 |            | $ | 0.80 |  | $ | 0.37



There were no dividends declared or
paid during 2004 or 2003. The DIP Facility stipulates that AWI will not declare or pay any dividends either directly or indirectly and bankruptcy law bars dividends by companies in Chapter 11.



No Company securities were repurchased by the Company during 2004.



17



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##### Table of Contents

ITEM 6. SELECTED FINANCIAL DATA



The following
data is presented for continuing operations.



(Dollars in millions except
for per-share data)

|                                                                                            |  |      |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | - |  | ---- | ------- | - |  | - | ------- | -
|For Year                                                                                    |  | 2004 |          |   | 2003 |   |          | 2002 |  |   | 2001     |   |  | 2000 |        
|Income statement data                                                                       |  |      |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Net sales                                                                                   |  | $    | 3,497.3  |   |      | $ | 3,259.0  |      |  | $ | 3,172.3  |   |  | $    | 3,138.7 |   |  | $ | 3,248.9 |  
|Cost of goods sold                                                                          |  |      | 2,811.0  |   |      |   | 2,597.4  |      |  |   | 2,404.5  |   |  |      | 2,364.7 |   |  |   | 2,386.2 |  
|Selling, general and administrative expenses                                                |  |      | 635.0    |   |      |   | 612.1    |      |  |   | 630.8    |   |  |      | 596.6   |   |  |   | 595.3   |  
|Charge for asbestos liability, net                                                          |  |      |         |   |      |   | 81.0     |      |  |   | 2,500.0  |   |  |      | 22.0    |   |  |   | 236.0   |  
|Goodwill impairment                                                                         |  |      | 108.4    |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Restructuring and reorganization charges, net                                               |  |      | 18.3     |   |      |   | 8.6      |      |  |   | 1.9      |   |  |      | 9.0     |   |  |   | 18.8    |  
|Goodwill amortization                                                                       |  |      |         |   |      |   |         |      |  |   |         |   |  |      | 22.8    |   |  |   | 23.9    |  
|Equity (earnings) from joint venture                                                        |  |      | (31.6    | ) |      |   | (20.8    | )    |  |   | (19.7    | ) |  |      | (16.2   | ) |  |   | (17.9   | )
|                                                                                            |  |      |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Operating income (loss)                                                                     |  |      | (43.8    | ) |      |   | (19.3    | )    |  |   | (2,345.2 | ) |  |      | 139.8   |   |  |   | 6.6     |  
|Interest expense                                                                            |  |      | 8.4      |   |      |   | 9.0      |      |  |   | 11.3     |   |  |      | 12.7    |   |  |   | 102.9   |  
|Other non-operating expense                                                                 |  |      | 3.1      |   |      |   | 5.7      |      |  |   | 3.6      |   |  |      | 10.3    |   |  |   | 3.7     |  
|Other non-operating (income)                                                                |  |      | (6.4     | ) |      |   | (5.0     | )    |  |   | (7.5     | ) |  |      | (13.3   | ) |  |   | (80.5   | )
|Chapter 11 reorganization costs, net                                                        |  |      | 6.9      |   |      |   | 9.4      |      |  |   | 23.5     |   |  |      | 12.5    |   |  |   | 103.3   |  
|Income tax expense (benefit)                                                                |  |      | 24.6     |   |      |   | (1.6     | )    |  |   | (827.8   | ) |  |      | 43.2    |   |  |   | (37.7   | )
|                                                                                            |  |      |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Earnings (loss) from continuing operations before cumulative change in accounting principle |  |      | (80.4    | ) |      |   | (36.8    | )    |  |   | (1,548.3 | ) |  |      | 74.4    |   |  |   | (85.1   | )
|Per common share  basic (a)                                                                |  | $    | (1.99    | ) |      | $ | (0.91    | )    |  | $ | (38.23   | ) |  | $    | 1.84    |   |  | $ | (2.12   | )
|Per common share  diluted (a)                                                              |  | $    | (1.99    | ) |      | $ | (0.91    | )    |  | $ | (38.23   | ) |  | $    | 1.82    |   |  | $ | (2.12   | )
|Cumulative effect of a change in accounting principle, net of tax of $2.2                   |  |      |         |   |      |   |         |      |  |   | (593.8   | ) |  |      |        |   |  |   |        |  
|                                                                                            |  |      |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Earnings (loss) from continuing operations                                                  |  |      | (80.4    | ) |      |   | (36.8    | )    |  |   | (2,142.1 | ) |  |      | 74.4    |   |  |   | (85.1   | )
|Earnings (loss) from discontinued operations                                                |  |      | (0.4     | ) |      |   | (2.5     | )    |  |   | (0.7     | ) |  |      | 18.4    |   |  |   | 97.3    |  
|                                                                                            |  |      |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Net earnings (loss)                                                                         |  | $    | (80.8    | ) |      | $ | (39.3    | )    |  | $ | (2,142.8 | ) |  | $    | 92.8    |   |  | $ | 12.2    |  
|Per common share  basic (a)                                                                |  | $    | (2.00    | ) |      | $ | (0.97    | )    |  | $ | (52.91   | ) |  | $    | 2.29    |   |  | $ | 0.30    |  
|Per common share  diluted (a)                                                              |  | $    | (2.00    | ) |      | $ | (0.97    | )    |  | $ | (52.91   | ) |  | $    | 2.27    |   |  | $ | 0.30    |  
|                                                                                            |  |      |          |   |     
|Dividends declared per share of common stock                                                |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  | $ | 1.44    |  
|                                                                                            |  |      |          |   |     
|For Year                                                                                    |  | 2004 |          |   | 2003 |   |          | 2002 |  |   | 2001     |   |  | 2000 |        
|Average number of common shares outstanding (in millions)                                   |  |      | 40.5     |   |      |   | 40.5     |      |  |   | 40.5     |   |  |      | 40.5    |   |  |   | 40.2    |  
|Average number of employees                                                                 |  |      | 15,400   |   |      |   | 15,800   |      |  |   | 16,700   |   |  |      | 16,800  |   |  |   | 16,500  |  
|                                                                                            |  |      |          |   |     
|Balance sheet data (December 31)                                                            |  |      |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Working capital                                                                             |  | $    | 994.1    |   |      | $ | 943.3    |      |  | $ | 859.3    |   |  | $    | 748.0   |   |  | $ | 618.3   |  
|Total assets                                                                                |  |      | 4,609.4  |   |      |   | 4,647.8  |      |  |   | 4,504.8  |   |  |      | 4,038.1 |   |  |   | 4,005.2 |  
|Liabilities subject to compromise                                                           |  |      | 4,866.2  |   |      |   | 4,858.5  |      |  |   | 4,861.1  |   |  |      | 2,357.6 |   |  |   | 2,385.2 |  
|Net long-term debt (b)                                                                      |  |      | 29.2     |   |      |   | 39.4     |      |  |   | 39.9     |   |  |      | 50.3    |   |  |   | 56.9    |  
|Shareholders equity (deficit)                                                              |  |      | (1,411.7 | ) |      |   | (1,330.2 | )    |  |   | (1,346.7 | ) |  |      | 760.4   |   |  |   | 665.1   |  

---

Notes:



|(a) | See definition of basic and diluted earnings per share in Note 2 of the Consolidated Financial Statements.
|--- | ----------------------------------------------------------------------------------------------------------

|(b) | Net long-term debt excludes debt subject to compromise for all periods presented.
|--- | ---------------------------------------------------------------------------------



Certain prior year amounts have been reclassified to conform to the current year presentation. See Note 2 of the Consolidated Financial
Statements.



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##### Table of Contents

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



Separate financial statements for AHI and AWI and its subsidiaries are included in this document because both have outstanding public securities. The difference between
the financial statements of Armstrong Holdings, Inc. and its subsidiaries and AWI and its subsidiaries is primarily due to transactions that occurred in 2000 related to the formation of Armstrong Holdings, Inc. and to employee compensation-related
stock activity. Due to the lack of material differences in the financial statements, the following discussion and analysis pertains to both AHI and AWI and its subsidiaries.



This discussion should be read in conjunction with the financial statements and the accompanying notes included elsewhere in this Form 10-K.
Certain prior year amounts have been reclassified to conform to the current year presentation. This discussion contains forward-looking statements based on our current expectations, which are inherently subject to risks and uncertainties. Actual
results and the timing of certain events may differ significantly from those referred to in such forward-looking statements. We undertake no obligation beyond what is required under applicable securities law to publicly update or revise any
forward-looking statement to reflect current or future events or circumstances, including those set forth in the section entitled Cautionary Factors and elsewhere in this Form 10-K.



References to performance excluding the translation effect of changes in foreign exchange
rates are non-GAAP measures. We believe that this information improves the comparability of business performance by excluding the impacts of changes in foreign exchange rates when translating comparable foreign currency amounts. We calculate the
translation effect of foreign exchange rates by applying the current years foreign exchange rates to the equivalent periods foreign currency amounts as reported in the prior year. Additionally, we reference operating income prior to the
charge for asbestos liability, net and the goodwill impairment. We believe that this non-GAAP reference provides a clearer picture of our operating performance. Furthermore, management evaluates the performance of the businesses excluding these
items.



OVERVIEW



We are a leading global producer of flooring products and ceiling systems for use primarily
in the construction and renovation of residential, commercial and institutional buildings. Through our United States (U.S.) operations and U.S. and international subsidiaries, we design, manufacture and sell flooring products (resilient,
wood, carpeting and sports flooring) and ceiling systems (primarily mineral fiber, fiberglass and metal) around the world. We also design, manufacture and sell kitchen and bathroom cabinets in the U.S. We own and operate 42 manufacturing plants in
12 countries, including 24 plants located throughout the United States. Through WAVE, our joint venture with Worthington Industries, Inc., we also have an interest in seven additional plants in five countries that produce suspension system (grid)
products for our ceiling systems.



We report our financial results through the
following segments: Resilient Flooring, Wood Flooring, Textiles and Sports Flooring, Building Products, Cabinets and Unallocated Corporate. See Reportable Segment Results for additional financial information on our segments.



On December 6, 2000, AWI filed a voluntary petition for relief under Chapter 11 of the
U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court) in order to use the court-supervised reorganization process to achieve a resolution of its asbestos liability. Also filing
under Chapter 11 were two of AWIs wholly-owned subsidiaries, Nitram Liquidators, Inc. and Desseaux Corporation of North America, Inc. The Chapter 11 cases are being jointly administered under case number 00-4471 (the Chapter 11
Case). AWI is operating its business and managing its properties as a debtor-in-possession subject to the provisions of the Bankruptcy Code. See Note 1 of the Consolidated Financial Statements for information on the Chapter 11 Case and Note 32
of the Consolidated Financial Statements for information on asbestos litigation.



19



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



Our consolidated net sales for 2004 were approximately $3.5 billion, which were approximately 7% greater than
consolidated net sales in 2003. After excluding the translation effect of changes in foreign exchange rates, net sales in 2004 increased by approximately 4.5% from net sales in 2003. Operating income prior to non-cash goodwill impairment charges was
approximately $65 million in 2004, as compared to operating income prior to non-cash asbestos-related charges of approximately $62 million in 2003. (For a reconciliation of non-GAAP measures, see Results of Operations, 2004 Compared to
2003) Cash and cash equivalents increased by approximately $32 million of cash in 2004, which was lower than the cash increase in 2003. In 2004:



| |  |  | The U.S. commercial market strengthened, while the U.S. housing market remained strong.
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | We made progress in improving product quality and customer service.
| | - |  | -------------------------------------------------------------------



| |  |  | We offset most of the significant cost increases incurred for certain items, such as the cost of lumber, PVC, resins, plasticizers and energy, by increasing selling prices.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We benefited from the cost reduction initiatives implemented in 2003, and implemented new initiatives in 2004 to further improve our cost structure and enhance our competitive
position.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We increased capital investments in our manufacturing operations.
| | - |  | -----------------------------------------------------------------



Our businesses experienced the following results in 2004:



| |  |  | Building Products generated record results.
| | - |  | -------------------------------------------



| |  |  | Wood Floorings operating income improved through increased sales and manufacturing efficiencies.
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Cabinets results turned positive.
| | - |  | ----------------------------------



| |  |  | Textiles and Sports Flooring generated less of an operating loss, primarily due to cost reduction initiatives implemented in 2003.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Resilient Flooring incurred a significant operating loss, primarily from recording non-cash charges of $108.4 million to impair goodwill and $44.8 million to impair fixed assets in
2004 in Europe. Resilient Flooring also incurred additional expenses in 2004 related to cost reduction initiatives.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Factors Affecting Revenues



For an estimate of our segments 2004 net sales by major markets, see Markets in Item 1. Business of this Form 10-K.



Markets. We compete in building material markets around the world. The majority of our
sales opportunity is in the North American and European markets. During 2004, these markets experienced the following, according to U.S. Government and industry reports:



| |  |  | In the North American residential market, housing construction remained very strong, with approximately 1.95 million housing units started in 2004 compared to approximately 1.85
million in 2003. However, housing starts in the fourth quarter of 2004 declined approximately 4% from starts in the fourth quarter of 2003 and declined slightly from the third quarter of 2004. Sales of existing homes were also very strong in 2004,
with approximately 6.7 million homes sold in 2004 compared to approximately 6.1 million in 2003.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



U.S. retail sales of building materials, garden equipment and supply stores (an indicator of home renovation activity) increased approximately 15% in 2004
over sales levels in 2003. This was partially due to strong sales of existing homes during the periods, after allowing for the usual lag for renovation-related expenditures.



20



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



For several years, the amount of vinyl flooring products, measured as a percent of the total
residential flooring market, has been declining, while laminate, ceramic and hardwood flooring products have increased. This trend of changing consumer preferences for flooring also continued in 2004. For 2005, we estimate the residential
replacement markets will decline and that it is likely that new construction demand will decline from record 2004 levels. A key consideration in changes in market segments is that margins for products sold into new construction tend to be lower than
those sold into the renovation segment. Further, we expect the category of vinyl products to continue to decline in units sold, while laminate, ceramic and hardwood flooring should continue to increase.



| |  |  | The North American commercial market strengthened overall in 2004, with renovation improving in the office and education segments, and construction completions in the office,
healthcare, retail and education segments increasing by approximately 6%, 10%, 5% and 3%, respectively. Industry statistics indicate that commercial starts will marginally improve in 2005, with improvements anticipated in office, education and
health care, while the retail segment will decline slightly. Indications are for a further decline in office vacancy rates, which could also positively impact the renovation segment of this market.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Increased global demand for steel created a shortage in the U.S. The steel
shortage increased raw material costs for our WAVE joint venture. This increase has been largely offset by price increases. An extended steel shortage could cause U.S. construction starts to be delayed or postponed, which could reduce our commercial
sales. To-date, sales of our commercial products have not been impacted by the shortage.



| |  |  | In Europe, we experienced mixed, but generally difficult, market conditions in the Western European countries. The economic environment adversely impacted both price and volume in
some of our businesses. At the same time, we benefited from more favorable growth opportunities in Eastern Europe, particularly Russia. In 2005, we anticipate minimal growth in the Western Europe markets, but more promising growth conditions in
Eastern Europe.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Asia Pacific, 2004 was a year of strong demand especially in China and India, and we expect strong demand to continue in 2005.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



Quality and Customer Service. Our quality and customer service is a critical component
of the total value proposition we offer our customers. In 2004, we experienced the following:



| |  |  | Our performance in fulfilling orders for Wood Flooring products was less than satisfactory due in part to substantially higher orders and lower inventory levels during early 2004.
We have been increasing our capacity and inventory in order to improve customer service performance levels.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Two of our Building Products plants were damaged by Hurricane Ivan in September 2004. The plants were partially operational within a few days and fully operational in less than a
week. We estimate that approximately $2 million of sales were delayed from the third quarter into the fourth quarter as a result of the hurricane. Customer service was not adversely affected during this time.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Production and research initiatives have enabled significant improvements in the quality of our Resilient Flooring in North American and Wood Flooring products. These improvements
helped reduce the number of quality-related claims and helped increase customer satisfaction.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | One of our U.S. distributors of resilient and wood flooring products incurred significant order, shipment and invoice processing problems after converting to a new computer system.
These problems caused customer service issues for independent retailers and home centers in early 2004. In April, the distributor resolved its problems. Our financial results were not materially affected by these problems.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



| |  |  | In April 2004, a key U.S. supplier of PVC resins to Armstrong had a substantial portion of one of its plants destroyed in an explosion. PVC resins are a key raw material for
manufacturing vinyl flooring, and this plant represented a sizeable portion of the capacity for these resins in the U.S. In January 2005, another supplier ceased producing PVC resins. For both events, we identified and qualified alternate suppliers.
These additional suppliers, together with various manufacturing initiatives, allowed us to operate without significant disruptions to customer supply.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pricing Initiatives. During 2004 and 2003, increased costs for raw materials, labor and labor-related expenses, energy and other
areas caused us to initiate several price increases to our customers. These pricing initiatives increased net sales in 2004 compared to the 2003.



The most significant of these pricing initiatives affecting 2004 included:



| |  |  | In Resilient Flooring, we announced a price increase in April for commercial vinyl composition tile products, effective later in the second quarter and third quarter. Additionally,
in June and October, we announced price increases on selected residential and commercial vinyl flooring products, which became effective in the third quarter and fourth quarters, respectively.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Wood Flooring, we announced a price increase in April for selected solid wood products, which was effective in the second quarter. Additionally, in the second quarter, we lowered
prices for selected engineered wood products in response to imported and domestic competitive products. In November, we announced a price increase on selected engineered wood products, to be effective in the first quarter of 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Building Products, a price increase was announced in April for most commercial acoustical ceiling products in the U.S. market, effective July 1, 2004. In May and June, price
increases were announced to our large home center customers and residential wholesalers, which were effective through the second half of 2004. In the fourth quarter, a price increase was announced for most commercial markets worldwide, effective
during the first quarter of 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Cabinets, we announced price increases to our retail, builder and distributor customers that became effective in June. We also announced an additional increase in November that
became effective in the first quarter of 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The most
significant of these pricing initiatives affecting 2003 included:



| |  |  | In Resilient Flooring, we implemented price increases for selected U.S. commercial products in July. We also implemented an increase on selected U.S. residential products in
November.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Wood Flooring, we implemented a price increase on solid wood products in April. We also announced another increase on solid wood products that became effective in November 2003
and January 2004, depending on the customer channel.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Building Products, a price increase was announced for most commercial acoustical ceiling products in the North American markets, effective July 1. Price increases on certain
products to our large home center customers in the U.S. were implemented in August and September. We also increased prices for certain U.S. residential-oriented products sold through distribution in July. An additional increase for most commercial
products was announced in the fourth quarter of 2003, which became effective January 1, 2004.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Cabinets, we announced price increases in September to our retail customers depending on the market conditions in the different geographic areas. At the same time, we also
increased prices to our builder customers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In certain cases,
price increases actually realized were less than the announced price increases, as we had to adjust to competitive actions and changing market conditions. Also, we made several price concessions in some of our segments and geographic regions, again
to respond to competition and market conditions.



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



We estimate that the various pricing actions provided a net increase to our total consolidated net sales in 2004
compared to 2003 by approximately $62 million.



During 2005 thus far, the most
significant pricing actions were:



| |  |  | In Resilient Flooring, we announced an increase for selected residential and commercial vinyl products effective February 1, 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Building Products, a price increase was announced to independent retailers for all ceiling products, effective February 1, 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



Impact From Major Customers Decisions. Lowes Companies, Inc., one of our
largest customers, increased purchases of non-Armstrong laminate flooring products in the second quarter of 2004. Our second half total laminate flooring sales declined approximately 12% from 2003, as a result of their action. During the third
quarter, Lowes advised us that they will further reduce the number of laminate flooring products they purchase from us starting in the first quarter of 2005. We estimate that Lowes action will reduce our sales to them in 2005, compared
to 2004 levels, by approximately $55 million and have a material adverse impact on operating income.



Certain national retailers dedicated less of their selling space to vinyl flooring products in 2004, as consumer demand for these products declined. This action contributed to the sales volume decline experienced in
2004 in our Resilient Flooring Americas business.



Factors Affecting
Operating Costs



Operating Expenses. Our operating expenses
consist of direct production (principally raw materials, labor and energy) and manufacturing overhead costs, costs to purchase sourced products and selling, general and administrative (SG&A) expenses.



Our largest individual raw material expenditures are for lumber and veneers, PVC resins,
backings for various flooring products and plasticizers. Fluctuations in the prices of these raw materials are generally beyond our control and have a direct impact on our financial results. In 2004, we experienced the following:



| |  |  | Prices for hardwood lumber increased during 2003 and through the third quarter of 2004, as the availability of lumber for flooring decreased due to reductions in industry saw mill
capacity, while demand for the lumber (for flooring and other products such as railroad ties and pallets) remained strong. We partially reduced the impact of the year-over-year increased costs through an improved procurement process. In the fourth
quarter of 2004, lumber prices declined from prices in the third quarter of 2004. However, our cost for lumber in 2004 was approximately $37 million greater than in 2003. Lumber costs for the year 2005 are expected to decline from 2004 levels.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | PVC is a widely used oil-based raw material. We experience cost pressures on PVC when energy prices increase and when industrial demand for the material increases. PVC resin,
plasticizers and film prices increased cost of goods sold by approximately $20 million in 2004 compared to 2003. We believe the cost for these oil-based raw materials in 2005 will exceed those in 2004, due to the expectation that the price of oil
will remain high, and due to reduced suppliers manufacturing capacity (see Overview  Quality and Customer Service).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Costs for natural gas have increased significantly over the past several years. In 2004, we incurred approximately $7 million of additional costs for natural gas compared to 2003.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Year over year, we normally incur additional costs in production
wages and non-production salaries due to wage and salary rate increases. This increased cost in 2004 compared to 2003 was approximately $25 million.



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act)
became law in the United States. Pursuant to accounting guidance on the Act issued in the second quarter of 2004, we elected to begin recording the effect of the Act in the second quarter. The Act was effective retroactive to January 1, 2004 and the
2004 benefit was $7 million. This benefit was recorded in cost of goods sold ($4 million) and SG&A expense ($3 million).



Cost Reduction Initiatives. During 2004, we implemented several manufacturing and organizational changes to improve our cost structure and enhance our competitive
position. Specifically:



| |  | We ceased production of certain products at our Resilient Flooring manufacturing plant in Lancaster, Pennsylvania, transferring production to other Resilient Flooring plants. One of
the products will continue to be produced in Lancaster until December 31, 2005.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We recorded costs associated with the announcement that we will cease production at our Building Products plant in The Netherlands. Acceptance of the closure proposal was received
from the local works council in the fourth quarter of 2004. The plant ceased production in the first quarter of 2005.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We ceased production at our Cabinets plant in Morristown, Tennessee, transferring production to other Cabinets plants.
|- |  | ----------------------------------------------------------------------------------------------------------------------



| |  | We restructured the sales force and management structure in our North America flooring organization in response to changing market conditions.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  | We ceased production at our Wood Flooring manufacturing plant in Searcy, Arkansas, transferring production to other Wood Flooring plants.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------



We incurred the following net expenses in 2004 due to implementing these cost reduction
initiatives:



|                           |  |                   |      |                     |   |      |                                   |  |                   |      |  |   |      |  
|-------------------------- |  | ----------------- | ---- | ------------------- | - | ---- | --------------------------------- |  | ----------------- | ---- |  | - | ---- | -
|                           |  | Cost ofGoods Sold |      | SG&AExpense/ (Gain) |   |      | RestructuringCharges/ (Reversals) |  | Total NetExpenses |     
|Resilient Flooring         |  | $                 | 28.1 |                     | $ | 0.5  |                                   |  | $                 | 4.1  |  | $ | 32.7 |  
|Wood Flooring              |  |                   | 0.8  |                     |   | (1.1 | )                                 |  |                   | 2.0  |  |   | 1.7  |  
|Textiles & Sports Flooring |  |                   | 0.1  |                     |   | (1.8 | )                                 |  |                   | 0.4  |  |   | (1.3 | )
|Building Products          |  |                   | 2.5  |                     |   |     |                                   |  |                   | 10.9 |  |   | 13.4 |  
|Cabinets                   |  |                   | 1.9  |                     |   |     |                                   |  |                   | 0.4  |  |   | 2.3  |  
|Corporate Unallocated      |  |                   |     |                     |   | 0.3  |                                   |  |                   | 0.5  |  |   | 0.8  |  
|                           |  |                   |      |                     |   |      |                                   |  |                   |      |  |   |      |  
|Total Consolidated         |  | $                 | 33.4 |                     | $ | (2.1 | )                                 |  | $                 | 18.3 |  | $ | 49.6 |  
|                           |  |                   |      |                     |   |      |                                   |  |                   |      |  |   |      |  



Cost of goods sold includes $18.9
million of fixed asset impairments, $13.2 million of accelerated depreciation and $1.3 million of other related costs.



We recorded gains of $2.9 million in Wood Flooring and TSF related to sales of buildings that had previously been reserved as part of cost reduction initiatives.



See Note 15 of the Consolidated Financial Statements for more information on
restructuring charges/(reversals).



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



During 2003, we recorded the following amounts related to cost reduction initiatives:



| |  |  | We ceased production of our residential stencil product line in Lancaster, PA.
| | - |  | ------------------------------------------------------------------------------



| |  |  | We closed two Wood Flooring facilities that manufactured engineered wood floors, consolidating their production volume into another Wood Flooring facility.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We closed a Textiles and Sports Flooring plant in The Netherlands as part of the continuing 2002 restructuring plan.
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | We consolidated several sales, operational and administrative support organizations throughout our company to more effectively manage the business. This consolidation included
integrating our Resilient Flooring and Wood Flooring organizations that manage the Americas markets.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We incurred the following expenses in 2003 due to implementing these cost reduction initiatives:



|                           |  |                   |      |             |   |                       |  |   |               |   |  |   |     
|-------------------------- |  | ----------------- | ---- | ----------- | - | --------------------- |  | - | ------------- | - |  | - | ----
|                           |  | Cost ofGoods Sold |      | SG&AExpense |   | Restructuring Charges |  |   | TotalExpenses
|Resilient Flooring         |  | $                 | 8.8  |             | $ | 3.1                   |  | $ | 1.4           |   |  | $ | 13.3
|Wood Flooring              |  |                   | 23.4 |             |   | 4.0                   |  |   | 0.8           |   |  |   | 28.2
|Textiles & Sports Flooring |  |                   | 0.3  |             |   |                      |  |   | 7.2           |   |  |   | 7.5 
|Building Products          |  |                   | 0.2  |             |   | 1.9                   |  |   |              |   |  |   | 2.1 
|Cabinets                   |  |                   |     |             |   | 0.8                   |  |   |              |   |  |   | 0.8 
|Corporate Unallocated      |  |                   |     |             |   | 2.8                   |  |   | (0.8          | ) |  |   | 2.0 
|                           |  |                   |      |             |   |                       |  |   |               |   |  |   |     
|Total Consolidated         |  | $                 | 32.7 |             | $ | 12.6                  |  | $ | 8.6           |   |  | $ | 53.9
|                           |  |                   |      |             |   |                       |  |   |               |   |  |   |     



Cost of goods sold includes $0.8
million of fixed asset impairments, $29.1 million of accelerated depreciation and $2.8 million of other related costs. SG&A expense includes $2.8 million of fixed asset impairments and $9.8 million of other employee related costs.



See Note 15 of the Consolidated Financial Statements for more information on restructuring
charges/(reversals).



We will incur additional expenses of approximately $56
million in 2005 to implement the 2004 cost reduction initiatives. Once completely implemented, we believe that the incremental cost savings from our 2004 and 2003 initiatives will be approximately $73 million. These projected incremental annual cost
savings will not be fully realized until 2007. We will continue to evaluate additional cost reduction actions in 2005.



Factors Affecting Cash Flow



Historically, excluding the cash demands for asbestos-related claims in 2000 and prior years, we typically generate positive cash flow from our operating activities. The
amount of cash generated in any one period is dependent on a number of factors, including the amount of operating profit generated and the amount of working capital (such as inventory, receivables and payables) required to operate our businesses. We
typically invest in property, plant & equipment (PP&E) and computer software.



During 2004, our cash and cash equivalents balance increased by $31.6 million, which was $72.7 million less than during 2003. The decrease compared to 2003 was primarily due to increasing capital spending for
manufacturing operations and increasing inventory during 2004. The spending is intended to improve our production efficiencies and customer service.



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



Asbestos-Related Charges



During 2003, we reduced our previously recorded insurance asset for asbestos-related personal injury claims by $73 million, reflecting
managements assessment of probable insurance recoveries based upon an unfavorable ruling in an alternative dispute resolution procedure. We also recorded an $8 million charge in 2003 to reflect an agreement to settle claims from the Center for
Claims Resolution and a surety bond insurance company. During 2002, we recorded a $2.5 billion charge to increase our estimate of probable asbestos-related liability. All amounts are reflected as a charge to asbestos liability, net. See
Asbestos-Related Litigation in Note 32 of the Consolidated Financial Statements for additional information.



Employees



As of December 31, 2004, we had approximately 15,500 full-time and part-time employees worldwide. This compares to approximately 15,200 employees as of December 31, 2003. The increase in employees in 2004 is primarily
due to additional workforce in our Wood Flooring segment.



During 2004, we
negotiated three collective bargaining agreements, with no locations experiencing a work stoppage. Throughout 2005, collective bargaining agreements covering certain employees at six plants will expire. As of the date of this filing, no employees
are working under an expired contract.



Late in September 2004, our Hoogezand,
The Netherlands plant (see Cost Reduction Initiatives and Note 15 of the Consolidated Financial Statements) experienced a 14 day work stoppage unrelated to a collective bargaining agreement, which delayed shipments of certain products.
This work stoppage did not have a material impact on operations.



CRITICAL ACCOUNTING POLICIES



Many accounting entries
require us to make estimates. These entries include asbestos-related liability and insurance assets, allowances for bad debts, inventory obsolescence and lower of cost or market charges, warranty, workers compensation, general liability and
environmental claims. When preparing an entry that requires an estimate to be made, we determine what factors are most likely to affect the estimate. We gather information relevant to these factors from inside and outside the company. This
information is evaluated and an estimate is made.



The following are the
critical accounting policies that management believes could have a significant impact to the financial statements if the estimates and judgments used by management turn out to be incorrect. In addition, management has discussed the application of
these critical accounting policies with our Audit Committee.



Asbestos-related Estimates  We record contingent liabilities, including asbestos-related liabilities, when a loss is probable and the amount of loss can be reasonably estimated. Prior to its Chapter 11 Filing, AWI estimated its
probable asbestos-related personal injury liability based upon a variety of factors including historical settlement amounts, the incidence of past claims, the mix of the injuries and occupations of the plaintiffs, the number of cases pending against
it and the status and results of broad-based settlement discussions. As of September 30, 2000, AWI had recorded a liability of $758.8 million for its asbestos-related personal injury liability that it determined was probable and estimable through
2006. Due to the increased uncertainty created as a result of the Filing, the only change made to the previously recorded liability through the third quarter of 2002 was to record October and November 2000 payments of $68.2 million against the
accrual. The asbestos-related personal injury liability balance recorded at December 31, 2001 was $690.6 million, which was recorded in liabilities subject to compromise.



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



AWI filed an initial POR and disclosure statement with respect to the POR during the fourth quarter of 2002. In March
2003, AWI filed an amended POR and disclosure statement. Based upon the foregoing, the discussions AWI had with the different creditors committees and the hearings held before the Bankruptcy Court, management believed that it was reasonably
likely that the asbestos-related personal injury liability would be satisfied substantially in the manner set forth in the POR. As a result, AWI concluded that it could reasonably estimate its probable liability for current and future
asbestos-related personal injury claims. Accordingly, in the fourth quarter of 2002, AWI recorded a $2.5 billion charge to increase the liability in accordance with AICPA Statement of Position 90-7, Financial Reporting by Entities in
Reorganization under the Bankruptcy Code (SOP 90-7). The recorded asbestos-related liability for personal injury claims of approximately $3.2 billion at December 31, 2004 and 2003, which was treated as a liability subject to
compromise, represents the estimated amount of liability that is implied based upon the negotiated resolution reflected in the POR, the total consideration expected to be paid to the Asbestos PI Trust pursuant to the POR and a recovery value
percentage for the allowed claims of the Asbestos PI Trust that is equal to the estimated recovery value percentage for the allowed non-asbestos unsecured claims. See Asbestos-Related Litigation in Note 32 of the Consolidated Financial
Statements for further discussion on the Asbestos PI Trust and the treatment of asbestos-related claims under the POR.



In February of 2005, the U.S. District Court denied confirmation of the POR in its current form. AWI is currently in discussions with the different creditors
committees to decide how to respond to the District Court ruling. AWI is unable to predict when and if the POR will be confirmed and, if confirmed, when the POR will be implemented. See Recent Developments and Next Steps in the Chapter 11
Process in Note 1 of the Consolidated Financial Statements. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. As long as this uncertainty exists, future changes to the recorded asbestos-related personal
injury liability are possible and could be material to AWIs financial position and the results of its operations. Management will continue to review the recorded liability in light of future developments in the Chapter 11 Case and make changes
to the recorded liability if and when it is appropriate.



Additionally, AWI has
a recorded asset of $98.6 million as of December 31, 2004 representing estimated insurance recoveries related to its asbestos liability. Approximately $79 million of the $98.6 million asset is determined from agreed coverage in place. During the
second quarter of 2003, AWI reduced its previously recorded insurance asset for asbestos-related personal injury claims by $73 million reflecting managements current assessment of probable insurance recoveries in light of an unfavorable ruling
in an alternative dispute resolution procedure. See Asbestos-Related Litigation in Note 32 of the Consolidated Financial Statements for further discussion.



The total amount of the estimated insurance recoveries asset recorded reflects the belief in the availability of insurance in this amount,
based upon prior success in insurance recoveries, settlement agreements that provide such coverage, the nonproducts recoveries by other companies and the opinion of outside counsel. In our opinion, such insurance is either available through
settlement or probable of recovery through negotiation or litigation. Although AWI revised its recorded asbestos liability by $2.5 billion in the fourth quarter of 2002, no increase has been recorded in the estimated insurance recovery asset. While
we believe that the process of pursuing disputed insurance coverage may result in additional settlement amounts beyond those recorded, there has been no increase in the recorded amounts due to the uncertainties remaining in the process. The estimate
of probable recoveries may be revised depending on the developments in the matters discussed above as well as events that occur in AWIs Chapter 11 Case.



U.S. Pension Credit and Postretirement Benefit Costs  We maintain pension and postretirement plans throughout the world, with the most significant plans
located in the U.S. The U.S. defined benefit pension plans were closed to new salaried and salaried production employees on January 1, 2005. Our defined benefit pension and postretirement benefit costs are developed from actuarial valuations. These
valuations are calculated using a number of assumptions, which are determined in accordance with generally accepted accounting principles (GAAP). Each assumption represents managements best estimate of the future. The assumptions
that have the most significant impact on reported results are the discount rate, the estimated long-term return on plan assets and the estimated



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(dollar amounts in millions)



inflation in health care costs. These assumptions are updated annually at the beginning of the year and applied in the valuations recorded for that year.



The discount rate is used to determine retirement plan liabilities and to
determine the interest cost component of net periodic pension and postretirement cost. Our actuary provides the expected modified duration of the liabilities. Management determines the appropriate discount rate by referencing the yield on investment
grade fixed-income securities of a similar duration (14 years) to that of the expected liabilities, as well as the yield for Moodys AA-rated long-term corporate bonds. As of December 31, 2004, we assumed a discount rate of 5.75% compared with
a discount rate of 6.00% as of December 31, 2003 for the U.S. plans. This decrease is consistent with the decline in U.S. corporate bond yields during the year. An additional one-quarter percentage point decrease in the discount rate to 5.50% would
reduce 2005 operating income by $0.3 million, while a one-quarter percentage point increase in the discount rate to 6.00% would increase 2005 operating income by $0.3 million. The effects of the decreased discount rate, which increases our
liabilities, will be amortized against earnings as described below.



Effective
January 1, 2003, we updated the mortality table used in our U.S. pension and postretirement benefit cost calculations to reflect more current information. The new table (RP2000) is based upon actual 1990 to 1994 general population mortality rates,
with improvements projected to 2003. The impact of this change was a $4.7 million reduction in 2003 operating income, compared to 2002.



We have two U.S. defined benefit pension plans, a qualified funded plan and a nonqualified unfunded plan. For the funded plan, the expected long-term return on plan
assets represents a long-term view of the future estimated investment return on plan assets. This estimate is determined based on the target allocation of plan assets among asset classes and input from investment professionals and academic sources
on the expected performance of the equity and bond markets over 10 to 20 years. Over the last 10 years, the annualized return was approximately 11.5% compared to an average expected return of 8.7%. The expected long-term return on plan assets used
in determining our 2004 U.S. pension credit was 8.00%. The actual return on plan assets achieved for 2004 was 12.8%. In accordance with GAAP, this excess will be amortized into earnings as described below. We do not expect to be required to make
cash contributions to the qualified funded plan during 2005. We have assumed a return on plan assets during 2005 of 8.00%. A one-quarter percentage point increase or decrease in this assumption would increase or decrease 2005 operating income by
approximately $4.9 million. Contributions to the unfunded plan were $3.3 million in 2004 and are made on a monthly basis to fund benefit payments. We estimate the contributions to be approximately $3 million in 2005. See Note 18 of the Consolidated
Financial Statements for more details.



The estimated inflation in health care
costs represents a long-term view (5-10 years) of the expected inflation in our postretirement health care costs. We separately estimate expected health care cost increases for pre-65 retirees and post-65 retirees due to the influence of Medicare
coverage at age 65, as illustrated below:



|     |  |             |   |  |        |   |  |         |   |  |         |   |  |        |   |  |         |  
|---- |  | ----------- | - |  | ------ | - |  | ------- | - |  | ------- | - |  | ------ | - |  | ------- | -
|     |  | Assumptions |   |  | Actual |  
|     |  | Post 65     |   |  | Pre 65 |   |  | Overall |   |  | Post 65 |   |  | Pre 65 |   |  | Overall |  
|2003 |  | 12          | % |  | 10     | % |  | 11      | % |  | 7       | % |  | 7      | % |  | 7       | %
|2004 |  | 11          |   |  | 9      |   |  | 10      |   |  | 6       |   |  | 11     |   |  | 7       |  
|2005 |  | 10          |   |  | 8      |   |  | 9       |   |  |         |   |  |        |   |  |         |  



In accordance with GAAP, the
difference between the actual and expected health care costs is amortized into earnings as described below. The overall percentage of health care cost increases are estimated to decrease by 1 percentage point per year until 2008, after which it is
constant at 6%. A one percentage point increase in the assumed health care cost trend rate would reduce 2005 operating income by $2.9 million, while a one percentage point decrease in the assumed health care cost trend rate would increase 2005
operating income by $2.4 million. See Note 18 of the Consolidated Financial Statements for more details.



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(dollar amounts in millions)



Actual results that differ from our estimates are captured as actuarial gains/losses and are amortized into future
earnings over the expected remaining service period of plan participants, which ranges from 12 to 15 years depending on the participants in the plan, in accordance with GAAP. Changes in assumptions could have significant effects on earnings in
future years.



We recorded U.S. pension credits of $14.3 million, $11.6 million
and $39.2 million in 2004, 2003 and 2002, respectively, reflecting the net overfunded status of our U.S. pension plans and the amortization into earnings of the difference between our actual results and the estimates used in the valuation process.
We recorded U.S. postretirement benefit costs of $30.3 million, $36.8 million and $45.1 million in 2004, 2003 and 2002, respectively.



Impairments of Tangible and Intangible Assets  We periodically review significant tangible and intangible assets, including goodwill, for impairment under
the guidelines of the Financial Accounting Standards Board (FASB) Statement Nos. 142  Goodwill and Other Intangible Assets (FAS 142) and 144  Accounting for the Impairment or Disposal of
Long-Lived Assets (FAS 144). In accordance with these Statements, we review our businesses for indicators of impairment such as operating losses and/or negative cash flows. If an indication of impairment exists, we estimate the
fair value and compare it to the carrying value of the asset. If the fair value is less than the carrying value of the asset, we record an impairment equal to the difference between the fair value and carrying value of the asset. The cash flow
estimates are based on managements analysis of information available at the time of the estimate. Actual cash flows in the future that turn out to be lower than the estimate could lead to significant future impairments.



In the second quarter of 2002, we completed an assessment of goodwill and intangible assets
in the Wood Flooring segment and recorded a non-cash transitional impairment charge of $596.0 million ($593.8 million, net of tax) as of January 1, 2002. From our initial FAS 142 transition charge through 2003, our assessments have indicated that
goodwill and other intangible assets have not been impaired. In 2004, we recorded a total goodwill impairment charge for our European resilient flooring reporting unit of $108.4 million. See Note 12 of the Consolidated Financial Statements for
further information.



In 2004, we also recorded fixed asset impairment charges
of $64.7 million and accelerated depreciation of $13.7 million, in cost of goods sold. See Cost Reduction Initiatives for further discussion. See Note 10 of the Consolidated Financial Statements for further discussion on the European
resilient flooring fixed asset impairment. Following is a summary of the 2004 charges:



|                                                   |  |                                                      |  |            |      |                         |   |                         |  |   |     
|-------------------------------------------------- |  | ---------------------------------------------------- |  | ---------- | ---- | ----------------------- | - | ----------------------- |  | - | ----
|Action                                             |  | Segment                                              |  | Impairment |      | AcceleratedDepreciation |   | Total FixedAssetCharges
|Cost Reduction Initiatives:                        |  |                                                      |  |            |      |                         |   |                         |  |   |     
|Lancaster, PA                                      |  | Resilient Flooring                                   |  | $          | 17.7 |                         | $ | 10.3                    |  | $ | 28.0
|Hoogezand, The Netherlands                         |  | Building Products                                    |  |            |     |                         |   | 1.4                     |  |   | 1.4 
|Morristown, TN                                     |  | Cabinets                                             |  |            | 0.4  |                         |   | 1.5                     |  |   | 1.9 
|Adjustment to 2003 Building Held for Sale          |  | Wood Flooring                                        |  |            | 0.8  |                         |   |                        |  |   | 0.8 
|European resilient flooring fixed asset Impairment |  | Resilient Flooring                                   |  |            | 44.8 |                         |   |                        |  |   | 44.8
|Obsolete Equipment and Buildings                   |  | Resilient Flooring, Wood Flooring, Building Products |  |            | 1.0  |                         |   | 0.5                     |  |   | 1.5 
|                                                   |  |                                                      |  |            |      |                         |   |                         |  |   |     
|Total                                              |  |                                                      |  | $          | 64.7 |                         | $ | 13.7                    |  | $ | 78.4
|                                                   |  |                                                      |  |            |      |                         |   |                         |  |   |     



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



In 2003, we recorded fixed asset impairment charges of $10.5 million and accelerated depreciation of $30.1 million,
in cost of goods sold and fixed asset impairment charges of $2.8 million in SG&A expense. See Cost Reduction Initiatives for further discussion. Following is a summary of the 2003 charges:



|                                    |  |                         |  |            |      |                         |   |                         |  |   |     
|----------------------------------- |  | ----------------------- |  | ---------- | ---- | ----------------------- | - | ----------------------- |  | - | ----
|Action                              |  | Segment                 |  | Impairment |      | AcceleratedDepreciation |   | Total FixedAssetCharges
|Cost Reduction Initiatives:         |  |                         |  |            |      |                         |   |                         |  |   |     
|Stencil Line, Lancaster, PA         |  | Resilient Flooring      |  |            |     |                         | $ | 4.1                     |  | $ | 4.1 
|E-Beam Line, Kankakee, IL           |  | Resilient Flooring      |  |            |     |                         |   | 2.8                     |  |   | 2.8 
|Baroda, India                       |  | Resilient Flooring      |  |            |     |                         |   | 0.1                     |  |   | 0.1 
|Port Gibson, MS                     |  | Wood Flooring           |  | $          | 0.8  |                         |   | 15.1                    |  |   | 15.9
|Warren, AK                          |  | Wood Flooring           |  |            |     |                         |   | 6.7                     |  |   | 6.7 
|Building held for sale, Addison, TX |  | Wood Flooring, Cabinets |  |            | 2.8  |                         |   |                        |  |   | 2.8 
|Oss, The Netherlands                |  | TSF                     |  |            |     |                         |   | 0.3                     |  |   | 0.3 
|Obsolete Equipment                  |  | Building Products       |  |            | 3.8  |                         |   |                        |  |   | 3.8 
|                                    |  | All other segments      |  |            | 3.1  |                         |   | 1.0                     |  |   | 4.1 
|                                    |  |                         |  |            |      |                         |   |                         |  |   |     
|Total                               |  |                         |  | $          | 10.5 |                         | $ | 30.1                    |  | $ | 40.6
|                                    |  |                         |  |            |      |                         |   |                         |  |   |     



In 2002, accelerated depreciation of
$4.8 million in cost of goods sold and SG&A expense related primarily to managements evaluation of the useful lives of certain idle property, plant and equipment based on future intended use.



Sales-related Accruals  We provide direct customer and end-user warranties for
our products. These warranties cover manufacturing defects that would prevent the product from performing in line with its intended and marketed use. Generally, the terms of these warranties range up to 25 years and provide for the repair or
replacement of the defective product. We collect and analyze warranty claims data with a focus on the historical amount of claims, the products involved, the amount of time between the warranty claims and the products respective sales and the
amount of current sales.



We also maintain numerous customer relationships that
incorporate different sales incentive programs (primarily volume rebates and promotions). The rebates vary by customer and usually include tiered incentives based on the level of customers purchases. Certain promotional allowances are also
tied to customer purchase volumes. We estimate the amount of expected annual sales during the course of the year and use the projected sales amount to estimate the cost of the incentive programs. For sales incentive programs that are on the same
calendar basis as our fiscal calendar, actual sales information is used in the year-end accruals.



The amount of actual experience related to these accruals could differ significantly from the estimated amounts during the year. If this occurs, we adjust our accruals accordingly. We maintained sales-related accruals
of $78.8 million and $76.3 million as of December 31, 2004 and 2003, respectively. We record the costs of these accruals as a reduction of gross sales.



30



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



NEW ACCOUNTING PRONOUNCEMENTS



In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, which
requires all share-based payment transactions be recognized in the financial statements using a fair-value method of accounting. This Statement replaces FASB Statement No. 123 and supersedes APB Opinion No. 25. The Statement also requires the
recognition of compensation expense for the fair value of any unvested stock option awards outstanding at the date of adoption. The standard is effective as of the beginning of the first interim or annual reporting period that begins after June 15,
2005. While we are finalizing our review of this standard, adoption of this standard on July 1, 2005 is not expected to have a material impact on our consolidated results of operations or financial condition because all of our outstanding stock
options are fully vested.



In November 2004, the FASB issued Statement of
Financial Accounting Standard No. 151, Inventory Costs. The new Statement amends Accounting Research Bulletin No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material. This Statement requires that those items be recognized as current-period charges and requires that allocation of fixed production overheads to the cost of conversion be based on the normal capacity of
the production facilities. This statement is effective for fiscal years beginning after June 15, 2005. We have elected to adopt this standard as of January 1, 2005, as permitted. Adoption of this standard is not expected to have a material impact on
our consolidated results of operations or financial condition.



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



RESULTS OF OPERATIONS



Unless otherwise indicated, net sales in these results of operations are reported based upon the location where the sale was made. Certain
prior year amounts have been reclassified to conform to the current year presentation. Please refer to Note 3 in the Consolidated Financial Statements for a reconciliation of operating income to consolidated income before income taxes, extraordinary
items, discontinued operations, and cumulative effect of changes in accounting principles.



2004 COMPARED TO 2003



CONSOLIDATED RESULTS



|                                                                                      |  |      |         |   |      |   |         |                                   |  |             |                                              |  |             |   
|------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | --------------------------------- |  | ----------- | -------------------------------------------- |  | ----------- | --
|                                                                                      |  |      |         |   |      |   |         | Change is Favorable/(Unfavorable) | 
|                                                                                      |  | 2004 |         |   | 2003 |   |         | As Reported                       |  |             | Excluding Effectsof ForeignExchange Rates(1) | 
|Net Sales:                                                                            |  |      |         |   |      |   |         |                                   |  |             |                                              |  |             |   
|Americas                                                                              |  | $    | 2,543.0 |   |      | $ | 2,390.8 |                                   |  | 6.4         | %                                            |  | 6.1         | % 
|Europe                                                                                |  |      | 841.0   |   |      |   | 778.8   |                                   |  | 8.0         | %                                            |  | (1.6        | )%
|Pacific                                                                               |  |      | 113.3   |   |      |   | 89.4    |                                   |  | 26.7        | %                                            |  | 19.9        | % 
|                                                                                      |  |      |         |   |      |   |         |                                   |  |             |                                              |  |             |   
|Total Consolidated Net Sales                                                          |  | $    | 3,497.3 |   |      | $ | 3,259.0 |                                   |  | 7.3         | %                                            |  | 4.5         | % 
|                                                                                      |  |      |         |  
|Operating (Loss)                                                                      |  | $    | (43.8   | ) |      | $ | (19.3   | )                                 |  | Unfavorable |                                              |  | Unfavorable |   
|Goodwill Impairment                                                                   |  |      | 108.4   |   |      |   |        |                                   |  |             |                                              |  |             |   
|Charge for Asbestos Liability, Net                                                    |  |      |        |   |      |   | 81.0    |                                   |  |             |                                              |  |             |   
|                                                                                      |  |      |         |   |      |   |         |                                   |  |             |                                              |  |             |   
|Operating Income, Prior to Goodwill Impairment and Charge for Asbestos Liability, Net |  | $    | 64.6    |   |      | $ | 61.7    |                                   |  | 4.7         | %                                            |  | 1.1         | % 

---

|(1) | Excludes favorable foreign exchange rate effect in translation of $87.9 million on net sales
and $2.2 million on operating income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------



Net sales in the Americas
increased by approximately $152 million, primarily as a result of sales volume and price increases of wood flooring and ceiling products. Sales for resilient flooring products in the Americas declined primarily due to lower sales to the U.S.
residential market (see Overview  Factors Affecting Revenue).



Excluding the translation effect of changes in foreign exchange rates, net sales in the European markets declined by 1.6%, primarily as a result of the weak economic conditions in our primary selling markets and volume decline for carpet
and sports flooring products. Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific area increased by approximately $19 million, primarily as a result of stronger sales in China and Australia.



Cost of goods sold in 2004 was 80.4% of net sales, compared to 79.7% in 2003. The 0.7
percentage point increase was primarily due to the European resilient flooring fixed asset impairment of $44.8 million (see Note 10 of the Consolidated Financial Statements) and higher raw material and energy costs of approximately $72 million (see
significant items in Overview  Factors Affecting Operating Costs), offset by the effects of sales price increases of approximately $62 million and the benefit in 2004 from 2003 cost reduction initiatives.



SG&A expenses in 2004 were $635.0 million, or 18.1% of net sales compared to $612.1
million or 18.8% of net sales in 2003. Excluding the translation effect of changes in foreign exchange rates, SG&A expenses in 2004 increased by approximately $1.9 million, primarily due to approximately $21 million of higher incentive
compensation costs, approximately $9 million for increased selling and advertising expense and a $5.0 million contribution to the Armstrong Foundation (a community giving program funded by Armstrong), partially offset by the $3.1 million favorable
impact of the Medicare Act, lower medical claim accruals, lower severance expenses and the benefit in 2004 from 2003 cost reduction initiatives.



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



There were no asbestos-related charges in 2004. During 2003, we reduced our previously recorded insurance asset for
asbestos-related personal injury claims by $73 million, reflecting managements current assessment of probable insurance recoveries based upon an unfavorable ruling in an alternative dispute resolution procedure. We also recorded an $8 million
non-cash charge to reflect an agreement to settle claims from the Center for Claims Resolution and a surety bond insurance company. All amounts were reflected as a charge to asbestos liability, net. See Asbestos-Related Litigation in
Note 32 of the Consolidated Financial Statements for additional information.



In the second quarter of 2004, we recorded a $60.0 million non-cash goodwill impairment loss related to our European resilient flooring reporting unit based on a preliminary impairment assessment. During the fourth quarter of 2004, we
recorded an additional $48.4 million non-cash goodwill impairment loss based on the results of our annual impairment test. The goodwill impairment charges arose from the European resilient flooring reporting units fair value being lower than
its carrying value. The fair value was negatively affected by lower operating profits and expected future cash flows determined in recent forecasting analyses. See Note 12 to the Consolidated Financial Statements for further details.



We recorded restructuring charges, net, of $18.3 million in 2004, compared to $8.6 million in
2003. See Note 15 of the Consolidated Financial Statements for a description of the restructuring actions. Once completely implemented, we believe that the incremental cost savings from our 2004 and 2003 initiatives will be approximately $73
million. These projected incremental annual cost savings will not be fully realized until 2007.



Equity earnings from affiliates, from our WAVE joint venture, were $31.6 million in 2004, as compared to $20.8 million in 2003. The improvement in earnings resulted from improved market conditions, the ability to
provide product during the global steel shortage and realized price increases ahead of recognized increased steel cost.



We recorded an operating loss of $43.8 million in 2004, compared to an operating loss of $19.3 million in 2003. Operating income prior to non-cash goodwill impairment and
asbestos-related charges was $64.6 million and $61.7 million, respectively.



Interest expense was $8.4 million in 2004, compared to $9.0 million in 2003. The decrease in interest expense is due to lower fees on the renewed DIP Facility and lower average outstanding debt amounts at our non-Chapter 11 subsidiaries. In
accordance with SOP 90-7, we did not record contractual interest expense on prepetition debt after the Chapter 11 filing date. This unrecorded interest expense was $86.9 million in 2004 and $95.1 million in 2003. Unrecorded interest expense reflects
the amount of interest expense we would have incurred under the original maturities of prepetition debt.



Chapter 11 reorganization costs, net in 2004 were $6.9 million, which was $2.5 million less than the $9.4 million amount recorded in 2003. The decrease was primarily due to lower professional fees resulting from less
activity in the Chapter 11 process in 2004.



During 2004, income tax expense of
$24.6 million compared to an income tax benefit of $1.6 million in 2003. The adjusted effective tax rate for 2004 was 25.3% based on adjusted pre-tax income from continuing operations of $97.4 million, which excluded the non-cash goodwill
impairments of $108.4 million, which were nontaxable events, and European resilient flooring fixed asset impairments of $44.8 million, which required a full valuation allowance on the related deferred tax asset. Excluding the $81.0 million of
asbestos-related charges, the adjusted effective tax rate for 2003 was 62.7%, based on adjusted pre-tax income from continuing operations of $42.6 million. The lower 2004 tax rate was primarily due to the overall favorable settlement of tax audits
in the U.S. and in Germany that combined to reduce tax expense by approximately $19.4 million. In addition, the unfavorable impact in 2003 of relatively higher nondeductible Chapter 11 reorganization costs (prior to the tax audits in the U.S.) on a
relatively lower base of taxable income resulted in a higher effective tax rate for that year.



A net loss of $80.8 million was recorded for 2004, compared to a net loss of $39.3 million for 2003.



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



REPORTABLE SEGMENT RESULTS



Resilient Flooring



|                        |  |      |         |   |      |   |                                   |  |             |                                              |  |             |   
|----------------------- |  | ---- | ------- | - | ---- | - | --------------------------------- |  | ----------- | -------------------------------------------- |  | ----------- | --
|                        |  |      |         |   |      |   | Change is Favorable/(Unfavorable) | 
|                        |  | 2004 |         |   | 2003 |   | As Reported                       |  |             | Excluding Effectsof ForeignExchange Rates(1) | 
|Net Sales:              |  |      |         |   |      |   |                                   |  |             |                                              |  |             |   
|Americas                |  | $    | 924.6   |   |      | $ | 935.0                             |  | (1.1        | )%                                           |  | (1.5        | )%
|Europe                  |  |      | 238.5   |   |      |   | 205.2                             |  | 16.2        | %                                            |  | 5.7         | % 
|Pacific                 |  |      | 52.0    |   |      |   | 41.3                              |  | 25.9        | %                                            |  | 17.1        | % 
|                        |  |      |         |   |      |   |                                   |  |             |                                              |  |             |   
|Total Segment Net Sales |  | $    | 1,215.1 |   |      | $ | 1,181.5                           |  | 2.8         | %                                            |  | 0.5         | % 
|                        |  |      |         |  
|Operating (Loss) Income |  | $    | (150.2  | ) |      | $ | 56.2                              |  | Unfavorable |                                              |  | Unfavorable |   

---

|(1) | Excludes favorable foreign exchange rate effect in translation of $27.6 million on net sales
and $0.8 million on operating income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------



Net sales in the Americas
decreased primarily due to an approximate 6% decline in laminate flooring sales, primarily as a result of a major customers decision to increase purchases of non-Armstrong laminate flooring products in the second quarter of 2004. Sales of our
vinyl products to the residential market decreased approximately 3%, primarily from the residential floor covering market shift away from vinyl products. Sales of our vinyl products to the commercial market increased by approximately 3%, primarily
due to price increases on certain vinyl sheet and tile products, and new product introductions.



Excluding the translation effect of changes in foreign exchange rates, net sales in Europe increased by 5.7% due to higher volume, which was partially offset by price concessions due to competitive pressure. Excluding
the translation effect of changes in foreign exchange rates, net sales in the Pacific area increased by approximately $8 million, primarily from strong sales in Australia and China.



Operating income in 2004 was negatively impacted by a $108.4 million non-cash goodwill impairment charge and a $44.8 million non-cash fixed
asset impairment charge related to our European resilient flooring business. Operating results were also adversely impacted by lower laminate sales volume, increased costs to purchase PVC, wage and salary inflation increases and charges for the cost
reduction initiatives (see Overview  Factors Affecting Operating Costs). Partially offsetting the negative effects of these items were operating income gains from manufacturing efficiencies.



Wood Flooring



|                           |  |      |       |      |   |       |                    |  |           |  
|-------------------------- |  | ---- | ----- | ---- | - | ----- | ------------------ |  | --------- | -
|                           |  | 2004 |       | 2003 |   |       | Change isFavorable | 
|Total Segment Net Sales(1) |  | $    | 832.1 |      | $ | 738.6 |                    |  | 12.7      | %
|Operating Income (Loss)    |  | $    | 51.4  |      | $ | (4.0  | )                  |  | Favorable |  

---

|(1) | Virtually all Wood Flooring products are sold in the Americas, primarily in the U.S.
|--- | ------------------------------------------------------------------------------------



Net sales in 2004 increased by $93.5 million. Units sold of
pre-finished solid and engineered floors each increased by approximately 9%, primarily from the strong U.S. new home construction market. Net sales were also positively impacted by the price increases implemented on wood flooring products (see
Overview  Factors Affecting Revenues).



Operating results
increased by $55.4 million, due to higher selling prices and sales volume, lower expenses for implementing the cost reduction initiatives (see Overview  Factors Affecting Operating Costs) and lower manufacturing overhead resulting
from those initiatives. Partially offsetting these were higher costs for lumber and increased production expenses in certain plants.



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



Textiles and Sports Flooring (TSF)



|                           |  |      |       |   |      |   |       |                                   |  |           |                                              |  |           |   
|-------------------------- |  | ---- | ----- | - | ---- | - | ----- | --------------------------------- |  | --------- | -------------------------------------------- |  | --------- | --
|                           |  |      |       |   |      |   |       | Change is Favorable/(Unfavorable) | 
|                           |  | 2004 |       |   | 2003 |   |       | As Reported                       |  |           | Excluding Effectsof ForeignExchange Rates(2) | 
|Total Segment Net Sales(1) |  | $    | 265.4 |   |      | $ | 271.9 |                                   |  | (2.4      | )%                                           |  | (10.8     | )%
|Operating (Loss)           |  | $    | (7.1  | ) |      | $ | (11.0 | )                                 |  | Favorable |                                              |  | Favorable |   

---

|(1) | Primarily all of TSF products are sold in Europe.
|--- | -------------------------------------------------

|(2) | Excludes favorable/(unfavorable) foreign exchange rate effect in translation of $25.8 million
on net sales and $(1.3) million on operating income.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------



Excluding
the translation effect of changes in foreign exchange rates, net sales decreased by 10.8%, primarily from volume declines in carpet flooring products due to weak economic conditions in our primary selling markets and loss of market share, caused by
the lack of new product development. Net sales were also adversely affected by price concessions for Sports Flooring products that were required to meet competitive pressures.



The operating loss in 2004 was less than the loss in 2003, primarily due to the expense in 2003 of cost reduction initiatives and the
benefit in 2004 of those cost reduction initiatives (see Overview  Factors Affecting Operating Costs). Partially offsetting these factors were the negative impact of lower sales volume and prices.



Building Products



|                        |  |      |       |      |   |                                   |  |      |                                              |  |      |  
|----------------------- |  | ---- | ----- | ---- | - | --------------------------------- |  | ---- | -------------------------------------------- |  | ---- | -
|                        |  |      |       |      |   | Change is Favorable/(Unfavorable) | 
|                        |  | 2004 |       | 2003 |   | As Reported                       |  |      | Excluding Effectsof ForeignExchange Rates(1) | 
|Net Sales:              |  |      |       |      |   |                                   |  |      |                                              |  |      |  
|Americas                |  | $    | 575.7 |      | $ | 515.6                             |  | 11.7 | %                                            |  | 11.0 | %
|Europe                  |  |      | 334.7 |      |   | 298.5                             |  | 12.1 | %                                            |  | 2.1  | %
|Pacific                 |  |      | 61.3  |      |   | 48.1                              |  | 27.4 | %                                            |  | 22.4 | %
|                        |  |      |       |      |   |                                   |  |      |                                              |  |      |  
|Total Segment Net Sales |  | $    | 971.7 |      | $ | 862.2                             |  | 12.7 | %                                            |  | 8.4  | %
|                        |  |      |       |     
|Operating Income        |  | $    | 127.0 |      | $ | 95.2                              |  | 33.4 | %                                            |  | 28.7 | %

---

|(1) | Excludes favorable foreign exchange rate effect in translation of $34.4 million on net sales
and $3.5 million on operating income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------



Excluding the translation
effect of changes in foreign exchange rates, net sales in the Americas increased approximately $57 million. Unit volume to the U.S. Commercial markets increased by approximately 7%, primarily due to market conditions (see Overview 
Factors Affecting Revenues). Complementing the impact from the higher volume were price increases started in July 2003 on most commercial products. Net sales also benefited from volume and price increases with the major national retailers in
the U.S. Residential markets.



Excluding the translation effect of changes in
foreign exchange rates, net sales in Europe increased by 2.1% from 2003. The volume of mineral fiber products, which constitute the majority of our European sales, increased by approximately 2%. The volume of mineral fiber product sold to Western
European countries declined by approximately 1%, primarily due to lower commercial market activity in the Euro Zone, while volume sold to the emerging markets of Eastern Europe (primarily Russia) increased by approximately 7% due to construction
growth in these markets. Products sold to the emerging markets tend to have lower margin than products sold in Western Europe. Excluding the translation effect of changes in foreign exchange rates, net sales of metal ceilings declined by
approximately 1%, primarily from some loss of market share in Asia.



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific area increased
approximately $11 million due to strong activity in the Chinese, Indian and Australian markets.



Excluding the translation effect of changes in foreign exchange rates, operating income increased 28.7%, as higher sales volume and prices, lower production expenses and increased equity earnings in WAVE were only
partially offset by inflation in the cost of raw materials and energy, and higher selling expenses (see Overview  Factors Affecting Operating Costs).



Cabinets



|                           |  |      |       |      |   |       |                    |  |           |  
|-------------------------- |  | ---- | ----- | ---- | - | ----- | ------------------ |  | --------- | -
|                           |  | 2004 |       | 2003 |   |       | Change isFavorable | 
|Total Segment Net Sales(1) |  | $    | 213.0 |      | $ | 204.8 |                    |  | 4.0       | %
|Operating Income (Loss)    |  | $    | 1.4   |      | $ | (11.1 | )                  |  | Favorable |  

---

|(1) | All Cabinet products are sold in the Americas, primarily in the U.S.
|--- | --------------------------------------------------------------------



Net sales in 2004 increased approximately $8 million from 2003,
primarily due to selling price increases and sales of higher priced products, both enabled by improved customer service.



Operating results improved by $12.5 million in 2004 from 2003, due to increased sales, manufacturing efficiencies and reduced SG&A expenses, partially offset by
expenses for cost reduction initiatives.



Unallocated Corporate



Unallocated corporate expense of $66.3 million in 2004 decreased from
$144.6 million in 2003. This decrease was primarily due to non-cash asbestos-related charges of $81.0 million in 2003. The remaining $2.7 million increase resulted primarily from increases of $9.4 million in employee incentive compensation; a $5.0
million contribution to the Armstrong Foundation (a community giving program funded by Armstrong); and $4.2 million to increase certain environmental liabilities at non-operating locations. These increases were partially offset by a $6.3 million
write off of a note receivable in 2003 from a previous divestiture, $4.5 million in lower medical claims, a $2.9 million higher U.S. pension plan credit, and reduced expenses in corporate staff departments.



FINANCIAL CONDITION AND LIQUIDITY



Cash Flow



As shown on the Consolidated Statements of Cash Flows, our cash and cash equivalents balance increased by $31.6 million in 2004, compared to
a $104.3 million increase in 2003.



Operating activities in 2004 provided
$142.8 million of net cash, or $23.0 million less than the $165.8 million provided in 2003. The decline in cash provided was primarily due to changes in inventories, receivables, and accounts payable and accrued expenses. In 2004, we increased
inventories by $61.7 million, compared to decreasing $6.6 million in 2003, primarily as part of our efforts to improve customer service in Wood Flooring (see Factors Affecting Revenues  Quality and Customer Service). Receivables
increased $9.5 million in 2004, compared to decreasing $40.6 million in 2003, primarily as a result of increased sales. Offsetting these two uses of cash was an increase in accounts payable and accrued expenses of $61.1 million in 2004, primarily
due to increased accruals for employee incentives and increased trade payables related primarily to increased capital expenditures and inventory.



Net cash used for investing activities was $111.7 million in 2004, compared to $57.2 million in 2003. In 2004, we increased our capital expenditures by $55.9 million
primarily to upgrade our manufacturing operations and improve production efficiencies. During the third quarter of 2004, WAVE successfully extended the term of their existing bank debt and we received a $10 million distribution in the fourth quarter
of 2004, while in 2003 we received $16 million in distributions.



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



Net cash totaling $7.0 million was used for our financing activities in 2004, compared to $14.1 million in 2003. The
year-to-year change was due to certain subsidiaries that are not participating in our Chapter 11 Case increasing their short-term borrowing for working capital needs in 2004.



Balance Sheet and Liquidity



Changes in significant balance sheet accounts and groups of accounts from December 31, 2003 to December 31, 2004 are as follows:



|                                                    |  |                  |         |                  |   |          |  |   |      
|--------------------------------------------------- |  | ---------------- | ------- | ---------------- | - | -------- |  | - | -----
|                                                    |  | December 31,2004 |         | December 31,2003 |   | Increase
|Cash and cash equivalents                           |  | $                | 515.9   |                  | $ | 484.3    |  | $ | 31.6 
|Current assets, excluding cash and cash equivalents |  |                  | 966.3   |                  |   | 874.5    |  |   | 91.8 
|                                                    |  |                  |         |                  |   |          |  |   |      
|Current assets                                      |  | $                | 1,482.2 |                  | $ | 1,358.8  |  | $ | 123.4
|                                                    |  |                  |         |                  |   |          |  |   |      



The increase in cash and cash
equivalents was described above (see Cash Flow). The increase in current assets, excluding cash and cash equivalents was primarily due to the increase in accounts receivable from higher sales and the increase in inventory, primarily for
Wood Flooring.



|                                                                                       |  |                  |         |                  |   |            |  |   |       |  
|-------------------------------------------------------------------------------------- |  | ---------------- | ------- | ---------------- | - | ---------- |  | - | ----- | -
|                                                                                       |  | December 31,2004 |         | December 31,2003 |   | (Decrease) | 
|Property, plant and equipment, less accumulated depreciation and amortization (PP&E) |  | $                | 1,208.8 |                  | $ | 1,267.3    |  | $ | (58.5 | )



The decrease was primarily due to
accelerated depreciation and impairments of $78.4 million (see Impairments of Tangible and Intangible Assets) and annual depreciation, partially offset by capital spending of $124.0 million and the positive translation effects of changes
in foreign exchange rates.



DIP Facility



AWI has a $75 million debtor-in-possession credit facility that is currently limited to
issuances of letters of credit. This facility was scheduled to mature on December 8, 2004, but the maturity date was extended to December 8, 2005 with approval of the Bankruptcy Court, granted on November 15, 2004. Obligations to reimburse drawings
under the letters of credit constitute a super-priority administrative expense claim in the Chapter 11 Case. As of December 31, 2004 and 2003, under the DIP Facility, there were no outstanding borrowings; however, AWI had approximately $40.6 million
and $22.8 million, respectively, in letters of credit outstanding. The DIP Facility also contains several covenants including, among other things, limits on asset sales and capital expenditures and a required ratio of debt to cash flow. We are in
compliance with all of the DIP Facility covenants. The covenants have not impaired our operating ability. Upon AWIs emergence from Chapter 11, we expect to replace this facility with a new facility that would provide reorganized Armstrong with
greater borrowing capacity and which will have debt covenants yet to be negotiated. In the event AWI has not emerged from Chapter 11 by December 8, 2005, we will pursue another extension of the facility.



Liquidity



Our liquidity needs for operations vary throughout the year. We retain lines of credit to facilitate our seasonal needs, if required. For
certain international operations, we had lines of credit of $54.4 million at December 31, 2004, of which $15.9 million was used and $38.5 million was available. However, these lines of credit are uncommitted, and poor operating results or credit
concerns at the related foreign subsidiaries could result in the lines being withdrawn by the lenders. We have been able to maintain and, as needed, replace credit facilities to support our operations. Additionally, we have letter of credit issuance
capabilities under the DIP Facility



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



(described above). We believe that cash on hand and generated from operations, together with lines of credit and the DIP Facility, will be adequate to
address our foreseeable liquidity needs in the normal course of business operations and for cost reduction initiatives and scheduled non-filer debt obligations. Cash and liquidity needs will change significantly at the time of emergence, the timing
of which remains uncertain. AWIs POR would provide a plan to meet these requirements (see Note 1 of the Consolidated Financial Statements).



2003 COMPARED TO 2002



CONSOLIDATED RESULTS



|                                                              |  |      |         |   |      |   |          |                                   |  |           |                                              |  |           |   
|------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | -------- | --------------------------------- |  | --------- | -------------------------------------------- |  | --------- | --
|                                                              |  |      |         |   |      |   |          | Change is Favorable/(Unfavorable) | 
|                                                              |  | 2003 |         |   | 2002 |   |          | As Reported                       |  |           | Excluding Effectsof ForeignExchange Rates(1) | 
|Net Sales:                                                    |  |      |         |   |      |   |          |                                   |  |           |                                              |  |           |   
|Americas                                                      |  | $    | 2,390.8 |   |      | $ | 2,368.1  |                                   |  | 1.0       | %                                            |  | 0.6       | % 
|Europe                                                        |  |      | 778.8   |   |      |   | 727.1    |                                   |  | 7.1       | %                                            |  | (9.0      | )%
|Pacific                                                       |  |      | 89.4    |   |      |   | 77.1     |                                   |  | 16.0      | %                                            |  | 8.8       | % 
|                                                              |  |      |         |   |      |   |          |                                   |  |           |                                              |  |           |   
|Total Consolidated Net Sales                                  |  | $    | 3,259.0 |   |      | $ | 3,172.3  |                                   |  | 2.7       | %                                            |  | (1.7      | )%
|                                                              |  |      |         |  
|Operating (Loss)                                              |  | $    | (19.3   | ) |      | $ | (2,345.2 | )                                 |  | Favorable |                                              |  | Favorable |   
|Charge for asbestos liability, net                            |  |      | 81.0    |   |      |   | 2,500.0  |                                   |  |           |                                              |  |           |   
|                                                              |  |      |         |   |      |   |          |                                   |  |           |                                              |  |           |   
|Operating Income, prior to charge for asbestos liability, net |  | $    | 61.7    |   |      | $ | 154.8    |                                   |  | (60.1     | )%                                           |  | (60.7     | )%

---

|(1) | Excludes favorable foreign exchange rate effect in translation of $142.5 million on net sales
and $2.3 million on operating income.
|--- | -----------------------------------------------------------------------------------------------------------------------------------



Net sales in the Americas
increased by 1.0%, primarily as a result of sales increases of laminate flooring, amendments to agreements with independent U.S. resilient flooring distributors (see Resilient Flooring below) and price increases implemented on certain products.
Despite the volume gains from laminate flooring, overall unit volume of our products declined, primarily due to lower activity in the U.S. commercial construction markets and the residential floor covering market shift away from vinyl products (see
Overview  Factors Affecting Revenue).



Excluding the
translation effect of changes in foreign exchange rates, net sales in the European markets declined by 9.0%, primarily as a result of the weak economic conditions in our primary selling markets and the loss of market share for some of our resilient
products due to customer service and pricing issues. Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific area increased by $7.2 million, primarily as a result of stronger sales in Australia and China.



Cost of goods sold in 2003 was 79.7% of net sales, compared to 75.8% in 2002.
The 3.9 percentage point increase was primarily due to approximately $58 million for increased raw material and energy costs, $33 million of expenses related to our 2003 cost reduction initiatives, wage and salary inflation and approximately $12
million from a decreased U.S. pension credit (see Overview  Factors Affecting Operating Costs).



