##### Table of Contents

---



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



(Mark One)

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------



For the quarterly period ended March 31, 2005



OR



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



For the transition period from
 to



ARMSTRONG HOLDINGS, INC.

(Exact name
of registrant as specified in its charter)



|                                                               |  |                        |  |                                     
|-------------------------------------------------------------- |  | ---------------------- |  | ------------------------------------
|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



ARMSTRONG WORLD INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                        |  |                                     
|-------------------------------------------------------------- |  | ---------------------- |  | ------------------------------------
|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



Armstrong World
Industries, Inc. meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore participating in the filing of this form in the reduced disclosure format permitted by such Instructions.



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act).



Yes ̈No x



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 ̈



Number of shares of Armstrong Holdings, Inc.s common stock outstanding as of April 19,
2005 - 40,668,690.



---



1



---

##### Table of Contents

TABLE OF CONTENTS



|                                                                                              |  |        
|--------------------------------------------------------------------------------------------- |  | -------
|                                                                                              |  | PAGES  
|SECTION                                                                                       |  |        
|                                                                                              | 
|Cautionary Factors                                                                            |  | 3  5  
|                                                                                              | 
|PART I  FINANCIAL INFORMATION                                                                |  |        
|                                                                                              | 
|Item 1. Condensed Consolidated Financial Statements                                           |  |        
|Armstrong Holdings, Inc., and Subsidiaries                                                    |  | 6  30 
|Report of Independent Registered Public Accounting Firm                                       |  | 31     
|Armstrong World Industries, Inc., and Subsidiaries                                            |  | 32  58
|                                                                                              | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 59  70
|                                                                                              | 
|Item 3.
Quantitative and Qualitative Disclosures about Market Risk                            |  | 71     
|                                                                                              | 
|Item 4.
Controls and Procedures                                                               |  | 71     
|                                                                                              | 
|PART II  OTHER INFORMATION                                                                   |  |        
|                                                                                              | 
|Item 1.
Legal Proceedings                                                                     |  | 72     
|                                                                                              | 
|Item 6.
Exhibits                                                                              |  | 73     
|                                                                                              | 
|Signatures                                                                                    |  | 74     



2



---

##### Table of Contents

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.



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 our 2004 Form 10-K.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



3



---

##### 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.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



4



---

##### Table of Contents

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



| |  | 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 II, Item 1 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.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



5



---

##### Table of Contents



PART I  FINANCIAL INFORMATION



Item 1. Financial Statements



Armstrong
Holdings, Inc., and Subsidiaries

Condensed Consolidated Statements of Earnings

(amounts in millions, except per share amounts)

Unaudited



|                                                                      |  |                             |       |   |      |   |       |  
|--------------------------------------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                                                                      |  | Three Months EndedMarch 31, |      
|                                                                      |  | 2005                        |       |   | 2004 |  
|Net sales                                                             |  | $                           | 840.7 |   |      | $ | 845.0 |  
|Cost of goods sold                                                    |  |                             | 662.5 |   |      |   | 660.4 |  
|                                                                      |  |                             |       |   |      |   |       |  
|Gross profit                                                          |  |                             | 178.2 |   |      |   | 184.6 |  
|Selling, general and administrative expenses                          |  |                             | 170.4 |   |      |   | 147.9 |  
|Restructuring charges, net                                            |  |                             | 8.2   |   |      |   | 2.0   |  
|Equity (earnings) from joint venture                                  |  |                             | (8.1  | ) |      |   | (6.1  | )
|                                                                      |  |                             |       |   |      |   |       |  
|Operating income                                                      |  |                             | 7.7   |   |      |   | 40.8  |  
|Interest expense (unrecorded contractual interest of $21.5 and $21.7) |  |                             | 2.2   |   |      |   | 2.1   |  
|Other non-operating expense                                           |  |                             |      |   |      |   | 0.9   |  
|Other non-operating (income)                                          |  |                             | (2.2  | ) |      |   | (1.5  | )
|Chapter 11 reorganization costs, net                                  |  |                             | 2.0   |   |      |   | 2.5   |  
|                                                                      |  |                             |       |   |      |   |       |  
|Earnings from continuing operations before income taxes               |  |                             | 5.7   |   |      |   | 36.8  |  
|Income tax expense                                                    |  |                             | 8.7   |   |      |   | 16.8  |  
|                                                                      |  |                             |       |   |      |   |       |  
|Net (loss) earnings from continuing operations                        |  | $                           | (3.0  | ) |      | $ | 20.0  |  
|(Loss) from discontinued operations, net of tax of $0.2               |  |                             |      |   |      |   | (0.4  | )
|                                                                      |  |                             |       |   |      |   |       |  
|Net (loss) earnings                                                   |  | $                           | (3.0  | ) |      | $ | 19.6  |  
|                                                                      |  |                             |       |   |      |   |       |  
|Net (loss) earnings per share of common stock, continuing operations: |  |                             |       |   |      |   |       |  
|Basic                                                                 |  | $                           | (0.07 | ) |      | $ | 0.49  |  
|Diluted                                                               |  | $                           | (0.07 | ) |      | $ | 0.49  |  
|                                                                      |  |                            
|(Loss) per share of common stock, discontinued operations:            |  |                             |       |   |      |   |       |  
|Basic                                                                 |  | $                           |      |   |      | $ | (0.01 | )
|Diluted                                                               |  | $                           |      |   |      | $ | (0.01 | )
|                                                                      |  |                            
|Net (loss) earnings per share of common stock:                        |  |                             |       |   |      |   |       |  
|Basic                                                                 |  | $                           | (0.07 | ) |      | $ | 0.48  |  
|Diluted                                                               |  | $                           | (0.07 | ) |      | $ | 0.48  |  
|                                                                      |  |                            
|Average number of common shares outstanding:                          |  |                             |       |   |      |   |       |  
|Basic                                                                 |  |                             | 40.5  |   |      |   | 40.5  |  
|Diluted                                                               |  |                             | 40.5  |   |      |   | 40.7  |  



See accompanying notes
to condensed consolidated financial statements beginning on page 10.



6



---

##### Table of Contents



Armstrong Holdings, Inc., and
Subsidiaries

Condensed Consolidated Balance Sheets

(amounts in millions, except share data)



|                                                                                                                     |  |                         |          |   |                   |   |          |  
|-------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                     |  | UnauditedMarch 31, 2005 |          |   | December 31, 2004 |  
|Assets                                                                                                               |  |                         |          |   |                   |   |          |  
|Current assets:                                                                                                      |  |                         |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                            |  | $                       | 401.6    |   |                   | $ | 515.9    |  
|Accounts and notes receivable, net                                                                                   |  |                         | 369.1    |   |                   |   | 336.1    |  
|Inventories, net                                                                                                     |  |                         | 541.7    |   |                   |   | 529.2    |  
|Deferred income taxes                                                                                                |  |                         | 15.6     |   |                   |   | 15.6     |  
|Income tax receivable                                                                                                |  |                         | 7.0      |   |                   |   | 7.0      |  
|Other current assets                                                                                                 |  |                         | 84.1     |   |                   |   | 78.4     |  
|                                                                                                                     |  |                         |          |   |                   |   |          |  
|Total current assets                                                                                                 |  |                         | 1,419.1  |   |                   |   | 1,482.2  |  
|Property, plant and equipment, less accumulated depreciation and amortization of $1,545.9 and $1,540.7, respectively |  |                         | 1,185.2  |   |                   |   | 1,208.8  |  
|Insurance receivable for asbestos-related liabilities, noncurrent                                                    |  |                         | 88.8     |   |                   |   | 88.8     |  
|Prepaid pension costs                                                                                                |  |                         | 480.7    |   |                   |   | 480.9    |  
|Investment in affiliates                                                                                             |  |                         | 74.9     |   |                   |   | 72.5     |  
|Goodwill, net                                                                                                        |  |                         | 135.3    |   |                   |   | 136.0    |  
|Other intangibles, net                                                                                               |  |                         | 74.0     |   |                   |   | 76.0     |  
|Deferred income taxes, noncurrent                                                                                    |  |                         | 942.6    |   |                   |   | 941.6    |  
|Other noncurrent assets                                                                                              |  |                         | 120.0    |   |                   |   | 122.6    |  
|                                                                                                                     |  |                         |          |   |                   |   |          |  
|Total assets                                                                                                         |  | $                       | 4,520.6  |   |                   | $ | 4,609.4  |  
|                                                                                                                     |  |                         |          |   |                   |   |          |  
|Liabilities and Shareholders Equity                                                                                 |  |                         |          |   |                   |   |          |  
|Current liabilities:                                                                                                 |  |                         |          |   |                   |   |          |  
|Short-term debt                                                                                                      |  | $                       | 18.1     |   |                   | $ | 11.1     |  
|Current installments of long-term debt                                                                               |  |                         | 7.8      |   |                   |   | 8.2      |  
|Accounts payable and accrued expenses                                                                                |  |                         | 367.7    |   |                   |   | 447.4    |  
|Income tax payable                                                                                                   |  |                         | 26.0     |   |                   |   | 20.3     |  
|Deferred income taxes                                                                                                |  |                         | 1.1      |   |                   |   | 1.1      |  
|                                                                                                                     |  |                         |          |   |                   |   |          |  
|Total current liabilities                                                                                            |  |                         | 420.7    |   |                   |   | 488.1    |  
|Liabilities subject to compromise                                                                                    |  |                         | 4,866.7  |   |                   |   | 4,866.2  |  
|Long-term debt, less current installments                                                                            |  |                         | 27.0     |   |                   |   | 29.2     |  
|Postretirement and postemployment benefit liabilities                                                                |  |                         | 262.0    |   |                   |   | 262.6    |  
|Pension benefit liabilities                                                                                          |  |                         | 246.1    |   |                   |   | 258.9    |  
|Other long-term liabilities                                                                                          |  |                         | 87.5     |   |                   |   | 87.6     |  
|Deferred income taxes, noncurrent                                                                                    |  |                         | 19.2     |   |                   |   | 19.2     |  
|Minority interest in subsidiaries                                                                                    |  |                         | 9.3      |   |                   |   | 9.3      |  
|                                                                                                                     |  |                         |          |   |                   |   |          |  
|Total noncurrent liabilities                                                                                         |  |                         | 5,517.8  |   |                   |   | 5,533.0  |  
|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    |   |                   |   | 167.7    |  
|Reduction for ESOP loan guarantee                                                                                    |  |                         | (142.2   | ) |                   |   | (142.2   | )
|Accumulated deficit                                                                                                  |  |                         | (1,021.6 | ) |                   |   | (1,018.6 | )
|Accumulated other comprehensive income                                                                               |  |                         | 39.6     |   |                   |   | 42.8     |  
|Less common stock in treasury, at cost 2005 and 2004  11,210,018 shares                                             |  |                         | (513.3   | ) |                   |   | (513.3   | )
|                                                                                                                     |  |                         |          |   |                   |   |          |  
|Total shareholders (deficit)                                                                                        |  |                         | (1,417.9 | ) |                   |   | (1,411.7 | )
|                                                                                                                     |  |                         |          |   |                   |   |          |  
|Total liabilities and shareholders equity                                                                           |  | $                       | 4,520.6  |   |                   | $ | 4,609.4  |  
|                                                                                                                     |  |                         |          |   |                   |   |          |  



See accompanying notes
to condensed consolidated financial statements beginning on page 10.



7



---

##### Table of Contents



Armstrong Holdings, Inc., and
Subsidiaries

Condensed Consolidated Statements of Shareholders Equity

(amounts in millions, except per share amounts)

Unaudited



|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|----------------------------------------- |  | ---- | -------- | - | ---- | - | ---- | - |  | - | -------- | - |  | - | ---- | -
|                                          |  | 2005 |          |   | 2004 |  
|Common stock, $1 par value:               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Balance at beginning of year and March 31 |  | $    | 51.9     |   |      |   |      |   |  | $ | 51.9     |   |  |   |      |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Capital in excess of par value:           |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Balance at beginning of year and March 31 |  | $    | 167.7    |   |      |   |      |   |  | $ | 167.9    |   |  |   |      |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Reduction for ESOP loan guarantee:        |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Balance at beginning of year and March 31 |  | $    | (142.2   | ) |      |   |      |   |  | $ | (142.2   | ) |  |   |      |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Retained earnings (accumulated deficit):  |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Balance at beginning of year              |  | $    | (1,018.6 | ) |      |   |      |   |  | $ | (937.8   | ) |  |   |      |  
|Net (loss) earnings for period            |  |      | (3.0     | ) |      | $ | (3.0 | ) |  |   | 19.6     |   |  | $ | 19.6 |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Balance at March 31                       |  | $    | (1,021.6 | ) |      |   |      |   |  | $ | (918.2   | ) |  |   |      |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Accumulated other comprehensive income:   |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Balance at beginning of year              |  | $    | 42.8     |   |      |   |      |   |  | $ | 43.3     |   |  |   |      |  
|Foreign currency translation adjustments  |  |      | (5.4     | ) |      |   |      |   |  |   | (1.9     | ) |  |   |      |  
|Derivative gain/(loss), net               |  |      | 1.4      |   |      |   |      |   |  |   | (0.5     | ) |  |   |      |  
|Minimum pension liability adjustments     |  |      | 0.8      |   |      |   |      |   |  |   | 0.1      |   |  |   |      |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Total other comprehensive (loss)          |  |      | (3.2     | ) |      |   | (3.2 | ) |  |   | (2.3     | ) |  |   | (2.3 | )
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Balance at March 31                       |  | $    | 39.6     |   |      |   |      |   |  | $ | 41.0     |   |  |   |      |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Comprehensive (loss) income               |  |      |          |   |      | $ | (6.2 | ) |  |   |          |   |  | $ | 17.3 |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Less treasury stock at cost:              |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Balance at beginning of year and March 31 |  | $    | (513.3   | ) |      |   |      |   |  | $ | (513.3   | ) |  |   |      |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Total shareholders (deficit)             |  | $    | (1,417.9 | ) |      |   |      |   |  | $ | (1,312.9 | ) |  |   |      |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  



See accompanying notes
to condensed consolidated financial statements beginning on page 10.