SG&A expenses in 2003 were $612.1 million, or 18.8% of net sales compared to $630.8 million, or 19.9% of net sales in 2002. Excluding the translation effect of
changes in foreign exchange rates, SG&A expenses in 2003 declined by approximately $57 million from 2002 SG&A expenses, primarily due to reductions in expenditures (principally in selling and advertising expenses and partially as a result of
the 2002 and 2003 cost reduction initiatives) and by approximately $22 million of lower incentive compensation costs, partially offset by approximately $16 million from a reduced U.S. pension credit and by approximately $12 million of expenses
related to our 2003 cost reduction initiatives.



38



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



During 2003, we reduced our previously recorded insurance asset for asbestos-related personal injury claims by $73
million, reflecting managements current assessment of probable insurance recoveries based upon an unfavorable ruling in an alternative dispute resolution procedure. We also recorded an $8 million charge to reflect an agreement to settle claims
from the Center for Claims Resolution and a surety bond insurance company. During 2002, we recorded a $2.5 billion charge to increase our estimate of probable asbestos-related liability. All amounts are reflected as a charge to asbestos liability,
net. See Asbestos-Related Litigation in Note 32 of the Consolidated Financial Statements for additional information.



We recorded net restructuring charges of $8.6 million in 2003, which included $10.4 million for severance and other benefits for approximately 470 employees and a $1.8
million reversal of previous restructuring charges for certain severance and lease obligation accruals that were no longer necessary. In 2002, we recorded net restructuring costs of $1.9 million, which included $2.7 million for severance benefits
for approximately 130 employees and a $0.8 million reversal of previous restructuring charges for certain severance accruals that were no longer necessary.



We incurred an operating loss of $19.3 million in 2003, compared to an operating loss of $2,345.2 million in 2002. Operating income prior to the non-cash asbestos-related
charges for 2003 and 2002 was $61.7 million and $154.8 million, respectively.



Interest expense was $9.0 million in 2003, compared to $11.3 million in 2002. The decrease in interest expense is due to lower fees on the reduced DIP Facility and lower average outstanding debt amounts at our non-Chapter 11 subsidiaries.
In accordance with SOP 90-7, we did not record contractual interest expense on prepetition debt after the Chapter 11 filing date. This unrecorded interest expense was $95.1 million in 2003 and $99.9 million in 2002. Unrecorded interest expense
reflects the amount of interest expense we would have incurred under the original maturities of prepetition debt.



Chapter 11 reorganization costs, net in 2003 were $9.4 million, which was $14.1 million less than the $23.5 million amount recorded in 2002. The decrease is primarily due
to a $12.1 million reduction to liabilities subject to compromise for the write down of a zero coupon note due to an agreement with the holder of the note that reduced the allowed amount of the note.



The effective tax benefit rate from continuing operations for 2003 was 4.2% versus 34.8% for
2002. The decreased tax benefit was primarily due to the impact of permanent differences (primarily Chapter 11 reorganization costs) on the significantly smaller amount of pre-tax loss in 2003, and higher overall foreign tax rates caused by
increased valuation allowances for foreign losses generated during 2003.



A net
loss of $39.3 million was recorded for 2003, compared to a net loss of $2,142.8 million for 2002.





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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



REPORTABLE SEGMENT RESULTS



Resilient Flooring



|                        |  |      |         |      |   |                                   |  |       |                                              |  |       |   
|----------------------- |  | ---- | ------- | ---- | - | --------------------------------- |  | ----- | -------------------------------------------- |  | ----- | --
|                        |  |      |         |      |   | Change is Favorable/(Unfavorable) | 
|                        |  | 2003 |         | 2002 |   | As Reported                       |  |       | Excluding Effectsof ForeignExchange Rates(1) | 
|Net Sales:              |  |      |         |      |   |                                   |  |       |                                              |  |       |   
|Americas                |  | $    | 935.0   |      | $ | 914.8                             |  | 2.2   | %                                            |  | 1.6   | % 
|Europe                  |  |      | 205.2   |      |   | 202.4                             |  | 1.4   | %                                            |  | (13.7 | )%
|Pacific                 |  |      | 41.3    |      |   | 35.1                              |  | 17.7  | %                                            |  | 7.8   | % 
|                        |  |      |         |      |   |                                   |  |       |                                              |  |       |   
|Total Segment Net Sales |  | $    | 1,181.5 |      | $ | 1,152.3                           |  | 2.5   | %                                            |  | (1.2  | )%
|                        |  |      |         |     
|Operating Income        |  | $    | 56.2    |      | $ | 64.6                              |  | (13.0 | )%                                           |  | (13.1 | )%

---

|(1) | Excludes favorable foreign exchange rate effect in translation of $43.9 million on net sales
and $0.1 million on operating income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------



Net sales in the Americas
increased primarily due to the effects of amendments to agreements with independent U.S. distributors, made in the fourth quarter of 2002, related to sales of certain products to large home centers. Sales are recorded under these agreements when the
products are shipped from the distributors location to the home center. Approximately $19.2 million of revenue was recorded in 2003 for products shipped to these distributors during the fourth quarter of 2002, under the amended terms. Sales of
our vinyl products to the residential market decreased by approximately 10%, primarily from the residential floor covering market shift away from vinyl products and from increased imports of competitive product from low cost producers. Sales of our
vinyl products to the commercial market increased by approximately 3%, primarily due to a July price increase on certain vinyl sheet products, new product introductions and from sales of higher priced tile products. Laminate sales increased by
approximately 37%, primarily from the strong laminate product category growth in the floor covering market.



Excluding the translation effect of changes in foreign exchange rates, net sales in Europe decreased by 13.7%. Significant market weakness in certain key countries, principally Germany, and loss of market share in
some countries due to customer service issues and a reluctance to be price competitive accounted for the decrease. Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific area increased by $3.0 million,
primarily from strong sales in Australia.



Operating income in 2003 declined
from 2002, with lower sales volumes in the higher margin vinyl products and in the Western European markets, increased costs to purchase PVC, wage and salary inflation increases and certain European manufacturing inefficiencies being the primary
contributors to the decrease. Additionally, charges for the cost reduction initiatives (see Overview  Factors Affecting Operating Costs) accounted for approximately $11 million of the decrease. Partially offsetting the negative
effects of these items were operating income gains from the increase in laminate sales, the effects of the amendments to agreements with independent U.S. distributors discussed above, and significant reductions in SG&A expenses in the U.S. and
in Europe, which resulted from restructuring and cost reduction initiatives implemented in 2002 and 2003, and reduced spending on advertising.



Wood Flooring



|                           |  |      |       |   |      |   |                                   |  |             |  
|-------------------------- |  | ---- | ----- | - | ---- | - | --------------------------------- |  | ----------- | -
|                           |  | 2003 |       |   | 2002 |   | Change isFavorable/ (Unfavorable) | 
|Total Segment Net Sales(1) |  | $    | 738.6 |   |      | $ | 719.3                             |  | 2.7         | %
|Operating (Loss) / Income  |  | $    | (4.0  | ) |      | $ | 53.0                              |  | Unfavorable |  

---

|(1) | Virtually all Wood Flooring products are sold in the Americas, primarily in the U.S.
|--- | ------------------------------------------------------------------------------------



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



Net sales in 2003 increased by $19.3 million. Units sold declined by approximately 3%, with unfinished solid floors
declining by approximately 60% as we elected to limit our output of this product, and engineered floors declining by 2% due to certain quality issues experienced primarily early in 2003 and an increase of imports from low cost competitors. Units
sold of pre-finished solid floors increased by approximately 8%, primarily from the strong U.S. new home construction market. Net sales were also positively impacted by the price increases implemented on the solid floor products (see Overview
 Factors Affecting Revenues).



Operating results declined by $57.0
million. The increased cost for acquiring lumber, the expenses for implementing the cost reduction initiatives (see Overview  Factors Affecting Operating Costs) and improving quality, and other increases in manufacturing expenses
were the primary reasons for the decline. Partially offsetting these increased expenses were gains from the selling price increases and reduced expenditures in SG&A expenses, the latter partially as an effect of the cost reduction initiatives.



Textiles and Sports Flooring (TSF)



|                        |  |      |       |   |      |   |       |                                   |  |             |                                              |  |             |   
|----------------------- |  | ---- | ----- | - | ---- | - | ----- | --------------------------------- |  | ----------- | -------------------------------------------- |  | ----------- | --
|                        |  |      |       |   |      |   |       | Change is Favorable/(Unfavorable) | 
|                        |  | 2003 |       |   | 2002 |   |       | As Reported                       |  |             | Excluding Effectsof ForeignExchange Rates(1) | 
|Total Segment Net Sales |  | $    | 271.9 |   |      | $ | 247.2 |                                   |  | 10.0        | %                                            |  | (8.5        | )%
|Operating (Loss)        |  | $    | (11.0 | ) |      | $ | (4.7  | )                                 |  | Unfavorable |                                              |  | Unfavorable |   

---

|(1) | Excludes favorable/(unfavorable) foreign exchange rate effect in translation of $49.8 million
on net sales and $(1.1) million on operating income.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------



Excluding
the translation effect of changes in foreign exchange rates, net sales decreased 8.5%, primarily from volume declines in our carpet products, due to weak economic conditions in our primary selling markets, and price concessions that were required to
meet competitive pressures. Net sales of our sports flooring products increased by approximately 3%.



An operating loss in 2003 exceeded the loss in 2002, primarily due to reduced net sales (excluding the favorable translation effect of foreign exchange rates) and the expenses related to the cost reduction initiatives
(see Overview  Factors Affecting Operating Costs). Partially offsetting these factors were reduced manufacturing expenses and lower SG&A expenses.



Building Products



|                        |  |      |       |      |   |                                   |  |      |                                              |  |      |   
|----------------------- |  | ---- | ----- | ---- | - | --------------------------------- |  | ---- | -------------------------------------------- |  | ---- | --
|                        |  |      |       |      |   | Change is Favorable/(Unfavorable) | 
|                        |  | 2003 |       | 2002 |   | As Reported                       |  |      | Excluding Effectsof ForeignExchange Rates(1) | 
|Net Sales:              |  |      |       |      |   |                                   |  |      |                                              |  |      |   
|Americas                |  | $    | 515.6 |      | $ | 511.8                             |  | 0.7  | %                                            |  | 0.0  | % 
|Europe                  |  |      | 298.5 |      |   | 272.8                             |  | 9.4  | %                                            |  | (5.6 | )%
|Pacific                 |  |      | 48.1  |      |   | 42.0                              |  | 14.5 | %                                            |  | 9.6  | % 
|                        |  |      |       |      |   |                                   |  |      |                                              |  |      |   
|Total Segment Net Sales |  | $    | 862.2 |      | $ | 826.6                             |  | 4.3  | %                                            |  | (1.5 | )%
|                        |  |      |       |     
|Operating Income        |  | $    | 95.2  |      | $ | 96.5                              |  | (1.3 | )%                                           |  | (5.4 | )%

---

|(1) | Excludes favorable foreign exchange rate effect in translation of $48.9 million on net sales
and $4.1 million on operating income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------



Excluding the translation
effect of changes in foreign exchange rates, net sales in the Americas were virtually unchanged from 2002 levels. Unit volume to the U.S. Commercial markets declined by approximately 3%, primarily due to market conditions. Offsetting



41



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



the impact from the lower volume were price increases implemented in July 2003 on most commercial products. Net sales also benefited from price increases to
the large home centers in the U.S. Residential markets.



Excluding the
translation effect of changes in foreign exchange rates, net sales in Europe declined by 5.6% from 2002. Units sold of mineral fiber products, which constitute the majority of our European sales, declined approximately 1%. However, the volume of
mineral fiber product sold to Western European countries declined by approximately 7%, primarily due to lower commercial market activity, while volume sold to the emerging markets of Eastern Europe (primarily Russia) increased by approximately 14%
due to construction growth in these markets. Products sold to the emerging markets tend to have lower margin than products sold in Western Europe. Excluding the translation effect of changes in foreign exchange rates, net sales of metal ceilings
declined by approximately 12%, primarily from weak market conditions in Switzerland and some loss of market share in Asia.



Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific area increased by $4.2 million due to strong activity in Australia and
growth in the China and India markets.



Excluding the translation effect of
changes in foreign exchange rates, operating income declined by $5.4 million, as lower sales volume, increased energy costs, wage and salary inflation, price concessions in Europe and expenses for cost reduction initiatives were only partially
offset by the positive effects of the price increases in the U.S. and manufacturing cost improvements.



Cabinets



|                           |  |      |       |   |      |   |       |                        |  |             |   
|-------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---------------------- |  | ----------- | --
|                           |  | 2003 |       |   | 2002 |   |       | Change is(Unfavorable) | 
|Total Segment Net Sales(1) |  | $    | 204.8 |   |      | $ | 226.9 |                        |  | (9.7        | )%
|Operating (Loss)           |  | $    | (11.1 | ) |      | $ | (3.9  | )                      |  | Unfavorable |   

---

|(1) | All Cabinet products are sold in the Americas, primarily in the U.S.
|--- | --------------------------------------------------------------------



Net sales in 2003 declined from 2002, primarily due to customer
service issues. Starting in the second half of 2002, we were unable to complete on time certain customers orders due to shortages in sourced cabinet components. Consequently, we lost sales opportunities in 2003, as the customers decided to
source their cabinets from other suppliers. During 2003, steps were taken to correct these inefficiencies, and incremental improvements were realized throughout the year. The reductions in volume were partially offset by a shift in customer
preference to our higher priced plywood product and from the September 2003 price increase (see Overview  Factors Affecting Revenues).



Operating results declined by $7.2 million from 2002 to 2003. Included in the 2002 operating loss of $3.9 million was $6.8 million of charges for inventory write-downs.
Excluding the 2002 write-downs, operating results declined by $14.0 million from 2002 to 2003, primarily due to the effects of the lower net sales. Partially offsetting the decline were lower selling expenses.



Unallocated Corporate



Unallocated corporate expense of $144.6 million in 2003 decreased from $2,550.7 million in
2002. This decrease was primarily due to non-cash asbestos-related charges, with 2003 including $81.0 million and 2002 including $2.5 billion (see Overview  Asbestos-Related Charges and Note 32 of the Consolidated Financial
Statements). Excluding these charges, unallocated corporate expense increased in 2003 by $12.9 million, primarily from our U.S. pension credit decreasing by approximately $28 million, by a $6.3 million write off of a note receivable from a previous
divestiture, by approximately $4 million to increase a medical liability accrual, severances related to the cost reduction initiatives (see Overview  Factors Affecting Operating Costs) and by a $2.5 million charge for certain
environmental liabilities (see Note 32 of the Consolidated Financial Statements), partially offset by reductions in employee incentive compensation accruals, reduced expenditures in our corporate staff departments and gains in the value of insurance
policies related to deferred compensation plans.



42



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



FINANCIAL CONDITION AND LIQUIDITY



As shown on the Consolidated Statements of Cash Flows, our cash and cash equivalents balance increased by $104.3 million in 2003, compared
to a $102.6 million increase in 2002. Versus 2002, the decline in net cash provided by operating activities in 2003 compared to 2002 was more than offset by less net cash used for investing and financing activities.



Operating activities in 2003 generated $165.8 million of net cash, $57.7 million less than
2002. Cash generated from net earnings, after adjusting for non-cash charges, restructuring and reorganization activities declined by $68.3 million, primarily from the increased operating costs discussed above. Reductions in the amount of net
operating assets and liabilities, primarily receivables, inventories and payables were greater than the reductions achieved in 2002 by $10.6 million.



Net cash used for investing activities was $57.2 million in 2003, compared to $104.1 million in 2002, with the decrease due to reduced PP&E and computer software
purchases. In consideration of both market conditions and cost reduction initiatives, we elected to defer or stop certain investments, resulting in approximately $47 million less spending in 2003 than in 2002. We believe the decision to reduce our
investing activities did not negatively impact our business.



Net cash used for
financing activities was $14.1 million in 2003, compared to $23.8 million in 2002, with the decrease due primarily to lower short-term debt payment requirements in 2003 than in 2002.



ACQUISITIONS AND DISPOSITIONS



Discontinued Operations



On May 31, 2000, Armstrong completed its sale of all entities, assets and certain liabilities comprising its Insulation Products segment. During 2003 and 2002, AHI recorded net losses of $2.4 million and $0.7 million
respectively, for the impairment of some note receivables and the settlement of certain tax contingencies related to this divestiture.



On December 29, 1995, Armstrong sold a furniture subsidiary, Thomasville Furniture Industries. During 2004 and 2003, AHI recorded net losses of $0.4 million and $0.1
million, respectively, for the environmental and tax indemnifications related to this divestiture.



In accordance with FAS 144, these adjustments were classified as part of discontinued operations since the original divestitures were reported as discontinued operations.



Divestiture



In July 2000, we sold our Installation Products Group to subsidiaries of the German company Ardex GmbH. During February 2003, we reached a
settlement with Ardex on several open issues related to the sale and the ongoing supply agreement between Ardex and Armstrong. The settlement allowed for the payment of a pre-petition liability to Ardex with a discount, adjusted the pricing for our
adhesives purchases, eliminated a minimum purchase requirement and resolved environmental remediation disputes. Under the settlement, Ardex filed a proof of claim related to environmental remediation in AWIs Chapter 11 Case, which has been
treated as an allowed unsecured claim. This claim resulted in a fourth quarter 2002 charge of $5.3 million, which was recorded in SG&A expenses.



Acquisition



On May 18, 2000, we acquired privately-held Switzerland-based Gema Holding AG (Gema), a manufacturer and installer of metal ceilings, for $6 million plus certain contingent consideration not to exceed
$25.5 million, based on results over the three year period ending December 31, 2002. In accordance with the purchase agreement, contingent consideration of $3.0 million was paid to the former owners, with the final payment being made in the third
quarter of 2004.



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



The Gema acquisition was recorded under the purchase method of accounting. The purchase price was allocated to the
assets acquired and the liabilities assumed based on the estimated fair market value at the date of acquisition. The fair market value of tangible and identifiable intangible net assets acquired exceeded the purchase price by $24.2 million and this
amount was recorded as a reduction of the fair value of property, plant and equipment. Contingent consideration of $3.0 million was accounted for as additional purchase price.



OFF-BALANCE SHEET ARRANGEMENTS



No disclosures are required pursuant to Item 303(a)(4) of Regulation S-K.



CONTRACTUAL OBLIGATIONS



As part of our normal operations, we enter into numerous contractual obligations that require specific payments during the term of the various agreements. The following
table includes amounts ongoing under contractual obligations existing as of December 31, 2004. Only known payments that are dependent solely on the passage of time are included. Obligations under contracts that contain minimum payment amounts are
shown at the minimum payment amount. Contracts that have variable payment structures without minimum payments are excluded. Purchase orders that are entered into in the normal course of business are also excluded because they are generally
cancelable and not legally binding. Amounts are presented below based upon the currently scheduled payment terms. Actual future payments may differ from the amounts presented below due to changes in payment terms or events leading to payments in
addition to the minimum contractual amounts.



|                                         |  |      |      |      |   |      |  |      |      |      |   |            |  |       |     |  |   |      |  |   |      
|---------------------------------------- |  | ---- | ---- | ---- | - | ---- |  | ---- | ---- | ---- | - | ---------- |  | ----- | --- |  | - | ---- |  | - | -----
|                                         |  | 2005 |      | 2006 |   | 2007 |  | 2008 |      | 2009 |   | Thereafter |  | Total
|Long-Term Debt(1)                        |  | $    | 8.2  |      | $ | 6.5  |  | $    | 1.9  |      | $ | 1.5        |  | $     | 1.3 |  | $ | 18.0 |  | $ | 37.4 
|Capital Lease Obligations(2)             |  |      | 1.7  |      |   | 1.0  |  |      | 0.7  |      |   | 0.3        |  |       |    |  |   | 0.1  |  |   | 3.8  
|Operating Lease Obligations(2)           |  |      | 14.4 |      |   | 11.8 |  |      | 8.3  |      |   | 5.0        |  |       | 2.6 |  |   | 10.4 |  |   | 52.5 
|Unconditional Purchase Obligations(3)(4) |  |      | 8.2  |      |   | 5.6  |  |      | 1.7  |      |   | 0.7        |  |       | 0.4 |  |   | 0.1  |  |   | 16.7 
|Other Long-Term Obligations(5)           |  |      | 17.6 |      |   | 0.3  |  |      | 0.2  |      |   | 0.1        |  |       | 0.1 |  |   |     |  |   | 18.3 
|                                         |  |      |      |      |   |      |  |      |      |      |   |            |  |       |     |  |   |      |  |   |      
|Total Contractual Obligations            |  | $    | 50.1 |      | $ | 25.2 |  | $    | 12.8 |      | $ | 7.6        |  | $     | 4.4 |  | $ | 28.6 |  | $ | 128.7
|                                         |  |      |      |      |   |      |  |      |      |      |   |            |  |       |     |  |   |      |  |   |      

---

|(1) | Payments for long-term debt obligations exclude debt subject to compromise.
|--- | ---------------------------------------------------------------------------

|(2) | Capital and operating lease obligations include the minimum lease payments due under existing
lease agreements with noncancelable lease terms in excess of one year. We have issued financial guarantees to assure payment on behalf of our subsidiaries in the event of default on various debt and lease obligations in the table above. We have not
issued any guarantees on behalf of joint-venture or unrelated businesses.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Unconditional purchase obligations include (a) purchase contracts whereby we must make
guaranteed minimum payments of a specified amount regardless of how little material is actually purchased (take or pay contracts) and (b) service agreements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Unconditional purchase obligations exclude contracts entered into during the normal course of
business that are non-cancelable and have fixed per unit fees, but where the monthly commitment varies based upon usage. Cellular phone contracts are an example.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Other long-term obligations include payments under employee service and severance agreements
as well as retainer payments to advisors within the Chapter 11 Case.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December 31, 2004, we maintained an agreement with the lending institution of one of our distributors. Under this agreement, if the distributor were to default on its borrowings and the lender foreclosed on the assets, the bank could
return a large part of any of our products still at the distributor (subject to certain quality and roll size minimums) for a refund of original cost. This agreement will expire in September 2005. At December 31, 2004, the amount of inventory held
at the distributor was approximately $3.2 million. Historically, no claim has been made under any of these types of agreements and we do not anticipate any such claims in the future. As such, no liability has been recorded for this agreement.



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



We are party to supply agreements, some of which require the purchase of inventory remaining at the supplier upon
termination of the agreement. The last such agreement will expire on April 5, 2006. Had these agreements terminated at December 31, 2004, Armstrong would have been obligated to purchase approximately $10.3 million of inventory. Historically, due to
production planning, we have not had to purchase material amounts of product at the end of similar contracts. Accordingly, no liability has been recorded for these guarantees.



As part of our executive compensation plan, certain current and former executives participate in a split-dollar insurance program where we
are responsible for remitting the premiums. Since 1998, the program was closed to new participants. As of December 31, 2004, we carried a cash surrender value asset of $6.5 million related to this program. Should we discontinue making premium
payments, the insured executives have the right to the entire policy cash surrender value. In light of the Sarbanes-Oxley Act, we believe it is inappropriate to make the premium payments for three of the executives participating in this plan. As a
result, beginning in 2003, we have required these three individuals to make the premium payments to continue the policy.



We utilize other commercial commitments in order to ensure that adequate funds are available to meet operating requirements. Letters of credit are issued to third party
suppliers, insurance and financial institutions and can only be drawn upon in the event of our failure to pay our obligations to the beneficiary. This table summarizes the commitments we have available for use. Letters of credit are currently
arranged through AWIs DIP Facility, lead managed by JP Morgan Chase. Certain letters of credit arranged with Wachovia Bank prior to the Filing were renewed at their scheduled expiration date.



|                             |  |                       |      |                  |   |             |  |             |     |              |   |  |  
|---------------------------- |  | --------------------- | ---- | ---------------- | - | ----------- |  | ----------- | --- | ------------ | - |  | -
|Other Commercial Commitments |  | TotalAmountsCommitted |      | Less Than 1 Year |   | 1  3 Years |  | 4  5 Years |     | Over 5 Years
|Letters of Credit            |  | $                     | 73.6 |                  | $ | 72.7        |  | $           | 0.9 |              |  |  | 



In addition, we have lines of credit
for certain international operations totaling $54.4 million, of which $15.9 million was used at December 31, 2004 and $38.5 million was available to ensure funds are available to meet operating requirements.



In disposing of assets through mid 2000, AWI and some subsidiaries had entered into contracts
that included various indemnity provisions, covering such matters as taxes, environmental liabilities and asbestos and other litigation. Some of these contracts had exposure limits, but many did not. Due to the nature of the indemnities, there is no
way to estimate the potential maximum exposure under these contracts. As a debtor-in-possession, for those contracts that are still executory where AWI was the sole guarantor, AWI anticipates rejecting those contracts. Parties that timely file
claims with respect to such contracts will have such claims addressed in AWIs Chapter 11 Case. AWI cannot estimate the value of any potential claims that will ultimately be allowed by the Bankruptcy Court. See Note 1 of the Consolidated
Financial Statements regarding Proceedings under Chapter 11.



Subsidiaries that
are not part of the Chapter 11 Filing also entered into certain contracts that included various indemnity provisions similar to those described above. Since these subsidiaries are not part of the Chapter 11 Filing, these contracts continue to be in
effect. Some of these contracts had exposure limits, but many did not. Due to the nature of the indemnities, there is no way to estimate the potential maximum exposure under all these contracts. For contracts under which an indemnity claim has been
received, a liability of $2.1 million has been recorded as of December 31, 2004.



In September 1999, we sold our Textiles Products operations. As part of the divestiture agreement, we transferred certain liabilities and assets to the purchaser to cover pension payments earned by the work force as of the sale date. We
also reimburse the purchaser for such pension payments that are not covered by the pension assets. In addition, we agreed to reimburse the purchaser for the



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



tax impact of our reimbursement of the pension payments. This agreement has no termination date. As of December 31, 2004, we maintained a $2.9 million
liability for this guarantee. As of December 31, 2004, the net present value of the maximum payments is approximately $5 million, excluding any amounts to be paid for tax reimbursement.



See Notes 4 and 24 to the Consolidated Financial Statements for a discussion of the ESOP loan guarantee.



RELATED PARTIES



See Note 31 of the Consolidated Financial Statements for a discussion of our relationships with WAVE and Interface Solutions, Inc.
(ISI).



See Note 7 of the Consolidated Financial Statements for a
discussion of our relationship with Ardex.



Related party transactions
with executives and outside directors are discussed in Item 13 - Certain Relationships and Related Transactions.



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##### Table of Contents

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Market Risk



We are exposed to market
risk from changes in foreign currency exchange rates, interest rates and commodity prices that could impact our results of operations and financial condition. We use swap, forward and option contracts to hedge currency and commodity exposures. We
regularly monitor developments in the capital markets and only enter into currency and swap transactions with established counterparties having investment-grade ratings. Exposure to individual counterparties is controlled, and thus we consider the
risk of counterparty default to be negligible. Swap, forward and option contracts are entered into for periods consistent with underlying exposure and do not constitute positions independent of those exposures. We use derivative financial
instruments as risk management tools and not for speculative trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions and energy companies in order to manage our
exposure to potential nonperformance on such instruments.



Interest Rate
Sensitivity



Due to AWIs Chapter 11 Filing, all affected debt has
been classified as liabilities subject to compromise. All such debt will be addressed in the Chapter 11 Case. While operating as a debtor-in-possession, AWI does not expect to pay any principal, interest or other payments on this debt unless
approved by the Bankruptcy Court. However, we also have debt of entities that were not a part of the Chapter 11 Filing, which are being paid on schedule. The table below provides information about our long-term debt obligations as of December 31,
2004 and December 31, 2003, including payment requirements and related weighted-average interest rates by scheduled maturity dates. Weighted-average variable rates are based on implied forward rates in the yield curve at the reporting date. The
information is presented in U.S. dollar equivalents, which is our reporting currency. The amounts below reflect only post-petition debt and debt of entities that are not a part of the Chapter 11 Filing.



|                                                |  |      |      |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |   |      |   |  |   |      |  
|----------------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | - |  | ---- | ---- | - | ---------- | - | ---- | ----- |  | - | ---- | - |  | - | ---- | -
|                                                |  | 2005 |      |   | 2006 |   |      | 2007 |  |   | 2008 |   |  | 2009 |      |   | After 2010 |   |      | Total | 
|Scheduled maturity date As of December 31, 2004 |  |      |      |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |   |      |   |  |   |      |  
|Long-term debt:                                 |  |      |      |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |   |      |   |  |   |      |  
|Fixed rate                                      |  | $    | 7.9  |   |      | $ | 6.2  |      |  | $ | 1.6  |   |  | $    | 1.2  |   |            | $ | 1.0  |       |  | $ | 7.6  |   |  | $ | 25.5 |  
|Avg. interest rate                              |  |      | 6.34 | % |      |   | 6.25 | %    |  |   | 7.07 | % |  |      | 6.89 | % |            |   | 6.70 | %     |  |   | 6.71 | % |  |   | 6.51 | %
|                                                |  |      |      |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |   |      |   |  |   |      |  
|Variable rate                                   |  | $    | 0.3  |   |      | $ | 0.3  |      |  | $ | 0.3  |   |  | $    | 0.3  |   |            | $ | 0.3  |       |  | $ | 10.4 |   |  | $ | 11.9 |  
|Avg. interest rate                              |  |      | 1.75 | % |      |   | 1.75 | %    |  |   | 1.75 | % |  |      | 1.75 | % |            |   | 1.75 | %     |  |   | 2.10 | % |  |   | 2.06 | %
|                                                |  |      |      |   |      |   |     
|                                                |  | 2004 |      |   | 2005 |   |      | 2006 |  |   | 2007 |   |  | 2008 |      |   | After 2009 |   |      | Total | 
|Scheduled maturity date As of December 31, 2003 |  |      |      |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |   |      |   |  |   |      |  
|Long-term debt:                                 |  |      |      |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |   |      |   |  |   |      |  
|Fixed rate                                      |  | $    | 8.0  |   |      | $ | 8.4  |      |  | $ | 6.5  |   |  | $    | 2.3  |   |            | $ | 1.9  |       |  | $ | 8.5  |   |  | $ | 35.6 |  
|Avg. interest rate                              |  |      | 6.00 | % |      |   | 6.02 | %    |  |   | 5.93 | % |  |      | 5.82 | % |            |   | 5.44 | %     |  |   | 6.55 | % |  |   | 6.08 | %
|                                                |  |      |      |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |      |       |  |   |      |   |  |   |      |  
|Variable rate                                   |  | $    | 0.2  |   |      | $ | 0.2  |      |  | $ | 0.2  |   |  | $    | 0.2  |   |            | $ | 0.2  |       |  | $ | 11.0 |   |  | $ | 12.0 |  
|Avg. interest rate                              |  |      | 0.88 | % |      |   | 0.88 | %    |  |   | 0.88 | % |  |      | 0.88 | % |            |   | 0.88 | %     |  |   | 1.50 | % |  |   | 1.44 | %



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##### Table of Contents

Exchange Rate Sensitivity



We manufacture and sell our products in a number of countries throughout the world and, as a
result, are exposed to movements in foreign currency exchange rates. To a large extent, our global manufacturing and sales provide a natural hedge of foreign currency exchange rate movement, as foreign currency expenses generally offset foreign
currency revenues. At December 31, 2004, Armstrongs major foreign currency exposures are to the Euro, the Canadian dollar and the British pound.



We have used foreign currency forward exchange contracts to reduce our exposure to the risk that the eventual net cash inflows and outflows, resulting from the sale of
product to foreign customers and purchases from foreign suppliers, will be adversely affected by changes in exchange rates. These derivative instruments are used for firmly committed or forecasted transactions. These transactions allow us to further
reduce our overall exposure to exchange rate movements, since the gains and losses on these contracts offset losses and gains on the transactions being hedged.



We also have used foreign currency forward exchange contracts to hedge exposures created by cross-currency inter-company loans.



The table below details our outstanding currency instruments as of December 31, 2004 and
2003. All the instruments outstanding as of December 31, 2004 have scheduled maturity before dates before March 31, 2006.



Forward contracts



|                        |  |              |       |   |      |   |       |  |   |       |  
|----------------------- |  | ------------ | ----- | - | ---- | - | ----- |  | - | ----- | -
|                        |  | Maturing in: |      
|                        |  | 2005         |       |   | 2006 |   | Total | 
|As of December 31, 2004 |  |              |       |   |      |   |       |  |   |       |  
|Notional Amount         |  | $            | 378.1 |   |      | $ | 8.7   |  | $ | 386.8 |  
|Fair Value (Liability)  |  | $            | (13.9 | ) |      |   |      |  | $ | (13.9 | )
|                        | 
|                        |  | Maturing in: |      
|                        |  | 2004         |       |   | 2005 |   | Total | 
|As of December 31, 2003 |  |              |       |   |      |   |       |  |   |       |  
|Notional Amount         |  | $            | 368.5 |   |      | $ | 10.6  |  | $ | 379.1 |  
|Fair Value (Liability)  |  | $            | (1.0  | ) |      |   |      |  | $ | (1.0  | )



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##### Table of Contents

Commodity Price Sensitivity



We purchase natural gas for use in the manufacture of ceiling tiles and other products, as well as to heat many of our facilities. As a
result, we are exposed to movements in the price of natural gas. We have a policy of minimizing natural gas cost volatility through derivative instruments, including swap contracts, purchased call options and zero-cash collars. The table below
provides information about our natural gas contracts as of December 31, 2004 and 2003 that are sensitive to changes in commodity prices. Notional amounts and price ranges are in millions of Btus (MMBtu).



On balance sheet commodity related derivatives

|                                |  |              |  |              |  |             
|------------------------------- |  | ------------ |  | ------------ |  | ------------
|                                |  | Maturing in:
|                                |  | 2005         |  | 2006         |  | Total       
|As of December 31, 2004         |  |              |  |              |  |             
|Contract amounts (MMBtu)        |  | 5,230,000    |  | 1,630,000    |  | 6,860,000   
|Contract price range ($/MMBtu)  |  | $4.46 -$6.72 |  | $6.37 -$8.10 |  | $4.46 -$8.10
|Assets at fair value (millions) |  | $4.3         |  | $1.0         |  | $5.3        
|                                | 
|                                |  | Maturing in:
|                                |  | 2004         |  | 2005         |  | Total       
|As of December 31, 2003         |  |              |  |              |  |             
|Contract amounts (MMBtu)        |  | 5,180,000    |  | 1,730,000    |  | 6,910,000   
|Contract price range ($/MMBtu)  |  | $3.68 -$6.00 |  | $4.46 -$5.95 |  | $3.68 -$6.00
|Assets at fair value (millions) |  | $3.1         |  | $0.4         |  | $3.5        



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##### Table of Contents

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



SUPPLEMENTARY DATA



Quarterly Financial Information for the
Years Ended December 31, 2004 and 2003 (Unaudited)



ARMSTRONG HOLDINGS, INC. AND SUBSIDIARIES



The
following consolidated financial statements are filed as part of this Annual Report on Form 10-K:



Report of Independent Registered Public Accounting Firm



Consolidated Statements of Earnings for the Years Ended December 31, 2004, 2003 and 2002



Consolidated Balance Sheets as of December 31, 2004 and 2003



Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002



Consolidated Statements of Shareholders Equity (Deficit) for the Years Ended December 31, 2004, 2003 and 2002



Notes to Consolidated Financial Statements



Schedule II - Valuation and Qualifying Reserves



ARMSTRONG WORLD INDUSTRIES, INC. AND SUBSIDIARIES



The following consolidated financial statements are filed as part of this Annual Report on
Form 10-K:



Report of Independent Registered Public Accounting Firm



Consolidated Statements of Earnings for the Years Ended December 31, 2004,
2003 and 2002



Consolidated Balance Sheets as of December 31, 2004 and 2003



Consolidated Statements of Cash Flows for the Years Ended December 31, 2004,
2003 and 2002



Consolidated Statements of Shareholders Equity (Deficit)
for the Years Ended December 31, 2004, 2003 and 2002



Notes to Consolidated
Financial Statements



Schedule II - Valuation and Qualifying Reserves



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QUARTERLY FINANCIAL INFORMATION

ARMSTRONG HOLDINGS, INC. (unaudited)



|                                     |  |                                                |  |        |       |  |       |       |   |        |   |       |            |  |   |        |   |  |   |         |  
|------------------------------------ |  | ---------------------------------------------- |  | ------ | ----- |  | ----- | ----- | - | ------ | - | ----- | ---------- |  | - | ------ | - |  | - | ------- | -
|(millions except for per share data) |  | First                                          |  | Second |       |  | Third |       |   | Fourth |   |       | Total year | 
|2004                                 |  | Net sales                                      |  | $      | 845.0 |  | $     | 903.5 |   |        | $ | 893.5 |            |  | $ | 855.3  |   |  | $ | 3,497.3 |  
|                                     |  | Gross profit                                   |  |        | 184.6 |  |       | 216.4 |   |        |   | 194.2 |            |  |   | 91.1   |   |  |   | 686.3   |  
|                                     |  |                                                |  |        |       | 
|                                     |  | Net earnings (loss) from continuing operations |  |        | 20.0  |  |       | (14.5 | ) |        |   | 23.2  |            |  |   | (109.1 | ) |  |   | (80.4   | )
|                                     |  | Per share of common stock:                     |  |        |       |  |       |       |   |        |   |       |            |  |   |        |   |  |   |         |  
|                                     |  | Basic                                          |  | $      | 0.49  |  | $     | (0.36 | ) |        | $ | 0.57  |            |  | $ | (2.69  | ) |  | $ | (1.99   | )
|                                     |  | Diluted                                        |  | $      | 0.49  |  | $     | (0.36 | ) |        | $ | 0.57  |            |  | $ | (2.69  | ) |  | $ | (1.99   | )
|                                     |  |                                                |  |        |       | 
|                                     |  | Net earnings (loss)                            |  |        | 19.6  |  |       | (14.5 | ) |        |   | 23.2  |            |  |   | (109.1 | ) |  |   | (80.8   | )
|                                     |  | Per share of common stock:                     |  |        |       |  |       |       |   |        |   |       |            |  |   |        |   |  |   |         |  
|                                     |  | Basic                                          |  | $      | 0.48  |  | $     | (0.36 | ) |        | $ | 0.57  |            |  | $ | (2.69  | ) |  | $ | (2.00   | )
|                                     |  | Diluted                                        |  | $      | 0.48  |  | $     | (0.36 | ) |        | $ | 0.57  |            |  | $ | (2.69  | ) |  | $ | (2.00   | )
|                                     |  |                                                |  |        |       | 
|                                     |  | Price range of common stockhigh               |  | $      | 1.39  |  | $     | 1.55  |   |        | $ | 2.30  |            |  | $ | 3.51   |   |  | $ | 3.51    |  
|                                     |  | Price range of common stocklow                |  | $      | 0.95  |  | $     | 0.76  |   |        | $ | 1.16  |            |  | $ | 1.20   |   |  | $ | 0.76    |  
|                                     |  |                                                |  |        |       | 
|2003                                 |  | Net sales                                      |  | $      | 774.9 |  | $     | 826.9 |   |        | $ | 851.4 |            |  | $ | 805.8  |   |  | $ | 3,259.0 |  
|                                     |  | Gross profit                                   |  |        | 166.5 |  |       | 180.4 |   |        |   | 174.0 |            |  |   | 140.7  |   |  |   | 661.6   |  
|                                     |  |                                                |  |        |       | 
|                                     |  | Net earnings (loss) from continuing operations |  |        | 1.8   |  |       | (34.3 | ) |        |   | (2.3  | )          |  |   | (2.0   | ) |  |   | (36.8   | )
|                                     |  | Per share of common stock:                     |  |        |       |  |       |       |   |        |   |       |            |  |   |        |   |  |   |         |  
|                                     |  | Basic                                          |  | $      | 0.04  |  | $     | (0.85 | ) |        | $ | (0.06 | )          |  | $ | (0.05  | ) |  | $ | (0.91   | )
|                                     |  | Diluted                                        |  | $      | 0.04  |  | $     | (0.85 | ) |        | $ | (0.06 | )          |  | $ | (0.05  | ) |  | $ | (0.91   | )
|                                     |  |                                                |  |        |       | 
|                                     |  | Net earnings (loss)                            |  |        | 1.9   |  |       | (34.3 | ) |        |   | (4.7  | )          |  |   | (2.2   | ) |  |   | (39.3   | )
|                                     |  | Per share of common stock:                     |  |        |       |  |       |       |   |        |   |       |            |  |   |        |   |  |   |         |  
|                                     |  | Basic                                          |  | $      | 0.05  |  | $     | (0.85 | ) |        | $ | (0.12 | )          |  | $ | (0.05  | ) |  | $ | (0.97   | )
|                                     |  | Diluted                                        |  | $      | 0.05  |  | $     | (0.85 | ) |        | $ | (0.12 | )          |  | $ | (0.05  | ) |  | $ | (0.97   | )
|                                     |  |                                                |  |        |       | 
|                                     |  | Price range of common stockhigh               |  | $      | 0.83  |  | $     | 2.33  |   |        | $ | 3.04  |            |  | $ | 2.00   |   |  | $ | 3.04    |  
|                                     |  | Price range of common stocklow                |  | $      | 0.37  |  | $     | 0.53  |   |        | $ | 1.26  |            |  | $ | 0.80   |   |  | $ | 0.37    |  



There were no dividends paid in 2004
or 2003. The DIP Facility stipulates that AWI will not declare or pay any dividends either directly or indirectly and bankruptcy law bars dividends by companies in Chapter 11.



The second quarter net loss included a non-cash goodwill impairment loss of $60.0 million. See Note 12.



Note: The net sales and gross profit amounts reported above are reported on a continuing
operations basis and may differ from previously reported amounts due to reclassifications to conform with current presentation. The sum of the quarterly earnings per share data may not equal the total year amounts due to changes in the average
shares outstanding and, for diluted data, the exclusion of the antidilutive effect in certain quarters.



Fourth Quarter 2004 Compared With Fourth Quarter 2003



Net sales of $855.3 million in the fourth quarter of 2004 increased from net sales of $805.8 million in the fourth quarter of 2003, an increase of 6.1%. Excluding the favorable effects of foreign exchange rates of
$18.4 million, net sales increased 3.8% primarily due to the positive effects of pricing initiatives. Resilient Flooring net sales increased 3.7% due to pricing initiatives, partially offset by lower volumes. Wood Flooring net sales increased by
2.5% due to pricing initiatives. Textiles and Sports Flooring decreased 2.2%, but excluding the favorable effects of foreign exchange rates of $5.7 million, decreased 9.6% due to lower sales volume and pricing. Building Products net sales increased
by 16.0% due to favorable effects of foreign exchange, increased volume and pricing initiatives. Cabinets increased by 4.1% due to pricing initiatives. Net sales increased 5.3% and 6.1% in the Americas and Europe, respectively,



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##### Table of Contents

with the Pacific area increasing $6.5 million. Excluding the favorable effects of foreign exchange rates of $15.9 million, Europe net sales decreased 2.0%.



For the fourth quarter of 2004, the cost of goods sold was 89.3% of sales,
compared to 82.5% in 2003. The 6.8 percentage point increase was primarily due to a $44.8 million fixed asset impairment charge in our European resilient flooring business, $31.1 million of charges related to 2004 cost reduction initiatives, and
increased raw material and energy costs, partially offset by the favorable impacts of increased volumes, and cost reduction and pricing initiatives.



SG&A expenses for the fourth quarter of 2004 were $172.4 million as compared to $156.2 million for the fourth quarter of 2003. The increase is primarily due to
increased selling expenses and a $5.0 million contribution to Armstrong Foundation (a community giving program funded by Armstrong), partially offset by the favorable impacts of cost reduction initiatives implemented in prior periods.



A goodwill impairment charge of $48.4 million was recorded in the fourth quarter of 2004
related to our European resilient flooring business. See Note 12 of the Consolidated Financial Statements.



Restructuring charges, net, were $13.3 million in the fourth quarter of 2004 and $1.3 million in the fourth quarter of 2003 primarily related to our Hoogezand and North American SG&A initiatives. See Note 15 of
the Consolidated Financial Statements.



An operating loss from continuing
operations of $134.8 million in the fourth quarter of 2004 compared to an operating loss of $12.1 million in the fourth quarter of 2003. The primary contributors to this increased loss include the goodwill impairment charge of $48.4 million, the
$44.8 million fixed asset impairment charge and $31.1 million of charges related to cost reduction initiatives.



Chapter 11 reorganization costs, net were expense of $0.3 million in the fourth quarter of 2004 and income of $6.8 million in the fourth quarter of 2003. The change is
primarily due to a $12.1 million write down in 2003 of a zero coupon note due to an agreement with the holder of the note that reduced the allowed claim amount of the note.



The effective tax benefit from continuing operations rate for the fourth quarter of 2004 was 19.6% compared to a tax benefit rate of 74.4%
for the same period of 2003. The difference relates primarily to a tax benefit booked in 2003 related to reduced capitalized Chapter 11 reorganization costs for tax purposes and the release in the fourth quarter of 2004 of $3.6 million in tax
reserves related to state tax issues (net of Federal benefit) on which the statute of limitations expired and $8.3 million for a favorable conclusion of a German tax audit. In addition, the $48.4 million goodwill impairment recorded during the
fourth quarter of 2004, which was a nontaxable event, and the $44.8 million of European resilient flooring fixed asset impairments, which required a full valuation allowance on the related deferred tax asset, had an unfavorable impact on the 2004
tax rate.



As further explained in Note 16, we are evaluating a possible
repatriation of foreign earnings to the U.S. in order to take advantage of a one-time deduction of 85% of certain foreign earnings that are repatriated, as defined in the American Jobs Creation Act (the ACJA). No deferred tax liability
will be recorded for the possible repatriation until such time as we make an affirmative decision to repatriate said earnings.



Net loss of $109.1 million in the fourth quarter of 2004 compared to net loss of $2.2 million in the fourth quarter of 2003.





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Report of Independent Registered Public Accounting Firm



The Board of Directors and Shareholders,

Armstrong Holdings, Inc.:



We have audited the accompanying consolidated financial statements of Armstrong Holdings, Inc. and subsidiaries (the Company) as listed in the accompanying index on page 50. In connection with our audits
of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index on page 50. These consolidated financial statements and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 financial position of Armstrong Holdings, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set forth therein.



The accompanying consolidated financial statements and financial statement schedule have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 of the consolidated financial
statements, three of the Companys domestic subsidiaries, including Armstrong World Industries, Inc., the Companys major operating subsidiary, filed separate voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court on December 6, 2000. Armstrong World Industries, Inc. has also defaulted on certain debt obligations. Although these operating subsidiaries are currently operating their businesses as debtors-in-possession
under the jurisdiction of the Bankruptcy Court, the continuation of their businesses as going concerns is contingent upon, among other things, the ability to formulate a plan of reorganization which will gain approval of the creditors and
confirmation by the Bankruptcy Court. The filing under Chapter 11 and the resulting increased uncertainty regarding the Companys potential asbestos liabilities, as discussed in Note 32 of the consolidated financial statements, raise
substantial doubt about the Companys ability to continue as a going concern. The accompanying consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of these
uncertainties.



|                          
|--------------------------
|/s/ KPMG LLP              
|                          
|Philadelphia, Pennsylvania
|March 14, 2005            



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Armstrong Holdings, Inc., and Subsidiaries

Consolidated Statements of Earnings

(amounts in millions, except per share amounts)



|                                                                                                                                         |  |                          |         |   |      |   |         |      |  |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                                                                         |  | Years Ended December 31, |        
|                                                                                                                                         |  | 2004                     |         |   | 2003 |   |         | 2002 | 
|Net sales                                                                                                                                |  | $                        | 3,497.3 |   |      | $ | 3,259.0 |      |  | $ | 3,172.3  |  
|Cost of goods sold                                                                                                                       |  |                          | 2,811.0 |   |      |   | 2,597.4 |      |  |   | 2,404.5  |  
|                                                                                                                                         |  |                          |         |   |      |   |         |      |  |   |          |  
|Gross profit                                                                                                                             |  |                          | 686.3   |   |      |   | 661.6   |      |  |   | 767.8    |  
|                                                                                                                                         |  |                          |        
|Selling, general and administrative expenses                                                                                             |  |                          | 635.0   |   |      |   | 612.1   |      |  |   | 630.8    |  
|Charge for asbestos liability, net                                                                                                       |  |                          |        |   |      |   | 81.0    |      |  |   | 2,500.0  |  
|Goodwill impairment                                                                                                                      |  |                          | 108.4   |   |      |   |        |      |  |   |         |  
|Restructuring and reorganization charges, net                                                                                            |  |                          | 18.3    |   |      |   | 8.6     |      |  |   | 1.9      |  
|Equity (earnings) from joint venture                                                                                                     |  |                          | (31.6   | ) |      |   | (20.8   | )    |  |   | (19.7    | )
|                                                                                                                                         |  |                          |         |   |      |   |         |      |  |   |          |  
|Operating (loss)                                                                                                                         |  |                          | (43.8   | ) |      |   | (19.3   | )    |  |   | (2,345.2 | )
|                                                                                                                                         |  |                          |        
|Interest expense (unrecorded contractual interest of $86.9, $95.1 and $99.9, respectively)                                               |  |                          | 8.4     |   |      |   | 9.0     |      |  |   | 11.3     |  
|Other non-operating expense                                                                                                              |  |                          | 3.1     |   |      |   | 5.7     |      |  |   | 3.6      |  
|Other non-operating (income)                                                                                                             |  |                          | (6.4    | ) |      |   | (5.0    | )    |  |   | (7.5     | )
|Chapter 11 reorganization costs, net                                                                                                     |  |                          | 6.9     |   |      |   | 9.4     |      |  |   | 23.5     |  
|                                                                                                                                         |  |                          |         |   |      |   |         |      |  |   |          |  
|(Loss) from continuing operations before income taxes and cumulative effect of a change in accounting principle                          |  |                          | (55.8   | ) |      |   | (38.4   | )    |  |   | (2,376.1 | )
|Income tax expense (benefit)                                                                                                             |  |                          | 24.6    |   |      |   | (1.6    | )    |  |   | (827.8   | )
|                                                                                                                                         |  |                          |         |   |      |   |         |      |  |   |          |  
|(Loss) from continuing operations before cumulative effect of a change in accounting principle                                           |  |                          | (80.4   | ) |      |   | (36.8   | )    |  |   | (1,548.3 | )
|Cumulative effect of a change in accounting principle, net of tax of $2.2                                                                |  |                          |        |   |      |   |        |      |  |   | (593.8   | )
|                                                                                                                                         |  |                          |         |   |      |   |         |      |  |   |          |  
|(Loss) from continuing operations                                                                                                        |  |                          | (80.4   | ) |      |   | (36.8   | )    |  |   | (2,142.1 | )
|(Loss) from discontinued operations, net of tax of $0.2, $0.1 and $0.0                                                                   |  |                          | (0.4    | ) |      |   | (2.5    | )    |  |   | (0.7     | )
|                                                                                                                                         |  |                          |         |   |      |   |         |      |  |   |          |  
|Net (loss)                                                                                                                               |  | $                        | (80.8   | ) |      | $ | (39.3   | )    |  | $ | (2,142.8 | )
|                                                                                                                                         |  |                          |         |   |      |   |         |      |  |   |          |  
|(Loss) per share of common stock, continuing operations before cumulative effect of a change in accounting principle, basic and
diluted: |  | $                        | (1.99   | ) |      | $ | (0.91   | )    |  | $ | (38.23   | )
|                                                                                                                                         |  |                          |        
|(Loss) per share of common stock, cumulative effect of a change in accounting principle, basic and diluted:                              |  |                          |        |   |      |   |        |      |  | $ | (14.66   | )
|                                                                                                                                         |  |                          |        
|(Loss) per share of common stock, discontinued operations, basic and diluted:                                                            |  | $                        | (0.01   | ) |      | $ | (0.06   | )    |  | $ | (0.02    | )
|                                                                                                                                         |  |                          |        
|Net (loss) per share of common stock, basic and diluted:                                                                                 |  | $                        | (2.00   | ) |      | $ | (0.97   | )    |  | $ | (52.91   | )
|                                                                                                                                         |  |                          |        
|Average number of common shares outstanding, basic and diluted:                                                                          |  |                          | 40.5    |   |      |   | 40.5    |      |  |   | 40.5     |  



See accompanying notes
to consolidated financial statements beginning on page 58.



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Consolidated Balance Sheets

(amounts in millions, except share data)



|                                                                                                                     |  |                  |          |   |                  |   |          |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                     |  | December 31,2004 |          |   | December 31,2003 |  
|Assets                                                                                                               |  |                  |          |   |                  |   |          |  
|Current assets:                                                                                                      |  |                  |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                            |  | $                | 515.9    |   |                  | $ | 484.3    |  
|Accounts and notes receivable, net                                                                                   |  |                  | 336.1    |   |                  |   | 315.4    |  
|Inventories, net                                                                                                     |  |                  | 529.2    |   |                  |   | 454.4    |  
|Deferred income taxes                                                                                                |  |                  | 15.6     |   |                  |   | 19.2     |  
|Income tax receivable                                                                                                |  |                  | 7.0      |   |                  |   |         |  
|Other current assets                                                                                                 |  |                  | 78.4     |   |                  |   | 85.5     |  
|                                                                                                                     |  |                  |          |   |                  |   |          |  
|Total current assets                                                                                                 |  |                  | 1,482.2  |   |                  |   | 1,358.8  |  
|                                                                                                                     |  |                 
|Property, plant and equipment, less accumulated depreciation and amortization of $1,540.7 and $1,434.8, respectively |  |                  | 1,208.8  |   |                  |   | 1,267.3  |  
|                                                                                                                     |  |                 
|Insurance receivable for asbestos-related liabilities, noncurrent                                                    |  |                  | 88.8     |   |                  |   | 95.1     |  
|Prepaid pension costs                                                                                                |  |                  | 480.9    |   |                  |   | 455.1    |  
|Investment in affiliates                                                                                             |  |                  | 72.5     |   |                  |   | 48.9     |  
|Goodwill                                                                                                             |  |                  | 136.0    |   |                  |   | 244.1    |  
|Other intangibles, net                                                                                               |  |                  | 76.0     |   |                  |   | 79.0     |  
|Deferred income taxes, noncurrent                                                                                    |  |                  | 941.6    |   |                  |   | 988.3    |  
|Other noncurrent assets                                                                                              |  |                  | 122.6    |   |                  |   | 111.2    |  
|                                                                                                                     |  |                  |          |   |                  |   |          |  
|Total assets                                                                                                         |  | $                | 4,609.4  |   |                  | $ | 4,647.8  |  
|                                                                                                                     |  |                  |          |   |                  |   |          |  
|Liabilities and Shareholders Equity                                                                                 |  |                  |          |   |                  |   |          |  
|Current liabilities:                                                                                                 |  |                  |          |   |                  |   |          |  
|Short-term debt                                                                                                      |  | $                | 11.1     |   |                  | $ | 3.9      |  
|Current installments of long-term debt                                                                               |  |                  | 8.2      |   |                  |   | 8.2      |  
|Accounts payable and accrued expenses                                                                                |  |                  | 447.4    |   |                  |   | 354.2    |  
|Income tax payable                                                                                                   |  |                  | 20.3     |   |                  |   | 45.9     |  
|Deferred income taxes                                                                                                |  |                  | 1.1      |   |                  |   | 3.3      |  
|                                                                                                                     |  |                  |          |   |                  |   |          |  
|Total current liabilities                                                                                            |  |                  | 488.1    |   |                  |   | 415.5    |  
|                                                                                                                     |  |                 
|Liabilities subject to compromise                                                                                    |  |                  | 4,866.2  |   |                  |   | 4,858.5  |  
|                                                                                                                     |  |                 
|Long-term debt, less current installments                                                                            |  |                  | 29.2     |   |                  |   | 39.4     |  
|Postretirement and postemployment benefit liabilities                                                                |  |                  | 262.6    |   |                  |   | 262.3    |  
|Pension benefit liabilities                                                                                          |  |                  | 258.9    |   |                  |   | 216.4    |  
|Other long-term liabilities                                                                                          |  |                  | 87.6     |   |                  |   | 81.2     |  
|Deferred income taxes, noncurrent                                                                                    |  |                  | 19.2     |   |                  |   | 95.0     |  
|Minority interest in subsidiaries                                                                                    |  |                  | 9.3      |   |                  |   | 9.7      |  
|                                                                                                                     |  |                  |          |   |                  |   |          |  
|Total noncurrent liabilities                                                                                         |  |                  | 5,533.0  |   |                  |   | 5,562.5  |  
|                                                                                                                     |  |                 
|Shareholders equity (deficit):                                                                                      |  |                  |          |   |                  |   |          |  
|Common stock, $1 par value per share Authorized 200 million shares; issued 51,878,910 shares                         |  |                  | 51.9     |   |                  |   | 51.9     |  
|Capital in excess of par value                                                                                       |  |                  | 167.7    |   |                  |   | 167.9    |  
|Reduction for ESOP loan guarantee                                                                                    |  |                  | (142.2   | ) |                  |   | (142.2   | )
|Accumulated deficit                                                                                                  |  |                  | (1,018.6 | ) |                  |   | (937.8   | )
|Accumulated other comprehensive income                                                                               |  |                  | 42.8     |   |                  |   | 43.3     |  
|Less common stock in treasury, at cost 2004 and 2003  11,210,018 shares                                             |  |                  | (513.3   | ) |                  |   | (513.3   | )
|                                                                                                                     |  |                  |          |   |                  |   |          |  
|Total shareholders (deficit)                                                                                        |  |                  | (1,411.7 | ) |                  |   | (1,330.2 | )
|                                                                                                                     |  |                  |          |   |                  |   |          |  
|Total liabilities and shareholders equity                                                                           |  | $                | 4,609.4  |   |                  | $ | 4,647.8  |  
|                                                                                                                     |  |                  |          |   |                  |   |          |  



See accompanying notes to consolidated
financial statements beginning on page 58.



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Armstrong Holdings, Inc., and Subsidiaries

Consolidated Statements of Shareholders Equity

(amounts in millions, except per
share amounts)



|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|---------------------------------------------- |  | ---- | -------- | - | ---- | - | ----- | ---- |  | - | -------- | - |  | - | ----- | - |  | - | -------- | - |  | - | -------- | -
|                                               |  | 2004 |          |   | 2003 |   |       | 2002 | 
|Common stock, $1 par value:                    |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Balance at beginning and end of year           |  | $    | 51.9     |   |      |   |       |      |  | $ | 51.9     |   |  |   |       |   |  | $ | 51.9     |   |  |   |          |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Capital in excess of par value:                |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Balance at beginning of year                   |  | $    | 167.9    |   |      |   |       |      |  | $ | 167.6    |   |  |   |       |   |  | $ | 166.8    |   |  |   |          |  
|Stock issuances and other                      |  |      | (0.2     | ) |      |   |       |      |  |   | 0.3      |   |  |   |       |   |  |   | 0.8      |   |  |   |          |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Balance at end of year                         |  | $    | 167.7    |   |      |   |       |      |  | $ | 167.9    |   |  |   |       |   |  | $ | 167.6    |   |  |   |          |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Reduction for ESOP loan guarantee:             |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Balance at beginning and end of year           |  | $    | (142.2   | ) |      |   |       |      |  | $ | (142.2   | ) |  |   |       |   |  | $ | (142.2   | ) |  |   |          |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Retained earnings (accumulated deficit):       |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Balance at beginning of year                   |  | $    | (937.8   | ) |      |   |       |      |  | $ | (898.5   | ) |  |   |       |   |  | $ | 1,244.3  |   |  |   |          |  
|Net (loss) for year                            |  |      | (80.8    | ) |      | $ | (80.8 | )    |  |   | (39.3    | ) |  | $ | (39.3 | ) |  |   | (2,142.8 | ) |  | $ | (2,142.8 | )
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Balance at end of year                         |  | $    | (1,018.6 | ) |      |   |       |      |  | $ | (937.8   | ) |  |   |       |   |  | $ | (898.5   | ) |  |   |          |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Accumulated other comprehensive income (loss): |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Balance at beginning of year                   |  | $    | 43.3     |   |      |   |       |      |  | $ | (12.2    | ) |  |   |       |   |  | $ | (47.1    | ) |  |   |          |  
|Foreign currency translation adjustments       |  |      | 22.4     |   |      |   |       |      |  |   | 56.8     |   |  |   |       |   |  |   | 37.7     |   |  |   |          |  
|Derivative gain (loss), net                    |  |      | 0.3      |   |      |   |       |      |  |   | (0.3     | ) |  |   |       |   |  |   | 6.9      |   |  |   |          |  
|Minimum pension liability adjustments          |  |      | (23.2    | ) |      |   |       |      |  |   | (1.0     | ) |  |   |       |   |  |   | (9.7     | ) |  |   |          |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Total other comprehensive income (loss)        |  |      | (0.5     | ) |      |   | (0.5  | )    |  |   | 55.5     |   |  |   | 55.5  |   |  |   | 34.9     |   |  |   | 34.9     |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Balance at end of year                         |  | $    | 42.8     |   |      |   |       |      |  | $ | 43.3     |   |  |   |       |   |  | $ | (12.2    | ) |  |   |          |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Comprehensive income (loss)                    |  |      |          |   |      | $ | (81.3 | )    |  |   |          |   |  | $ | 16.2  |   |  |   |          |   |  | $ | (2,107.9 | )
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Less treasury stock at cost:                   |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Balance at beginning and end of year           |  | $    | (513.3   | ) |      |   |       |      |  | $ | (513.3   | ) |  |   |       |   |  | $ | (513.3   | ) |  |   |          |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Total shareholders (deficit)                  |  | $    | (1,411.7 | ) |      |   |       |      |  | $ | (1,330.2 | ) |  |   |       |   |  | $ | (1,346.7 | ) |  |   |          |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  



See accompanying notes
to consolidated financial statements beginning on page 58.



56



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Consolidated Statements of Cash Flows



|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ----- | ---- |  | - | -------- | -
|                                                                                  |  | Year Ended December 31, |       
|                                                                                  |  | 2004                    |        |   | 2003 |   |       | 2002 | 
|Cash flows from operating activities:                                             |  |                         |        |   |      |   |       |      |  |   |          |  
|Net (loss)                                                                        |  | $                       | (80.8  | ) |      | $ | (39.3 | )    |  | $ | (2,142.8 | )
|Adjustments to reconcile net (loss) to net cash provided by operating activities: |  |                         |        |   |      |   |       |      |  |   |          |  
|Cumulative effect of change in accounting principle, net                          |  |                         |       |   |      |   |      |      |  |   | 593.8    |  
|Depreciation and amortization                                                     |  |                         | 151.0  |   |      |   | 163.1 |      |  |   | 136.7    |  
|Goodwill impairment                                                               |  |                         | 108.4  |   |      |   |      |      |  |   |         |  
|Fixed asset impairments                                                           |  |                         | 64.7   |   |      |   | 10.5  |      |  |   |         |  
|Deferred income taxes                                                             |  |                         | (22.4  | ) |      |   | (51.5 | )    |  |   | (870.4   | )
|Equity (earnings) from affiliates, net                                            |  |                         | (33.5  | ) |      |   | (20.7 | )    |  |   | (21.7    | )
|Chapter 11 reorganization costs, net                                              |  |                         | 6.9    |   |      |   | 9.4   |      |  |   | 23.5     |  
|Chapter 11 reorganization costs payments                                          |  |                         | (15.9  | ) |      |   | (25.8 | )    |  |   | (23.0    | )
|Restructuring and reorganization charges, net of reversals                        |  |                         | 18.3   |   |      |   | 8.6   |      |  |   | 1.9      |  
|Restructuring and reorganization payments                                         |  |                         | (4.1   | ) |      |   | (8.7  | )    |  |   | (2.1     | )
|Asbestos-related insurance recoveries                                             |  |                         | 4.5    |   |      |   | 31.0  |      |  |   | 16.0     |  
|Payments for asbestos-related claims                                              |  |                         |       |   |      |   | (9.0  | )    |  |   |         |  
|Charge for asbestos liability, net                                                |  |                         |       |   |      |   | 81.0  |      |  |   | 2,500.0  |  
|Cash effect of hedging activities                                                 |  |                         | 1.1    |   |      |   | (27.0 | )    |  |   | (22.0    | )
|Increase (decrease) in cash from change in:                                       |  |                         |        |   |      |   |       |      |  |   |          |  
|Receivables                                                                       |  |                         | (9.5   | ) |      |   | 40.6  |      |  |   | 11.7     |  
|Inventories                                                                       |  |                         | (61.7  | ) |      |   | 6.6   |      |  |   | 18.1     |  
|Other current assets                                                              |  |                         | 11.8   |   |      |   | (4.6  | )    |  |   | (16.1    | )
|Other noncurrent assets                                                           |  |                         | (34.8  | ) |      |   | (18.6 | )    |  |   | (42.0    | )
|Accounts payable and accrued expenses                                             |  |                         | 61.1   |   |      |   | (15.6 | )    |  |   | 29.0     |  
|Income taxes payable                                                              |  |                         | (29.8  | ) |      |   | 21.9  |      |  |   | 0.2      |  
|Other long-term liabilities                                                       |  |                         | 3.5    |   |      |   | 4.0   |      |  |   | 11.9     |  
|Other, net                                                                        |  |                         | 4.0    |   |      |   | 9.9   |      |  |   | 20.8     |  
|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  
|Net cash provided by operating activities                                         |  |                         | 142.8  |   |      |   | 165.8 |      |  |   | 223.5    |  
|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  
|Cash flows from investing activities:                                             |  |                         |        |   |      |   |       |      |  |   |          |  
|Purchases of property, plant and equipment and computer software                  |  |                         | (134.0 | ) |      |   | (78.1 | )    |  |   | (125.1   | )
|Distributions from equity affiliates                                              |  |                         | 10.0   |   |      |   | 16.0  |      |  |   | 17.5     |  
|Proceeds from the sale of assets                                                  |  |                         | 12.3   |   |      |   | 4.9   |      |  |   | 3.5      |  
|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  
|Net cash (used for) investing activities                                          |  |                         | (111.7 | ) |      |   | (57.2 | )    |  |   | (104.1   | )
|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  
|Cash flows from financing activities:                                             |  |                         |        |   |      |   |       |      |  |   |          |  
|Increase/(decrease) in short-term debt, net                                       |  |                         | 4.0    |   |      |   | (5.3  | )    |  |   | (13.9    | )
|Payments of long-term debt                                                        |  |                         | (9.8   | ) |      |   | (8.2  | )    |  |   | (9.0     | )
|Other, net                                                                        |  |                         | (1.2   | ) |      |   | (0.6  | )    |  |   | (0.9     | )
|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  
|Net cash (used for) financing activities                                          |  |                         | (7.0   | ) |      |   | (14.1 | )    |  |   | (23.8    | )
|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  
|Effect of exchange rate changes on cash and cash equivalents                      |  |                         | 7.5    |   |      |   | 9.8   |      |  |   | 7.0      |  
|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  
|Net increase in cash and cash equivalents                                         |  | $                       | 31.6   |   |      | $ | 104.3 |      |  | $ | 102.6    |  
|Cash and cash equivalents at beginning of year                                    |  | $                       | 484.3  |   |      | $ | 380.0 |      |  | $ | 277.4    |  
|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  
|Cash and cash equivalents at end of year                                          |  | $                       | 515.9  |   |      | $ | 484.3 |      |  | $ | 380.0    |  
|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  



See accompanying notes
to consolidated financial statements beginning on page 58.



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



NOTE 1. BUSINESS AND CHAPTER 11 REORGANIZATION



Armstrong World Industries, Inc. (AWI) is a Pennsylvania corporation incorporated in 1891. Armstrong Holdings, Inc. is a
Pennsylvania corporation and the publicly held parent holding company of AWI. Armstrong Holdings, Inc.s only significant asset and operation is its indirect ownership, through Armstrong Worldwide, Inc. (a Delaware Corporation) of all of the
capital stock of AWI. Due to the lack of material differences in the financial statements, when we refer in this document to AHI and its subsidiaries as AHI, Armstrong, we, us, and
ourselves, we are also effectively referring to AWI and its subsidiaries. We use the term AWI when we are referring solely to Armstrong World Industries, Inc.



Proceedings under Chapter 11



On December 6, 2000, AWI, the major operating subsidiary of AHI, filed a voluntary petition for relief (the Filing) under Chapter 11 of the U.S. Bankruptcy
Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court) in order to use the court-supervised reorganization process to achieve a resolution of the AWIs
asbestos-related liability. Also filing under Chapter 11 were two of AWIs wholly-owned subsidiaries, Nitram Liquidators, Inc. (Nitram) and Desseaux Corporation of North America, Inc. (Desseaux). The Chapter 11 cases are
being jointly administered under case number 00-4471 (the Chapter 11 Case). Shortly after its commencement, the Chapter 11 Case was assigned to Judge Randall J. Newsome. His appointment as a visiting judge in the District of Delaware
ended on December 31, 2003. On January 6, 2004, the Chapter 11 Case was reassigned to Judge Judith K. Fitzgerald.



AHI and all of AWIs other direct and indirect subsidiaries, including Armstrong Wood Products Inc. (formerly Triangle Pacific Corp.), WAVE (AWIs ceiling grid
systems joint venture with Worthington Industries, Inc.), Armstrong Canada, and Armstrong DLW AG, were not a part of the Filing and accordingly, except for any asbestos-related liability that also relates, directly or indirectly, to the pre-Filing
activities of AWI, the liabilities, including asbestos-related liability if any, of such companies will not be resolved in AWIs Chapter 11 Case. See below under The Asbestos Personal Injury Trust and Note 32 under
Asbestos-Related Litigation.



AWI is operating its business and
managing its properties as a debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims or obligations which arose prior to the Filing date
(prepetition claims) unless specifically authorized by the Bankruptcy Court. Similarly, claimants may not enforce any claims against AWI that arose prior to the date of the Filing unless specifically authorized by the Bankruptcy Court. In addition,
as a debtor-in-possession, AWI has the right, subject to the Bankruptcy Courts approval, to assume or reject any executory contracts and unexpired leases in existence at the date of the Filing. Some of these have been specifically assumed and
others have been specifically rejected already in the course of the Chapter 11 Case. In the plan of reorganization which it has proposed, as described below, AWI has indicated the other executory contracts and unexpired leases that it intends to
assume or reject upon consummation of the plan; any not specifically assumed under the plan will be rejected upon consummation of the plan. Parties having claims as a result of the rejection of a contract may file claims with the Bankruptcy Court,
which will be dealt with as part of the Chapter 11 Case.

|
|



Three creditors
committees, one representing asbestos personal injury claimants (the Asbestos Personal Injury Claimants Committee), one representing asbestos property damage claimants (the Asbestos Property Damage Committee), and the
other representing other unsecured creditors (the Unsecured Creditors Committee), were appointed in the Chapter 11 Case. In addition, an individual was appointed to represent the interests of future asbestos personal injury
claimants (the Future Claimants Representative). In accordance with the provisions of the Bankruptcy Code, these parties have the right to be heard on matters that come before the Bankruptcy Court in the Chapter 11 Case. Upon
resolution of all asbestos property damage claims, the Asbestos Property Damage Committee was disbanded.



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Plan of Reorganization and Disclosure Statement



On November 4, 2002, AWI filed a Plan of Reorganization with the Bankruptcy Court. Subsequently, AWI filed several amendments to the plan,
along with various exhibits. The Fourth Amended Plan of Reorganization, with certain exhibits, was filed on May 23, 2003 and, as so amended and as modified by modifications filed with the Bankruptcy Court on October 17, 2003, November 10, 2003 and
December 3, 2004, is referred to in this report as the POR. The POR provides for AWI to continue to conduct its existing lines of business with a reorganized capital structure under which, among other things, its existing shares of stock
will be cancelled and new common shares and notes will be issued to its unsecured creditors and to a trust, as further discussed below, to be established under the POR for the benefit of AWIs current and future asbestos-related personal injury
claimants, in full satisfaction of their claims against AWI. References in this report to reorganized Armstrong are to AWI as it would be reorganized under the POR, and its subsidiaries collectively. The POR excludes AWIs Nitram
and Desseaux subsidiaries, neither of which is material to Armstrong and which are pursuing separate resolutions of their Chapter 11 cases that are expected to result in the winding up of their affairs.



In connection with the vote of creditors on the POR, AWI was required to prepare a disclosure
statement concerning its business and the POR, including certain projected financial information assuming an Effective Date of the POR as July 1, 2003, intended to demonstrate to the Bankruptcy Court the feasibility of the POR and AWIs ability
to continue operations upon its emergence from Chapter 11. On May 30, 2003, the Bankruptcy Court approved the disclosure statement for distribution to parties in interest in the Chapter 11 Case. The projected financial information included in the
disclosure statement was updated in certain respects by information submitted to the Bankruptcy Court in connection with the Bankruptcy Courts November 2003 hearing on confirmation of the POR. The projected financial information was prepared
for the limited purposes of consideration by the Bankruptcy Court, creditors and other parties in interest in the Chapter 11 Case of matters pertinent to the case. As indicated in the disclosure statement, the projected financial information and
various estimates of value therein provided should not be regarded as representations or warranties by AWI, AHI or any other person. There is no assurance that any such projection or valuation will be realized. The projected financial information
and estimates of value were prepared by AWI and its financial advisors and have not been audited or reviewed by independent accountants. The projections will not be updated on an ongoing basis. At the time they were prepared in 2003, the projections
reflected numerous assumptions concerning reorganized Armstrongs anticipated future performance and with respect to prevailing and anticipated market and economic conditions, which were and remain beyond our control and which may not
materialize. Projections are inherently subject to significant and numerous uncertainties and to a wide variety of significant business, economic and competitive risks and the assumptions underlying the projections may be wrong in a material
respect. Actual results may vary significantly from those contemplated by the projections.