8



---

##### Table of Contents



Armstrong Holdings, Inc., and
Subsidiaries

Condensed Consolidated Statements of Cash Flows

(amounts in millions)

Unaudited



|                                                                                          |  |                             |        |   |      |   |       |  
|----------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ----- | -
|                                                                                          |  | Three MonthsEnded March 31, |       
|                                                                                          |  | 2005                        |        |   | 2004 |  
|Cash flows from operating activities:                                                     |  |                             |        |   |      |   |       |  
|Net (loss) earnings                                                                       |  | $                           | (3.0   | ) |      | $ | 19.6  |  
|Adjustments to reconcile net (loss) earnings to net cash (used for) operating activities: |  |                             |        |   |      |   |       |  
|Depreciation and amortization                                                             |  |                             | 36.4   |   |      |   | 34.9  |  
|Deferred income taxes                                                                     |  |                             | (1.4   | ) |      |   | 0.3   |  
|Equity (earnings) from affiliates, net                                                    |  |                             | (8.4   | ) |      |   | (6.6  | )
|Chapter 11 reorganization costs, net                                                      |  |                             | 2.0    |   |      |   | 2.5   |  
|Chapter 11 reorganization costs payments                                                  |  |                             | (3.4   | ) |      |   | (6.9  | )
|Restructuring charges, net of reversals                                                   |  |                             | 8.2    |   |      |   | 2.0   |  
|Restructuring payments                                                                    |  |                             | (12.8  | ) |      |   | (1.2  | )
|Cash effect of hedging activities                                                         |  |                             | (5.7   | ) |      |   | 2.6   |  
|Increase (decrease) in cash from change in:                                               |  |                             |        |   |      |   |       |  
|Receivables                                                                               |  |                             | (38.7  | ) |      |   | (75.6 | )
|Inventories                                                                               |  |                             | (19.3  | ) |      |   | (10.9 | )
|Other current assets                                                                      |  |                             | (5.0   | ) |      |   | 0.3   |  
|Other noncurrent assets                                                                   |  |                             | (5.5   | ) |      |   | (6.9  | )
|Accounts payable and accrued expenses                                                     |  |                             | (43.2  | ) |      |   | 12.6  |  
|Income taxes payable                                                                      |  |                             | 6.2    |   |      |   | (3.9  | )
|Other long-term liabilities                                                               |  |                             | (3.4   | ) |      |   | 1.9   |  
|Other, net                                                                                |  |                             | (1.5   | ) |      |   | (1.3  | )
|                                                                                          |  |                             |        |   |      |   |       |  
|Net cash (used for) operating activities                                                  |  |                             | (98.5  | ) |      |   | (36.6 | )
|                                                                                          |  |                             |        |   |      |   |       |  
|Cash flow from investing activities:                                                      |  |                             |        |   |      |   |       |  
|Purchases of property, plant and equipment and computer software                          |  |                             | (26.9  | ) |      |   | (16.7 | )
|Distributions from equity affiliates                                                      |  |                             | 6.0    |   |      |   |      |  
|Proceeds from the sale of assets                                                          |  |                             | 1.2    |   |      |   | 0.9   |  
|                                                                                          |  |                             |        |   |      |   |       |  
|Net cash (used for) investing activities                                                  |  |                             | (19.7  | ) |      |   | (15.8 | )
|                                                                                          |  |                             |        |   |      |   |       |  
|Cash flows from financing activities:                                                     |  |                             |        |   |      |   |       |  
|Increase in short-term debt, net                                                          |  |                             | 7.7    |   |      |   | 5.1   |  
|Payments of long-term debt                                                                |  |                             | (1.5   | ) |      |   | (0.7  | )
|Other, net                                                                                |  |                             |       |   |      |   | (0.2  | )
|                                                                                          |  |                             |        |   |      |   |       |  
|Net cash provided by financing activities                                                 |  |                             | 6.2    |   |      |   | 4.2   |  
|                                                                                          |  |                             |        |   |      |   |       |  
|Effect of exchange rate changes on cash and cash equivalents                              |  |                             | (2.3   | ) |      |   |      |  
|                                                                                          |  |                             |        |   |      |   |       |  
|Net (decrease) in cash and cash equivalents                                               |  |                             | (114.3 | ) |      |   | (48.2 | )
|Cash and cash equivalents at beginning of year                                            |  |                             | 515.9  |   |      |   | 484.3 |  
|                                                                                          |  |                             |        |   |      |   |       |  
|Cash and cash equivalents at end of period                                                |  | $                           | 401.6  |   |      | $ | 436.1 |  
|                                                                                          |  |                             |        |   |      |   |       |  



See accompanying notes
to condensed consolidated financial statements beginning on page 10.



9



---

##### Table of Contents



Armstrong Holdings, Inc., and
Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



NOTE 1. BASIS OF PRESENTATION



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 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.



The accounting policies used in preparing these statements are the same as those used in
preparing AHIs consolidated financial statements for the year ended December 31, 2004, which includes the accounts of AHI and its majority-owned subsidiaries. These condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in AHIs Form 10-K for the fiscal year ended December 31, 2004. In the opinion of management, all adjustments of a normal recurring nature have been included to provide a fair
statement of the results for the reporting periods presented. Quarterly results are not necessarily indicative of annual earnings, primarily due to the different level of sales in each quarter of the year and the possibility of changes in general
economic conditions.



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 changes, 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.



Operating results for the first quarter of 2005 and the corresponding period of 2004 included in this report are unaudited. However, these condensed consolidated
financial statements have been reviewed by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States) for a limited review of interim financial information.



Certain prior year amounts have been reclassified to conform to the current
year presentation. These reclassifications were made to the condensed consolidated statement of earnings and primarily consisted of reclassifying 2004 amounts from other non-operating income and other non-operating expense to selling, general and
administrative (SG&A) expense and discontinued operations. In addition, 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. The Act affects both operating income and balance sheet liabilities over time. Since the Act was effective retroactive to January 1, 2004 and the total year benefit was $7 million, operating income for the
three months ended March 31, 2004 benefited by $1.8 million. The $1.8 million benefit in 2004 was recorded in cost of goods sold ($1.0 million) and SG&A ($0.8 million). The impact of the Act also decreased income tax expense in the first quarter
of 2004 by $0.1 million. Operating income in the first quarter of 2005 also benefited from the



10



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



effects of the Act by $2.3 million (cost of goods sold by $1.4 million and SG&A by $0.9 million). The impact of the Act decreased income tax expense in
the first quarter of 2005 by $0.4 million.



There would have been no effect on
net income and earnings per share if AHI had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-based Compensation, to stock-based employee compensation in 2005 or 2004.



NOTE 2. CHAPTER 11 REORGANIZATION



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 14 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.



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



11



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



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



12



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



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. A motion to dismiss the appeal was filed by the Committee of Unsecured Creditors on March 29, 2005. AWI is also reviewing other options to resolve its Chapter 11 Case,
and is monitoring a proposed asbestos claims litigation reform bill in Congress (see the discussion under Potential Legislation in Note 14). 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 14 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.



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,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



13



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



| |  |  | 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.



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



14



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



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.



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



15



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



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 14.



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.



16



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



Financing



AWI has a $75.0 million debtor-in-possession credit facility that currently is limited to issuances of letters of credit. This facility is
scheduled to mature on December 8, 2005. As of March 31, 2005, AWI had approximately $42.4 million in letters of credit, which were issued pursuant to the DIP Facility. As of March 31, 2005, AWI had $221.9 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 March 31, 2005 and December 31,2004. 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 14 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.



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 the first quarters of 2005 and 2004:



|                                                  |  |      |      |   |      |   |      |  
|------------------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|                                                  |  | 2005 |      |   | 2004 |  
|Professional fees                                 |  | $    | 3.8  |   |      | $ | 3.3  |  
|Interest income, post-Filing                      |  |      | (1.9 | ) |      |   | (0.8 | )
|Other expense directly related to bankruptcy, net |  |      | 0.1  |   |      |   |     |  
|                                                  |  |      |      |   |      |   |      |  
|Total Chapter 11 reorganization costs, net        |  | $    | 2.0  |   |      | $ | 2.5  |  
|                                                  |  |      |      |   |      |   |      |  



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.



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.



17



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



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 3. SEGMENT RESULTS



(amounts in millions)



|                                    |  |                             |       |   |      |   |       |  
|----------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                                    |  | Three Months EndedMarch 31, |      
|                                    |  | 2005                        |       |   | 2004 |  
|Net sales to external customers     |  |                             |       |   |      |   |       |  
|Resilient Flooring                  |  | $                           | 284.9 |   |      | $ | 304.1 |  
|Wood Flooring                       |  |                             | 190.1 |   |      |   | 197.4 |  
|Textiles and Sports Flooring        |  |                             | 62.9  |   |      |   | 62.3  |  
|Building Products                   |  |                             | 253.6 |   |      |   | 230.0 |  
|Cabinets                            |  |                             | 49.2  |   |      |   | 51.2  |  
|                                    |  |                             |       |   |      |   |       |  
|Total sales to external customers   |  | $                           | 840.7 |   |      | $ | 845.0 |  
|                                    |  |                             |       |   |      |   |       |  
|                                    | 
|                                    |  | Three Months EndedMarch 31, |      
|                                    |  | 2005                        |       |   | 2004 |  
|Segment operating income (loss)     |  |                             |       |   |      |   |       |  
|Resilient Flooring                  |  | $                           | (9.6  | ) |      | $ | 15.0  |  
|Wood Flooring                       |  |                             | 8.8   |   |      |   | 10.3  |  
|Textiles and Sports Flooring        |  |                             | (5.9  | ) |      |   | (1.9  | )
|Building Products                   |  |                             | 35.3  |   |      |   | 27.9  |  
|Cabinets                            |  |                             | (5.9  | ) |      |   | 0.6   |  
|Unallocated Corporate (expense)     |  |                             | (15.0 | ) |      |   | (11.1 | )
|                                    |  |                             |       |   |      |   |       |  
|Total consolidated operating income |  | $                           | 7.7   |   |      | $ | 40.8  |  
|                                    |  |                             |       |   |      |   |       |  



|                                |  |               |         |                  |   |        
|------------------------------- |  | ------------- | ------- | ---------------- | - | -------
|                                |  | March 31,2005 |         | December 31,2004
|Segment assets                  |  |               |         |                  |   |        
|Resilient Flooring              |  | $             | 759.2   |                  | $ | 737.9  
|Wood Flooring                   |  |               | 660.0   |                  |   | 663.6  
|Textiles and Sports Flooring    |  |               | 214.0   |                  |   | 218.1  
|Building Products               |  |               | 600.5   |                  |   | 596.3  
|Cabinets                        |  |               | 99.5    |                  |   | 102.2  
|                                |  |               |         |                  |   |        
|Total segment assets            |  |               | 2,333.2 |                  |   | 2,318.1
|Assets not assigned to segments |  |               | 2,187.4 |                  |   | 2,291.3
|                                |  |               |         |                  |   |        
|Total consolidated assets       |  | $             | 4,520.6 |                  | $ | 4,609.4
|                                |  |               |         |                  |   |        



NOTE 4. LIABILITIES SUBJECT TO COMPROMISE



As a result of
AWIs Chapter 11 filing (see Note 2), 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 condensed consolidated balance sheet based upon maturity date. AWIs asbestos liability is also recorded in
liabilities subject to compromise. See Note 2 for further discussion on how the Chapter 11process may



18



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



address AWIs liabilities subject to compromise and Note 14 for further discussion of AWIs asbestos liability.



Liabilities subject to compromise at March 31, 2005 and December 31, 2004 are as follows:



|                                                |  |               |         |                  |   |        
|----------------------------------------------- |  | ------------- | ------- | ---------------- | - | -------
|                                                |  | March 31,2005 |         | December 31,2004
|Debt (at face value)(1)                         |  | $             | 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 |  |               | 70.9    |                  |   | 70.4   
|ESOP loan guarantee                             |  |               | 157.7   |                  |   | 157.7  
|                                                |  |               |         |                  |   |        
|Total liabilities subject to compromise         |  | $             | 4,866.7 |                  | $ | 4,866.2
|                                                |  |               |         |                  |   |        



|(1) | 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 $21.5 million in the first quarter of 2005 and $21.7 million in the first quarter of 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



NOTE 5. DISCONTINUED OPERATIONS



On
December 29, 1995, Armstrong sold a furniture subsidiary, Thomasville Furniture Industries. During the first quarter of 2004, AHI recorded a net loss of $0.4 million for an environmental indemnification related to this divestiture. This adjustment
was classified as discontinued operations since the original divestiture was reported as discontinued operations.



NOTE 6. INVENTORIES



|                             |  |               |       |   |                  |   |       |  
|---------------------------- |  | ------------- | ----- | - | ---------------- | - | ----- | -
|                             |  | March 31,2005 |       |   | December 31,2004 |  
|Finished goods               |  | $             | 375.9 |   |                  | $ | 362.9 |  
|Goods in process             |  |               | 45.4  |   |                  |   | 49.3  |  
|Raw materials and supplies   |  |               | 196.5 |   |                  |   | 206.9 |  
|Less LIFO and other reserves |  |               | (76.1 | ) |                  |   | (89.9 | )
|                             |  |               |       |   |                  |   |       |  
|Total inventories, net       |  | $             | 541.7 |   |                  | $ | 529.2 |  
|                             |  |               |       |   |                  |   |       |  



NOTE 7. EQUITY INVESTMENTS



Investments in affiliates were
$74.9 million at March 31, 2005, an increase of $2.4 million, reflecting the equity earnings of our 50% interest in our WAVE joint venture and our remaining 35% interest in Interface Solutions, Inc. (ISI). Condensed income statement data
for WAVE, our joint venture accounted for under the equity method of accounting, is summarized below:



|             |  |                              |      |      |   |     
|------------ |  | ---------------------------- | ---- | ---- | - | ----
|             |  | Three Months Ended March 31,
|             |  | 2005                         |      | 2004
|Net sales    |  | $                            | 72.6 |      | $ | 60.9
|Gross profit |  |                              | 20.7 |      |   | 17.4
|Net earnings |  |                              | 16.1 |      |   | 12.2



19



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



NOTE 8. GOODWILL AND INTANGIBLE ASSETS



As of January 1, 2005, we had goodwill of approximately $136 million. Goodwill is required
to be tested for impairment at least annually. We perform our annual assessment in the fourth quarter.



The following table represents the changes in goodwill for the first three months of 2005.



|                            |  |                |       |                    |   |      |             |  |               |  |   |      
|--------------------------- |  | -------------- | ----- | ------------------ | - | ---- | ----------- |  | ------------- |  | - | -----
|                            |  | January 1,2005 |       | Adjustments,net(1) |   |      | Impairments |  | March 31,2005
|Goodwill by segment         |  |                |       |                    |   |      |             |  |               |  |   |      
|Wood Flooring               |  | $              | 108.2 |                    |   |     |             |  |              |  | $ | 108.2
|Building Products           |  |                | 15.2  |                    | $ | (0.7 | )           |  |              |  |   | 14.5 
|Cabinets                    |  |                | 12.6  |                    |   |     |             |  |              |  |   | 12.6 
|                            |  |                |       |                    |   |      |             |  |               |  |   |      
|Total consolidated goodwill |  | $              | 136.0 |                    | $ | (0.7 | )           |  |              |  | $ | 135.3
|                            |  |                |       |                    |   |      |             |  |               |  |   |      



|(1) | Consists of the effects of foreign exchange.
|--- | --------------------------------------------



The following table details amounts related to AHIs intangible assets as of March 31, 2005 and December 31, 2004.



|                               |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|------------------------------ |  | -------------------- | ----- | ----------------------- | - | -------------------- |  | ----------------------- | ----- |  | - | ----
|                               |  | March 31, 2005       |       | December 31, 2004      
|                               |  | Gross CarryingAmount |       | AccumulatedAmortization |   | Gross CarryingAmount |  | AccumulatedAmortization
|Amortized intangible assets    |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Computer software              |  | $                    | 110.8 |                         | $ | 69.4                 |  | $                       | 109.8 |  | $ | 66.4
|Land use rights and other      |  |                      | 4.4   |                         |   | 1.0                  |  |                         | 4.4   |  |   | 1.0 
|                               |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Total                          |  | $                    | 115.2 |                         | $ | 70.4                 |  | $                       | 114.2 |  | $ | 67.4
|                               |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Unamortized intangible assets  |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Trademarks and brand names     |  | $                    | 29.2  |                         |   |                      |  | $                       | 29.2  |  |   |     
|                               |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Other intangible assets, gross |  | $                    | 144.4 |                         |   |                      |  | $                       | 143.4 |  |   |     
|                               |  |                      |       |                         |   |                      |  |                         |       |  |   |     



|                                          |  |   |    
|----------------------------------------- |  | - | ---
|Aggregate Amortization Expense            |  |   |    
|For the three months ended March 31, 2005 |  | $ | 4.0
|For the three months ended March 31, 2004 |  | $ | 3.8



NOTE 9. RESTRUCTURING AND OTHER ACTIONS



Net restructuring
charges of $8.2 million and $2.0 million were recorded in the first quarters of 2005 and 2004, respectively. These charges are summarized in the following table:



|                       |  |                                                  |      |   |      |   |      |         |  |                                               
|---------------------- |  | ------------------------------------------------ | ---- | - | ---- | - | ---- | ------- |  | ----------------------------------------------
|                       |  | Net Charge/(Reversal)Three Months EndedMarch 31, |      |   |     
|                       |  | 2005                                             |      |   | 2004 |   |      | Segment
|Action Title           |  |                                                  |      |   |      |   |      |         |  |                                               
|Lancaster Plant        |  | $                                                | 6.8  |   |      |   |     |         |  | Resilient Flooring                            
|Hoogezand              |  |                                                  | 1.0  |   |      |   | 2.3  |         |  | Building Products                             
|North America SG&A     |  |                                                  | (0.1 | ) |      |   |     |         |  | Resilient Flooring                            
|Morristown             |  |                                                  | 0.2  |   |      |   |     |         |  | Cabinet Products                              
|Searcy                 |  |                                                  | 0.1  |   |      |   |     |         |  | Wood Flooring                                 
|Oss                    |  |                                                  | 0.2  |   |      |   |     |         |  | Textiles & Sports Flooring                    
|European consolidation |  |                                                  |     |   |      |   | (0.3 | )       |  | Resilient Flooring, Textiles & Sports Flooring
|                       |  |                                                  |      |   |      |   |      |         |  |                                               
|Total                  |  | $                                                | 8.2  |   |      | $ | 2.0  |         |  |                                               
|                       |  |                                                  |      |   |      |   |      |         |  |                                               



20



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



Lancaster Plant: The charge related to the fourth quarter 2004 decision to cease commercial flooring
production at Lancaster in 2006. Commercial flooring production requirements will be serviced by other facilities around the world. Of the $6.8 million charge in 2005, $6.2 million is a non-cash charge related to termination benefits to be paid
through the U.S. pension plan. The other $0.6 million is comprised of severance and related costs. We have incurred $7.8 million of severance and pension related restructuring charges to-date. We expect to incur an additional $31 million of
restructuring charges for severances and pension benefits between 2005 and 2008, with the majority of charges incurred in 2005. Additionally, we recorded $2.1 million of accelerated depreciation and $0.3 million of other related costs in the first
quarter of 2005, both in cost of goods sold.



Hoogezand: These charges
are related to the first quarter 2004 decision to close the manufacturing facility and are 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 restructuring charges of $11.9 million to-date, and expect to incur an additional $6.9 million in the remainder of
2005. Additionally, we recorded $0.5 million and $0.7 million of accelerated depreciation in cost of goods sold in the first quarters of 2005 and 2004, respectively. We also recorded $0.1 million of other related costs in cost of goods sold in the
first quarter of 2005.



North America SG&A: The 2005 net reversal of
$0.1 million was related to Resilient Flooring and was recorded for 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 $5.2 million of restructuring charges to-date and do not expect to incur any additional charges.



Morristown: The 2005 charge related to the fourth quarter 2004 decision to close a
plant in Tennessee in the first quarter of 2005. Manufacturing was consolidated at two existing plants in the United States. We have incurred $0.4 million of severance related restructuring charges and $0.2 million of related shutdown costs to-date
and expect to incur an additional $0.3 million of shutdown costs in 2005. Additionally, we recorded $0.1 million of accelerated depreciation and $0.8 million of other related costs in 2005, both in cost of goods sold.



Searcy: The charge related to the fourth quarter 2004 decision to close a solid
hardwood flooring location in Arkansas in the first quarter of 2005 and was 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
$0.9 million of restructuring charges to-date and expect to incur an additional $0.1 million in the second quarter of 2005.



Oss: The 2005 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 $4.9 million of restructuring charges to-date and do not expect to incur any additional costs in the
future.



European consolidation: The net reversals in 2004 comprised
certain severance accruals that were no longer necessary in the remaining accruals from the 2003 and 2002 charges in the Resilient Flooring ($0.2 million) and Textiles and Sports Flooring ($0.1 million) segments.



The following table summarizes activity in the restructuring accruals for the first three
months of 2005 and 2004.



|     |  |                  |      |              |   |       |             |  |       |     |  |               |      |   |  |   |     
|---- |  | ---------------- | ---- | ------------ | - | ----- | ----------- |  | ----- | --- |  | ------------- | ---- | - |  | - | ----
|     |  | BeginningBalance |      | CashPayments |   |       | Net Charges |  | Other |     |  | EndingBalance
|2005 |  | $                | 24.8 |              | $ | (12.8 | )           |  | $     | 2.0 |  | $             | (0.4 | ) |  | $ | 13.6
|2004 |  |                  | 10.0 |              |   | (1.2  | )           |  |       | 2.0 |  |               | 0.1  |   |  |   | 10.9



21



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



The amount in other for 2005 and 2004 is related to the effects of foreign exchange.



Of the March 31, 2005 and 2004 ending balances, $1.3 million is reported in liabilities
subject to compromise.



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



NOTE 10. INCOME TAX EXPENSE



|                                                        |  |                             |     |      |   |     
|------------------------------------------------------- |  | --------------------------- | --- | ---- | - | ----
|                                                        |  | Three months endedMarch 31,
|                                                        |  | 2005                        |     | 2004
|Earnings from continuing operations before income taxes |  | $                           | 5.7 |      | $ | 36.8
|Income tax expense                                      |  | $                           | 8.7 |      | $ | 16.8



Tax expense of $8.7 million recorded
in the first three months of 2005 represents the estimated effective tax rate for 2005 applied against year-to-date taxable income of $5.7 million, taking into consideration the matters described below. The resulting three-month tax rate of 152.6%
is higher than the statutory US Federal and state rate primarily because of $13.8 million in foreign losses incurred in the quarter for which no tax benefit can be recognized as we have provided valuation allowances on the losses in these foreign
jurisdictions. The tax rate also increased due to certain adjustments of tax reserves related to Canadian withholding taxes, a German tax audit item, state tax reserve needs, and additional valuation allowances placed on state net operating losses.



Tax expense of $16.8 million recorded in the first quarter of 2004 represents
the estimated effective tax rate for 2004 applied against quarterly pre-tax income of $36.8 million.



NOTE 11. PENSIONS



Following are the components of net periodic benefit costs:



|                                              |  |                              |       |   |      |   |       |  
|--------------------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ----- | -
|                                              |  | Three Months Ended March 31, |      
|                                              |  | 2005                         |       |   | 2004 |  
|U.S. defined-benefit plans                    |  |                              |       |   |      |   |       |  
|Pension Benefits                              |  |                              |       |   |      |   |       |  
|Service cost of benefits earned               |  | $                            | 6.2   |   |      | $ | 5.8   |  
|Interest cost on projected benefit obligation |  |                              | 24.0  |   |      |   | 22.8  |  
|Expected return on plan assets                |  |                              | (39.5 | ) |      |   | (36.9 | )
|Amortization of prior service cost            |  |                              | 4.1   |   |      |   | 4.3   |  
|Recognized net actuarial loss                 |  |                              | 0.4   |   |      |   | 0.4   |  
|                                              |  |                              |       |   |      |   |       |  
|Net periodic pension (credit)                 |  | $                            | (4.8  | ) |      | $ | (3.6  | )
|                                              |  |                              |       |   |      |   |       |  
|Retiree Health and Life Insurance Benefits    |  |                              |       |   |      |   |       |  
|Service cost of benefits earned               |  | $                            | 0.7   |   |      | $ | 0.7   |  
|Interest cost on projected benefit obligation |  |                              | 5.1   |   |      |   | 5.5   |  
|Amortization of prior service benefit         |  |                              | (1.4  | ) |      |   | (1.4  | )
|Recognized net actuarial loss                 |  |                              | 3.0   |   |      |   | 2.4   |  
|                                              |  |                              |       |   |      |   |       |  
|Net periodic postretirement benefit cost      |  | $                            | 7.4   |   |      | $ | 7.2   |  
|                                              |  |                              |       |   |      |   |       |  



22



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



|                                              |  |                              |      |   |      |   |      |  
|--------------------------------------------- |  | ---------------------------- | ---- | - | ---- | - | ---- | -
|                                              |  | Three Months Ended March 31, |     
|                                              |  | 2005                         |      |   | 2004 |  
|Non-U.S. defined-benefit plans                |  |                              |      |   |      |   |      |  
|Pension Benefits                              |  |                              |      |   |      |   |      |  
|Service cost of benefits earned               |  | $                            | 2.6  |   |      | $ | 2.5  |  
|Interest cost on projected benefit obligation |  |                              | 5.7  |   |      |   | 5.3  |  
|Expected return on plan assets                |  |                              | (4.1 | ) |      |   | (3.7 | )
|Amortization of prior service cost            |  |                              |     |   |      |   | 0.1  |  
|Recognized net actuarial loss                 |  |                              | 0.5  |   |      |   | 0.1  |  
|                                              |  |                              |      |   |      |   |      |  
|Net periodic pension cost                     |  | $                            | 4.7  |   |      | $ | 4.3  |  
|                                              |  |                              |      |   |      |   |      |  



We previously disclosed in our
financial statements for the year ended December 31, 2004 that we expected to contribute $22.7 million to our non-U.S. defined benefit pension plans in 2005. As of March 31, 2005, $9.6 million of contributions have been made. We presently anticipate
contributing an additional $16.5 million to fund our pension plans in 2005 for a total of $26.1 million.



NOTE 12. 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 the first three months of
2005 and 2004:



|                                        |  |      |      |   |      |   |      |  
|--------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|                                        |  | 2005 |      |   | 2004 |  
|Balance at January 1                    |  | $    | 22.6 |   |      | $ | 25.5 |  
|Reductions for payments                 |  |      | (8.5 | ) |      |   | (9.8 | )
|Current year warranty accruals          |  |      | 8.7  |   |      |   | 9.5  |  
|Preexisting warranty accrual changes    |  |      | (0.1 | ) |      |   | (0.2 | )
|Effects of foreign exchange translation |  |      | (0.4 | ) |      |   | (0.2 | )
|                                        |  |      |      |   |      |   |      |  
|Balance at March 31                     |  | $    | 22.3 |   |      | $ | 24.8 |  
|                                        |  |      |      |   |      |   |      |  



NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION



|                       |  |                              |     |      |   |     
|---------------------- |  | ---------------------------- | --- | ---- | - | ----
|                       |  | Three Months Ended March 31,
|                       |  | 2005                         |     | 2004
|Interest paid          |  | $                            | 0.5 |      | $ | 0.4 
|Income taxes paid, net |  | $                            | 4.0 |      | $ | 19.9



NOTE 14. 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.



23



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



(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 2 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. A motion to dismiss the appeal was filed by the
Committee of Unsecured Creditors on March 29, 2005. AWI is also reviewing other options to resolve its Chapter 11 Case. See Note 2 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 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



24



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



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 March 31, 2005 and December 31, 2004, 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 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.



25



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



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 March 31, 2005 and December 31, 2004. 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 March 31, 2005 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 first quarter of 2005.



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. Additionally, AWI did not receive any asbestos-related insurance recoveries during the first quarters of 2005 and 2004.
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.



26



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



Potential Legislation



On April 19, 2005 asbestos personal injury claims reform legislation was introduced, as the
FAIR Act of 2005 (S.852), to the United States Senate. Members of the Senate are currently reviewing the bill. There is uncertainty as to whether this bill or any asbestos reform proposal will become law, and what impact there might be on AWIs
Chapter 11 Case.



If legislation as currently proposed is enacted into law,
AWIs recorded asbestos liability would likely be materially reduced from the $3.2 billion amount currently implied by the POR, but its size would depend on AWIs payment obligations under the law and the present value of those
obligations. In such event, the POR would no longer provide an appropriate framework for a reorganization of AWI, and AWI would seek to develop a new plan of reorganization based on a re-evaluation of the then value of AWIs assets and ongoing
businesses, the amount of allowed unsecured claims against AWI (including any post-petition interest that may be allowed on such claims, as to which no provision is currently included under the POR), and other factors. Under the absolute priority
rule applicable in Chapter 11, AWIs shareholder would not be entitled to any recovery until the allowed claims of all of its creditors have been satisfied. We do not know enough today to predict the likely terms of a reorganization plan that
may be feasible under such circumstances, or if such reorganization would result in existing AHI shareholders receiving or retaining any equity value in AWI upon AWIs emergence from Chapter 11.



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.



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.



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



27



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



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. 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 (DOJ) 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



28



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in
millions, except share data)



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. On April 8, 2005, AWI and EPA filed a joint
motion with the bankruptcy court seeking approval of the Settlement Agreement. May 16, 2005 has been set as the hearing date.



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 $28.3 million and $28.0 million at March 31, 2005
and December 31, 2004, respectively were for potential environmental liabilities that we consider probable and for which a reasonable estimate of the probable liability could be made. 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, $19.4 million of the March 31, 2005 and $18.6 million of the December 31, 2004 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 at March 31,
2005 and December 31, 2004.



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.



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.



29



---

##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(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, legal fees and costs, 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 15. EARNINGS PER SHARE



The diluted loss per share in 2005 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.