During 2003, the POR was submitted for a vote by AWIs creditors for its approval. It was approved by each creditor class that was entitled to vote on the POR except the class of unsecured creditors. On November
17 and 18, 2003, the Bankruptcy Court held a hearing on confirmation of the Plan and on December 19, 2003, issued proposed findings of fact and conclusions of law and a proposed order confirming the POR, notwithstanding the rejection of the POR by
the class of unsecured creditors. On December 29, 2003, the Unsecured Creditors Committee filed an objection to the Bankruptcy Courts proposed findings of fact and conclusions of law and the proposed order of confirmation of the POR.



In order for the POR to be confirmed, the U.S. District Court must also issue
findings of fact and conclusions of law in support of confirmation of the POR, enter or affirm an order confirming the POR and issue the 524(g) injunction which is part of the POR.



Recent Developments and Next Steps in the Chapter 11 Process



Following procedural delays concerning the status of the prior U.S. District Court judge on
AWIs Chapter 11 Case, the AWI case was assigned to U.S. District Court Judge Eduardo C. Robreno in June 2004. A hearing was held before Judge Robreno on December 15, 2004 to consider the objections to confirmation of the POR. On February 23,
2005, Judge Robreno ruled that the POR could not be confirmed. In the courts decision (which is available at www.armstrongplan.com), the Judge found that, because the class of



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



unsecured creditors voted to reject the POR, the distribution of warrants to existing equity holders under the POR violated the absolute priority rule.



AWI filed a Notice of Appeal to the United States Court of Appeals for the
Third Circuit on March 4, 2005. On March 18, 2005, AWI filed a motion to expedite the appeal to the U.S. Court of Appeals. AWI is also reviewing other options to resolve its Chapter 11 Case. AWI is unable to predict whether the POR will be confirmed
or when AWI would emerge from Chapter 11.



Asbestos Personal Injury
Trust



A principal feature of the POR is the creation of a trust (the
Asbestos PI Trust), pursuant to section 524(g) of the Bankruptcy Code, for the purpose of addressing AWIs personal injury (including wrongful death) asbestos-related liability. All present and future asbestos-related personal
injury claims against AWI, including contribution claims of co-defendants, arising directly or indirectly out of AWIs pre-Filing use of or other activities involving asbestos will be channeled to the Asbestos PI Trust.



In accordance with the 524(g) injunction to be issued if the POR goes into effect
various entities would be protected from such present and future AWI asbestos-related personal injury claims. These entities include, among others, reorganized AWI, AHI, AWIs subsidiaries and other affiliates (as defined in the POR), and their
respective officers and directors. Upon emergence from Chapter 11, AWI would not have any responsibility for these claims (including claims against AWI based solely on its ownership of a subsidiary or other affiliate), nor would it participate in
their resolution.



However, although AWIs domestic and foreign
subsidiaries and other affiliates would be protected parties, asbestos-related personal injury claims against them would be channeled to the Asbestos PI Trust only to the extent such claims directly or indirectly relate to the pre-Filing
manufacturing, installation, distribution or other activities of AWI, or AWIs ownership of the subsidiaries or affiliates (as distinguished from independent activities of the subsidiaries or affiliates). See Note 32 under
Asbestos-Related Litigation.



In addition, workers
compensation claims brought against AWI or its subsidiaries or other affiliates would not be channeled to the Asbestos PI Trust and would remain subject to the workers compensation process. Workers compensation law provides that the
employer is responsible for evaluation, medical treatment and lost wages as a result of a job-related injury. Historically, workers compensation claims against AWI or its subsidiaries have not been significant in number or amount, and AWI has
continued to honor its obligations with respect to such claims during the Chapter 11 Case. Currently, AWI has three pending workers compensation claims, and its UK subsidiary has five employer liability claims involving alleged asbestos
exposure.



There also is uncertainty as to proceedings, if any, brought in
certain foreign jurisdictions with respect to the effect of the 524(g) injunction in precluding the assertion in such jurisdictions of asbestos-related personal injury claims, proceedings related thereto or the enforcement of judgments rendered in
such proceedings.



Management believes neither AWI nor its subsidiaries or
other affiliates is subject to asbestos-related personal injury claims, that would not be channeled to the Asbestos PI Trust under the POR, which would be material in amount to reorganized Armstrong.



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Consideration to Be Distributed under the POR (unaudited)



The Asbestos PI Trust and the holders of allowed unsecured claims would share in the
following consideration to be distributed under the POR:



| |  |  | AWIs Available Cash, which is defined in the POR as:
| | - |  | -------------------------------------------------------



| |  |  | Cash available on the effective date of the POR after reserving up to $100 million (as determined by AWI) to fund ongoing operations and making provisions for certain required
payments under the POR,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Any cash drawn, at AWIs sole discretion, under a credit facility to be established as provided by the POR for the purpose of funding distributions under the POR, and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Certain insurance proceeds related to environmental matters
| | - |  | -----------------------------------------------------------



However, proceeds received under any private offering of debt securities and/or secured term loan borrowings made, as permitted by the POR, in connection
with consummation of the POR, and certain other amounts authorized or directed by the Court, would be excluded from the determination of Available Cash.



| |  |  | Plan Notes of AWI as further described below or net cash proceeds from any private offerings of debt securities issued in lieu thereof, and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Substantially all of the new common stock of AWI.
| | - |  | -------------------------------------------------



The total amount of Plan Notes would be the greater of (i) $1.125 billion less Available Cash and (ii) $775 million. However, AWI would use reasonable efforts to issue
one or more private offerings of debt securities on, or as soon as practicable after, the Effective Date. These offerings are expected to yield net proceeds at least equal to the amount of the Plan Notes prescribed by the Plan. If the private
offerings are successful, the Plan Notes would not be issued. If the offerings yield proceeds less than the amount of the Plan Notes prescribed by the Plan, Plan Notes equal to the difference will be issued. If only the Plan Notes are issued,
reorganized Armstrong expects to issue an aggregate amount of $775 million of Plan Notes. These Plan Notes would consist of (i) a tranche of notes with a seven-year maturity and a fixed interest rate, (ii) a tranche of notes with a ten-year maturity
and a fixed interest rate and (iii) a tranche of floating rate notes with a maturity of not less than five years, but no more than ten years, structured in a manner similar to, and as liquid as, marketable bank debt which satisfy the requirements of
the POR and are on terms and conditions that are satisfactory to AWI, the Asbestos Personal Injury Claimants Committee, and the Future Claimants Representative. To the extent Plan Notes of more than one type are issued, a pro rata share
of each tranche would be issued to the Asbestos PI Trust and the holders of unsecured claims.



The POR provides that unsecured creditors, other than convenience creditors described below, would receive their pro rata share of:



| |  |  | 34.43% of the new common stock of reorganized Armstrong,
| | - |  | --------------------------------------------------------



| |  |  | 34.43% of the first $1.05 billion of all the cash and Plan Notes to be distributed under the POR to unsecured creditors (other than convenience creditors) and the Asbestos PI Trust,
in the form of:
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Up to $300 million of Available Cash and
| | - |  | ----------------------------------------



| |  |  | The balance in principal amount of Plan Notes or in net cash proceeds from any private offerings of debt securities made in lieu of issuing Plan Notes.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 60% of the next $50 million of Available Cash but, if such Available Cash is less than $50 million, then 60% of the balance in Plan Notes or in net cash proceeds from any private
offerings of debt securities made in lieu of issuing Plan Notes, and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 34.43% of the remaining amount of any Available Cash and any Plan Notes up to the maximum amount of Plan Notes provided to be issued under the POR, or net cash proceeds from any
private offerings of debt securities made in lieu of issuing such Plan Notes.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The remaining amount of new common stock of reorganized Armstrong, Available Cash and Plan Notes or net cash proceeds from any private offerings of debt securities made in lieu of issuing Plan Notes would be
distributed to the Asbestos PI Trust.



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Under the POR, unsecured creditors whose claims (other than claims on debt securities) are less than $10 thousand or
who elect to reduce their claims to $10 thousand would be treated as convenience creditors and would receive payment of 75% of their allowed claim amount in cash (which payments would reduce the amount of Available Cash).



Under the POR, the existing equity interests in AWI (including all of its outstanding shares
of common stock) would be cancelled. The POR provides for the distribution of warrants to purchase shares of reorganized Armstrong (the Warrants) to the holders of AWIs existing common stock. The terms of the Warrants are provided
in an exhibit to the POR. The Warrants:



| |  |  | would permit the purchase of 5% of the common stock of reorganized Armstrong on a fully diluted basis, upon exercise of all the Warrants;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | would be exercisable at any time during the seven years after the effective date of the POR; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | would permit the purchase of shares at an exercise price of $37.50, which is equal to 125% of the $30.00 per share equity value of reorganized Armstrong, as agreed among the
financial advisers for AWI, the Asbestos Personal Injury Claimants Committee, the Unsecured Creditors Committee, and the Future Claimants Representative, as set forth in the Bankruptcy Court-approved disclosure statement for the
POR (as further described below).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Whether any value would be
realized from the Warrants would depend on whether the market value of reorganized Armstrongs new common stock reaches a value in excess of the exercise price of the Warrants during the period that they may be exercised.



AHIs shareholders were not entitled to vote on the POR. However, AHIs
shareholders were sent the Disclosure Statement and POR. If the POR is implemented, the only value that would be available to AHI shareholders is their ratable share of the Warrants available upon the contemplated dissolution of AHI. See AHIs
Plan of Dissolution below. As discussed above, however, on February 23, 2005, the U.S. District Court entered an order denying confirmation of the POR. In the courts decision (which is available at www.armstrongplan.com), the Judge
found that, because the class of unsecured creditors voted to reject the POR, the distribution of warrants to existing equity holders under the POR violated the absolute priority rule.



Valuation of Consideration to be Distributed under the POR (unaudited)



Based upon many assumptions (see Disclosure Statement discussion above), to calculate the value of consideration to be distributed, AWI used
$2.7 billion as the value of reorganized Armstrong. This is the mid-point of the range of estimated values of $2.4 billion and $3.0 billion that was estimated by AWI and its financial advisors during the third quarter of 2003. AWIs estimated
value of the consideration to be distributed under the POR to the Asbestos PI Trust, holders of allowed unsecured claims and AWIs existing common stock, is:



| |  |  | New common stock at $30 a share, which is the approximate mid-point of the range of estimated values of $24.66 and $35.30 per share, assuming a distribution of 56.4 million shares
of new common stock to holders of unsecured claims and the Asbestos PI Trust;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Plan Notes in the aggregate principal amount of $775 million, that are worth their face value;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | Available Cash of approximately $350 million that AWI expects to have; and
| | - |  | --------------------------------------------------------------------------



| |  |  | Warrants with an estimated value of between $35 million and $40 million.
| | - |  | ------------------------------------------------------------------------



The total value of the consideration to be distributed to the Asbestos PI Trust, other than rights under asbestos non-product liability insurance policies, has been
estimated to be approximately $1.8 billion, and the total value of consideration to be distributed to holders of allowed unsecured claims (other than convenience claims) has been estimated to be approximately $0.9 billion. Based upon the estimated
value of the POR consideration, and upon AWIs estimate that unsecured claims allowed by the Bankruptcy Court (other than convenience claims) would total approximately $1.65 billion, AWI estimated that holders of allowed unsecured claims (other
than convenience claims) would receive a recovery having a value equal to approximately 59.5% of their allowed claims.



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



AHIs Plan of Dissolution, Winding Up and Distribution (Plan of Dissolution)



In connection with the implementation of the POR, the Warrants would be issued to AHI (or a
wholly-owned subsidiary of AHI). The Board of Directors of AHI has determined that it is not practicable for AHI to continue in operation as an on-going business owning the Warrants, which would then be AHIs only asset. Accordingly, the Board
of Directors of AHI approved and recommended to AHI shareholders the Plan of Dissolution, whereby AHI would voluntarily dissolve and wind up its affairs in accordance with Pennsylvania law and, subject to completion of AHIs winding up
(including the satisfaction of any liabilities of AHI), distribute any remaining Warrants to the shareholders. At a special meeting of AHI shareholders on January 7, 2004, the Plan of Dissolution was approved. The POR provides that AWI would pay the
costs and expenses incurred in connection with administering AHIs Plan of Dissolution.



Common Stock and Debt Securities



As a
result of AWI filing the Plan of Reorganization on November 4, 2002, the New York Stock Exchange stopped trading on the Exchange of the common stock of AHI (traded under the ticker symbol ACK) and two debt securities of AWI (traded under
the ticker symbols AKK and ACK 08). AHIs common stock resumed trading in the over-the-counter (OTC) Bulletin Board under the ticker symbol ACKHQ and one of AWIs debt securities resumed trading under
the ticker symbol AKKWQ.



Bar Date for Filing Claims



The Bankruptcy Court established August 31, 2001 as the bar date for all
claims against AWI except for asbestos-related personal injury claims and certain other specified claims. A bar date is the date by which claims against AWI must be filed if the claimants wish to participate in any distribution in the Chapter 11
Case. A bar date for asbestos-related personal injury claims (other than claims for contribution, indemnification, or subrogation) has been rendered unnecessary under the terms of the POR, which defers the filings of such claims until the Asbestos
PI Trust is established to administer such claims.



Approximately 4,800 proofs
of claim (including late-filed claims) totaling approximately $6.3 billion, alleging a right to payment from AWI, were filed with the Bankruptcy Court in response to the August 31, 2001 bar date. The disposition of these claims under the POR is
discussed below. AWI continues the process of investigating and resolving these claims. The Bankruptcy Court will ultimately determine the claims and related liability amounts that will be allowed as part of the Chapter 11 process if the parties
cannot agree.



In its ongoing review of the filed claims, AWI to date has
objected to approximately 2,200 claims totaling $2.7 billion. The Bankruptcy Court disallowed these claims with prejudice.



During the first six months of 2003, AWI settled all of the approximately 460 remaining property damage claims that alleged damages of $800 million, for approximately $9
million. Payments to claimants were made during the third quarter of 2003 and were funded by insurance.



Approximately 1,100 proofs of claim totaling approximately $1.3 billion are pending with the Bankruptcy Court that are associated with asbestos-related personal injury litigation, including direct personal injury
claims, claims by co-defendants for contribution and indemnification, and claims relating to AWIs participation in the Center for Claims Resolution. As stated above, the bar date of August 31, 2001 did not apply to asbestos-related personal
injury claims other than claims for contribution, indemnification, or subrogation. The POR contemplates that all AWI asbestos-related personal injury claims, including claims for contribution, indemnification, or subrogation, will be addressed in
the future pursuant to the procedures relating to the Asbestos PI Trust developed in connection with the POR. See further discussion regarding AWIs liability for asbestos-related matters in Note 32.



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Approximately 1,100 claims totaling approximately $1.6 billion alleging a right to payment for financing,
environmental, trade debt and other claims remain. For these categories of claims, AWI has previously recorded approximately $1.6 billion in liabilities.



AWI has recorded liability amounts for claims that can be reasonably estimated and which it does not contest or believes are probable of being allowed by the Bankruptcy
Court. The final value of all the claims that will ultimately be allowed by the Bankruptcy Court is not known at this time. However, it is likely the value of the claims ultimately allowed by the Bankruptcy Court will be different than amounts
presently recorded by AWI. This difference could be material to AWIs financial position and the results of its operations. Management will continue to review the recorded liability in light of future developments in the Chapter 11 Case and
make changes to the recorded liability if and when it is appropriate.



Financing



AWI has a $75.0 million debtor-in-possession credit
facility that currently is limited to issuances of letters of credit. This facility was extended to December 8, 2005 with approval of the Bankruptcy Court, granted on November 15, 2004. As of December 31, 2004, AWI had approximately $40.6 million in
letters of credit, which were issued pursuant to the DIP Facility. As of December 31, 2004, AWI had $308.7 million of cash and cash equivalents, excluding cash held by its non-debtor subsidiaries. AWI believes that cash on hand and generated from
operations and dividends from its subsidiaries, together with subsidiary lines of credit and the DIP Facility, will be adequate to address its foreseeable liquidity needs. Obligations under the DIP Facility, including reimbursement of draws under
the letters of credit, if any, constitute superpriority administrative expense claims in the Chapter 11 Case.



Accounting Impact



AICPA Statement of
Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code (SOP 90-7) provides financial reporting guidance for entities that are reorganizing under the Bankruptcy Code. This guidance is
implemented in the accompanying consolidated financial statements.



Pursuant to
SOP 90-7, AWI is required to segregate pre-Filing liabilities that are subject to compromise and report them separately on the balance sheet. See Note 4 for detail of the liabilities subject to compromise at December 31, 2004 and December 31, 2003.
Liabilities that may be affected by a plan of reorganization are recorded at the expected amount of the allowed claims, even if they may be settled for lesser amounts. Substantially all of AWIs pre-Filing debt, now in default, is recorded at
face value and is classified within liabilities subject to compromise. Obligations of AWI subsidiaries not covered by the Filing remain classified on the consolidated balance sheet based upon maturity date. AWIs estimated liability for
asbestos-related personal injury claims is also recorded in liabilities subject to compromise. See Note 32 for further discussion of AWIs asbestos liability.



Additional pre-Filing claims (liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases,
or as a result of the allowance of contingent or disputed claims.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



SOP 90-7 also requires separate reporting of all revenues, expenses, realized gains and losses, and provision for
losses related to the Filing as Chapter 11 reorganization costs, net. Accordingly, AWI recorded the following Chapter 11 reorganization activities during 2004, 2003 and 2002:



|                                                  |  |      |      |   |      |   |       |      |  |   |      |  
|------------------------------------------------- |  | ---- | ---- | - | ---- | - | ----- | ---- |  | - | ---- | -
|                                                  |  | 2004 |      |   | 2003 |   |       | 2002 | 
|Professional fees                                 |  | $    | 11.5 |   |      | $ | 25.2  |      |  | $ | 27.8 |  
|Interest income, post-Filing                      |  |      | (4.8 | ) |      |   | (3.4  | )    |  |   | (3.5 | )
|Reductions to pre-Filing liabilities              |  |      |     |   |      |   | (12.9 | )    |  |   | (1.1 | )
|Other expense directly related to bankruptcy, net |  |      | 0.2  |   |      |   | 0.5   |      |  |   | 0.3  |  
|                                                  |  |      |      |   |      |   |       |      |  |   |      |  
|Total Chapter 11 reorganization costs, net        |  | $    | 6.9  |   |      | $ | 9.4   |      |  | $ | 23.5 |  
|                                                  |  |      |      |   |      |   |       |      |  |   |      |  



Professional fees represent legal and
financial advisory fees and expenses directly related to the Filing.



Interest
income is earned from short-term investments subsequent to the Filing.



Reductions to pre-Filing liabilities represent Bankruptcy Court approved settlements of prepetition liabilities. In 2003, AWI reached an agreement with the holder of a zero coupon note on the amount of its allowed claim. This agreement
reduced the previously accrued liability by $12.1 million.



As a result of the
Filing, realization of assets and liquidation of liabilities are subject to uncertainty. While operating as a debtor-in-possession, AWI may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those
reflected in the condensed consolidated financial statements.



If and when the
POR is confirmed and made effective, reorganized AWIs condensed consolidated financial statements will change materially in amounts and classifications through the implementation of the fresh start accounting rules of SOP 90-7.



Conclusion



AWI is unable to predict whether the POR will be confirmed or when AWI would emerge from Chapter 11. Therefore, the timing and terms of a
resolution of the Chapter 11 Case remain uncertain.



NOTE 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES



Consolidation Policy. The
consolidated financial statements and accompanying data in this report include the accounts of AHI and its majority-owned subsidiaries. The results of less than majority owned subsidiaries are accounted for under the equity method. All significant
intercompany transactions have been eliminated from the consolidated financial statements.



Use of Estimates. These financial statements are prepared in accordance with generally accepted accounting principles and include management estimates and judgments, where appropriate. Management utilizes
estimates to record many items including asbestos-related liabilities and insurance assets, allowances for bad debts, inventory obsolescence and lower of cost or market charges, warranty, workers compensation, general liability and environmental
claims. When preparing an estimate, management determines the amount based upon considering relevant information. Management may confer with outside parties, including outside counsel. Actual results may differ from these estimates.



Reclassifications. Certain amounts in the prior years consolidated financial
statements and notes thereto have been reclassified to conform to the 2004 presentation. These reclassifications were made to the consolidated statements of earnings and primarily consisted of reclassifying 2003 and 2002 amounts from other
non-operating income and other non-operating expense to selling, general and administrative (SG&A) expense and discontinued operations.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Revenue Recognition: We recognize revenue from the sale of products when persuasive evidence of an arrangement
exists, title and risk of loss transfers to the customers, prices are fixed and determinable, and it is reasonably assured the related accounts receivable is collectable. Our sales terms primarily are FOB shipping point. We have some sales terms
that are FOB destination. Our products are sold with normal and customary return provisions. Sales discounts are deducted immediately from the sales invoice. Provisions, which are recorded as a reduction of revenue, are made for the estimated cost
of rebates and promotional programs. We defer recognizing revenue if special sales agreements, established at the time of sale, warrant this treatment.



Sales Incentives.Sales incentives are reflected as a reduction of net sales for all periods presented.



Shipping and Handling Costs. Shipping and handling costs are reflected in cost of
goods sold for all periods presented.



Advertising Costs. We recognize
advertising expenses as they are incurred.



Pension and Postretirement
Benefits. We have benefit plans that provide for pension, medical and life insurance benefits to certain eligible employees when they retire from active service. Generally, our practice is to fund the actuarially determined current service costs
and the amounts necessary to amortize prior service obligations over periods ranging up to 30 years, but not in excess of the funding limitations.



Taxes. The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Deferred tax assets and
liabilities are recognized using enacted tax rates for expected future tax consequences of events recognized in the financial statements or tax returns. The provision for income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.



Earnings (loss) per Common Share. Basic earnings (loss) per share are computed by dividing the earnings (loss) by the weighted
average number of shares of common stock outstanding during the year. Diluted earnings (loss) per common share reflect the potential dilution of securities that could share in the earnings (loss). The diluted earnings (loss) per share computations
for all periods presented use the basic number of shares due to the loss from continuing operations.



Cash and Cash Equivalents. Cash and cash equivalents include cash on hand and short-term investments that have maturities of three months or less when purchased.



Concentration of Credit. We principally sell products to customers in the building
products industries, in various geographic regions. Net sales in excess of 10% of our consolidated net sales for 2004, 2003 and 2002 were:



|                       |  |      |       |   |      |   |       |  |   |       |  
|---------------------- |  | ---- | ----- | - | ---- | - | ----- |  | - | ----- | -
|Customer               |  | 2004 |       |   | 2003 |   | 2002  | 
|The Home Depot, Inc.   |  | $    | 393.4 |   |      | $ | 400.0 |  | $ | 380.3 |  
|Lowes Companies, Inc. |  |      | (1    | ) |      |   | 318.7 |  |   | (1    | )

---

|(1) | Net sales to Lowes Companies, Inc. were less than 10% of consolidated net sales.
|--- | ---------------------------------------------------------------------------------



Net sales to these customers were recorded in our Resilient Flooring, Wood Flooring and Building Products segments. No other customers
accounted for 10% or more of our total consolidated net sales.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



There are no significant concentrations of credit risk other than with two home center customers who represent 22% of
our trade receivables as of December 31, 2004 and 2003. We monitor the creditworthiness of our customers and generally do not require collateral.



Receivables.We sell the vast majority of our products to select, pre-approved customers using customary trade terms that allow for payment in the future. Customer
trade receivables, customer notes receivable and miscellaneous receivables (which include supply related rebates and claims to be received, unpaid insurance claims from litigation and other), net of allowances for doubtful accounts, are reported in
accounts and notes receivable, net. Notes receivable from divesting certain businesses in prior years are included in other current assets and other non-current assets based upon the payment terms. Insurance receivables for asbestos-related
liabilities are primarily non-current, with the current portion reported in other current assets.



We establish credit worthiness prior to extending credit. We estimate the recoverability of current and non-current receivables each period. This estimate is based upon triggering events and new information in the
period, which can include the review of any available financial statements and forecasts, as well as discussions with legal counsel and the management of the debtor company. Periodic changes to the allowances for doubtful accounts and/or impairment
charges are made to reflect our estimate.



Inventories. Inventories are
valued at the lower of cost or market. Inventories also include certain resilient flooring samples used in ongoing sales and marketing activities.



Property and Depreciation. Property, plant and equipment values are stated at acquisition cost less accumulated depreciation and amortization. Depreciation charges
for financial reporting purposes are determined on a straight-line basis at rates calculated to provide for the retirement of assets at the end of their useful lives. Machinery and equipment includes manufacturing equipment (depreciated over 3 to 20
years), computer equipment (3 to 5 years) and office furniture and equipment (5 to 10 years). Within manufacturing equipment, assets that are subject to quick obsolescence or wear out quickly, such as tooling and engraving equipment, are depreciated
over shorter periods (3 to 7 years). Heavy production equipment, such as conveyors and production presses, are depreciated over longer periods (15 to 20 years). Buildings are depreciated over 20 to 40 years, depending on factors such as type of
construction and use.



In accordance with Financial Accounting Standards Board
(FSAB) Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (FAS 144) effective January 1, 2002, impairment losses are recorded when indicators of impairment are present, such as
operating losses and/or negative cash flows. For purposes of calculating any impairment, we estimate the fair value and compare it to the carrying value of the asset. If the fair value is less than the carrying value of the asset, we record an
impairment equal to the difference between the fair value and carrying value of the asset. When assets are disposed of or retired, their costs and related depreciation are removed from the financial statements and any resulting gains or losses
normally are reflected in SG&A expenses.



Costs of the construction of
certain property include capitalized interest which is amortized over the estimated useful life of the related asset. There was no capitalized interest recorded in 2004, 2003 and 2002 due to the Chapter 11 Filing.



Goodwill and Other Intangibles. Effective January 1, 2002, we adopted FASB Statement
No. 142, Goodwill and Other Intangible Assets (FAS 142), which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Our
annual impairment test is performed in the fourth quarter. FAS 142 also requires that intangible assets with determinable useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for
impairment. See Note 12 for disclosure on goodwill and other intangibles.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Contingent Liabilities. In the context of the Chapter 11 Case, contingent liabilities, including claims that
became known after the Filing, are recorded on the basis of the expected amount of the allowed claim in accordance with SOP 90-7 as opposed to the amount for which a claim may be settled.



Foreign Currency Transactions. Assets and liabilities of our subsidiaries operating outside the United States, which account in a
functional currency other than US dollars, are translated using the year end exchange rate. Revenues and expenses are translated at exchange rates effective during each month. Foreign currency translation gains or losses are included as a component
of accumulated other comprehensive income (loss) within shareholders equity. Gains or losses on foreign currency transactions are recognized through the statement of earnings.



Financial Instruments and Derivatives. From time to time, we use derivatives and other financial instruments to diversify or offset
the effect of currency, interest rate and commodity price variability. See Note 20 for further discussion.



Stock-based Employee Compensation. At December 31, 2004, we had three stock-based employee compensation plans, which are described more fully in Note 25. No equity compensation has been granted since AWI filed
for Chapter 11 in December 2000, other than commitments entered into prior to the Chapter 11 filing. However, some previously granted restricted stock and options vested after that date. All outstanding options are vested as of December 31, 2004. We
account for these plans under the intrinsic value recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The following table illustrates the effect on net
income and earnings per share if we had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-based Compensation, (FAS 123) to stock-based employee compensation.



|                                                                                                                                            |  |      |       |   |      |   |       |      |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | -------- | -
|                                                                                                                                            |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Net (loss), as reported                                                                                                                     |  | $    | (80.8 | ) |      | $ | (39.3 | )    |  | $ | (2,142.8 | )
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                                  |  |      |      |   |      |   | 0.1   |      |  |   | 0.6      |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |      |      |   |      |   | (0.2  | )    |  |   | (1.1     | )
|                                                                                                                                            |  |      |       |   |      |   |       |      |  |   |          |  
|Pro forma net (loss)                                                                                                                        |  | $    | (80.8 | ) |      | $ | (39.4 | )    |  | $ | (2,143.3 | )
|                                                                                                                                            |  |      |       |   |      |   |       |      |  |   |          |  
|Net (loss) per share:                                                                                                                       |  |      |       |   |      |   |       |      |  |   |          |  
|Basic and diluted  as reported                                                                                                             |  | $    | (2.00 | ) |      | $ | (0.97 | )    |  | $ | (52.91   | )
|Basic and diluted  pro forma                                                                                                               |  | $    | (2.00 | ) |      | $ | (0.97 | )    |  | $ | (52.92   | )



Fiscal Periods. Prior to 2003,
the fiscal years of the Wood Flooring and Cabinets segments ended on the Saturday closest to December 31, which was December 28, 2002. No events had occurred between these dates and December 31 materially affecting our financial position or results
of operations. During 2003, the Wood Flooring and Cabinets segments transitioned to a calendar quarter and year end. The effect of this transition on our comparative financial information was immaterial.



New Accounting Standards



In December 2003, the FASB issued Statement of Financial Accounting Standards (FAS) No.
132R, Employers Disclosures about Pensions and Other Postretirement Benefits (FAS 132R). This standard amends the disclosure requirements of FAS 132 to require additional disclosures about assets, obligations, cash flow and
net periodic benefit cost. The revised standard was effective for fiscal years ending after December 15, 2003 for U.S. plans and for fiscal years ending after June 15, 2004 for foreign plans. The related disclosures have been included in Note 18.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



In December 2004, the FASB issued FASB Staff Position (FSP) FAS No. 109-1 Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004. This FSP, which became effective upon issuance, provides that the tax deduction for
income with respect to qualified domestic production activities, as part of the American Jobs Creation Act of 2004 that was enacted on October 22, 2004, will be treated as a special deduction as described in FAS No. 109. As a result, this deduction
has no effect on our deferred tax assets and liabilities existing at the date of enactment. Instead, the impact of this deduction, which is effective January 1, 2005, will be reported in the period in which the deduction is claimed on our income tax
returns.



In December 2004, the FASB issued FSP FAS No. 109-2 Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. This FSP, which became effective upon issuance, allows an enterprise additional time beyond the financial reporting period
of enactment of the American Jobs Creation Act of 2004 to evaluate the effect of this act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FAS No. 109. See Note 16, Income Taxes, for more information on the
impact of adopting this FSP.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



NOTE 3. NATURE OF OPERATIONS



Reportable Segments



Resilient Flooring  produces a broad range of floor coverings for homes and commercial and institutional buildings. Resilient Flooring products include vinyl
sheet, vinyl tile, linoleum flooring and luxury vinyl tile. In addition, our Resilient Flooring segment sources and sells laminate flooring products, ceramic tile products, adhesives, installation and maintenance materials and accessories. Resilient
Flooring products are offered in a wide variety of types, designs and colors. Many products offer reduced maintenance (no-wax). We sell these products to wholesalers, large home centers, retailers, contractors and to the manufactured homes industry.



Wood Flooring  produces and sources wood flooring products for
use in new residential construction and renovation, with some commercial applications in stores, restaurants and high-end offices. The product offering includes solid wood (pre-finished or unfinished), engineered wood floors in various wood species
(with oak being the primary species of choice) and related accessories. Virtually all of our Wood Floorings sales are in North America. Our Wood Flooring products are generally sold to independent wholesale flooring distributors and large home
centers under the brand names Bruce®, Hartco® and Robbins®.



Textiles and Sports Flooring (TSF)  produces carpeting and sports flooring products that are sold mainly in Europe.
Carpeting products consist principally of carpet tiles and broadloom used in commercial applications and in the leisure and travel industry. Sports flooring products include artificial turf and other sports surfaces. Our TSF products are sold
primarily through retailers, contractors, distributors and other industrial businesses.



Building Products  produces suspended mineral fiber, soft fiber and metal ceiling systems for use in commercial, institutional and residential settings. In addition, our Building Products segment sources
and sells wood ceiling systems. The products are available in numerous colors, performance characteristics and designs, and offer attributes such as acoustical control, rated fire protection and aesthetic appeal. Commercial ceiling materials and
accessories are sold to ceiling systems contractors and to resale distributors. Residential ceiling products are sold through wholesalers and retailers (including large home centers), primarily in North America. Suspension system (grid) products
manufactured by WAVE are sold by both Armstrong and our WAVE joint venture.



Cabinets  produces kitchen and bathroom cabinetry and related products, which are used primarily in the U.S. residential new construction and renovation markets. Through our system of company-owned and independent distribution
centers and through direct sales to builders, our Cabinets segment provides design, fabrication and installation services to single and multi-family homebuilders, remodelers and consumers under the brand names Armstrong and Bruce®.



Unallocated Corporate  includes assets and expenses that have not been allocated to the business units. Unallocated Corporate
assets are primarily deferred tax assets, cash and the U.S. prepaid pension cost. The most significant of the Unallocated Corporate expenses relates to asbestos charges as described in Note 32. Other expenses included in Unallocated Corporate are
corporate departments expenses that have not been allocated to other reportable segments, and the U.S. pension credit. Unallocated Corporate also includes assets and equity earnings related to a corporate equity investment in Interface
Solutions, Inc. Expenses for our corporate departments (including computer services, human resources, legal, finance and other) are allocated to the reportable segments when the departments provide specific work to the reportable segment and the
expense allocation can be based on known metrics, such as time reporting, headcount or square-footage. The remaining expenses, which cannot be attributable to the reportable segments without a high degree of generalization, are reported in
Unallocated Corporate.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



|                                                           |  |                   |         |   |              |   |       |                          |  |   |                  |   |  |          |       |   |                      |   |       |       |  |   |          |   |  |   |          |  
|---------------------------------------------------------- |  | ----------------- | ------- | - | ------------ | - | ----- | ------------------------ |  | - | ---------------- | - |  | -------- | ----- | - | -------------------- | - | ----- | ----- |  | - | -------- | - |  | - | -------- | -
|For the year ended 2004                                    |  | ResilientFlooring |         |   | WoodFlooring |   |       | Textiles& SportsFlooring |  |   | BuildingProducts |   |  | Cabinets |       |   | UnallocatedCorporate |   |       | Total | 
|Net sales to external customers                            |  | $                 | 1,215.1 |   |              | $ | 832.1 |                          |  | $ | 265.4            |   |  | $        | 971.7 |   |                      | $ | 213.0 |       |  |   |         |   |  | $ | 3,497.3  |  
|Equity (earnings) from joint venture                       |  |                   |        |   |              |   |      |                          |  |   |                 |   |  |          | (31.6 | ) |                      |   |      |       |  |   |         |   |  |   | (31.6    | )
|Segment operating income (loss)(1)                         |  |                   | (150.2  | ) |              |   | 51.4  |                          |  |   | (7.1             | ) |  |          | 127.0 |   |                      |   | 1.4   |       |  | $ | (66.3    | ) |  |   | (43.8    | )
|Restructuring and reorganization charges, net of reversals |  |                   | 4.5     |   |              |   | 1.6   |                          |  |   | 0.4              |   |  |          | 10.9  |   |                      |   | 0.4   |       |  |   | 0.5      |   |  |   | 18.3     |  
|Segment assets                                             |  |                   | 737.9   |   |              |   | 663.6 |                          |  |   | 218.1            |   |  |          | 596.3 |   |                      |   | 102.2 |       |  |   | 2,291.3  |   |  |   | 4,609.4  |  
|Depreciation and amortization                              |  |                   | 62.6    |   |              |   | 18.1  |                          |  |   | 5.6              |   |  |          | 35.2  |   |                      |   | 3.8   |       |  |   | 25.7     |   |  |   | 151.0    |  
|Fixed asset impairment loss                                |  |                   | 63.1    |   |              |   | 0.8   |                          |  |   |                 |   |  |          | 0.4   |   |                      |   | 0.4   |       |  |   |         |   |  |   | 64.7     |  
|Goodwill impairment                                        |  |                   | 108.4   |   |              |   |      |                          |  |   |                 |   |  |          |      |   |                      |   |      |       |  |   |         |   |  |   | 108.4    |  
|Investment in affiliates                                   |  |                   | 0.6     |   |              |   |      |                          |  |   |                 |   |  |          | 51.0  |   |                      |   |      |       |  |   | 20.9     |   |  |   | 72.5     |  
|Capital additions                                          |  |                   | 33.8    |   |              |   | 33.7  |                          |  |   | 3.9              |   |  |          | 44.5  |   |                      |   | 1.4   |       |  |   | 16.7     |   |  |   | 134.0    |  
|                                                           |  |                   |         |   |              |   |      
|For the year ended 2003                                    |  | ResilientFlooring |         |   | WoodFlooring |   |       | Textiles& SportsFlooring |  |   | BuildingProducts |   |  | Cabinets |       |   | UnallocatedCorporate |   |       | Total | 
|Net sales to external customers                            |  | $                 | 1,181.5 |   |              | $ | 738.6 |                          |  | $ | 271.9            |   |  | $        | 862.2 |   |                      | $ | 204.8 |       |  |   |         |   |  | $ | 3,259.0  |  
|Equity (earnings) from joint venture                       |  |                   |        |   |              |   |      |                          |  |   |                 |   |  |          | (20.8 | ) |                      |   |      |       |  |   |         |   |  |   | (20.8    | )
|Segment operating income (loss)(1)                         |  |                   | 56.2    |   |              |   | (4.0  | )                        |  |   | (11.0            | ) |  |          | 95.2  |   |                      |   | (11.1 | )     |  | $ | (144.6   | ) |  |   | (19.3    | )
|Restructuring and reorganization charges, net of reversals |  |                   | 1.2     |   |              |   | 0.8   |                          |  |   | 7.4              |   |  |          |      |   |                      |   |      |       |  |   | (0.8     | ) |  |   | 8.6      |  
|Segment assets                                             |  |                   | 915.3   |   |              |   | 576.6 |                          |  |   | 207.1            |   |  |          | 551.5 |   |                      |   | 102.3 |       |  |   | 2,295.0  |   |  |   | 4,647.8  |  
|Depreciation and amortization                              |  |                   | 60.6    |   |              |   | 39.4  |                          |  |   | 5.2              |   |  |          | 30.2  |   |                      |   | 1.6   |       |  |   | 26.1     |   |  |   | 163.1    |  
|Fixed asset impairment loss                                |  |                   | 1.1     |   |              |   | 3.4   |                          |  |   |                 |   |  |          | 3.8   |   |                      |   | 1.6   |       |  |   | 0.6      |   |  |   | 10.5     |  
|Investment in affiliates                                   |  |                   | 0.6     |   |              |   |      |                          |  |   |                 |   |  |          | 29.5  |   |                      |   |      |       |  |   | 18.8     |   |  |   | 48.9     |  
|Capital additions                                          |  |                   | 26.5    |   |              |   | 17.3  |                          |  |   | 3.4              |   |  |          | 22.3  |   |                      |   | 1.6   |       |  |   | 7.0      |   |  |   | 78.1     |  
|                                                           |  |                   |         |   |              |   |      
|For the year ended 2002                                    |  | ResilientFlooring |         |   | WoodFlooring |   |       | Textiles& SportsFlooring |  |   | BuildingProducts |   |  | Cabinets |       |   | UnallocatedCorporate |   |       | Total | 
|Net sales to external customers                            |  | $                 | 1,152.3 |   |              | $ | 719.3 |                          |  | $ | 247.2            |   |  | $        | 826.6 |   |                      | $ | 226.9 |       |  |   |         |   |  | $ | 3,172.3  |  
|Equity (earnings) from joint venture                       |  |                   |        |   |              |   |      |                          |  |   |                 |   |  |          | (19.7 | ) |                      |   |      |       |  |   |         |   |  |   | (19.7    | )
|Segment operating income (loss)(1)                         |  |                   | 64.6    |   |              |   | 53.0  |                          |  |   | (4.7             | ) |  |          | 96.5  |   |                      |   | (3.9  | )     |  | $ | (2,550.7 | ) |  |   | (2,345.2 | )
|Restructuring and reorganization charges, net of reversals |  |                   | 2.2     |   |              |   |      |                          |  |   | (0.3             | ) |  |          |      |   |                      |   |      |       |  |   |         |   |  |   | 1.9      |  
|Segment assets                                             |  |                   | 890.7   |   |              |   | 619.7 |                          |  |   | 203.4            |   |  |          | 544.6 |   |                      |   | 116.6 |       |  |   | 2,129.8  |   |  |   | 4,504.8  |  
|Depreciation and amortization                              |  |                   | 54.7    |   |              |   | 16.8  |                          |  |   | 5.6              |   |  |          | 32.2  |   |                      |   | 2.2   |       |  |   | 25.2     |   |  |   | 136.7    |  
|Investment in affiliates                                   |  |                   | 0.9     |   |              |   |      |                          |  |   |                 |   |  |          | 24.6  |   |                      |   |      |       |  |   | 18.4     |   |  |   | 43.9     |  
|Capital additions                                          |  |                   | 39.0    |   |              |   | 22.9  |                          |  |   | 4.1              |   |  |          | 28.5  |   |                      |   | 6.0   |       |  |   | 24.6     |   |  |   | 125.1    |  

---

|(1) | Segment operating income is the measure of segment profit or loss reviewed by the chief
operating decision maker. The sum of the segments operating income equals the total consolidated operating income as reported on our income statement. The following reconciles our total consolidated operating income to income before taxes,
extraordinary items, discontinued operations, and the cumulative effect of changes in accounting principles. These items are only measured and managed on a consolidated basis:
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                                                 |  |      |       |   |      |   |       |      |  |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | -------- | -
|                                                                                                                                 |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Segment operating income (loss)                                                                                                  |  | $    | (43.8 | ) |      | $ | (19.3 | )    |  | $ | (2,345.2 | )
|Interest expense                                                                                                                 |  |      | 8.4   |   |      |   | 9.0   |      |  |   | 11.3     |  
|Other non-operating expense                                                                                                      |  |      | 3.1   |   |      |   | 5.7   |      |  |   | 3.6      |  
|Other non-operating (income)                                                                                                     |  |      | (6.4  | ) |      |   | (5.0  | )    |  |   | (7.5     | )
|Chapter 11 reorganization costs, net                                                                                             |  |      | 6.9   |   |      |   | 9.4   |      |  |   | 23.5     |  
|                                                                                                                                 |  |      |       |   |      |   |       |      |  |   |          |  
|(Loss) before taxes, extraordinary items, discontinued operations, and the cumulative effect of changes in accounting
principles |  | $    | (55.8 | ) |      | $ | (38.4 | )    |  | $ | (2,376.1 | )
|                                                                                                                                 |  |      |       |   |      |   |       |      |  |   |          |  



Accounting policies of the segments
are the same as those described in the summary of significant accounting policies.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



The sales in the table below are allocated to geographic areas based upon the location of the customer.



Geographic Areas



|                      |  |      |         |      |   |         |  |   |        
|--------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|Net trade sales       |  | 2004 |         | 2003 |   | 2002   
|Americas:             |  |      |         |      |   |         |  |   |        
|United States         |  | $    | 2,338.9 |      | $ | 2,210.9 |  | $ | 2,197.0
|Canada                |  |      | 177.6   |      |   | 162.2   |  |   | 152.6  
|Other Americas        |  |      | 31.8    |      |   | 24.8    |  |   | 26.4   
|                      |  |      |         |      |   |         |  |   |        
|Total Americas        |  | $    | 2,548.3 |      | $ | 2,397.9 |  | $ | 2,376.0
|                      |  |      |         |      |   |         |  |   |        
|Europe:               |  |      |         |      |   |         |  |   |        
|Germany               |  | $    | 181.2   |      | $ | 178.2   |  | $ | 172.6  
|England               |  |      | 148.0   |      |   | 125.5   |  |   | 129.8  
|Other Europe          |  |      | 478.1   |      |   | 439.3   |  |   | 387.9  
|                      |  |      |         |      |   |         |  |   |        
|Total Europe          |  | $    | 807.3   |      | $ | 743.0   |  | $ | 690.3  
|                      |  |      |         |      |   |         |  |   |        
|Total Pacific area    |  | $    | 141.7   |      | $ | 118.1   |  | $ | 106.0  
|                      |  |      |         |      |   |         |  |   |        
|Total net trade sales |  | $    | 3,497.3 |      | $ | 3,259.0 |  | $ | 3,172.3
|                      |  |      |         |      |   |         |  |   |        





|                                                                      |  |      |         |      |   |        
|--------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|Long-lived assets (property, plant and equipment), net at December 31 |  | 2004 |         | 2003
|Americas:                                                             |  |      |         |      |   |        
|United States                                                         |  | $    | 823.6   |      | $ | 848.5  
|Canada                                                                |  |      | 14.8    |      |   | 15.0   
|                                                                      |  |      |         |      |   |        
|Total Americas                                                        |  | $    | 838.4   |      | $ | 863.5  
|                                                                      |  |      |         |      |   |        
|Europe:                                                               |  |      |         |      |   |        
|Germany                                                               |  | $    | 191.3   |      | $ | 224.0  
|Other Europe                                                          |  |      | 150.8   |      |   | 150.8  
|                                                                      |  |      |         |      |   |        
|Total Europe                                                          |  | $    | 342.1   |      | $ | 374.8  
|                                                                      |  |      |         |      |   |        
|Total Pacific area                                                    |  | $    | 28.3    |      | $ | 29.0   
|                                                                      |  |      |         |      |   |        
|Total long-lived assets, net                                          |  | $    | 1,208.8 |      | $ | 1,267.3
|                                                                      |  |      |         |      |   |        



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



NOTE 4. LIABILITIES SUBJECT TO COMPROMISE



As a result of AWIs Chapter 11 Filing (see Note 1), pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that
are subject to compromise and report them separately on the balance sheet. Liabilities that may be affected by a plan of reorganization are recorded at the amount of the expected allowed claims, even if they may be settled for lesser amounts.
Substantially all of AWIs prepetition debt, now in default, is recorded at face value and is classified within liabilities subject to compromise. Obligations of our subsidiaries that are not covered by the Filing remain classified on the
consolidated balance sheet based upon maturity date. AWIs asbestos liability is also recorded in liabilities subject to compromise. See Note 1 for further discussion on how the Chapter 11 process may address AWIs liabilities subject to
compromise and Note 32 for further discussion of AWIs asbestos liability.



Liabilities subject to compromise at December 31, 2004 and December 31, 2003 are as follows:



|                                                |  |      |         |      |   |        
|----------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                |  | 2004 |         | 2003
|Debt (at face value)                            |  | $    | 1,388.6 |      | $ | 1,388.6
|Asbestos-related liability                      |  |      | 3,190.6 |      |   | 3,190.6
|Prepetition trade payables                      |  |      | 58.9    |      |   | 58.9   
|Prepetition other payables and accrued interest |  |      | 70.4    |      |   | 62.7   
|ESOP loan guarantee                             |  |      | 157.7   |      |   | 157.7  
|                                                |  |      |         |      |   |        
|Total liabilities subject to compromise         |  | $    | 4,866.2 |      | $ | 4,858.5
|                                                |  |      |         |      |   |        



Additional prepetition claims
(liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims.



See Note 17 for detail of debt subject to compromise.



NOTE 5. ACQUISITIONS



On May 18, 2000, we acquired privately-held Switzerland-based Gema Holding AG (Gema), a manufacturer and installer of metal ceilings, for $6 million plus
certain contingent consideration not to exceed $25.5 million, based on results over the three year period ending December 31, 2002. In accordance with the purchase agreement, contingent consideration of $3.0 million was paid to the former owners,
with the final payment being made in the third quarter of 2004.



The Gema
acquisition was recorded under the purchase method of accounting. The purchase price was allocated to the assets acquired and the liabilities assumed based on the estimated fair market value at the date of acquisition. The fair market value of
tangible and identifiable intangible net assets acquired exceeded the purchase price by $24.2 million and this amount was recorded as a reduction of the fair value of property, plant and equipment. Contingent consideration of $3.0 million was
accounted for as additional purchase price.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



NOTE 6. DISCONTINUED OPERATIONS



On May 31, 2000, Armstrong completed its sale of all entities, assets and certain liabilities comprising its Insulation Products segment.
During 2003 and 2002, AHI recorded net losses of $2.4 million and $0.7 million respectively, for the impairment of some note receivables and the settlement of certain tax contingencies related to this divestiture.



On December 29, 1995, Armstrong sold a furniture subsidiary, Thomasville Furniture
Industries. During 2004 and 2003, AHI recorded net losses of $0.4 million and $0.1 million, respectively, for the environmental and tax indemnification related to this divestiture.



In accordance with FAS 144, these adjustments were classified as discontinued operations since the original divestitures were reported as
discontinued operations.



NOTE 7. OTHER DIVESTITURES



In July 2000, we sold our Installation Products Group to subsidiaries of the German company
Ardex GmbH. During February 2003, we reached a settlement with Ardex on several open issues related to the sale and the ongoing supply agreement between Ardex and Armstrong. The settlement allowed for the payment of a pre-petition liability to Ardex
with a discount, adjusted the pricing for our adhesives purchases, eliminated a minimum purchase requirement and resolved environmental remediation disputes. Under the settlement, Ardex filed a proof of claim related to environmental remediation in
AWIs Chapter 11 Case, which has been treated as an allowed unsecured claim. This claim resulted in a fourth quarter 2002 charge of $5.3 million, which was recorded in SG&A expense.



NOTE 8. ACCOUNTS AND NOTES RECEIVABLE



|                                        |  |      |       |   |      |   |       |  
|--------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                        |  | 2004 |       |   | 2003 |  
|Customer receivables                    |  | $    | 372.0 |   |      | $ | 358.4 |  
|Customer notes                          |  |      | 7.9   |   |      |   | 6.2   |  
|Miscellaneous receivables               |  |      | 14.7  |   |      |   | 17.0  |  
|Less allowance for discounts and losses |  |      | (58.5 | ) |      |   | (66.2 | )
|                                        |  |      |       |   |      |   |       |  
|Net accounts and notes receivable       |  | $    | 336.1 |   |      | $ | 315.4 |  
|                                        |  |      |       |   |      |   |       |  



Generally, we sell our products to
select, pre-approved customers whose businesses are affected by changes in economic and market conditions. We consider these factors and the financial condition of each customer when establishing our allowance for losses from doubtful accounts.



NOTE 9. INVENTORIES



Following are the components of our inventories:



|                             |  |      |       |   |      |   |       |  
|---------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                             |  | 2004 |       |   | 2003 |  
|Finished goods               |  | $    | 362.9 |   |      | $ | 330.7 |  
|Goods in process             |  |      | 49.3  |   |      |   | 40.6  |  
|Raw materials and supplies   |  |      | 206.9 |   |      |   | 165.3 |  
|Less LIFO and other reserves |  |      | (89.9 | ) |      |   | (82.2 | )
|                             |  |      |       |   |      |   |       |  
|Total inventories, net       |  | $    | 529.2 |   |      | $ | 454.4 |  
|                             |  |      |       |   |      |   |       |  



Approximately 40% of our total
inventory in 2004 and 2003 was valued on a LIFO (last-in, first-out) basis. Inventory values were lower than would have been reported on a total FIFO (first-in, first-out) basis by $74.1 million at the end of 2004 and $62.0 million at year-end 2003.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



The distinction between the use of different methods of inventory valuation is primarily based on geographical
locations and/or legal entities rather than types of inventory. The following table summarizes the amount of inventory that is not accounted for under the LIFO method.



|                                |  |      |       |      |   |      
|------------------------------- |  | ---- | ----- | ---- | - | -----
|                                |  | 2004 |       | 2003
|International locations         |  | $    | 173.0 |      | $ | 162.0
|U.S. Wood Flooring and Cabinets |  |      | 119.4 |      |   | 100.9
|U.S. sourced products           |  |      | 21.0  |      |   | 21.9 
|                                |  |      |       |      |   |      
|Total                           |  | $    | 313.4 |      | $ | 284.8
|                                |  |      |       |      |   |      



Our international locations all use
the FIFO method of inventory valuation primarily because either the LIFO method is not permitted for local tax and/or statutory reporting purposes, or the entities were part of various acquisitions that had adopted the FIFO method prior to our
acquisition. In these situations, a conversion to LIFO would be highly complex and involve excessive cost and effort to achieve under local tax and/or statutory reporting requirements.



Several of the Wood Flooring and Cabinets entities were acquired by Triangle Pacific Corporation (TPC) prior to our acquisition
of TPC in 1998. TPC had elected to retain the historical inventory valuation policies of the acquired companies and, on the basis of consistency and due to the excessive cost involved, we elected not to amend these policies.



The sourced products represent certain finished goods sourced from third party manufacturers
of unique type, primarily from foreign suppliers.



NOTE 10. PROPERTY, PLANT
AND EQUIPMENT



|                                               |  |      |          |   |      |   |          |  
|---------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                               |  | 2004 |          |   | 2003 |  
|Land                                           |  | $    | 77.0     |   |      | $ | 105.4    |  
|Buildings                                      |  |      | 657.4    |   |      |   | 659.7    |  
|Machinery and equipment                        |  |      | 1,937.3  |   |      |   | 1,893.7  |  
|Construction in progress                       |  |      | 77.8     |   |      |   | 43.3     |  
|Less accumulated depreciation and amortization |  |      | (1,540.7 | ) |      |   | (1,434.8 | )
|                                               |  |      |          |   |      |   |          |  
|Net property, plant and equipment              |  | $    | 1,208.8  |   |      | $ | 1,267.3  |  
|                                               |  |      |          |   |      |   |          |  



In the fourth quarter of 2004, we
recorded a $44.8 million fixed asset impairment charge in Resilient Flooring for our European resilient flooring business. This impairment charge reduced land by approximately $29 million and buildings by approximately $16 million and was reported
in cost of goods sold. The fixed asset impairment charge was triggered by actual operating losses and negative cash flows incurred in the European resilient flooring business. The expectation is that the operating losses and negative cash flows will
continue in the near future. The fixed asset fair values were determined by an independent appraisal firm.



NOTE 11. EQUITY INVESTMENTS



Investments in affiliates were $72.5 million at December 31, 2004, an increase of $23.6 million, primarily reflecting the equity earnings of our 50% interest in our WAVE joint venture and our remaining 35% interest in Interface Solutions,
Inc. (ISI).



|          |  |                                    |  |      |      |      |   |      |      |  |   |      |  
|--------- |  | ---------------------------------- |  | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | -
|Affiliate |  | Income Statement Classification    |  | 2004 |      | 2003 |   |      | 2002 | 
|WAVE      |  | Equity earnings from joint venture |  | $    | 31.6 |      | $ | 20.8 |      |  | $ | 19.7 |  
|ISI       |  | Other non-operating income         |  |      | 1.9  |      |   | 0.3  |      |  |   | 2.1  |  
|Other     |  | Other non-operating expense        |  |      |     |      |   | (0.4 | )    |  |   | (0.1 | )



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Condensed financial data for WAVE, our joint venture accounted for under the equity method of accounting is
summarized below:



|                              |  |      |       |      |   |     
|----------------------------- |  | ---- | ----- | ---- | - | ----
|                              |  | 2004 |       | 2003
|Current assets                |  | $    | 145.1 |      | $ | 93.1
|Non-current assets            |  |      | 33.8  |      |   | 32.3
|Current liabilities           |  |      | 71.4  |      |   | 64.1
|Other non-current liabilities |  |      | 5.1   |      |   | 4.0 



|             |  |      |       |      |   |       |  |   |      
|------------ |  | ---- | ----- | ---- | - | ----- |  | - | -----
|             |  | 2004 |       | 2003 |   | 2002 
|Net sales    |  | $    | 278.6 |      | $ | 213.8 |  | $ | 201.4
|Gross profit |  |      | 86.3  |      |   | 61.7  |  |   | 59.2 
|Net earnings |  |      | 63.2  |      |   | 41.7  |  |   | 39.2 



See discussion in Note 31 for
additional information on these related parties.



NOTE 12. GOODWILL AND
INTANGIBLE ASSETS



Goodwill



As of January 1, 2004, we had goodwill of approximately $244 million. FAS 142 requires that
goodwill be tested for impairment at least annually. We perform our annual assessment in the fourth quarter.



During the second quarter of 2004, we concluded that an indication of impairment existed for our European resilient flooring goodwill, which was based on an assessment of financial projections incorporated in our
annual strategic plan process. Continuing price declines and volume shortfalls related to our European resilient flooring products are causing significant operating losses, and we revised our projections accordingly. We calculated a preliminary
estimate of the European resilient flooring reporting units fair value using discounted cash flows. Based on this preliminary fair value calculation, we recorded a non-cash goodwill impairment loss of $60.0 million in the second quarter of
2004. In the fourth quarter of 2004, we completed our annual assessment of goodwill as required by FAS 142 and determined that based upon a revised strategic plan, our European resilient flooring goodwill was fully impaired. Therefore, we recorded a
$48.4 million impairment charge. The goodwill impairment charges arose from the European resilient flooring reporting units fair value being lower than its carrying value. The fair value was negatively affected by lower operating profits and
expected future cash flows determined in recent forecasting analyses. We calculated the reporting units fair value using discounted cash flows. No other goodwill impairment was identified in our annual assessment.



The following table represents the changes in goodwill during 2004.



|                            |  |                 |       |                     |   |      |             |  |   |                   |   |  |   |      
|--------------------------- |  | --------------- | ----- | ------------------- | - | ---- | ----------- |  | - | ----------------- | - |  | - | -----
|Goodwill by segment         |  | January 1, 2004 |       | Adjustments, net(1) |   |      | Impairments |  |   | December 31, 2004
|Resilient Flooring          |  | $               | 107.1 |                     | $ | 1.3  |             |  | $ | (108.4            | ) |  |   |     
|Wood Flooring               |  |                 | 110.4 |                     |   | (2.2 | )           |  |   |                  |   |  | $ | 108.2
|Building Products           |  |                 | 14.0  |                     |   | 1.2  |             |  |   |                  |   |  |   | 15.2 
|Cabinets                    |  |                 | 12.6  |                     |   |     |             |  |   |                  |   |  |   | 12.6 
|                            |  |                 |       |                     |   |      |             |  |   |                   |   |  |   |      
|Total consolidated goodwill |  | $               | 244.1 |                     | $ | 0.3  |             |  | $ | (108.4            | ) |  | $ | 136.0
|                            |  |                 |       |                     |   |      |             |  |   |                   |   |  |   |      

---

|(1) | Primarily consists of the effects of resolution of pre-acquisition tax contingencies and foreign exchange.
|--- | ----------------------------------------------------------------------------------------------------------



In the fourth quarter of 2003, we completed our annual assessment of goodwill as required by
FAS 142 and determined there was no impairment.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



The following table represents the changes in goodwill during 2003.



|                            |  |                 |       |                     |   |      |             |  |                   |   |  |   |      
|--------------------------- |  | --------------- | ----- | ------------------- | - | ---- | ----------- |  | ----------------- | - |  | - | -----
|Goodwill by segment         |  | January 1, 2003 |       | Adjustments, net(1) |   |      | Impairments |  | December 31, 2003
|Resilient Flooring          |  | $               | 89.3  |                     | $ | 17.8 |             |  | $                 |  |  | $ | 107.1
|Wood Flooring               |  |                 | 113.8 |                     |   | (3.4 | )           |  |                   |  |  |   | 110.4
|Building Products           |  |                 | 11.9  |                     |   | 2.1  |             |  |                   |  |  |   | 14.0 
|Cabinets                    |  |                 | 12.6  |                     |   |     |             |  |                   |  |  |   | 12.6 
|                            |  |                 |       |                     |   |      |             |  |                   |   |  |   |      
|Total consolidated goodwill |  | $               | 227.6 |                     | $ | 16.5 |             |  | $                 |  |  | $ | 244.1
|                            |  |                 |       |                     |   |      |             |  |                   |   |  |   |      

---

|(1) | Primarily consists of the effects of foreign exchange and resolution of pre-acquisition tax contingencies.
|--- | ----------------------------------------------------------------------------------------------------------



In the second quarter of 2002, we completed our initial assessment of goodwill under FAS 142
and recorded a $590.0 million non-cash transitional impairment charge related to the Wood Flooring segment. The impairment charge is presented in the income statement as a cumulative effect of a change in accounting principle as of January 1, 2002.
The impairment charge arose from the Wood Flooring segments fair value being lower than our carrying value. The Wood Flooring segments fair value was determined using a combination of discounted cash flows, values implicit in precedent
business combinations of similar companies in the building products industry and stock market multiples of publicly-traded flooring companies. The fair value was negatively affected by lower operating profits and cash flows than were assumed at the
time of the acquisition in 1998. The shortfalls were caused by a combination of lower sales plus higher manufacturing costs. Under previous accounting rules, no goodwill impairment would have been recorded at January 1, 2002.



Intangible Assets



The following table details amounts related to our intangible assets as of December 31, 2004 and 2003.



|                                 |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|-------------------------------- |  | -------------------- | ----- | ----------------------- | - | -------------------- |  | ----------------------- | ----- |  | - | ----
|                                 |  | December 31, 2004    |       | December 31, 2003      
|                                 |  | Gross CarryingAmount |       | AccumulatedAmortization |   | Gross CarryingAmount |  | AccumulatedAmortization
|Amortizing intangible assets     |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Computer software                |  | $                    | 109.8 |                         | $ | 66.4                 |  | $                       | 104.1 |  | $ | 57.7
|Land use rights and other        |  |                      | 4.4   |                         |   | 1.0                  |  |                         | 4.4   |  |   | 0.9 
|                                 |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Total                            |  | $                    | 114.2 |                         | $ | 67.4                 |  | $                       | 108.5 |  | $ | 58.6
|                                 |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Non-amortizing intangible assets |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Trademarks and brand names       |  |                      | 29.2  |                         |   |                      |  |                         | 29.1  |  |   |     
|                                 |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Total intangible assets          |  | $                    | 143.4 |                         |   |                      |  | $                       | 137.6 |  |   |     
|                                 |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Aggregate Amortization Expense   |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|For the year ended December 31   |  | $                    | 15.4  |                         |   |                      |  | $                       | 15.5  |  |   |     



Amortization charges for computer
software are determined on a straight-line basis at rates calculated to provide for the retirement of assets at the end of their useful lives, generally 3 to 7 years.



The annual amortization expense expected for the years 2005 through 2009 is as follows:



|     |  |   |     
|---- |  | - | ----
|2005 |  | $ | 15.1
|2006 |  |   | 11.8
|2007 |  |   | 6.2 
|2008 |  | $ | 5.0 
|2009 |  |   | 2.8 



In connection with our adoption of FAS
142 in 2002, it was determined that the fair value of one of Wood Floorings trademarks was lower than its carrying value. The fair value of the trademark was estimated using a discounted cash flow methodology. Accordingly, a non-cash
transitional impairment charge of $6.0 million ($3.8 million, net of tax) was calculated and is presented in the income statement as a cumulative effect of a change in accounting principle as of January 1, 2002.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



NOTE 13. OTHER NON-CURRENT ASSETS



|                                                              |  |      |       |      |   |      
|------------------------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                                              |  | 2004 |       | 2003
|Cash surrender value of company owned life insurance policies |  | $    | 66.8  |      | $ | 62.1 
|Long term notes receivable                                    |  |      | 31.8  |      |   | 27.9 
|Other                                                         |  |      | 24.0  |      |   | 21.2 
|                                                              |  |      |       |      |   |      
|Total other non-current assets                                |  | $    | 122.6 |      | $ | 111.2
|                                                              |  |      |       |      |   |      



NOTE 14. ACCOUNTS PAYABLE AND
ACCRUED EXPENSES



|                                            |  |      |       |      |   |      
|------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                            |  | 2004 |       | 2003
|Payables, trade and other                   |  | $    | 259.8 |      | $ | 221.9
|Employment costs                            |  |      | 65.7  |      |   | 41.8 
|Restructuring severance expenses            |  |      | 18.0  |      |   | 3.4  
|Other                                       |  |      | 103.9 |      |   | 87.1 
|                                            |  |      |       |      |   |      
|Total accounts payable and accrued expenses |  | $    | 447.4 |      | $ | 354.2
|                                            |  |      |       |      |   |      



Certain other accounts payable and
accrued expenses have been categorized as liabilities subject to compromise (see Note 4).



NOTE 15. RESTRUCTURING AND REORGANIZATION CHARGES



2004 Restructuring Activities



Net
restructuring charges of $18.3 million were recorded in 2004. The following table summarizes these charges:



|                       |  |                      |      |   |                                       |     |         |                                               
|---------------------- |  | -------------------- | ---- | - | ------------------------------------- | --- | ------- | ----------------------------------------------
|Action Title           |  | NetCharge/(Reversal) |      |   | (unaudited)Number ofEmployeesImpacted |     | Segment
|Hoogezand              |  | $                    | 10.9 |   |                                       | 130 |         | Building Products                             
|North America SG&A     |  |                      | 5.3  |   |                                       | 250 |         | Resilient Flooring, Wood Flooring, Corporate  
|Lancaster Plant        |  |                      | 1.0  |   |                                       | 450 |         | Resilient Flooring                            
|Searcy                 |  |                      | 0.8  |   |                                       | 230 |         | Wood Flooring                                 
|Oss                    |  |                      | 0.7  |   |                                       | 70  |         | Textiles & Sports Flooring                    
|Morristown             |  |                      | 0.4  |   |                                       | 100 |         | Cabinet Products                              
|European consolidation |  |                      | (0.8 | ) |                                       |     |         | Resilient Flooring, Textiles & Sports Flooring
|                       |  |                      |      |   |                                       |     |         |                                               
|Total                  |  | $                    | 18.3 |   |                                       |     |         |                                               
|                       |  |                      |      |   |                                       |     |         |                                               



Hoogezand: The charge is
related to the first quarter 2004 decision to close the manufacturing facility and is comprised of severance and related costs. Closure of the plant was completed in the first quarter of 2005. The production will be transferred to another Building
Products location in Münster, Germany and will result in a net reduction of approximately 72 positions. We have incurred $10.9 million of restructuring charges to-date and expect to incur an additional $7.7 million, which will be in 2005.
Additionally, we recorded $1.4 million of accelerated depreciation and $1.1 million of other related costs in cost of goods sold.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



North America SG&A: The charge of $5.3 million ($4.0 million in Resilient Flooring, $0.8 million in Wood
Flooring, and $0.5 million in Corporate) was recorded related to severance and related costs due to a restructuring of the sales force and management structure in North America in response to changing market conditions. This initiative was announced
in the fourth quarter of 2004 and is expected to be completed by the second quarter of 2005. We have incurred $5.3 million of restructuring charges to-date and do not expect to incur any additional charges.



Lancaster Plant: The charge related to the fourth quarter 2004 decision to end
commercial flooring production at Lancaster in 2006. Commercial flooring production requirements will be serviced by other facilities around the world. Of the $1.0 million charge, $0.6 million is a non-cash charge related to termination benefits to
be paid through the U.S. pension plan. We expect to incur an additional $38 million of restructuring charges for severance between 2005 and 2008, with the majority of charges incurred in 2005. Additionally, we recorded $17.7 million of fixed asset
impairments and $10.3 million of accelerated depreciation, both in cost of goods sold. We have incurred $1.0 million of severance related restructuring charges to-date.



Searcy: The charge is related to the fourth quarter 2004 decision to close a solid hardwood flooring location in Arkansas in the
first quarter of 2005 and is comprised of estimated severance benefits and related costs. We will continue to manufacture solid wood flooring at other plants across the United States. We have incurred $0.8 million of restructuring charges to-date
and expect to incur an additional $0.2 million, which will be in 2005.



Oss: The charge was recorded to reflect shutdown costs related to a plant closure in The Netherlands. The related severance charges were recorded during the third quarter of 2003 when the plant closure was announced. We will continue
to manufacture carpet at other plants across Europe. We have incurred $4.7 million of restructuring charges to-date and expect to incur an additional $0.2 million, which will be in 2005.



Morristown: The charge related to the fourth quarter 2004 decision to close a plant in Tennessee in the first quarter of 2005.
Manufacturing will be consolidated at two existing plants in the United States. We have incurred $0.4 million of severance related restructuring charges to-date and expect to incur an additional $0.4 million, which will be in 2005. Additionally, we
recorded $1.5 million of accelerated depreciation and $0.4 million of fixed asset impairments, both in cost of goods sold.



European consolidation: The net reversals comprised certain severance accruals that were no longer necessary in the remaining accruals from the 2003 and 2002
charges in the Textiles and Sports Flooring ($0.3 million) and Resilient Flooring ($0.5 million) segments.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



2003 Restructuring Activities



Net restructuring charges of $8.6 million were recorded in 2003. These charges are summarized in the following table:



|                       |  |                      |      |   |                            |     |         |                                               
|---------------------- |  | -------------------- | ---- | - | -------------------------- | --- | ------- | ----------------------------------------------
|Action Title           |  | NetCharge/(Reversal) |      |   | Number ofEmployeesImpacted |     | Segment
|European consolidation |  | $                    | 4.4  |   |                            | 60  |         | Resilient Flooring, Textiles & Sports Flooring
|Oss                    |  |                      | 4.0  |   |                            | 70  |         | Textiles & Sports Flooring                    
|Port Gibson            |  |                      | 0.5  |   |                            | 150 |         | Wood Flooring                                 
|Warren                 |  |                      | 0.3  |   |                            | 120 |         | Wood Flooring                                 
|Baroda                 |  |                      | 0.2  |   |                            | 70  |         | Resilient Flooring                            
|U.K. lease             |  |                      | (0.8 | ) |                            |     |         | Corporate                                     
|                       |  |                      |      |   |                            |     |         |                                               
|Total                  |  | $                    | 8.6  |   |                            |     |         |                                               
|                       |  |                      |      |   |                            |     |         |                                               



European consolidation: The
charge related to severance and retirement benefits for employees in the Textiles and Sports Flooring ($3.4 million) and Resilient Flooring ($1.0 million) segments, as part of the restructuring plan to consolidate certain functions in the European
flooring business. This consolidation was completed in 2004.



Oss: The
charge related primarily to severance benefits for employees at a plant in The Netherlands, which was closed by the end of 2004. The closure was part of the 2002 restructuring plan to consolidate certain functions in the European flooring business.
Of the $4.0 million, $0.3 million represented a non-cash charge for retirement benefits, which was accounted for as a reduction of the prepaid pension asset. Additionally, we recorded $0.3 million of accelerated depreciation in cost of goods sold.



Port Gibson: The charge was for severance benefits related to a
manufacturing location in Mississippi, which was closed effective September 2003 due to excess production capacity. The production was transferred to another Wood Flooring location. Additionally, we recorded $15.1 million of accelerated depreciation
and $0.8 million of fixed asset impairments, both in cost of goods sold.



Warren: The charge related to the closing of a manufacturing location in Arkansas. This location was closed in the fourth quarter of 2003. Additionally, we recorded $6.7 million of accelerated depreciation in cost of goods sold.



Baroda: The charge related to the closing of a plant in India. This
plant was closed in the fourth quarter of 2003. Additionally, we recorded $0.1 million of accelerated depreciation in cost of goods sold.



U.K. lease: A portion of the remaining reserve related to a noncancelable operating lease in the U.K. was reversed as a result of reaching agreement with outside
parties on future rent increases and disputed rent payments by a sublessee. This lease extends through 2017.



In 2002, we recorded restructuring charges, net, of $1.9 million, primarily related to $2.2 million of European resilient flooring and reversals of some TSF accruals that were no longer necessary.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



The following table summarizes activity in the reorganization and restructuring accruals for 2004 and 2003. The net
amount of charges and reversals in the table does not agree to the income statement due to non-cash charges for enhanced retirement benefits that did not affect the restructuring accrual accounts.



|     |  |                   |      |               |   |      |         |  |           |      |  |       |      |                |  |   |     |  |   |     
|---- |  | ----------------- | ---- | ------------- | - | ---- | ------- |  | --------- | ---- |  | ----- | ---- | -------------- |  | - | --- |  | - | ----
|     |  | Beginning Balance |      | Cash Payments |   |      | Charges |  | Reversals |      |  | Other |      | Ending Balance
|2004 |  | $                 | 10.0 |               | $ | (4.1 | )       |  | $         | 18.6 |  | $     | (0.9 | )              |  | $ | 1.2 |  | $ | 24.8
|2003 |  |                   | 9.1  |               |   | (8.7 | )       |  |           | 10.1 |  |       | (1.8 | )              |  |   | 1.3 |  |   | 10.0



The amount in other for
2004 and 2003 is primarily related to foreign currency translation.



Of the
2004 and 2003 ending balances, $1.3 million is reported in liabilities subject to compromise.



Substantially all of the remaining balance of the restructuring accrual as of December 31, 2004 relates to severance for terminated employees with extended payouts, the majority of which will be paid in 2005 and 2006,
and a noncancelable operating lease, which extends through 2017.