30



---

##### Table of Contents



Report of Independent Registered Public Accounting Firm



The Board of Directors and Shareholders

Armstrong Holdings, Inc.:



We have reviewed the accompanying condensed consolidated balance sheet of Armstrong Holdings, Inc., and subsidiaries (the
Company) as of March 31, 2005, and the related condensed consolidated statements of earnings, cash flows, and shareholders equity for the three-month periods ended March 31, 2005 and 2004. These condensed consolidated financial
statements are the responsibility of the Companys management.



We
conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.



Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to
be in conformity with U.S. generally accepted accounting principles.



We have
previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Armstrong Holdings, Inc., and subsidiaries as of December 31, 2004, and the related consolidated
statements of earnings, cash flows and shareholders equity for the year then ended (not presented herein); and in our report dated March 14, 2005, we expressed an unqualified opinion on those consolidated financial statements. Our report dated
March 14, 2005 contains an explanatory paragraph that states that 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, and that the filing under Chapter 11 and the increased uncertainty regarding the Companys potential asbestos liability
raise substantial doubt about the Companys ability to continue as a going concern. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been derived.



/s/ KPMG LLP



Philadelphia, Pennsylvania

April 28, 2005



31



---

##### Table of Contents



Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Statements of Earnings

(amounts in millions)

Unaudited



|                                                                      |  |                             |       |   |      |   |       |  
|--------------------------------------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                                                                      |  | Three Months EndedMarch 31, |      
|                                                                      |  | 2005                        |       |   | 2004 |  
|Net sales                                                             |  | $                           | 840.7 |   |      | $ | 845.0 |  
|Cost of goods sold                                                    |  |                             | 662.5 |   |      |   | 660.4 |  
|                                                                      |  |                             |       |   |      |   |       |  
|Gross profit                                                          |  |                             | 178.2 |   |      |   | 184.6 |  
|Selling, general and administrative expenses                          |  |                             | 170.6 |   |      |   | 147.9 |  
|Restructuring charges, net                                            |  |                             | 8.2   |   |      |   | 2.0   |  
|Equity (earnings) from joint venture                                  |  |                             | (8.1  | ) |      |   | (6.1  | )
|                                                                      |  |                             |       |   |      |   |       |  
|Operating income                                                      |  |                             | 7.5   |   |      |   | 40.8  |  
|Interest expense (unrecorded contractual interest of $21.5 and $21.7) |  |                             | 2.2   |   |      |   | 2.1   |  
|Other non-operating expense                                           |  |                             |      |   |      |   | 0.9   |  
|Other non-operating (income)                                          |  |                             | (2.2  | ) |      |   | (1.5  | )
|Chapter 11 reorganization costs, net                                  |  |                             | 2.0   |   |      |   | 2.5   |  
|                                                                      |  |                             |       |   |      |   |       |  
|Earnings from continuing operations before income taxes               |  |                             | 5.5   |   |      |   | 36.8  |  
|Income tax expense                                                    |  |                             | 8.7   |   |      |   | 16.8  |  
|                                                                      |  |                             |       |   |      |   |       |  
|Net (loss) earnings from continuing operations                        |  | $                           | (3.2  | ) |      | $ | 20.0  |  
|(Loss) from discontinued operations, net of tax of $0.2               |  |                             |      |   |      |   | (0.4  | )
|                                                                      |  |                             |       |   |      |   |       |  
|Net (loss) earnings                                                   |  | $                           | (3.2  | ) |      | $ | 19.6  |  
|                                                                      |  |                             |       |   |      |   |       |  



See accompanying notes
to condensed consolidated financial statements beginning on page 36.



32



---

##### Table of Contents



Armstrong World Industries,
Inc., and Subsidiaries

Condensed Consolidated Balance Sheets

(amounts in millions, except share data)



|                                                                                                                     |  |                |          |   |                   |   |          |  
|-------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                     |  | Unaudited      |          |   |                   |  
|                                                                                                                     |  | March 31, 2005 |          |   | December 31, 2004 |  
|Assets                                                                                                               |  |                |          |   |                   |   |          |  
|Current assets:                                                                                                      |  |                |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                            |  | $              | 401.6    |   |                   | $ | 515.9    |  
|Accounts and notes receivable, net                                                                                   |  |                | 369.1    |   |                   |   | 336.1    |  
|Inventories, net                                                                                                     |  |                | 541.7    |   |                   |   | 529.2    |  
|Deferred income taxes                                                                                                |  |                | 15.6     |   |                   |   | 15.6     |  
|Income tax receivable                                                                                                |  |                | 7.0      |   |                   |   | 7.0      |  
|Other current assets                                                                                                 |  |                | 84.1     |   |                   |   | 78.4     |  
|                                                                                                                     |  |                |          |   |                   |   |          |  
|Total current assets                                                                                                 |  |                | 1,419.1  |   |                   |   | 1,482.2  |  
|Property, plant and equipment, less accumulated depreciation and amortization of $1,545.9 and $1,540.7, respectively |  |                | 1,185.2  |   |                   |   | 1,208.8  |  
|Insurance receivable for asbestos-related liabilities, noncurrent                                                    |  |                | 88.8     |   |                   |   | 88.8     |  
|Prepaid pension costs                                                                                                |  |                | 480.7    |   |                   |   | 480.9    |  
|Investment in affiliates                                                                                             |  |                | 74.9     |   |                   |   | 72.5     |  
|Goodwill, net                                                                                                        |  |                | 135.3    |   |                   |   | 136.0    |  
|Other intangibles, net                                                                                               |  |                | 74.0     |   |                   |   | 76.0     |  
|Deferred income taxes, noncurrent                                                                                    |  |                | 942.6    |   |                   |   | 941.6    |  
|Other noncurrent assets                                                                                              |  |                | 120.0    |   |                   |   | 122.6    |  
|                                                                                                                     |  |                |          |   |                   |   |          |  
|Total assets                                                                                                         |  | $              | 4,520.6  |   |                   | $ | 4,609.4  |  
|                                                                                                                     |  |                |          |   |                   |   |          |  
|Liabilities and Shareholders Equity                                                                                 |  |                |          |   |                   |   |          |  
|Current liabilities:                                                                                                 |  |                |          |   |                   |   |          |  
|Short-term debt                                                                                                      |  | $              | 18.1     |   |                   | $ | 11.1     |  
|Current installments of long-term debt                                                                               |  |                | 7.8      |   |                   |   | 8.2      |  
|Accounts payable and accrued expenses                                                                                |  |                | 367.7    |   |                   |   | 447.4    |  
|Short term amounts due to affiliates                                                                                 |  |                | 13.2     |   |                   |   | 13.3     |  
|Income tax payable                                                                                                   |  |                | 21.3     |   |                   |   | 15.3     |  
|Deferred income taxes                                                                                                |  |                | 1.1      |   |                   |   | 1.1      |  
|                                                                                                                     |  |                |          |   |                   |   |          |  
|Total current liabilities                                                                                            |  |                | 429.2    |   |                   |   | 496.4    |  
|Liabilities subject to compromise                                                                                    |  |                | 4,871.4  |   |                   |   | 4,870.9  |  
|Long-term debt, less current installments                                                                            |  |                | 27.0     |   |                   |   | 29.2     |  
|Postretirement and postemployment benefit liabilities                                                                |  |                | 262.0    |   |                   |   | 262.6    |  
|Pension benefit liabilities                                                                                          |  |                | 246.1    |   |                   |   | 258.9    |  
|Other long-term liabilities                                                                                          |  |                | 87.5     |   |                   |   | 87.6     |  
|Deferred income taxes, noncurrent                                                                                    |  |                | 19.8     |   |                   |   | 19.8     |  
|Minority interest in subsidiaries                                                                                    |  |                | 9.3      |   |                   |   | 9.3      |  
|                                                                                                                     |  |                |          |   |                   |   |          |  
|Total noncurrent liabilities                                                                                         |  |                | 5,523.1  |   |                   |   | 5,538.3  |  
|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    |   |                   |   | 172.6    |  
|Reduction for ESOP loan guarantee                                                                                    |  |                | (142.2   | ) |                   |   | (142.2   | )
|Accumulated deficit                                                                                                  |  |                | (1,025.1 | ) |                   |   | (1,021.9 | )
|Accumulated other comprehensive income                                                                               |  |                | 39.6     |   |                   |   | 42.8     |  
|Less common stock in treasury, at cost 2005 and 2004  11,393,170 shares                                             |  |                | (528.5   | ) |                   |   | (528.5   | )
|                                                                                                                     |  |                |          |   |                   |   |          |  
|Total shareholders (deficit)                                                                                        |  |                | (1,431.7 | ) |                   |   | (1,425.3 | )
|                                                                                                                     |  |                |          |   |                   |   |          |  
|Total liabilities and shareholders equity                                                                           |  | $              | 4,520.6  |   |                   | $ | 4,609.4  |  
|                                                                                                                     |  |                |          |   |                   |   |          |  



See accompanying notes
to condensed consolidated financial statements beginning on page 36.



33



---

##### Table of Contents



Armstrong World Industries,
Inc., and Subsidiaries

Condensed Consolidated Statements of Shareholders Equity

(amounts in millions, except per share amounts)

Unaudited



|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|----------------------------------------- |  | ---- | -------- | - | ---- | - | ---- | - |  | - | -------- | - |  | - | ---- | -
|                                          |  | 2005 |          |   | 2004 |  
|Common stock, $1 par value:               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Balance at beginning of year and March 31 |  | $    | 51.9     |   |      |   |      |   |  | $ | 51.9     |   |  |   |      |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Capital in excess of par value:           |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Balance at beginning of year              |  | $    | 172.6    |   |      |   |      |   |  | $ | 172.7    |   |  |   |      |  
|Stock issuances and other                 |  |      |         |   |      |   |      |   |  |   | 0.2      |   |  |   |      |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Balance at March 31                       |  | $    | 172.6    |   |      |   |      |   |  | $ | 172.9    |   |  |   |      |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Reduction for ESOP loan guarantee:        |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Balance at beginning of year and March 31 |  | $    | (142.2   | ) |      |   |      |   |  | $ | (142.2   | ) |  |   |      |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Retained earnings (accumulated deficit):  |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Balance at beginning of year              |  | $    | (1,021.9 | ) |      |   |      |   |  | $ | (942.2   | ) |  |   |      |  
|Net (loss) earnings for period            |  |      | (3.2     | ) |      | $ | (3.2 | ) |  |   | 19.6     |   |  | $ | 19.6 |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Balance at March 31                       |  | $    | (1,025.1 | ) |      |   |      |   |  | $ | (922.6   | ) |  |   |      |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Accumulated other comprehensive income:   |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Balance at beginning of year              |  | $    | 42.8     |   |      |   |      |   |  | $ | 43.3     |   |  |   |      |  
|Foreign currency translation adjustments  |  |      | (5.4     | ) |      |   |      |   |  |   | (1.9     | ) |  |   |      |  
|Derivative gain/(loss), net               |  |      | 1.4      |   |      |   |      |   |  |   | (0.5     | ) |  |   |      |  
|Minimum pension liability adjustments     |  |      | 0.8      |   |      |   |      |   |  |   | 0.1      |   |  |   |      |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Total other comprehensive (loss)          |  |      | (3.2     | ) |      |   | (3.2 | ) |  |   | (2.3     | ) |  |   | (2.3 | )
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Balance at March 31                       |  | $    | 39.6     |   |      |   |      |   |  | $ | 41.0     |   |  |   |      |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Comprehensive (loss) income               |  |      |          |   |      | $ | (6.4 | ) |  |   |          |   |  | $ | 17.3 |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Less treasury stock at cost:              |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Balance at beginning of year and March 31 |  | $    | (528.5   | ) |      |   |      |   |  | $ | (528.5   | ) |  |   |      |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  
|Total shareholders (deficit)             |  | $    | (1,431.7 | ) |      |   |      |   |  | $ | (1,327.5 | ) |  |   |      |  
|                                          |  |      |          |   |      |   |      |   |  |   |          |   |  |   |      |  



See accompanying notes
to condensed consolidated financial statements beginning on page 36.



34



---

##### Table of Contents



Armstrong World Industries,
Inc., and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(amounts in millions)

Unaudited



|                                                                                          |  |                             |        |   |      |   |       |  
|----------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ----- | -
|                                                                                          |  | Three Months EndedMarch 31, |       
|                                                                                          |  | 2005                        |        |   | 2004 |  
|Cash flows from operating activities:                                                     |  |                             |        |   |      |   |       |  
|Net (loss) earnings                                                                       |  | $                           | (3.2   | ) |      | $ | 19.6  |  
|Adjustments to reconcile net (loss) earnings to net cash (used for) operating activities: |  |                             |        |   |      |   |       |  
|Depreciation and amortization                                                             |  |                             | 36.4   |   |      |   | 34.9  |  
|Deferred income taxes                                                                     |  |                             | (1.4   | ) |      |   | 0.3   |  
|Equity (earnings) from affiliates, net                                                    |  |                             | (8.4   | ) |      |   | (6.6  | )
|Chapter 11 reorganization costs, net                                                      |  |                             | 2.0    |   |      |   | 2.5   |  
|Chapter 11 reorganization costs payments                                                  |  |                             | (3.4   | ) |      |   | (6.9  | )
|Restructuring charges, net of reversals                                                   |  |                             | 8.2    |   |      |   | 2.0   |  
|Restructuring payments                                                                    |  |                             | (12.8  | ) |      |   | (1.2  | )
|Cash effect of hedging activities                                                         |  |                             | (5.7   | ) |      |   | 2.6   |  
|Increase (decrease) in cash from change in:                                               |  |                             |        |   |      |   |       |  
|Receivables                                                                               |  |                             | (38.7  | ) |      |   | (75.6 | )
|Inventories                                                                               |  |                             | (19.3  | ) |      |   | (10.9 | )
|Other current assets                                                                      |  |                             | (5.0   | ) |      |   | 0.3   |  
|Other noncurrent assets                                                                   |  |                             | (5.5   | ) |      |   | (6.9  | )
|Accounts payable and accrued expenses                                                     |  |                             | (43.2  | ) |      |   | 12.6  |  
|Income taxes payable                                                                      |  |                             | 6.4    |   |      |   | (3.9  | )
|Other long-term liabilities                                                               |  |                             | (3.4   | ) |      |   | 1.9   |  
|Other, net                                                                                |  |                             | (1.5   | ) |      |   | (1.3  | )
|                                                                                          |  |                             |        |   |      |   |       |  
|Net cash (used for) operating activities                                                  |  |                             | (98.5  | ) |      |   | (36.6 | )
|                                                                                          |  |                             |        |   |      |   |       |  
|Cash flow from investing activities:                                                      |  |                             |        |   |      |   |       |  
|Purchases of property, plant and equipment and computer software                          |  |                             | (26.9  | ) |      |   | (16.7 | )
|Distributions from equity affiliates                                                      |  |                             | 6.0    |   |      |   |      |  
|Proceeds from the sale of assets                                                          |  |                             | 1.2    |   |      |   | 0.9   |  
|                                                                                          |  |                             |        |   |      |   |       |  
|Net cash (used for) investing activities                                                  |  |                             | (19.7  | ) |      |   | (15.8 | )
|                                                                                          |  |                             |        |   |      |   |       |  
|Cash flows from financing activities:                                                     |  |                             |        |   |      |   |       |  
|Increase in short-term debt, net                                                          |  |                             | 7.7    |   |      |   | 5.1   |  
|Payments of long-term debt                                                                |  |                             | (1.5   | ) |      |   | (0.7  | )
|Other, net                                                                                |  |                             |       |   |      |   | (0.2  | )
|                                                                                          |  |                             |        |   |      |   |       |  
|Net cash provided by financing activities                                                 |  |                             | 6.2    |   |      |   | 4.2   |  
|                                                                                          |  |                             |        |   |      |   |       |  
|Effect of exchange rate changes on cash and cash equivalents                              |  |                             | (2.3   | ) |      |   |      |  
|                                                                                          |  |                             |        |   |      |   |       |  
|Net (decrease) in cash and cash equivalents                                               |  |                             | (114.3 | ) |      |   | (48.2 | )
|Cash and cash equivalents at beginning of year                                            |  |                             | 515.9  |   |      |   | 484.3 |  
|                                                                                          |  |                             |        |   |      |   |       |  
|Cash and cash equivalents at end of period                                                |  | $                           | 401.6  |   |      | $ | 436.1 |  
|                                                                                          |  |                             |        |   |      |   |       |  



See accompanying notes
to condensed consolidated financial statements beginning on page 36.



35



---

##### Table of Contents



Armstrong World Industries,
Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



NOTE 1. BASIS OF PRESENTATION



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 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.



The accounting policies used in preparing these statements are the same as those used in
preparing AHIs consolidated financial statements for the year ended December 31, 2004, which includes the accounts of AHI and its majority-owned subsidiaries. These condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in AHIs Form 10-K for the fiscal year ended December 31, 2004. In the opinion of management, all adjustments of a normal recurring nature have been included to provide a fair
statement of the results for the reporting periods presented. Quarterly results are not necessarily indicative of annual earnings, primarily due to the different level of sales in each quarter of the year and the possibility of changes in general
economic conditions.



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 changes, 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.



Operating results for the first quarter of 2005 and the corresponding period of 2004 included in this report are unaudited.



Certain prior year amounts have been reclassified to conform to the current year
presentation. These reclassifications were made to the condensed consolidated statement of earnings and primarily consisted of reclassifying 2004 amounts from other non-operating income and other non-operating expense to selling, general and
administrative (SG&A) expense and discontinued operations. In addition, 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. The Act affects both operating income and balance sheet liabilities over time. Since the Act was effective retroactive to January 1, 2004 and the total year benefit was $7 million, operating income for the
three months ended March 31, 2004 benefited by $1.8 million. The $1.8 million benefit in 2004 was recorded in cost of goods sold ($1.0 million) and SG&A ($0.8 million). The impact of the Act also decreased income tax expense in the first quarter
of 2004 by $0.1 million. Operating income in the first quarter of 2005 also benefited from the



36



---

##### Table of Contents

effects of the Act by $2.3 million (cost of goods sold by $1.4 million and SG&A by $0.9 million). The impact of the Act decreased income tax expense in
the first quarter of 2005 by $0.4 million.



There would have been no effect on
net income if AHI had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-based Compensation, to stock-based employee compensation in 2005 or 2004.



NOTE 2. CHAPTER 11 REORGANIZATION



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 14 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.



37



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(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



38



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



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 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. A motion to dismiss the appeal was filed by the Committee of Unsecured
Creditors on March 29, 2005. AWI is also reviewing other options to resolve its Chapter 11 Case, and is monitoring a proposed asbestos claims litigation reform bill in Congress (see the discussion under Potential Legislation in Note 14).
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 14 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.



39



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



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.



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
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



40



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



| |  |  | 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.



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.
| | - |  | ------------------------------------------------------------------------



41



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



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.



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



42



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



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 14.



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 is scheduled to mature on December 8, 2005. As of March 31, 2005, AWI had approximately $42.4 million in letters of credit, which were issued pursuant to the DIP Facility. As of March 31, 2005, AWI had
$221.9 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 March 31, 2005 and December 31,2004. 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 14 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.



43



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(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 the first quarters of 2005 and 2004:



|                                                  |  |      |      |   |      |   |      |  
|------------------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|                                                  |  | 2005 |      |   | 2004 |  
|Professional fees                                 |  | $    | 3.8  |   |      | $ | 3.3  |  
|Interest income, post-Filing                      |  |      | (1.9 | ) |      |   | (0.8 | )
|Other expense directly related to bankruptcy, net |  |      | 0.1  |   |      |   |     |  
|                                                  |  |      |      |   |      |   |      |  
|Total Chapter 11 reorganization costs, net        |  | $    | 2.0  |   |      | $ | 2.5  |  
|                                                  |  |      |      |   |      |   |      |  



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.



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 3. SEGMENT RESULTS



(amounts in millions)



|                                  |  |                              |       |      |   |      
|--------------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                                  |  | Three Months Ended March 31,
|                                  |  | 2005                         |       | 2004
|Net sales to external customers   |  |                              |       |      |   |      
|Resilient Flooring                |  | $                            | 284.9 |      | $ | 304.1
|Wood Flooring                     |  |                              | 190.1 |      |   | 197.4
|Textiles and Sports Flooring      |  |                              | 62.9  |      |   | 62.3 
|Building Products                 |  |                              | 253.6 |      |   | 230.0
|Cabinets                          |  |                              | 49.2  |      |   | 51.2 
|                                  |  |                              |       |      |   |      
|Total sales to external customers |  | $                            | 840.7 |      | $ | 845.0
|                                  |  |                              |       |      |   |      



44



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



|                                    |  |                              |       |   |      |   |       |  
|----------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ----- | -
|                                    |  | Three Months Ended March 31, |      
|                                    |  | 2005                         |       |   | 2004 |  
|Segment operating income (loss)     |  |                              |       |   |      |   |       |  
|Resilient Flooring                  |  | $                            | (9.6  | ) |      | $ | 15.0  |  
|Wood Flooring                       |  |                              | 8.8   |   |      |   | 10.3  |  
|Textiles and Sports Flooring        |  |                              | (5.9  | ) |      |   | (1.9  | )
|Building Products                   |  |                              | 35.3  |   |      |   | 27.9  |  
|Cabinets                            |  |                              | (5.9  | ) |      |   | 0.6   |  
|Unallocated Corporate (expense)     |  |                              | (15.2 | ) |      |   | (11.1 | )
|                                    |  |                              |       |   |      |   |       |  
|Total consolidated operating income |  | $                            | 7.5   |   |      | $ | 40.8  |  
|                                    |  |                              |       |   |      |   |       |  



|                                |  |                |         |                   |   |        
|------------------------------- |  | -------------- | ------- | ----------------- | - | -------
|                                |  | March 31, 2005 |         | December 31, 2004
|                                |  |                |         |                   |   |        
|Segment assets                  |  |                |         |                   |   |        
|Resilient Flooring              |  | $              | 759.2   |                   | $ | 737.9  
|Wood Flooring                   |  |                | 660.0   |                   |   | 663.6  
|Textiles and Sports Flooring    |  |                | 214.0   |                   |   | 218.1  
|Building Products               |  |                | 600.5   |                   |   | 596.3  
|Cabinets                        |  |                | 99.5    |                   |   | 102.2  
|                                |  |                |         |                   |   |        
|Total segment assets            |  |                | 2,333.2 |                   |   | 2,318.1
|Assets not assigned to segments |  |                | 2,187.4 |                   |   | 2,291.3
|                                |  |                |         |                   |   |        
|Total consolidated assets       |  | $              | 4,520.6 |                   | $ | 4,609.4
|                                |  |                |         |                   |   |        



NOTE 4. LIABILITIES SUBJECT TO COMPROMISE



As a result of
AWIs Chapter 11 filing (see Note 2), 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 condensed consolidated balance sheet based upon maturity date. AWIs asbestos liability is also recorded in
liabilities subject to compromise. See Note 2 for further discussion on how the Chapter 11 process may address AWIs liabilities subject to compromise and Note 14 for further discussion of AWIs asbestos liability.



45



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



Liabilities subject to compromise at March 31, 2005 and December 31, 2004 are as follows:



|                                                |  |               |         |                  |   |        
|----------------------------------------------- |  | ------------- | ------- | ---------------- | - | -------
|                                                |  | March 31,2005 |         | December 31,2004
|Debt (at face value)(1)                         |  | $             | 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 |  |               | 70.9    |                  |   | 70.4   
|Amounts due to affiliates                       |  |               | 4.7     |                  |   | 4.7    
|ESOP loan guarantee                             |  |               | 157.7   |                  |   | 157.7  
|                                                |  |               |         |                  |   |        
|Total liabilities subject to compromise         |  | $             | 4,871.4 |                  | $ | 4,870.9
|                                                |  |               |         |                  |   |        



|(2) | 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 $21.5 million in the first quarter of 2005 and $21.7 million in the first quarter of 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



NOTE 5. DISCONTINUED OPERATIONS



On
December 29, 1995, Armstrong sold a furniture subsidiary, Thomasville Furniture Industries. During the first quarter of 2004, AHI recorded a net loss of $0.4 million for an environmental indemnification related to this divestiture. This adjustment
was classified as discontinued operations since the original divestiture was reported as discontinued operations.



NOTE 6. INVENTORIES



|                             |  |                |       |   |                   |   |       |  
|---------------------------- |  | -------------- | ----- | - | ----------------- | - | ----- | -
|                             |  | March 31, 2005 |       |   | December 31, 2004 |  
|Finished goods               |  | $              | 375.9 |   |                   | $ | 362.9 |  
|Goods in process             |  |                | 45.4  |   |                   |   | 49.3  |  
|Raw materials and supplies   |  |                | 196.5 |   |                   |   | 206.9 |  
|Less LIFO and other reserves |  |                | (76.1 | ) |                   |   | (89.9 | )
|                             |  |                |       |   |                   |   |       |  
|Total inventories, net       |  | $              | 541.7 |   |                   | $ | 529.2 |  
|                             |  |                |       |   |                   |   |       |  



NOTE 7. EQUITY INVESTMENTS



Investments in affiliates were
$74.9 million at March 31, 2005, an increase of $2.4 million, reflecting the equity earnings of our 50% interest in our WAVE joint venture and our remaining 35% interest in Interface Solutions, Inc. (ISI). Condensed income statement data
for WAVE, our joint venture accounted for under the equity method of accounting, is summarized below:



|             |  |                              |      |      |   |     
|------------ |  | ---------------------------- | ---- | ---- | - | ----
|             |  | Three Months Ended March 31,
|             |  | 2005                         |      | 2004
|Net sales    |  | $                            | 72.6 |      | $ | 60.9
|Gross profit |  |                              | 20.7 |      |   | 17.4
|Net earnings |  |                              | 16.1 |      |   | 12.2



NOTE 8. GOODWILL AND INTANGIBLE ASSETS



As of January 1, 2005,
we had goodwill of approximately $136 million. Goodwill is required to be tested for impairment at least annually. We perform our annual assessment in the fourth quarter.



46



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



The following table represents the changes in goodwill for the first three months of 2005.



|                            |  |                 |       |                     |   |      |             |  |                |  |   |      
|--------------------------- |  | --------------- | ----- | ------------------- | - | ---- | ----------- |  | -------------- |  | - | -----
|                            |  | January 1, 2005 |       | Adjustments, net(1) |   |      | Impairments |  | March 31, 2005
|Goodwill by segment         |  |                 |       |                     |   |      |             |  |                |  |   |      
|Wood Flooring               |  | $               | 108.2 |                     |   |     |             |  |               |  | $ | 108.2
|Building Products           |  |                 | 15.2  |                     | $ | (0.7 | )           |  |               |  |   | 14.5 
|Cabinets                    |  |                 | 12.6  |                     |   |     |             |  |               |  |   | 12.6 
|                            |  |                 |       |                     |   |      |             |  |                |  |   |      
|Total consolidated goodwill |  | $               | 136.0 |                     | $ | (0.7 | )           |  |               |  | $ | 135.3
|                            |  |                 |       |                     |   |      |             |  |                |  |   |      



|(1) | Consists of the effects of foreign exchange.
|--- | --------------------------------------------



The following table details amounts related to AHIs intangible assets as of March 31, 2005 and December 31, 2004.



|                               |  |                     |       |                         |   |                     |  |                         |       |  |   |     
|------------------------------ |  | ------------------- | ----- | ----------------------- | - | ------------------- |  | ----------------------- | ----- |  | - | ----
|                               |  | March 31, 2005      |       | December 31, 2004      
|                               |  | GrossCarryingAmount |       | AccumulatedAmortization |   | GrossCarryingAmount |  | AccumulatedAmortization
|Amortized intangible assets    |  |                     |       |                         |   |                     |  |                         |       |  |   |     
|Computer software              |  | $                   | 110.8 |                         | $ | 69.4                |  | $                       | 109.8 |  | $ | 66.4
|Land use rights and other      |  |                     | 4.4   |                         |   | 1.0                 |  |                         | 4.4   |  |   | 1.0 
|                               |  |                     |       |                         |   |                     |  |                         |       |  |   |     
|Total                          |  | $                   | 115.2 |                         | $ | 70.4                |  | $                       | 114.2 |  | $ | 67.4
|                               |  |                     |       |                         |   |                     |  |                         |       |  |   |     
|Unamortized intangible assets  |  |                     |       |                         |   |                     |  |                         |       |  |   |     
|Trademarks and brand names     |  | $                   | 29.2  |                         |   |                     |  | $                       | 29.2  |  |   |     
|                               |  |                     |       |                         |   |                     |  |                         |       |  |   |     
|Other intangible assets, gross |  | $                   | 144.4 |                         |   |                     |  | $                       | 143.4 |  |   |     
|                               |  |                     |       |                         |   |                     |  |                         |       |  |   |     



|                                          |  |   |    
|----------------------------------------- |  | - | ---
|Aggregate Amortization Expense            |  |   |    
|For the three months ended March 31, 2005 |  | $ | 4.0
|For the three months ended March 31, 2004 |  | $ | 3.8



NOTE 9. RESTRUCTURING AND OTHER ACTIONS



Net restructuring
charges of $8.2 million and $2.0 million were recorded in the first quarters of 2005 and 2004, respectively. These charges are summarized in the following table:



|                       |  |                                                  |      |   |      |   |      |         |  |                                               
|---------------------- |  | ------------------------------------------------ | ---- | - | ---- | - | ---- | ------- |  | ----------------------------------------------
|                       |  | Net Charge/(Reversal)Three Months EndedMarch 31, |      |   |     
|                       |  | 2005                                             |      |   | 2004 |   |      | Segment
|Action Title           |  |                                                  |      |   |      |   |      |         |  |                                               
|Lancaster Plant        |  | $                                                | 6.8  |   |      |   |     |         |  | Resilient Flooring                            
|Hoogezand              |  |                                                  | 1.0  |   |      |   | 2.3  |         |  | Building Products                             
|North America SG&A     |  |                                                  | (0.1 | ) |      |   |     |         |  | Resilient Flooring                            
|Morristown             |  |                                                  | 0.2  |   |      |   |     |         |  | Cabinet Products                              
|Searcy                 |  |                                                  | 0.1  |   |      |   |     |         |  | Wood Flooring                                 
|Oss                    |  |                                                  | 0.2  |   |      |   |     |         |  | Textiles & Sports Flooring                    
|European consolidation |  |                                                  |     |   |      |   | (0.3 | )       |  | Resilient Flooring, Textiles & Sports Flooring
|                       |  |                                                  |      |   |      |   |      |         |  |                                               
|Total                  |  | $                                                | 8.2  |   |      | $ | 2.0  |         |  |                                               
|                       |  |                                                  |      |   |      |   |      |         |  |                                               



47



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



Lancaster Plant: The charge related to the fourth quarter 2004 decision to cease commercial flooring
production at Lancaster in 2006. Commercial flooring production requirements will be serviced by other facilities around the world. Of the $6.8 million charge in 2005, $6.2 million is a non-cash charge related to termination benefits to be paid
through the U.S. pension plan. The other $0.6 million is comprised of severance and related costs. We have incurred $7.8 million of severance and pension related restructuring charges to-date. We expect to incur an additional $31 million of
restructuring charges for severances and pension benefits between 2005 and 2008, with the majority of charges incurred in 2005. Additionally, we recorded $2.1 million of accelerated depreciation and $0.3 million of other related costs in the first
quarter of 2005, both in cost of goods sold.