NOTE 16.
INCOME TAXES



The tax effects of principal temporary differences between
the carrying amounts of assets and liabilities and their tax bases are summarized in the table below. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize deferred
tax assets, except for certain state and foreign net operating loss carryforwards and other basis adjustments for which we have provided a valuation allowance of $265.5 million. We have $1,387.8 million of state net operating loss carryforwards with
expirations between 2005 and 2024, and $298.7 million of foreign net operating loss carryforwards, which will be carried forward indefinitely. The decrease in the deferred tax asset related to state net operating losses was primarily due to the
expiration of state net operating loss carryforwards and managements detailed analysis of state net operating losses available. The valuation allowance increased by $43.1 million in 2004 primarily due to managements detailed analysis of
state deferred tax assets and liabilities and the addition of new foreign net operating losses generated by current year operations offset by the expiration of state net operating loss carryforwards.



|                                                        |  |      |         |   |      |   |         |  
|------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|Deferred income tax assets (liabilities)                |  | 2004 |         |   | 2003 |  
|Postretirement and postemployment benefits              |  | $    | 116.0   |   |      | $ | 91.0    |  
|Chapter 11 reorganization costs and restructuring costs |  |      | 21.5    |   |      |   | 16.4    |  
|Asbestos-related liabilities                            |  |      | 1,352.7 |   |      |   | 1,153.9 |  
|Foreign tax credit carryforward                         |  |      |        |   |      |   | 2.3     |  
|Net operating losses                                    |  |      | 139.0   |   |      |   | 211.2   |  
|Other                                                   |  |      | 193.8   |   |      |   | 135.4   |  
|                                                        |  |      |         |   |      |   |         |  
|Total deferred tax assets                               |  |      | 1,823.0 |   |      |   | 1,610.2 |  
|Valuation allowance                                     |  |      | (265.5  | ) |      |   | (222.4  | )
|                                                        |  |      |         |   |      |   |         |  
|Net deferred tax assets                                 |  |      | 1,557.5 |   |      |   | 1,387.8 |  
|                                                        |  |     
|Accumulated depreciation                                |  |      | (199.1  | ) |      |   | (200.6  | )
|Pension credit                                          |  |      | (182.6  | ) |      |   | (144.1  | )
|Insurance for asbestos-related liabilities              |  |      | (38.3   | ) |      |   | (33.2   | )
|Tax on unremitted earnings                              |  |      | (28.8   | ) |      |   | (27.0   | )
|Other                                                   |  |      | (171.8  | ) |      |   | (73.7   | )
|                                                        |  |      |         |   |      |   |         |  
|Total deferred income tax liabilities                   |  |      | (620.6  | ) |      |   | (478.6  | )
|                                                        |  |      |         |   |      |   |         |  
|Net deferred income tax assets                          |  | $    | 936.9   |   |      | $ | 909.2   |  
|                                                        |  |      |         |   |      |   |         |  



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



|                                                                                 |  |   |       |   |  |   |       |  
|-------------------------------------------------------------------------------- |  | - | ----- | - |  | - | ----- | -
|Deferred income taxes have been classified in the Consolidated Balance Sheet as: |  |   |       |   |  |   |       |  
|Deferred income tax asset  current                                              |  | $ | 15.6  |   |  | $ | 19.2  |  
|Deferred income tax asset  non-current                                          |  |   | 941.6 |   |  |   | 988.3 |  
|Deferred income tax liability  current                                          |  |   | (1.1  | ) |  |   | (3.3  | )
|Deferred income tax liability  non-current                                      |  |   | (19.2 | ) |  |   | (95.0 | )
|                                                                                 |  |   |       |   |  |   |       |  
|Net deferred income tax assets                                                   |  | $ | 936.9 |   |  | $ | 909.2 |  
|                                                                                 |  |   |       |   |  |   |       |  



|                                                                |  |      |        |   |      |   |       |      |  |   |          |  
|--------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | -------- | -
|Details of taxes                                                |  | 2004 |        |   | 2003 |   |       | 2002 | 
|Earnings (loss) from continuing operations before income taxes: |  |      |        |   |      |   |       |      |  |   |          |  
|Domestic                                                        |  | $    | 79.1   |   |      | $ | (53.7 | )    |  | $ | (2,398.0 | )
|Foreign                                                         |  |      | (130.8 | ) |      |   | 20.0  |      |  |   | 21.9     |  
|Eliminations                                                    |  |      | (4.1   | ) |      |   | (4.7  | )    |  |   |         |  
|                                                                |  |      |        |   |      |   |       |      |  |   |          |  
|Total                                                           |  | $    | (55.8  | ) |      | $ | (38.4 | )    |  | $ | (2,376.1 | )
|                                                                |  |      |        |   |      |   |       |      |  |   |          |  
|Income tax provision (benefit):                                 |  |      |        |   |      |   |       |      |  |   |          |  
|Current:                                                        |  |      |        |   |      |   |       |      |  |   |          |  
|Federal                                                         |  | $    | 33.1   |   |      | $ | 25.2  |      |  | $ | 35.2     |  
|Foreign                                                         |  |      | 14.5   |   |      |   | 20.8  |      |  |   | 10.6     |  
|State                                                           |  |      | (0.9   | ) |      |   | 3.9   |      |  |   | 1.4      |  
|                                                                |  |      |        |   |      |   |       |      |  |   |          |  
|Total current                                                   |  |      | 46.7   |   |      |   | 49.9  |      |  |   | 47.2     |  
|                                                                |  |      |        |   |      |   |       |      |  |   |          |  
|Deferred:                                                       |  |      |        |   |      |   |       |      |  |   |          |  
|Federal                                                         |  |      | (15.6  | ) |      |   | (41.5 | )    |  |   | (874.1   | )
|Foreign                                                         |  |      | (6.2   | ) |      |   | (9.3  | )    |  |   | (1.6     | )
|State                                                           |  |      | (0.3   | ) |      |   | (0.7  | )    |  |   | 0.7      |  
|                                                                |  |      |        |   |      |   |       |      |  |   |          |  
|Total deferred                                                  |  |      | (22.1  | ) |      |   | (51.5 | )    |  |   | (875.0   | )
|                                                                |  |      |        |   |      |   |       |      |  |   |          |  
|Total income taxes (benefit)                                    |  | $    | 24.6   |   |      | $ | (1.6  | )    |  | $ | (827.8   | )
|                                                                |  |      |        |   |      |   |       |      |  |   |          |  



At December 31, 2004, unremitted
earnings of subsidiaries outside the U.S. were $342.6 million. We expect to repatriate $82.2 million of earnings for which $1.8 million of U.S. taxes were provided in 2004 and $27.0 million in 2000. No U.S. taxes have been provided on the remaining
unremitted earnings as our intention is to invest these earnings permanently. If such earnings were to be remitted, approximately $30.3 million in net taxes would be payable in the U.S. in addition to $5.8 million of non-U.S. withholding taxes. On
October 22, 2004, the American Jobs Creation Act (the AJCA) was signed into law. The AJCA includes a deduction of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. We may elect to apply this provision to
qualifying earnings repatriations in 2005. We have started an evaluation of the effects of the repatriation provision; however, we do not expect to be able to complete this evaluation until after Congress or the U.S. Treasury Department provides
additional clarifying language on key elements of the provision. We expect to complete our evaluation of the effects of the repatriation provision following the publication of the additional clarifying language or by the end of 2005 since the AJCA
requires that qualifying dividends need to be paid to the U.S. before the close of the 2005 tax year. The range of possible amounts that we are considering for repatriation under this provision is between zero and $250 million. The related potential
range of income tax expense is between zero and $15 million.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



The 2004, 2003 and 2002 tax provisions reflect the reversal of certain federal, state and foreign tax accruals no
longer required due to the completion of tax audits and expiration of statutes of limitation partially offset by certain nondeductible expenses.



|                                                      |  |      |       |   |      |   |       |      |  |   |        |  
|----------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ------ | -
|Reconciliation to U.S. statutory tax rate             |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Continuing operations tax (benefit) at statutory rate |  | $    | (19.5 | ) |      | $ | (13.4 | )    |  | $ | (831.6 | )
|State income taxes, net of federal benefit            |  |      | (2.8  | ) |      |   | 0.4   |      |  |   | 1.7    |  
|Foreign losses and change in valuation allowance      |  |      | 18.4  |   |      |   | 7.8   |      |  |   | 7.2    |  
|Tax on foreign and foreign-source income              |  |      | (3.4  | ) |      |   | (5.8  | )    |  |   | (16.2  | )
|Goodwill impairment                                   |  |      | 37.9  |   |      |   |      |      |  |   |       |  
|Bankruptcy reorganization expense                     |  |      | (5.1  | ) |      |   | 9.0   |      |  |   | 9.6    |  
|Permanent book/tax differences                        |  |      | (2.7  | ) |      |   | 0.4   |      |  |   | 1.5    |  
|Net tax on unremitted earnings                        |  |      | 1.8   |   |      |   |      |      |  |   |       |  
|                                                      |  |      |       |   |      |   |       |      |  |   |        |  
|Tax expense (benefit) at effective rate               |  | $    | 24.6  |   |      | $ | (1.6  | )    |  | $ | (827.8 | )
|                                                      |  |      |       |   |      |   |       |      |  |   |        |  



|                                            |  |      |      |      |   |      |  |   |     
|------------------------------------------- |  | ---- | ---- | ---- | - | ---- |  | - | ----
|Other taxes                                 |  | 2004 |      | 2003 |   | 2002
|Payroll taxes                               |  | $    | 81.5 |      | $ | 78.0 |  | $ | 76.1
|Property, franchise and capital stock taxes |  |      | 17.8 |      |   | 15.8 |  |   | 12.6



NOTE 17. DEBT



(See Note 4 regarding treatment of prepetition debt.)



|                                               |  |      |         |                                |      |   |      |   |                                |  |      |  
|---------------------------------------------- |  | ---- | ------- | ------------------------------ | ---- | - | ---- | - | ------------------------------ |  | ---- | -
|                                               |  | 2004 |         | Average year-end interest rate |      |   | 2003 |   | Average year-end interest rate | 
|Borrowings under lines of credit               |  | $    | 450.0   |                                | 7.18 | % |      | $ | 450.0                          |  | 7.18 | %
|Commercial paper                               |  |      | 50.0    |                                | 6.75 | % |      |   | 50.0                           |  | 6.75 | %
|Foreign banks                                  |  |      | 11.1    |                                | 3.68 | % |      |   | 3.9                            |  | 3.62 | %
|Bank loans due 2004-2015                       |  |      | 24.7    |                                | 6.04 | % |      |   | 34.1                           |  | 5.65 | %
|9.00% medium-term notes due 2001               |  |      | 7.5     |                                | 9.00 | % |      |   | 7.5                            |  | 9.00 | %
|6.35% senior notes due 2003                    |  |      | 200.0   |                                | 6.35 | % |      |   | 200.0                          |  | 6.35 | %
|6.50% senior notes due 2005                    |  |      | 150.0   |                                | 6.50 | % |      |   | 150.0                          |  | 6.50 | %
|9.75% debentures due 2008                      |  |      | 125.0   |                                | 9.75 | % |      |   | 125.0                          |  | 9.75 | %
|7.45% senior notes due 2029                    |  |      | 200.0   |                                | 7.45 | % |      |   | 200.0                          |  | 7.45 | %
|7.45% senior quarterly interest bonds due 2038 |  |      | 180.0   |                                | 7.45 | % |      |   | 180.0                          |  | 7.45 | %
|Industrial development bonds                   |  |      | 21.0    |                                | 4.13 | % |      |   | 21.0                           |  | 3.85 | %
|Capital lease obligations                      |  |      | 2.7     |                                | 7.63 | % |      |   | 3.3                            |  | 7.63 | %
|Other                                          |  |      | 15.1    |                                | 8.61 | % |      |   | 15.3                           |  | 8.56 | %
|                                               |  |      |         |                                |      |   |      |   |                                |  |      |  
|Subtotal                                       |  |      | 1,437.1 |                                | 7.21 | % |      |   | 1,440.1                        |  | 7.20 | %
|Less debt subject to compromise                |  |      | 1,388.6 |                                | 7.29 | % |      |   | 1,388.6                        |  | 7.29 | %
|Less current portion and short-term debt       |  |      | 19.3    |                                | 4.74 | % |      |   | 12.1                           |  | 5.13 | %
|                                               |  |      |         |                                |      |   |      |   |                                |  |      |  
|Total long-term debt, less current portion     |  | $    | 29.2    |                                | 4.80 | % |      | $ | 39.4                           |  | 4.72 | %
|                                               |  |      |         |                                |      |   |      |   |                                |  |      |  



Approximately $35.7 million of the
$48.5 million of total debt not subject to compromise outstanding as of December 31, 2004 was secured with buildings and other assets. Approximately $37.0 million of the $51.5 million of total debt not subject to compromise outstanding as of
December 31, 2003 was secured with buildings and other assets.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Scheduled payments of long-term debt, excluding debt subject to compromise :



|     |  |   |    
|---- |  | - | ---
|2005 |  | $ | 8.2
|2006 |  |   | 6.5
|2007 |  |   | 1.9
|2008 |  | $ | 1.5
|2009 |  |   | 1.3



Debt from the table above included in
liabilities subject to compromise consisted of the following at December 31, 2004 and 2003.



|                                               |  |      |         |      |   |        
|---------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                               |  | 2004 |         | 2003
|Borrowings under lines of credit               |  | $    | 450.0   |      | $ | 450.0  
|Commercial paper                               |  |      | 50.0    |      |   | 50.0   
|9.00% medium-term notes due 2001               |  |      | 7.5     |      |   | 7.5    
|6.35% senior notes due 2003                    |  |      | 200.0   |      |   | 200.0  
|6.50% senior notes due 2005                    |  |      | 150.0   |      |   | 150.0  
|9.75% debentures due 2008                      |  |      | 125.0   |      |   | 125.0  
|7.45% senior notes due 2029                    |  |      | 200.0   |      |   | 200.0  
|7.45% senior quarterly interest bonds due 2038 |  |      | 180.0   |      |   | 180.0  
|Industrial development bonds                   |  |      | 11.0    |      |   | 11.0   
|Other                                          |  |      | 15.1    |      |   | 15.1   
|                                               |  |      |         |      |   |        
|Total debt subject to compromise               |  | $    | 1,388.6 |      | $ | 1,388.6
|                                               |  |      |         |      |   |        



In accordance with SOP 90-7, we did
not record contractual interest expense on prepetition debt after the Chapter 11 filing date. This unrecorded interest expense was $86.9 million, $95.1 million and $99.9 million for 2004, 2003 and 2002, respectively. Unrecorded interest expense
reflects the amount of interest expense we would have incurred under the original maturities of prepetition debt.



On November 15, 2004, the Bankruptcy Court announced it had approved AWIs motion to extend the maturity date from December 8, 2004, to December 8, 2005, on its $75
million DIP Facility that is limited to issuances of letters of credit. Obligations under the DIP Facility to reimburse drawings under the letters of credit constitute a super-priority administrative expense claim in the Chapter 11 Case. As of
December 31, 2004 and 2003, AWI had approximately $40.6 million and $22.8 million, respectively, in letters of credit that were issued under the DIP Facility.



In addition, certain foreign subsidiaries have approximately $38.5 million of unused short-term lines of credit available from banks. The credit lines are subject to
immaterial annual commitment fees.



NOTE 18. PENSION AND OTHER BENEFIT
PROGRAMS



We have defined benefit pension plans and postretirement medical
and insurance benefit plans covering eligible employees worldwide. We also have defined-contribution pension plans for eligible employees. Benefits from defined benefit pension plans, which cover substantially all employees worldwide, are based
primarily on an employees compensation and years of service. We fund our pension plans when appropriate. The U.S. defined benefit pension plans were closed to new salaried and salaried production employees on January 1, 2005. We fund
postretirement benefits on a pay-as-you-go basis, with the retiree paying a portion of the cost for health care benefits by means of deductibles and contributions. We announced in 1989 and 1990 a 15-year phase-out of health care benefits for certain
future retirees. These future retirees include parent company nonunion employees and some union employees.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Medicare Act



On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (The Act) became law in the United States. The Act provides
employers currently sponsoring prescription drug programs for Medicare-eligible participants with a range of options for coordinating with the new government-sponsored program. These options include supplementing the government program on a
secondary payor basis or accepting a direct subsidy from the government to support a portion of the cost of the employers program.



Pursuant to guidance issued in the second quarter of 2004 by the FASB, we elected to begin recording the effect of the Act in the second quarter of 2004, retroactive to
January 1, 2004. The Act affects both operating income and balance sheet liabilities over time. The total year benefit of $7.0 million was recorded in cost of goods sold ($3.9 million) and SG&A ($3.1 million). The reduction in the accumulated
postretirement benefit obligation related to the Medicare benefit was $52.4 million, reflected in actuarial (gain)/loss in the table below.



UNITED STATES PLANS



The following tables summarize the balance sheet impact of the pension and postretirement benefit plans, as well as the related benefit obligations, assets, funded status and rate assumptions. The pension benefits
disclosures include both the Retirement Income Plan (RIP) and the Retirement Benefit Equity Plan, which is a nonqualified, unfunded plan designed to provide pension benefits in excess of the limits defined under Sections 415 and 401(a)(17) of the
Internal Revenue Code.



We use a December 31 measurement date for our U.S.
defined benefit plans.



|                                            |  |                  |         |   |                                            |   |         |      |  |   |        |   |  |   |        |  
|------------------------------------------- |  | ---------------- | ------- | - | ------------------------------------------ | - | ------- | ---- |  | - | ------ | - |  | - | ------ | -
|                                            |  | Pension Benefits |         |   | Retiree Health and Life Insurance Benefits |  
|U.S. defined-benefit plans                  |  | 2004             |         |   | 2003                                       |   |         | 2004 |  |   | 2003   |  
|Change in benefit obligation:               |  |                  |         |   |                                            |   |         |      |  |   |        |   |  |   |        |  
|Benefit obligation as of January 1          |  | $                | 1,570.8 |   |                                            | $ | 1,423.4 |      |  | $ | 436.6  |   |  | $ | 458.2  |  
|Service cost                                |  |                  | 23.2    |   |                                            |   | 21.8    |      |  |   | 3.4    |   |  |   | 3.4    |  
|Interest cost                               |  |                  | 91.3    |   |                                            |   | 91.8    |      |  |   | 22.3   |   |  |   | 26.2   |  
|Plan participants contributions            |  |                  |        |   |                                            |   |        |      |  |   | 5.7    |   |  |   | 4.6    |  
|Plan amendments                             |  |                  | 0.9     |   |                                            |   | 20.2    |      |  |   |       |   |  |   | (60.0  | )
|Effect of special termination benefits      |  |                  | 0.6     |   |                                            |   |        |      |  |   |       |   |  |   |       |  
|Actuarial (gain)/loss                       |  |                  | 50.9    |   |                                            |   | 111.2   |      |  |   | (37.0  | ) |  |   | 38.0   |  
|Benefits paid                               |  |                  | (100.3  | ) |                                            |   | (97.6   | )    |  |   | (34.3  | ) |  |   | (33.8  | )
|                                            |  |                  |         |   |                                            |   |         |      |  |   |        |   |  |   |        |  
|Benefit obligation as of December 31        |  | $                | 1,637.4 |   |                                            | $ | 1,570.8 |      |  | $ | 396.7  |   |  | $ | 436.6  |  
|                                            |  |                  |         |   |                                            |   |         |      |  |   |        |   |  |   |        |  
|Change in plan assets:                      |  |                  |         |   |                                            |   |         |      |  |   |        |   |  |   |        |  
|Fair value of plan assets as of January 1   |  | $                | 1,882.9 |   |                                            | $ | 1,603.6 |      |  |   |       |   |  |   |       |  
|Actual return on plan assets  gain         |  |                  | 224.5   |   |                                            |   | 373.7   |      |  |   |       |   |  |   |       |  
|Employer contribution                       |  |                  | 3.3     |   |                                            |   | 3.2     |      |  | $ | 28.6   |   |  | $ | 29.2   |  
|Plan participants contributions            |  |                  |        |   |                                            |   |        |      |  |   | 5.7    |   |  |   | 4.6    |  
|Benefits paid                               |  |                  | (100.3  | ) |                                            |   | (97.6   | )    |  |   | (34.3  | ) |  |   | (33.8  | )
|                                            |  |                  |         |   |                                            |   |         |      |  |   |        |   |  |   |        |  
|Fair value of plan assets as of December 31 |  | $                | 2,010.4 |   |                                            | $ | 1,882.9 |      |  | $ | 0.0    |   |  | $ | 0.0    |  
|                                            |  |                  |         |   |                                            |   |         |      |  |   |        |   |  |   |        |  
|Funded status of the plans                  |  | $                | 373.0   |   |                                            | $ | 312.1   |      |  | $ | (396.7 | ) |  | $ | (436.6 | )
|Unrecognized net actuarial (gain)/loss      |  |                  | (46.4   | ) |                                            |   | (19.0   | )    |  |   | 193.2  |   |  |   | 240.3  |  
|Unrecognized prior service cost             |  |                  | 117.7   |   |                                            |   | 134.2   |      |  |   | (40.7  | ) |  |   | (45.9  | )
|                                            |  |                  |         |   |                                            |   |         |      |  |   |        |   |  |   |        |  
|Net asset/(liability) recognized            |  | $                | 444.3   |   |                                            | $ | 427.3   |      |  | $ | (244.2 | ) |  | $ | (242.2 | )
|                                            |  |                  |         |   |                                            |   |         |      |  |   |        |   |  |   |        |  



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



|                                                                                                      |  |                  |   |  |                                           |   |  |      |   |  |      |  
|----------------------------------------------------------------------------------------------------- |  | ---------------- | - |  | ----------------------------------------- | - |  | ---- | - |  | ---- | -
|                                                                                                      |  | Pension Benefits |   |  | Retiree Health and LifeInsurance Benefits |  
|U.S. defined-benefit plans                                                                            |  | 2004             |   |  | 2003                                      |   |  | 2004 |   |  | 2003 |  
|Weighted-average assumptions used to determine benefit obligations at December 31:                    |  |                  |   |  |                                           |   |  |      |   |  |      |  
|Discount rate                                                                                         |  | 5.75             | % |  | 6.00                                      | % |  | 5.75 | % |  | 6.00 | %
|Rate of compensation increase                                                                         |  | 4.00             | % |  | 4.00                                      | % |  | 4.00 | % |  | 4.00 | %
|                                                                                                      |  |                  |   | 
|Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31: |  |                  |   |  |                                           |   |  |      |   |  |      |  
|Discount rate                                                                                         |  | 6.00             | % |  | 6.50                                      | % |  | 6.00 | % |  | 6.50 | %
|Expected return on plan assets                                                                        |  | 8.00             | % |  | 8.00                                      | % |  | n/a  |   |  | n/a  |  
|Rate of compensation increase                                                                         |  | 4.00             | % |  | 4.00                                      | % |  | 4.00 | % |  | 4.00 | %



Investment Policies



The RIPs primary investment objective is to increase the ratio of RIP assets to
liabilities by maximizing the long-term return on investments while minimizing the likelihood of cash contributions over the next 5-10 years. This is to be achieved by (a) investing primarily in publicly-traded equities, (b) limiting return
volatility by diversifying investments among additional asset classes with differing expected rates of return and return correlations, and (c) investing a portion of RIP assets in a bond portfolio whose duration is roughly equal to the duration of
RIP liabilities. Derivatives may be used either to implement investment positions efficiently or to hedge risk but not to create investment leverage.



Each asset class utilized by the RIP has a targeted asset allocation. The table below shows the asset allocation target and the December 31, 2004 and 2003 position for
each asset class:



|                     |  |                                    |      |  |                          |      |  |    |  
|-------------------- |  | ---------------------------------- | ---- |  | ------------------------ | ---- |  | -- | -
|                     |  | Target Weight at December 31, 2004 |      |  | Position at December 31, |     
|Asset Class          |  |                                    | 2004 |  |                          | 2003 | 
|Domestic equity      |  | 41                                 | %    |  | 40                       | %    |  | 43 | %
|International equity |  | 22                                 | %    |  | 25                       | %    |  | 25 | %
|High yield bonds     |  | 5                                  | %    |  | 6                        | %    |  | 6  | %
|Long duration bonds  |  | 25                                 | %    |  | 24                       | %    |  | 22 | %
|Real estate          |  | 7                                  | %    |  | 1                        | %    |  | 1  | %
|Other fixed income   |  | 0                                  | %    |  | 4                        | %    |  | 3  | %



Domestic equity included AHI common
stock in the amount of $1.6 million (0.08% of total RIP assets) at December 31, 2003. No AHI common stock was held at December 31, 2004.



Basis of Rate-of-Return Assumption



Long-term asset class return assumptions are determined based on input from investment professionals and academic sources on the expected performance of the equity and
bond markets over 10 to 20 years. The forecasts were averaged to come up with consensus passive return forecasts for each asset class. An incremental component was added for the expected return from active management based both on the RIPs
experience and on historical information obtained from the RIPs investment consultants. These forecast gross returns were reduced by estimated management fees and expenses, yielding a long-term return forecast of 8.00% per annum.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Amounts recognized in the consolidated balance sheets consist of:



|                                 |  |                  |       |   |                                           |   |       |      |  |   |        |   |  |   |        |  
|-------------------------------- |  | ---------------- | ----- | - | ----------------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                 |  | Pension Benefits |       |   | Retiree Health and LifeInsurance Benefits |  
|                                 |  | 2004             |       |   | 2003                                      |   |       | 2004 |  |   | 2003   |  
|Prepaid pension costs            |  | $                | 465.1 |   |                                           | $ | 445.8 |      |  |   |        |   |  |   |        |  
|Pension benefit liabilities      |  |                  | (41.2 | ) |                                           |   | (38.3 | )    |  | $ | (244.2 | ) |  | $ | (242.2 | )
|Intangible asset                 |  |                  | 0.5   |   |                                           |   | 0.8   |      |  |   |       |   |  |   |       |  
|Other comprehensive income       |  |                  | 19.9  |   |                                           |   | 19.0  |      |  |   |       |   |  |   |       |  
|                                 |  |                  |       |   |                                           |   |       |      |  |   |        |   |  |   |        |  
|Net asset/(liability) recognized |  | $                | 444.3 |   |                                           | $ | 427.3 |      |  | $ | (244.2 | ) |  | $ | (242.2 | )
|                                 |  |                  |       |   |                                           |   |       |      |  |   |        |   |  |   |        |  



The accumulated benefit obligation for
the U.S. defined benefit pension plans was $1,551.0 million and $1,464.1 million at December 31, 2004 and 2003, respectively.



|                                                                |  |                  |      |      |   |     
|--------------------------------------------------------------- |  | ---------------- | ---- | ---- | - | ----
|                                                                |  | Pension Benefits
|U.S. pension plans with benefit obligations in excess of assets |  | 2004             |      | 2003
|Projected benefit obligation, December 31                       |  | $                | 46.1 |      | $ | 43.4
|Accrued benefit obligation, December 31                         |  |                  | 41.2 |      |   | 38.3
|Fair value of plan assets, December 31                          |  |                  |     |      |   |    



The above table relates to the
Retirement Benefit Equity Plan, which is a nonqualified, unfunded plan designed to provide pension benefits in excess of the limits defined under Sections 415 and 401(a)(17) of the Internal Revenue Code.



The components of pension credit are as follows:



|                                                |  |                  |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------- |  | ---------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                |  | Pension Benefits |       
|U.S. defined-benefit plans                      |  | 2004             |        |   | 2003 |   |        | 2002 | 
|Service cost of benefits earned during the year |  | $                | 23.2   |   |      | $ | 21.8   |      |  | $ | 17.2   |  
|Interest cost on projected benefit obligation   |  |                  | 91.3   |   |      |   | 91.8   |      |  |   | 89.1   |  
|Expected return on plan assets                  |  |                  | (147.7 | ) |      |   | (144.5 | )    |  |   | (154.4 | )
|Amortization of transition asset                |  |                  |       |   |      |   |       |      |  |   | (2.1   | )
|Amortization of prior service cost              |  |                  | 17.4   |   |      |   | 17.9   |      |  |   | 17.6   |  
|Amortization of net actuarial loss/(gain)       |  |                  | 1.5    |   |      |   | 1.4    |      |  |   | (6.6   | )
|                                                |  |                  |        |   |      |   |        |      |  |   |        |  
|Net periodic pension credit                     |  | $                | (14.3  | ) |      | $ | (11.6  | )    |  | $ | (39.2  | )
|                                                |  |                  |        |   |      |   |        |      |  |   |        |  



In addition, we recorded a separate
charge in 2004 of $0.6 million within restructuring expense for special termination benefits related to the closure of certain operations at a manufacturing plant in Lancaster. See Note 15 for further information.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



The components of postretirement benefits cost are as follows:



|                                                               |  |                                           |      |   |      |   |      |      |  |   |     
|-------------------------------------------------------------- |  | ----------------------------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ----
|                                                               |  | Retiree Health and LifeInsurance Benefits
|U.S. defined-benefit plans                                     |  | 2004                                      |      |   | 2003 |   |      | 2002
|Service cost of benefits earned during the year                |  | $                                         | 3.4  |   |      | $ | 3.4  |      |  | $ | 5.6 
|Interest cost on accumulated postretirement benefit obligation |  |                                           | 22.3 |   |      |   | 26.2 |      |  |   | 28.1
|Amortization of prior service cost (benefit)                   |  |                                           | (5.1 | ) |      |   | (5.1 | )    |  |   | 0.2 
|Amortization of net actuarial loss                             |  |                                           | 9.7  |   |      |   | 12.3 |      |  |   | 11.2
|                                                               |  |                                           |      |   |      |   |      |      |  |   |     
|Net periodic postretirement benefit cost                       |  | $                                         | 30.3 |   |      | $ | 36.8 |      |  | $ | 45.1
|                                                               |  |                                           |      |   |      |   |      |      |  |   |     



For measurement purposes, an average
rate of 9% annual increase in the per capita cost of covered health care benefits was assumed for 2005, decreasing 1% per year to an ultimate rate of 6%. Assumed health care cost trend rates have a significant effect on the amounts reported for the
health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:



|                                                        |  |                      |      |          |   |       |  
|------------------------------------------------------- |  | -------------------- | ---- | -------- | - | ----- | -
|                                                        |  | One percentage point |     
|U.S. retiree health and life insurance benefit plans    |  | Increase             |      | Decrease |  
|Effect on total of service and interest cost components |  | $                    | 1.5  |          | $ | (1.3  | )
|Effect on postretirement benefit obligation             |  |                      | 22.8 |          |   | (19.4 | )



We expect to contribute $3.3 million
to our U.S. defined benefit pension plans and $28.0 million to our U.S. postretirement benefit plans in 2005.



The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid over the next ten years for our U.S. plans:



|          |  |                  |       |                                           |   |      
|--------- |  | ---------------- | ----- | ----------------------------------------- | - | -----
|          |  | Pension Benefits |       | Retiree Health and Life InsuranceBenefits
|2005      |  | $                | 98.0  |                                           | $ | 28.0 
|2006      |  |                  | 96.7  |                                           |   | 26.6 
|2007      |  |                  | 95.9  |                                           |   | 27.3 
|2008      |  |                  | 95.9  |                                           |   | 27.7 
|2009      |  |                  | 96.0  |                                           |   | 28.1 
|2010-2014 |  |                  | 505.6 |                                           |   | 143.3



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



NON-U.S. PLANS



We have defined benefit pension plans covering employees in a number of foreign countries that utilize assumptions which are consistent with, but not identical to, those
of the U.S. plans. The following tables summarize the balance sheet impact of foreign pension benefit plans, as well as the related benefit obligations, assets, funded status and rate assumptions.



We use a December 31 measurement date for most of our non-U.S. defined benefit plans.



|                                            |  |                  |        |   |      |   |        |  
|------------------------------------------- |  | ---------------- | ------ | - | ---- | - | ------ | -
|                                            |  | Pension Benefits |       
|Non-U.S. defined-benefit plans              |  | 2004             |        |   | 2003 |  
|Change in benefit obligation:               |  |                  |        |   |      |   |        |  
|Benefit obligation as of January 1          |  | $                | 403.8  |   |      | $ | 340.1  |  
|Service cost                                |  |                  | 9.3    |   |      |   | 8.2    |  
|Interest cost                               |  |                  | 21.2   |   |      |   | 19.4   |  
|Plan participants contributions            |  |                  | 3.6    |   |      |   | 2.8    |  
|Plan amendments                             |  |                  | 0.2    |   |      |   | (5.7   | )
|Effect of settlements and curtailments      |  |                  |       |   |      |   | (0.9   | )
|Foreign currency translation adjustment     |  |                  | 37.1   |   |      |   | 57.1   |  
|Actuarial loss                              |  |                  | 33.1   |   |      |   | 2.4    |  
|Benefits paid                               |  |                  | (20.3  | ) |      |   | (19.6  | )
|                                            |  |                  |        |   |      |   |        |  
|Benefit obligation as of December 31        |  | $                | 488.0  |   |      | $ | 403.8  |  
|                                            |  |                  |        |   |      |   |        |  
|Change in plan assets:                      |  |                  |        |   |      |   |        |  
|Fair value of plan assets as of January 1   |  | $                | 200.4  |   |      | $ | 153.7  |  
|Actual return on plan assets gain           |  |                  | 17.7   |   |      |   | 19.4   |  
|Employer contributions                      |  |                  | 28.3   |   |      |   | 19.4   |  
|Plan participants contributions            |  |                  | 3.6    |   |      |   | 2.8    |  
|Foreign currency translation adjustment     |  |                  | 18.5   |   |      |   | 24.7   |  
|Benefits paid                               |  |                  | (20.3  | ) |      |   | (19.6  | )
|                                            |  |                  |        |   |      |   |        |  
|Fair value of plan assets as of December 31 |  | $                | 248.2  |   |      | $ | 200.4  |  
|                                            |  |                  |        |   |      |   |        |  
|Funded status of the plans                  |  | $                | (239.8 | ) |      | $ | (203.4 | )
|Unrecognized net actuarial loss             |  |                  | 89.3   |   |      |   | 53.0   |  
|Unrecognized transition obligation          |  |                  | (0.3   | ) |      |   | (0.1   | )
|Unrecognized prior service benefit          |  |                  | (0.7   | ) |      |   | (0.5   | )
|                                            |  |                  |        |   |      |   |        |  
|Net liability recognized                    |  | $                | (151.5 | ) |      | $ | (151.0 | )
|                                            |  |                  |        |   |      |   |        |  



The funded status of non-U.S.
defined-benefit plans was determined using the following assumptions:



|                                                                                                      |  |                  |   |  |      |  
|----------------------------------------------------------------------------------------------------- |  | ---------------- | - |  | ---- | -
|                                                                                                      |  | Pension Benefits |  
|Non-U.S. defined-benefit plans                                                                        |  | 2004             |   |  | 2003 |  
|Weighted-average assumptions used to determine benefit obligations at December 31:                    |  |                  |   |  |      |  
|Discount rate                                                                                         |  | 4.80             | % |  | 5.40 | %
|Rate of compensation increase                                                                         |  | 3.20             | % |  | 3.40 | %
|                                                                                                      |  |                 
|Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31: |  |                  |   |  |      |  
|Discount rate                                                                                         |  | 5.40             | % |  | 5.50 | %
|Expected return on plan assets                                                                        |  | 6.40             | % |  | 6.40 | %
|Rate of compensation increase                                                                         |  | 3.40             | % |  | 3.40 | %



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Investment Policies



Each of the funded non-US pension plans primary investment objective is to earn sufficient long-term returns on investments both to increase the ratio of the
assets to liabilities in order for the plans to meet their benefits obligations, and to minimize required cash contributions to the plans. This is to be achieved by (a) investing in publicly-traded equities, (b) limiting return volatility by
diversifying investments among additional asset classes with differing expected rates of return and return correlations, and (c) utilizing long duration bonds to limit the volatility of the plans asset/liability ratios.



Each asset class utilized has a targeted asset allocation. The table below shows the asset
allocation target and the December 31, 2004 and 2003 position for each asset class:



|                    |  |                                    |      |  |                          |      |  |    |  
|------------------- |  | ---------------------------------- | ---- |  | ------------------------ | ---- |  | -- | -
|                    |  | Target Weight at December 31, 2004 |      |  | Position at December 31, |     
|Asset Class         |  |                                    | 2004 |  |                          | 2003 | 
|Equities            |  | 49                                 | %    |  | 49                       | %    |  | 50 | %
|Long duration bonds |  | 17                                 | %    |  | 17                       | %    |  | 17 | %
|Other fixed income  |  | 34                                 | %    |  | 34                       | %    |  | 33 | %



Basis of Rate-of-Return
Assumption



Long-term asset class return forecasts were obtained from
investment professionals. The forecasts were averaged to come up with consensus passive return forecasts for each asset class. These forecast asset class returns were weighted by the plans target asset class weights, yielding a long-term
return forecast of 6.4% per annum.



Amounts recognized in the consolidated
balance sheets consist of:



|                            |  |                  |        |   |      |   |        |  
|--------------------------- |  | ---------------- | ------ | - | ---- | - | ------ | -
|                            |  | Pension Benefits |       
|                            |  | 2004             |        |   | 2003 |  
|Prepaid pension cost        |  | $                | 15.8   |   |      | $ | 9.3    |  
|Pension benefit liabilities |  |                  | (217.7 | ) |      |   | (178.1 | )
|Intangible asset            |  |                  | 3.4    |   |      |   | 3.5    |  
|Other comprehensive income  |  |                  | 47.0   |   |      |   | 14.3   |  
|                            |  |                  |        |   |      |   |        |  
|Net liability recognized    |  | $                | (151.5 | ) |      | $ | (151.0 | )
|                            |  |                  |        |   |      |   |        |  



The accumulated benefit obligation for
the non-U.S. defined benefit pension plans was $449.0 million and $363.2 million at December 31, 2004 and 2003, respectively.



|                                                                    |      |                  |       |  |   |      
|------------------------------------------------------------------- | ---- | ---------------- | ----- |  | - | -----
|Non-U.S. pension plans with benefit obligations in excess of assets |      | Pension Benefits
|                                                                    | 2004 |                  | 2003 
|Projected benefit obligation, December 31                           |      | $                | 402.0 |  | $ | 335.0
|Accrued benefit obligation, December 31                             |      |                  | 370.3 |  |   | 300.6
|Fair value of plan assets, December 31                              |      |                  | 161.8 |  |   | 131.2



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



The components of pension cost are as follows:



|                                                |  |      |       |   |      |   |       |      |  |   |       |  
|----------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|Non-U.S. defined-benefit plans                  |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Service cost of benefits earned during the year |  | $    | 9.3   |   |      | $ | 8.2   |      |  | $ | 8.1   |  
|Interest cost on projected benefit obligation   |  |      | 21.2  |   |      |   | 19.4  |      |  |   | 15.9  |  
|Expected return on plan assets                  |  |      | (14.8 | ) |      |   | (12.8 | )    |  |   | (11.2 | )
|Amortization of transition obligation           |  |      | 0.2   |   |      |   | 0.3   |      |  |   | 0.1   |  
|Amortization of prior service cost              |  |      | 0.2   |   |      |   | 0.6   |      |  |   | 0.6   |  
|Amortization of net actuarial loss              |  |      | 0.5   |   |      |   | 0.5   |      |  |   | 0.2   |  
|                                                |  |      |       |   |      |   |       |      |  |   |       |  
|Net periodic pension cost                       |  | $    | 16.6  |   |      | $ | 16.2  |      |  | $ | 13.7  |  
|                                                |  |      |       |   |      |   |       |      |  |   |       |  



In addition, we recorded a separate
charge in 2003 of $0.3 million within restructuring expense for a curtailment loss related to the closure of certain operations at a manufacturing plant in Oss, the Netherlands. See Note 15 for further information.



Costs for other non-U.S. defined contribution benefit plans and multiemployer pension plans
were $11.0 million in 2004, $11.3 million in 2003, and $9.9 million in 2002.



We expect to contribute $22.7 million to our non-U.S. defined benefit pension plans in 2005.



The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid over the next ten years:



|          |  |                  |      
|--------- |  | ---------------- | -----
|          |  | Pension Benefits
|2005      |  | $                | 21.3 
|2006      |  |                  | 22.3 
|2007      |  |                  | 23.2 
|2008      |  |                  | 25.5 
|2009      |  |                  | 26.6 
|2010-2014 |  |                  | 154.7



NOTE 19. FINANCIAL INSTRUMENTS



We do not hold or issue financial instruments for trading purposes. The
estimated fair values of our financial instruments as of December 31, 2004 and 2003 are as follows:



|                                          |  |                |          |   |                      |   |        |                |  |   |                      |   |  |   |        |  
|----------------------------------------- |  | -------------- | -------- | - | -------------------- | - | ------ | -------------- |  | - | -------------------- | - |  | - | ------ | -
|                                          |  | 2004           |          |   | 2003                 |  
|                                          |  | Carryingamount |          |   | Estimated fair value |   |        | Carryingamount |  |   | Estimated fair value |  
|Assets/(Liabilities):                     |  |                |          |   |                      |   |        |                |  |   |                      |   |  |   |        |  
|Debt subject to compromise                |  | $              | (1,388.6 | ) |                      | $ | (982.8 | )              |  | $ | (1,388.6             | ) |  | $ | (752.2 | )
|Long-term debt, including current portion |  |                | (37.4    | ) |                      |   | (37.4  | )              |  |   | (47.6                | ) |  |   | (47.6  | )
|Foreign currency contract obligations     |  |                | (13.9    | ) |                      |   | (13.9  | )              |  |   | (1.0                 | ) |  |   | (1.0   | )
|Natural gas contracts                     |  |                | 5.3      |   |                      |   | 5.3    |                |  |   | 3.5                  |   |  |   | 3.5    |  



The carrying amounts of cash and cash
equivalents, receivables, accounts payable and accrued expenses, short-term debt and current installments of long-term debt approximate fair value because of the short-term maturity of these instruments. The fair value estimates of long-term debt
were based upon quotes from major financial institutions taking into consideration current rates offered to us for debt of the same remaining maturities. The fair value estimates of foreign currency contract obligations are estimated from national
exchange quotes. The fair values of natural gas contracts are estimated by obtaining quotes from major financial institutions and energy companies.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



We utilize lines of credit and other commercial commitments in order to ensure that adequate funds are available to
meet operating requirements. On December 31, 2004, our foreign subsidiaries had available lines of credit totaling $54.4 million, of which $15.9 million was used, leaving $38.5 million of unused lines of credit for borrowing on December 31, 2004.



On December 31, 2004, we had outstanding letters of credit totaling $73.6
million, of which $40.6 million was issued under the DIP Facility. The DIP Facility had $34.4 million that remained available for issuance of letters of credit as of December 31, 2004. Letters of credit are issued to third party suppliers, insurance
and financial institutions and typically can only be drawn upon in the event of AHIs failure to pay its obligations to the beneficiary. We also have several commercial letters of credit whereby vendors are paid directly via the letter of
credit. Letters of credit are currently arranged through AWIs DIP Facility with JP Morgan Chase. Certain letters of credit arranged with Wachovia Bank, N.A. prior to the Filing remain outstanding.



NOTE 20. DERIVATIVE FINANCIAL INSTRUMENTS



We are exposed to market risk from changes in foreign currency exchange rates, interest
rates and commodity prices that could impact our results of operations and financial condition. We use swap, forward and option contracts to hedge currency and commodity exposures. We regularly monitor developments in the capital markets and only
enter into currency and swap transactions with established counter-parties having investment grade ratings. Exposure to individual counterparties is controlled, and thus we consider the risk of counterparty default to be negligible. Swap, forward
and option contracts are entered into for periods consistent with underlying exposure and do not constitute positions independent of those exposures. We use derivative financial instruments as risk management tools and not for speculative trading
purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions and energy companies in order to manage our exposure to nonperformance on such instruments.



Interest Rate Risk - Due to AWIs Chapter 11 Filing, all affected debt was
classified as liabilities subject to compromise and there were no open interest rate derivatives as of December 31, 2004 and 2003.



Currency Rate Risk - We manufacture and sell our products in a number of countries throughout the world and, as a result, are exposed to movements in foreign
currency exchange rates. To a large extent, our global manufacturing and sales provide a natural hedge of foreign currency exchange rate movement, as foreign currency expenses generally offset foreign currency revenues. At December 31, 2004, our
major foreign currency exposures are to the Euro, the Canadian dollar and the British pound.



We use foreign currency forward exchange contracts to reduce our exposure to the risk that the eventual net cash inflows and outflows, resulting from the sale of product to foreign customers and purchases from foreign
suppliers, will be adversely affected by changes in exchange rates. These derivative instruments are used for forecasted transactions and are classified as cash flow hedges. These transactions allow us to further reduce our overall exposure to
exchange rate movements, since the gains and losses on these contracts offset losses and gains on the transactions being hedged. Gains and losses on these instruments are deferred in other comprehensive income until the underlying transaction is
recognized in earnings. The net fair value of these instruments at December 31, 2004 was an asset of $3.3 million, all of which is expected to be taken to earnings in the next twelve months. The earnings impact is reported in either net sales or
cost of goods sold to match the underlying transaction being hedged. The earnings impact of these hedges was a gain of $1.3 million during 2004.



We also use foreign currency forward exchange contracts to hedge exposures created by cross-currency inter-company loans. The underlying inter-company loans are
classified as short-term and translation adjustments related to these loans are recorded in other income. The related derivative contracts are classified as fair value hedges and the offsetting gains and losses on these contracts are also recorded
in other income. The fair value of these instruments at December 31, 2004 was a $17.1 million liability, all of which is



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



expected to be charged to earnings in the next twelve months. During 2004, the net earnings impact of these hedges was a loss of $0.7 million, recorded in
other non-operating income/expense, which was comprised of a loss of approximately $17.7 million from the foreign currency forward exchange contracts substantially offset by the 2004 translation adjustment of approximately $17.0 million for the
underlying inter-company loans.



Commodity Price Risk - We purchase
natural gas for use in the manufacture of ceiling tiles and other products and to heat many of our facilities. As a result, we are exposed to movements in the price of natural gas. We have a policy of minimizing cost volatility by purchasing natural
gas forward contracts, purchased call options and zero-cash collars. These instruments are designated as cash flow hedges. The mark-to-market gain or loss on qualifying hedges is included in other comprehensive income to the extent effective, and
reclassified into cost of goods sold in the period during which the underlying products are sold. The mark-to-market gains or losses on ineffective portions of hedges are recognized in cost of goods sold immediately. The fair value of these
instruments at December 31, 2004 was a $5.3 million asset, of which $4.3 million is expected to be taken to earnings in the next twelve months. The earnings impact of hedges that matured during 2004, recorded in cost of goods sold, was $5.8 million
of income. The earnings impact of the ineffective portion of these hedges was not material during 2004.



NOTE 21. GUARANTEES



As of December 31,
2004, we maintained an agreement with the lending institution of one of our distributors. Under this agreement, if the distributor were to default on its borrowings and the lender foreclosed on the assets, the bank could return a large part of any
of our products still at the distributor (subject to certain quality and roll size minimums) for a refund of original cost. This agreement will expire in September 2005. At December 31, 2004, the amount of inventory held at the distributor was
approximately $3.2 million. Historically, no claim has been made under any of these types of agreements and we do not anticipate any such claim in the future. As such, no liability has been recorded for this agreement.



In disposing of assets through mid 2000, AWI and some subsidiaries had entered into contracts
that included various indemnity provisions, covering such matters as taxes, environmental liabilities and asbestos and other litigation. Some of these contracts had exposure limits, but many did not. Due to the nature of the indemnities, it is not
possible to estimate the potential maximum exposure under these contracts. As a debtor-in-possession, for those contracts that are still executory where AWI was the sole guarantor, AWI anticipates rejecting those contracts. Parties that timely file
claims with respect to such contracts will have such claims addressed in AWIs Chapter 11 Case. AWI cannot estimate the value of any potential claims that will ultimately be allowed by the Bankruptcy Court. See Item 1 - Business regarding
Proceedings under Chapter 11.



Subsidiaries that are not part of the Chapter 11
Filing also entered into certain contracts that included various indemnity provisions similar to those described above. Since these subsidiaries are not part of the Chapter 11 Filing, these contracts continue to be in effect. Some of these contracts
had exposure limits, but many did not. Due to the nature of the indemnities, it is not possible to estimate the potential maximum exposure under all these contracts. For contracts under which an indemnity claim has been received, a liability of $2.1
million has been recorded as of December 31, 2004. See Note 32 of the Consolidated Financial Statements for additional information.



In September 1999, we sold our Textiles Products operations. As part of the divestiture agreement, we transferred certain liabilities and assets to the purchaser to cover
pension payments earned by the work force as of the sale date. We also reimburse the purchaser for such pension payments that are not covered by the pension assets. In addition, we agreed to reimburse the purchaser for the tax impact of our
reimbursement of the pension payments. This agreement has no termination date. As of December 31, 2004, we maintained a $2.9 million liability for this guarantee. As of December 31, 2004, the net present value of the maximum payments is
approximately $5 million, excluding any amounts paid for tax reimbursement.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



See Notes 4 and 24 for a discussion of the ESOP loan guarantee.



NOTE 22. PRODUCT WARRANTIES



We provide direct customer and end-user warranties for our products. These warranties cover
manufacturing defects that would prevent the product from performing in line with its intended and marketed use. Generally, the terms of these warranties range up to 25 years and provide for the repair or replacement of the defective product. We
collect and analyze warranty claims data with a focus on the historic amount of claims, the products involved, the amount of time between the warranty claims and their respective sales and the amount of current sales. The following table summarizes
the activity for the accrual of product warranties for 2004 and 2003:



|                                        |  |      |       |   |      |   |       |  
|--------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                        |  | 2004 |       |   | 2003 |  
|Balance at beginning of year            |  | $    | 25.5  |   |      | $ | 22.3  |  
|Reductions for payments                 |  |      | (39.0 | ) |      |   | (38.9 | )
|Current year warranty accruals          |  |      | 37.3  |   |      |   | 40.6  |  
|Preexisting warranty accrual changes    |  |      | (1.8  | ) |      |   | (0.3  | )
|Effects of foreign exchange translation |  |      | 0.6   |   |      |   | 1.8   |  
|                                        |  |      |       |   |      |   |       |  
|Balance at end of year                  |  | $    | 22.6  |   |      | $ | 25.5  |  
|                                        |  |      |       |   |      |   |       |  



NOTE 23. OTHER LONG-TERM
LIABILITIES



|                                                    |  |      |      |      |   |     
|--------------------------------------------------- |  | ---- | ---- | ---- | - | ----
|                                                    |  | 2004 |      | 2003
|Long-term deferred compensation arrangements        |  | $    | 40.6 |      | $ | 41.1
|Environmental liabilities not subject to compromise |  |      | 9.4  |      |   | 8.4 
|Other                                               |  |      | 37.6 |      |   | 31.7
|                                                    |  |      |      |      |   |     
|Total other long-term liabilities                   |  | $    | 87.6 |      | $ | 81.2
|                                                    |  |      |      |      |   |     



NOTE 24. RETIREMENT SAVINGS AND
STOCK OWNERSHIP PLAN (RSSOP)



In 1989, we established an Employee Stock
Ownership Plan (ESOP) that borrowed $270 million from banks and insurance companies, repayable over 15 years and guaranteed by AWI. The ESOP used the proceeds to purchase 5,654,450 shares of a new series of convertible preferred stock
issued by Armstrong. In 1996, the ESOP was merged with the Retirement Savings Plan for salaried employees (a defined-contribution pension plan) to form the Retirement Savings and Stock Ownership Plan (RSSOP). On July 31, 1996, the
trustee of the ESOP converted the preferred stock held by the trust into approximately 5.1 million shares of common stock at a one-for-one ratio.



The number of shares released for allocation to participant accounts has been based on the proportion of principal and interest paid to the total amount of debt service
remaining to be paid over the life of the borrowings. Through December 31, 2004, the RSSOP allocated 2,152,000 shares to participants that remain outstanding, participants retired 2,272,000 shares, AHI contributed an additional 437,000 shares from
its treasury and the trustee purchased 243,000 shares on the open market to allocate to employees. During 2004 the RSSOP sold 450,000 unallocated shares on the open market. The proceeds from the sale remain in the RSSOP and are expected to be
allocated to participants no later than when the RSSOP debt is addressed in AWIs Chapter 11 proceedings. As of December 31, 2004, there were approximately 1,462,000 shares in the RSSOP that had yet to be allocated to participants.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



The RSSOP is a qualified defined contribution plan that also includes a 401(k) elective deferral component. A
substantial portion of U.S. employees are eligible and participate. We recorded costs for the RSSOP of $5.8 million in 2004, $5.6 million in 2003 and $4.5 million in 2002, which related to company cash matching contributions.



All RSSOP shares are considered outstanding for earnings per share calculations.
Historically, dividends on allocated shares were credited to employee accounts while dividends on unallocated shares were used to satisfy debt service payments.



See Note 32 for information regarding an audit of the RSSOP by the U.S. Department of Labor.



The RSSOP currently covers parent company nonunion employees, some parent company union employees, Wood Flooring salaried employees, and
Cabinets salaried employees.



On November 22, 2000, AWI failed to repay $50
million in commercial paper that was due. Subsequently, the remaining ESOP bond principal balance of $142.2 million became immediately payable along with a $15.5 million interest and tax make-whole premium. ESOP debt service payments have not been
made since June 2000. As a result of the Chapter 11 Filing, AWIs guarantee of these ESOP loan obligations of $157.7 million is now classified as a liability subject to compromise.



NOTE 25. STOCK-BASED COMPENSATION PLANS



Awards under the 1993 Long-Term Stock Incentive Plan (1993 Plan) were made in the form of stock options, stock appreciation rights in conjunction with stock
options, performance restricted shares and restricted stock awards. No additional awards may be issued under the 1993 Plan.



During 1999, we adopted the 1999 Long-Term Incentive Plan (1999 Plan) which replaced the 1993 Plan. The 1999 Plan provides for the granting of incentive stock
options, nonqualified stock options, stock appreciation rights, performance-restricted shares and restricted stock awards. The 1999 Plan also incorporates stock awards and cash incentive awards. No more than 3,250,000 shares of common stock may be
issued under the 1999 Plan, and no more than 300,000 of the shares may be awarded in the form of performance restricted shares, restricted stock awards or stock awards. The 1999 Plan does not allow awards to be granted after April 25, 2009. Pre-1999
grants made under predecessor plans will be governed under the provisions of those plans.



During 2000, we adopted the Stock Award Plan (2000 Plan) to enable stock awards and restricted stock awards to officers, key employees and non-employee directors. No more than 750,000 treasury shares may
be awarded under the 2000 Plan. The 2000 Plan will remain in effect until the earlier of the grant of all the shares allowed under the plan or termination of the plan by the Board of Directors.



All of the three plans discussed above would be terminated upon the effective date of
AWIs POR. No equity based compensation has been granted since AWI filed for relief under Chapter 11 in December 2000, other than commitments entered into prior to the Chapter 11 filing.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Options were granted to purchase shares at prices not less than the closing market price of the shares on the dates
the options were granted. The options generally became exercisable in one to three years and expire 10 years from the date of grant.





|                                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|Changes in option shares outstanding (thousands except for share price) |  | 2004 |         |   | 2003 |   |         | 2002 | 
|Option shares at beginning of year                                      |  |      | 2,376.9 |   |      |   | 2,508.8 |      |  |   | 2,682.6 |  
|Options granted                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Option shares exercised                                                 |  |      |        |   |      |   |        |      |  |   |        |  
|Options cancelled                                                       |  |      | (112.9  | ) |      |   | (131.9  | )    |  |   | (173.8  | )
|                                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Option shares at end of year                                            |  |      | 2,264.0 |   |      |   | 2,376.9 |      |  |   | 2,508.8 |  
|                                                                        |  |      |        
|Option shares exercisable at end of year                                |  |      | 2,264.0 |   |      |   | 2,343.6 |      |  |   | 1,963.5 |  
|Shares available for grant                                              |  |      | 4,538.7 |   |      |   | 4,425.8 |      |  |   | 4,285.6 |  
|                                                                        |  |      |        
|Weighted average price per share:                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Options outstanding                                                     |  | $    | 29.75   |   |      | $ | 30.62   |      |  | $ | 30.52   |  
|Options exercisable                                                     |  | $    | 29.75   |   |      | $ | 31.01   |      |  |   | 34.50   |  



The table below summarizes information
about stock options outstanding at December 31, 2004.



(thousands except for
life and share price)



|                         |  |                                               |  |                                              |  |                                  |      
|------------------------ |  | --------------------------------------------- |  | -------------------------------------------- |  | -------------------------------- | -----
|                         |  | Options outstanding and exercisable          
|Range of exercise prices |  | Number outstanding andexercisable at 12/31/04 |  | Weighted- average remaining contractual life |  | Weighted- average exercise price
|$1.19 - $18.00           |  | 300.0                                         |  | 5.9                                          |  | $                                | 7.05 
|$18.01 - $19.50          |  | 1,235.3                                       |  | 5.2                                          |  |                                  | 19.44
|$19.51 - $46.00          |  | 243.9                                         |  | 0.4                                          |  |                                  | 45.02
|$46.01 - $60.00          |  | 305.6                                         |  | 2.3                                          |  |                                  | 56.10
|$60.01 - $83.06          |  | 179.2                                         |  | 2.9                                          |  |                                  | 73.14
|                         |  |                                               |  |                                              |  |                                  |      
|                         |  | 2,264.0                                       |  |                                              |  |                                  |      
|                         |  |                                               |  |                                              |  |                                  |      



Restricted stock awards can be used
for the purposes of recruitment, special recognition and retention of key employees. No award of restricted stock shares was granted in 2004, 2003 or 2002. At the end of 2004, there were 121,313 restricted shares of common stock outstanding with
1,026 accumulated dividend equivalent shares.



FAS 123, permits entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net earnings and pro forma earnings per share disclosures. Had compensation costs for these plans been determined consistent with FAS 123, our net earnings and earnings per
share would have been reduced to the following pro forma amounts.



|                                    |  |      |       |   |      |   |       |      |  |   |          |  
|----------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | -------- | -
|                                    |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Net (loss):                         |  |      |       |   |      |   |       |      |  |   |          |  
|As reported                         |  | $    | (80.8 | ) |      | $ | (39.3 | )    |  | $ | (2,142.8 | )
|Pro forma                           |  | $    | (80.8 | ) |      | $ | (39.4 | )    |  | $ | (2,143.3 | )
|                                    |  |      |      
|Basic and diluted (loss) per share: |  |      |       |   |      |   |       |      |  |   |          |  
|As reported                         |  | $    | (2.00 | ) |      | $ | (0.97 | )    |  | $ | (52.91   | )
|Pro forma                           |  | $    | (2.00 | ) |      | $ | (0.97 | )    |  | $ | (52.92   | )



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



The fair value of grants was estimated on the date of grant using the Black-Scholes option pricing model. There were
no stock options granted in 2004, 2003 or 2002.



NOTE 26. EMPLOYEE
COMPENSATION



Employee compensation is presented in the table below.
Charges for severance costs and early retirement incentives to terminated employees (otherwise recorded as restructuring charges) have been excluded.



|                                  |  |      |       |      |   |       |  |   |       |  
|--------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | ----- | -
|Employee compensation cost        |  | 2004 |       | 2003 |   | 2002  | 
|Wages and salaries                |  | $    | 778.5 |      | $ | 718.9 |  | $ | 713.3 |  
|Payroll taxes                     |  |      | 81.5  |      |   | 78.0  |  |   | 76.1  |  
|Pension expense (credits), net    |  |      | 13.3  |      |   | 15.9  |  |   | (15.6 | )
|Insurance and other benefit costs |  |      | 96.0  |      |   | 112.2 |  |   | 106.7 |  
|Stock-based compensation          |  |      |      |      |   | 0.2   |  |   | 0.9   |  
|                                  |  |      |       |      |   |       |  |   |       |  
|Total                             |  | $    | 969.3 |      | $ | 925.2 |  | $ | 881.4 |  
|                                  |  |      |       |      |   |       |  |   |       |  



The decreases in insurance and other
benefit costs is primarily related to decreased medical benefit costs from favorable experience and fewer covered lives plus the favorable impact of the Medicare Act of $7.0 million.



NOTE 27. LEASES



We rent certain real estate and equipment. Several leases include options for renewal or purchase, and contain clauses for payment of real estate taxes and insurance. In
most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases. As part of the Chapter 11 Case, AWI must decide whether to assume, assume and assign, or reject prepetition unexpired leases
and other prepetition executory contracts. AWI has been granted an extension through and including the date on which an order confirming the Plan is entered by the U.S. District Court for the District of Delaware to make these decisions with respect
to prepetition unexpired leases of real property. With respect to prepetition executory contracts and unexpired leases not related to real estate, AWI has until confirmation of a reorganization plan to make these decisions unless such time is
shortened by the Bankruptcy Court. The accompanying financial statements do not reflect any adjustment related to assumption or rejection of such agreements.



Rental expense was $22.4 million in 2004, $21.3 million in 2003 and $22.7 million in 2002. Future minimum payments at December 31, 2004, by year and in the aggregate,
having noncancelable lease terms in excess of one year were as follows:



|                                 |  |                |     |                  |   |     
|-------------------------------- |  | -------------- | --- | ---------------- | - | ----
|Scheduled minimum lease payments |  | Capital Leases |     | Operating Leases
|2005                             |  | $              | 1.7 |                  | $ | 14.4
|2006                             |  |                | 1.0 |                  |   | 11.8
|2007                             |  |                | 0.7 |                  |   | 8.3 
|2008                             |  |                | 0.3 |                  |   | 5.0 
|2009                             |  |                |    |                  |   | 2.6 
|Thereafter                       |  |                | 0.1 |                  |   | 10.4
|Total                            |  | $              | 3.8 |                  | $ | 52.5



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Assets under capital leases are included in the consolidated balance sheets as follows:



|                              |  |      |       |   |      |   |       |  
|----------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                              |  | 2004 |       |   | 2003 |  
|Land                          |  | $    | 3.8   |   |      | $ | 3.8   |  
|Building                      |  |      | 4.1   |   |      |   | 4.1   |  
|Machinery                     |  |      | 26.7  |   |      |   | 25.8  |  
|Less accumulated amortization |  |      | (14.8 | ) |      |   | (11.6 | )
|                              |  |      |       |   |      |   |       |  
|Net assets                    |  | $    | 19.8  |   |      | $ | 22.1  |  
|                              |  |      |       |   |      |   |       |  



NOTE 28. SHAREHOLDERS
EQUITY



Treasury share changes for 2004, 2003 and 2002 are as follows:



|                                       |  |          |  |          |  |         
|-------------------------------------- |  | -------- |  | -------- |  | --------
|Years ended December 31 (in thousands) |  | 2004     |  | 2003     |  | 2002    
|Common shares                          |  |          |  |          |  |         
|Balance at beginning of year           |  | 11,210.0 |  | 11,201.3 |  | 11,176.6
|Stock purchases and other              |  |         |  | 8.7      |  | 24.7    
|                                       |  |          |  |          |  |         
|Balance at end of year                 |  | 11,210.0 |  | 11,210.0 |  | 11,201.3
|                                       |  |          |  |          |  |         



Stock purchases and other represent
shares received under stock-based compensation plan forfeitures and share tax withholding transactions.



The balance of each component of accumulated other comprehensive income as of December 31, 2004 and 2003 is presented in the table below.



|                                         |  |      |       |   |      |   |       |  
|---------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                         |  | 2004 |       |   | 2003 |  
|Foreign currency translation adjustments |  | $    | 84.3  |   |      | $ | 61.9  |  
|Derivative gain, net                     |  |      | 3.6   |   |      |   | 3.3   |  
|Minimum pension liability adjustments    |  |      | (45.1 | ) |      |   | (21.9 | )
|                                         |  |      |       |   |      |   |       |  
|Accumulated other comprehensive income   |  | $    | 42.8  |   |      | $ | 43.3  |  
|                                         |  |      |       |   |      |   |       |  



The related tax effects allocated to
each component of other comprehensive income for 2004 are presented in the table below.



|                                         |  |                |       |   |                       |   |      |                  |  |   |       |  
|---------------------------------------- |  | -------------- | ----- | - | --------------------- | - | ---- | ---------------- |  | - | ----- | -
|                                         |  | Pre-tax Amount |       |   | Tax Expense (Benefit) |   |      | After tax Amount | 
|Foreign currency translation adjustments |  | $              | 22.4  |   |                       | $ |     |                  |  | $ | 22.4  |  
|Derivative gain, net                     |  |                | 0.5   |   |                       |   | (0.2 | )                |  |   | 0.3   |  
|Minimum pension liability adjustments    |  |                | (33.6 | ) |                       |   | 10.4 |                  |  |   | (23.2 | )
|                                         |  |                |       |   |                       |   |      |                  |  |   |       |  
|Total other comprehensive income         |  | $              | (10.7 | ) |                       | $ | 10.2 |                  |  | $ | (0.5  | )
|                                         |  |                |       |   |                       |   |      |                  |  |   |       |  



The change in the minimum pension
liability adjustment between 2004 and 2003 was primarily due to the reduction of discount rates related to our plans.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



NOTE 29. SUPPLEMENTAL FINANCIAL INFORMATION



|                                                           |  |      |       |      |   |       |  |   |      
|---------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                                           |  | 2004 |       | 2003 |   | 2002 
|Selected operating expenses                                |  |      |       |      |   |       |  |   |      
|Maintenance and repair costs                               |  | $    | 114.7 |      | $ | 107.8 |  | $ | 110.7
|Research and development costs                             |  |      | 46.6  |      |   | 45.3  |  |   | 50.1 
|Advertising costs                                          |  |      | 29.6  |      |   | 32.7  |  |   | 41.2 
|                                                           |  |      |      
|Other non-operating expense                                |  |      |       |      |   |       |  |   |      
|Foreign currency translation loss, net of hedging activity |  | $    | 1.3   |      | $ | 3.8   |  | $ | 2.2  
|Other                                                      |  |      | 1.8   |      |   | 1.9   |  |   | 1.4  
|                                                           |  |      |       |      |   |       |  |   |      
|Total                                                      |  | $    | 3.1   |      | $ | 5.7   |  | $ | 3.6  
|                                                           |  |      |       |      |   |       |  |   |      
|Other non-operating income                                 |  |      |       |      |   |       |  |   |      
|Interest income                                            |  | $    | 4.0   |      | $ | 3.5   |  | $ | 4.8  
|Equity earnings in ISI                                     |  |      | 1.9   |      |   | 0.3   |  |   | 2.1  
|Interest on asbestos receivable payment                    |  |      |      |      |   | 1.1   |  |   |     
|Other                                                      |  |      | 0.5   |      |   | 0.1   |  |   | 0.6  
|                                                           |  |      |       |      |   |       |  |   |      
|Total                                                      |  | $    | 6.4   |      | $ | 5.0   |  | $ | 7.5  
|                                                           |  |      |       |      |   |       |  |   |      



NOTE 30. SUPPLEMENTAL CASH FLOW
INFORMATION



|                                  |  |      |      |      |   |      |  |   |     
|--------------------------------- |  | ---- | ---- | ---- | - | ---- |  | - | ----
|                                  |  | 2004 |      | 2003 |   | 2002
|Interest paid                     |  | $    | 2.2  |      | $ | 2.8  |  | $ | 3.4 
|Income taxes paid, net of refunds |  |      | 77.3 |      |   | 27.5 |  |   | 44.4



NOTE 31. RELATED PARTIES



We sold 65% of our ownership in our gasket products subsidiary, (now known as
Interface Solutions, Inc. or ISI) on June 30, 1999. We still retain 35% ownership of this business as of December 31, 2004. As part of the divestiture, we agreed to continue to purchase a portion of the felt products used in the
manufacturing of resilient flooring from ISI for an initial term of eight years. Currently, we are required to purchase at least 75% of our felt requirements from ISI. The sale agreement also stipulated quarterly felt price adjustments that are
based upon changing market prices for the felt. In October 2002, the agreement was amended to include a cap on increases for 2003 and 2004. We can purchase felt products from another supplier if ISIs prices are more than 10% higher than
another suppliers prices. Our purchases of felt products from ISI for 2004, 2003 and 2002 were $27.5 million, $26.9 million and $29.2 million, respectively. The amounts due to ISI for these purchases were $1.7 million and $1.6 million at the
end of 2004 and 2003. Armstrong and ISI are contractually required to cooperate in product reformulation and new product development, but we are free to seek alternatives to felt products. Additionally, we receive nominal monthly payments from ISI
for some logistics and administrative services. The amounts outstanding from ISI at the end of 2004 and 2003 for the logistics and administrative services we provide them were less than $0.1 million. ISI had filed a proof of claim in
Armstrongs Chapter 11 Case requesting payment for our prepetition obligations. This matter was settled in November 2002 with ISI agreeing to withdraw its proof of claim upon the consummation of the POR, subject to certain terms and conditions.
See Note 11 for additional information.



We purchase grid products from WAVE,
our 50%-owned joint venture with Worthington Industries. The total amount of these purchases was approximately $60 million, $51 million and $41 million for the years ended December 31, 2004, 2003 and 2002, respectively. We also provide certain
selling, promotional and administrative processing services to WAVE for which we receive reimbursement. Those services amounted to $11.8 million, $9.8 million and $10.0 million for the years ended December 31, 2004, 2003 and 2002, respectively. The
net amounts due from us to WAVE for these relationships were $4.0 million and $1.8 million at the end of 2004 and 2003. See Note 11 for additional information.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



See discussion of Ardex in Note 7.



NOTE 32. LITIGATION AND RELATED MATTERS



ASBESTOS-RELATED LITIGATION



Prior to December 6, 2000, AWI, the major operating subsidiary of AHI, had been named as a defendant in personal injury cases and property damage cases related to
asbestos-containing products. On December 6, 2000, AWI filed a voluntary petition for relief (the Filing) under Chapter 11 of the U.S. Bankruptcy Code to use the court-supervised reorganization process to achieve a resolution of
AWIs asbestos-related liability.



Two of AWIs domestic subsidiaries
also commenced Chapter 11 proceedings at the time of the Filing. AHI and all of AWIs other direct and indirect subsidiaries, including Armstrong Wood Products Inc. (formerly Triangle Pacific Corp.), WAVE (Armstrongs ceiling grid systems
joint venture with Worthington Industries, Inc.), Armstrong Canada and Armstrong DLW AG were not a part of the Filing and accordingly the liabilities, including asbestos-related liability if any, of such companies arising out of their own activities
will not be resolved in AWIs Chapter 11 Case except for any asbestos-related liability that also relates, directly or indirectly, to the pre-Filing activities of AWI.



Asbestos-Related Personal Injury Claims



Prior to the Filing, AWI was a member of the Center for Claims Resolution (the CCR), which handled the defense and settlement of asbestos-related personal
injury claims on behalf of its members. The CCR pursued broad-based settlements of asbestos-related personal injury claims under the Strategic Settlement Program (SSP) and had reached agreements with law firms that covered approximately
130,000 claims that named AWI as a defendant.



Due to the Filing, holders of
asbestos-related personal injury claims are stayed from continuing to prosecute pending litigation and from commencing new lawsuits against AWI. In addition, AWI ceased making payments to the CCR with respect to asbestos-related personal injury
claims, including payments pursuant to the outstanding SSP agreements. A creditors committee representing the interests of asbestos-related personal injury claimants and an individual representing the interests of future claimants have been
appointed in the Chapter 11 Case. AWIs present and future asbestos-related liability will be addressed in its Chapter 11 Case. See Note 1 regarding AWIs Chapter 11 proceeding.



During 2003, AWI and the other parties in its Chapter 11 Case reached agreement on a plan of reorganization that addresses how all of
AWIs pre-Filing liabilities are to be settled. Several amendments to the plan of reorganization were filed, culminating in the Fourth Amended Plan of Reorganization filed with the Bankruptcy Court on May 23, 2003, which was modified by
modifications filed with the Bankruptcy Court on October 17, 2003, November 10, 2003, and December 3, 2004, and is referred to in this report as the POR.



Before the POR may be implemented, it must be confirmed by order of the Bankruptcy Court and the U.S. District Court. In addition,
consummation of the POR is subject to the satisfaction after confirmation of certain conditions, as provided by the POR. On February 23, 2005, the U.S. District Court Judge Eduardo C. Robreno ruled that the POR, in its current form, could not be
confirmed. AWI filed a Notice of Appeal to the U.S. Court of Appeals for the Third Circuit on March 4, 2005. On March 18, 2005, AWI filed a motion to expedite the appeal to the U.S. Court of Appeals. AWI is also reviewing other options to resolve
its Chapter 11 Case. See Note 1 for further discussion of AWIs Chapter 11 process.



A principal feature of the POR is the creation of a trust (the Asbestos PI Trust), pursuant to section 524(g) of the Bankruptcy Code, for the purpose of addressing AWIs personal injury (including
wrongful death) asbestos-related liability. All present and future



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



asbestos-related personal injury claims against AWI, including contribution claims of co-defendants, arising directly or indirectly out of AWIs
pre-Filing use of or other activities involving asbestos would be channeled to the Asbestos PI Trust.



In accordance with the 524(g) injunction if the POR goes into effect, various entities would be protected from such present and future asbestos-related personal injury claims. These entities include, among others,
reorganized AWI, AHI, AWIs subsidiaries and other affiliates (as defined in the POR), and their respective officers and directors. Upon emergence from Chapter 11, AWI would not have any responsibility for these claims (including claims against
AWI based solely on its ownership of a subsidiary or other affiliate), nor would it participate in their resolution.



However, although AWIs domestic and foreign subsidiaries and other affiliates would be protected parties, asbestos-related personal injury claims against them would
be channeled to the Asbestos PI Trust only to the extent such claims directly or indirectly relate to the manufacturing, installation, distribution or other activities of AWI or are based solely on AWIs ownership of the subsidiaries or other
affiliates (as distinguished from independent activities of the subsidiaries or affiliates). Currently, three asbestos-related personal injury litigations against subsidiaries of AWI allegedly arising out of such independent activities are pending.
These claims would not be channeled to the Asbestos PI Trust under the POR inasmuch as they do not involve activities of AWI. The cases have several defendants. The subsidiaries deny liability and are aggressively defending the matters. AWI has not
recorded any liability for these matters. Management does not expect that any sum that may have to be paid in connection with these matters will be material to Armstrong.



In addition, workers compensation claims brought against AWI or its subsidiaries or other affiliates would not be channeled to the
Asbestos PI Trust and would remain subject to the workers compensation process. Historically, workers compensation claims against AWI and its subsidiaries have not been significant in number or amount and AWI has continued to honor its
obligations with respect to such claims during the Chapter 11 Case. Workers compensation law provides that the employer is responsible for evaluation, medical treatment and lost wages as a result of a job-related injury. Currently, AWI has
three pending workers compensation claims, and its UK subsidiary has five employer liability claims involving alleged asbestos exposure.