Hoogezand: These charges
are related to the first quarter 2004 decision to close the manufacturing facility and are 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 restructuring charges of $11.9 million to-date, and expect to incur an additional $6.9 million in the remainder of
2005. Additionally, we recorded $0.5 million and $0.7 million of accelerated depreciation in cost of goods sold in the first quarters of 2005 and 2004, respectively. We also recorded $0.1 million of other related costs in cost of goods sold in the
first quarter of 2005.



North America SG&A: The 2005 net reversal of
$0.1 million was related to Resilient Flooring and was recorded for 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 $5.2 million of restructuring charges to-date and do not expect to incur any additional charges.



Morristown: The 2005 charge related to the fourth quarter 2004 decision to close a
plant in Tennessee in the first quarter of 2005. Manufacturing was consolidated at two existing plants in the United States. We have incurred $0.4 million of severance related restructuring charges and $0.2 million of related shutdown costs to-date
and expect to incur an additional $0.3 million of shutdown costs in 2005. Additionally, we recorded $0.1 million of accelerated depreciation and $0.8 million of other related costs in 2005, both in cost of goods sold.



Searcy: The charge related to the fourth quarter 2004 decision to close a solid
hardwood flooring location in Arkansas in the first quarter of 2005 and was 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
$0.9 million of restructuring charges to-date and expect to incur an additional $0.1 million in the second quarter of 2005.



Oss: The 2005 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 $4.9 million of restructuring charges to-date and do not expect to incur any additional costs in the
future.



European consolidation: The net reversals in 2004 comprised
certain severance accruals that were no longer necessary in the remaining accruals from the 2003 and 2002 charges in the Resilient Flooring ($0.2 million) and Textiles and Sports Flooring ($0.1 million) segments.



48



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



The following table summarizes activity in the restructuring accruals for the first three months of 2005 and 2004.



|     |  |                  |      |              |   |       |             |  |       |     |  |               |      |   |  |   |     
|---- |  | ---------------- | ---- | ------------ | - | ----- | ----------- |  | ----- | --- |  | ------------- | ---- | - |  | - | ----
|     |  | BeginningBalance |      | CashPayments |   |       | Net Charges |  | Other |     |  | EndingBalance
|2005 |  | $                | 24.8 |              | $ | (12.8 | )           |  | $     | 2.0 |  | $             | (0.4 | ) |  | $ | 13.6
|2004 |  |                  | 10.0 |              |   | (1.2  | )           |  |       | 2.0 |  |               | 0.1  |   |  |   | 10.9



The amount in other for
2005 and 2004 is related to the effects of foreign exchange.



Of the March 31,
2005 and 2004 ending balances, $1.3 million is reported in liabilities subject to compromise.



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



NOTE 10. INCOME TAX EXPENSE



|                                                        |  |                             |     |      |   |     
|------------------------------------------------------- |  | --------------------------- | --- | ---- | - | ----
|                                                        |  | Three months endedMarch 31,
|                                                        |  | 2005                        |     | 2004
|Earnings from continuing operations before income taxes |  | $                           | 5.5 |      | $ | 36.8
|Income tax expense                                      |  | $                           | 8.7 |      | $ | 16.8



Tax expense of $8.7 million recorded
in the first three months of 2005 represents the estimated effective tax rate for 2005 applied against year-to-date taxable income of $5.5 million, taking into consideration the matters described below. The resulting three-month tax rate of 158.2%
is higher than the statutory US Federal and state rate primarily because of $13.8 million in foreign losses incurred in the quarter for which no tax benefit can be recognized as we have provided valuation allowances on the losses in these foreign
jurisdictions. The tax rate also increased due to certain adjustments of tax reserves related to Canadian withholding taxes, a German tax audit item, state tax reserve needs, and additional valuation allowances placed on state net operating losses.



Tax expense of $16.8 million recorded in the first quarter of 2004 represents
the estimated effective tax rate for 2004 applied against quarterly pre-tax income of $36.8 million.



49



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



NOTE 11. PENSIONS



Following are the components of net periodic benefit costs:



|                                              |  |                              |       |   |      |   |       |  
|--------------------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ----- | -
|                                              |  | Three Months Ended March 31, |      
|                                              |  | 2005                         |       |   | 2004 |  
|U.S. defined-benefit plans                    |  |                              |       |   |      |   |       |  
|Pension Benefits                              |  |                              |       |   |      |   |       |  
|Service cost of benefits earned               |  | $                            | 6.2   |   |      | $ | 5.8   |  
|Interest cost on projected benefit obligation |  |                              | 24.0  |   |      |   | 22.8  |  
|Expected return on plan assets                |  |                              | (39.5 | ) |      |   | (36.9 | )
|Amortization of prior service cost            |  |                              | 4.1   |   |      |   | 4.3   |  
|Recognized net actuarial loss                 |  |                              | 0.4   |   |      |   | 0.4   |  
|                                              |  |                              |       |   |      |   |       |  
|Net periodic pension (credit)                 |  | $                            | (4.8  | ) |      | $ | (3.6  | )
|                                              |  |                              |       |   |      |   |       |  
|Retiree Health and Life Insurance Benefits    |  |                              |       |   |      |   |       |  
|Service cost of benefits earned               |  | $                            | 0.7   |   |      | $ | 0.7   |  
|Interest cost on projected benefit obligation |  |                              | 5.1   |   |      |   | 5.5   |  
|Amortization of prior service benefit         |  |                              | (1.4  | ) |      |   | (1.4  | )
|Recognized net actuarial loss                 |  |                              | 3.0   |   |      |   | 2.4   |  
|                                              |  |                              |       |   |      |   |       |  
|Net periodic postretirement benefit cost      |  | $                            | 7.4   |   |      | $ | 7.2   |  
|                                              |  |                              |       |   |      |   |       |  
|                                              | 
|                                              |  | Three Months Ended March 31, |      
|                                              |  | 2005                         |       |   | 2004 |  
|Non-U.S. defined-benefit plans                |  |                              |       |   |      |   |       |  
|Pension Benefits                              |  |                              |       |   |      |   |       |  
|Service cost of benefits earned               |  | $                            | 2.6   |   |      | $ | 2.5   |  
|Interest cost on projected benefit obligation |  |                              | 5.7   |   |      |   | 5.3   |  
|Expected return on plan assets                |  |                              | (4.1  | ) |      |   | (3.7  | )
|Amortization of prior service cost            |  |                              |      |   |      |   | 0.1   |  
|Recognized net actuarial loss                 |  |                              | 0.5   |   |      |   | 0.1   |  
|                                              |  |                              |       |   |      |   |       |  
|Net periodic pension cost                     |  | $                            | 4.7   |   |      | $ | 4.3   |  
|                                              |  |                              |       |   |      |   |       |  



We previously disclosed in our
financial statements for the year ended December 31, 2004 that we expected to contribute $22.7 million to our non-U.S. defined benefit pension plans in 2005. As of March 31, 2005, $9.6 million of contributions have been made. We presently anticipate
contributing an additional $16.5 million to fund our pension plans in 2005 for a total of $26.1 million.



50



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



NOTE 12. 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 the first three months of 2005 and 2004:



|                                        |  |      |      |   |      |   |      |  
|--------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|                                        |  | 2005 |      |   | 2004 |  
|Balance at January 1                    |  | $    | 22.6 |   |      | $ | 25.5 |  
|Reductions for payments                 |  |      | (8.5 | ) |      |   | (9.8 | )
|Current year warranty accruals          |  |      | 8.7  |   |      |   | 9.5  |  
|Preexisting warranty accrual changes    |  |      | (0.1 | ) |      |   | (0.2 | )
|Effects of foreign exchange translation |  |      | (0.4 | ) |      |   | (0.2 | )
|                                        |  |      |      |   |      |   |      |  
|Balance at March 31                     |  | $    | 22.3 |   |      | $ | 24.8 |  
|                                        |  |      |      |   |      |   |      |  



NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION



|                       |  |                             |     |      |   |     
|---------------------- |  | --------------------------- | --- | ---- | - | ----
|                       |  | Three Months EndedMarch 31,
|                       |  | 2005                        |     | 2004
|Interest paid          |  | $                           | 0.5 |      | $ | 0.4 
|Income taxes paid, net |  | $                           | 4.0 |      | $ | 19.9



NOTE 14. 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



51



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



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 2 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. A motion to dismiss the appeal was filed by the Committee of Unsecured Creditors on March
29, 2005. AWI is also reviewing other options to resolve its Chapter 11 Case. See Note 2 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 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



52



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



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 March 31, 2005 and December 31, 2004, 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 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



53



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



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 March 31, 2005 and December 31, 2004. 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 March 31, 2005 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 first quarter of 2005.



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. Additionally, AWI did
not receive any asbestos-related insurance recoveries during the first quarters of 2005 and 2004. 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 April 19, 2005 asbestos personal injury claims reform legislation was introduced, as the
FAIR Act of 2005 (S.852), to the United States Senate. Members of the Senate are currently reviewing the bill. There is uncertainty as to whether this bill or any asbestos reform proposal will become law, and what impact there might be on AWIs
Chapter 11 Case.



If legislation as currently proposed is enacted into law,
AWIs recorded asbestos liability would likely be materially reduced from the $3.2 billion amount currently implied by the POR, but its size would depend on AWIs payment obligations under the law and the present value of those
obligations. In such event, the



54



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



POR would no longer provide an appropriate framework for a reorganization of AWI, and AWI would seek to develop a new plan of reorganization based on a
re-evaluation of the then value of AWIs assets and ongoing businesses, the amount of allowed unsecured claims against AWI (including any post-petition interest that may be allowed on such claims, as to which no provision is currently included
under the POR), and other factors. Under the absolute priority rule applicable in Chapter 11, AWIs shareholder would not be entitled to any recovery until the allowed claims of all of its creditors have been satisfied. We do not know enough
today to predict the likely terms of a reorganization plan that may be feasible under such circumstances, or if such reorganization would result in existing AHI shareholders receiving or retaining any equity value in AWI upon AWIs emergence
from Chapter 11.



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.



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.



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



55



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



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. 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 (DOJ) 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



56



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)



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. On April 8, 2005, AWI and EPA filed a joint motion with the bankruptcy court seeking approval of the
Settlement Agreement. May 16, 2005 has been set as the hearing date.



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 $28.3 million and $28.0 million at March 31, 2005 and December 31, 2004, respectively were for potential environmental liabilities that we consider
probable and for which a reasonable estimate of the probable liability could be made. 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, $19.4 million of the March 31, 2005 and $18.6 million of the December 31, 2004 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 at March 31, 2005 and December 31, 2004.



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.



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.



57



---

##### Table of Contents

Armstrong World Industries, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(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, legal fees and costs, 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.



58



---

##### Table of Contents



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



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. The following discussion and analysis pertains to both Armstrong Holdings, Inc. and its subsidiaries and Armstrong World Industries, Inc. and its subsidiaries due to the lack of material differences in the financial statements,
as explained in Note 1 of the Condensed Consolidated Financial Statements. Due to this lack of material differences, 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.



This discussion should be read in conjunction with the financial statements and the
accompanying notes included elsewhere in this Form 10-Q. 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-Q.



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. We believe that this non-GAAP reference
provides a clearer picture of our operating performance. Furthermore, management evaluates the performance of the businesses excluding the impact of foreign exchange rates.



We maintain a Web site 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).



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 operate 41 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.



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.



59



---

##### Table of Contents

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 2 of the Condensed Consolidated Financial Statements for information on the Chapter 11 Case and Note 14 of the Condensed
Consolidated Financial Statements for information on asbestos litigation.



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®,
Robbins®, and Armstrong.



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 the 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®.



We also report an Unallocated Corporate segment, which includes assets and expenses that have not been allocated to the business units.



See Note 3 of the Condensed Consolidated Financial Statements for additional financial
information on our reportable segments.



60



---

##### Table of Contents

Financial highlights for the first quarter:



|                                          |  |                            |             |   |                                   |                                           |       |   |  |             |    |  |       |   
|----------------------------------------- |  | -------------------------- | ----------- | - | --------------------------------- | ----------------------------------------- | ----- | - |  | ----------- | -- |  | ----- | --
|                                          |  | Three MonthsEnded March 31 |             |   | Change is Favorable/(Unfavorable) |                                          
|                                          |  |                            | As Reported |   |                                   | Excluding Effects ofForeign ExchangeRates |      
|                                          |  | 2005                       |             |   | 2004                              |                                           |       |  
|Total Consolidated Net Sales              |  | $                          | 840.7       |   |                                   | $                                         | 845.0 |   |  | (0.5        | )% |  | (2.2  | )%
|Operating Income                          |  | $                          | 7.7         |   |                                   | $                                         | 40.8  |   |  | (81.1       | )% |  | (81.3 | )%
|Net decrease in cash and cash equivalents |  | $                          | (114.3      | ) |                                   | $                                         | (48.2 | ) |  | Unfavorable |    |  |       |   



In the first quarter of 2005:



| |  |  | In the Americas, we experienced weak demand in Resilient Flooring, while demand in Wood Flooring was mixed. We continued to experience positive demand in Building Products.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our sales performance in Europe was mixed, but essentially flat overall in comparison with the prior year.
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | We incurred higher raw material costs for PVC resins but lumber prices declined.
| | - |  | --------------------------------------------------------------------------------



| |  |  | We incurred significant expenses for cost reduction activities initiated in prior years.
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | We used more cash than the first quarter of 2004.
| | - |  | -------------------------------------------------



Our businesses experienced the following results in the first quarter of 2005:



| |  |  | Resilient Flooring recorded an operating loss primarily due to the impact of declining sales volume, increased costs to purchase raw materials and charges related to cost reduction
initiatives.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Wood Floorings sales and operating income declined.
| | - |  | ----------------------------------------------------



| |  |  | Textiles and Sports Floorings operating loss increased primarily due to sales volume declines.
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | Building Products continued to have strong sales and earnings.
| | - |  | --------------------------------------------------------------



| |  |  | Cabinets results were negatively affected by higher selling, general and administrative (SG&A) expenses, costs related to the Morristown plant shutdown and lower
sales.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Factors Affecting Revenues



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 the first quarter of 2005, these markets experienced the following:



| |  |  | In the North American residential market, housing activity remained strong. U.S. single family housing completions in the first quarter of 2005 were approximately
7% higher than in the first quarter of 2004 (our products tend to be installed towards the latter stages of the housing construction process). U.S. housing starts in the first quarter of 2005 were approximately 7%
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



61



---

##### Table of Contents

| | higher than the first quarter of 2004. Sales of existing homes increased approximately 8% in the first quarter of 2005 compared to the first quarter of 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------



U.S. retail sales of building materials,
garden equipment and supply stores (an indicator of home renovation activity) increased approximately 11% in the first quarter of 2005 over sales levels in the first quarter of 2004. This was partially due to the continued momentum in existing home
sales.



| |  |  | The North American commercial market continued to expand in the first quarter of 2005 in dollar terms with inflationary effects suggesting only moderate growth in square footage.
Industry statistics indicate continued marginal improvements for project starts in 2005 although some short-term declines have been observed in the key segments of office and retail. Office vacancy rates dropped to their lowest levels in nine
quarters which could positively impact office starts and renovations in future quarters, contingent upon employment-related demand for new and renovated office space.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Europe, we experienced mixed market conditions in the Western European countries. The economic environment adversely impacted both price and volume in some of our businesses.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Asia Pacific, we experienced strong demand in Australia and India.
| | - |  | ---------------------------------------------------------------------



Quality and Customer Service Issues. Our quality and customer service are critical components of our total value proposition. In the first quarter of 2005, we
experienced the following:



| |  |  | Our performance in fulfilling orders for the Cabinets business has been negatively affected by plant inefficiencies resulting from the transfer of production related to the
Morristown plant shutdown.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pricing Initiatives. During
2005 and 2004, changes in costs for raw materials, labor and labor-related expenses, energy and other areas led us to modify prices. These pricing initiatives positively impacted net sales in the first quarter of 2005 compared to 2004. The most
significant of these pricing actions were:



| |  |  | In Resilient Flooring, we announced an increase for selected residential and commercial vinyl products effective February 1, 2005. Additionally, we increased prices on selected
residential and commercial vinyl flooring products, effective in the third quarter and fourth quarters of 2004, respectively. We also increased prices for commercial vinyl composition tile products, effective in the second quarter and third quarter
of 2004.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Wood Flooring, we increased prices on selected engineered wood products, effective January 1, 2005. We also increased prices for selected solid wood products, effective in the
second quarter 2004. Additionally, in the second quarter of 2004, we lowered prices for selected engineered wood products in response to imported and domestic competitive products.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Building Products, a price increase was announced to independent retailers for all ceiling products in the North American markets, effective February 1, 2005. Also in the first
quarter, we announced a price increase for North American retail home centers, effective June 2005. A price increase was implemented for most worldwide commercial markets, effective during the first quarter of 2005. Additionally, we increased prices
for most commercial acoustical ceiling products in the U.S. market, effective July 2004. Prices were increased for our large home center customers and residential wholesalers, effective through the second half of 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Cabinets, we announced a price increase in November 2004 that became effective in the first quarter of 2005. We also increased prices to our retail, builder and distributor
customers, effective in June 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



62



---

##### Table of Contents

| |  |  | We made several price concessions for certain products in some of our segments and geographic regions, particularly for Resilient Flooring and Wood Flooring, to respond to
competitive conditions.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In certain cases, price increases
actually realized were less than the announced price increases because we had to adjust to competitive actions and changing market conditions.



The pricing actions described above positively impacted consolidated net sales in the first quarter of 2005 by approximately $15 million, when compared to the first
quarter of 2004.



Impact From Major Customers Decisions.
Lowes Companies, Inc., one of our largest customers, increased its purchasing of laminate flooring products from other suppliers in the second quarter of 2004. Further, Lowes advised us in 2004 that they will reduce the number of
laminate flooring products they purchase from us starting in the first quarter of 2005. Our first quarter 2005 total laminate flooring sales declined approximately 21% from the first quarter of 2004, primarily as a result of these actions. We
estimate that Lowes actions will reduce our annual sales in 2005 by approximately $55 million compared to 2004 levels, and have a material adverse impact on operating income depending on the implementation of these actions by Lowes.



Certain national retailers dedicated less of their selling space to vinyl
flooring as customer demand for these products declined. This action contributed to the sales volume decline in the first quarter of 2005 in our Resilient Flooring Americas business.



Factors Affecting Operating Costs



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



Our largest individual raw
materials 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 the first quarter of 2005, we experienced the following:



| |  |  | Prices for hardwood lumber decreased through the first quarter of 2005, primarily due to lower demand. Our cost for acquiring lumber was approximately $12 million lower than in the
first quarter of 2004.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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. In January 2005,
a U.S. supplier ceased producing PVC resins. While we have been able to address our PVC needs from other suppliers, the reduced manufacturing capacity led to upward pricing pressure. Cost to acquire PVC resin, plasticizers and film prices increased
by approximately $11 million compared to the first quarter of 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We incurred approximately $3 million of additional costs for natural gas compared to the first quarter of 2004.



Production wages and non-production salaries increased approximately $6.3 million for the first quarter of 2005 compared to the first quarter of 2004 due to wage and
salary rate increases.



Cost Reduction Initiatives. During 2004, we
implemented several manufacturing and organizational changes to improve our cost structure and enhance our competitive position. We did not initiate any



63



---

##### Table of Contents

major cost reduction activities in the first quarter of 2005 but did incur costs in the first quarter 2005 related to previously announced cost reduction
initiatives. The major 2004 initiatives were:



| |  |  | We ceased production of certain products at our Resilient Flooring manufacturing plant in Lancaster, Pennsylvania, transferring production to other Resilient Flooring plants. We
also announced that we will cease production of certain other products in Lancaster by December 31, 2005.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We announced 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, and production will be transferred to another Building Products location in Münster, Germany.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | We restructured the sales force and management structure in our North America flooring organization.
| | - |  | ----------------------------------------------------------------------------------------------------



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



We incurred the following expenses in 2005 due to implementing these initiatives:



|                           |  |                   |     |                       |   |               |  |   |     
|-------------------------- |  | ----------------- | --- | --------------------- | - | ------------- |  | - | ----
|                           |  | Cost ofGoods Sold |     | Restructuring Charges |   | TotalExpenses
|Resilient Flooring         |  | $                 | 2.4 |                       | $ | 6.7           |  | $ | 9.1 
|Wood Flooring              |  |                   |    |                       |   | 0.1           |  |   | 0.1 
|Textiles & Sports Flooring |  |                   |    |                       |   | 0.2           |  |   | 0.2 
|Building Products          |  |                   | 0.6 |                       |   | 1.0           |  |   | 1.6 
|Cabinets                   |  |                   | 0.9 |                       |   | 0.2           |  |   | 1.1 
|                           |  |                   |     |                       |   |               |  |   |     
|Total Consolidated         |  | $                 | 3.9 |                       | $ | 8.2           |  | $ | 12.1
|                           |  |                   |     |                       |   |               |  |   |     



Cost of goods sold includes $2.7
million of accelerated depreciation and $1.2 million of other related costs.



We incurred $3.0 million for cost reduction initiatives in the first quarter of 2004. All of the expenses were recorded in the Building Products segment related to closing the Hoogezand plant. The expenses were recorded within cost of goods
sold, primarily for accelerated depreciation ($0.7 million) and restructuring and reorganization charges, primarily for severance ($2.3 million).



See Note 9 of the Condensed Consolidated Financial Statements for more information on restructuring charges.



Factors Affecting Cash Flow



Historically, excluding the cash demands for asbestos-related claims in 2000 and prior years, we typically generate negative cash flow from our operating activities in
the first quarter, but generate positive cash flow from operating activities on an annual basis. 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. To maintain and enhance our operating efficiencies, we typically invest in property, plant & equipment (PP&E) and computer
software.



64



---

##### Table of Contents

During the first quarter of 2005, our cash and cash equivalents balance decreased by $114.3 million, compared to a
decrease of $48.2 million during the same period of 2004. The change was due primarily to an additional $61.9 million of cash used by operations. See Financial Condition and Liquidity for further discussion.



Employee Relations



As of March 31, 2005, we had approximately 14,900 full-time and part-time employees
worldwide, compared to approximately 15,500 employees as of December 31, 2004. The decline reflects headcount reductions associated with recent cost reduction initiatives in Resilient Flooring and Wood Flooring. During the third quarter of 2005,
collective bargaining agreements covering certain employees at six domestic plants will expire. Employees at five of the six plants are represented by the same international union. As of the date of this filing, no employees are working under an
expired contract.



RESULTS OF OPERATIONS



Unless otherwise indicated, net sales in these results of operations are reported based upon
the location where the sale was made.



2005
COMPARED TO 2004



CONSOLIDATED RESULTS



|                             |  |                             |       |                                   |   |             |  |       |                                              |  |       |   
|---------------------------- |  | --------------------------- | ----- | --------------------------------- | - | ----------- |  | ----- | -------------------------------------------- |  | ----- | --
|                             |  | Three Months EndedMarch 31, |       | Change is Favorable/(Unfavorable) |  
|                             |  | 2005                        |       | 2004                              |   | As Reported |  |       | Excluding Effects ofForeign ExchangeRates(1) | 
|Net Sales:                   |  |                             |       |                                   |   |             |  |       |                                              |  |       |   
|Americas                     |  | $                           | 600.6 |                                   | $ | 618.3       |  | (2.9  | )%                                           |  | (3.1  | )%
|Europe                       |  |                             | 214.7 |                                   |   | 202.2       |  | 6.2   | %                                            |  | (0.1  | )%
|Pacific                      |  |                             | 25.4  |                                   |   | 24.5        |  | 3.7   | %                                            |  | 2.0   | % 
|                             |  |                             |       |                                   |   |             |  |       |                                              |  |       |   
|Total Consolidated Net Sales |  | $                           | 840.7 |                                   | $ | 845.0       |  | (0.5  | )%                                           |  | (2.2  | )%
|Operating Income             |  | $                           | 7.7   |                                   | $ | 40.8        |  | (81.1 | )%                                           |  | (81.3 | )%



|(1) | Excludes favorable foreign exchange rate effect in translation of $14.9 million on net sales
and $0.3 million on operating income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------



Net sales in the Americas
decreased by approximately $18 million primarily from sales volume decreases in Resilient Flooring and Wood Flooring, partially offset by sales increases in Building Products (See Overview  Factors Affecting Revenues).



Excluding the translation effect of changes in foreign exchange rates, net sales in the
European markets were flat as small increases in Building Products and Resilient Flooring were offset by volume declines in Textiles and Sports Flooring.



Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific area increased $0.5 million, primarily as a result of strong Building
Products sales in Australia and India.



Cost of goods sold in the first quarter
of 2005 was 78.8% of net sales, compared to 78.2% in the same period of 2004. The percentage increase was primarily due to $3.2 million more expense recorded for cost reduction initiatives in 2005, higher raw material and energy costs of
approximately $19 million and manufacturing inefficiencies, partially offset by benefits from cost reduction initiatives.



SG&A in the first quarter of 2005 was $170.4 million (20.3% of net sales), compared to $147.9 million (17.5% of net sales) for the first quarter of 2004. Excluding
the translation effect of changes in foreign exchange rates of $3.4 million, SG&A expenses were $19.1 million higher than the 2004 SG&A expenses.



65



---

##### Table of Contents

The increase was the result of higher selling, advertising and promotional spending and higher compensation costs.



We recorded a net restructuring charge of $8.2 million in the first quarter of 2005 compared
to $2.0 million in the first quarter of 2004. See Note 9 of the Condensed Consolidated Financial Statements for a description of the restructuring actions.



Equity earnings from our WAVE joint venture were $8.1 million in the first quarter of 2005 compared to $6.1 for the first quarter of 2004.



Operating income of $7.7 million in the first quarter of 2005 compared to operating income of
$40.8 million in the first quarter of 2004.



Interest expense was $2.2 million
in the first quarter of 2005, compared to $2.1 million in the first quarter of 2004. 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 $21.5 million in the first quarter of 2005 and $21.7 million in the first quarter of 2004. 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 the first quarter of 2005 were $2.0 million,
compared to $2.5 million in the first quarter of 2004. The decrease is primarily due to higher interest income partially offset by higher professional fees.



In the first quarter of 2005, income tax expense of $8.7 million compared to $16.8 million in 2004. The effective tax rate for the first quarter was 152.6% in 2005 based
on pre-tax income of $5.7 million and 45.7% in 2004 based on pre-tax income of $36.8 million. The effective tax rate variation relates primarily to the lower pretax income and $13.8 million in foreign losses incurred in the quarter for which no tax
benefit can be recognized, as we have provided valuation allowances on the losses in these foreign jurisdictions. The tax rate also increased due to certain adjustments of tax reserves related to Canadian withholding taxes, a German tax audit item,
state tax reserve needs, and additional valuation allowances placed on state net operating losses.



A net loss of $3.0 million for the first quarter of 2005 compared to net income of $19.6 million for the first quarter for 2004.