There also is uncertainty as to proceedings, if any, brought in certain foreign jurisdictions with respect to the effect of the 524(g) injunction in precluding the
assertion in such jurisdictions of asbestos-related personal injury claims, proceedings related thereto or the enforcement of judgments rendered in such proceedings.



Management believes that neither AWI nor any of its subsidiaries or other affiliates is subject to any asbestos-related personal injury
claims that would not be channeled to the Asbestos PI Trust and that are of a magnitude that, individually or collectively, would be material to reorganized Armstrong.



Asbestos-Related Liability



Based upon events through early March 2003, primarily the parties agreement on the basic terms of the PORs treatment of AWIs asbestos-related
liabilities, management concluded that it could reasonably estimate its probable liability for AWIs current and future asbestos-related personal injury claims. Accordingly, in the fourth quarter of 2002, AWI recorded a $2.5 billion charge to
increase the balance sheet liability. The recorded asbestos-related liability for personal injury claims of approximately $3.2 billion at December 31, 2004 and 2003, which was treated as subject to compromise, represents the estimated amount of
liability that is implied based upon the negotiated resolution reflected in the POR, the total consideration expected to be paid to the Asbestos PI Trust pursuant to the POR and an assumption for this purpose that the recovery value percentage for
the allowed claims of the Asbestos PI Trust is equal to the estimated recovery value percentage for the allowed non-asbestos unsecured claims.



AWI is unable to predict whether the POR will be confirmed or when AWI would emerge from Chapter 11. Therefore, the timing and terms of resolution of the Chapter 11 Case
remain uncertain. As long as this uncertainty exists, future changes to the recorded



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



asbestos-related liability are possible and could be material to AWIs financial position and the results of its operations. Management will continue to
review the recorded liability in light of future developments in the Chapter 11 Case and make changes to the recorded liability if and when it is appropriate.



Insurance Recovery Proceedings



A substantial portion of AWIs primary and remaining excess insurance asset is nonproducts (general liability) insurance for personal injury claims. AWI has entered
into settlements with a number of the carriers resolving its coverage issues. However, an alternative dispute resolution (ADR) procedure was commenced against certain carriers to determine the percentage of resolved and unresolved claims
that are nonproducts claims, to establish the entitlement to such coverage and to determine whether and how much reinstatement of prematurely exhausted products hazard insurance is warranted. The nonproducts coverage potentially available is
substantial and includes defense costs in addition to limits.



During 1999, AWI
received preliminary decisions in the initial phases of the trial proceeding of the ADR, which were generally favorable to AWI on a number of issues related to insurance coverage. However, during the first quarter of 2001, a new trial judge was
selected for the ADR. The new trial judge conducted hearings in 2001 and determined not to rehear matters decided by the previous judge. In the first quarter of 2002, the trial judge concluded the ADR trial proceeding with findings in favor of AWI
on substantially all key issues. Liberty Mutual, the only insurer that is still a party to the ADR, appealed that final judgment. Appellate argument was held on March 11, 2003. On July 30, 2003, the appellate arbitrators ruled that AWIs claims
against certain Liberty Mutual policies were barred by the statute of limitations. The ruling did not address the merits of any of the other issues Liberty Mutual raised in its appeal. Based on that unfavorable ruling, AWI concluded that insurance
assets of $73 million were no longer probable of recovery. AWI was also ordered to reimburse Liberty Mutual for certain costs and administration fees that Liberty Mutual incurred during the ADR. The $1.6 million claimed for these costs and fees is
in dispute. Based upon an AWI request, the appellate panel held a rehearing on November 21, 2003. In January 2004, the appellate panel upheld its initial ruling. On February 4, 2004, AWI filed a motion in the U.S. District Court for the Eastern
District of Pennsylvania to vacate the rulings of the appellate panel.



In July
2002, AWI filed a lawsuit against Liberty Mutual in the U.S. District Court for the Eastern District of Pennsylvania seeking, among other things, a declaratory judgment with respect to certain policy issues not subject to binding ADR. The U.S.
District Court has not yet set a schedule to hear this matter.



On June 13,
2003, the New Hampshire Insurance Department placed The Home Insurance Company (Home) under an order of liquidation. Less than $10 million of AWIs recorded insurance asset is based on policies with Home, which management believes
is probable of recovery. AWI filed a proof of claim against Home during June 2004. It is uncertain when AWI will receive proceeds from Home under these insurance policies.



Insurance Asset



An insurance asset in respect of asbestos claims in the amount of $98.6 million was recorded as of December 31, 2004 compared to $103.1 million recorded as of December
31, 2003. The total amount recorded reflects AWIs belief that insurance proceeds will be recovered in this amount, based upon AWIs success in insurance recoveries, settlement agreements that provide such coverage, the nonproducts
recoveries by other companies and the opinion of outside counsel. Such insurance, in our opinion, is either available through settlement or probable of recovery through negotiation or litigation. Depending on further progress of the ADR, activities
such as settlement discussions with insurance carriers party to the ADR and those not party to the ADR, the final determination of coverage shared with ACandS (the former AWI insulation contracting subsidiary that was sold in August 1969 and which
filed for relief under Chapter 11 of the Bankruptcy Code in September 2002) and the financial condition of the insurers, AWI may revise its estimate of probable insurance recoveries. Approximately $79 million of the $98.6 million asset is determined
from agreed coverage in place. Of the $98.6 million, $9.8 million has been recorded as a current asset as of December 31, 2004 reflecting managements estimate of the minimum insurance payments to be received in the next 12 months.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Many uncertainties remain in the insurance recovery process; therefore, AWI did not increase the estimated insurance
recovery asset in the fourth quarter of 2004.



Cash Flow Impact



As a result of the Chapter 11 Filing, AWI has not made any payments for
asbestos-related personal injury claims since the fourth quarter of 2000. During 2004, 2003 and 2002, AWI received asbestos-related insurance recoveries of $4.5 million, $22.0 million and $16.0 million, respectively. During the third quarter of
2003, AWI paid $9.0 million for asbestos-related property damage claims and received $9.0 million of insurance proceeds related to these claims. During the pendency of the Chapter 11 Case, AWI does not expect to make any further cash payments for
asbestos-related claims, but AWI expects to continue to receive insurance proceeds under the terms of various settlement agreements. Management estimates that the timing of future cash recoveries of the recorded asset may extend beyond 10 years.



Potential Legislation



On February 7, 2005 Senator Arlen Specter submitted into the Congressional Record and
distributed to the Senate Judiciary Committee a discussion draft of asbestos reform legislation. Members of the Senate are currently reviewing the draft bill. There is uncertainty as to whether any asbestos reform proposal will become law, and what
impact there might be on AWIs asbestos liability and/or AWIs Chapter 11 Case.



Conclusion



Many uncertainties
continue to exist about the matters impacting AWIs asbestos-related liability and insurance asset. These uncertainties include when and if the POR will be confirmed by the U.S. District Court, the impact of any potential legislation, and the
financial condition of AWIs insurance carriers.



Additionally, if the POR
is confirmed, AWI is unable to predict when it will be implemented. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. As long as this uncertainty exists, future changes to the recorded liability and insurance
asset are possible and could be material to AWIs financial position and the results of its operations. Management will continue to review the recorded liability and insurance asset in light of future developments in the Chapter 11 Case and
make changes to the recorded amounts if and when it is appropriate.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



ENVIRONMENTAL MATTERS



Environmental Expenditures



Most of our manufacturing and certain of our research facilities are affected by various federal, state and local environmental requirements relating to the discharge of
materials or the protection of the environment. We make expenditures necessary for compliance with applicable environmental requirements at our operating facilities. We incurred expenditures of approximately $5.5 million in 2004, $3.7 million in
2003, and $4.5 million in 2002 associated with environmental compliance and control facilities.



As a result of continuous changes in regulatory requirements, we cannot predict with certainty future expenditures associated with compliance with environmental requirements. The United States Environmental Protection
Agency (EPA) has recently promulgated a new regulation pursuant to the Clean Air Act that may impact our domestic manufacturing operations. That regulation, The National Emission Standards for Hazardous Air Pollutants for Industrial,
Commercial, and Institutional Boilers and Process Heathers Act, became effective in November, 2004, and requires compliance by September 13, 2007. While we are finalizing our review of this regulation, adoption of this regulation is not expected to
have a material impact on our consolidated results of operations or financial condition.



Environmental Remediation



Summary



We are involved in proceedings under the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA), and similar state Superfund laws at 28 sites. In most cases, we are one of many potentially responsible parties (PRPs) which have potential liability for the
required investigation and remediation of each site and which, in some cases, have agreed to jointly fund that required investigation and remediation. With regard to some sites, however, we dispute the liability, the proposed remedy or the proposed
cost allocation among the PRPs. We may have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies.



We have also been remediating environmental contamination resulting from past industrial activity at certain of our former plant sites. Estimates of our future
environmental liability at the Superfund sites and current or former plant sites are based on evaluations of currently available facts regarding each individual site and consider factors such as our activities in conjunction with the site, existing
technology, presently enacted laws and regulations and prior company experience in remediating contaminated sites. Although current law imposes joint and several liability on all parties at Superfund sites, our contribution to the remediation of
these sites is expected to be limited by the number of other companies also identified as potentially liable for site remediation. As a result, our estimated liability reflects only our expected share. In determining the probability of contribution,
we consider the solvency of the parties, whether liability is being disputed, the terms of any existing agreements and experience with similar matters. Additionally, the Chapter 11 Case also may affect the ultimate amount of such contributions.



Effects of Chapter 11



Certain of AWIs environmental liabilities are subject to discharge through its Chapter
11 Case while others are not. AWIs payments and remediation work on such sites for which AWI is a PRP is under review in light of the Chapter 11 Filing. The bar date for claims from the EPA expired during the third quarter of 2003. AWI
received an unliquidated proof of claim from the EPA. Those environmental obligations that AWI has with respect to property that it owns or operates are likely to be unaffected by the Chapter 11 Case. Therefore, AWI will be required to continue
meeting its on-going environmental compliance obligations at the properties that AWI owns or operates. AWI will also be required to address the effects of any contamination at those sites, even if the contamination predated Chapter 11 Filing. In
addition, AWI may be obligated to remedy the off-site impact of activities that occurred on the properties it owns and operates.



Monetary claims with respect to properties that AWI does not own or operate (such as formerly owned sites, or landfills to which AWIs waste was taken) may be
discharged in AWIs Chapter 11 Case.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Accordingly, claims brought by a federal or state agency alleging that AWI should reimburse the claimant for money that it spent cleaning up a site which AWI
does not own or operate would be subject to discharge, provided the claimant received proper notice of the bankruptcy and bar date. The same would be true for monetary claims by private parties, such as other PRPs with respect to sites with multiple
PRPs. Under the POR, the Superfund sites at which AWI is alleged to be a PRP are being treated as unsecured liabilities subject to compromise. Other Superfund sites relate to entities that are not part of AWIs Chapter 11 Case and therefore
will not be discharged.



In addition to the right to sue for reimbursement of
the money it spends, CERCLA also gives the federal government the right to sue for an injunction compelling a defendant to perform a cleanup. Several state statutes give similar injunctive rights to those States. While we believe such rights do not
survive Chapter 11, there does not appear to be controlling judicial precedent that these injunctive rights are dischargeable. Thus, according to some cases, while a governmental agencys right to require AWI to reimburse it for the costs of
cleaning up a site may be dischargeable, the same government agencys right to compel us to spend our money cleaning up the same site may not be dischargeable even though the financial impact to AWI would be the same in both instances.



Specific Events



AWI has been working to resolve as many of its environmental liabilities through its Chapter
11 Case as possible. AWI has negotiated a global environmental settlement with the Department of Justice and the EPA with respect to CERCLA liability at 37 sites. Pursuant to the proposed Settlement Agreement, the federal government would covenant
not to sue AWI for either monetary or injunctive relief under CERCLA at 19 of these sites, in exchange for an allowed claim amount in the bankruptcy with respect to known claims concerning sites that AWI does not own or operate. Under the
Settlement, AWI would have contribution protection under CERCLA with respect to private party claims at the sites at which the government receives an allowed claim. Additionally, AWI has the benefit of discharge both at the 19 sites for which the
government receives an allowed claim and at an additional 18 sites identified in the Settlement Agreement. At an additional site, AWI would continue to participate in the cleanup under a previously approved Consent Decree. Upon this global
settlement becoming effective, the EPA proof of claim will be amended to assert a claim in the amount of $8.7 million. This amount includes the $7.8 million that AWI and EPA agreed upon with respect to the Peterson Puritan site. Notice of the
Settlement was published in the Federal Register on February 10, 2005, soliciting comment for 30 days. Following the conclusion of the public comment period, the government may reconsider the Settlement Agreement on the basis of any comments. If the
government decides to go forward with the Settlement Agreement, the parties will file a motion with the bankruptcy court seeking approval.



AWI is subject to a unilateral order by the Oregon Department of Environmental Quality (DEQ) to conduct a remedial investigation and feasibility study and any
necessary remedial design and action at its St. Helens, Oregon facility, as well as the adjacent Scappoose Bay. AWI has denied liability for Scappoose Bay, but has cooperated with the DEQ regarding its owned property. Other potentially responsible
parties who are not yet subject to orders by the DEQ include former site owners Owens Corning (OC) and Kaiser Gypsum Company, Inc. (Kaiser). AWI has entered into an agreement with Kaiser for the sharing of costs and
responsibilities with respect to the remedial investigation, feasibility study and remedy selection at the site. OC has entered into a settlement with the DEQ. Pursuant to the settlement, OC has made a lump sum payment to the DEQ in exchange for
contribution protection (including protection against common law and statutory contribution claims by AWI against OC) and a covenant not to sue. AWI has reached an agreement with the DEQ as to how these funds will be made available for the
investigation and remediation of the site. AWI has recorded an environmental liability with respect to the investigation and feasibility study at its St. Helens facility, but not for Scappoose Bay because AWI continues to dispute
responsibility for contamination of Scappoose Bay.



Summary of Financial
Position



Liabilities of $28.0 million and $21.2 million at December 31,
2004 and December 31, 2003, respectively were for potential environmental liabilities that we consider probable and for which a reasonable estimate of the probable liability could be made. The



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



majority of this increase relates to developments in the Peterson Puritan site described in Specific Events above. Where existing data is
sufficient to estimate the liability, that estimate has been used; where only a range of probable liabilities is available and no amount within that range is more likely than any other, the lower end of the range has been used. As assessments and
remediation activities progress at each site, these liabilities are reviewed to reflect additional information as it becomes available. Due to the Chapter 11 Filing, $18.6 million of the December 31, 2004 and $12.8 million of the December 31, 2003
environmental liabilities are classified as prepetition liabilities subject to compromise. As a general rule, the Chapter 11 process does not preserve company assets for such prepetition liabilities.



The estimated liabilities above do not take into account any claims for recoveries from
insurance or third parties. Such recoveries, where probable, have been recorded as an asset in the consolidated financial statements and are either available through settlement or anticipated to be recovered through negotiation or litigation. The
amount of the recorded asset for estimated recoveries was $2.4 million and $2.5 million at December 31, 2004 and December 31, 2003, respectively.



Actual costs to be incurred at identified sites may vary from our estimates. Based on our current knowledge of the identified sites, we believe that any sum we may have
to pay in connection with environmental matters in excess of the amounts noted above would not have a material adverse effect on our financial condition, or liquidity, although the recording of future costs may be material to earnings in such future
period. For the years ended December 31, 2004, 2003 and 2002, our net expense, recorded in the income statement, was $7.2 million, less than $0.1 million, and $4.5 million, respectively.



PATENT INFRINGEMENT CLAIMS



We are a defendant in two lawsuits claiming patent infringement related to some of our laminate flooring products. The plaintiffs have claimed unspecified monetary
damages. We are being defended and indemnified by our supplier for all costs and potential damages related to the litigation.



FORMER EMPLOYEES CLAIM



Former Armstrong employees that were separated from the company in two business divestitures in 2000 brought two purported class actions against the Retirement Committee of AWI, certain current and former members of
the Retirement Committee, the Retirement Savings and Stock Ownership Plan (RSSOP), AHI and the trustee bank of the RSSOP. Plaintiffs alleged breach of Employee Retirement Income Security Act (ERISA) fiduciary duties and other violations of ERISA
pertaining to losses in their RSSOP accounts, which were invested in Armstrong common stock.



In 2003, an agreement was reached to settle this matter. Contributors to the settlement were AWI, its insurer and the trustee bank of the RSSOP. The full amount of the settlement was allocated in December 2003 among
approximately 370 former employees. AWIs portion of the settlement is $1.0 million, which will be treated as convenience claims in the Chapter 11 Case. The settlement was approved by the Bankruptcy Court on March 31, 2003 and by the United
States District Court (Eastern District of PA) on June 16, 2003. Based upon the Bankruptcy Courts approval of the settlement, AWI recorded a $1.0 million charge in the first quarter of 2003 in SG&A expense.



DEPARTMENT OF LABOR SETTLEMENT



Subsequent to an audit by the United States Department of Labor (DOL), we were
informed that the DOL was challenging the validity of the use of certain contributions, in the approximate aggregate amount of $33.4 million, to fund debt payments made by the Armstrong Employee Stock Ownership Plan (ESOP), as provided
for by that plan. We reached a settlement with the DOL to resolve this matter with a funding to the ESOP of $1.5 million, which was distributed to plan participants in accordance with terms of the agreement in February 2004. Insurance and third
parties funded $0.9 million of the settlement. Both the accrual of $1.5 million expense and $0.9 million insurance receivable were recorded in the third quarter of 2003 in SG&A expense.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



OTHER CLAIMS



Additionally, we are involved in various other claims and legal actions involving product liability, patent infringement, breach of contract, distributor termination,
employment law issues and other actions arising in the ordinary course of business. While complete assurance cannot be given to the outcome of these claims, we do not expect that any sum that may have to be paid in connection with these matters will
have a materially adverse effect on our consolidated financial position or liquidity, however it could be material to the results of operations in the particular period in which a matter is resolved.



NOTE 33. EARNINGS PER SHARE



The diluted loss per share is calculated using basic common shares outstanding since using
diluted common shares would be anti-dilutive. The difference between the average number of basic and diluted common shares outstanding is due to contingently issuable shares. Earnings per share components may not add due to rounding.



NOTE 34. PREFERRED STOCK PURCHASE RIGHTS PLAN



AHI has a shareholder rights plan under a Rights Agreement dated as of March 14, 2000 and in
connection therewith distributed one right for each share of its common stock outstanding. In general, the rights become exercisable at $300 per right for a fractional share of a new series of Class A preferred stock 10 days after a person or group,
other than certain affiliates of AHI either acquires beneficial ownership of shares representing 20% or more of the voting power of AHI or announces a tender or exchange offer that could result in such person or group beneficially owning shares
representing 28% or more of the voting power of AHI. Currently, one right is attached to each share of common stock and trades automatically with the share of common stock. When exercisable, the rights may trade separately from the common stock. If
thereafter any person or group becomes the beneficial owner of 28% or more of the voting power of AHI, or if AHI is the surviving company in a merger with a person or group that owns 20% or more of the voting power of AHI, then each owner of a right
(other than such 20% shareholder) would be entitled to purchase shares of company common stock having a value equal to twice the exercise price of the right. Should AHI be acquired in a merger or other business combination, or sell 50% or more of
its assets or earnings power, each right would entitle the holder to purchase, at the exercise price, common shares of the acquirer having a value of twice the exercise price of the right. The exercise price was determined on the basis of the
Boards view of the long-term value of AHIs common stock. The rights have no voting power nor do they entitle a holder to receive dividends. At AHIs option, the rights are redeemable prior to becoming exercisable at five cents per
right. The rights expire on March 21, 2006, unless extended or earlier redeemed by the AHI Board of Directors. If the POR discussed in Note 1 would be approved and become effective, and the proposed dissolution of AHI is effected, the rights will be
cancelled along with the related shares of AHI common stock.



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Report of Independent Registered Public Accounting Firm



The Board of Directors,

Armstrong World Industries, Inc.:



We have
audited the accompanying consolidated financial statements of Armstrong World Industries, Inc. and subsidiaries (the Company) as listed in the accompanying index on page 50. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule as listed in the accompanying index on page 50. These consolidated financial statements and financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 financial position of Armstrong World Industries, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth therein.



The accompanying consolidated financial statements and financial statement schedule have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 of the consolidated financial statements, the Company
and two of its domestic subsidiaries filed separate voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court on December 6, 2000. The Company has also defaulted on certain debt
obligations. Although the Company and these operating subsidiaries are currently operating their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court, the continuation of their businesses as going concerns is contingent
upon, among other things, the ability to formulate a plan of reorganization which will gain approval of the creditors and confirmation by the Bankruptcy Court. The filing under Chapter 11 and the resulting increased uncertainty regarding the
Companys potential asbestos liabilities, as discussed in Note 32 of the consolidated financial statements, raise substantial doubt about the Companys ability to continue as a going concern. The accompanying consolidated financial
statements and financial statement schedule do not include any adjustments that might result from the outcome of these uncertainties.



/s/ KPMG LLP



Philadelphia, Pennsylvania

March 14, 2005



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Armstrong World Industries, Inc., and Subsidiaries

Consolidated Statements of Earnings

(amounts in millions)



|                                                                                                                |  |                          |         |   |      |   |         |      |  |   |          |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                                                |  | Years Ended December 31, |        
|                                                                                                                |  | 2004                     |         |   | 2003 |   |         | 2002 | 
|Net sales                                                                                                       |  | $                        | 3,497.3 |   |      | $ | 3,259.0 |      |  | $ | 3,172.3  |  
|Cost of goods sold                                                                                              |  |                          | 2,811.0 |   |      |   | 2,597.4 |      |  |   | 2,404.5  |  
|                                                                                                                |  |                          |         |   |      |   |         |      |  |   |          |  
|Gross profit                                                                                                    |  |                          | 686.3   |   |      |   | 661.6   |      |  |   | 767.8    |  
|                                                                                                                |  |                          |        
|Selling, general and administrative expenses                                                                    |  |                          | 633.4   |   |      |   | 612.1   |      |  |   | 630.8    |  
|Charge for asbestos liability, net                                                                              |  |                          |        |   |      |   | 81.0    |      |  |   | 2,500.0  |  
|Goodwill impairment                                                                                             |  |                          | 108.4   |   |      |   |        |      |  |   |         |  
|Restructuring and reorganization charges, net                                                                   |  |                          | 18.3    |   |      |   | 8.6     |      |  |   | 1.9      |  
|Equity (earnings) from joint venture                                                                            |  |                          | (31.6   | ) |      |   | (20.8   | )    |  |   | (19.7    | )
|                                                                                                                |  |                          |         |   |      |   |         |      |  |   |          |  
|Operating (loss)                                                                                                |  |                          | (42.2   | ) |      |   | (19.3   | )    |  |   | (2,345.2 | )
|                                                                                                                |  |                          |        
|Interest expense (unrecorded contractual interest of $86.9, $95.1 and $99.9, respectively)                      |  |                          | 8.4     |   |      |   | 9.0     |      |  |   | 11.3     |  
|Other non-operating expense                                                                                     |  |                          | 3.1     |   |      |   | 5.7     |      |  |   | 3.6      |  
|Other non-operating (income)                                                                                    |  |                          | (6.4    | ) |      |   | (5.0    | )    |  |   | (7.5     | )
|Chapter 11 reorganization costs, net                                                                            |  |                          | 6.9     |   |      |   | 9.4     |      |  |   | 23.5     |  
|                                                                                                                |  |                          |         |   |      |   |         |      |  |   |          |  
|(Loss) from continuing operations before income taxes and cumulative effect of a change in accounting principle |  |                          | (54.2   | ) |      |   | (38.4   | )    |  |   | (2,376.1 | )
|Income tax expense (benefit)                                                                                    |  |                          | 25.1    |   |      |   | (1.6    | )    |  |   | (827.8   | )
|                                                                                                                |  |                          |         |   |      |   |         |      |  |   |          |  
|(Loss) from continuing operations before cumulative effect of a change in accounting principle                  |  |                          | (79.3   | ) |      |   | (36.8   | )    |  |   | (1,548.3 | )
|Cumulative effect of a change in accounting principle, net of tax of $2.2                                       |  |                          |        |   |      |   |        |      |  |   | (593.8   | )
|                                                                                                                |  |                          |         |   |      |   |         |      |  |   |          |  
|(Loss) from continuing operations                                                                               |  |                          | (79.3   | ) |      |   | (36.8   | )    |  |   | (2,142.1 | )
|(Loss) from discontinued operations, net of tax of $0.2, $0.1 and $0.0                                          |  |                          | (0.4    | ) |      |   | (2.5    | )    |  |   | (0.7     | )
|                                                                                                                |  |                          |         |   |      |   |         |      |  |   |          |  
|Net (loss)                                                                                                      |  | $                        | (79.7   | ) |      | $ | (39.3   | )    |  | $ | (2,142.8 | )
|                                                                                                                |  |                          |         |   |      |   |         |      |  |   |          |  



See accompanying notes
to consolidated financial statements beginning on page 113.



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Armstrong World Industries, Inc., and Subsidiaries

Consolidated Balance Sheets

(amounts in millions, except share data)



|                                                                                                                     |  |                   |          |   |                   |   |          |  
|-------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                     |  | December 31, 2004 |          |   | December 31, 2003 |  
|Assets                                                                                                               |  |                   |          |   |                   |   |          |  
|Current assets:                                                                                                      |  |                   |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                            |  | $                 | 515.9    |   |                   | $ | 484.3    |  
|Accounts and notes receivable, net                                                                                   |  |                   | 336.1    |   |                   |   | 315.4    |  
|Inventories, net                                                                                                     |  |                   | 529.2    |   |                   |   | 454.4    |  
|Deferred income taxes                                                                                                |  |                   | 15.6     |   |                   |   | 19.2     |  
|Income tax receivable                                                                                                |  |                   | 7.0      |   |                   |   |         |  
|Other current assets                                                                                                 |  |                   | 78.4     |   |                   |   | 85.5     |  
|                                                                                                                     |  |                   |          |   |                   |   |          |  
|Total current assets                                                                                                 |  |                   | 1,482.2  |   |                   |   | 1,358.8  |  
|                                                                                                                     |  |                  
|Property, plant and equipment, less accumulated depreciation and amortization of $1,540.7 and $1,434.8, respectively |  |                   | 1,208.8  |   |                   |   | 1,267.3  |  
|                                                                                                                     |  |                  
|Insurance receivable for asbestos-related liabilities, noncurrent                                                    |  |                   | 88.8     |   |                   |   | 95.1     |  
|Prepaid pension costs                                                                                                |  |                   | 480.9    |   |                   |   | 455.1    |  
|Investment in affiliates                                                                                             |  |                   | 72.5     |   |                   |   | 48.9     |  
|Goodwill                                                                                                             |  |                   | 136.0    |   |                   |   | 244.1    |  
|Other intangibles, net                                                                                               |  |                   | 76.0     |   |                   |   | 79.0     |  
|Deferred income taxes, noncurrent                                                                                    |  |                   | 941.6    |   |                   |   | 988.3    |  
|Other noncurrent assets                                                                                              |  |                   | 122.6    |   |                   |   | 111.2    |  
|                                                                                                                     |  |                   |          |   |                   |   |          |  
|Total assets                                                                                                         |  | $                 | 4,609.4  |   |                   | $ | 4,647.8  |  
|                                                                                                                     |  |                   |          |   |                   |   |          |  
|Liabilities and Shareholders Equity                                                                                 |  |                   |          |   |                   |   |          |  
|Current liabilities:                                                                                                 |  |                   |          |   |                   |   |          |  
|Short-term debt                                                                                                      |  | $                 | 11.1     |   |                   | $ | 3.9      |  
|Current installments of long-term debt                                                                               |  |                   | 8.2      |   |                   |   | 8.2      |  
|Accounts payable and accrued expenses                                                                                |  |                   | 447.4    |   |                   |   | 354.2    |  
|Short term amounts due to affiliates                                                                                 |  |                   | 13.3     |   |                   |   | 10.0     |  
|Income tax payable                                                                                                   |  |                   | 15.3     |   |                   |   | 45.9     |  
|Deferred income taxes                                                                                                |  |                   | 1.1      |   |                   |   | 3.3      |  
|                                                                                                                     |  |                   |          |   |                   |   |          |  
|Total current liabilities                                                                                            |  |                   | 496.4    |   |                   |   | 425.5    |  
|                                                                                                                     |  |                  
|Liabilities subject to compromise                                                                                    |  |                   | 4,870.9  |   |                   |   | 4,863.2  |  
|                                                                                                                     |  |                  
|Long-term debt, less current installments                                                                            |  |                   | 29.2     |   |                   |   | 39.4     |  
|Postretirement and postemployment benefit liabilities                                                                |  |                   | 262.6    |   |                   |   | 262.3    |  
|Pension benefit liabilities                                                                                          |  |                   | 258.9    |   |                   |   | 216.4    |  
|Other long-term liabilities                                                                                          |  |                   | 87.6     |   |                   |   | 81.2     |  
|Deferred income taxes, noncurrent                                                                                    |  |                   | 19.8     |   |                   |   | 95.1     |  
|Minority interest in subsidiaries                                                                                    |  |                   | 9.3      |   |                   |   | 9.7      |  
|                                                                                                                     |  |                   |          |   |                   |   |          |  
|Total noncurrent liabilities                                                                                         |  |                   | 5,538.3  |   |                   |   | 5,567.3  |  
|                                                                                                                     |  |                  
|Shareholders equity (deficit):                                                                                      |  |                   |          |   |                   |   |          |  
|Common stock, $1 par value per share Authorized 200 million shares; issued 51,878,910 shares                         |  |                   | 51.9     |   |                   |   | 51.9     |  
|Capital in excess of par value                                                                                       |  |                   | 172.6    |   |                   |   | 172.7    |  
|Reduction for ESOP loan guarantee                                                                                    |  |                   | (142.2   | ) |                   |   | (142.2   | )
|Accumulated deficit                                                                                                  |  |                   | (1,021.9 | ) |                   |   | (942.2   | )
|Accumulated other comprehensive income                                                                               |  |                   | 42.8     |   |                   |   | 43.3     |  
|Less common stock in treasury, at cost 2004 and 2003  11,393,170 shares                                             |  |                   | (528.5   | ) |                   |   | (528.5   | )
|                                                                                                                     |  |                   |          |   |                   |   |          |  
|Total shareholders (deficit)                                                                                        |  |                   | (1,425.3 | ) |                   |   | (1,345.0 | )
|                                                                                                                     |  |                   |          |   |                   |   |          |  
|Total liabilities and shareholders equity                                                                           |  | $                 | 4,609.4  |   |                   | $ | 4,647.8  |  
|                                                                                                                     |  |                   |          |   |                   |   |          |  



See accompanying notes to consolidated
financial statements beginning on page 113.



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Armstrong World Industries, Inc., and Subsidiaries

Consolidated Statements of Shareholders Equity

(amounts in millions, except per
share amounts)



|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|---------------------------------------------- |  | ---- | -------- | - | ---- | - | ----- | ---- |  | - | -------- | - |  | - | ----- | - |  | - | -------- | - |  | - | -------- | -
|                                               |  | 2004 |          |   | 2003 |   |       | 2002 | 
|Common stock, $1 par value:                    |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Balance at beginning and end of year           |  | $    | 51.9     |   |      |   |       |      |  | $ | 51.9     |   |  |   |       |   |  | $ | 51.9     |   |  |   |          |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Capital in excess of par value:                |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Balance at beginning of year                   |  | $    | 172.7    |   |      |   |       |      |  | $ | 172.9    |   |  |   |       |   |  | $ | 173.2    |   |  |   |          |  
|Stock issuances and other                      |  |      | (0.1     | ) |      |   |       |      |  |   | (0.2     | ) |  |   |       |   |  |   | (0.3     | ) |  |   |          |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Balance at end of year                         |  | $    | 172.6    |   |      |   |       |      |  | $ | 172.7    |   |  |   |       |   |  | $ | 172.9    |   |  |   |          |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Reduction for ESOP loan guarantee:             |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Balance at beginning and end of year           |  | $    | (142.2   | ) |      |   |       |      |  | $ | (142.2   | ) |  |   |       |   |  | $ | (142.2   | ) |  |   |          |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Retained earnings (accumulated deficit):       |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Balance at beginning of year                   |  | $    | (942.2   | ) |      |   |       |      |  | $ | (902.9   | ) |  |   |       |   |  | $ | 1,239.9  |   |  |   |          |  
|Net (loss) for year                            |  |      | (79.7    | ) |      | $ | (79.7 | )    |  |   | (39.3    | ) |  | $ | (39.3 | ) |  |   | (2,142.8 | ) |  | $ | (2,142.8 | )
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Balance at end of year                         |  | $    | (1,021.9 | ) |      |   |       |      |  | $ | (942.2   | ) |  |   |       |   |  | $ | (902.9   | ) |  |   |          |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Accumulated other comprehensive income (loss): |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Balance at beginning of year                   |  | $    | 43.3     |   |      |   |       |      |  | $ | (12.2    | ) |  |   |       |   |  | $ | (47.1    | ) |  |   |          |  
|Foreign currency translation adjustments       |  |      | 22.4     |   |      |   |       |      |  |   | 56.8     |   |  |   |       |   |  |   | 37.7     |   |  |   |          |  
|Derivative gain (loss), net                    |  |      | 0.3      |   |      |   |       |      |  |   | (0.3     | ) |  |   |       |   |  |   | 6.9      |   |  |   |          |  
|Minimum pension liability adjustments          |  |      | (23.2    | ) |      |   |       |      |  |   | (1.0     | ) |  |   |       |   |  |   | (9.7     | ) |  |   |          |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Total other comprehensive income (loss)        |  |      | (0.5     | ) |      |   | (0.5  | )    |  |   | 55.5     |   |  |   | 55.5  |   |  |   | 34.9     |   |  |   | 34.9     |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Balance at end of year                         |  | $    | 42.8     |   |      |   |       |      |  | $ | 43.3     |   |  |   |       |   |  | $ | (12.2    | ) |  |   |          |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Comprehensive income (loss)                    |  |      |          |   |      | $ | (80.2 | )    |  |   |          |   |  | $ | 16.2  |   |  |   |          |   |  | $ | (2,107.9 | )
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Less treasury stock at cost:                   |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Balance at beginning and end of year           |  | $    | (528.5   | ) |      |   |       |      |  | $ | (528.5   | ) |  |   |       |   |  | $ | (528.5   | ) |  |   |          |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  
|Total shareholders (deficit)                  |  | $    | (1,425.3 | ) |      |   |       |      |  | $ | (1,345.0 | ) |  |   |       |   |  | $ | (1,361.0 | ) |  |   |          |  
|                                               |  |      |          |   |      |   |       |      |  |   |          |   |  |   |       |   |  |   |          |   |  |   |          |  



See accompanying notes
to consolidated financial statements beginning on page 113.



111



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##### Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Consolidated Statements of Cash Flows



|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ----- | ---- |  | - | -------- | -
|                                                                                  |  | Year Ended December 31, |       
|                                                                                  |  | 2004                    |        |   | 2003 |   |       | 2002 | 
|Cash flows from operating activities:                                             |  |                         |        |   |      |   |       |      |  |   |          |  
|Net (loss)                                                                        |  | $                       | (79.7  | ) |      | $ | (39.3 | )    |  | $ | (2,142.8 | )
|Adjustments to reconcile net (loss) to net cash provided by operating activities: |  |                         |        |   |      |   |       |      |  |   |          |  
|Cumulative effect of change in accounting principle, net                          |  |                         |       |   |      |   |      |      |  |   | 593.8    |  
|Depreciation and amortization                                                     |  |                         | 151.0  |   |      |   | 163.1 |      |  |   | 136.7    |  
|Goodwill impairment                                                               |  |                         | 108.4  |   |      |   |      |      |  |   |         |  
|Fixed asset impairments                                                           |  |                         | 64.7   |   |      |   | 10.5  |      |  |   |         |  
|Deferred income taxes                                                             |  |                         | (21.9  | ) |      |   | (51.5 | )    |  |   | (870.4   | )
|Equity (earnings) from affiliates, net                                            |  |                         | (33.5  | ) |      |   | (20.7 | )    |  |   | (21.7    | )
|Chapter 11 reorganization costs, net                                              |  |                         | 6.9    |   |      |   | 9.4   |      |  |   | 23.5     |  
|Chapter 11 reorganization costs payments                                          |  |                         | (15.9  | ) |      |   | (25.8 | )    |  |   | (23.0    | )
|Restructuring and reorganization charges, net of reversals                        |  |                         | 18.3   |   |      |   | 8.6   |      |  |   | 1.9      |  
|Restructuring and reorganization payments                                         |  |                         | (4.1   | ) |      |   | (8.7  | )    |  |   | (2.1     | )
|Asbestos-related insurance recoveries                                             |  |                         | 4.5    |   |      |   | 31.0  |      |  |   | 16.0     |  
|Payments for asbestos-related claims                                              |  |                         |       |   |      |   | (9.0  | )    |  |   |         |  
|Charge for asbestos liability, net                                                |  |                         |       |   |      |   | 81.0  |      |  |   | 2,500.0  |  
|Cash effect of hedging activities                                                 |  |                         | 1.1    |   |      |   | (27.0 | )    |  |   | (22.0    | )
|Increase (decrease) in cash from change in:                                       |  |                         |        |   |      |   |       |      |  |   |          |  
|Receivables                                                                       |  |                         | (9.5   | ) |      |   | 40.6  |      |  |   | 11.7     |  
|Inventories                                                                       |  |                         | (61.7  | ) |      |   | 6.6   |      |  |   | 18.1     |  
|Other current assets                                                              |  |                         | 11.8   |   |      |   | (4.6  | )    |  |   | (16.1    | )
|Other noncurrent assets                                                           |  |                         | (34.8  | ) |      |   | (18.6 | )    |  |   | (42.0    | )
|Accounts payable and accrued expenses                                             |  |                         | 61.1   |   |      |   | (15.6 | )    |  |   | 29.0     |  
|Income taxes payable                                                              |  |                         | (31.4  | ) |      |   | 21.9  |      |  |   | 0.2      |  
|Other long-term liabilities                                                       |  |                         | 3.5    |   |      |   | 4.0   |      |  |   | 11.9     |  
|Other, net                                                                        |  |                         | 4.0    |   |      |   | 9.9   |      |  |   | 20.8     |  
|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  
|Net cash provided by operating activities                                         |  |                         | 142.8  |   |      |   | 165.8 |      |  |   | 223.5    |  
|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  
|Cash flows from investing activities:                                             |  |                         |        |   |      |   |       |      |  |   |          |  
|Purchases of property, plant and equipment and computer software                  |  |                         | (134.0 | ) |      |   | (78.1 | )    |  |   | (125.1   | )
|Distributions from equity affiliates                                              |  |                         | 10.0   |   |      |   | 16.0  |      |  |   | 17.5     |  
|Proceeds from the sale of assets                                                  |  |                         | 12.3   |   |      |   | 4.9   |      |  |   | 3.5      |  
|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  
|Net cash (used for) investing activities                                          |  |                         | (111.7 | ) |      |   | (57.2 | )    |  |   | (104.1   | )
|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  
|Cash flows from financing activities:                                             |  |                         |        |   |      |   |       |      |  |   |          |  
|Increase/(decrease) in short-term debt, net                                       |  |                         | 4.0    |   |      |   | (5.3  | )    |  |   | (13.9    | )
|Payments of long-term debt                                                        |  |                         | (9.8   | ) |      |   | (8.2  | )    |  |   | (9.0     | )
|Other, net                                                                        |  |                         | (1.2   | ) |      |   | (0.6  | )    |  |   | (0.9     | )
|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  
|Net cash (used for) financing activities                                          |  |                         | (7.0   | ) |      |   | (14.1 | )    |  |   | (23.8    | )
|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  
|Effect of exchange rate changes on cash and cash equivalents                      |  |                         | 7.5    |   |      |   | 9.8   |      |  |   | 7.0      |  
|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  
|Net increase in cash and cash equivalents                                         |  | $                       | 31.6   |   |      | $ | 104.3 |      |  | $ | 102.6    |  
|Cash and cash equivalents at beginning of year                                    |  | $                       | 484.3  |   |      | $ | 380.0 |      |  | $ | 277.4    |  
|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  
|Cash and cash equivalents at end of year                                          |  | $                       | 515.9  |   |      | $ | 484.3 |      |  | $ | 380.0    |  
|                                                                                  |  |                         |        |   |      |   |       |      |  |   |          |  



See accompanying notes
to consolidated financial statements beginning on page 113.



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##### Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



NOTE 1. BUSINESS AND CHAPTER 11 REORGANIZATION



Armstrong World Industries, Inc. (AWI) is a Pennsylvania corporation incorporated in 1891. Armstrong Holdings, Inc. is a
Pennsylvania corporation and the publicly held parent holding company of AWI. Armstrong Holdings, Inc.s only significant asset and operation is its indirect ownership, through Armstrong Worldwide, Inc. (a Delaware Corporation) of all of the
capital stock of AWI. Due to the lack of material differences in the financial statements, when we refer in this document to AHI and its subsidiaries as AHI, Armstrong, we, us, and
ourselves, we are also effectively referring to AWI and its subsidiaries. We use the term AWI when we are referring solely to Armstrong World Industries, Inc.



Proceedings under Chapter 11



On December 6, 2000, AWI, the major operating subsidiary of AHI, filed a voluntary petition for relief (the Filing) under Chapter 11 of the U.S. Bankruptcy
Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court) in order to use the court-supervised reorganization process to achieve a resolution of the AWIs
asbestos-related liability. Also filing under Chapter 11 were two of AWIs wholly-owned subsidiaries, Nitram Liquidators, Inc. (Nitram) and Desseaux Corporation of North America, Inc. (Desseaux). The Chapter 11 cases are
being jointly administered under case number 00-4471 (the Chapter 11 Case). Shortly after its commencement, the Chapter 11 Case was assigned to Judge Randall J. Newsome. His appointment as a visiting judge in the District of Delaware
ended on December 31, 2003. On January 6, 2004, the Chapter 11 Case was reassigned to Judge Judith K. Fitzgerald.



AHI and all of AWIs other direct and indirect subsidiaries, including Armstrong Wood Products Inc. (formerly Triangle Pacific Corp.), WAVE (AWIs ceiling grid
systems joint venture with Worthington Industries, Inc.), Armstrong Canada, and Armstrong DLW AG, were not a part of the Filing and accordingly, except for any asbestos-related liability that also relates, directly or indirectly, to the pre-Filing
activities of AWI, the liabilities, including asbestos-related liability if any, of such companies will not be resolved in AWIs Chapter 11 Case. See below under The Asbestos Personal Injury Trust and Note 32 under
Asbestos-Related Litigation.



AWI is operating its business and
managing its properties as a debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims or obligations which arose prior to the Filing date
(prepetition claims) unless specifically authorized by the Bankruptcy Court. Similarly, claimants may not enforce any claims against AWI that arose prior to the date of the Filing unless specifically authorized by the Bankruptcy Court. In addition,
as a debtor-in-possession, AWI has the right, subject to the Bankruptcy Courts approval, to assume or reject any executory contracts and unexpired leases in existence at the date of the Filing. Some of these have been specifically assumed and
others have been specifically rejected already in the course of the Chapter 11 Case. In the plan of reorganization which it has proposed, as described below, AWI has indicated the other executory contracts and unexpired leases that it intends to
assume or reject upon consummation of the plan; any not specifically assumed under the plan will be rejected upon consummation of the plan. Parties having claims as a result of the rejection of a contract may file claims with the Bankruptcy Court,
which will be dealt with as part of the Chapter 11 Case.



Three creditors
committees, one representing asbestos personal injury claimants (the Asbestos Personal Injury Claimants Committee), one representing asbestos property damage claimants (the Asbestos Property Damage Committee), and the
other representing other unsecured creditors (the Unsecured Creditors Committee), were appointed in the Chapter 11 Case. In addition, an individual was appointed to represent the interests of future asbestos personal injury
claimants (the Future Claimants Representative). In accordance with the provisions of the Bankruptcy Code, these parties have the right to be heard on matters that come before the Bankruptcy Court in the Chapter 11 Case. Upon
resolution of all asbestos property damage claims, the Asbestos Property Damage Committee was disbanded.



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##### Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Plan of Reorganization and Disclosure Statement



On November 4, 2002, AWI filed a Plan of Reorganization with the Bankruptcy Court. Subsequently, AWI filed several amendments to the plan,
along with various exhibits. The Fourth Amended Plan of Reorganization, with certain exhibits, was filed on May 23, 2003 and, as so amended and as modified by modifications filed with the Bankruptcy Court on October 17, 2003, November 10, 2003 and
December 3, 2004, is referred to in this report as the POR. The POR provides for AWI to continue to conduct its existing lines of business with a reorganized capital structure under which, among other things, its existing shares of stock
will be cancelled and new common shares and notes will be issued to its unsecured creditors and to a trust, as further discussed below, to be established under the POR for the benefit of AWIs current and future asbestos-related personal injury
claimants, in full satisfaction of their claims against AWI. References in this report to reorganized Armstrong are to AWI as it would be reorganized under the POR, and its subsidiaries collectively. The POR excludes AWIs Nitram
and Desseaux subsidiaries, neither of which is material to Armstrong and which are pursuing separate resolutions of their Chapter 11 cases that are expected to result in the winding up of their affairs.



In connection with the vote of creditors on the POR, AWI was required to prepare a disclosure
statement concerning its business and the POR, including certain projected financial information assuming an Effective Date of the POR as July 1, 2003, intended to demonstrate to the Bankruptcy Court the feasibility of the POR and AWIs ability
to continue operations upon its emergence from Chapter 11. On May 30, 2003, the Bankruptcy Court approved the disclosure statement for distribution to parties in interest in the Chapter 11 Case. The projected financial information included in the
disclosure statement was updated in certain respects by information submitted to the Bankruptcy Court in connection with the Bankruptcy Courts November 2003 hearing on confirmation of the POR. The projected financial information was prepared
for the limited purposes of consideration by the Bankruptcy Court, creditors and other parties in interest in the Chapter 11 Case of matters pertinent to the case. As indicated in the disclosure statement, the projected financial information and
various estimates of value therein provided should not be regarded as representations or warranties by AWI, AHI or any other person. There is no assurance that any such projection or valuation will be realized. The projected financial information
and estimates of value were prepared by AWI and its financial advisors and have not been audited or reviewed by independent accountants. The projections will not be updated on an ongoing basis. At the time they were prepared in 2003, the projections
reflected numerous assumptions concerning reorganized Armstrongs anticipated future performance and with respect to prevailing and anticipated market and economic conditions, which were and remain beyond our control and which may not
materialize. Projections are inherently subject to significant and numerous uncertainties and to a wide variety of significant business, economic and competitive risks and the assumptions underlying the projections may be wrong in a material
respect. Actual results may vary significantly from those contemplated by the projections.



During 2003, the POR was submitted for a vote by AWIs creditors for its approval. It was approved by each creditor class that was entitled to vote on the POR except the class of unsecured creditors. On November
17 and 18, 2003, the Bankruptcy Court held a hearing on confirmation of the Plan and on December 19, 2003, issued proposed findings of fact and conclusions of law and a proposed order confirming the POR, notwithstanding the rejection of the POR by
the class of unsecured creditors. On December 29, 2003, the Unsecured Creditors Committee filed an objection to the Bankruptcy Courts proposed findings of fact and conclusions of law and the proposed order of confirmation of the POR.



In order for the POR to be confirmed, the U.S. District Court must also issue
findings of fact and conclusions of law in support of confirmation of the POR, enter or affirm an order confirming the POR and issue the 524(g) injunction which is part of the POR.



Recent Developments and Next Steps in the Chapter 11 Process



Following procedural delays concerning the status of the prior U.S. District Court judge on
AWIs Chapter 11 Case, the AWI case was assigned to U.S. District Court Judge Eduardo C. Robreno in June 2004. A hearing was held before Judge Robreno on December 15, 2004 to consider the objections to confirmation of the POR. On February 23,
2005, Judge Robreno ruled that the POR could not be confirmed. In the courts decision (which is available at www.armstrongplan.com), the Judge found that, because the class of



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



unsecured creditors voted to reject the POR, the distribution of warrants to existing equity holders under the POR
violated the absolute priority rule.



AWI filed a Notice of Appeal to the
United States Court of Appeals for the Third Circuit on March 4, 2005. On March 18, 2005, AWI filed a motion to expedite the appeal to the U.S. Court of Appeals. AWI is also reviewing other options to resolve its Chapter 11 Case. AWI is unable to
predict whether the POR will be confirmed or when AWI would emerge from Chapter 11.



Asbestos Personal Injury Trust



A principal feature of the POR
is the creation of a trust (the Asbestos PI Trust), pursuant to section 524(g) of the Bankruptcy Code, for the purpose of addressing AWIs personal injury (including wrongful death) asbestos-related liability. All present and future
asbestos-related personal injury claims against AWI, including contribution claims of co-defendants, arising directly or indirectly out of AWIs pre-Filing use of or other activities involving asbestos will be channeled to the Asbestos PI
Trust.



In accordance with the 524(g) injunction to be issued if
the POR goes into effect various entities would be protected from such present and future AWI asbestos-related personal injury claims. These entities include, among others, reorganized AWI, AHI, AWIs subsidiaries and other affiliates (as
defined in the POR), and their respective officers and directors. Upon emergence from Chapter 11, AWI would not have any responsibility for these claims (including claims against AWI based solely on its ownership of a subsidiary or other affiliate),
nor would it participate in their resolution.



However, although AWIs
domestic and foreign subsidiaries and other affiliates would be protected parties, asbestos-related personal injury claims against them would be channeled to the Asbestos PI Trust only to the extent such claims directly or indirectly relate to the
pre-Filing manufacturing, installation, distribution or other activities of AWI, or AWIs ownership of the subsidiaries or affiliates (as distinguished from independent activities of the subsidiaries or affiliates). See Note 32 under
Asbestos-Related Litigation.



In addition, workers
compensation claims brought against AWI or its subsidiaries or other affiliates would not be channeled to the Asbestos PI Trust and would remain subject to the workers compensation process. Workers compensation law provides that the
employer is responsible for evaluation, medical treatment and lost wages as a result of a job-related injury. Historically, workers compensation claims against AWI or its subsidiaries have not been significant in number or amount, and AWI has
continued to honor its obligations with respect to such claims during the Chapter 11 Case. Currently, AWI has three pending workers compensation claims, and its UK subsidiary has five employer liability claims involving alleged asbestos
exposure.



There also is uncertainty as to proceedings, if any, brought in
certain foreign jurisdictions with respect to the effect of the 524(g) injunction in precluding the assertion in such jurisdictions of asbestos-related personal injury claims, proceedings related thereto or the enforcement of judgments rendered in
such proceedings.



Management believes neither AWI nor its subsidiaries or
other affiliates is subject to asbestos-related personal injury claims, that would not be channeled to the Asbestos PI Trust under the POR, which would be material in amount to reorganized Armstrong.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Consideration to Be Distributed under the POR (unaudited)



The Asbestos PI Trust and the holders of allowed unsecured claims would share in the
following consideration to be distributed under the POR:



| |  |  | AWIs Available Cash, which is defined in the POR as:
| | - |  | -------------------------------------------------------



| |  |  | Cash available on the effective date of the POR after reserving up to $100 million (as determined by AWI) to fund ongoing operations and making provisions for certain required
payments under the POR,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Any cash drawn, at AWIs sole discretion, under a credit facility to be established as provided by the POR for the purpose of funding distributions under the POR, and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Certain insurance proceeds related to environmental matters
| | - |  | -----------------------------------------------------------



However, proceeds received under any private offering of debt securities and/or secured term loan borrowings made, as permitted by the POR, in connection
with consummation of the POR, and certain other amounts authorized or directed by the Court, would be excluded from the determination of Available Cash.



| |  |  | Plan Notes of AWI as further described below or net cash proceeds from any private offerings of debt securities issued in lieu thereof, and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Substantially all of the new common stock of AWI.
| | - |  | -------------------------------------------------



The total amount of Plan Notes would be the greater of (i) $1.125 billion less Available Cash and (ii) $775 million. However, AWI would use reasonable efforts to issue
one or more private offerings of debt securities on, or as soon as practicable after, the Effective Date. These offerings are expected to yield net proceeds at least equal to the amount of the Plan Notes prescribed by the Plan. If the private
offerings are successful, the Plan Notes would not be issued. If the offerings yield proceeds less than the amount of the Plan Notes prescribed by the Plan, Plan Notes equal to the difference will be issued. If only the Plan Notes are issued,
reorganized Armstrong expects to issue an aggregate amount of $775 million of Plan Notes. These Plan Notes would consist of (i) a tranche of notes with a seven-year maturity and a fixed interest rate, (ii) a tranche of notes with a ten-year maturity
and a fixed interest rate and (iii) a tranche of floating rate notes with a maturity of not less than five years, but no more than ten years, structured in a manner similar to, and as liquid as, marketable bank debt which satisfy the requirements of
the POR and are on terms and conditions that are satisfactory to AWI, the Asbestos Personal Injury Claimants Committee, and the Future Claimants Representative. To the extent Plan Notes of more than one type are issued, a pro rata share
of each tranche would be issued to the Asbestos PI Trust and the holders of unsecured claims.



The POR provides that unsecured creditors, other than convenience creditors described below, would receive their pro rata share of:



| |  |  | 34.43% of the new common stock of reorganized Armstrong,
| | - |  | --------------------------------------------------------



| |  |  | 34.43% of the first $1.05 billion of all the cash and Plan Notes to be distributed under the POR to unsecured creditors (other than convenience creditors) and the Asbestos PI Trust,
in the form of:
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Up to $300 million of Available Cash and
| | - |  | ----------------------------------------



| |  |  | The balance in principal amount of Plan Notes or in net cash proceeds from any private offerings of debt securities made in lieu of issuing Plan Notes.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 60% of the next $50 million of Available Cash but, if such Available Cash is less than $50 million, then 60% of the balance in Plan Notes or in net cash proceeds from any private
offerings of debt securities made in lieu of issuing Plan Notes, and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 34.43% of the remaining amount of any Available Cash and any Plan Notes up to the maximum amount of Plan Notes provided to be issued under the POR, or net cash proceeds from any
private offerings of debt securities made in lieu of issuing such Plan Notes.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The remaining amount of new common stock of reorganized Armstrong, Available Cash and Plan Notes or net cash proceeds from any private offerings of debt securities made in lieu of issuing Plan Notes would be
distributed to the Asbestos PI Trust.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Under the POR, unsecured creditors whose claims (other than claims on debt securities) are less than $10 thousand or
who elect to reduce their claims to $10 thousand would be treated as convenience creditors and would receive payment of 75% of their allowed claim amount in cash (which payments would reduce the amount of Available Cash).



Under the POR, the existing equity interests in AWI (including all of its outstanding shares
of common stock) would be cancelled. The POR provides for the distribution of warrants to purchase shares of reorganized Armstrong (the Warrants) to the holders of AWIs existing common stock. The terms of the Warrants are provided
in an exhibit to the POR. The Warrants:



| |  |  | would permit the purchase of 5% of the common stock of reorganized Armstrong on a fully diluted basis, upon exercise of all the Warrants;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | would be exercisable at any time during the seven years after the effective date of the POR; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | would permit the purchase of shares at an exercise price of $37.50, which is equal to 125% of the $30.00 per share equity value of reorganized Armstrong, as agreed among the
financial advisers for AWI, the Asbestos Personal Injury Claimants Committee, the Unsecured Creditors Committee, and the Future Claimants Representative, as set forth in the Bankruptcy Court-approved disclosure statement for the
POR (as further described below).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Whether any value would be
realized from the Warrants would depend on whether the market value of reorganized Armstrongs new common stock reaches a value in excess of the exercise price of the Warrants during the period that they may be exercised.



AHIs shareholders were not entitled to vote on the POR. However, AHIs
shareholders were sent the Disclosure Statement and POR. If the POR is implemented, the only value that would be available to AHI shareholders is their ratable share of the Warrants available upon the contemplated dissolution of AHI. See AHIs
Plan of Dissolution below. As discussed above, however, on February 23, 2005, the U.S. District Court entered an order denying confirmation of the POR. In the courts decision (which is available at www.armstrongplan.com), the Judge
found that, because the class of unsecured creditors voted to reject the POR, the distribution of warrants to existing equity holders under the POR violated the absolute priority rule.



Valuation of Consideration to be Distributed under the POR (unaudited)



Based upon many assumptions (see Disclosure Statement discussion above), to calculate the value of consideration to be distributed, AWI used
$2.7 billion as the value of reorganized Armstrong. This is the mid-point of the range of estimated values of $2.4 billion and $3.0 billion that was estimated by AWI and its financial advisors during the third quarter of 2003. AWIs estimated
value of the consideration to be distributed under the POR to the Asbestos PI Trust, holders of allowed unsecured claims and AWIs existing common stock, is:



| |  |  | New common stock at $30 a share, which is the approximate mid-point of the range of estimated values of $24.66 and $35.30 per share, assuming a distribution of 56.4 million shares
of new common stock to holders of unsecured claims and the Asbestos PI Trust;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Plan Notes in the aggregate principal amount of $775 million, that are worth their face value;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | Available Cash of approximately $350 million that AWI expects to have; and
| | - |  | --------------------------------------------------------------------------



| |  |  | Warrants with an estimated value of between $35 million and $40 million.
| | - |  | ------------------------------------------------------------------------



The total value of the consideration to be distributed to the Asbestos PI Trust, other than rights under asbestos non-product liability insurance policies, has been
estimated to be approximately $1.8 billion, and the total value of consideration to be distributed to holders of allowed unsecured claims (other than convenience claims) has been estimated to be approximately $0.9 billion. Based upon the estimated
value of the POR consideration, and upon AWIs estimate that unsecured claims allowed by the Bankruptcy Court (other than convenience claims) would total approximately $1.65 billion, AWI estimated that holders of allowed unsecured claims (other
than convenience claims) would receive a recovery having a value equal to approximately 59.5% of their allowed claims.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



AHIs Plan of Dissolution, Winding Up and Distribution (Plan of Dissolution)



In connection with the implementation of the POR, the Warrants would be issued to AHI (or a
wholly-owned subsidiary of AHI). The Board of Directors of AHI has determined that it is not practicable for AHI to continue in operation as an on-going business owning the Warrants, which would then be AHIs only asset. Accordingly, the Board
of Directors of AHI approved and recommended to AHI shareholders the Plan of Dissolution, whereby AHI would voluntarily dissolve and wind up its affairs in accordance with Pennsylvania law and, subject to completion of AHIs winding up
(including the satisfaction of any liabilities of AHI), distribute any remaining Warrants to the shareholders. At a special meeting of AHI shareholders on January 7, 2004, the Plan of Dissolution was approved. The POR provides that AWI would pay the
costs and expenses incurred in connection with administering AHIs Plan of Dissolution.



Common Stock and Debt Securities



As a
result of AWI filing the Plan of Reorganization on November 4, 2002, the New York Stock Exchange stopped trading on the Exchange of the common stock of AHI (traded under the ticker symbol ACK) and two debt securities of AWI (traded under
the ticker symbols AKK and ACK 08). AHIs common stock resumed trading in the over-the-counter (OTC) Bulletin Board under the ticker symbol ACKHQ and one of AWIs debt securities resumed trading under
the ticker symbol AKKWQ.



Bar Date for Filing Claims



The Bankruptcy Court established August 31, 2001 as the bar date for all
claims against AWI except for asbestos-related personal injury claims and certain other specified claims. A bar date is the date by which claims against AWI must be filed if the claimants wish to participate in any distribution in the Chapter 11
Case. A bar date for asbestos-related personal injury claims (other than claims for contribution, indemnification, or subrogation) has been rendered unnecessary under the terms of the POR, which defers the filings of such claims until the Asbestos
PI Trust is established to administer such claims.



Approximately 4,800 proofs
of claim (including late-filed claims) totaling approximately $6.3 billion, alleging a right to payment from AWI, were filed with the Bankruptcy Court in response to the August 31, 2001 bar date. The disposition of these claims under the POR is
discussed below. AWI continues the process of investigating and resolving these claims. The Bankruptcy Court will ultimately determine the claims and related liability amounts that will be allowed as part of the Chapter 11 process if the parties
cannot agree.



In its ongoing review of the filed claims, AWI to date has
objected to approximately 2,200 claims totaling $2.7 billion. The Bankruptcy Court disallowed these claims with prejudice.



During the first six months of 2003, AWI settled all of the approximately 460 remaining property damage claims that alleged damages of $800 million, for approximately $9
million. Payments to claimants were made during the third quarter of 2003 and were funded by insurance.



Approximately 1,100 proofs of claim totaling approximately $1.3 billion are pending with the Bankruptcy Court that are associated with asbestos-related personal injury litigation, including direct personal injury
claims, claims by co-defendants for contribution and indemnification, and claims relating to AWIs participation in the Center for Claims Resolution. As stated above, the bar date of August 31, 2001 did not apply to asbestos-related personal
injury claims other than claims for contribution, indemnification, or subrogation. The POR contemplates that all AWI asbestos-related personal injury claims, including claims for contribution, indemnification, or subrogation, will be addressed in
the future pursuant to the procedures relating to the Asbestos PI Trust developed in connection with the POR. See further discussion regarding AWIs liability for asbestos-related matters in Note 32.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Approximately 1,100 claims totaling approximately $1.6 billion alleging a right to payment for financing,
environmental, trade debt and other claims remain. For these categories of claims, AWI has previously recorded approximately $1.6 billion in liabilities.



AWI has recorded liability amounts for claims that can be reasonably estimated and which it does not contest or believes are probable of being allowed by the Bankruptcy
Court. The final value of all the claims that will ultimately be allowed by the Bankruptcy Court is not known at this time. However, it is likely the value of the claims ultimately allowed by the Bankruptcy Court will be different than amounts
presently recorded by AWI. This difference could be material to AWIs financial position and the results of its operations. Management will continue to review the recorded liability in light of future developments in the Chapter 11 Case and
make changes to the recorded liability if and when it is appropriate.



Financing



AWI has a $75.0 million debtor-in-possession credit
facility that currently is limited to issuances of letters of credit. This facility was extended to December 8, 2005 with approval of the Bankruptcy Court, granted on November 15, 2004. As of December 31, 2004, AWI had approximately $40.6 million in
letters of credit, which were issued pursuant to the DIP Facility. As of December 31, 2004, AWI had $308.7 million of cash and cash equivalents, excluding cash held by its non-debtor subsidiaries. AWI believes that cash on hand and generated from
operations and dividends from its subsidiaries, together with subsidiary lines of credit and the DIP Facility, will be adequate to address its foreseeable liquidity needs. Obligations under the DIP Facility, including reimbursement of draws under
the letters of credit, if any, constitute superpriority administrative expense claims in the Chapter 11 Case.



Accounting Impact



AICPA Statement of
Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code (SOP 90-7) provides financial reporting guidance for entities that are reorganizing under the Bankruptcy Code. This guidance is
implemented in the accompanying consolidated financial statements.



Pursuant to
SOP 90-7, AWI is required to segregate pre-Filing liabilities that are subject to compromise and report them separately on the balance sheet. See Note 4 for detail of the liabilities subject to compromise at December 31, 2004 and December 31, 2003.
Liabilities that may be affected by a plan of reorganization are recorded at the expected amount of the allowed claims, even if they may be settled for lesser amounts. Substantially all of AWIs pre-Filing debt, now in default, is recorded at
face value and is classified within liabilities subject to compromise. Obligations of AWI subsidiaries not covered by the Filing remain classified on the consolidated balance sheet based upon maturity date. AWIs estimated liability for
asbestos-related personal injury claims is also recorded in liabilities subject to compromise. See Note 32 for further discussion of AWIs asbestos liability.



Additional pre-Filing claims (liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases,
or as a result of the allowance of contingent or disputed claims.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



SOP 90-7 also requires separate reporting of all revenues, expenses, realized gains and losses, and provision for
losses related to the Filing as Chapter 11 reorganization costs, net. Accordingly, AWI recorded the following Chapter 11 reorganization activities during 2004, 2003 and 2002:



|                                                  |  |      |      |   |      |   |       |      |  |   |      |  
|------------------------------------------------- |  | ---- | ---- | - | ---- | - | ----- | ---- |  | - | ---- | -
|                                                  |  | 2004 |      |   | 2003 |   |       | 2002 | 
|Professional fees                                 |  | $    | 11.5 |   |      | $ | 25.2  |      |  | $ | 27.8 |  
|Interest income, post-Filing                      |  |      | (4.8 | ) |      |   | (3.4  | )    |  |   | (3.5 | )
|Reductions to pre-Filing liabilities              |  |      |     |   |      |   | (12.9 | )    |  |   | (1.1 | )
|Other expense directly related to bankruptcy, net |  |      | 0.2  |   |      |   | 0.5   |      |  |   | 0.3  |  
|                                                  |  |      |      |   |      |   |       |      |  |   |      |  
|Total Chapter 11 reorganization costs, net        |  | $    | 6.9  |   |      | $ | 9.4   |      |  | $ | 23.5 |  
|                                                  |  |      |      |   |      |   |       |      |  |   |      |  



Professional fees represent legal and
financial advisory fees and expenses directly related to the Filing.



Interest
income is earned from short-term investments subsequent to the Filing.



Reductions to pre-Filing liabilities represent Bankruptcy Court approved settlements of prepetition liabilities. In 2003, AWI reached an agreement with the holder of a zero coupon note on the amount of its allowed claim. This agreement
reduced the previously accrued liability by $12.1 million.



As a result of the
Filing, realization of assets and liquidation of liabilities are subject to uncertainty. While operating as a debtor-in-possession, AWI may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those
reflected in the condensed consolidated financial statements.



If and when the
POR is confirmed and made effective, reorganized AWIs condensed consolidated financial statements will change materially in amounts and classifications through the implementation of the fresh start accounting rules of SOP 90-7.



Conclusion



AWI is unable to predict whether the POR will be confirmed or when AWI would emerge from Chapter 11. Therefore, the timing and terms of a
resolution of the Chapter 11 Case remain uncertain.



NOTE 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES



Consolidation Policy. The
consolidated financial statements and accompanying data in this report include the accounts of AHI and its majority-owned subsidiaries. The results of less than majority owned subsidiaries are accounted for under the equity method. All significant
intercompany transactions have been eliminated from the consolidated financial statements.



Use of Estimates. These financial statements are prepared in accordance with generally accepted accounting principles and include management estimates and judgments, where appropriate. Management utilizes
estimates to record many items including asbestos-related liabilities and insurance assets, allowances for bad debts, inventory obsolescence and lower of cost or market charges, warranty, workers compensation, general liability and environmental
claims. When preparing an estimate, management determines the amount based upon considering relevant information. Management may confer with outside parties, including outside counsel. Actual results may differ from these estimates.



Reclassifications. Certain amounts in the prior years consolidated financial
statements and notes thereto have been reclassified to conform to the 2004 presentation. These reclassifications were made to the consolidated statements of earnings and primarily consisted of reclassifying 2003 and 2002 amounts from other
non-operating income and other non-operating expense to selling, general and administrative (SG&A) expense and discontinued operations.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Revenue Recognition: We recognize revenue from the sale of products when persuasive evidence of an arrangement
exists, title and risk of loss transfers to the customers, prices are fixed and determinable, and it is reasonably assured the related accounts receivable is collectable. Our sales terms primarily are FOB shipping point. We have some sales terms
that are FOB destination. Our products are sold with normal and customary return provisions. Sales discounts are deducted immediately from the sales invoice. Provisions, which are recorded as a reduction of revenue, are made for the estimated cost
of rebates and promotional programs. We defer recognizing revenue if special sales agreements, established at the time of sale, warrant this treatment.



Sales Incentives. Sales incentives are reflected as a reduction of net sales for all periods presented.



Shipping and Handling Costs. Shipping and handling costs are reflected in cost of
goods sold for all periods presented.



Advertising Costs. We recognize
advertising expenses as they are incurred.



Pension and Postretirement
Benefits. We have benefit plans that provide for pension, medical and life insurance benefits to certain eligible employees when they retire from active service. Generally, our practice is to fund the actuarially determined current service costs
and the amounts necessary to amortize prior service obligations over periods ranging up to 30 years, but not in excess of the funding limitations.



Taxes. The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Deferred tax assets and
liabilities are recognized using enacted tax rates for expected future tax consequences of events recognized in the financial statements or tax returns. The provision for income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.



Cash and Cash Equivalents. Cash and cash equivalents include cash on hand and short-term investments that have maturities of three
months or less when purchased.



Concentration of Credit. We principally
sell products to customers in the building products industries, in various geographic regions. Net sales in excess of 10% of our consolidated net sales for 2004, 2003 and 2002 were:



|                       |  |      |       |   |      |   |       |  |   |       |  
|---------------------- |  | ---- | ----- | - | ---- | - | ----- |  | - | ----- | -
|Customer               |  | 2004 |       |   | 2003 |   | 2002  | 
|The Home Depot, Inc.   |  | $    | 393.4 |   |      | $ | 400.0 |  | $ | 380.3 |  
|Lowes Companies, Inc. |  |      | (1    | ) |      |   | 318.7 |  |   | (1    | )

---

|(1) | Net sales to Lowes Companies, Inc. were less than 10% of consolidated net sales.
|--- | ---------------------------------------------------------------------------------



Net sales to these customers were recorded in our Resilient Flooring, Wood Flooring and Building Products segments. No other customers
accounted for 10% or more of our total consolidated net sales.



There are no
significant concentrations of credit risk other than with two home center customers who represent 22% of our trade receivables as of December 31, 2004 and 2003. We monitor the creditworthiness of our customers and generally do not require
collateral.



Receivables. We sell the vast majority of our products to
select, pre-approved customers using customary trade terms that allow for payment in the future. Customer trade receivables, customer notes receivable and miscellaneous receivables (which include supply related rebates and claims to be received,
unpaid insurance claims from litigation and other), net of allowances for doubtful accounts,



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



are reported in accounts and notes receivable, net. Notes receivable from divesting certain businesses in prior years
are included in other current assets and other non-current assets based upon the payment terms. Insurance receivables for asbestos-related liabilities are primarily non-current, with the current portion reported in other current assets.



We establish credit worthiness prior to extending credit. We estimate the recoverability
of current and non-current receivables each period. This estimate is based upon triggering events and new information in the period, which can include the review of any available financial statements and forecasts, as well as discussions with legal
counsel and the management of the debtor company. Periodic changes to the allowances for doubtful accounts and/or impairment charges are made to reflect our estimate.



Inventories. Inventories are valued at the lower of cost or market. Inventories also include certain resilient flooring samples used
in ongoing sales and marketing activities.



Property and Depreciation.
Property, plant and equipment values are stated at acquisition cost less accumulated depreciation and amortization. Depreciation charges for financial reporting purposes are determined on a straight-line basis at rates calculated to provide for the
retirement of assets at the end of their useful lives. Machinery and equipment includes manufacturing equipment (depreciated over 3 to 20 years), computer equipment (3 to 5 years) and office furniture and equipment (5 to 10 years). Within
manufacturing equipment, assets that are subject to quick obsolescence or wear out quickly, such as tooling and engraving equipment, are depreciated over shorter periods (3 to 7 years). Heavy production equipment, such as conveyors and production
presses, are depreciated over longer periods (15 to 20 years). Buildings are depreciated over 20 to 40 years, depending on factors such as type of construction and use.



In accordance with Financial Accounting Standards Board (FSAB) Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, (FAS 144) effective January 1, 2002, impairment losses are recorded when indicators of impairment are present, such as operating losses and/or negative cash flows. For purposes of calculating any
impairment, we estimate the fair value and compare it to the carrying value of the asset. If the fair value is less than the carrying value of the asset, we record an impairment equal to the difference between the fair value and carrying value of
the asset. When assets are disposed of or retired, their costs and related depreciation are removed from the financial statements and any resulting gains or losses normally are reflected in SG&A expenses.



Costs of the construction of certain property include capitalized interest which is amortized
over the estimated useful life of the related asset. There was no capitalized interest recorded in 2004, 2003 and 2002 due to the Chapter 11 Filing.



Goodwill and Other Intangibles. Effective January 1, 2002, we adopted FASB Statement No. 142, Goodwill and Other Intangible Assets (FAS
142), which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Our annual impairment test is performed in the fourth quarter. FAS 142 also
requires that intangible assets with determinable useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment. See Note 12 for disclosure on goodwill and other intangibles.



Contingent Liabilities. In the context of the Chapter 11 Case,
contingent liabilities, including claims that became known after the Filing, are recorded on the basis of the expected amount of the allowed claim in accordance with SOP 90-7 as opposed to the amount for which a claim may be settled.



Foreign Currency Transactions. Assets and liabilities of our subsidiaries operating
outside the United States, which account in a functional currency other than US dollars, are translated using the year end exchange rate. Revenues and expenses are translated at exchange rates effective during each month.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Foreign currency translation gains or losses are included as a component of accumulated other comprehensive income
(loss) within shareholders equity. Gains or losses on foreign currency transactions are recognized through the statement of earnings.



Financial Instruments and Derivatives. From time to time, we use derivatives and other financial instruments to diversify or offset the effect of currency,
interest rate and commodity price variability. See Note 20 for further discussion.