REPORTABLE SEGMENT RESULTS



Resilient Flooring



|                        |  |                             |       |                                   |      |   |             |  |             |                                              |  |             |   
|----------------------- |  | --------------------------- | ----- | --------------------------------- | ---- | - | ----------- |  | ----------- | -------------------------------------------- |  | ----------- | --
|                        |  | Three MonthsEnded March 31, |       | Change is Favorable/(Unfavorable) |     
|                        |  | 2005                        |       |                                   | 2004 |   | As Reported |  |             | Excluding Effects ofForeign ExchangeRates(1) | 
|Net Sales:              |  |                             |       |                                   |      |   |             |  |             |                                              |  |             |   
|Americas                |  | $                           | 211.6 |                                   |      | $ | 235.0       |  | (10.0       | )%                                           |  | (10.3       | )%
|Europe                  |  |                             | 62.7  |                                   |      |   | 57.0        |  | 10.0        | %                                            |  | 3.5         | % 
|Pacific                 |  |                             | 10.6  |                                   |      |   | 12.1        |  | (12.4       | )%                                           |  | (13.8       | )%
|                        |  |                             |       |                                   |      |   |             |  |             |                                              |  |             |   
|Total Segment Net Sales |  | $                           | 284.9 |                                   |      | $ | 304.1       |  | (6.3        | )%                                           |  | (7.7        | )%
|Operating Income/(Loss) |  | $                           | (9.6  | )                                 |      | $ | 15.0        |  | Unfavorable |                                              |  | Unfavorable |   



|(1) | Excludes favorable foreign exchange rate effect in translation of $4.7 million on net sales
and $0.1 million on operating income.
|--- | ---------------------------------------------------------------------------------------------------------------------------------



Net sales in the Americas
declined for all product categories, led by declines in laminate flooring and residential vinyl products. The 21% decline in laminate flooring net sales was primarily the result of a



66



---

##### Table of Contents

major customers decisions to increase purchases of non-Armstrong laminate flooring products and reduce their purchases of our laminate products. The
reduction in sales of residential vinyl products reflects a continued shift in the residential market away from vinyl products.



Excluding the translation effect of changes in foreign exchange rates, net sales in the European markets increased 3.5%, primarily 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 decreased $1.7 million.



An operating loss of $9.6 million was recorded in the first quarter of 2005, compared to operating income of $15.0 million in the first quarter of 2004. The decline is
primarily attributable to the impact of the sales volume decline, increased costs to purchase PVC resins, charges for cost reduction initiatives and higher SG&A expenses for increased selling and advertising activity (See Overview 
Factors Affecting Operating Costs).



Wood Flooring



|                           |  |                             |       |                                  |   |       |  |       |   
|-------------------------- |  | --------------------------- | ----- | -------------------------------- | - | ----- |  | ----- | --
|                           |  | Three months endedMarch 31, |       | Change isFavorable/(Unfavorable) |  
|                           |  | 2005                        |       | 2004                             |  
|Total Segment Net Sales(1) |  | $                           | 190.1 |                                  | $ | 197.4 |  | (3.7  | )%
|Operating Income           |  | $                           | 8.8   |                                  | $ | 10.3  |  | (14.6 | )%



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



Net sales for the first quarter decreased by $7.3 million. Units
sold of pre-finished solid wood floors declined approximately 9% primarily due to competitive pricing pressures and distributor inventory reductions. Units sold of engineered hardwood floors increased by approximately 18% due to continued strong
overall demand. Net sales were impacted favorably by price increases implemented for selected products (see Overview  Factors Affecting Revenues).



Operating income decreased by $1.5 million due primarily to the impact of lower net sales, higher manufacturing costs and increased SG&A
expenses, partially offset by reduced raw material costs.



Textiles and
Sports Flooring (TSF)



|                        |  |                             |             |   |                                   |                                              |      |   |  |             |   |  |             |   
|----------------------- |  | --------------------------- | ----------- | - | --------------------------------- | -------------------------------------------- | ---- | - |  | ----------- | - |  | ----------- | --
|                        |  | Three months endedMarch 31, |             |   | Change is Favorable/(Unfavorable) |                                             
|                        |  |                             | As Reported |   |                                   | Excluding Effects ofForeign ExchangeRates(1) |     
|                        |  | 2005                        |             |   | 2004                              |                                              |      |  
|Total Segment Net Sales |  | $                           | 62.9        |   |                                   | $                                            | 62.3 |   |  | 1.0         | % |  | (5.3        | )%
|Operating (Loss)        |  | $                           | (5.9        | ) |                                   | $                                            | (1.9 | ) |  | Unfavorable |   |  | Unfavorable |   



|(1) | Excludes favorable foreign exchange rate effect in translation of $4.1 million on net sales
and $0.1 million on operating income.
|--- | ---------------------------------------------------------------------------------------------------------------------------------



Excluding the translation
effects of changes in foreign exchange rates, net sales decreased by $3.5 million primarily from lower sales volume and pricing in carpet flooring products.



Operating loss increased in the first quarter of 2005 by $4.0 million, due primarily to the impact of lower net sales, increased SG&A expenses (for new product
introductions and severance costs) and higher raw material costs.



67



---

##### Table of Contents

Building Products



|                        |  |                             |             |                     |   |                                              |  |      |   |  |      |  
|----------------------- |  | --------------------------- | ----------- | ------------------- | - | -------------------------------------------- |  | ---- | - |  | ---- | -
|                        |  | Three months endedMarch 31, |             | Change is Favorable |  
|                        |  |                             | As Reported |                     |   | Excluding Effects ofForeign ExchangeRates(1) | 
|                        |  | 2005                        |             | 2004                |   |                                             
|Net Sales:              |  |                             |             |                     |   |                                              |  |      |   |  |      |  
|Americas                |  | $                           | 149.7       |                     | $ | 135.6                                        |  | 10.4 | % |  | 9.8  | %
|Europe                  |  |                             | 89.1        |                     |   | 82.0                                         |  | 8.7  | % |  | 2.3  | %
|Pacific                 |  |                             | 14.8        |                     |   | 12.4                                         |  | 19.4 | % |  | 17.5 | %
|                        |  |                             |             |                     |   |                                              |  |      |   |  |      |  
|Total Segment Net Sales |  | $                           | 253.6       |                     | $ | 230.0                                        |  | 10.3 | % |  | 7.4  | %
|Operating Income        |  | $                           | 35.3        |                     | $ | 27.9                                         |  | 26.5 | % |  | 24.7 | %



|(1) | Excludes favorable foreign exchange rate effect in translation of $6.1 million on net sales
and $0.4 million on operating income.
|--- | ---------------------------------------------------------------------------------------------------------------------------------



Excluding the translation
effect of changes in foreign exchange rates, net sales in the Americas increased 9.8%. Net sales benefited from the previously described pricing initiatives and sales of higher priced products combined with a 1% unit volume increase to the U.S.
commercial markets.



Excluding the translation effect of changes in foreign
exchange rates, net sales in Europe increased 2.3% primarily due to the previously described pricing initiatives and unit volume increases of mineral fiber ceilings in the UK and France of approximately 10% and 8%, respectively, offset by soft
demand in other countries. Products sold in Western Europe tend to have higher margins than Eastern Europe. Excluding the translation effect of changes in foreign exchange rates, net sales of metal ceilings decreased approximately 19% due to weak
market conditions in Switzerland, Austria, and Germany.



Excluding the
translation effect of changes in foreign exchange rates, net sales in the Pacific area increased 17.5% primarily due to strong activity in Australia and India.



Excluding the translation effect of changes in foreign exchange rates, operating income increased 24.7%. Increased selling prices covered a majority of the
inflationary cost pressures of wage and salary increases and increased raw material, energy, and transportation costs. Operating income benefited from sales volume gains, sales of higher priced products, increased equity earnings from our WAVE joint
venture and lower comparative spending on cost reduction initiatives.



Cabinets



|                           |  |                             |      |                    |      |   |      |  |             |   
|-------------------------- |  | --------------------------- | ---- | ------------------ | ---- | - | ---- |  | ----------- | --
|                           |  | Three months endedMarch 31, |      | Change isFavorable |     
|                           |  | 2005                        |      |                    | 2004 |  
|Total Segment Net Sales(1) |  | $                           | 49.2 |                    |      | $ | 51.2 |  | (3.9        | )%
|Operating Income/(Loss)    |  | $                           | (5.9 | )                  |      | $ | 0.6  |  | Unfavorable |   



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



Net sales decreased primarily due to lower volume in certain
geographic markets and overall customer service issues. The reductions in volume were partially offset by increased sales prices.



An operating loss of $5.9 million was recorded due to the impact of higher SG&A expenses (particularly consulting costs, employee compensation and selling-related
expenses), costs incurred to shut down the Morristown plant, manufacturing inefficiencies in other plants resulting from the transfer of production from Morristown and lower net sales.



68



---

##### Table of Contents

Unallocated Corporate



Unallocated corporate expense of $15.0 million in the first quarter of 2005 increased from $11.1 million in 2004, primarily due to higher
costs for employee compensation programs, expenses related to the Chief Financial Officer transition, and increases to environmental liabilities at a non-operating location, partially offset by an increased U.S. pension credit.



FINANCIAL CONDITION AND LIQUIDITY



Cash Flow



As shown on the Condensed Consolidated Statements of Cash Flows, our cash and cash
equivalents balance decreased by $114.3 million in the first quarter of 2005, compared to a $48.2 million decrease in 2004.



Operating activities in the first quarter of 2005 used $98.5 million of net cash, compared to $36.6 million used in the same period of 2004. The $61.9 million increased
use of cash was primarily due to lower earnings and higher payments for accounts payable and accrued expenses partially offset by a lower increase in accounts receivable. The higher payments for accounts payable and accrued expenses primarily
related to prior year accruals for incentive compensation plans and capital expenditures. The lower increase in accounts receivable was due to lower net sales and improved collection efforts in the Americas.



Net cash used for investing activities was $19.7 million in the first quarter of 2005,
compared to $15.8 million in 2004. We increased our capital expenditures by $9.8 million to upgrade our manufacturing operations. We received a $6.0 million distribution from WAVE in the first quarter of 2005, while we did not receive any
distributions from WAVE in the first quarter of 2004.



Net cash of $6.2 million
was provided by our financing activities in the first quarter of 2005, compared to $4.2 million provided in the same period of 2004. The year-to-year change was due to certain subsidiaries that are not participating in our Chapter 11 Case increasing
their short-term borrowing in 2005.



Balance Sheet and Liquidity



Changes in significant balance
sheet accounts and groups of accounts from December 31, 2004 to March 31, 2005 are as follows:



|                                                    |  |               |         |                  |   |                     |  |   |        |  
|--------------------------------------------------- |  | ------------- | ------- | ---------------- | - | ------------------- |  | - | ------ | -
|                                                    |  | March 31,2005 |         | December 31,2004 |   | Increase/(Decrease) | 
|Cash and cash equivalents                           |  | $             | 401.6   |                  | $ | 515.9               |  | $ | (114.3 | )
|Current assets, excluding cash and cash equivalents |  |               | 1,017.5 |                  |   | 966.3               |  |   | 51.2   |  
|                                                    |  |               |         |                  |   |                     |  |   |        |  
|Current assets                                      |  | $             | 1,419.1 |                  | $ | 1,482.2             |  | $ | (63.1  | )
|                                                    |  |               |         |                  |   |                     |  |   |        |  



The decrease 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 an increase in accounts receivable from higher sales in March 2005 compared to December 2004 and
an increase in inventory, primarily in Resilient Flooring and Building Products.



|                                   |  |               |         |                  |   |            |  |   |       |  
|---------------------------------- |  | ------------- | ------- | ---------------- | - | ---------- |  | - | ----- | -
|                                   |  | March 31,2005 |         | December 31,2004 |   | (Decrease) | 
|Property, plant and equipment, net |  | $             | 1,185.2 |                  | $ | 1,208.8    |  | $ | (23.6 | )



The decrease was primarily due to the
translation impact of lower foreign exchange rates, accelerated depreciation of $2.7 million (See Factors Affecting Operating Costs  Cost Reduction Initiatives) and scheduled depreciation partially offset by $24.9 million of capital
expenditures.



69



---

##### Table of Contents

DIP Facility



AWI has a $75 million debtor-in-possession credit facility that currently is limited to issuances of letters of credit. This facility is
scheduled to mature on December 8, 2005. Obligations to reimburse drawings under the letters of credit constitute a super-priority administrative expense claim in the Chapter 11 Case. As of March 31, 2005 and December 31, 2004, under the DIP
Facility, there were no outstanding borrowings; however, AWI had $42.4 million and $40.6 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 that AWI has not emerged from Chapter 11 by December 8, 2005, we will
pursue another extension of the DIP Facility.



Liquidity



Our liquidity needs for operations vary throughout
the year. We retain lines of credit to meet our liquidity needs. For certain international operations, we had lines of credit of $59.5 million at March 31, 2005, of which $32.0 million was used and $27.5 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 (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 for scheduled non-filer debt obligations. Cash and liquidity needs will change significantly at the time of AWIs
emergence from Chapter 11, the timing of which remains uncertain. AWIs POR provides a plan to meet these requirements (see Note 2 of the Condensed Consolidated Financial Statements).



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 to 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. Based on an April 2005 ruling by the SEC, the standard is effective
as of the beginning of the first annual reporting period that begins after June 15, 2005. While we are finalizing our review of this standard, along with SEC Staff Accounting Bulletin No. 107 which provides additional guidance regarding the
implementation of FAS 123 (revised 2004), adoption of this standard on January 1, 2006 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 March 2005, the FASB issued Interpretation No. 47, Accounting
for Conditional Asset Retirement Obligations, which provides additional guidance on conditional asset retirement obligations under FAS 143, Accounting for Asset Retirement Obligations. This standard is effective for fiscal years
ending after December 15, 2005. As of the date of this filing, we have not determined the impact of this pronouncement.



70



---

##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------



For information regarding our exposure to certain market risks, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in AHIs 2004
Form 10-K filing. There have been no significant changes in our financial instruments or market risk exposures from the amounts and descriptions disclosed therein.



|Item 4. | Controls and Procedures
|------- | -----------------------



|(a) | Evaluation of Disclosure 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 of 1934 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 of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commissions rules and forms.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Changes in Internal Control Over Financial Reporting. 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 March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



71



---

##### Table of Contents



PART II  OTHER
INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------



See Note 14 of the Condensed Consolidated Financial Statements for the disclosure of our legal proceedings required by this Item.



72



---

##### Table of Contents

|Item 6. | Exhibits
|------- | --------



|         |  |                                                                                                                                                                 
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|         | 
|No. 15   |  | Awareness Letter from Independent Registered Public Accounting Firm.                                                                                            
|         | 
|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.



73



---

##### Table of Contents

SIGNATURES



Pursuant to the requirements 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. Armstrong World Industries, Inc.By:

/s/    F. NICHOLAS GRASBERGER
IIIF. Nicholas Grasberger III,Senior Vice Presidentand Chief Financial Officer




By:

/s/    JOHN N. RIGASJohn N. Rigas,Senior Vice President,Secretary and General Counsel




By:

/s/    WILLIAM C.
RODRUANWilliam C. Rodruan,Vice President andController (Principal Accounting Officer)




Date: April 28, 2005



76



---

##### Table of Contents

EXHIBIT INDEX



|         |  |                                                                                                                                                                 
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|         | 
|No. 15   |  | Awareness Letter from Independent Registered Public Accounting Firm.                                                                                            
|         | 
|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.