Stock-based Employee Compensation. At December 31, 2004, we had three stock-based employee compensation plans, which are described more fully in Note 25. No equity compensation has been granted since AWI filed for Chapter 11 in
December 2000, other than commitments entered into prior to the Chapter 11 filing. However, some previously granted restricted stock and options vested after that date. All outstanding options are vested as of December 31, 2004. We account for these
plans under the intrinsic value recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The following table illustrates the effect on net income if we had
applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-based Compensation, (FAS 123) to stock-based employee compensation.



|                                                                                                                                            |  |      |       |   |      |   |       |      |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | -------- | -
|                                                                                                                                            |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Net (loss), as reported                                                                                                                     |  | $    | (80.8 | ) |      | $ | (39.3 | )    |  | $ | (2,142.8 | )
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                                  |  |      |      |   |      |   | 0.1   |      |  |   | 0.6      |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |      |      |   |      |   | (0.2  | )    |  |   | (1.1     | )
|                                                                                                                                            |  |      |       |   |      |   |       |      |  |   |          |  
|Pro forma net (loss)                                                                                                                        |  | $    | (80.8 | ) |      | $ | (39.4 | )    |  | $ | (2,143.3 | )
|                                                                                                                                            |  |      |       |   |      |   |       |      |  |   |          |  



Fiscal Periods. Prior to 2003,
the fiscal years of the Wood Flooring and Cabinets segments ended on the Saturday closest to December 31, which was December 28, 2002. No events had occurred between these dates and December 31 materially affecting our financial position or results
of operations. During 2003, the Wood Flooring and Cabinets segments transitioned to a calendar quarter and year end. The effect of this transition on our comparative financial information was immaterial.



New Accounting Standards



In December 2003, the FASB issued Statement of Financial Accounting Standards (FAS) No.
132R, Employers Disclosures about Pensions and Other Postretirement Benefits (FAS 132R). This standard amends the disclosure requirements of FAS 132 to require additional disclosures about assets, obligations, cash flow and
net periodic benefit cost. The revised standard was effective for fiscal years ending after December 15, 2003 for U.S. plans and for fiscal years ending after June 15, 2004 for foreign plans. The related disclosures have been included in Note 18.



In December 2004, the FASB issued FASB Staff Position (FSP) FAS
No. 109-1 Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004. This FSP, which became effective upon issuance,
provides that the tax deduction for income with respect to qualified domestic production activities, as part of the American Jobs Creation Act of 2004 that was enacted on October 22, 2004, will be treated as a special deduction as described in FAS
No. 109. As a result, this deduction has no effect on our deferred tax assets and liabilities existing at the date of enactment. Instead, the impact of this deduction, which is effective January 1, 2005, will be reported in the period in which the
deduction is claimed on our income tax returns.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



In December 2004, the FASB issued FSP FAS No. 109-2 Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004. This FSP, which became effective upon issuance, allows an enterprise additional time beyond the financial reporting period of enactment of the American Jobs Creation Act of
2004 to evaluate the effect of this act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FAS No. 109. See Note 16, Income Taxes, for more information on the impact of adopting this FSP.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



NOTE 3. NATURE OF OPERATIONS



Reportable Segments



Resilient Flooring  produces a broad range of floor coverings for homes and commercial and institutional buildings. Resilient Flooring products include vinyl
sheet, vinyl tile, linoleum flooring and luxury vinyl tile. In addition, our Resilient Flooring segment sources and sells laminate flooring products, ceramic tile products, adhesives, installation and maintenance materials and accessories. Resilient
Flooring products are offered in a wide variety of types, designs and colors. Many products offer reduced maintenance (no-wax). We sell these products to wholesalers, large home centers, retailers, contractors and to the manufactured homes industry.



Wood Flooring  produces and sources wood flooring products for
use in new residential construction and renovation, with some commercial applications in stores, restaurants and high-end offices. The product offering includes solid wood (pre-finished or unfinished), engineered wood floors in various wood species
(with oak being the primary species of choice) and related accessories. Virtually all of our Wood Floorings sales are in North America. Our Wood Flooring products are generally sold to independent wholesale flooring distributors and large home
centers under the brand names Bruce®, Hartco® and Robbins®.



Textiles and Sports Flooring (TSF)  produces carpeting and sports flooring products that are sold mainly in Europe.
Carpeting products consist principally of carpet tiles and broadloom used in commercial applications and in the leisure and travel industry. Sports flooring products include artificial turf and other sports surfaces. Our TSF products are sold
primarily through retailers, contractors, distributors and other industrial businesses.



Building Products  produces suspended mineral fiber, soft fiber and metal ceiling systems for use in commercial, institutional and residential settings. In addition, our Building Products segment sources and sells wood ceiling
systems. The products are available in numerous colors, performance characteristics and designs, and offer attributes such as acoustical control, rated fire protection and aesthetic appeal. Commercial ceiling materials and accessories are sold to
ceiling systems contractors and to resale distributors. Residential ceiling products are sold through wholesalers and retailers (including large home centers), primarily in North America. Suspension system (grid) products manufactured by WAVE are
sold by both Armstrong and our WAVE joint venture.



Cabinets 
produces kitchen and bathroom cabinetry and related products, which are used primarily in the U.S. residential new construction and renovation markets. Through our system of company-owned and independent distribution centers and through direct sales
to builders, our Cabinets segment provides design, fabrication and installation services to single and multi-family homebuilders, remodelers and consumers under the brand names Armstrong and Bruce®.



Unallocated Corporate  includes assets and expenses that have not been allocated to the business units. Unallocated Corporate assets are primarily deferred
tax assets, cash and the U.S. prepaid pension cost. The most significant of the Unallocated Corporate expenses relates to asbestos charges as described in Note 32. Other expenses included in Unallocated Corporate are corporate departments
expenses that have not been allocated to other reportable segments, and the U.S. pension credit. Unallocated Corporate also includes assets and equity earnings related to a corporate equity investment in Interface Solutions, Inc. Expenses for our
corporate departments (including computer services, human resources, legal, finance and other) are allocated to the reportable segments when the departments provide specific work to the reportable segment and the expense allocation can be based on
known metrics, such as time reporting, headcount or square-footage. The remaining expenses, which cannot be attributable to the reportable segments without a high degree of generalization, are reported in Unallocated Corporate.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



|                                                           |  |                   |         |   |              |   |       |                          |  |   |                  |   |  |          |       |   |                      |   |       |       |  |   |          |   |  |   |          |  
|---------------------------------------------------------- |  | ----------------- | ------- | - | ------------ | - | ----- | ------------------------ |  | - | ---------------- | - |  | -------- | ----- | - | -------------------- | - | ----- | ----- |  | - | -------- | - |  | - | -------- | -
|For the year ended 2004                                    |  | ResilientFlooring |         |   | WoodFlooring |   |       | Textiles& SportsFlooring |  |   | BuildingProducts |   |  | Cabinets |       |   | UnallocatedCorporate |   |       | Total | 
|Net sales to external customers                            |  | $                 | 1,215.1 |   |              | $ | 832.1 |                          |  | $ | 265.4            |   |  | $        | 971.7 |   |                      | $ | 213.0 |       |  |   |         |   |  | $ | 3,497.3  |  
|Equity (earnings) from joint venture                       |  |                   |        |   |              |   |      |                          |  |   |                 |   |  |          | (31.6 | ) |                      |   |      |       |  |   |         |   |  |   | (31.6    | )
|Segment operating income (loss)(1)                         |  |                   | (150.2  | ) |              |   | 51.4  |                          |  |   | (7.1             | ) |  |          | 127.0 |   |                      |   | 1.4   |       |  | $ | (66.3    | ) |  |   | (43.8    | )
|Restructuring and reorganization charges, net of reversals |  |                   | 4.5     |   |              |   | 1.6   |                          |  |   | 0.4              |   |  |          | 10.9  |   |                      |   | 0.4   |       |  |   | 0.5      |   |  |   | 18.3     |  
|Segment assets                                             |  |                   | 737.9   |   |              |   | 663.6 |                          |  |   | 218.1            |   |  |          | 596.3 |   |                      |   | 102.2 |       |  |   | 2,291.3  |   |  |   | 4,609.4  |  
|Depreciation and amortization                              |  |                   | 62.6    |   |              |   | 18.1  |                          |  |   | 5.6              |   |  |          | 35.2  |   |                      |   | 3.8   |       |  |   | 25.7     |   |  |   | 151.0    |  
|Fixed asset impairment loss                                |  |                   | 63.1    |   |              |   | 0.8   |                          |  |   |                 |   |  |          | 0.4   |   |                      |   | 0.4   |       |  |   |         |   |  |   | 64.7     |  
|Goodwill impairment                                        |  |                   | 108.4   |   |              |   |      |                          |  |   |                 |   |  |          |      |   |                      |   |      |       |  |   |         |   |  |   | 108.4    |  
|Investment in affiliates                                   |  |                   | 0.6     |   |              |   |      |                          |  |   |                 |   |  |          | 51.0  |   |                      |   |      |       |  |   | 20.9     |   |  |   | 72.5     |  
|Capital additions                                          |  |                   | 33.8    |   |              |   | 33.7  |                          |  |   | 3.9              |   |  |          | 44.5  |   |                      |   | 1.4   |       |  |   | 16.7     |   |  |   | 134.0    |  
|                                                           |  |                   |         |   |              |   |      
|For the year ended 2003                                    |  | ResilientFlooring |         |   | WoodFlooring |   |       | Textiles& SportsFlooring |  |   | BuildingProducts |   |  | Cabinets |       |   | UnallocatedCorporate |   |       | Total | 
|Net sales to external customers                            |  | $                 | 1,181.5 |   |              | $ | 738.6 |                          |  | $ | 271.9            |   |  | $        | 862.2 |   |                      | $ | 204.8 |       |  |   |         |   |  | $ | 3,259.0  |  
|Equity (earnings) from joint venture                       |  |                   |        |   |              |   |      |                          |  |   |                 |   |  |          | (20.8 | ) |                      |   |      |       |  |   |         |   |  |   | (20.8    | )
|Segment operating income (loss)(1)                         |  |                   | 56.2    |   |              |   | (4.0  | )                        |  |   | (11.0            | ) |  |          | 95.2  |   |                      |   | (11.1 | )     |  | $ | (144.6   | ) |  |   | (19.3    | )
|Restructuring and reorganization charges, net of reversals |  |                   | 1.2     |   |              |   | 0.8   |                          |  |   | 7.4              |   |  |          |      |   |                      |   |      |       |  |   | (0.8     | ) |  |   | 8.6      |  
|Segment assets                                             |  |                   | 915.3   |   |              |   | 576.6 |                          |  |   | 207.1            |   |  |          | 551.5 |   |                      |   | 102.3 |       |  |   | 2,295.0  |   |  |   | 4,647.8  |  
|Depreciation and amortization                              |  |                   | 60.6    |   |              |   | 39.4  |                          |  |   | 5.2              |   |  |          | 30.2  |   |                      |   | 1.6   |       |  |   | 26.1     |   |  |   | 163.1    |  
|Fixed asset impairment loss                                |  |                   | 1.1     |   |              |   | 3.4   |                          |  |   |                 |   |  |          | 3.8   |   |                      |   | 1.6   |       |  |   | 0.6      |   |  |   | 10.5     |  
|Investment in affiliates                                   |  |                   | 0.6     |   |              |   |      |                          |  |   |                 |   |  |          | 29.5  |   |                      |   |      |       |  |   | 18.8     |   |  |   | 48.9     |  
|Capital additions                                          |  |                   | 26.5    |   |              |   | 17.3  |                          |  |   | 3.4              |   |  |          | 22.3  |   |                      |   | 1.6   |       |  |   | 7.0      |   |  |   | 78.1     |  
|                                                           |  |                   |         |   |              |   |      
|For the year ended 2002                                    |  | ResilientFlooring |         |   | WoodFlooring |   |       | Textiles& SportsFlooring |  |   | BuildingProducts |   |  | Cabinets |       |   | UnallocatedCorporate |   |       | Total | 
|Net sales to external customers                            |  | $                 | 1,152.3 |   |              | $ | 719.3 |                          |  | $ | 247.2            |   |  | $        | 826.6 |   |                      | $ | 226.9 |       |  |   |         |   |  | $ | 3,172.3  |  
|Equity (earnings) from joint venture                       |  |                   |        |   |              |   |      |                          |  |   |                 |   |  |          | (19.7 | ) |                      |   |      |       |  |   |         |   |  |   | (19.7    | )
|Segment operating income (loss)(1)                         |  |                   | 64.6    |   |              |   | 53.0  |                          |  |   | (4.7             | ) |  |          | 96.5  |   |                      |   | (3.9  | )     |  | $ | (2,550.7 | ) |  |   | (2,345.2 | )
|Restructuring and reorganization charges, net of reversals |  |                   | 2.2     |   |              |   |      |                          |  |   | (0.3             | ) |  |          |      |   |                      |   |      |       |  |   |         |   |  |   | 1.9      |  
|Segment assets                                             |  |                   | 890.7   |   |              |   | 619.7 |                          |  |   | 203.4            |   |  |          | 544.6 |   |                      |   | 116.6 |       |  |   | 2,129.8  |   |  |   | 4,504.8  |  
|Depreciation and amortization                              |  |                   | 54.7    |   |              |   | 16.8  |                          |  |   | 5.6              |   |  |          | 32.2  |   |                      |   | 2.2   |       |  |   | 25.2     |   |  |   | 136.7    |  
|Investment in affiliates                                   |  |                   | 0.9     |   |              |   |      |                          |  |   |                 |   |  |          | 24.6  |   |                      |   |      |       |  |   | 18.4     |   |  |   | 43.9     |  
|Capital additions                                          |  |                   | 39.0    |   |              |   | 22.9  |                          |  |   | 4.1              |   |  |          | 28.5  |   |                      |   | 6.0   |       |  |   | 24.6     |   |  |   | 125.1    |  

---

|(1) | Segment operating income is the measure of segment profit or loss reviewed by the chief
operating decision maker. The sum of the segments operating income equals the total consolidated operating income as reported on our income statement. The following reconciles our total consolidated operating income to income before taxes,
extraordinary items, discontinued operations, and the cumulative effect of changes in accounting principles. These items are only measured and managed on a consolidated basis:
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                                                 |  |      |       |   |      |   |       |      |  |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | -------- | -
|                                                                                                                                 |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Segment operating income (loss)                                                                                                  |  | $    | (43.8 | ) |      | $ | (19.3 | )    |  | $ | (2,345.2 | )
|Interest expense                                                                                                                 |  |      | 8.4   |   |      |   | 9.0   |      |  |   | 11.3     |  
|Other non-operating expense                                                                                                      |  |      | 3.1   |   |      |   | 5.7   |      |  |   | 3.6      |  
|Other non-operating (income)                                                                                                     |  |      | (6.4  | ) |      |   | (5.0  | )    |  |   | (7.5     | )
|Chapter 11 reorganization costs, net                                                                                             |  |      | 6.9   |   |      |   | 9.4   |      |  |   | 23.5     |  
|                                                                                                                                 |  |      |       |   |      |   |       |      |  |   |          |  
|(Loss) before taxes, extraordinary items, discontinued operations, and the cumulative effect of changes in accounting
principles |  | $    | (55.8 | ) |      | $ | (38.4 | )    |  | $ | (2,376.1 | )
|                                                                                                                                 |  |      |       |   |      |   |       |      |  |   |          |  



Accounting policies of the segments
are the same as those described in the summary of significant accounting policies.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



The sales in the table below are allocated to geographic areas based upon the location of the customer.



Geographic Areas



|                      |  |      |         |      |   |         |  |   |        
|--------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|Net trade sales       |  | 2004 |         | 2003 |   | 2002   
|Americas:             |  |      |         |      |   |         |  |   |        
|United States         |  | $    | 2,338.9 |      | $ | 2,210.9 |  | $ | 2,197.0
|Canada                |  |      | 177.6   |      |   | 162.2   |  |   | 152.6  
|Other Americas        |  |      | 31.8    |      |   | 24.8    |  |   | 26.4   
|                      |  |      |         |      |   |         |  |   |        
|Total Americas        |  | $    | 2,548.3 |      | $ | 2,397.9 |  | $ | 2,376.0
|                      |  |      |         |      |   |         |  |   |        
|Europe:               |  |      |         |      |   |         |  |   |        
|Germany               |  | $    | 181.2   |      | $ | 178.2   |  | $ | 172.6  
|England               |  |      | 148.0   |      |   | 125.5   |  |   | 129.8  
|Other Europe          |  |      | 478.1   |      |   | 439.3   |  |   | 387.9  
|                      |  |      |         |      |   |         |  |   |        
|Total Europe          |  | $    | 807.3   |      | $ | 743.0   |  | $ | 690.3  
|                      |  |      |         |      |   |         |  |   |        
|Total Pacific area    |  | $    | 141.7   |      | $ | 118.1   |  | $ | 106.0  
|                      |  |      |         |      |   |         |  |   |        
|Total net trade sales |  | $    | 3,497.3 |      | $ | 3,259.0 |  | $ | 3,172.3
|                      |  |      |         |      |   |         |  |   |        



|                                                                      |  |      |         |      |   |        
|--------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|Long-lived assets (property, plant and equipment), net at December 31 |  | 2004 |         | 2003
|Americas:                                                             |  |      |         |      |   |        
|United States                                                         |  | $    | 823.6   |      | $ | 848.5  
|Canada                                                                |  |      | 14.8    |      |   | 15.0   
|                                                                      |  |      |         |      |   |        
|Total Americas                                                        |  | $    | 838.4   |      | $ | 863.5  
|                                                                      |  |      |         |      |   |        
|Europe:                                                               |  |      |         |      |   |        
|Germany                                                               |  | $    | 191.3   |      | $ | 224.0  
|Other Europe                                                          |  |      | 150.8   |      |   | 150.8  
|                                                                      |  |      |         |      |   |        
|Total Europe                                                          |  | $    | 342.1   |      | $ | 374.8  
|                                                                      |  |      |         |      |   |        
|Total Pacific area                                                    |  | $    | 28.3    |      | $ | 29.0   
|                                                                      |  |      |         |      |   |        
|Total long-lived assets, net                                          |  | $    | 1,208.8 |      | $ | 1,267.3
|                                                                      |  |      |         |      |   |        



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



NOTE 4. LIABILITIES SUBJECT TO COMPROMISE



As a result of AWIs Chapter 11 Filing (see Note 1), pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that
are subject to compromise and report them separately on the balance sheet. Liabilities that may be affected by a plan of reorganization are recorded at the amount of the expected allowed claims, even if they may be settled for lesser amounts.
Substantially all of AWIs prepetition debt, now in default, is recorded at face value and is classified within liabilities subject to compromise. Obligations of our subsidiaries that are not covered by the Filing remain classified on the
consolidated balance sheet based upon maturity date. AWIs asbestos liability is also recorded in liabilities subject to compromise. See Note 1 for further discussion on how the Chapter 11 process may address AWIs liabilities subject to
compromise and Note 32 for further discussion of AWIs asbestos liability.



Liabilities subject to compromise at December 31, 2004 and December 31, 2003 are as follows:



|                                                |  |      |         |      |   |        
|----------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                |  | 2004 |         | 2003
|Debt (at face value)                            |  | $    | 1,388.6 |      | $ | 1,388.6
|Asbestos-related liability                      |  |      | 3,190.6 |      |   | 3,190.6
|Prepetition trade payables                      |  |      | 58.9    |      |   | 58.9   
|Prepetition other payables and accrued interest |  |      | 70.4    |      |   | 62.7   
|Amounts due to affiliates                       |  |      | 4.7     |      |   | 4.7    
|ESOP loan guarantee                             |  |      | 157.7   |      |   | 157.7  
|                                                |  |      |         |      |   |        
|Total liabilities subject to compromise         |  | $    | 4,870.9 |      | $ | 4,863.2
|                                                |  |      |         |      |   |        



Additional prepetition claims
(liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims.



See Note 17 for detail of debt subject to compromise.



NOTE 5. ACQUISITIONS



On May 18, 2000, we acquired privately-held Switzerland-based Gema Holding AG (Gema), a manufacturer and installer of metal ceilings, for $6 million plus
certain contingent consideration not to exceed $25.5 million, based on results over the three year period ending December 31, 2002. In accordance with the purchase agreement, contingent consideration of $3.0 million was paid to the former owners,
with the final payment being made in the third quarter of 2004.



The Gema
acquisition was recorded under the purchase method of accounting. The purchase price was allocated to the assets acquired and the liabilities assumed based on the estimated fair market value at the date of acquisition. The fair market value of
tangible and identifiable intangible net assets acquired exceeded the purchase price by $24.2 million and this amount was recorded as a reduction of the fair value of property, plant and equipment. Contingent consideration of $3.0 million was
accounted for as additional purchase price.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



NOTE 6. DISCONTINUED OPERATIONS



On May 31, 2000, Armstrong completed its sale of all entities, assets and certain liabilities comprising its Insulation Products segment.
During 2003 and 2002, AHI recorded net losses of $2.4 million and $0.7 million respectively, for the impairment of some note receivables and the settlement of certain tax contingencies related to this divestiture.



On December 29, 1995, Armstrong sold a furniture subsidiary, Thomasville Furniture
Industries. During 2004 and 2003, AHI recorded net losses of $0.4 million and $0.1 million, respectively, for the environmental and tax indemnification related to this divestiture.



In accordance with FAS 144, these adjustments were classified as discontinued operations since the original divestitures were reported as
discontinued operations.



NOTE 7. OTHER DIVESTITURES



In July 2000, we sold our Installation Products Group to subsidiaries of the German company
Ardex GmbH. During February 2003, we reached a settlement with Ardex on several open issues related to the sale and the ongoing supply agreement between Ardex and Armstrong. The settlement allowed for the payment of a pre-petition liability to Ardex
with a discount, adjusted the pricing for our adhesives purchases, eliminated a minimum purchase requirement and resolved environmental remediation disputes. Under the settlement, Ardex filed a proof of claim related to environmental remediation in
AWIs Chapter 11 Case, which has been treated as an allowed unsecured claim. This claim resulted in a fourth quarter 2002 charge of $5.3 million, which was recorded in SG&A expense.



NOTE 8. ACCOUNTS AND NOTES RECEIVABLE



|                                        |  |      |       |   |      |   |       |  
|--------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                        |  | 2004 |       |   | 2003 |  
|Customer receivables                    |  | $    | 372.0 |   |      | $ | 358.4 |  
|Customer notes                          |  |      | 7.9   |   |      |   | 6.2   |  
|Miscellaneous receivables               |  |      | 14.7  |   |      |   | 17.0  |  
|Less allowance for discounts and losses |  |      | (58.5 | ) |      |   | (66.2 | )
|                                        |  |      |       |   |      |   |       |  
|Net accounts and notes receivable       |  | $    | 336.1 |   |      | $ | 315.4 |  
|                                        |  |      |       |   |      |   |       |  



Generally, we sell our products to
select, pre-approved customers whose businesses are affected by changes in economic and market conditions. We consider these factors and the financial condition of each customer when establishing our allowance for losses from doubtful accounts.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



NOTE 9. INVENTORIES



Following are the components of our inventories:



|                             |  |      |       |   |      |   |       |  
|---------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                             |  | 2004 |       |   | 2003 |  
|Finished goods               |  | $    | 362.9 |   |      | $ | 330.7 |  
|Goods in process             |  |      | 49.3  |   |      |   | 40.6  |  
|Raw materials and supplies   |  |      | 206.9 |   |      |   | 165.3 |  
|Less LIFO and other reserves |  |      | (89.9 | ) |      |   | (82.2 | )
|                             |  |      |       |   |      |   |       |  
|Total inventories, net       |  | $    | 529.2 |   |      | $ | 454.4 |  
|                             |  |      |       |   |      |   |       |  



Approximately 40% of our total
inventory in 2004 and 2003 was valued on a LIFO (last-in, first-out) basis. Inventory values were lower than would have been reported on a total FIFO (first-in, first-out) basis by $74.1 million at the end of 2004 and $62.0 million at year-end 2003.



The distinction between the use of different methods of inventory valuation is
primarily based on geographical locations and/or legal entities rather than types of inventory. The following table summarizes the amount of inventory that is not accounted for under the LIFO method.



|                                |  |      |       |      |   |      
|------------------------------- |  | ---- | ----- | ---- | - | -----
|                                |  | 2004 |       | 2003
|International locations         |  | $    | 173.0 |      | $ | 162.0
|U.S. Wood Flooring and Cabinets |  |      | 119.4 |      |   | 100.9
|U.S. sourced products           |  |      | 21.0  |      |   | 21.9 
|                                |  |      |       |      |   |      
|Total                           |  | $    | 313.4 |      | $ | 284.8
|                                |  |      |       |      |   |      



Our international locations all use
the FIFO method of inventory valuation primarily because either the LIFO method is not permitted for local tax and/or statutory reporting purposes, or the entities were part of various acquisitions that had adopted the FIFO method prior to our
acquisition. In these situations, a conversion to LIFO would be highly complex and involve excessive cost and effort to achieve under local tax and/or statutory reporting requirements.



Several of the Wood Flooring and Cabinets entities were acquired by Triangle Pacific Corporation (TPC) prior to our acquisition
of TPC in 1998. TPC had elected to retain the historical inventory valuation policies of the acquired companies and, on the basis of consistency and due to the excessive cost involved, we elected not to amend these policies.



The sourced products represent certain finished goods sourced from third party manufacturers
of unique type, primarily from foreign suppliers.



NOTE 10. PROPERTY, PLANT
AND EQUIPMENT



|                                               |  |      |          |   |      |   |          |  
|---------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                               |  | 2004 |          |   | 2003 |  
|Land                                           |  | $    | 77.0     |   |      | $ | 105.4    |  
|Buildings                                      |  |      | 657.4    |   |      |   | 659.7    |  
|Machinery and equipment                        |  |      | 1,937.3  |   |      |   | 1,893.7  |  
|Construction in progress                       |  |      | 77.8     |   |      |   | 43.3     |  
|Less accumulated depreciation and amortization |  |      | (1,540.7 | ) |      |   | (1,434.8 | )
|                                               |  |      |          |   |      |   |          |  
|Net property, plant and equipment              |  | $    | 1,208.8  |   |      | $ | 1,267.3  |  
|                                               |  |      |          |   |      |   |          |  



In the fourth quarter of 2004, we
recorded a $44.8 million fixed asset impairment charge in Resilient Flooring for our European resilient flooring business. This impairment charge reduced land by approximately $29 million and buildings by approximately $16 million and was reported
in cost of goods sold. The fixed asset impairment charge was triggered by actual operating losses and negative cash flows incurred in the European resilient flooring business. The expectation is that the operating losses and negative cash flows will
continue in the near future. The fixed asset fair values were determined by an independent appraisal firm.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



NOTE 11. EQUITY INVESTMENTS



Investments in affiliates were $72.5 million at December 31, 2004, an increase of $23.6 million, primarily reflecting the equity earnings of
our 50% interest in our WAVE joint venture and our remaining 35% interest in Interface Solutions, Inc. (ISI).



|          |  |                                    |  |      |      |      |   |      |      |  |   |      |  
|--------- |  | ---------------------------------- |  | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | -
|Affiliate |  | Income Statement Classification    |  | 2004 |      | 2003 |   |      | 2002 | 
|WAVE      |  | Equity earnings from joint venture |  | $    | 31.6 |      | $ | 20.8 |      |  | $ | 19.7 |  
|ISI       |  | Other non-operating income         |  |      | 1.9  |      |   | 0.3  |      |  |   | 2.1  |  
|Other     |  | Other non-operating expense        |  |      |     |      |   | (0.4 | )    |  |   | (0.1 | )



Condensed financial data for WAVE, our
joint venture accounted for under the equity method of accounting is summarized below:



|                              |  |      |       |      |   |     
|----------------------------- |  | ---- | ----- | ---- | - | ----
|                              |  | 2004 |       | 2003
|Current assets                |  | $    | 145.1 |      | $ | 93.1
|Non-current assets            |  |      | 33.8  |      |   | 32.3
|Current liabilities           |  |      | 71.4  |      |   | 64.1
|Other non-current liabilities |  |      | 5.1   |      |   | 4.0 



|             |  |      |       |      |   |       |  |   |      
|------------ |  | ---- | ----- | ---- | - | ----- |  | - | -----
|             |  | 2004 |       | 2003 |   | 2002 
|Net sales    |  | $    | 278.6 |      | $ | 213.8 |  | $ | 201.4
|Gross profit |  |      | 86.3  |      |   | 61.7  |  |   | 59.2 
|Net earnings |  |      | 63.2  |      |   | 41.7  |  |   | 39.2 



See discussion in Note 31 for
additional information on these related parties.



NOTE 12. GOODWILL AND
INTANGIBLE ASSETS



Goodwill



As of January 1, 2004, we had goodwill of approximately $244 million. FAS 142 requires that
goodwill be tested for impairment at least annually. We perform our annual assessment in the fourth quarter.



During the second quarter of 2004, we concluded that an indication of impairment existed for our European resilient flooring goodwill, which was based on an assessment of financial projections incorporated in our
annual strategic plan process. Continuing price declines and volume shortfalls related to our European resilient flooring products are causing significant operating losses, and we revised our projections accordingly. We calculated a preliminary
estimate of the European resilient flooring reporting units fair value using discounted cash flows. Based on this preliminary fair value calculation, we recorded a non-cash goodwill impairment loss of $60.0 million in the second quarter of
2004. In the fourth quarter of 2004, we completed our annual assessment of goodwill as required by FAS 142 and determined that based upon a revised strategic plan, our European resilient flooring goodwill was fully impaired. Therefore, we recorded a
$48.4 million impairment charge. The goodwill impairment charges arose from the European resilient flooring reporting units fair value being lower than its carrying value. The fair value was negatively affected by lower operating profits and
expected future cash flows determined in recent forecasting analyses. We calculated the reporting units fair value using discounted cash flows. No other goodwill impairment was identified in our annual assessment.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



The following table represents the changes in goodwill during 2004.



|                            |  |                |       |                     |   |      |             |  |   |                  |   |  |   |      
|--------------------------- |  | -------------- | ----- | ------------------- | - | ---- | ----------- |  | - | ---------------- | - |  | - | -----
|Goodwill by segment         |  | January 1,2004 |       | Adjustments, net(1) |   |      | Impairments |  |   | December 31,2004
|Resilient Flooring          |  | $              | 107.1 |                     | $ | 1.3  |             |  | $ | (108.4           | ) |  |   |     
|Wood Flooring               |  |                | 110.4 |                     |   | (2.2 | )           |  |   |                 |   |  | $ | 108.2
|Building Products           |  |                | 14.0  |                     |   | 1.2  |             |  |   |                 |   |  |   | 15.2 
|Cabinets                    |  |                | 12.6  |                     |   |     |             |  |   |                 |   |  |   | 12.6 
|                            |  |                |       |                     |   |      |             |  |   |                  |   |  |   |      
|Total consolidated goodwill |  | $              | 244.1 |                     | $ | 0.3  |             |  | $ | (108.4           | ) |  | $ | 136.0
|                            |  |                |       |                     |   |      |             |  |   |                  |   |  |   |      

---

|(1) | Primarily consists of the effects of resolution of pre-acquisition tax contingencies and foreign exchange.
|--- | ----------------------------------------------------------------------------------------------------------



In the fourth quarter of 2003, we completed our annual assessment of goodwill as required by
FAS 142 and determined there was no impairment.



The following table represents
the changes in goodwill during 2003.



|                            |  |                |       |                     |   |      |             |  |                  |   |  |   |      
|--------------------------- |  | -------------- | ----- | ------------------- | - | ---- | ----------- |  | ---------------- | - |  | - | -----
|Goodwill by segment         |  | January 1,2003 |       | Adjustments, net(1) |   |      | Impairments |  | December 31,2003
|Resilient Flooring          |  | $              | 89.3  |                     | $ | 17.8 |             |  | $                |  |  | $ | 107.1
|Wood Flooring               |  |                | 113.8 |                     |   | (3.4 | )           |  |                  |  |  |   | 110.4
|Building Products           |  |                | 11.9  |                     |   | 2.1  |             |  |                  |  |  |   | 14.0 
|Cabinets                    |  |                | 12.6  |                     |   |     |             |  |                  |  |  |   | 12.6 
|                            |  |                |       |                     |   |      |             |  |                  |   |  |   |      
|Total consolidated goodwill |  | $              | 227.6 |                     | $ | 16.5 |             |  | $                |  |  | $ | 244.1
|                            |  |                |       |                     |   |      |             |  |                  |   |  |   |      

---

|(1) | Primarily consists of the effects of foreign exchange and resolution of pre-acquisition tax contingencies.
|--- | ----------------------------------------------------------------------------------------------------------



In the second quarter of 2002, we completed our initial assessment of goodwill under FAS 142
and recorded a $590.0 million non-cash transitional impairment charge related to the Wood Flooring segment. The impairment charge is presented in the income statement as a cumulative effect of a change in accounting principle as of January 1, 2002.
The impairment charge arose from the Wood Flooring segments fair value being lower than our carrying value. The Wood Flooring segments fair value was determined using a combination of discounted cash flows, values implicit in precedent
business combinations of similar companies in the building products industry and stock market multiples of publicly-traded flooring companies. The fair value was negatively affected by lower operating profits and cash flows than were assumed at the
time of the acquisition in 1998. The shortfalls were caused by a combination of lower sales plus higher manufacturing costs. Under previous accounting rules, no goodwill impairment would have been recorded at January 1, 2002.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Intangible Assets



The following table details amounts related to our intangible assets as of December 31, 2004 and 2003.



|                                 |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|-------------------------------- |  | -------------------- | ----- | ----------------------- | - | -------------------- |  | ----------------------- | ----- |  | - | ----
|                                 |  | December 31, 2004    |       | December 31, 2003      
|                                 |  | Gross CarryingAmount |       | AccumulatedAmortization |   | Gross CarryingAmount |  | AccumulatedAmortization
|Amortizing intangible assets     |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Computer software                |  | $                    | 109.8 |                         | $ | 66.4                 |  | $                       | 104.1 |  | $ | 57.7
|Land use rights and other        |  |                      | 4.4   |                         |   | 1.0                  |  |                         | 4.4   |  |   | 0.9 
|                                 |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Total                            |  | $                    | 114.2 |                         | $ | 67.4                 |  | $                       | 108.5 |  | $ | 58.6
|                                 |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Non-amortizing intangible assets |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Trademarks and brand names       |  |                      | 29.2  |                         |   |                      |  |                         | 29.1  |  |   |     
|                                 |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Total intangible assets          |  | $                    | 143.4 |                         |   |                      |  | $                       | 137.6 |  |   |     
|                                 |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Aggregate Amortization Expense   |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|For the year ended December 31   |  | $                    | 15.4  |                         |   |                      |  | $                       | 15.5  |  |   |     



Amortization charges for computer
software are determined on a straight-line basis at rates calculated to provide for the retirement of assets at the end of their useful lives, generally 3 to 7 years.



The annual amortization expense expected for the years 2005 through 2009 is as follows:



|     |  |      
|---- |  | -----
|2005 |  | $15.1
|2006 |  | 11.8 
|2007 |  | 6.2  
|2008 |  | $5.0 
|2009 |  | 2.8  



In connection with our adoption of FAS
142 in 2002, it was determined that the fair value of one of Wood Floorings trademarks was lower than its carrying value. The fair value of the trademark was estimated using a discounted cash flow methodology. Accordingly, a non-cash
transitional impairment charge of $6.0 million ($3.8 million, net of tax) was calculated and is presented in the income statement as a cumulative effect of a change in accounting principle as of January 1, 2002.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



NOTE 13. OTHER NON-CURRENT ASSETS



|                                                              |  |      |       |      |   |      
|------------------------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                                              |  | 2004 |       | 2003
|Cash surrender value of company owned life insurance policies |  | $    | 66.8  |      | $ | 62.1 
|Long term notes receivable                                    |  |      | 31.8  |      |   | 27.9 
|Other                                                         |  |      | 24.0  |      |   | 21.2 
|                                                              |  |      |       |      |   |      
|Total other non-current assets                                |  | $    | 122.6 |      | $ | 111.2
|                                                              |  |      |       |      |   |      



NOTE 14. ACCOUNTS PAYABLE AND
ACCRUED EXPENSES



|                                            |  |      |       |      |   |      
|------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                            |  | 2004 |       | 2003
|Payables, trade and other                   |  | $    | 259.8 |      | $ | 221.9
|Employment costs                            |  |      | 65.7  |      |   | 41.8 
|Restructuring severance expenses            |  |      | 18.0  |      |   | 3.4  
|Other                                       |  |      | 103.9 |      |   | 87.1 
|                                            |  |      |       |      |   |      
|Total accounts payable and accrued expenses |  | $    | 447.4 |      | $ | 354.2
|                                            |  |      |       |      |   |      



Certain other accounts payable and
accrued expenses have been categorized as liabilities subject to compromise (see Note 4).



NOTE 15. RESTRUCTURING AND REORGANIZATION CHARGES



2004 Restructuring Activities



Net
restructuring charges of $18.3 million were recorded in 2004. The following table summarizes these charges:



|                       |  |                      |      |   |                                       |     |         |                                               
|---------------------- |  | -------------------- | ---- | - | ------------------------------------- | --- | ------- | ----------------------------------------------
|Action Title           |  | NetCharge/(Reversal) |      |   | (unaudited)Number ofEmployeesImpacted |     | Segment
|Hoogezand              |  | $                    | 10.9 |   |                                       | 130 |         | Building Products                             
|North America SG&A     |  |                      | 5.3  |   |                                       | 250 |         | Resilient Flooring, Wood Flooring, Corporate  
|Lancaster Plant        |  |                      | 1.0  |   |                                       | 450 |         | Resilient Flooring                            
|Searcy                 |  |                      | 0.8  |   |                                       | 230 |         | Wood Flooring                                 
|Oss                    |  |                      | 0.7  |   |                                       | 70  |         | Textiles & Sports Flooring                    
|Morristown             |  |                      | 0.4  |   |                                       | 100 |         | Cabinet Products                              
|European consolidation |  |                      | (0.8 | ) |                                       |     |         | Resilient Flooring, Textiles & Sports Flooring
|                       |  |                      |      |   |                                       |     |         |                                               
|Total                  |  | $                    | 18.3 |   |                                       |     |         |                                               
|                       |  |                      |      |   |                                       |     |         |                                               



Hoogezand: The charge is
related to the first quarter 2004 decision to close the manufacturing facility and is comprised of severance and related costs. Closure of the plant was completed in the first quarter of 2005. The production will be transferred to another Building
Products location in Münster, Germany and will result in a net reduction of approximately 72 positions. We have incurred $10.9 million of restructuring charges to-date and expect to incur an additional $7.7 million, which will be in 2005.



Additionally, we recorded $1.4 million of accelerated depreciation and $1.1
million of other related costs in cost of goods sold.



North America
SG&A: The charge of $5.3 million ($4.0 million in Resilient Flooring, $0.8 million in Wood Flooring, and $0.5 million in Corporate) was recorded related to severance and related costs due to a restructuring of the sales force and management
structure in North America in response to changing market conditions. This initiative was announced in the fourth quarter of 2004 and is expected to be completed by the second quarter of 2005. We have incurred $5.3 million of restructuring charges
to-date and do not expect to incur any additional charges.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Lancaster Plant: The charge related to the fourth quarter 2004 decision to end commercial flooring production
at Lancaster in 2006. Commercial flooring production requirements will be serviced by other facilities around the world. Of the $1.0 million charge, $0.6 million is a non-cash charge related to termination benefits to be paid through the U.S.
pension plan. We expect to incur an additional $38 million of restructuring charges for severance between 2005 and 2008, with the majority of charges incurred in 2005. Additionally, we recorded $17.7 million of fixed asset impairments and $10.3
million of accelerated depreciation, both in cost of goods sold. We have incurred $1.0 million of severance related restructuring charges to-date.



Searcy: The charge is related to the fourth quarter 2004 decision to close a solid hardwood flooring location in Arkansas in the first quarter of 2005 and is
comprised of estimated severance benefits and related costs. We will continue to manufacture solid wood flooring at other plants across the United States. We have incurred $0.8 million of restructuring charges to-date and expect to incur an
additional $0.2 million, which will be in 2005.



Oss: The charge was
recorded to reflect shutdown costs related to a plant closure in The Netherlands. The related severance charges were recorded during the third quarter of 2003 when the plant closure was announced. We will continue to manufacture carpet at other
plants across Europe. We have incurred $4.7 million of restructuring charges to-date and expect to incur an additional $0.2 million, which will be in 2005.



Morristown: The charge related to the fourth quarter 2004 decision to close a plant in Tennessee in the first quarter of 2005. Manufacturing will be consolidated
at two existing plants in the United States. We have incurred $0.4 million of severance related restructuring charges to-date and expect to incur an additional $0.4 million, which will be in 2005. Additionally, we recorded $1.5 million of
accelerated depreciation and $0.4 million of fixed asset impairments, both in cost of goods sold.



European consolidation: The net reversals comprised certain severance accruals that were no longer necessary in the remaining accruals from the 2003 and 2002 charges in the Textiles and Sports Flooring ($0.3
million) and Resilient Flooring ($0.5 million) segments.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



2003 Restructuring Activities



Net restructuring charges of $8.6 million were recorded in 2003. These charges are summarized in the following table:



|                       |  |                      |      |   |                            |     |         |                                               
|---------------------- |  | -------------------- | ---- | - | -------------------------- | --- | ------- | ----------------------------------------------
|Action Title           |  | NetCharge/(Reversal) |      |   | Number ofEmployeesImpacted |     | Segment
|European consolidation |  | $                    | 4.4  |   |                            | 60  |         | Resilient Flooring, Textiles & Sports Flooring
|Oss                    |  |                      | 4.0  |   |                            | 70  |         | Textiles & Sports Flooring                    
|Port Gibson            |  |                      | 0.5  |   |                            | 150 |         | Wood Flooring                                 
|Warren                 |  |                      | 0.3  |   |                            | 120 |         | Wood Flooring                                 
|Baroda                 |  |                      | 0.2  |   |                            | 70  |         | Resilient Flooring                            
|U.K. lease             |  |                      | (0.8 | ) |                            |     |         | Corporate                                     
|                       |  |                      |      |   |                            |     |         |                                               
|Total                  |  | $                    | 8.6  |   |                            |     |         |                                               
|                       |  |                      |      |   |                            |     |         |                                               



European consolidation: The
charge related to severance and retirement benefits for employees in the Textiles and Sports Flooring ($3.4 million) and Resilient Flooring ($1.0 million) segments, as part of the restructuring plan to consolidate certain functions in the European
flooring business. This consolidation was completed in 2004.



Oss: The
charge related primarily to severance benefits for employees at a plant in The Netherlands, which was closed by the end of 2004. The closure was part of the 2002 restructuring plan to consolidate certain functions in the European flooring business.
Of the $4.0 million, $0.3 million represented a non-cash charge for retirement benefits, which was accounted for as a reduction of the prepaid pension asset. Additionally, we recorded $0.3 million of accelerated depreciation in cost of goods sold.



Port Gibson: The charge was for severance benefits related to a
manufacturing location in Mississippi, which was closed effective September 2003 due to excess production capacity. The production was transferred to another Wood Flooring location. Additionally, we recorded $15.1 million of accelerated depreciation
and $0.8 million of fixed asset impairments, both in cost of goods sold.



Warren: The charge related to the closing of a manufacturing location in Arkansas. This location was closed in the fourth quarter of 2003. Additionally, we recorded $6.7 million of accelerated depreciation in cost of goods sold.



Baroda: The charge related to the closing of a plant in India. This
plant was closed in the fourth quarter of 2003. Additionally, we recorded $0.1 million of accelerated depreciation in cost of goods sold.



U.K. lease: A portion of the remaining reserve related to a noncancelable operating lease in the U.K. was reversed as a result of reaching agreement with outside
parties on future rent increases and disputed rent payments by a sublessee. This lease extends through 2017.



In 2002, we recorded restructuring charges, net, of $1.9 million, primarily related to $2.2 million of European resilient flooring and reversals of some TSF accruals that were no longer necessary.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



The following table summarizes activity in the reorganization and restructuring accruals for 2004 and 2003. The net
amount of charges and reversals in the table does not agree to the income statement due to non-cash charges for enhanced retirement benefits that did not affect the restructuring accrual accounts.



|     |  |                   |      |               |   |      |         |  |           |      |  |       |      |                |  |   |     |  |   |     
|---- |  | ----------------- | ---- | ------------- | - | ---- | ------- |  | --------- | ---- |  | ----- | ---- | -------------- |  | - | --- |  | - | ----
|     |  | Beginning Balance |      | Cash Payments |   |      | Charges |  | Reversals |      |  | Other |      | Ending Balance
|2004 |  | $                 | 10.0 |               | $ | (4.1 | )       |  | $         | 18.6 |  | $     | (0.9 | )              |  | $ | 1.2 |  | $ | 24.8
|2003 |  |                   | 9.1  |               |   | (8.7 | )       |  |           | 10.1 |  |       | (1.8 | )              |  |   | 1.3 |  |   | 10.0



The amount in other for
2004 and 2003 is primarily related to foreign currency translation.



Of the
2004 and 2003 ending balances, $1.3 million is reported in liabilities subject to compromise.



Substantially all of the remaining balance of the restructuring accrual as of December 31, 2004 relates to severance for terminated employees with extended payouts, the majority of which will be paid in 2005 and 2006,
and a noncancelable operating lease, which extends through 2017.



NOTE 16.
INCOME TAXES



The tax effects of principal temporary differences between
the carrying amounts of assets and liabilities and their tax bases are summarized in the table below. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize deferred
tax assets, except for certain state and foreign net operating loss carryforwards and other basis adjustments for which we have provided a valuation allowance of $265.5 million. We have $1,387.8 million of state net operating loss carryforwards with
expirations between 2005 and 2024, and $298.7 million of foreign net operating loss carryforwards, which will be carried forward indefinitely. The decrease in the deferred tax asset related to state net operating losses was primarily due to the
expiration of state net operating loss carryforwards and managements detailed analysis of state net operating losses available. The valuation allowance increased by $43.1 million in 2004 primarily due to managements detailed analysis of
state deferred tax assets and liabilities and the addition of new foreign net operating losses generated by current year operations offset by the expiration of state net operating loss carryforwards.



|                                                        |  |      |         |   |      |   |         |  
|------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|Deferred income tax assets (liabilities)                |  | 2004 |         |   | 2003 |  
|Postretirement and postemployment benefits              |  | $    | 116.0   |   |      | $ | 91.0    |  
|Chapter 11 reorganization costs and restructuring costs |  |      | 21.5    |   |      |   | 16.4    |  
|Asbestos-related liabilities                            |  |      | 1,352.7 |   |      |   | 1,153.9 |  
|Foreign tax credit carryforward                         |  |      |        |   |      |   | 2.3     |  
|Net operating losses                                    |  |      | 139.0   |   |      |   | 211.2   |  
|Other                                                   |  |      | 193.8   |   |      |   | 135.3   |  
|                                                        |  |      |         |   |      |   |         |  
|Total deferred tax assets                               |  |      | 1,823.0 |   |      |   | 1,610.1 |  
|Valuation allowance                                     |  |      | (265.5  | ) |      |   | (222.4  | )
|                                                        |  |      |         |   |      |   |         |  
|Net deferred tax assets                                 |  |      | 1,557.5 |   |      |   | 1,387.7 |  
|                                                        |  |     
|Accumulated depreciation                                |  |      | (199.1  | ) |      |   | (200.6  | )
|Pension credit                                          |  |      | (182.6  | ) |      |   | (144.1  | )
|Insurance for asbestos-related liabilities              |  |      | (38.3   | ) |      |   | (33.2   | )
|Tax on unremitted earnings                              |  |      | (28.8   | ) |      |   | (27.0   | )
|Other                                                   |  |      | (172.4  | ) |      |   | (73.7   | )
|                                                        |  |      |         |   |      |   |         |  
|Total deferred income tax liabilities                   |  |      | (621.2  | ) |      |   | (478.6  | )
|                                                        |  |      |         |   |      |   |         |  
|Net deferred income tax assets                          |  | $    | 936.3   |   |      | $ | 909.1   |  
|                                                        |  |      |         |   |      |   |         |  



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



|                                                                                 |  |   |       |   |  |   |       |  
|-------------------------------------------------------------------------------- |  | - | ----- | - |  | - | ----- | -
|Deferred income taxes have been classified in the Consolidated Balance Sheet as: |  |   |       |   |  |   |       |  
|Deferred income tax asset  current                                              |  | $ | 15.6  |   |  | $ | 19.2  |  
|Deferred income tax asset  non-current                                          |  |   | 941.6 |   |  |   | 988.3 |  
|Deferred income tax liability  current                                          |  |   | (1.1  | ) |  |   | (3.3  | )
|Deferred income tax liability  non-current                                      |  |   | (19.8 | ) |  |   | (95.1 | )
|                                                                                 |  |   |       |   |  |   |       |  
|Net deferred income tax assets                                                   |  | $ | 936.3 |   |  | $ | 909.1 |  
|                                                                                 |  |   |       |   |  |   |       |  



|                                                                |  |      |        |   |      |   |       |      |  |   |          |  
|--------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | -------- | -
|Details of taxes                                                |  | 2004 |        |   | 2003 |   |       | 2002 | 
|Earnings (loss) from continuing operations before income taxes: |  |      |        |   |      |   |       |      |  |   |          |  
|Domestic                                                        |  | $    | 77.5   |   |      | $ | (53.7 | )    |  | $ | (2,398.0 | )
|Foreign                                                         |  |      | (130.8 | ) |      |   | 20.0  |      |  |   | 21.9     |  
|Eliminations                                                    |  |      | (4.1   | ) |      |   | (4.7  | )    |  |   |         |  
|                                                                |  |      |        |   |      |   |       |      |  |   |          |  
|Total                                                           |  | $    | (54.2  | ) |      | $ | (38.4 | )    |  | $ | (2,376.1 | )
|                                                                |  |      |        |   |      |   |       |      |  |   |          |  
|Income tax provision (benefit):                                 |  |      |        |   |      |   |       |      |  |   |          |  
|Current:                                                        |  |      |        |   |      |   |       |      |  |   |          |  
|Federal                                                         |  | $    | 33.1   |   |      | $ | 25.2  |      |  | $ | 35.2     |  
|Foreign                                                         |  |      | 14.5   |   |      |   | 20.8  |      |  |   | 10.6     |  
|State                                                           |  |      | (0.9   | ) |      |   | 3.9   |      |  |   | 1.4      |  
|                                                                |  |      |        |   |      |   |       |      |  |   |          |  
|Total current                                                   |  |      | 46.7   |   |      |   | 49.9  |      |  |   | 47.2     |  
|                                                                |  |      |        |   |      |   |       |      |  |   |          |  
|Deferred:                                                       |  |      |        |   |      |   |       |      |  |   |          |  
|Federal                                                         |  |      | (15.1  | ) |      |   | (41.5 | )    |  |   | (874.1   | )
|Foreign                                                         |  |      | (6.2   | ) |      |   | (9.3  | )    |  |   | (1.6     | )
|State                                                           |  |      | (0.3   | ) |      |   | (0.7  | )    |  |   | 0.7      |  
|                                                                |  |      |        |   |      |   |       |      |  |   |          |  
|Total deferred                                                  |  |      | (21.6  | ) |      |   | (51.5 | )    |  |   | (875.0   | )
|                                                                |  |      |        |   |      |   |       |      |  |   |          |  
|Total income taxes (benefit)                                    |  | $    | 25.1   |   |      | $ | (1.6  | )    |  | $ | (827.8   | )
|                                                                |  |      |        |   |      |   |       |      |  |   |          |  



At December 31, 2004, unremitted
earnings of subsidiaries outside the U.S. were $342.6 million. We expect to repatriate $82.2 million of earnings for which $1.8 million of U.S. taxes were provided in 2004 and $27.0 million in 2000. No U.S. taxes have been provided on the remaining
unremitted earnings as our intention is to invest these earnings permanently. If such earnings were to be remitted, approximately $30.3 million in net taxes would be payable in the U.S. in addition to $5.8 million of non-U.S. withholding taxes. On
October 22, 2004, the American Jobs Creation Act (the AJCA) was signed into law. The AJCA includes a deduction of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. We may elect to apply this provision to
qualifying earnings repatriations in 2005. We have started an evaluation of the effects of the repatriation provision; however, we do not expect to be able to complete this evaluation until after Congress or the U.S. Treasury Department provides
additional clarifying language on key elements of the provision. We expect to complete our evaluation of the effects of the repatriation provision following the publication of the additional clarifying language or by the end of 2005 since the AJCA
requires that qualifying dividends need to be paid to the U.S. before the close of the 2005 tax year. The range of possible amounts that we are considering for repatriation under this provision is between zero and $250 million. The related potential
range of income tax expense is between zero and $15 million.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



The 2004, 2003 and 2002 tax provisions reflect the reversal of certain federal, state and foreign tax accruals no
longer required due to the completion of tax audits and expiration of statutes of limitation partially offset by certain nondeductible expenses.



|                                                      |  |      |       |   |      |   |       |      |  |   |        |  
|----------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ------ | -
|Reconciliation to U.S. statutory tax rate             |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Continuing operations tax (benefit) at statutory rate |  | $    | (19.0 | ) |      | $ | (13.4 | )    |  | $ | (831.6 | )
|State income taxes, net of federal benefit            |  |      | (2.8  | ) |      |   | 0.4   |      |  |   | 1.7    |  
|Foreign losses and change in valuation allowance      |  |      | 18.4  |   |      |   | 7.8   |      |  |   | 7.2    |  
|Tax on foreign and foreign-source income              |  |      | (3.4  | ) |      |   | (5.8  | )    |  |   | (16.2  | )
|Goodwill impairment                                   |  |      | 37.9  |   |      |   |      |      |  |   |       |  
|Bankruptcy reorganization expense                     |  |      | (5.1  | ) |      |   | 9.0   |      |  |   | 9.6    |  
|Permanent book/tax differences                        |  |      | (2.7  | ) |      |   | 0.4   |      |  |   | 1.5    |  
|Net tax on unremitted earnings                        |  |      | 1.8   |   |      |   |      |      |  |   |       |  
|                                                      |  |      |       |   |      |   |       |      |  |   |        |  
|Tax expense (benefit) at effective rate               |  | $    | 25.1  |   |      | $ | (1.6  | )    |  | $ | (827.8 | )
|                                                      |  |      |       |   |      |   |       |      |  |   |        |  



|                                            |  |      |      |      |   |      |  |   |     
|------------------------------------------- |  | ---- | ---- | ---- | - | ---- |  | - | ----
|Other taxes                                 |  | 2004 |      | 2003 |   | 2002
|Payroll taxes                               |  | $    | 81.5 |      | $ | 78.0 |  | $ | 76.1
|Property, franchise and capital stock taxes |  |      | 17.8 |      |   | 15.8 |  |   | 12.6



NOTE 17. DEBT



(See Note 4 regarding treatment of prepetition debt.)



|                                               |  |      |         |                                |      |   |      |   |                                |  |      |  
|---------------------------------------------- |  | ---- | ------- | ------------------------------ | ---- | - | ---- | - | ------------------------------ |  | ---- | -
|                                               |  | 2004 |         | Average year-end interest rate |      |   | 2003 |   | Average year-end interest rate | 
|Borrowings under lines of credit               |  | $    | 450.0   |                                | 7.18 | % |      | $ | 450.0                          |  | 7.18 | %
|Commercial paper                               |  |      | 50.0    |                                | 6.75 | % |      |   | 50.0                           |  | 6.75 | %
|Foreign banks                                  |  |      | 11.1    |                                | 3.68 | % |      |   | 3.9                            |  | 3.62 | %
|Bank loans due 2004-2015                       |  |      | 24.7    |                                | 6.04 | % |      |   | 34.1                           |  | 5.65 | %
|9.00% medium-term notes due 2001               |  |      | 7.5     |                                | 9.00 | % |      |   | 7.5                            |  | 9.00 | %
|6.35% senior notes due 2003                    |  |      | 200.0   |                                | 6.35 | % |      |   | 200.0                          |  | 6.35 | %
|6.50% senior notes due 2005                    |  |      | 150.0   |                                | 6.50 | % |      |   | 150.0                          |  | 6.50 | %
|9.75% debentures due 2008                      |  |      | 125.0   |                                | 9.75 | % |      |   | 125.0                          |  | 9.75 | %
|7.45% senior notes due 2029                    |  |      | 200.0   |                                | 7.45 | % |      |   | 200.0                          |  | 7.45 | %
|7.45% senior quarterly interest bonds due 2038 |  |      | 180.0   |                                | 7.45 | % |      |   | 180.0                          |  | 7.45 | %
|Industrial development bonds                   |  |      | 21.0    |                                | 4.13 | % |      |   | 21.0                           |  | 3.85 | %
|Capital lease obligations                      |  |      | 2.7     |                                | 7.63 | % |      |   | 3.3                            |  | 7.63 | %
|Other                                          |  |      | 15.1    |                                | 8.61 | % |      |   | 15.3                           |  | 8.56 | %
|                                               |  |      |         |                                |      |   |      |   |                                |  |      |  
|Subtotal                                       |  |      | 1,437.1 |                                | 7.21 | % |      |   | 1,440.1                        |  | 7.20 | %
|Less debt subject to compromise                |  |      | 1,388.6 |                                | 7.29 | % |      |   | 1,388.6                        |  | 7.29 | %
|Less current portion and short-term debt       |  |      | 19.3    |                                | 4.74 | % |      |   | 12.1                           |  | 5.13 | %
|                                               |  |      |         |                                |      |   |      |   |                                |  |      |  
|Total long-term debt, less current portion     |  | $    | 29.2    |                                | 4.80 | % |      | $ | 39.4                           |  | 4.72 | %
|                                               |  |      |         |                                |      |   |      |   |                                |  |      |  



Approximately $35.7 million of the
$48.5 million of total debt not subject to compromise outstanding as of December 31, 2004 was secured with buildings and other assets. Approximately $37.0 million of the $51.5 million of total debt not subject to compromise outstanding as of
December 31, 2003 was secured with buildings and other assets.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Scheduled payments of long-term debt, excluding debt subject to compromise :



|     |  |   |    
|---- |  | - | ---
|2005 |  | $ | 8.2
|2006 |  |   | 6.5
|2007 |  |   | 1.9
|2008 |  | $ | 1.5
|2009 |  |   | 1.3



Debt from the table above included in
liabilities subject to compromise consisted of the following at December 31, 2004 and 2003.



|                                               |  |      |         |      |   |        
|---------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                               |  | 2004 |         | 2003
|Borrowings under lines of credit               |  | $    | 450.0   |      | $ | 450.0  
|Commercial paper                               |  |      | 50.0    |      |   | 50.0   
|9.00% medium-term notes due 2001               |  |      | 7.5     |      |   | 7.5    
|6.35% senior notes due 2003                    |  |      | 200.0   |      |   | 200.0  
|6.50% senior notes due 2005                    |  |      | 150.0   |      |   | 150.0  
|9.75% debentures due 2008                      |  |      | 125.0   |      |   | 125.0  
|7.45% senior notes due 2029                    |  |      | 200.0   |      |   | 200.0  
|7.45% senior quarterly interest bonds due 2038 |  |      | 180.0   |      |   | 180.0  
|Industrial development bonds                   |  |      | 11.0    |      |   | 11.0   
|Other                                          |  |      | 15.1    |      |   | 15.1   
|                                               |  |      |         |      |   |        
|Total debt subject to compromise               |  | $    | 1,388.6 |      | $ | 1,388.6
|                                               |  |      |         |      |   |        



In accordance with SOP 90-7, we did
not record contractual interest expense on prepetition debt after the Chapter 11 filing date. This unrecorded interest expense was $86.9 million, $95.1 million and $99.9 million for 2004, 2003 and 2002, respectively. Unrecorded interest expense
reflects the amount of interest expense we would have incurred under the original maturities of prepetition debt.



On November 15, 2004, the Bankruptcy Court announced it had approved AWIs motion to extend the maturity date from December 8, 2004, to December 8, 2005, on its $75
million DIP Facility that is limited to issuances of letters of credit. Obligations under the DIP Facility to reimburse drawings under the letters of credit constitute a super-priority administrative expense claim in the Chapter 11 Case. As of
December 31, 2004 and 2003, AWI had approximately $40.6 million and $22.8 million, respectively, in letters of credit that were issued under the DIP Facility.



In addition, certain foreign subsidiaries have approximately $38.5 million of unused short-term lines of credit available from banks. The credit lines are subject to
immaterial annual commitment fees.



NOTE 18. PENSION AND OTHER BENEFIT
PROGRAMS



We have defined benefit pension plans and postretirement medical
and insurance benefit plans covering eligible employees worldwide. We also have defined-contribution pension plans for eligible employees. Benefits from defined benefit pension plans, which cover substantially all employees worldwide, are based
primarily on an employees compensation and years of service. We fund our pension plans when appropriate. The U.S. defined benefit pension plans were closed to new salaried and salaried production employees on January 1, 2005. We fund
postretirement benefits on a pay-as-you-go basis, with the retiree paying a portion of the cost for health care benefits by means of deductibles and contributions. We announced in 1989 and 1990 a 15-year phase-out of health care benefits for certain
future retirees. These future retirees include parent company nonunion employees and some union employees.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Medicare Act



On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (The Act) became law in the United States. The Act provides
employers currently sponsoring prescription drug programs for Medicare-eligible participants with a range of options for coordinating with the new government-sponsored program. These options include supplementing the government program on a
secondary payor basis or accepting a direct subsidy from the government to support a portion of the cost of the employers program.



Pursuant to guidance issued in the second quarter of 2004 by the FASB, we elected to begin recording the effect of the Act in the second quarter of 2004, retroactive to
January 1, 2004. The Act affects both operating income and balance sheet liabilities over time. The total year benefit of $7.0 million was recorded in cost of goods sold ($3.9 million) and SG&A ($3.1 million). The reduction in the accumulated
postretirement benefit obligation related to the Medicare benefit was $52.4 million, reflected in actuarial (gain)/loss in the table below.



UNITED STATES PLANS



The following tables summarize the balance sheet impact of the pension and postretirement benefit plans, as well as the related benefit obligations, assets, funded status and rate assumptions. The pension benefits
disclosures include both the Retirement Income Plan (RIP) and the Retirement Benefit Equity Plan, which is a nonqualified, unfunded plan designed to provide pension benefits in excess of the limits defined under Sections 415 and 401(a)(17) of the
Internal Revenue Code.



We use a December 31 measurement date for our U.S.
defined benefit plans.



|                                            |  |                  |         |   |                                           |   |         |      |  |   |        |   |  |   |        |  
|------------------------------------------- |  | ---------------- | ------- | - | ----------------------------------------- | - | ------- | ---- |  | - | ------ | - |  | - | ------ | -
|                                            |  | Pension Benefits |         |   | Retiree Health and LifeInsurance Benefits |  
|U.S. defined-benefit plans                  |  | 2004             |         |   | 2003                                      |   |         | 2004 |  |   | 2003   |  
|Change in benefit obligation:               |  |                  |         |   |                                           |   |         |      |  |   |        |   |  |   |        |  
|Benefit obligation as of January 1          |  | $                | 1,570.8 |   |                                           | $ | 1,423.4 |      |  | $ | 436.6  |   |  | $ | 458.2  |  
|Service cost                                |  |                  | 23.2    |   |                                           |   | 21.8    |      |  |   | 3.4    |   |  |   | 3.4    |  
|Interest cost                               |  |                  | 91.3    |   |                                           |   | 91.8    |      |  |   | 22.3   |   |  |   | 26.2   |  
|Plan participants contributions            |  |                  |        |   |                                           |   |        |      |  |   | 5.7    |   |  |   | 4.6    |  
|Plan amendments                             |  |                  | 0.9     |   |                                           |   | 20.2    |      |  |   |       |   |  |   | (60.0  | )
|Effect of special termination benefits      |  |                  | 0.6     |   |                                           |   |        |      |  |   |       |   |  |   |       |  
|Actuarial (gain)/loss                       |  |                  | 50.9    |   |                                           |   | 111.2   |      |  |   | (37.0  | ) |  |   | 38.0   |  
|Benefits paid                               |  |                  | (100.3  | ) |                                           |   | (97.6   | )    |  |   | (34.3  | ) |  |   | (33.8  | )
|                                            |  |                  |         |   |                                           |   |         |      |  |   |        |   |  |   |        |  
|Benefit obligation as of December 31        |  | $                | 1,637.4 |   |                                           | $ | 1,570.8 |      |  | $ | 396.7  |   |  | $ | 436.6  |  
|                                            |  |                  |         |   |                                           |   |         |      |  |   |        |   |  |   |        |  
|Change in plan assets:                      |  |                  |         |   |                                           |   |         |      |  |   |        |   |  |   |        |  
|Fair value of plan assets as of January 1   |  | $                | 1,882.9 |   |                                           | $ | 1,603.6 |      |  |   |       |   |  |   |       |  
|Actual return on plan assets  gain         |  |                  | 224.5   |   |                                           |   | 373.7   |      |  |   |       |   |  |   |       |  
|Employer contribution                       |  |                  | 3.3     |   |                                           |   | 3.2     |      |  | $ | 28.6   |   |  | $ | 29.2   |  
|Plan participants contributions            |  |                  |        |   |                                           |   |        |      |  |   | 5.7    |   |  |   | 4.6    |  
|Benefits paid                               |  |                  | (100.3  | ) |                                           |   | (97.6   | )    |  |   | (34.3  | ) |  |   | (33.8  | )
|                                            |  |                  |         |   |                                           |   |         |      |  |   |        |   |  |   |        |  
|Fair value of plan assets as of December 31 |  | $                | 2,010.4 |   |                                           | $ | 1,882.9 |      |  | $ | 0.0    |   |  | $ | 0.0    |  
|                                            |  |                  |         |   |                                           |   |         |      |  |   |        |   |  |   |        |  
|Funded status of the plans                  |  | $                | 373.0   |   |                                           | $ | 312.1   |      |  | $ | (396.7 | ) |  | $ | (436.6 | )
|Unrecognized net actuarial (gain)/loss      |  |                  | (46.4   | ) |                                           |   | (19.0   | )    |  |   | 193.2  |   |  |   | 240.3  |  
|Unrecognized prior service cost             |  |                  | 117.7   |   |                                           |   | 134.2   |      |  |   | (40.7  | ) |  |   | (45.9  | )
|                                            |  |                  |         |   |                                           |   |         |      |  |   |        |   |  |   |        |  
|Net asset/(liability) recognized            |  | $                | 444.3   |   |                                           | $ | 427.3   |      |  | $ | (244.2 | ) |  | $ | (242.2 | )
|                                            |  |                  |         |   |                                           |   |         |      |  |   |        |   |  |   |        |  



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



|                                                                                                      |  |                  |   |  |                                            |   |  |      |   |  |      |  
|----------------------------------------------------------------------------------------------------- |  | ---------------- | - |  | ------------------------------------------ | - |  | ---- | - |  | ---- | -
|                                                                                                      |  | Pension Benefits |   |  | Retiree Health and Life Insurance Benefits |  
|U.S. defined-benefit plans                                                                            |  | 2004             |   |  | 2003                                       |   |  | 2004 |   |  | 2003 |  
|Weighted-average assumptions used to determine benefit obligations at December 31:                    |  |                  |   |  |                                            |   |  |      |   |  |      |  
|Discount rate                                                                                         |  | 5.75             | % |  | 6.00                                       | % |  | 5.75 | % |  | 6.00 | %
|Rate of compensation increase                                                                         |  | 4.00             | % |  | 4.00                                       | % |  | 4.00 | % |  | 4.00 | %
|                                                                                                      |  |                  |   | 
|Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31: |  |                  |   |  |                                            |   |  |      |   |  |      |  
|Discount rate                                                                                         |  | 6.00             | % |  | 6.50                                       | % |  | 6.00 | % |  | 6.50 | %
|Expected return on plan assets                                                                        |  | 8.00             | % |  | 8.00                                       | % |  | n/a  |   |  | n/a  |  
|Rate of compensation increase                                                                         |  | 4.00             | % |  | 4.00                                       | % |  | 4.00 | % |  | 4.00 | %



Investment Policies



The RIPs primary investment objective is to increase the ratio of RIP assets to
liabilities by maximizing the long-term return on investments while minimizing the likelihood of cash contributions over the next 5-10 years. This is to be achieved by (a) investing primarily in publicly-traded equities, (b) limiting return
volatility by diversifying investments among additional asset classes with differing expected rates of return and return correlations, and (c) investing a portion of RIP assets in a bond portfolio whose duration is roughly equal to the duration of
RIP liabilities. Derivatives may be used either to implement investment positions efficiently or to hedge risk but not to create investment leverage.



Each asset class utilized by the RIP has a targeted asset allocation. The table below shows the asset allocation target and the December 31, 2004 and 2003 position for
each asset class:



|                     |  |                                   |   |  |                          |   |  |    |  
|-------------------- |  | --------------------------------- | - |  | ------------------------ | - |  | -- | -
|Asset Class          |  | Target Weight atDecember 31, 2004 |   |  | Position at December 31, |  
|                     |  | 2004                              |   |  | 2003                     |  
|Domestic equity      |  | 41                                | % |  | 40                       | % |  | 43 | %
|International equity |  | 22                                | % |  | 25                       | % |  | 25 | %
|High yield bonds     |  | 5                                 | % |  | 6                        | % |  | 6  | %
|Long duration bonds  |  | 25                                | % |  | 24                       | % |  | 22 | %
|Real estate          |  | 7                                 | % |  | 1                        | % |  | 1  | %
|Other fixed income   |  | 0                                 | % |  | 4                        | % |  | 3  | %



Domestic equity included AHI common
stock in the amount of $1.6 million (0.08% of total RIP assets) at December 31, 2003. No AHI common stock was held at December 31, 2004.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Basis of Rate-of-Return Assumption



Long-term asset class return assumptions are determined based on input from investment professionals and academic sources on the expected
performance of the equity and bond markets over 10 to 20 years. The forecasts were averaged to come up with consensus passive return forecasts for each asset class. An incremental component was added for the expected return from active management
based both on the RIPs experience and on historical information obtained from the RIPs investment consultants. These forecast gross returns were reduced by estimated management fees and expenses, yielding a long-term return forecast of
8.00% per annum.



Amounts recognized in the consolidated balance sheets
consist of:



|                                 |  |                  |       |   |                                           |   |       |      |  |   |        |   |  |   |        |  
|-------------------------------- |  | ---------------- | ----- | - | ----------------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                 |  | Pension Benefits |       |   | Retiree Health and LifeInsurance Benefits |  
|                                 |  | 2004             |       |   | 2003                                      |   |       | 2004 |  |   | 2003   |  
|Prepaid pension costs            |  | $                | 465.1 |   |                                           | $ | 445.8 |      |  |   |        |   |  |   |        |  
|Pension benefit liabilities      |  |                  | (41.2 | ) |                                           |   | (38.3 | )    |  | $ | (244.2 | ) |  | $ | (242.2 | )
|Intangible asset                 |  |                  | 0.5   |   |                                           |   | 0.8   |      |  |   |       |   |  |   |       |  
|Other comprehensive income       |  |                  | 19.9  |   |                                           |   | 19.0  |      |  |   |       |   |  |   |       |  
|                                 |  |                  |       |   |                                           |   |       |      |  |   |        |   |  |   |        |  
|Net asset/(liability) recognized |  | $                | 444.3 |   |                                           | $ | 427.3 |      |  | $ | (244.2 | ) |  | $ | (242.2 | )
|                                 |  |                  |       |   |                                           |   |       |      |  |   |        |   |  |   |        |  



The accumulated benefit obligation for
the U.S. defined benefit pension plans was $1,551.0 million and $1,464.1 million at December 31, 2004 and 2003, respectively.



|                                                                |  |                  |      |      |   |     
|--------------------------------------------------------------- |  | ---------------- | ---- | ---- | - | ----
|                                                                |  | Pension Benefits
|U.S. pension plans with benefit obligations in excess of assets |  | 2004             |      | 2003
|Projected benefit obligation, December 31                       |  | $                | 46.1 |      | $ | 43.4
|Accrued benefit obligation, December 31                         |  |                  | 41.2 |      |   | 38.3
|Fair value of plan assets, December 31                          |  |                  |     |      |   |    



The above table relates to the
Retirement Benefit Equity Plan, which is a nonqualified, unfunded plan designed to provide pension benefits in excess of the limits defined under Sections 415 and 401(a)(17) of the Internal Revenue Code.



The components of pension credit are as follows:



|                                                |  |                  |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------- |  | ---------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                |  | Pension Benefits |       
|U.S. defined-benefit plans                      |  | 2004             |        |   | 2003 |   |        | 2002 | 
|Service cost of benefits earned during the year |  | $                | 23.2   |   |      | $ | 21.8   |      |  | $ | 17.2   |  
|Interest cost on projected benefit obligation   |  |                  | 91.3   |   |      |   | 91.8   |      |  |   | 89.1   |  
|Expected return on plan assets                  |  |                  | (147.7 | ) |      |   | (144.5 | )    |  |   | (154.4 | )
|Amortization of transition asset                |  |                  |       |   |      |   |       |      |  |   | (2.1   | )
|Amortization of prior service cost              |  |                  | 17.4   |   |      |   | 17.9   |      |  |   | 17.6   |  
|Amortization of net actuarial loss/(gain)       |  |                  | 1.5    |   |      |   | 1.4    |      |  |   | (6.6   | )
|                                                |  |                  |        |   |      |   |        |      |  |   |        |  
|Net periodic pension credit                     |  | $                | (14.3  | ) |      | $ | (11.6  | )    |  | $ | (39.2  | )
|                                                |  |                  |        |   |      |   |        |      |  |   |        |  



In addition, we recorded a separate
charge in 2004 of $0.6 million within restructuring expense for special termination benefits related to the closure of certain operations at a manufacturing plant in Lancaster. See Note 15 for further information.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



The components of postretirement benefits cost are as follows:



|                                                               |  |                                            |      |   |      |   |      |      |  |   |     
|-------------------------------------------------------------- |  | ------------------------------------------ | ---- | - | ---- | - | ---- | ---- |  | - | ----
|                                                               |  | Retiree Health and Life Insurance Benefits
|U.S. defined-benefit plans                                     |  | 2004                                       |      |   | 2003 |   |      | 2002
|Service cost of benefits earned during the year                |  | $                                          | 3.4  |   |      | $ | 3.4  |      |  | $ | 5.6 
|Interest cost on accumulated postretirement benefit obligation |  |                                            | 22.3 |   |      |   | 26.2 |      |  |   | 28.1
|Amortization of prior service cost (benefit)                   |  |                                            | (5.1 | ) |      |   | (5.1 | )    |  |   | 0.2 
|Amortization of net actuarial loss                             |  |                                            | 9.7  |   |      |   | 12.3 |      |  |   | 11.2
|                                                               |  |                                            |      |   |      |   |      |      |  |   |     
|Net periodic postretirement benefit cost                       |  | $                                          | 30.3 |   |      | $ | 36.8 |      |  | $ | 45.1
|                                                               |  |                                            |      |   |      |   |      |      |  |   |     



For measurement purposes, an average
rate of 9% annual increase in the per capita cost of covered health care benefits was assumed for 2005, decreasing 1% per year to an ultimate rate of 6%. Assumed health care cost trend rates have a significant effect on the amounts reported for the
health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:



|                                                        |  |                      |      |          |   |       |  
|------------------------------------------------------- |  | -------------------- | ---- | -------- | - | ----- | -
|                                                        |  | One percentage point |     
|U.S. retiree health and life insurance benefit plans    |  | Increase             |      | Decrease |  
|Effect on total of service and interest cost components |  | $                    | 1.5  |          | $ | (1.3  | )
|Effect on postretirement benefit obligation             |  |                      | 22.8 |          |   | (19.4 | )



We expect to contribute $3.3 million
to our U.S. defined benefit pension plans and $28.0 million to our U.S. postretirement benefit plans in 2005.



The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid over the next ten years for our U.S. plans:



|          |  |                  |       |                                          |   |      
|--------- |  | ---------------- | ----- | ---------------------------------------- | - | -----
|          |  | Pension Benefits |       | Retiree Health andLife InsuranceBenefits
|2005      |  | $                | 98.0  |                                          | $ | 28.0 
|2006      |  |                  | 96.7  |                                          |   | 26.6 
|2007      |  |                  | 95.9  |                                          |   | 27.3 
|2008      |  |                  | 95.9  |                                          |   | 27.7 
|2009      |  |                  | 96.0  |                                          |   | 28.1 
|2010-2014 |  |                  | 505.6 |                                          |   | 143.3



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



NON-U.S. PLANS



We have defined benefit pension plans covering employees in a number of foreign countries that utilize assumptions which are consistent with, but not identical to, those
of the U.S. plans. The following tables summarize the balance sheet impact of foreign pension benefit plans, as well as the related benefit obligations, assets, funded status and rate assumptions.



We use a December 31 measurement date for most of our non-U.S. defined benefit plans.



|                                            |  |                  |        |   |      |   |        |  
|------------------------------------------- |  | ---------------- | ------ | - | ---- | - | ------ | -
|                                            |  | Pension Benefits |       
|Non-U.S. defined-benefit plans              |  | 2004             |        |   | 2003 |  
|Change in benefit obligation:               |  |                  |        |   |      |   |        |  
|Benefit obligation as of January 1          |  | $                | 403.8  |   |      | $ | 340.1  |  
|Service cost                                |  |                  | 9.3    |   |      |   | 8.2    |  
|Interest cost                               |  |                  | 21.2   |   |      |   | 19.4   |  
|Plan participants contributions            |  |                  | 3.6    |   |      |   | 2.8    |  
|Plan amendments                             |  |                  | 0.2    |   |      |   | (5.7   | )
|Effect of settlements and curtailments      |  |                  |       |   |      |   | (0.9   | )
|Foreign currency translation adjustment     |  |                  | 37.1   |   |      |   | 57.1   |  
|Actuarial loss                              |  |                  | 33.1   |   |      |   | 2.4    |  
|Benefits paid                               |  |                  | (20.3  | ) |      |   | (19.6  | )
|                                            |  |                  |        |   |      |   |        |  
|Benefit obligation as of December 31        |  | $                | 488.0  |   |      | $ | 403.8  |  
|                                            |  |                  |        |   |      |   |        |  
|Change in plan assets:                      |  |                  |        |   |      |   |        |  
|Fair value of plan assets as of January 1   |  | $                | 200.4  |   |      | $ | 153.7  |  
|Actual return on plan assets gain           |  |                  | 17.7   |   |      |   | 19.4   |  
|Employer contributions                      |  |                  | 28.3   |   |      |   | 19.4   |  
|Plan participants contributions            |  |                  | 3.6    |   |      |   | 2.8    |  
|Foreign currency translation adjustment     |  |                  | 18.5   |   |      |   | 24.7   |  
|Benefits paid                               |  |                  | (20.3  | ) |      |   | (19.6  | )
|                                            |  |                  |        |   |      |   |        |  
|Fair value of plan assets as of December 31 |  | $                | 248.2  |   |      | $ | 200.4  |  
|                                            |  |                  |        |   |      |   |        |  
|Funded status of the plans                  |  | $                | (239.8 | ) |      | $ | (203.4 | )
|Unrecognized net actuarial loss             |  |                  | 89.3   |   |      |   | 53.0   |  
|Unrecognized transition obligation          |  |                  | (0.3   | ) |      |   | (0.1   | )
|Unrecognized prior service benefit          |  |                  | (0.7   | ) |      |   | (0.5   | )
|                                            |  |                  |        |   |      |   |        |  
|Net liability recognized                    |  | $                | (151.5 | ) |      | $ | (151.0 | )
|                                            |  |                  |        |   |      |   |        |  



The funded status of non-U.S.
defined-benefit plans was determined using the following assumptions:



|                                                                                                      |  |                  |   |  |      |  
|----------------------------------------------------------------------------------------------------- |  | ---------------- | - |  | ---- | -
|                                                                                                      |  | Pension Benefits |  
|Non-U.S. defined-benefit plans                                                                        |  | 2004             |   |  | 2003 |  
|Weighted-average assumptions used to determine benefit obligations at December 31:                    |  | 4.80             | % |  | 5.40 | %
|Discount rate                                                                                         |  |                  |   |  |      |  
|Rate of compensation increase                                                                         |  | 3.20             | % |  | 3.40 | %
|                                                                                                      |  |                 
|Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31: |  |                  |   |  |      |  
|Discount rate                                                                                         |  | 5.40             | % |  | 5.50 | %
|Expected return on plan assets                                                                        |  | 6.40             | % |  | 6.40 | %
|Rate of compensation increase                                                                         |  | 3.40             | % |  | 3.40 | %



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Investment Policies



Each of the funded non-US pension plans primary investment objective is to earn sufficient long-term returns on investments both to increase the ratio of the
assets to liabilities in order for the plans to meet their benefits obligations, and to minimize required cash contributions to the plans. This is to be achieved by (a) investing in publicly-traded equities, (b) limiting return volatility by
diversifying investments among additional asset classes with differing expected rates of return and return correlations, and (c) utilizing long duration bonds to limit the volatility of the plans asset/liability ratios.



Each asset class utilized has a targeted asset allocation. The table below shows the asset
allocation target and the December 31, 2004 and 2003 position for each asset class:



|                    |  |                                   |      |  |                          |      |  |    |  
|------------------- |  | --------------------------------- | ---- |  | ------------------------ | ---- |  | -- | -
|                    |  | Target Weight atDecember 31, 2004 |      |  | Position at December 31, |     
|Asset Class         |  |                                   | 2004 |  |                          | 2003 | 
|Equities            |  | 49                                | %    |  | 49                       | %    |  | 50 | %
|Long duration bonds |  | 17                                | %    |  | 17                       | %    |  | 17 | %
|Other fixed income  |  | 34                                | %    |  | 34                       | %    |  | 33 | %



Basis of Rate-of-Return
Assumption



Long-term asset class return forecasts were obtained from
investment professionals. The forecasts were averaged to come up with consensus passive return forecasts for each asset class. These forecast asset class returns were weighted by the plans target asset class weights, yielding a long-term
return forecast of 6.4% per annum.



Amounts recognized in the consolidated
balance sheets consist of:



|                            |  |                  |        |   |      |   |        |  
|--------------------------- |  | ---------------- | ------ | - | ---- | - | ------ | -
|                            |  | Pension Benefits |       
|                            |  | 2004             |        |   | 2003 |  
|Prepaid pension cost        |  | $                | 15.8   |   |      | $ | 9.3    |  
|Pension benefit liabilities |  |                  | (217.7 | ) |      |   | (178.1 | )
|Intangible asset            |  |                  | 3.4    |   |      |   | 3.5    |  
|Other comprehensive income  |  |                  | 47.0   |   |      |   | 14.3   |  
|                            |  |                  |        |   |      |   |        |  
|Net liability recognized    |  | $                | (151.5 | ) |      | $ | (151.0 | )
|                            |  |                  |        |   |      |   |        |  



The accumulated benefit obligation for
the non-U.S. defined benefit pension plans was $449.0 million and $363.2 million at December 31, 2004 and 2003, respectively.



|                                                                    |  |                  |       |      |   |      
|------------------------------------------------------------------- |  | ---------------- | ----- | ---- | - | -----
|                                                                    |  | Pension Benefits
|Non-U.S. pension plans with benefit obligations in excess of assets |  | 2004             |       | 2003
|Projected benefit obligation, December 31                           |  | $                | 402.0 |      | $ | 335.0
|Accrued benefit obligation, December 31                             |  |                  | 370.3 |      |   | 300.6
|Fair value of plan assets, December 31                              |  |                  | 161.8 |      |   | 131.2



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



The components of pension cost are as follows:



|                                                |  |      |       |   |      |   |       |      |  |   |       |  
|----------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|Non-U.S. defined-benefit plans                  |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Service cost of benefits earned during the year |  | $    | 9.3   |   |      | $ | 8.2   |      |  | $ | 8.1   |  
|Interest cost on projected benefit obligation   |  |      | 21.2  |   |      |   | 19.4  |      |  |   | 15.9  |  
|Expected return on plan assets                  |  |      | (14.8 | ) |      |   | (12.8 | )    |  |   | (11.2 | )
|Amortization of transition obligation           |  |      | 0.2   |   |      |   | 0.3   |      |  |   | 0.1   |  
|Amortization of prior service cost              |  |      | 0.2   |   |      |   | 0.6   |      |  |   | 0.6   |  
|Amortization of net actuarial loss              |  |      | 0.5   |   |      |   | 0.5   |      |  |   | 0.2   |  
|                                                |  |      |       |   |      |   |       |      |  |   |       |  
|Net periodic pension cost                       |  | $    | 16.6  |   |      | $ | 16.2  |      |  | $ | 13.7  |  
|                                                |  |      |       |   |      |   |       |      |  |   |       |  



In addition, we recorded a separate
charge in 2003 of $0.3 million within restructuring expense for a curtailment loss related to the closure of certain operations at a manufacturing plant in Oss, the Netherlands. See Note 15 for further information.



Costs for other non-U.S. defined contribution benefit plans and multiemployer pension plans
were $11.0 million in 2004, $11.3 million in 2003, and $9.9 million in 2002.



We expect to contribute $22.7 million to our non-U.S. defined benefit pension plans in 2005.



The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid over the next ten years:



|          |  |                  |      
|--------- |  | ---------------- | -----
|          |  | Pension Benefits
|2005      |  | $                | 21.3 
|2006      |  |                  | 22.3 
|2007      |  |                  | 23.2 
|2008      |  |                  | 25.5 
|2009      |  |                  | 26.6 
|2010-2014 |  |                  | 154.7



NOTE 19. FINANCIAL INSTRUMENTS



We do not hold or issue
financial instruments for trading purposes. The estimated fair values of our financial instruments as of December 31, 2004 and 2003 are as follows:



|                                          |  |                |          |   |                      |   |        |                |  |   |                      |   |  |   |        |  
|----------------------------------------- |  | -------------- | -------- | - | -------------------- | - | ------ | -------------- |  | - | -------------------- | - |  | - | ------ | -
|                                          |  | 2004           |          |   | 2003                 |  
|                                          |  | Carryingamount |          |   | Estimated fair value |   |        | Carryingamount |  |   | Estimated fair value |  
|Assets/(Liabilities):                     |  |                |          |   |                      |   |        |                |  |   |                      |   |  |   |        |  
|Debt subject to compromise                |  | $              | (1,388.6 | ) |                      | $ | (982.8 | )              |  | $ | (1,388.6             | ) |  | $ | (752.2 | )
|Long-term debt, including current portion |  |                | (37.4    | ) |                      |   | (37.4  | )              |  |   | (47.6                | ) |  |   | (47.6  | )
|Foreign currency contract obligations     |  |                | (13.9    | ) |                      |   | (13.9  | )              |  |   | (1.0                 | ) |  |   | (1.0   | )
|Natural gas contracts                     |  |                | 5.3      |   |                      |   | 5.3    |                |  |   | 3.5                  |   |  |   | 3.5    |  



The carrying amounts of cash and cash
equivalents, receivables, accounts payable and accrued expenses, short-term debt and current installments of long-term debt approximate fair value because of the short-term maturity of these instruments. The fair value estimates of long-term debt
were based upon quotes from major financial institutions taking into consideration current rates offered to us for debt of the same remaining maturities. The fair value estimates of foreign currency contract obligations are estimated from national
exchange quotes. The fair values of natural gas contracts are estimated by obtaining quotes from major financial institutions and energy companies.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



We utilize lines of credit and other commercial commitments in order to ensure that adequate funds are available to
meet operating requirements. On December 31, 2004, our foreign subsidiaries had available lines of credit totaling $54.4 million, of which $15.9 million was used, leaving $38.5 million of unused lines of credit for borrowing on December 31, 2004.



On December 31, 2004, we had outstanding letters of credit totaling $73.6
million, of which $40.6 million was issued under the DIP Facility. The DIP Facility had $34.4 million that remained available for issuance of letters of credit as of December 31, 2004. Letters of credit are issued to third party suppliers, insurance
and financial institutions and typically can only be drawn upon in the event of AHIs failure to pay its obligations to the beneficiary. We also have several commercial letters of credit whereby vendors are paid directly via the letter of
credit. Letters of credit are currently arranged through AWIs DIP Facility with JP Morgan Chase. Certain letters of credit arranged with Wachovia Bank, N.A. prior to the Filing remain outstanding.



NOTE 20. DERIVATIVE FINANCIAL INSTRUMENTS



We are exposed to market risk from changes in foreign currency exchange rates, interest
rates and commodity prices that could impact our results of operations and financial condition. We use swap, forward and option contracts to hedge currency and commodity exposures. We regularly monitor developments in the capital markets and only
enter into currency and swap transactions with established counter-parties having investment grade ratings. Exposure to individual counterparties is controlled, and thus we consider the risk of counterparty default to be negligible. Swap, forward
and option contracts are entered into for periods consistent with underlying exposure and do not constitute positions independent of those exposures. We use derivative financial instruments as risk management tools and not for speculative trading
purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions and energy companies in order to manage our exposure to nonperformance on such instruments.



Interest Rate Risk - Due to AWIs Chapter 11 Filing, all affected debt was
classified as liabilities subject to compromise and there were no open interest rate derivatives as of December 31, 2004 and 2003.



Currency Rate Risk - We manufacture and sell our products in a number of countries throughout the world and, as a result, are exposed to movements in foreign
currency exchange rates. To a large extent, our global manufacturing and sales provide a natural hedge of foreign currency exchange rate movement, as foreign currency expenses generally offset foreign currency revenues. At December 31, 2004, our
major foreign currency exposures are to the Euro, the Canadian dollar and the British pound.



We use foreign currency forward exchange contracts to reduce our exposure to the risk that the eventual net cash inflows and outflows, resulting from the sale of product to foreign customers and purchases from foreign
suppliers, will be adversely affected by changes in exchange rates. These derivative instruments are used for forecasted transactions and are classified as cash flow hedges. These transactions allow us to further reduce our overall exposure to
exchange rate movements, since the gains and losses on these contracts offset losses and gains on the transactions being hedged. Gains and losses on these instruments are deferred in other comprehensive income until the underlying transaction is
recognized in earnings. The net fair value of these instruments at December 31, 2004 was an asset of $3.3 million, all of which is expected to be taken to earnings in the next twelve months. The earnings impact is reported in either net sales or
cost of goods sold to match the underlying transaction being hedged. The earnings impact of these hedges was a gain of $1.3 million during 2004.



We also use foreign currency forward exchange contracts to hedge exposures created by cross-currency inter-company loans. The underlying inter-company loans are
classified as short-term and translation adjustments related to these loans are recorded in other income. The related derivative contracts are classified as fair value hedges and the offsetting gains and losses on these contracts are also recorded
in other income. The fair value of these instruments at December 31, 2004 was a $17.1 million liability, all of which is



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



expected to be charged to earnings in the next twelve months. During 2004, the net earnings impact of these hedges was a loss of $0.7 million, recorded in
other non-operating income/expense, which was comprised of a loss of approximately $17.7 million from the foreign currency forward exchange contracts substantially offset by the 2004 translation adjustment of approximately $17.0 million for the
underlying inter-company loans.



Commodity Price Risk - We purchase
natural gas for use in the manufacture of ceiling tiles and other products and to heat many of our facilities. As a result, we are exposed to movements in the price of natural gas. We have a policy of minimizing cost volatility by purchasing natural
gas forward contracts, purchased call options and zero-cash collars. These instruments are designated as cash flow hedges. The mark-to-market gain or loss on qualifying hedges is included in other comprehensive income to the extent effective, and
reclassified into cost of goods sold in the period during which the underlying products are sold. The mark-to-market gains or losses on ineffective portions of hedges are recognized in cost of goods sold immediately. The fair value of these
instruments at December 31, 2004 was a $5.3 million asset, of which $4.3 million is expected to be taken to earnings in the next twelve months. The earnings impact of hedges that matured during 2004, recorded in cost of goods sold, was $5.8 million
of income. The earnings impact of the ineffective portion of these hedges was not material during 2004.



NOTE 21. GUARANTEES



As of December 31,
2004, we maintained an agreement with the lending institution of one of our distributors. Under this agreement, if the distributor were to default on its borrowings and the lender foreclosed on the assets, the bank could return a large part of any
of our products still at the distributor (subject to certain quality and roll size minimums) for a refund of original cost. This agreement will expire in September 2005. At December 31, 2004, the amount of inventory held at the distributor was
approximately $3.2 million. Historically, no claim has been made under any of these types of agreements and we do not anticipate any such claim in the future. As such, no liability has been recorded for this agreement.



In disposing of assets through mid 2000, AWI and some subsidiaries had entered into contracts
that included various indemnity provisions, covering such matters as taxes, environmental liabilities and asbestos and other litigation. Some of these contracts had exposure limits, but many did not. Due to the nature of the indemnities, it is not
possible to estimate the potential maximum exposure under these contracts. As a debtor-in-possession, for those contracts that are still executory where AWI was the sole guarantor, AWI anticipates rejecting those contracts. Parties that timely file
claims with respect to such contracts will have such claims addressed in AWIs Chapter 11 Case. AWI cannot estimate the value of any potential claims that will ultimately be allowed by the Bankruptcy Court. See Item 1 - Business regarding
Proceedings under Chapter 11.



Subsidiaries that are not part of the Chapter 11
Filing also entered into certain contracts that included various indemnity provisions similar to those described above. Since these subsidiaries are not part of the Chapter 11 Filing, these contracts continue to be in effect. Some of these contracts
had exposure limits, but many did not. Due to the nature of the indemnities, it is not possible to estimate the potential maximum exposure under all these contracts. For contracts under which an indemnity claim has been received, a liability of $2.1
million has been recorded as of December 31, 2004. See Note 32 of the Consolidated Financial Statements for additional information.



In September 1999, we sold our Textiles Products operations. As part of the divestiture agreement, we transferred certain liabilities and assets to the purchaser to cover
pension payments earned by the work force as of the sale date. We also reimburse the purchaser for such pension payments that are not covered by the pension assets. In addition, we agreed to reimburse the purchaser for the tax impact of our
reimbursement of the pension payments. This agreement has no termination date. As of December 31, 2004, we maintained a $2.9 million liability for this guarantee. As of December 31, 2004, the net present value of the maximum payments is
approximately $5 million, excluding any amounts paid for tax reimbursement.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



See Notes 4 and 24 for a discussion of the ESOP loan guarantee.



NOTE 22. PRODUCT WARRANTIES



We provide direct customer and end-user warranties for our products. These warranties cover
manufacturing defects that would prevent the product from performing in line with its intended and marketed use. Generally, the terms of these warranties range up to 25 years and provide for the repair or replacement of the defective product. We
collect and analyze warranty claims data with a focus on the historic amount of claims, the products involved, the amount of time between the warranty claims and their respective sales and the amount of current sales. The following table summarizes
the activity for the accrual of product warranties for 2004 and 2003:



|                                        |  |      |       |   |      |   |       |  
|--------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                        |  | 2004 |       |   | 2003 |  
|Balance at beginning of year            |  | $    | 25.5  |   |      | $ | 22.3  |  
|Reductions for payments                 |  |      | (39.0 | ) |      |   | (38.9 | )
|Current year warranty accruals          |  |      | 37.3  |   |      |   | 40.6  |  
|Preexisting warranty accrual changes    |  |      | (1.8  | ) |      |   | (0.3  | )
|Effects of foreign exchange translation |  |      | 0.6   |   |      |   | 1.8   |  
|                                        |  |      |       |   |      |   |       |  
|Balance at end of year                  |  | $    | 22.6  |   |      | $ | 25.5  |  
|                                        |  |      |       |   |      |   |       |  



NOTE 23. OTHER LONG-TERM
LIABILITIES



|                                                    |  |      |      |      |   |     
|--------------------------------------------------- |  | ---- | ---- | ---- | - | ----
|                                                    |  | 2004 |      | 2003
|Long-term deferred compensation arrangements        |  | $    | 40.6 |      | $ | 41.1
|Environmental liabilities not subject to compromise |  |      | 9.4  |      |   | 8.4 
|Other                                               |  |      | 37.6 |      |   | 31.7
|                                                    |  |      |      |      |   |     
|Total other long-term liabilities                   |  | $    | 87.6 |      | $ | 81.2
|                                                    |  |      |      |      |   |     



NOTE 24. RETIREMENT SAVINGS AND
STOCK OWNERSHIP PLAN (RSSOP)



In 1989, we established an Employee Stock
Ownership Plan (ESOP) that borrowed $270 million from banks and insurance companies, repayable over 15 years and guaranteed by AWI. The ESOP used the proceeds to purchase 5,654,450 shares of a new series of convertible preferred stock
issued by Armstrong. In 1996, the ESOP was merged with the Retirement Savings Plan for salaried employees (a defined-contribution pension plan) to form the Retirement Savings and Stock Ownership Plan (RSSOP). On July 31, 1996, the
trustee of the ESOP converted the preferred stock held by the trust into approximately 5.1 million shares of common stock at a one-for-one ratio.



The number of shares released for allocation to participant accounts has been based on the proportion of principal and interest paid to the total amount of debt service
remaining to be paid over the life of the borrowings. Through December 31, 2004, the RSSOP allocated 2,152,000 shares to participants that remain outstanding, participants retired 2,272,000 shares, AHI contributed an additional 437,000 shares from
its treasury and the trustee purchased 243,000 shares on the open market to allocate to employees. During 2004 the RSSOP sold 450,000 unallocated shares on the open market. The proceeds from the sale remain in the RSSOP and are expected to be
allocated to participants no later than when the RSSOP debt is addressed in AWIs Chapter 11 proceedings. As of December 31, 2004, there were approximately 1,462,000 shares in the RSSOP that had yet to be allocated to participants.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



The RSSOP is a qualified defined contribution plan that also includes a 401(k) elective deferral component. A
substantial portion of U.S. employees are eligible and participate. We recorded costs for the RSSOP of $5.8 million in 2004, $5.6 million in 2003 and $4.5 million in 2002, which related to company cash matching contributions.



All RSSOP shares are considered outstanding for earnings per share calculations.
Historically, dividends on allocated shares were credited to employee accounts while dividends on unallocated shares were used to satisfy debt service payments.



See Note 32 for information regarding an audit of the RSSOP by the U.S. Department of Labor.



The RSSOP currently covers parent company nonunion employees, some parent company union employees, Wood Flooring salaried employees, and
Cabinets salaried employees.



On November 22, 2000, AWI failed to repay $50
million in commercial paper that was due. Subsequently, the remaining ESOP bond principal balance of $142.2 million became immediately payable along with a $15.5 million interest and tax make-whole premium. ESOP debt service payments have not been
made since June 2000. As a result of the Chapter 11 Filing, AWIs guarantee of these ESOP loan obligations of $157.7 million is now classified as a liability subject to compromise.



NOTE 25. STOCK-BASED COMPENSATION PLANS



Awards under the 1993 Long-Term Stock Incentive Plan (1993 Plan) were made in the form of stock options, stock appreciation rights in conjunction with stock
options, performance restricted shares and restricted stock awards. No additional awards may be issued under the 1993 Plan.



During 1999, we adopted the 1999 Long-Term Incentive Plan (1999 Plan) which replaced the 1993 Plan. The 1999 Plan provides for the granting of incentive stock
options, nonqualified stock options, stock appreciation rights, performance-restricted shares and restricted stock awards. The 1999 Plan also incorporates stock awards and cash incentive awards. No more than 3,250,000 shares of common stock may be
issued under the 1999 Plan, and no more than 300,000 of the shares may be awarded in the form of performance restricted shares, restricted stock awards or stock awards. The 1999 Plan does not allow awards to be granted after April 25, 2009. Pre-1999
grants made under predecessor plans will be governed under the provisions of those plans.



During 2000, we adopted the Stock Award Plan (2000 Plan) to enable stock awards and restricted stock awards to officers, key employees and non-employee directors. No more than 750,000 treasury shares may
be awarded under the 2000 Plan. The 2000 Plan will remain in effect until the earlier of the grant of all the shares allowed under the plan or termination of the plan by the Board of Directors.



All of the three plans discussed above would be terminated upon the effective date of
AWIs POR. No equity based compensation has been granted since AWI filed for relief under Chapter 11 in December 2000, other than commitments entered into prior to the Chapter 11 filing.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Options were granted to purchase shares at prices not less than the closing market price of the shares on the dates
the options were granted. The options generally became exercisable in one to three years and expire 10 years from the date of grant.



|                                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|Changes in option shares outstanding (thousands except for share price) |  | 2004 |         |   | 2003 |   |         | 2002 | 
|Option shares at beginning of year                                      |  |      | 2,376.9 |   |      |   | 2,508.8 |      |  |   | 2,682.6 |  
|Options granted                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Option shares exercised                                                 |  |      |        |   |      |   |        |      |  |   |        |  
|Options cancelled                                                       |  |      | (112.9  | ) |      |   | (131.9  | )    |  |   | (173.8  | )
|                                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Option shares at end of year                                            |  |      | 2,264.0 |   |      |   | 2,376.9 |      |  |   | 2,508.8 |  
|                                                                        |  |      |        
|Option shares exercisable at end of year                                |  |      | 2,264.0 |   |      |   | 2,343.6 |      |  |   | 1,963.5 |  
|Shares available for grant                                              |  |      | 4,538.7 |   |      |   | 4,425.8 |      |  |   | 4,285.6 |  
|                                                                        |  |      |        
|Weighted average price per share:                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Options outstanding                                                     |  | $    | 29.75   |   |      | $ | 30.62   |      |  | $ | 30.52   |  
|Options exercisable                                                     |  | $    | 29.75   |   |      | $ | 31.01   |      |  |   | 34.50   |  



The table below summarizes information
about stock options outstanding at December 31, 2004. (thousands except for life and share price)



|                         |  |                                               |  |                                              |  |                                  |      
|------------------------ |  | --------------------------------------------- |  | -------------------------------------------- |  | -------------------------------- | -----
|                         |  | Options outstanding and exercisable          
|Range of exercise prices |  | Number outstanding andexercisable at 12/31/04 |  | Weighted- average remaining contractual life |  | Weighted- average exercise price
|$1.19 - $18.00           |  | 300.0                                         |  | 5.9                                          |  | $                                | 7.05 
|$18.01 - $19.50          |  | 1,235.3                                       |  | 5.2                                          |  |                                  | 19.44
|$19.51 - $46.00          |  | 243.9                                         |  | 0.4                                          |  |                                  | 45.02
|$46.01 - $60.00          |  | 305.6                                         |  | 2.3                                          |  |                                  | 56.10
|$60.01 - $83.06          |  | 179.2                                         |  | 2.9                                          |  |                                  | 73.14
|                         |  |                                               |  |                                              |  |                                  |      
|                         |  | 2,264.0                                       |  |                                              |  |                                  |      
|                         |  |                                               |  |                                              |  |                                  |      



Restricted stock awards can be used
for the purposes of recruitment, special recognition and retention of key employees. No award of restricted stock shares was granted in 2004, 2003 or 2002. At the end of 2004, there were 121,313 restricted shares of common stock outstanding with
1,026 accumulated dividend equivalent shares.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



FAS 123, permits entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
earnings disclosures. Had compensation costs for these plans been determined consistent with FAS 123, our net earnings would have been reduced to the following pro forma amounts.



|            |  |      |       |   |      |   |       |      |  |   |          |  
|----------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | -------- | -
|            |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Net (loss): |  |      |       |   |      |   |       |      |  |   |          |  
|As reported |  | $    | (80.8 | ) |      | $ | (39.3 | )    |  | $ | (2,142.8 | )
|Pro forma   |  | $    | (80.8 | ) |      | $ | (39.4 | )    |  | $ | (2,143.3 | )



The fair value of grants was estimated
on the date of grant using the Black-Scholes option pricing model. There were no stock options granted in 2004, 2003 or 2002.



NOTE 26. EMPLOYEE COMPENSATION



Employee compensation is presented in the table below. Charges for severance costs and early retirement incentives to terminated employees (otherwise recorded as
restructuring charges) have been excluded.



|                                  |  |      |       |      |   |       |  |   |       |  
|--------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | ----- | -
|Employee compensation cost        |  | 2004 |       | 2003 |   | 2002  | 
|Wages and salaries                |  | $    | 778.5 |      | $ | 718.9 |  | $ | 713.3 |  
|Payroll taxes                     |  |      | 81.5  |      |   | 78.0  |  |   | 76.1  |  
|Pension expense (credits), net    |  |      | 13.3  |      |   | 15.9  |  |   | (15.6 | )
|Insurance and other benefit costs |  |      | 96.0  |      |   | 112.2 |  |   | 106.7 |  
|Stock-based compensation          |  |      |      |      |   | 0.2   |  |   | 0.9   |  
|                                  |  |      |       |      |   |       |  |   |       |  
|Total                             |  | $    | 969.3 |      | $ | 925.2 |  | $ | 881.4 |  
|                                  |  |      |       |      |   |       |  |   |       |  



The decreases in insurance and other
benefit costs is primarily related to decreased medical benefit costs from favorable experience and fewer covered lives plus the favorable impact of the Medicare Act of $7.0 million.



NOTE 27. LEASES



We rent certain real estate and equipment. Several leases include options for renewal or purchase, and contain clauses for payment of real estate taxes and insurance. In
most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases. As part of the Chapter 11 Case, AWI must decide whether to assume, assume and assign, or reject prepetition unexpired leases
and other prepetition executory contracts. AWI has been granted an extension through and including the date on which an order confirming the Plan is entered by the U.S. District Court for the District of Delaware to make these decisions with respect
to prepetition unexpired leases of real property. With respect to prepetition executory contracts and unexpired leases not related to real estate, AWI has until confirmation of a reorganization plan to make these decisions unless such time is
shortened by the Bankruptcy Court. The accompanying financial statements do not reflect any adjustment related to assumption or rejection of such agreements.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Rental expense was $22.4 million in 2004, $21.3 million in 2003 and $22.7 million in 2002. Future minimum payments at
December 31, 2004, by year and in the aggregate, having noncancelable lease terms in excess of one year were as follows:



|                                 |  |                |     |                  |   |     
|-------------------------------- |  | -------------- | --- | ---------------- | - | ----
|Scheduled minimum lease payments |  | Capital Leases |     | Operating Leases
|2005                             |  | $              | 1.7 |                  | $ | 14.4
|2006                             |  |                | 1.0 |                  |   | 11.8
|2007                             |  |                | 0.7 |                  |   | 8.3 
|2008                             |  |                | 0.3 |                  |   | 5.0 
|2009                             |  |                |    |                  |   | 2.6 
|Thereafter                       |  |                | 0.1 |                  |   | 10.4
|                                 |  |                |     |                  |   |     
|Total                            |  | $              | 3.8 |                  | $ | 52.5
|                                 |  |                |     |                  |   |     



Assets under capital leases are
included in the consolidated balance sheets as follows:



|                              |  |      |       |   |      |   |       |  
|----------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                              |  | 2004 |       |   | 2003 |  
|Land                          |  | $    | 3.8   |   |      | $ | 3.8   |  
|Building                      |  |      | 4.1   |   |      |   | 4.1   |  
|Machinery                     |  |      | 26.7  |   |      |   | 25.8  |  
|Less accumulated amortization |  |      | (14.8 | ) |      |   | (11.6 | )
|                              |  |      |       |   |      |   |       |  
|Net assets                    |  | $    | 19.8  |   |      | $ | 22.1  |  
|                              |  |      |       |   |      |   |       |  



NOTE 28. SHAREHOLDERS
EQUITY



Treasury share were unchanged at 11,393,170 for 2004, 2003 and
2002.



Stock purchases and other represent shares received under stock-based
compensation plan forfeitures and share tax withholding transactions.



The
balance of each component of accumulated other comprehensive income as of December 31, 2004 and 2003 is presented in the table below.



|                                         |  |      |       |   |      |   |       |  
|---------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                         |  | 2004 |       |   | 2003 |  
|Foreign currency translation adjustments |  | $    | 84.3  |   |      | $ | 61.9  |  
|Derivative gain, net                     |  |      | 3.6   |   |      |   | 3.3   |  
|Minimum pension liability adjustments    |  |      | (45.1 | ) |      |   | (21.9 | )
|                                         |  |      |       |   |      |   |       |  
|Accumulated other comprehensive income   |  | $    | 42.8  |   |      | $ | 43.3  |  
|                                         |  |      |       |   |      |   |       |  



The related tax effects allocated to
each component of other comprehensive income for 2004 are presented in the table below.



|                                         |  |                |       |   |                       |   |      |                  |  |   |       |  
|---------------------------------------- |  | -------------- | ----- | - | --------------------- | - | ---- | ---------------- |  | - | ----- | -
|                                         |  | Pre-tax Amount |       |   | Tax Expense (Benefit) |   |      | After tax Amount | 
|Foreign currency translation adjustments |  | $              | 22.4  |   |                       | $ |     |                  |  | $ | 22.4  |  
|Derivative gain, net                     |  |                | 0.5   |   |                       |   | (0.2 | )                |  |   | 0.3   |  
|Minimum pension liability adjustments    |  |                | (33.6 | ) |                       |   | 10.4 |                  |  |   | (23.2 | )
|                                         |  |                |       |   |                       |   |      |                  |  |   |       |  
|Total other comprehensive income         |  | $              | (10.7 | ) |                       | $ | 10.2 |                  |  | $ | (0.5  | )
|                                         |  |                |       |   |                       |   |      |                  |  |   |       |  



The change in the minimum pension
liability adjustment between 2004 and 2003 was primarily due to the reduction of discount rates related to our plans.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



NOTE 29. SUPPLEMENTAL FINANCIAL INFORMATION



|                                                           |  |      |       |      |   |       |  |   |      
|---------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                                           |  | 2004 |       | 2003 |   | 2002 
|Selected operating expenses                                |  |      |       |      |   |       |  |   |      
|Maintenance and repair costs                               |  | $    | 114.7 |      | $ | 107.8 |  | $ | 110.7
|Research and development costs                             |  |      | 46.6  |      |   | 45.3  |  |   | 50.1 
|Advertising costs                                          |  |      | 29.6  |      |   | 32.7  |  |   | 41.2 
|                                                           |  |      |      
|Other non-operating expense                                |  |      |       |      |   |       |  |   |      
|Foreign currency translation loss, net of hedging activity |  | $    | 1.3   |      | $ | 3.8   |  | $ | 2.2  
|Other                                                      |  |      | 1.8   |      |   | 1.9   |  |   | 1.4  
|                                                           |  |      |       |      |   |       |  |   |      
|Total                                                      |  | $    | 3.1   |      | $ | 5.7   |  | $ | 3.6  
|                                                           |  |      |       |      |   |       |  |   |      
|Other non-operating income                                 |  |      |       |      |   |       |  |   |      
|Interest income                                            |  | $    | 4.0   |      | $ | 3.5   |  | $ | 4.8  
|Equity earnings in ISI                                     |  |      | 1.9   |      |   | 0.3   |  |   | 2.1  
|Interest on asbestos receivable payment                    |  |      |      |      |   | 1.1   |  |   |     
|Other                                                      |  |      | 0.5   |      |   | 0.1   |  |   | 0.6  
|                                                           |  |      |       |      |   |       |  |   |      
|Total                                                      |  | $    | 6.4   |      | $ | 5.0   |  | $ | 7.5  
|                                                           |  |      |       |      |   |       |  |   |      



NOTE 30. SUPPLEMENTAL CASH FLOW INFORMATION



|                                  |  |      |      |      |   |      |  |   |     
|--------------------------------- |  | ---- | ---- | ---- | - | ---- |  | - | ----
|                                  |  | 2004 |      | 2003 |   | 2002
|Interest paid                     |  | $    | 2.2  |      | $ | 2.8  |  | $ | 3.4 
|Income taxes paid, net of refunds |  |      | 77.3 |      |   | 27.5 |  |   | 44.4



NOTE 31. RELATED PARTIES



We sold 65% of our ownership in our
gasket products subsidiary, (now known as Interface Solutions, Inc. or ISI) on June 30, 1999. We still retain 35% ownership of this business as of December 31, 2004. As part of the divestiture, we agreed to continue to purchase a portion
of the felt products used in the manufacturing of resilient flooring from ISI for an initial term of eight years. Currently, we are required to purchase at least 75% of our felt requirements from ISI. The sale agreement also stipulated quarterly
felt price adjustments that are based upon changing market prices for the felt. In October 2002, the agreement was amended to include a cap on increases for 2003 and 2004. We can purchase felt products from another supplier if ISIs prices are
more than 10% higher than another suppliers prices. Our purchases of felt products from ISI for 2004, 2003 and 2002 were $27.5 million, $26.9 million and $29.2 million, respectively. The amounts due to ISI for these purchases were $1.7 million
and $1.6 million at the end of 2004 and 2003. Armstrong and ISI are contractually required to cooperate in product reformulation and new product development, but we are free to seek alternatives to felt products. Additionally, we receive nominal
monthly payments from ISI for some logistics and administrative services. The amounts outstanding from ISI at the end of 2004 and 2003 for the logistics and administrative services we provide them were less than $0.1 million. ISI had filed a proof
of claim in Armstrongs Chapter 11 Case requesting payment for our prepetition obligations. This matter was settled in November 2002 with ISI agreeing to withdraw its proof of claim upon the consummation of the POR, subject to certain terms and
conditions. See Note 11 for additional information.



We purchase grid products
from WAVE, our 50%-owned joint venture with Worthington Industries. The total amount of these purchases was approximately $60 million, $51 million and $41 million for the years ended December 31, 2004, 2003 and 2002, respectively. We also provide
certain selling, promotional and administrative processing services to WAVE for which we receive reimbursement. Those services amounted to $11.8 million, $9.8 million and $10.0 million for the years ended December 31, 2004,



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



2003 and 2002, respectively. The net amounts due from us to WAVE for these relationships were $4.0 million and $1.8 million at the end of 2004 and 2003. See
Note 11 for additional information.



See discussion of Ardex in Note 7.



NOTE 32. LITIGATION AND RELATED
MATTERS



ASBESTOS-RELATED
LITIGATION



Prior to December 6, 2000, AWI, the major operating subsidiary
of AHI, had been named as a defendant in personal injury cases and property damage cases related to asbestos-containing products. On December 6, 2000, AWI filed a voluntary petition for relief (the Filing) under Chapter 11 of the U.S.
Bankruptcy Code to use the court-supervised reorganization process to achieve a resolution of AWIs asbestos-related liability.



Two of AWIs domestic subsidiaries also commenced Chapter 11 proceedings at the time of the Filing. AHI and all of AWIs other direct and indirect subsidiaries,
including Armstrong Wood Products Inc. (formerly Triangle Pacific Corp.), WAVE (Armstrongs ceiling grid systems joint venture with Worthington Industries, Inc.), Armstrong Canada and Armstrong DLW AG were not a part of the Filing and
accordingly the liabilities, including asbestos-related liability if any, of such companies arising out of their own activities will not be resolved in AWIs Chapter 11 Case except for any asbestos-related liability that also relates, directly
or indirectly, to the pre-Filing activities of AWI.



Asbestos-Related Personal Injury Claims



Prior to the Filing,
AWI was a member of the Center for Claims Resolution (the CCR), which handled the defense and settlement of asbestos-related personal injury claims on behalf of its members. The CCR pursued broad-based settlements of asbestos-related
personal injury claims under the Strategic Settlement Program (SSP) and had reached agreements with law firms that covered approximately 130,000 claims that named AWI as a defendant.



Due to the Filing, holders of asbestos-related personal injury claims are stayed from
continuing to prosecute pending litigation and from commencing new lawsuits against AWI. In addition, AWI ceased making payments to the CCR with respect to asbestos-related personal injury claims, including payments pursuant to the outstanding SSP
agreements. A creditors committee representing the interests of asbestos-related personal injury claimants and an individual representing the interests of future claimants have been appointed in the Chapter 11 Case. AWIs present and
future asbestos-related liability will be addressed in its Chapter 11 Case. See Note 1 regarding AWIs Chapter 11 proceeding.



During 2003, AWI and the other parties in its Chapter 11 Case reached agreement on a plan of reorganization that addresses how all of AWIs pre-Filing liabilities
are to be settled. Several amendments to the plan of reorganization were filed, culminating in the Fourth Amended Plan of Reorganization filed with the Bankruptcy Court on May 23, 2003, which was modified by modifications filed with the Bankruptcy
Court on October 17, 2003, November 10, 2003, and December 3, 2004, and is referred to in this report as the POR.



Before the POR may be implemented, it must be confirmed by order of the Bankruptcy Court and the U.S. District Court. In addition, consummation of the POR is subject to
the satisfaction after confirmation of certain conditions, as provided by the POR. On February 23, 2005, the U.S. District Court Judge Eduardo C. Robreno ruled that the POR, in its current form, could not be confirmed. AWI filed a Notice of Appeal
to the U.S. Court of Appeals for the Third Circuit on March 4, 2005. On March 18, 2005, AWI filed a motion to expedite the appeal to the U.S. Court of Appeals. AWI is also reviewing other options to resolve its Chapter 11 Case. See Note 1 for
further discussion of AWIs Chapter 11 process.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



A principal feature of the POR is the creation of a trust (the Asbestos PI Trust), pursuant to section
524(g) of the Bankruptcy Code, for the purpose of addressing AWIs personal injury (including wrongful death) asbestos-related liability. All present and future asbestos-related personal injury claims against AWI, including contribution claims
of co-defendants, arising directly or indirectly out of AWIs pre-Filing use of or other activities involving asbestos would be channeled to the Asbestos PI Trust.



In accordance with the 524(g) injunction if the POR goes into effect, various entities would be protected from such present and future
asbestos-related personal injury claims. These entities include, among others, reorganized AWI, AHI, AWIs subsidiaries and other affiliates (as defined in the POR), and their respective officers and directors. Upon emergence from Chapter 11,
AWI would not have any responsibility for these claims (including claims against AWI based solely on its ownership of a subsidiary or other affiliate), nor would it participate in their resolution.



However, although AWIs domestic and foreign subsidiaries and other affiliates would be
protected parties, asbestos-related personal injury claims against them would be channeled to the Asbestos PI Trust only to the extent such claims directly or indirectly relate to the manufacturing, installation, distribution or other activities of
AWI or are based solely on AWIs ownership of the subsidiaries or other affiliates (as distinguished from independent activities of the subsidiaries or affiliates). Currently, three asbestos-related personal injury litigations against
subsidiaries of AWI allegedly arising out of such independent activities are pending. These claims would not be channeled to the Asbestos PI Trust under the POR inasmuch as they do not involve activities of AWI. The cases have several defendants.
The subsidiaries deny liability and are aggressively defending the matters. AWI has not recorded any liability for these matters. Management does not expect that any sum that may have to be paid in connection with these matters will be material to
Armstrong.



In addition, workers compensation claims brought against AWI
or its subsidiaries or other affiliates would not be channeled to the Asbestos PI Trust and would remain subject to the workers compensation process. Historically, workers compensation claims against AWI and its subsidiaries have not
been significant in number or amount and AWI has continued to honor its obligations with respect to such claims during the Chapter 11 Case. Workers compensation law provides that the employer is responsible for evaluation, medical treatment
and lost wages as a result of a job-related injury. Currently, AWI has three pending workers compensation claims, and its UK subsidiary has five employer liability claims involving alleged asbestos exposure.



There also is uncertainty as to proceedings, if any, brought in certain foreign jurisdictions
with respect to the effect of the 524(g) injunction in precluding the assertion in such jurisdictions of asbestos-related personal injury claims, proceedings related thereto or the enforcement of judgments rendered in such proceedings.



Management believes that neither AWI nor any of its subsidiaries or other affiliates is
subject to any asbestos-related personal injury claims that would not be channeled to the Asbestos PI Trust and that are of a magnitude that, individually or collectively, would be material to reorganized Armstrong.



Asbestos-Related Liability



Based upon events through early March 2003, primarily the parties agreement on the
basic terms of the PORs treatment of AWIs asbestos-related liabilities, management concluded that it could reasonably estimate its probable liability for AWIs current and future asbestos-related personal injury claims. Accordingly,
in the fourth quarter of 2002, AWI recorded a $2.5 billion charge to increase the balance sheet liability. The recorded asbestos-related liability for personal injury claims of approximately $3.2 billion at December 31, 2004 and 2003, which was
treated as subject to compromise, represents the estimated amount of liability that is implied based upon the negotiated resolution reflected in the POR, the total consideration expected to be paid to the Asbestos PI Trust pursuant to the POR and an
assumption for this purpose that the recovery value percentage for the allowed claims of the Asbestos PI Trust is equal to the estimated recovery value percentage for the allowed non-asbestos unsecured claims.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



AWI is unable to predict whether the POR will be confirmed or when AWI would emerge from Chapter 11. Therefore, the
timing and terms of resolution of the Chapter 11 Case remain uncertain. As long as this uncertainty exists, future changes to the recorded asbestos-related liability are possible and could be material to AWIs financial position and the results
of its operations. Management will continue to review the recorded liability in light of future developments in the Chapter 11 Case and make changes to the recorded liability if and when it is appropriate.



Insurance Recovery Proceedings



A substantial portion of AWIs primary and remaining excess insurance asset is
nonproducts (general liability) insurance for personal injury claims. AWI has entered into settlements with a number of the carriers resolving its coverage issues. However, an alternative dispute resolution (ADR) procedure was commenced
against certain carriers to determine the percentage of resolved and unresolved claims that are nonproducts claims, to establish the entitlement to such coverage and to determine whether and how much reinstatement of prematurely exhausted products
hazard insurance is warranted. The nonproducts coverage potentially available is substantial and includes defense costs in addition to limits.



During 1999, AWI received preliminary decisions in the initial phases of the trial proceeding of the ADR, which were generally favorable to AWI on a number of issues
related to insurance coverage. However, during the first quarter of 2001, a new trial judge was selected for the ADR. The new trial judge conducted hearings in 2001 and determined not to rehear matters decided by the previous judge. In the first
quarter of 2002, the trial judge concluded the ADR trial proceeding with findings in favor of AWI on substantially all key issues. Liberty Mutual, the only insurer that is still a party to the ADR, appealed that final judgment. Appellate argument
was held on March 11, 2003. On July 30, 2003, the appellate arbitrators ruled that AWIs claims against certain Liberty Mutual policies were barred by the statute of limitations. The ruling did not address the merits of any of the other issues
Liberty Mutual raised in its appeal. Based on that unfavorable ruling, AWI concluded that insurance assets of $73 million were no longer probable of recovery. AWI was also ordered to reimburse Liberty Mutual for certain costs and administration fees
that Liberty Mutual incurred during the ADR. The $1.6 million claimed for these costs and fees is in dispute. Based upon an AWI request, the appellate panel held a rehearing on November 21, 2003. In January 2004, the appellate panel upheld its
initial ruling. On February 4, 2004, AWI filed a motion in the U.S. District Court for the Eastern District of Pennsylvania to vacate the rulings of the appellate panel.



In July 2002, AWI filed a lawsuit against Liberty Mutual in the U.S. District Court for the Eastern District of Pennsylvania seeking, among
other things, a declaratory judgment with respect to certain policy issues not subject to binding ADR. The U.S. District Court has not yet set a schedule to hear this matter.



On June 13, 2003, the New Hampshire Insurance Department placed The Home Insurance Company (Home) under an order of liquidation.
Less than $10 million of AWIs recorded insurance asset is based on policies with Home, which management believes is probable of recovery. AWI filed a proof of claim against Home during June 2004. It is uncertain when AWI will receive proceeds
from Home under these insurance policies.



Insurance Asset



An insurance asset in respect of asbestos
claims in the amount of $98.6 million was recorded as of December 31, 2004 compared to $103.1 million recorded as of December 31, 2003. The total amount recorded reflects AWIs belief that insurance proceeds will be recovered in this amount,
based upon AWIs success in insurance recoveries, settlement agreements that provide such coverage, the nonproducts recoveries by other companies and the opinion of outside counsel. Such insurance, in our opinion, is either available through
settlement or probable of recovery through negotiation or litigation. Depending on further progress of the ADR, activities such as settlement discussions with insurance carriers party to the ADR and those not party to the ADR, the final
determination of coverage shared with ACandS (the former AWI insulation contracting subsidiary that was sold in August 1969 and which filed for relief under Chapter 11 of the Bankruptcy Code in September 2002) and the financial condition of the
insurers, AWI may revise its



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



estimate of probable insurance recoveries. Approximately $79 million of the $98.6 million asset is determined from agreed coverage in place. Of the $98.6
million, $9.8 million has been recorded as a current asset as of December 31, 2004 reflecting managements estimate of the minimum insurance payments to be received in the next 12 months.



Many uncertainties remain in the insurance recovery process, therefore, AWI did not increase
the estimated insurance recovery asset in the fourth quarter of 2004.



Cash Flow Impact



As a result of the
Chapter 11 Filing, AWI has not made any payments for asbestos-related personal injury claims since the fourth quarter of 2000. During 2004, 2003 and 2002, AWI received asbestos-related insurance recoveries of $4.5 million, $22.0 million and $16.0
million, respectively. During the third quarter of 2003, AWI paid $9.0 million for asbestos-related property damage claims and received $9.0 million of insurance proceeds related to these claims. During the pendency of the Chapter 11 Case, AWI does
not expect to make any further cash payments for asbestos-related claims, but AWI expects to continue to receive insurance proceeds under the terms of various settlement agreements. Management estimates that the timing of future cash recoveries of
the recorded asset may extend beyond 10 years.



Potential Legislation



On February 7, 2005 Senator Arlen
Specter submitted into the Congressional Record and distributed to the Senate Judiciary Committee a discussion draft of asbestos reform legislation. Members of the Senate are currently reviewing the draft bill. There is uncertainty as to whether any
asbestos reform proposal will become law, and what impact there might be on AWIs asbestos liability and/or AWIs Chapter 11 Case.



Conclusion



Many uncertainties continue to exist about the matters impacting AWIs asbestos-related liability and insurance asset. These uncertainties include when and if the
POR will be confirmed by the U.S. District Court, the impact of any potential legislation, and the financial condition of AWIs insurance carriers.



Additionally, if the POR is confirmed, AWI is unable to predict when it will be implemented. Therefore, the timing and terms of resolution of the Chapter 11 Case remain
uncertain. As long as this uncertainty exists, future changes to the recorded liability and insurance asset are possible and could be material to AWIs financial position and the results of its operations. Management will continue to review the
recorded liability and insurance asset in light of future developments in the Chapter 11 Case and make changes to the recorded amounts if and when it is appropriate.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



ENVIRONMENTAL MATTERS



Environmental Expenditures



Most of our manufacturing and certain of our research facilities are affected by various
federal, state and local environmental requirements relating to the discharge of materials or the protection of the environment. We make expenditures necessary for compliance with applicable environmental requirements at our operating facilities. We
incurred expenditures of approximately $5.5 million in 2004, $3.7 million in 2003, and $4.5 million in 2002 associated with environmental compliance and control facilities.



As a result of continuous changes in regulatory requirements, we cannot predict with certainty future expenditures associated with
compliance with environmental requirements. The United States Environmental Protection Agency (EPA) has recently promulgated a new regulation pursuant to the Clean Air Act that may impact our domestic manufacturing operations. That
regulation, The National Emission Standards for Hazardous Air Pollutants for Industrial, Commercial, and Institutional Boilers and Process Heathers Act, became effective in November, 2004, and requires compliance by September 13, 2007. While we are
finalizing our review of this regulation, adoption of this regulation is not expected to have a material impact on our consolidated results of operations or financial condition.



Environmental Remediation



Summary



We are involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), and similar state
Superfund laws at 28 sites. In most cases, we are one of many potentially responsible parties (PRPs) which have potential liability for the required investigation and remediation of each site and which, in some cases, have
agreed to jointly fund that required investigation and remediation. With regard to some sites, however, we dispute the liability, the proposed remedy or the proposed cost allocation among the PRPs. We may have rights of contribution or reimbursement
from other parties or coverage under applicable insurance policies.



We have
also been remediating environmental contamination resulting from past industrial activity at certain of our former plant sites. Estimates of our future environmental liability at the Superfund sites and current or former plant sites are based on
evaluations of currently available facts regarding each individual site and consider factors such as our activities in conjunction with the site, existing technology, presently enacted laws and regulations and prior company experience in remediating
contaminated sites. Although current law imposes joint and several liability on all parties at Superfund sites, our contribution to the remediation of these sites is expected to be limited by the number of other companies also identified as
potentially liable for site remediation. As a result, our estimated liability reflects only our expected share. In determining the probability of contribution, we consider the solvency of the parties, whether liability is being disputed, the terms
of any existing agreements and experience with similar matters. Additionally, the Chapter 11 Case also may affect the ultimate amount of such contributions.



Effects of Chapter 11



Certain of AWIs environmental liabilities are subject to discharge through its Chapter 11 Case while others are not. AWIs payments and remediation work on such sites for which AWI is a PRP is under review
in light of the Chapter 11 Filing. The bar date for claims from the EPA expired during the third quarter of 2003. AWI received an unliquidated proof of claim from the EPA. Those environmental obligations that AWI has with respect to property that it
owns or operates are likely to be unaffected by the Chapter 11 Case. Therefore, AWI will be required to continue meeting its on-going environmental compliance obligations at the properties that AWI owns or operates. AWI will also be required to
address the effects of any contamination at those sites, even if the contamination predated Chapter 11 Filing. In addition, AWI may be obligated to remedy the off-site impact of activities that occurred on the properties it owns and operates.



Monetary claims with respect to properties that AWI does not own or operate
(such as formerly owned sites, or landfills to which AWIs waste was taken) may be discharged in AWIs Chapter 11 Case.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Accordingly, claims brought by a federal or state agency alleging that AWI should reimburse the claimant for money
that it spent cleaning up a site which AWI does not own or operate would be subject to discharge, provided the claimant received proper notice of the bankruptcy and bar date. The same would be true for monetary claims by private parties, such as
other PRPs with respect to sites with multiple PRPs. Under the POR, the Superfund sites at which AWI is alleged to be a PRP are being treated as unsecured liabilities subject to compromise. Other Superfund sites relate to entities that are not part
of AWIs Chapter 11 Case and therefore will not be discharged.



In
addition to the right to sue for reimbursement of the money it spends, CERCLA also gives the federal government the right to sue for an injunction compelling a defendant to perform a cleanup. Several state statutes give similar injunctive rights to
those States. While we believe such rights do not survive Chapter 11, there does not appear to be controlling judicial precedent that these injunctive rights are dischargeable. Thus, according to some cases, while a governmental agencys right
to require AWI to reimburse it for the costs of cleaning up a site may be dischargeable, the same government agencys right to compel us to spend our money cleaning up the same site may not be dischargeable even though the financial impact to
AWI would be the same in both instances.



Specific Events



AWI has been working to resolve as many of its environmental liabilities through its Chapter
11 Case as possible. AWI has negotiated a global environmental settlement with the Department of Justice and the EPA with respect to CERCLA liability at 37 sites. Pursuant to the proposed Settlement Agreement, the federal government would covenant
not to sue AWI for either monetary or injunctive relief under CERCLA at 19 of these sites, in exchange for an allowed claim amount in the bankruptcy with respect to known claims concerning sites that AWI does not own or operate. Under the
Settlement, AWI would have contribution protection under CERCLA with respect to private party claims at the sites at which the government receives an allowed claim. Additionally, AWI has the benefit of discharge both at the 19 sites for which the
government receives an allowed claim and at an additional 18 sites identified in the Settlement Agreement. At an additional site, AWI would continue to participate in the cleanup under a previously approved Consent Decree. Upon this global
settlement becoming effective, the EPA proof of claim will be amended to assert a claim in the amount of $8.7 million. This amount includes the $7.8 million that AWI and EPA agreed upon with respect to the Peterson Puritan site. Notice of the
Settlement was published in the Federal Register on February 10, 2005, soliciting comment for 30 days. Following the conclusion of the public comment period, the government may reconsider the Settlement Agreement on the basis of any comments. If the
government decides to go forward with the Settlement Agreement, the parties will file a motion with the bankruptcy court seeking approval.



AWI is subject to a unilateral order by the Oregon Department of Environmental Quality (DEQ) to conduct a remedial investigation and feasibility study and any
necessary remedial design and action at its St. Helens, Oregon facility, as well as the adjacent Scappoose Bay. AWI has denied liability for Scappoose Bay, but has cooperated with the DEQ regarding its owned property. Other potentially responsible
parties who are not yet subject to orders by the DEQ include former site owners Owens Corning (OC) and Kaiser Gypsum Company, Inc. (Kaiser). AWI has entered into an agreement with Kaiser for the sharing of costs and
responsibilities with respect to the remedial investigation, feasibility study and remedy selection at the site. OC has entered into a settlement with the DEQ. Pursuant to the settlement, OC has made a lump sum payment to the DEQ in exchange for
contribution protection (including protection against common law and statutory contribution claims by AWI against OC) and a covenant not to sue. AWI has reached an agreement with the DEQ as to how these funds will be made available for the
investigation and remediation of the site. AWI has recorded an environmental liability with respect to the investigation and feasibility study at its St. Helens facility, but not for Scappoose Bay because AWI continues to dispute
responsibility for contamination of Scappoose Bay.



Summary of Financial
Position



Liabilities of $28.0 million and $21.2 million at December 31,
2004 and December 31, 2003, respectively were for potential environmental liabilities that we consider probable and for which a reasonable estimate of the probable liability could be made.



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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



The majority of this increase relates to developments in the Peterson Puritan site described in Specific Events above. Where existing data
is sufficient to estimate the liability, that estimate has been used; where only a range of probable liabilities is available and no amount within that range is more likely than any other, the lower end of the range has been used. As assessments and
remediation activities progress at each site, these liabilities are reviewed to reflect additional information as it becomes available. Due to the Chapter 11 Filing, $18.6 million of the December 31, 2004 and $12.8 million of the December 31, 2003
environmental liabilities are classified as prepetition liabilities subject to compromise. As a general rule, the Chapter 11 process does not preserve company assets for such prepetition liabilities.



The estimated liabilities above do not take into account any claims for recoveries from
insurance or third parties. Such recoveries, where probable, have been recorded as an asset in the consolidated financial statements and are either available through settlement or anticipated to be recovered through negotiation or litigation. The
amount of the recorded asset for estimated recoveries was $2.4 million and $2.5 million at December 31, 2004 and December 31, 2003, respectively.



Actual costs to be incurred at identified sites may vary from our estimates. Based on our current knowledge of the identified sites, we believe that any sum we may have
to pay in connection with environmental matters in excess of the amounts noted above would not have a material adverse effect on our financial condition, or liquidity, although the recording of future costs may be material to earnings in such future
period. For the years ended December 31, 2004, 2003 and 2002, our net expense, recorded in the income statement, was $7.2 million, less than $0.1 million, and $4.5 million, respectively.



PATENT INFRINGEMENT CLAIMS



We are a defendant in two lawsuits claiming patent infringement related to some of our laminate flooring products. The plaintiffs have claimed unspecified monetary
damages. We are being defended and indemnified by our supplier for all costs and potential damages related to the litigation.



FORMER EMPLOYEES CLAIM



Former Armstrong employees that were separated from the company in two business divestitures in 2000 brought two purported class actions against the Retirement Committee of AWI, certain current and former members of
the Retirement Committee, the Retirement Savings and Stock Ownership Plan (RSSOP), AHI and the trustee bank of the RSSOP. Plaintiffs alleged breach of Employee Retirement Income Security Act (ERISA) fiduciary duties and other violations of ERISA
pertaining to losses in their RSSOP accounts, which were invested in Armstrong common stock.



In 2003, an agreement was reached to settle this matter. Contributors to the settlement were AWI, its insurer and the trustee bank of the RSSOP. The full amount of the settlement was allocated in December 2003 among
approximately 370 former employees. AWIs portion of the settlement is $1.0 million, which will be treated as convenience claims in the Chapter 11 Case. The settlement was approved by the Bankruptcy Court on March 31, 2003 and by the United
States District Court (Eastern District of PA) on June 16, 2003. Based upon the Bankruptcy Courts approval of the settlement, AWI recorded a $1.0 million charge in the first quarter of 2003 in SG&A expense.



DEPARTMENT OF LABOR SETTLEMENT



Subsequent to an audit by the United States Department of Labor (DOL), we were
informed that the DOL was challenging the validity of the use of certain contributions, in the approximate aggregate amount of $33.4 million, to fund debt payments made by the Armstrong Employee Stock Ownership Plan (ESOP), as provided
for by that plan. We reached a settlement with the DOL to resolve this matter with a funding to the ESOP of $1.5 million, which was distributed to plan participants in accordance with terms of the agreement in February 2004. Insurance and third
parties funded $0.9 million of the settlement. Both the accrual of $1.5 million expense and $0.9 million insurance receivable were recorded in the third quarter of 2003 in SG&A expense.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



OTHER CLAIMS



Additionally, we are involved in various other claims and legal actions involving product liability, patent infringement, breach of
contract, distributor termination, employment law issues and other actions arising in the ordinary course of business. While complete assurance cannot be given to the outcome of these claims, we do not expect that any sum that may have to be paid in
connection with these matters will have a materially adverse effect on our consolidated financial position or liquidity, however it could be material to the results of operations in the particular period in which a matter is resolved.



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



Not applicable.



ITEM 9A. CONTROLS AND PROCEDURES



The
Securities and Exchange Commission defines the term disclosure controls and procedures to mean a companys controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it
files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. Based on the evaluation of the effectiveness of
our disclosure controls and procedures by our management, with the participation of our chief executive officer and our chief financial officer, as of the end of the period covered by this report, our chief executive officer and our chief financial
officer have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Commissions rules and forms.



In October 2004, we requested guidance from the staff of the Securities and Exchange Commission (SEC) on interpreting Regulation S-X rules 1-02(w) and 3-09. The SEC staff advised us that our Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 should have included as an exhibit the audited financial statements of WAVE, our 50% equity investment, as of and for the three years ended December 31, 2003. Our 2003 Form 10-K included only condensed financial
information on WAVE. A 2003 Form 10-K/A was filed with the SEC on November 4, 2004 to include the audited financial statements of WAVE. Our Form 10-Q for the quarter ended September 30, 2004 included summarized income statement information of WAVE
for each of the first three quarters of 2004 and this 2004 Form 10-K includes as an exhibit the audited financial statements of WAVE.



No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



ITEM 9B. OTHER INFORMATION



Information with
respect to bonus and long-term incentive payments to executive officers for service in 2004 is incorporated by reference from the Summary Compensation Table in Item 11- Executive Compensation of this Form 10-K. In addition, Mr. Rodruan was paid a
bonus of $98,970 under the MAP and received a payout of $98,200 under the LTIP based upon his service in 2004.



On March 29, 2005, the Company approved a grant to Mr. Lockhart of five additional years of service credit under AWIs Retirement Benefit Equity Plan. See the sections captioned Employment Agreements
and Benefits from Retirement Plans in Item 11. Executive Compensation of this Form 10-K for more information.



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PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



Code of Ethics



Armstrong has
followed a code of ethics for many years. The Company began in a small cork-cutting shop in 1860 in Pittsburgh under its Founder, Thomas Armstrong. He was determined that his company act with fairness and in the balanced best interests (of)
customers, stockholders, employees, suppliers, community neighbors, government and the general public.



Thomas Armstrong was among the first American entrepreneurs to discard the old business maxim of caveat emptorLet the buyer bewareand replace it by practicing the principle of Let
the buyer have faith, which became an enduring motto for Armstrong.



To
memorialize this ethical foundation, in 1960 Armstrong adopted its Operating Principles which incorporate the philosophy of Thomas Armstrong and his successors:



| |  | To respect the dignity and inherent rights of the individual human being in all dealings with people.
|- |  | -----------------------------------------------------------------------------------------------------



| |  | To maintain high moral and ethical standards to reflect honesty, integrity, reliability and forthrightness in all relationships.
|- |  | --------------------------------------------------------------------------------------------------------------------------------



| |  | To reflect the tenets of good taste and common courtesy in all attitudes, words and deeds.
|- |  | ------------------------------------------------------------------------------------------



| |  | To serve fairly and in proper balance the interests of all groups associated with the business  customers, stockholders, employees, suppliers, community neighbors, government
and the public.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In 1992, Armstrong built on these Operating
Principles and established its Code of Business Conduct, which applies to all employees, executives and directors, specifically including our Chief Executive Officer, our Chief Financial Officer and our Controller. That Code was updated
in 2000, when the current version was introduced.



In 2002, we adopted an
additional Code of Ethics for Financial Professionals, which applies to all professionals in Armstrongs finance and controller functions worldwide, including our Chief Financial Officer and our Controller.



These Codes are intended to deter wrongdoing and to promote:



| |  | Honest and ethical conduct, including handling of actual or apparent conflicts of interest between personal and professional relationships;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  | Full, fair, accurate, timely and understandable public disclosures;
|- |  | -------------------------------------------------------------------



| |  | Compliance with applicable governmental laws, rules and regulations;
|- |  | --------------------------------------------------------------------



| |  | The prompt internal reporting of violations of the Codes; and,
|- |  | --------------------------------------------------------------



| |  | Accountability for compliance with the Codes.
|- |  | ---------------------------------------------



These two Codes are available on the Armstrong web site at www.armstrong.com/corporatena/corp_mission.html. If the substance of either Code is amended in the
future, we will note the date and describe the nature of the amendment at that web site. We will also note at that site any express or implicit waiver from a provision of either Code granted to any Armstrong officer. To date, no such waivers have
been granted.



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Armstrong Holdings Inc. Board of Directors



The Board of Directors has determined that all members of the Board, including all members of the Audit, Management Development and
Compensation, and Nominating Governance Committees are independent in accordance with the rules and regulations of The Nasdaq Stock Market, Inc. Although Armstrong is not currently listed on Nasdaq, the Company anticipates listing its stock on that
exchange when AWI emerges from Chapter 11, and has been complying with Nasdaq requirements in preparation for such listing.



The Board of Directors has also determined that all members of the Board are independent within the meaning of Armstrongs Corporate Governance Principles (see
www.armstrong.com/corporate/corp_mission.html). The standards of independence set forth in Armstrongs Corporate Governance Principles incorporate and, in certain areas exceed, the standards under Nasdaq.



The determinations made as to independence under the rules and regulations of NASDAQ and
Armstrongs Corporate Governance Principals were based upon the Boards consideration of relationships between directors and the Company or management, and of known factors that reasonably could compromise the independent judgment of a
director. For example, the Board considered director relationships with vendors and service providers to the Company, and considered whether any director had sought to influence any decisions by the Company in a way beneficial to their personal
interests.



Based on information disclosed by the directors, the Board was also
advised that no director was disqualified from being considered an independent director under Armstrongs Corporate Governance Principles or any governmental or NASDAQ regulation. Following consideration of these facts, the Board of Directors
determined that all outside directors are, in fact, independent.



The Board, lead by its Nominating & Governance Committee, monitors the independence of outside directors. Each director is charged with a responsibility of candor and disclosure to their Board colleagues relative to potentially
compromising relationships, transactions and compensation.



Audit
Committee



The Audit Committee of Armstrong Holdings consists of John
J. Roberts (Chairman), H. Jesse Arnelle, James E. Marley and M. Edward Sellers. The business experience of these and all other directors is described below under the heading Director Information. The Board of Directors determined that at
least one member of this committee, John J. Roberts, qualifies as an Audit Committee Financial Expert as defined in Item 401(h)(2) of Regulation S-K of the Securities Exchange Act. Mr. Roberts is also independent, as that term is used in
SEC regulations pertaining to such experts (Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act ). Additionally, as noted above, all of the members of the Audit Committee are independent under the listing standards of NASDAQ and
within the meaning of the applicable SEC rule pertaining to Audit Committees (Rule 10A-3) under the Securities Exchange Act).



Director Information



The following information is current as of February 28, 2005. The directors named here serve until their successors are elected, or until their earlier retirement or
removal.



Directors of Armstrong Holdings, Inc.



H. Jesse Arnelle  Age 71; Director since July 1995; MemberAudit Committee. Mr.
Arnelle is Of Counsel with the law firm of Womble Carlyle Sandridge & Rice, PLLC since October 1997 and former senior partner and co-founder of Arnelle, Hastie, McGee, Willis & Greene, a San Francisco-based corporate law firm from which he
retired in 1996. He is a graduate of Pennsylvania State University and the Dickinson School of Law. Armstrong has retained Womble Carlyle Sandridge & Rice, PLLC for many years, including 2003 and 2004. Mr. Arnelle served as Vice Chairman
(1992-1995) and Chairman (1996-1998) of the Board of Trustees of the Pennsylvania State University. He serves on the Boards of FPL Group, Inc., Eastman Chemical Company, URS Corporation, Textron, Inc., Gannett Corporation and Metropolitan Life
Series Fund.



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Judith R. Haberkorn  Age 58; Director since July 1998; Lead Director of the Board; MemberNominating and Governance Committee (Chair) and
Management Development and Compensation Committee. Ms. Haberkorn is a graduate of Briarcliff (N.Y.) College and completed the Advanced Management Program at Harvard Business School. From 1998 until her retirement in June 2000, she served as
President  Consumer Sales & Service for Bell Atlantic (telecommunications). She previously served as President  Public & Operator Services (1997-1998), also at Bell Atlantic, and Vice President  Material Management
(1990-1997) for NYNEX Telesector Resources Group (telecommunications). Ms. Haberkorn is a director of MCI, Enesco Corporation and serves on the advisory board of Norfolk Southern. She is Chair Emerita of the Committee of 200 and a member of The
International Womens Forum and The Harvard Business School Network of Women Alumnae. She is a Vice President Emerita of the Harvard Business School Alumni Advisory Board and a member of the Visiting Committee.



Michael D. Lockhart  Age 55; Chairman of the Board and Chief Executive Officer of AHI
since August 2000. Director since November 2000 and Chairman of the Board and President since March 2001 of Armstrong World Industries, Inc. Mr. Lockhart previously served as Chairman and Chief Executive Officer of General Signal (a diversified
manufacturer) headquartered in Stamford, Connecticut from September 1995 until it was acquired in October 1998. He joined General Signal as President and Chief Operating Officer in September 1994. From 1981 until 1994, Mr. Lockhart worked for
General Electric in various executive capacities in GE Capital, GE Power Systems, GE Transportation Systems and GE Aircraft Engines. He is a member of the Business Council for the Graduate School of Business at the University of Chicago.



James E. Marley  Age 69; Director since November 1988; MemberAudit Committee,
also DirectorArmstrong World Industries, Inc. Mr. Marley is a graduate of Pennsylvania State University and earned a masters degree in mechanical engineering from Drexel University. From 1993 until his retirement (August 1998), he served
as Chairman of the Board of AMP Incorporated (electrical/electronic connection devices), which he joined in 1963 and where he served as President and Chief Operating Officer (1990-1992) and President (1986-1990). He also serves on the Board of Arvin
Meritor, Inc.



Ruth M. Owades  Age 56; Director since April 2002; Member
 Nominating and Governance Committee and Management Development and Compensation Committee. Ms. Owades is a graduate of Scripps College in Claremont, California and earned an MBA from Harvard Business School. She was a Fulbright Scholar in
Strasbourg, France. Since 2002, she has served as the President of Owades Enterprises, LLC. (marketing enterprise having the rights to four new patented consumer products). She was the founder and CEO (1989-2001) of Calyx & Corolla (first fresh
flower catalog and internet company). She was also the founder and CEO of Gardeners Eden (a catalog of gardening tools and accessories). Ms. Owades is a director of Providian Financial Corporation and The J. Jill Group, Inc. She also serves as
a member of the Board of Associates of Harvard Business School, the Board of Trustees of Scripps College, the Council on Competitiveness, the Committee of 200 and the Advisory Board of Insolia, LLC.



John J. Roberts  Age 60; Director since April 2003; Member  Audit Committee
(Chairman). Mr. Roberts served as Global Managing Partner for PricewaterhouseCoopers LLP from 1998 until his retirement in June 2002. Mr. Roberts held numerous positions at Coopers & Lybrand LLP from 1967 until its merger with Price Waterhouse
LLP in 1998. From 1994 to 1998 Mr. Roberts served as one of three members of the Office of the Chairman of Coopers & Lybrands United States operations. Prior to that time, Mr. Roberts held other positions at Coopers & Lybrand,
including Deputy Vice Chairman, Vice Chairman and Managing Partner. Mr. Roberts is a graduate of Drexel University. He serves on the Boards of Directors and Audit Committees of Safeguard Scientifics, Inc. and the Pennsylvania Real Estate Investment
Trust. He also serves on the Board of Directors and Audit Committee of Vonage, Inc., a privately-held company.



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M. Edward Sellers  Age 60; Director since April 2001; Member  Audit Committee. Mr. Sellers is a graduate of Vanderbilt University and received
his MBA from Harvard Business School. Mr. Sellers joined Blue Cross Blue Shield of South Carolina and The Companion Group of Companies (a health, life, property and casualty insurance company with related services and functions) in 1987, serving as
President and Chief Operating Officer until 1992 when he assumed the role of President and Chief Executive Officer. In 2001, he was named Chairman and Chief Executive Officer. He serves as Chair of the South Carolina Council on Competitiveness. He
also serves on the following Boards: Open Networks Technologies, Inc.; National Bank of South Carolina; American Red Cross; ETV (Educational Television) Endowment of South Carolina, Central Carolina Economic Development Alliance and Central Carolina
Community Foundation. Mr. Sellers is past Chair of the South Carolina State Chamber of Commerce; Palmetto Business Forum; Columbia College; ETV Endowment Board, and the Palmetto Conservation Foundation.



Jerre L. Stead  Age 62; Director since April 1992; MemberNominating and
Governance Committee and Management Development and Compensation Committee (Chairman). Mr. Stead is a graduate of the University of Iowa and was a participant in the Advanced Management Program, Harvard Business School. He has served as the Chairman
of the Board of IHS, Inc. since December 2000. From August 1996 until June 2000 he served as Chairman and Chief Executive Officer of Ingram Micro, Inc. (technology products and services). During 1995, he served as Chairman, President and Chief
Executive Officer of Legent Corporation (integrated product and service software solutions) until its sale late in 1995. He was Executive Vice President, American Telephone and Telegraph Company (telecommunications) and Chairman and Chief Executive
Officer of AT&T Global Information Solutions (computers and communicating), formerly NCR Corp. (1993-1994). He was President of AT&T Global Business Communications Systems (communications) (1991-1993) and Chairman, President and Chief
Executive Officer (1989-1991) and President (1987-1989) of Square D Company (industrial control and electrical distribution products). In addition, he held numerous positions during a 21-year career at Honeywell. He is a Director of Conexant
Systems, Inc., Brightpoint Inc., Mobility Electronics, Inc. and Mindspeed, Inc.



Directors of Armstrong World Industries, Inc.



Michael D.
Lockhart - (See description, above.)



James E. Marley - (See description,
above.)



John N. Rigas  (See description, below.)



Changes to Nomination Procedures



There have been no changes to the procedures by which shareholders may recommend nominees to
the Board of Directors since these procedures were first disclosed in the March 31, 2004 Form 10-Q. These procedures are posted at www.armstrong.com/corporatena/article9748.html.



Executive Officer Information



The following information is current as of February 28, 2005. Each executive officer serves a one-year term until reelected or until the earlier of his death,
resignation, retirement or replacement.



Executive Officers of Armstrong
Holdings, Inc. and Armstrong World Industries, Inc.



Michael D. Lockhart -
(See description, above.)



Stephen J. Senkowski  Age 53; Executive Vice
President, Armstrong Holdings, Inc. and Executive Vice President and President and Chief Executive Officer, Armstrong Building Products, Armstrong World Industries, Inc. since April 2004. Previously, President and Chief Executive Officer, Armstrong
Building Products, Armstrong World Industries, Inc. October 2000  April 2004; Senior Vice President, Americas, Building Products Operations, Armstrong World Industries, Inc. April 2000  October 2000; President/Chief Executive Officer,
WAVE July 1997  April 2000; Vice President, Innovation Process, Building Products Operations 1994  July 1997.



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##### Table of Contents

Matthew J. Angello  Age 45; Senior Vice President, Human Resources, Armstrong Holdings, Inc. since September 2000 and Armstrong World Industries, Inc.
since December 2002. Previously Vice President, Human Resources, Floor Products Operations, Armstrong World Industries, Inc. January 1997  September 2000; Vice President and Senior Director, Human Resources, The Restaurant Company (food
service) 1992  January 1997.



F. Nicholas Grasberger III  Age 41;
Senior Vice President and Chief Financial Officer since January 2005. Vice President and Chief Financial Officer of Kennametal, Inc. (a manufacturer of cutting tools and wear parts) August 2000  December 2004. Previously employed at H. J.
Heinz (a global U.S. based food company) for eleven years, his last title being Treasurer.



John N. Rigas  Age 56; Senior Vice President, Secretary and General Counsel, Armstrong Holdings, Inc. since November 2000 and Armstrong World Industries, Inc. since May 2001. Previously Deputy General
Counsel-Litigation, Armstrong World Industries, Inc. March 1999  November 2000; worked for Dow Corning Corporation (specialty chemical company) October 1982  March 1999, his last title being Senior Managing Counsel.



William C. Rodruan  Age 50; Vice President and Controller, Armstrong World Industries,
Inc. since July 1999 and Armstrong Holdings, Inc. since May 2000. Previously Director, Corporate Transformation and Shared Services, Armstrong World Industries, Inc. February 1997  July 1999 and Vice President of Finance, Corporate Retail
Accounts, Armstrong World Industries, Inc. July 1994  February 1997.



Involvement in Certain Legal Proceedings



On December
6, 2000, AWI and two of Armstrong World Industries wholly-owned subsidiaries, Nitram Liquidators, Inc. and Desseaux Corporation of North America, Inc., filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Therefore,
individuals who were or are executive officers and directors of AWI have been associated with a corporation that filed a petition under the federal bankruptcy laws within the last five years. With the exception of Ms. Owades and Messrs. Sellers and
Roberts, all present directors of AHI were or are directors of AWI.



Section 16(a) Beneficial Ownership Reporting Compliance



Securities and Exchange Commission (SEC) regulations require Armstrong Holdings, Inc. directors and executive officers, and any persons beneficially owning more than ten percent of its common stock to report to the SEC their
ownership of this stock and any changes in that ownership. SEC regulations also require these persons to furnish the Company with copies of these reports. SEC rules require the Company to report any failure to timely file those reports in the
previous fiscal year.



Based solely upon our review of copies of reports
furnished to us and written representations from directors and executive officers that no other reports were required, we believe that all of these filing requirements were satisfied by Armstrong Holdings directors and executive officers
during 2004.



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##### Table of Contents

ITEM 11. EXECUTIVE COMPENSATION



Executive
Officers Compensation



The following table shows the compensation
received by the Chief Executive Officer and the four other highest paid individuals who served as executive officers during 2004. The data reflects compensation for services rendered to AHI and AWI and its subsidiaries in each of the last three
fiscal years, for services in these individuals current position or previous positions during the three year period.



TABLE 1: SUMMARY COMPENSATION TABLE



|                                                                                |  |              |  |                       |  |                        |  |                              |  |                               |  |                                         |  |                           |  |                           
|------------------------------------------------------------------------------- |  | ------------ |  | --------------------- |  | ---------------------- |  | ---------------------------- |  | ----------------------------- |  | --------------------------------------- |  | ------------------------- |  | --------------------------
|                                                                                |  |              |  | ANNUAL COMPENSATION   |  | LONG-TERM COMPENSATION |  |                             
|                                                                                |  |              |  |                       |  |                        |  |                              |  | Awards                        |  | Payout                                  |  |                          
|Name and Current Principal
Position                                             |  | Year         |  | Salary($)             |  | Bonus ($)1             |  | OtherAnnualCompen-sation($)2 |  | AHI RestrictedStockAwards($)3 |  | AHI SecuritiesUnderlyingOptions/SARs(#) |  | LTIPPayouts($)4           |  | AllOtherCompen-sation ($)5
|M. D. Lockhart Chairman of the Board and Chief Executive Officer of AHI and AWI |  | 200420032002 |  | 920,000905,000860,000 |  | 1,337,0001,055,000    |  | 166,637127,77979,978         |  |                            |  |                                      |  | 611,9001,359,2002,241,000 |  | 27,0166,27625,776         
|S. J. Senkowski Executive Vice President, AHI                                   |  | 200420032002 |  | 502,525426,250385,000 |  | 771,800535,798634,500  |  |                           |  |                            |  |                                      |  | 721,000                 |  | 25,57225,14327,588        
|M. J. Angello Senior Vice President, Human Resources, AHI & AWI                 |  | 200420032002 |  | 364,500350,500340,000 |  | 424,100347,225474,700  |  |                           |  |                            |  |                                      |  | 310,254                 |  | 26,50013,22527,778        
|L. A. Campanaro, Financial Advisor6                                             |  | 200420032002 |  | 437,000434,000425,000 |  | 652,150212,050        |  |                           |  |                            |  |                                      |  | 670,225                 |  | 27,0166,51625,776         
|J. N. Rigas, Senior Vice President, Secretary and General Counsel, AHI & AWI    |  | 200420032002 |  | 365,000345,000330,000 |  | 421,400330,000640,875  |  |                           |  |                            |  |                                      |  | 355,350                 |  | 27,0166,27625,776         

---

|1) | The amounts disclosed for 2004 include payments under the Management Achievement Plan and,
where applicable, other cash payments related to incentive awards for the indicated year, including payments on single-year incentive awards under the Long-Term Incentive Plan.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2) | Except for the income related to Mr. Lockhart during 2004, the aggregate value does not exceed the lesser of $50,000 or 10% of shown salary and bonus. Mr. Lockhart
had taxable income of $122,019 related to the personal use of the company aircraft and was reimbursed for related taxes incurred in the amount of $37,349.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3) | The number of shares and value of previously-granted restricted stock held by each executive as of January 31, 2005 was: M. D. Lockhart  100,000 ($191,000);
S.J. Senkowski  668 ($1,276); M. J. Angello  2,160 ($4,126).
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4) | The amounts disclosed include pay-outs only on multi-year incentive awards granted under the Long-Term Incentive Plan. See note 1.
|-- | ----------------------------------------------------------------------------------------------------------------------------------

|5) | The amounts disclosed for 2004 include:
|-- | ---------------------------------------

| | a) | Non-elective contribution by Armstrong of $20,000 to each individuals Bonus Replacement Retirement Plan account
| | -- | ----------------------------------------------------------------------------------------------------------------

| | b) | Contributions by the Company under the Retirement Savings and Stock Ownership Plan that match the employees contributions: M.D. Lockhart - $6,500; S.J.
Senkowski - $5,572; M. J. Angello - $6,500; L. A. Campanaro - $6,500; J. N. Rigas - $6,500.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) | Taxable income related to company-paid life insurance benefits: M. D. Lockhart - $516; L.A. Campanaro - $516; J. N. Rigas - $516.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------

|6) | Prior to January 1, 2005, L. A. Campanaro served as Senior Vice President and Chief Financial Officer of AHI and AWI. His employment terminated February 28, 2005. In
addition to the amounts included above, Mr. Campanaro received $1,398,400 in March 2005 as a severance payment.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Management Achievement Plan and Long-Term Incentive Plan



Bonus payments disclosed in the Summary Compensation Table included awards made
to executive officers in accordance with the Management Achievement Plan for Key Executives(MAP). Under the MAP, an executive can earn cash rewards in relation to the attainment of corporate, business unit and individual goals. The
corporate and business unit goals are set by the Companys Management Development and Compensation Committee of the Board of Directors. A specific weighting is assigned to each of the corporate and business unit achievement segments where such
segments are applicable. Each participant has a targeted annual incentive award which is expressed as a percentage of base salary earnings and varies with the participants level of responsibility. Incentive amounts earned under the corporate
and business unit segments of the MAP are based on financial performance against predetermined financial goals.



Payouts were also made to executive officers under the Long-Term Incentive Plan (the Incentive Plan). The Incentive Plan provides cash incentive awards to
officers and key employees. Each award is conditioned upon achievement of one or more performance goals covering a performance period of one or more years, as set forth in the award agreement. In making a cash incentive award, a threshold
performance level is established, below which no award will be payable.



Change in Control Agreements



A group of senior executives,
including M. D. Lockhart, S. J. Senkowski, J. N. Rigas, M. J. Angello, W. C. Rodruan and F. N. Grasberger III have entered into change in control (CIC) agreements. These agreements provide severance benefits in the event of a change in
control of AHI or AWI. The purpose of the agreements is to foster stability in the management ranks in the face of a possible change in control.



The severance benefits are payable if the executive is involuntarily terminated or terminates employment for good reason within three years following a change in control.
Good reason to terminate employment exists if there are significant changes in the nature of the individuals employment following the change in control. For example, a reduction in compensation, a change in responsibility, or a relocation of
the place of employment would constitute significant changes. For the most senior officers, the agreement includes a provision where the executive may choose to terminate employment for any reason during the thirty-day period beginning twelve months
following a qualifying change in control and receive severance benefits. The qualifying change in control must meet the definitions in (2) and (3) shown below. The agreements have an automatic annual renewal feature, meaning the agreements will
continue in effect unless either one of Armstrong, AHI or the executive elects not to extend the agreement.



For the purposes of these agreements, a change in control includes the following: (1) acquisition by a person (excluding certain qualified owners) of beneficial ownership of 20% or more of AHIs common stock; (2)
change in the composition of the Board of AHI, so that existing Board members and their approved successors do not constitute a majority of the Board; (3) consummation of a merger or consolidation of AHI, unless shareholders of voting securities
immediately prior to the merger or consolidation continue to hold 662/3% or more of the voting securities of the
resulting entity; and (4) shareholder approval of a liquidation or dissolution of AHI or sale of substantially all of AHIs assets.



Severance benefits under the agreements depend on the position the executive holds, but generally include: (1) a lump severance payment equal to two or three times the
sum of the officers annual base salary and the higher of the officers highest annual bonus earned in the three years prior to termination or prior to the change in control; (2) a lump-sum payment of the portion of the officers
target incentive awards applicable to the year of termination of employment calculated by multiplying the target award by the fractional number of months completed in the performance award period; (3) up to three additional years of service credit
for purpose of determining retirement benefits, the actuarial present value of which are payable as a lump sum; (4) continuation of life, disability, accident and health insurance benefits for three years following termination; (5) full
reimbursement for the payment of any applicable excise taxes; and (6) payment of legal fees incurred in connection with a good faith dispute involving the agreement.



The Bankruptcy Court in Armstrong World Industries Chapter 11 Case approved AWIs assumption of the CIC agreements subject



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to certain modifications. The modifications limit in certain respects (i) what constitutes a change in control under the CIC agreements; and (ii) with
respect to the CIC agreements for the most senior officers, what constitutes Good Reason entitling the executive to terminate employment and receive benefits under the agreement. If the POR discussed in Note 1 of the Consolidated
Financial Statements of this 10-K report were to become effective, the issuance of the new stock of reorganized AWI according to the provisions of the POR would constitute a change in control under the CIC agreements for all executives except for F.
N. Grasberger III.



Employment Agreements



Armstrong entered into an employment agreement with Michael D. Lockhart effective August 7,
2000, in which Mr. Lockhart agreed to serve as Chairman of the Board and Chief Executive Officer of AHI at an initial base salary of $800,000 per year and a $5,000,000 one-time signing bonus. This contract was subsequently approved by the Bankruptcy
Court in Armstrong World Industries Chapter 11 Case. The employment agreement was automatically renewed for an additional one-year term on the third anniversary of the date of the agreement and renews for an additional one-year term on each
successive anniversary, unless AHI gives notice not to extend the agreement at least 180 days prior to the anniversary date. If the employment agreement with Mr. Lockhart is terminated without cause, or if Mr. Lockhart terminates his
employment for good reason, Mr. Lockhart is entitled to receive (1) a lump-sum cash payment equal to his base salary, plus the higher of (i) the bonus for which he is eligible in the year of termination at target performance levels, or
(ii) the highest bonus award paid during the last three years, multiplied by either the number of years remaining in his employment agreement or by one (1), whichever is larger, and (2) continuation of certain benefits for the remainder
of the term of his employment agreement. Mr. Lockharts employment agreement also contains a non-competition provision that bars him from competing with AHI or any subsidiaries or affiliates for a period of two years following his termination.
The agreement also provides Mr. Lockhart with the opportunity to participate in all short-term and long-term incentive plans offered by AHI and AWI, including an annual cash incentive opportunity and an annual long-term incentive award under
AHIs long-term incentive plan. The agreement further provides that the value of his annual long-term incentive award on the grant date is required to equal 150% of Mr. Lockharts target annual cash compensation (salary and bonus) for the
year, and that he receives two years of service credit for every one year of actual service towards the calculation of his pension benefits under the Retirement Benefit Equity Plan. In addition, in March 2005, the Company granted Mr. Lockhart five
additional years of service credit under that plan. See the section Benefits from Retirement Plans below for a table illustrating actual benefit payments based upon credited years of service and compensation.



AWI hired F. Nicholas Grasberger III effective January 1, 2005 as Senior Vice President and
Chief Financial Officer of AHI at an initial base salary of $450,000 per year and a $300,000 one-time signing bonus. His agreement also provides Mr. Grasberger with the opportunity to participate in AWIs annual cash incentive and long-term
incentive plans with target incentive awards for 2005 valued at 60% and 180% of annual base salary respectively. As approved by the Bankruptcy Court in AWIs Chapter 11 Case, Mr. Grasberger will receive a Cash Retention Payment of $450,000 if
he remains employed through December 31, 2005. During AWIs Chapter 11 reorganization, Mr. Grasberger will qualify for enhanced severance benefits if he meets the eligibility provisions of the AWI Severance Pay Plan which is described below.
His severance payment would be two times the sum of annual base salary and target annual bonus. Mr. Grasberger would be eligible to continue health care and life insurance benefits for two years at active employee costs. Following emergence from
Chapter 11 reorganization, AWI will provide a minimum severance payment equal to annual base salary, and benefits would continue for one year. At the time of AWIs emergence from Chapter 11 reorganization, it is planned that Mr. Grasberger
would receive equity awards consisting of 41,400 shares of restricted stock and 124,200 nonqualified stock options. It is anticipated that both awards would vest in one-third installments at two, three and four years from the grant date.



Severance Pay Plan for Salaried Employees



The Severance Pay Plan for Armstrong World Industries Salaried Employees was adopted
in 1990. This plan is designed to cushion the effects of unemployment for certain salaried employees. The benefits are payable if a covered employee is terminated under certain circumstances. All salaried employees of AHI and AWI, including the
officers named in the Summary Compensation Table,



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are eligible to participate in the plan. A participant will be entitled to severance pay if they are terminated and an exclusion does not apply. The employee
is not entitled to severance pay if the reason for the termination is the following: (1) voluntary separation; (2) the employee accepts employment with the successor organization in connection with the sale of a plant, unit, division or subsidiary;
(3) the employee rejects the offer of a position in the same geographic area at a base salary of at least 90% of the employees current salary made by AHI or AWI, their subsidiaries or any successor organization; (4) misconduct; or (5)
unsatisfactory performance, unless otherwise approved by the Severance Pay Committee. Severance benefits will be offset by payments made under CIC agreements or individual employment agreements.



Under the plan, the scheduled amount of the payment is based on the employees length of
service, reason for termination and base salary level. The amount of the payment ranges from a minimum of two weeks base salary to a maximum of 39 weeks base salary. The Severance Pay Committee retains the right to depart from the severance pay
schedule where factors justify an upward or downward adjustment in the level of benefits. In no event may the severance benefit exceed two times the participants annual compensation.



Enhanced Severance Benefits during AWIs Chapter 11 Reorganization



Under the Retention Program for Key Employees approved by the Bankruptcy Court in AWIs
Chapter 11 Case, enhanced severance benefits apply to approximately 195 employees (excluding M. D. Lockhart) during the term of the Chapter 11 reorganization. Cash severance payments ranging from two years of base salary and target annual bonus for
the year of termination to nine months of base salary apply depending on the employees job and evaluation level. Employees will receive continued health care and life insurance benefits for the duration of their severance payment period along
with outplacement support.



Other Benefits



Except as specifically noted, the benefit programs for executives are generally the same as
those offered to the companys other salaried employees. Depending on the executives job evaluation and pay level, Armstrong currently provides the following executive benefits: (1) supplemental benefits on comparable terms to those
otherwise available under either the pension or savings plan but for qualified plan limitations, (2) company-paid long-term disability insurance, (3) limited reimbursement (a maximum of $4,500 per year) for personal financial planning expenses, and
(4) annual company-paid physical exams. As noted in the Summary Compensation Table, Mr. Lockhart has access to company aircraft for personal use and is reimbursed for taxes accrued as a result of his imputed taxable income stemming from such use.



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TABLE 2: OPTION/SAR GRANTS IN LAST FISCAL YEAR



There were no grant of stock options or any other equity-based awards during 2004 under any
of Armstrongs stock-based compensation plans. No equity compensation awards have been made since AWIs Chapter 11 Filing in December 2000, other than commitments entered into prior to the Chapter 11 filing.



TABLE 3: AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR

AND FISCAL YEAR-END OPTION/SAR VALUES



The following table sets forth information regarding the exercise of stock options during 2004 and the unexercised options held as of the end of 2004 by each of the named
executives:



|                |  |                                 |  |                                                              |  |                                                                      |  |                                                                       |  |               |         |  |  
|--------------- |  | ------------------------------- |  | ------------------------------------------------------------ |  | -------------------------------------------------------------------- |  | --------------------------------------------------------------------- |  | ------------- | ------- |  | -
|                |  | AHISharesAcquiredOnExercise (#) |  | ValueRealized(market priceat exerciseless exerciseprice) ($) |  | Securities UnderlyingUnexercised Options/SARs At Fiscal Year-End (#) |  | Value of Unexercised In- The-Money Options/SARs AtFiscal Year-End ($)
|Name            |  |                                 |  | Exercisable                                                  |  | Unexercisable                                                        |  | Exercisable                                                           |  | Unexercisable
|M. D. Lockhart  |  | 0                               |  | 0                                                            |  | 300,000                                                              |  | 0                                                                     |  | $             | 133,250 |  | 0
|S. J. Senkowski |  | 0                               |  | 0                                                            |  | 14,655                                                               |  | 0                                                                     |  |               | 0       |  | 0
|L. A. Campanaro |  | 0                               |  | 0                                                            |  | 0                                                                    |  | 0                                                                     |  |               | 0       |  | 0
|J. N. Rigas     |  | 0                               |  | 0                                                            |  | 17,000                                                               |  | 0                                                                     |  |               | 0       |  | 0
|M. J. Angello   |  | 0                               |  | 0                                                            |  | 10,570                                                               |  | 0                                                                     |  |               | 0       |  | 0



TABLE 4: LONG TERM
INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR



The following table sets forth
information regarding the long-term incentive plan awards granted during 2004 to each of the named executives:



|                |  |                                            |  |                                                             |  |              |  |          
|--------------- |  | ------------------------------------------ |  | ----------------------------------------------------------- |  | ------------ |  | ---------
|Name            |  | PerformancePeriod UntilMaturation orPayout |  | Estimated Future Payouts Under Non-Stock Price- Based Plans
|                |  | Threshold ($)                              |  | Target ($)                                                  |  | Maximum4 ($)
|M. D. Lockhart  |  | 2/23/2004 12/31/2005                      |  |                                                             |  | 1,240,0001   |  | 1,240,000
|M. D. Lockhart  |  | 2/23/2004 12/31/2005                      |  |                                                             |  | 1,860,0002   |  | 2,790,000
|S. J. Senkowski |  | 1/01/2004 12/31/2005                      |  |                                                             |  | 440,0003     |  | 528,000  
|L. A. Campanaro |  | 1/01/2004 12/31/2005                      |  |                                                             |  | 415,1503     |  | 498,180  
|J. N. Rigas     |  | 1/01/2004 12/31/2005                      |  |                                                             |  | 262,5003     |  | 315,000  
|M. J. Angello   |  | 1/01/2004 12/31/2005                      |  |                                                             |  | 265,5003     |  | 318,600  

---

|1) | Mr. Lockharts cash incentive award will be earned in direct proportion to the ratio of
(1) three times the increase in 2005 earnings before interest, taxes, depreciation and amortization (EBITDA) over 2003 EBITDA to (2) 2003 EBITDA. EBITDA results exclude the impact of bankruptcy-related expense/income, restructuring charges and
significant unusual items. No threshold payment level has been established. Cash payments earned will be paid in early 2006.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|2) | Mr. Lockharts second cash incentive award will be determined on the basis of a factor related to the EBITDA compound annual growth percentage comparing 2005 to
2003, multiplied by a number equal to 1 plus the ratio of (1) the dollar increase in EBITDA from 2003 to 2005 to (2) 2003 EBITDA. EBITDA results exclude the impact of bankruptcy-related expenses/income, restructuring charges and significant unusual
items. No threshold payment level has been established. Cash payments earned will be paid in early 2006.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3) | This award will be earned based on cumulative adjusted operating income results for 2004 and 2005 and paid in early 2006. The target and actual results exclude the
impact of interest expense/income, bankruptcy-related expense/income, restructuring charges and significant unusual items.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4) | Under the terms of the 1999 Long-Term Incentive Plan, the maximum payment to any one participant pursuant to a Cash Incentive Award with respect to any one year is
$3 million.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



BENEFITS FROM RETIREMENT PLANS



The following table shows the estimated pension benefits payable to a participant at normal
retirement age under Armstrongs Retirement Income Plan and Retirement Benefit Equity Plan. The Retirement Income Plan is a qualified defined benefit pension plan. Salaried employees hired after December 31, 2004 will not participate in this
plan but will receive an enhanced match under the 401(k) savings plan. The Retirement Benefit Equity Plan is an unfunded, nonqualified supplemental pension plan. It provides participants with benefits that would otherwise be denied by reason of
certain Internal Revenue Code limitations on qualified plan benefits. The amounts shown in Table 5 are based on compensation that is covered under the plans and years of service with AWI and its subsidiaries (plus additional years of credited
service awarded).



TABLE 5: PENSION PLAN TABLE

ANNUAL RETIREMENT BENEFIT BASED ON SERVICE1



|              |           |          |   |          |  |          |         |          |   |          |  |          |           |  |   |           |  |   |          
|------------- | --------- | -------- | - | -------- |  | -------- | ------- | -------- | - | -------- |  | -------- | --------- |  | - | --------- |  | - | ---------
|Remuneration2 |           | 15 Years |   | 20 Years |  | 25 Years |         | 30 Years |   | 35 Years |  | 40 Years
|$             | 200,000   |          | $ | 43,000   |  | $        | 58,000  |          | $ | 72,000   |  | $        | 86,000    |  | $ | 101,000   |  | $ | 113,000  
|$             | 400,000   |          | $ | 90,000   |  | $        | 120,000 |          | $ | 150,000  |  | $        | 179,000   |  | $ | 209,000   |  | $ | 233,000  
|$             | 600,000   |          | $ | 136,000  |  | $        | 182,000 |          | $ | 227,000  |  | $        | 272,000   |  | $ | 318,000   |  | $ | 354,000  
|$             | 800,000   |          | $ | 183,000  |  | $        | 244,000 |          | $ | 305,000  |  | $        | 365,000   |  | $ | 426,000   |  | $ | 474,000  
|$             | 1,000,000 |          | $ | 229,000  |  | $        | 306,000 |          | $ | 382,000  |  | $        | 458,000   |  | $ | 535,000   |  | $ | 595,000  
|$             | 1,200,000 |          | $ | 276,000  |  | $        | 368,000 |          | $ | 460,000  |  | $        | 551,000   |  | $ | 643,000   |  | $ | 715,000  
|$             | 1,400,000 |          | $ | 322,000  |  | $        | 430,000 |          | $ | 537,000  |  | $        | 644,000   |  | $ | 752,000   |  | $ | 836,000  
|$             | 1,600,000 |          | $ | 369,000  |  | $        | 492,000 |          | $ | 615,000  |  | $        | 737,000   |  | $ | 860,000   |  | $ | 956,000  
|$             | 1,800,000 |          | $ | 415,000  |  | $        | 554,000 |          | $ | 692,000  |  | $        | 830,000   |  | $ | 969,000   |  | $ | 1,077,000
|$             | 2,000,000 |          | $ | 462,000  |  | $        | 616,000 |          | $ | 770,000  |  | $        | 923,000   |  | $ | 1,077,000 |  | $ | 1,197,000
|$             | 2,200,000 |          | $ | 508,000  |  | $        | 678,000 |          | $ | 847,000  |  | $        | 1,016,000 |  | $ | 1,186,000 |  | $ | 1,318,000

---

|1) | Benefits shown assume retirement in 2004. The benefits are computed as a straight life
annuity beginning at age 65 and are not subject to deduction for Social Security or other offsets.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2) | Calculated as the average annual compensation in the three highest paid years during the 10
years prior to retirement. Annual compensation equals the total of the amounts reported under the columns captioned Salary and Bonus in the Summary Compensation Table (excluding cash retention and long-term incentive
payments) as well as Armstrong contributions under the Bonus Replacement Retirement Plan.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The 2004 annual compensation and estimated years of service for plan purposes for each of the executives named in the Summary Compensation Table were as follows:



M. D. Lockhart - $920,000 (13.8 years); S. J. Senkowski - $634,823 (31.6 years); M.J.
Angello - $378,950 (21.9 years); and J. N. Rigas - $365,000 (22.8 years). Mr. Campanaro was not vested in the plans. Under his employment agreement, Mr. Lockhart receives two years of service credit for every one year of actual service toward the
calculation of his pension benefits under the Retirement Benefit Equity Plan and five additional years of service credit, which are reflected in the numbers above. Estimated years of service include credit for prior service awarded to M.J. Angello
(14 years) and J. N. Rigas (17 years) upon their employment with Armstrong. The Armstrong retirement benefit for Messrs. Angello and Rigas will be reduced by the value of any defined benefit pension payable by previous employers for the respective
period of the prior service credit.



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Special provisions apply if the Retirement Income Plan is terminated within five years following an Extraordinary Event,
as this item is defined in the plan. In that event, plan liabilities will first be satisfied; then, remaining plan assets will be applied to increase retirement income to employees. The amount of the increase is based on the assumption that the
employee would have continued employment with Armstrong until retirement. Messrs. Lockhart, Senkowski, Angello and Rigas would be entitled to this benefit.



Pension enhancement provisions apply in the event that a salaried member is terminated other than for cause or resigns for good reason, as those terms are defined in the
plan, within two years following a change in control of AHI. If those members have at least 10 years of service and are at least 50 years in age, they would be eligible for early retirement without certain normal reductions applying. Members with 15
or more years of service would also receive credit under the plan for an additional five years of service. Effective March 1, 2004, salaried members ceased to accrue additional pension benefits under these pension enhancement provisions and no such
benefits will be paid from the Retirement Benefit Equity Plan.



Compensation
of Directors



AHI and Armstrong do not separately compensate directors who
are employees for services as a director. AHI and Armstrong pay directors who are not employees a retainer of $90,000 per year. Shared directors receive only a single retainer. The Audit Committee chairman receives an annual fee of $20,000 and the
chairpersons of the Management Development and Compensation Committee, and the Nominating and Governance Committee each receive an annual fee of $10,000. AHI and Armstrong directors who are not employees are paid $2,500 per day plus reasonable
expenses for special assignments including special meetings in connection with Board activity.



Management Development and Compensation Committee and Interlocks and Insider Participation



The Management Development and Compensation Committee members are Jerre L. Stead (Chairman); Judith R. Haberkorn; and Ruth M. Owades. John A. Krol served as a Committee
member during 2004 prior to his retirement from the Board of Directors on March 31, 2004. The Management Development and Compensation Committee establishes the overall philosophy and policies governing compensation programs, including those subject
to Section 162(m) of the Internal Revenue Code, for AHI and Armstrong management.



None of the members of the Management Development and Compensation Committee is a current or former officer of the Company or was a party to any related party transaction (as determined under SEC disclosure requirements) involving the
Company during the year ended December 31, 2004.



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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS



a) Stock Ownership of Certain Beneficial Owners



AHI indirectly owns all of the capital stock of AWI. The following table1sets forth, as of February 15, 2005, unless otherwise indicated, each person or entity known to AHI that may be deemed to have beneficial ownership of more than 5% of the outstanding AHI common stock.



|                                                                                                                                                                  |  |                                          |  |                              |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- |  | ---------------------------- | -
|Name And Address OfBeneficial Owner                                                                                                                               |  | Amount And Nature OfBeneficial Ownership |  | Percent Of ClassOutstanding2 |  
|JP Morgan Chase3 270 Park Avenue New York, NY
10017                                                                                                               |  | 3,613,2254                               |  | 8.9                          | %
|Harbert Distressed Investment Management Fund,
Ltd.5 c/o International
fund Services (Ireland) Ltd. Third Floor, Bishops
Square Redmonds Hill Dublin 2, Ireland |  | 2,770,246                                |  | 6.8                          | %
|Chesapeake Partners Management Co. Inc.6 1829 Reisterstown Road, Suite 420 Baltimore, MD 21208                                                                    |  | 2,614,000                                |  | 6.4                          | %
|Royce & Associates, LLC 1414 Avenue of the
Americas New York, NY 10019                                                                                            |  | 2,419,500                                |  | 5.9                          | %
|Glenview Capital Management, LLC 399 Park Avenue, Floor
39 New York, NY 10022                                                                                     |  | 2,332,562                                |  | 5.7                          | %

---

|1) | In accordance with applicable rules of the Securities and Exchange Commission, this
information is based on Schedule 13G information filed in February 2005.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|2) | In accordance with applicable rules of the Securities and Exchange Commission, this
percentage is based upon the total 40,668,892 shares of AHIs common stock that were outstanding on December 31, 2004.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3) | JP Morgan Chase serves as the trustee of the Stock Ownership Armstrong Holdings Stock Fund of
the Retirement Savings and Stock Ownership Plan (RSSOP). As trustee, JP Morgan Chase may be deemed to be the beneficial owner of 3,613,225 shares held in the trusts. JP Morgan Chase is obligated to vote, tender, or exchange any Common Stock
beneficially owned by the RSSOP Trust as directed by participants in RSSOP. JP Morgan Chase votes these shares in accordance with the participants direction. Shares that are unallocated and any allocated shares for which no instructions are
received, are voted in the same proportion as the shares of Common Stock for which instructions are received. JP Morgan Chase directly votes the shares beneficially owned by the Retirement Income Plan.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4) | Number of shares held as of December 31, 2004.
|-- | ----------------------------------------------

|5) | Harbert Distressed Investment Management Fund, Ltd. filed a Schedule 13G on February 14,
2005. Harbert Distressed Investment Management Fund, Ltd. indicated it and its affiliated parties, HMC Distressed Investment Offshore Manager, L.L.C., HMC Investors, L.L.C., Philip Falcone, Raymond J. Harbert and Michael D. Luce own in the aggregate
2,770,246 shares.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6) | The Schedule 13G filed on March 7, 2005 by Chesapeake Partners Management Co. Inc. was a
joint filing in accordance with the provisions of Rule 13-d-1(k) of the Securities Exchange Act, as amended. Chesapeake Partners Management Co. Inc. is the beneficial owner of 2,614,000 shares. 1,355,835 shares are held for the account of Chesapeake
Partners Limited Partnership and 1,258,165 shares are held for the account of Chesapeake Partners International Ltd.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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b) Security Ownership of Management



The following table shows the amount of AHI stock that each director, each individual named in the Summary Compensation Table and all
directors and executive officers owned as a group. The ownership rights in these shares consist of sole voting and investment power, except where otherwise indicated. No named individual beneficially owns 1% or more of the outstanding common shares.
Collectively, all of the directors and executive officers as a group beneficially own 1.2% of the outstanding common shares. This information is as of January 31, 2005.



|                                              |  |         |  |                                        |  |                           |  |                  |  |               
|--------------------------------------------- |  | ------- |  | -------------------------------------- |  | ------------------------- |  | ---------------- |  | --------------
|Name                                          |  | Stock1  |  | Stock OptionsExercisablewithin 60 days |  | Total BeneficialOwnership |  | RestrictedStock2 |  | PhantomShares3
|H. Jesse Arnelle                              |  | 2,044   |  |                                       |  | 2,044                     |  |                 |  | 1,689         
|Judith R. Haberkorn                           |  | 1,084   |  | 4,970                                  |  | 6,054                     |  |                 |  | 1,910         
|Michael D. Lockhart                           |  | 100,124 |  | 300,000                                |  | 400,124                   |  |                 |  |              
|James E. Marley                               |  | 3,022   |  | 1,410                                  |  | 4,432                     |  |                 |  | 8,086         
|Ruth M. Owades                                |  | 5,000   |  |                                       |  | 5,000                     |  |                 |  |              
|John. J. Roberts                              |  |        |  |                                       |  |                          |  |                 |  |              
|M. Edward Sellers                             |  |        |  |                                       |  |                          |  |                 |  |              
|Jerre L. Stead                                |  | 4,400   |  | 3,260                                  |  | 7,660                     |  |                 |  | 2,094         
|Matthew J. Angello                            |  | 2,262   |  | 10,570                                 |  | 12,832                    |  | 2,756            |  |              
|Leonard A. Campanaro                          |  | 124     |  |                                       |  | 124                       |  |                 |  |              
|John N. Rigas                                 |  | 979     |  | 17,000                                 |  | 17,979                    |  |                 |  |              
|Stephen J. Senkowski                          |  | 3,235   |  | 14,655                                 |  | 17,890                    |  | 1,995            |  |              
|Director and officers as a group (13 persons) |  | 126,506 |  | 366,465                                |  | 492,971                   |  | 6,198            |  | 14,062        

---

|1) | Includes the following shares that may be determined to be owned by the employee through the
employee stock ownership accounts of AHIs Retirement Savings and Stock Ownership Plan (RSSOP): M. D. Lockhart  124; S. J. Senkowski  2,186; M. J. Angello  1,407; L.A. Campanaro  124; J. N. Rigas  979
and executive officers as a group  11,274. Includes the following shares indirectly owned and held in the savings accounts of the RSSOP accounts of the following individuals: S. J. Senkowski  38; M. J. Angello  563 and executive
officers as a group  2,029. Includes the following shares indirectly owned and held in the Bonus Replacement Retirement Plan accounts: M. J. Angello  292 and executive officers as a group  292.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2) | Includes restricted shares, some of which have been deferred and are held in trust. The
participants have voting power but not investment power.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------

|3) | Includes phantom shares held in a stock subaccount under the Deferred Compensation Plan. The
participants have no voting or investment power.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------

|
|



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Equity Compensation Plan Information



No equity-based compensation has been granted since AWI filed for relief under Chapter 11 in December 2000, other than commitments entered
into prior to the Chapter 11 filing.



The following table provides information
as of December 31, 2004 regarding securities that were authorized for issuance under pre-December 2000 grants pursuant to equity compensation plans:



|                                                            |  |                                                                                              |  |                                                                              |       |                                                                                                                                           |          
|----------------------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------- | ----- | ----------------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan category                                               |  | Number of securities tobe issued upon exerciseof outstanding options,warrants and
rights (a) |  | Weighted-averageexercise price ofoutstanding options,warrants and rights1(b) |       | Number of securitiesremaining available forfuture issuance underequity
compensationplans (excludingsecurities reflected incolumn (a)) (c)
|Equity compensation plans approved by security holders      |  | 2,278,096                                                                                    |  | $                                                                            | 29.57 |                                                                                                                                           | 4,538,709
|Equity compensation plans not approved by security holders2 |  | 108,260                                                                                      |  |                                                                              |      |                                                                                                                                           | 504,443  
|                                                            |  |                                                                                              |  |                                                                              |       |                                                                                                                                           |          
|Total                                                       |  | 2,386,356                                                                                    |  | $                                                                            | 28.23 |                                                                                                                                           | 5,043,152
|                                                            |  |                                                                                              |  |                                                                              |       |                                                                                                                                           |          

---

|1) | Restricted stock included in weighted-average exercise price as $0 because it has no exercise
price.
|-- | ----------------------------------------------------------------------------------------------------

|2) | The Stock Award Plan was adopted by the AHI Board of Directors effective July 24, 2000. The
purpose of the plan was to providing a portion of the compensation for officers, directors and key employees in shares of common stock pursuant to the terms of the plan. The plan is administered by the Management Development and Compensation
Committee and provides for the grant of Restricted Stock Awards and Stock Awards which may be subject to certain terms and conditions established by the Committee. The awards were to be used for the purposes of recruitment, recognition and retention
of eligible participants.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Mr. H. Jesse Arnelle is Of Counsel with the law firm of Womble Carlyle Sandridge & Rice, PLLC. Armstrong has retained Womble Carlyle Sandridge & Rice, PLLC for many years, including 2004 and 2003. Mr. Arnelle
receives no benefit from, and has no interest in, the fees the company pays to that law firm. Mr. Arnelles relationship with this law firm does not prevent him from being considered an independent outside director under SEC or NASDAQ rules.



During 2004, Stratford Management Company, Inc. purchased products from our
Cabinets segment in the amount of $120,511. The President of Stratford Management Co. is the brother of David E. Gordon, who was President of our Cabinets segment during most of 2004. The transactions were all in the ordinary course of business.



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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES



Professional Audit Fee Services Rendered



The following table
presents fees for professional audit services rendered by KPMG LLP for the audit of AHIs annual financial statements for 2004 and 2003, and fees billed for other services rendered by KPMG LLP. For the purposes of this table, audit fees are for
services rendered in connection with the audit of AHIs financial statements as of and for the year ended December 31, 2004, for which a portion of the billings occurred or will occur in 2005. All fees in 2004 were pre-approved by the Audit
Committee. In 2003, all but $13,000 of the fees were pre-approved by the Audit Committee.



|                             |  |      |       |      |   |      
|---------------------------- |  | ---- | ----- | ---- | - | -----
|(amounts in 000s)           |  | 2004 |       | 2003
|Audit Fees                   |  | $    | 3,950 |      | $ | 3,650
|Audit Related Fees(1)        |  |      | 900   |      |   | 760  
|                             |  |      |       |      |   |      
|Audit and Audit Related Fees |  |      | 4,850 |      |   | 4,410
|                             |  |     
|Tax Fees(2)                  |  |      | 915   |      |   | 1,480
|                             |  |     
|All Other Fees(3)            |  |      | 105   |      |   | 890  
|                             |  |      |       |      |   |      
|Total Fees                   |  | $    | 5,870 |      | $ | 6,780
|                             |  |      |       |      |   |      

---

|1) | Audit Related Fees consisted principally of fees for audits of financial statements of
certain employee benefit plans, accounting research assistance on technical topics (including Chapter 11 related accounting issues), limited agreed upon procedures over certain internal controls and other consultations relating to internal controls,
international financial reporting standards at some foreign locations and other issues with respect to foreign statutory financial statements.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2) | Tax Fees consisted of fees for tax consultation and tax compliance services.
|-- | ----------------------------------------------------------------------------

|3) | All Other Fees consist primarily of fees for Bankruptcy Court fee application preparation for
2004 and primarily Chapter 11 corporate recovery assistance services for 2003.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Audit Committee Pre-approval Policies and Procedures



The Audit Committee of Armstrong Holdings, Inc.s Board of Directors adopted a policy and procedures that require their pre-approval of any services provided by the firm that serves as our independent auditor.
Per the policy, management cannot engage the independent auditor for any services without the Audit Committees pre-approval. Further, the Audit Committee delegates to the Committee chair the authority to pre-approve services not exceeding 5%
of the total audit fees for the year for purposes of handling emergency needs, with a report to the full Committee of such approvals at its next meeting. The policy and procedures comply with Section 10A(i) of the Securities Exchange Act.



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PART IV



ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



|            |  |                                                                                                                                                                                                                                                                                                                                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            | 
|(a)(1)(2)   |  | The financial statements and schedule of Armstrong Holdings, Inc. and Armstrong World Industries, Inc. filed as a part of this 2004 Annual Report on Form 10-K are listed in the Index to
Financial Statements and Schedules on page 50.                                                                                          
|            | 
|(a)(2)      |  | The financial statements required to be filed pursuant to Item 15(d) of Form 10-K are:                                                                                                                                                                                                                                              
|            | 
|            |  | Worthington Armstrong Venture consolidated financial statements as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002 (filed herewith as Exhibit
99.1).                                                                                                                                         
|            | 
|(a)(3)      |  | The following exhibits are filed as a part of this 2004 Annual Report on Form 10-K.                                                                                                                                                                                                                                                 
|            | 
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                         
|No. 2.1     |  | Armstrong Holdings, Inc. Plan of Dissolution, Winding Up and Distribution is incorporated by reference from Exhibit A to the Proxy Statement of Armstrong Holdings, Inc. filed on October 16,
2003.                                                                                                                                 
|            | 
|No. 2.2     |  | Armstrong World Industries, Inc.s Revised Projected Financial Information submitted to the U.S. Bankruptcy Court for the District of Delaware, constituting Exhibit C to the Disclosure
Statement, is incorporated by reference from the Current Report filed on Form 8-K on November 20, 2003 wherein it appeared as Exhibit 99.1.
|            | 
|No. 2.3     |  | Certain Exhibits to Armstrong World Industries, Inc.s Fourth Amended Plan of Reorganization submitted to the U.S. District Court for the District of Delaware are incorporated by
reference from the Current Report filed on Form 8-K on September 8, 2003.                                                                        
|            | 
|No. 2.4     |  | Armstrong World Industries, Inc.s Disclosure Statement submitted to the U.S. District Court for the District of Delaware is incorporated by reference from the Current Report filed on
Form 8-K on May 23, 2003.                                                                                                                   
|            | 
|No. 2.5     |  | Armstrong World Industries, Inc.s Fourth Amended Plan of Reorganization submitted to the U.S. District Court for the District of Delaware on May 23, 2003, and as modified by
modifications filed with the Bankruptcy Court on October 17, 2003, November 10, 2003 and December 3, 2004.                                           
|            | 
|No. 3.1     |  | Armstrong Holdings, Inc.s Amended and Restated Articles of Incorporation are incorporated herein by reference from the Current Report on Form 8-K dated May 9, 2000, wherein it appeared
as Exhibit 3.1(i). (SEC File No. 000-50408)                                                                                               
|            | 
|No. 3.2     |  | Armstrong Holdings, Inc.s Bylaws, effective May 1, 2000 are incorporated by reference from the 2000 Annual Report on Form 10-K wherein they appear as Exhibit 3(b). (SEC File No.
000-50408)                                                                                                                                       
|            | 
|No. 3.3     |  | Armstrong World Industries, Inc.s Restated Articles of Incorporation, as amended, are incorporated by reference from the 1994 Annual Report on Form 10-K wherein they appear as Exhibit
3(b). (SEC File No. 1-2116)                                                                                                                
|            | 
|No. 3.4     |  | Armstrong World Industries, Inc.s Bylaws as amended November 9, 2000 are incorporated by reference from the 2000 Annual Report on Form 10-K wherein they appear as Exhibit 3(d). (SEC
File No. 1-2116)                                                                                                                             



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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No. 4.1 |  | Armstrong Holdings, Inc.s Shareholder Summary of Rights to Purchase Preferred Stock dated as of March, 14, 2000 is incorporated by reference from Armstrong Holdings, Inc.s
registration statement on Form 8-K dated May 9, 2000, wherein it appeared as Exhibit 99.2. (SEC File No. 000-50408)                                                                                                                                                                                                                                                                                    
|        | 
|No. 4.2 |  | Armstrong World Industries, Inc.s Retirement Savings and Stock Ownership Plan effective as of October 1, 1996, as amended April 12, 2001 is incorporated by reference from Armstrong
World Industries, Inc.s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, wherein it appeared as Exhibit 4.* (SEC File No. 1-2116)                                                                                                                                                                                                                                           
|        | 
|No. 4.3 |  | Armstrong World Industries, Inc.s $450,000,000 Credit Agreement (5-year) dated as of October 29, 1998, among Armstrong World Industries, Inc., The Chase Manhattan Bank, as
administrative agent, and the banks listed therein, is incorporated by reference from the 1998 Annual Report on Form 10-K, wherein it appeared as Exhibit 4(f). (SEC File No. 1-2116)                                                                                                                                                                                                                   
|        | 
|No. 4.4 |  | Armstrong World Industries, Inc.s Indenture, dated as of August 6, 1996, between Armstrong World Industries, Inc. and The Chase Manhattan Bank, formerly known as Chemical Bank, as
successor to Mellon Bank, N.A., as Trustee, is incorporated by reference from Armstrong World Industries, Inc.s registration statement on Form S-3/A dated August 14, 1996, wherein it appeared as Exhibit 4.1. (SEC File No.
1-2116)                                                                                                                                                          
|        | 
|No 4.5  |  | Instrument of Resignation, Appointment and Acceptance dated as of December 1, 2000 among Armstrong World Industries, Inc., The Chase Manhattan Bank and Wells Fargo Bank Minnesota, National
Association, regarding Armstrong World Industries, Inc.s Indenture, dated as of August 6, 1996, between Armstrong World Industries, Inc. and The Chase Manhattan Bank, formerly known as Chemical Bank, as successor to Mellon Bank, N.A., as
Trustee, is incorporated by reference from the 2000 Annual Report on Form 10-K wherein they appear as Exhibit 4(e). (SEC File No. 1-2116)
|        | 
|No. 4.6 |  | Copy of portions of Armstrong World Industries, Inc.s Board of Directors Pricing Committees resolutions establishing the terms and conditions of $200,000,000 of 6.35% Senior
Notes Due 2003 and $150,000,000 of 61/2% Senior Notes Due 2005, is incorporated by reference from the 1998
Annual Report on Form 10-K, wherein it appeared as Exhibit 4(h). (SEC File No. 1-2116)                                                                                                                                                                                                   
|        | 
|No. 4.7 |  | Copy of portions of Armstrong World Industries, Inc.s Board of Directors Pricing Committees resolutions establishing the terms and conditions of $180,000,000 of 7.45% Senior
Quarterly Interest Bonds Due 2038, is incorporated by reference from the 1998 Annual Report on Form 10-K, wherein it appeared as Exhibit 4(i). (SEC File No. 1-2116)                                                                                                                                                                                                                                
|        | 
|No. 4.8 |  | Note Purchase Agreement dated June 19, 1989 for 8.43% Series A Guaranteed Serial ESOP Notes due 1989 2001 and 9.00% Series B Guaranteed Serial ESOP Notes due 2000-2004 for the Armstrong
World Industries, Inc. Employee Stock Ownership Plan (Share in Success Plan) Trust, with Armstrong World Industries, Inc. as guarantor is incorporated by reference from Armstrong Holdings, Inc. and Armstrong World Industries, Inc.s
registration statement on Form 10-Q for the quarter ended September 30, 2000, wherein it appeared as Exhibit 4(a). (SEC File No. 1-2116)       
|        | 
|No. 4.9 |  | Armstrong World Industries, Inc.s $300,000,000 Revolving Credit and Guarantee Agreement dated December 6, 2000, between Armstrong World Industries, Inc. and The Chase Manhattan Bank and
the banks referenced therein; the First Amendment to this Agreement, dated February 2, 2001; and the Amendment Letter to this Agreement, dated February 28, 2001, are incorporated by reference from the 2000 Annual Report on Form 10-K wherein they
appear as Exhibit 4(i). (SEC File No. 1-2116)                                                                                       



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|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |  | Armstrong Holdings, Inc. and Armstrong World Industries, Inc. agree to furnish to the Commission upon request copies of instruments defining the rights of holders of long-term debt of the
registrants and their subsidiaries which are not filed herewith in accordance with applicable rules of the Commission because the total amount of securities authorized thereunder does not exceed 10% of the total assets of the registrants and their
subsidiaries on a consolidated basis.
|         | 
|No. 4.10 |  | Amendment to Armstrong World Industries, Inc.s Debtor in Possession Credit Facility dated October 31, 2003, is incorporated by reference from the 2003 Annual Report on Form 10-K wherein
it appeared as Exhibit 4(j).                                                                                                                                                                                                                                                                  
|         | 
|No. 4.11 |  | Indenture, dated as of March 15, 1988, between Armstrong World Industries, Inc. and Morgan Guaranty Trust Company of New York, as Trustee, as to which The First National Bank of Chicago is
successor trustee, (relating to Armstrong World Industries, Inc.s $125 million 93/4% Debentures due 2008
and Series A Medium Term Notes) is incorporated by reference from the 1995 Annual Report on Form 10-K wherein it appeared as Exhibit 4(c). (SEC File No. 1-2116)                  
|         | 
|No. 4.12 |  | Senior Indenture dated as of December 23, 1998 between Armstrong World Industries, Inc. and First National Bank of Chicago, as Trustee, is incorporated by reference from Armstrong World
Industries, Inc.s Registration Statement on Form S-3 (File No. 333 - 74501) dated March 16, 1999, wherein it appeared as Exhibit 4.3. (SEC File No. 1-2116)                                                                                                                                   
|         | 
|No. 4.13 |  | Global Note representing $200 million of 7.45% Senior Notes due 2029 is incorporated by reference from the Current Report on Form 8-K filed on May 29, 1999, wherein it appeared as Exhibit
4.2. (SEC File No. 1-2116)                                                                                                                                                                                                                                                                   
|         | 
|No. 4.14 |  | Agreement and Plan of Merger, dated as of June 30, 1999 by and among AISI Acquisition Corp. and Armstrong World Industries, Inc and Armstrong Industrial Specialties, Inc. is incorporated by
reference from the Current Report on Form 8 - K filed on July 14, 1999, wherein it appeared as Exhibit 1. (SEC File No. 1-2116)                                                                                                                                                            
|         | 
|No. 10.1 |  | Armstrong World Industries, Inc.s Agreement Concerning Asbestos-Related Claims dated June 19, 1985, (the Wellington Agreement) among Armstrong World Industries, Inc. and
other companies is incorporated by reference from the 1997 Annual Report on Form 10-K wherein it appeared as Exhibit 10(i)(a). (SEC File No. 1-2116)                                                                                                                                                        
|         | 
|No. 10.2 |  | Producer Agreement concerning Center for Claims Resolution, as amended, among Armstrong World Industries, Inc. and other companies is incorporated by reference from the 1999 Annual Report on
Form 10-K wherein it appeared as Exhibit 10(i)(b). (SEC File No. 1-2116)                                                                                                                                                                                                                  
|         | 
|No. 10.3 |  | Armstrong World Industries, Inc.s 1993 Long-Term Stock Incentive Plan is incorporated by reference from the 1993 Proxy Statement wherein it appeared as Exhibit A. * (SEC File No.
1-2116)                                                                                                                                                                                                                                                                                              
|         | 
|No. 10.4 |  | Armstrong World Industries, Inc.s Directors Retirement Income Plan, as amended, is incorporated by reference from the 1996 Annual Report on Form 10-K wherein it appeared as
Exhibit 10(iii)(c). * (SEC File No. 1-2116)                                                                                                                                                                                                                                                               
|         | 
|No. 10.5 |  | Armstrong World Industries, Inc. and Armstrong Holdings, Inc.s Management Achievement Plan for Key Executives, as amended February 26, 2001, is incorporated by reference from the 2000
Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(d). * (SEC File No. 1-2116)                                                                                                                                                                                                   



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|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No. 10.6  |  | Armstrong World Industries, Inc.s Retirement Benefit Equity Plan (formerly known as the Excess Benefit Plan), as amended January 1, 2000 is incorporated by reference from the 1999
Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(e). * (SEC File No. 1-2116)                                                                                                                                                                                                                         
|          | 
|No. 10.7  |  | Armstrong Holdings, Inc.s Deferred Compensation Plan, as amended May 1, 2000, is incorporated by reference from the 2000 Annual Report on Form 10-K wherein it appeared as Exhibit
10(iii)(f) * (SEC File No. 000-50408)                                                                                                                                                                                                                                                                                  
|          | 
|No. 10.8  |  | Armstrong World Industries, Inc.s Severance Pay Plan for Salaried Employees, as amended January 1, 2003 and March 15, 2005. *                                                                                                                                                                                                                                                                                                                                                                             
|          | 
|No. 10.9  |  | Armstrong World Industries, Inc.s 1999 Long-Term Incentive Plan is incorporated by reference from the 1999 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(j). * (SEC
File No. 1-2116)                                                                                                                                                                                                                                                                                                  
|          | 
|No. 10.10 |  | Form of Change in Control Agreement between Armstrong World Industries, Inc. and certain of its officers is incorporated by reference from the 2000 Annual Report on Form 10-K wherein they
appear as Exhibit 10(iii)(k), together with a schedule identifying those executives and the material differences among the agreements to which each executive is a party, incorporated by reference from the 2003 Annual Report on Form 10-K wherein it
appeared as Exhibit 10(iii)(j). * (SEC File No. 1-2116)
|          | 
|No. 10.11 |  | Change in Control Agreement between Armstrong Holdings, Inc. and Michael D. Lockhart, dated August 7, 2000 is incorporated by reference from Armstrong Holdings, Inc. and Armstrong World
Industries, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, wherein it appeared as Exhibit 10(e). * (SEC File No. 000-50408)                                                                                                                                                      
|          | 
|No. 10.12 |  | Form of Indemnification Agreement between Armstrong Holdings, Inc., Armstrong World Industries, Inc. and Messrs. Arnelle, Marley, Stead and Ms. Haberkorn, is incorporated by reference from
Armstrong Holdings, Inc. and Armstrong World Industries, Inc.s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, wherein it appeared as Exhibit 10(iii)(a). * (SEC File No. 000-50408)                                                                                                      
|          | 
|No. 10.13 |  | Form of Indemnification Agreement between Armstrong Holdings, Inc., Armstrong World Industries Inc. and certain Directors and Officers, together with schedules identifying those Directors and
Officers and the material differences among the agreements to which each executive is a party, are incorporated by reference from the 2003 Annual Report on Form 10-K wherein they appeared as Exhibit 10(iii)(m), Exhibit 10(iii)(n) and Exhibit
10(iii)(q). * (SEC File No. 000-50408)                   
|          | 
|No. 10.14 |  | Form of Indemnification Agreement between Armstrong Holdings, Inc., Armstrong World Industries Inc. and M. Edward Sellers, dated May 1, 2001 is incorporated by reference from the 2001 Annual
Report of Form 10-K wherein it appeared as Exhibit 10(iii)(s). * (SEC File No. 000-50406)                                                                                                                                                                                                                   
|          | 
|No. 10.15 |  | Form of Indemnification Agreement between Armstrong Holdings, Inc. and Armstrong World Industries, Inc. and Ms. Ruth M. Owades and Mr. John J. Roberts, incorporated by reference from the 2003
Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(q). *                                                                                                                                                                                                                                    
|          | 
|No. 10.16 |  | Armstrong World Industries, Inc.s Bonus Replacement Retirement Plan, dated as of January 1, 1998, as amended, is incorporated by reference from the 1998 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(iii)(m). * (SEC File No. 1-2116)                                                                                                                                                                                                                                                    



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|          |  |                                                                                                                                                                                                                                                                                                                                                                    
|--------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No. 10.17 |  | Employment Agreement between Armstrong Holdings, Inc. and Michael D. Lockhart dated August 7, 2000 is incorporated by reference from Armstrong Holdings, Inc. and Armstrong World Industries,
Inc.s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 wherein it appeared as Exhibit 10(a). * (SEC File No. 000-50408)                       
|          | 
|No. 10.18 |  | Amendment to August 7, 2000 Employment Agreement between Armstrong Holdings, Inc. and Michael D. Lockhart is incorporated by reference from Armstrong Holdings, Inc. and Armstrong World
Industries, Inc.s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, wherein it appeared as Exhibit 10. * (SEC File No. 000-50408)                      
|          | 
|No. 10.19 |  | Order Authorizing and Approving Retention Program for Key Employees and Approving Assumption of Executory Contracts dated April 18, 2001 is incorporated by reference from the 2001 Annual
Report on Form 10-K wherein it appeared as Exhibit 10(iii)(u).                                                                                                          
|          | 
|No. 10.20 |  | Armstrong Holdings, Inc.s Stock Award Plan is incorporated by reference from Armstrong Holdings, Inc.s registration statement on Form S-8 filed August 16, 2000, wherein it
appeared as Exhibit 4.1. * (SEC File No. 000-50408)                                                                                                                                  
|          | 
|No. 10.21 |  | Management Services Agreement between Armstrong Holdings, Inc. and Armstrong World Industries, Inc., dated August 7, 2000 is incorporated by reference from Armstrong Holdings, Inc. and
Armstrong World Industries, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 wherein it appeared as Exhibit 10(g). * (SEC File No. 000-50408)
|          | 
|No. 10.22 |  | Form of Amendment of Restricted Stock Award Agreements between Armstrong Holdings, Inc. and the following executive officers: M.D. Lockhart, M.J. Angello, S.J. Senkowski and W.C. Rodruan
dated July 22, 2002 is incorporated by reference from Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 wherein it appeared as Exhibit 10. *            
|          | 
|No. 10.23 |  | Settlement and Release Agreement between Armstrong Holdings, Inc., Armstrong Worldwide, Inc. and Armstrong World Industries, Inc. dated May 9, 2003, incorporated by reference from the 2003
Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(aa).                                                                                                
|          | 
|No. 10.24 |  | Hiring Agreement between Armstrong World Industries, Inc. and F. Nicholas Grasberger dated January 6, 2005 is incorporated by reference from the Current Report filed on Form 8-K on January 6,
2005, wherein it appeared as Exhibit 10.1. *                                                                                                                       
|          | 
|No. 10.25 |  | Change in Control Agreement between Armstrong World Industries, Inc. and F. Nicholas Grasberger dated January 6, 2005 is incorporated by reference from the Current Report filed on Form 8-K on
January 6, 2005, wherein it appeared as Exhibit 10.2. *                                                                                                            
|          | 
|No. 10.26 |  | Indemnification Agreement between Armstrong World Industries, Inc. and F. Nicholas Grasberger dated January 6, 2005 is incorporated by reference from the Current Report filed on Form 8-K on
January 6, 2005, wherein it appeared as Exhibit 10.3. *                                                                                                              
|          | 
|No. 10.27 |  | Form of grant letter regarding executive officer participation in Armstrong World Industries, Inc.s retention payment program together with the schedule of participating Executive
Officers is incorporated by reference from the Current Report filed on Form 8-K on February 3, 2005, wherein they appeared as Exhibits 10.1 and 10.2. *                       



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|          |  |                                                                                                                                                                                                                                                                       
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No. 10.28 |  | Order of the U.S. District Court Authorizing and Approving Continued Cash Retention Program for Key Employees dated December 9, 2004, is incorporated by reference from the Current Report
filed on Form 8-K on February 3, 2005, wherein it appeared as Exhibit 99.1.
|          | 
|No. 10.29 |  | Executive Officer Compensation Arrangements between Armstrong World Industries Inc. and certain executive officers. *                                                                                                                                                 
|          | 
|No. 10.30 |  | Form of Long-Term Incentive Plan 2005 award letter regarding executive participation in the 1999 Long-Term Incentive Plan is incorporated by reference form the Current Report filed on Form
8-K on February 25, 2005, wherein it appeared as Exhibit 10.5. *         
|          | 
|No. 10.31 |  | Summary of Armstrong World Industries, Inc.s Nonqualified Deferred Compensation Plan. *                                                                                                                                                                              
|          | 
|No. 10.32 |  | Summary of Armstrong Nonemployee Director Compensation. *                                                                                                                                                                                                             
|          | 
|No. 11.1  |  | Computation for basic earnings per share.                                                                                                                                                                                                                             
|          | 
|No. 11.2  |  | Computation for diluted earnings per share.                                                                                                                                                                                                                           
|          | 
|No. 21.1  |  | List of Armstrong Holdings, Inc. and Armstrong World Industries, Inc.s domestic and foreign subsidiaries.                                                                                                                                                            
|          | 
|No. 23.1  |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                             
|          | 
|No. 23.2  |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                             
|          | 
|No. 23.3  |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                             
|          | 
|No. 23.4  |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                             
|          | 
|No. 24.1  |  | Power of Attorney and authorizing resolution.                                                                                                                                                                                                                         
|          | 
|No. 31.1  |  | Certification of Principal Executive Officer of Armstrong Holdings, Inc. required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act.                                                                                                                                 
|          | 
|No. 31.2  |  | Certification of Principal Financial Officer of Armstrong Holdings, Inc. required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act.                                                                                                                                 
|          | 
|No. 31.3  |  | Certification of Principal Executive Officer of Armstrong World Industries, Inc. required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act.                                                                                                                         
|          | 
|No. 31.4  |  | Certification of Principal Financial Officer of Armstrong World Industries, Inc. required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act.                                                                                                                         
|          | 
|No. 32.1  |  | Certification of Chief Executive Officer of Armstrong Holdings, Inc. and Armstrong World Industries, Inc. required by Rule 13a-14(b) and 18 U.S.C. Section 1350 (furnished
herewith).                                                                                 
|          | 
|No. 32.2  |  | Certification of Chief Financial Officer of Armstrong Holdings, Inc. and Armstrong World Industries, Inc. required by Rule 13a-14(b) and 18 U.S.C. Section 1350 (furnished
herewith).                                                                                 



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|         |  |                                                                                                                                                                                                                                                               
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No. 99.1 |  | Worthington Armstrong Venture consolidated financial statements as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001, incorporated by reference from the
Form 10-K/A Amendment No. 2 wherein it appeared as Exhibit 99.1.

---

|* | Management Contract or Compensatory Plan
|- | ----------------------------------------



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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.



ARMSTRONG HOLDINGS, INC.(Registrant)By:

/s/ Michael D. LockhartChairman, Chief Executive Officer and PresidentDate: March 29, 2005




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



Directors and Principal Officers of the registrant AHI:



|                           |  |                                                  
|-------------------------- |  | -------------------------------------------------
|Name                       |  | Title                                            
|Michael D. Lockhart        |  | Chairman, Chief Executive Officer and President  
|                           |  | (Principal Executive Officer)                    
|F. Nicholas Grasberger III |  | Senior Vice President and Chief Financial Officer
|                           |  | (Principal Financial Officer)                    
|William C. Rodruan         |  | Vice President and Controller                    
|                           |  | (Chief Accounting Officer)                       
|H. Jesse Arnelle           |  | Director                                         
|Judith R. Haberkorn        |  | Director                                         
|James E. Marley            |  | Director                                         
|Ruth M. Owades             |  | Director                                         
|John J. Roberts            |  | Director                                         
|M. Edward Sellers          |  | Director                                         
|Jerre L. Stead             |  | Director                                         



By:

/s/ Michael D. Lockhart(Michael D. Lockhart, as attoney-in-fact for AHI directors and on his own behalf)As of March 29, 2005By:

/s/ F. Nicholas Grasberger III(F. Nicholas Grasberger III)As of March 29, 2005By:

/s/ William C. Rodruan(William C. Rodruan)As of March 29, 2005




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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.



ARMSTRONG WORLD INDUSTRIES, INC.(Registrant)By:

/s/ Michael D. LockhartChairman, Chief Executive Officer and PresidentDate: March 29, 2005




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



Directors and Principal Officers of the registrant AWI:



|                           |  |                                                  
|-------------------------- |  | -------------------------------------------------
|Name                       |  | Title                                            
|Michael D. Lockhart        |  | Chairman, Chief Executive Officer and President  
|                           |  | (Principal Executive Officer)                    
|F. Nicholas Grasberger III |  | Senior Vice President and Chief Financial Officer
|                           |  | (Principal Financial Officer)                    
|William C. Rodruan         |  | Vice President and Controller                    
|                           |  | (Chief Accounting Officer)                       
|James E. Marley            |  | Director                                         
|John N. Rigas              |  | Director                                         



By:

/s/ Michael D. Lockhart(Michael D. Lockhart, as attoney-in-fact for James E. Marley and on his own behalf)As of March 29, 2005By:

/s/ F. Nicholas Grasberger III(F. Nicholas Grasberger III)As of March 29, 2005By:

/s/ William C. Rodruan(William C. Rodruan)As of March 29, 2005By:

/s/ John N. Rigas(John N. Rigas)As of March 29, 2005




190



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##### Table of Contents

SCHEDULE II



Armstrong Holdings, Inc. and Armstrong World Industries, Inc.

Valuation and Qualifying Reserves of Accounts Receivable



For Years Ended December 31



|                                         |  |      |        |   |      |   |        |      |  |   |        |  
|---------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                         |  | 2004 |        |   | 2003 |   |        | 2002 | 
|Provision for Losses                     |  |      |        |   |      |   |        |      |  |   |        |  
|Balance at beginning of year             |  | $    | 18.9   |   |      | $ | 20.3   |      |  | $ | 22.0   |  
|Additions charged to earnings            |  |      | 4.1    |   |      |   | 6.4    |      |  |   | 7.8    |  
|Deductions                               |  |      | (10.0  | ) |      |   | (7.8   | )    |  |   | (9.5   | )
|                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Balance at end of year                   |  | $    | 13.0   |   |      | $ | 18.9   |      |  | $ | 20.3   |  
|                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Provision for Discounts                  |  |      |        |   |      |   |        |      |  |   |        |  
|Balance at beginning of year             |  | $    | 47.3   |   |      | $ | 41.4   |      |  | $ | 36.6   |  
|Additions charged to earnings            |  |      | 217.8  |   |      |   | 229.6  |      |  |   | 237.5  |  
|Deductions                               |  |      | (219.6 | ) |      |   | (223.7 | )    |  |   | (232.7 | )
|                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Balance at end of year                   |  | $    | 45.5   |   |      | $ | 47.3   |      |  | $ | 41.4   |  
|                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Total Provision for Discounts and Losses |  |      |        |   |      |   |        |      |  |   |        |  
|Balance at beginning of year             |  | $    | 66.2   |   |      | $ | 61.7   |      |  | $ | 58.6   |  
|Additions charged to earnings            |  |      | 221.9  |   |      |   | 236.0  |      |  |   | 245.3  |  
|Deductions                               |  |      | (229.6 | ) |      |   | (231.5 | )    |  |   | (242.2 | )
|                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Balance at end of year                   |  | $    | 58.5   |   |      | $ | 66.2   |      |  | $ | 61.7   |  
|                                         |  |      |        |   |      |   |        |      |  |   |        |  



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##### Table of Contents

|            |  |                                                                                                                                                                                                                                                                                       
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Index                                                                                                                                                                                                                                                                         
|No. 2.5     |  | Armstrong World Industries, Inc.s Fourth Amended Plan of Reorganization submitted to the Bankruptcy Court for the District of Delaware on May 23, 2003, and as modified by modifications
filed with the Bankruptcy Court on October 17, 2003, November 10, 2003 and December 3, 2004.
|            | 
|No. 10.8    |  | Armstrong World Industries Inc.s Severance Pay Plan for Salaried Employees, as amended January 1, 2003 and March 15, 2005.                                                                                                                                                           
|            | 
|No. 10.29   |  | Executive Officer Compensation Arrangements between Armstrong World Industries Inc. and certain executive officers.                                                                                                                                                                   
|            | 
|No. 10.30   |  | Form of Long-Term Incentive Plan 2005 award letter regarding executive officer participation in the 1999 Long-Term Incentive Plan.                                                                                                                                                    
|            | 
|No. 10.31   |  | Summary of Armstrong World Industries, Inc.s Nonqualified Deferred Compensation Plan                                                                                                                                                                                                 
|            | 
|No. 10.32   |  | Summary of Armstrong Nonemployee Director Compensation.                                                                                                                                                                                                                               
|            | 
|No. 11.1    |  | Computation for basic earnings per share.                                                                                                                                                                                                                                             
|            | 
|No. 11.2    |  | Computation for diluted earnings per share.                                                                                                                                                                                                                                           
|            | 
|No. 21      |  | List of Armstrong Holdings, Inc. and Armstrong World Industries, Inc.s domestic and foreign subsidiaries.                                                                                                                                                                            
|            | 
|No. 23.1    |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                             
|            | 
|No. 23.2    |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                             
|            | 
|No. 23.3    |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                             
|            | 
|No. 23.4    |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                             
|            | 
|No. 24      |  | Power of Attorney and authorizing resolution.                                                                                                                                                                                                                                         
|            | 
|No. 31.1    |  | Certification of Principal Executive Officer of Armstrong Holdings, Inc. required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act.                                                                                                                                                 
|            | 
|No. 31.2    |  | Certification of Principal Financial Officer of Armstrong Holdings, Inc. required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act 2002.                                                                                                                                            
|            | 
|No. 31.3    |  | Certification of Principal Executive Officer of Armstrong World Industries, Inc. required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act.                                                                                                                                         
|            | 
|No. 31.4    |  | Certification of Principal Financial Officer of Armstrong World Industries, Inc. required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act.                                                                                                                                         
|            | 
|No. 32.1    |  | Certification of Chief Executive Officer of Armstrong Holdings, Inc. and Armstrong World Industries, Inc. required by Rule 13a-14(b) and 18 U.S.C. Section 1350.                                                                                                                      
|            | 
|No. 32.2    |  | Certification of Chief Financial Officer of Armstrong Holdings, Inc. and Armstrong World Industries, Inc. required by Rule 13a-14(b) and 18 U.S.C. Section 1350.                                                                                                                      
|            | 
|No. 99.1    |  | Worthington Armstrong Venture consolidated financial statements as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002.