UNITED STATES

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 September 30, ~~2002~~2005

¨	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		~~333~~000-~~32530~~50408		23-3033414
(State or other jurisdiction of incorporation or organization)		Commission ~~file number~~filenumber		(I.R.S. ~~Employer~~EmployerIdentification ~~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

Registrant’s telephone number, including area code

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~~filenumber		(I.R.S. ~~Employer~~EmployerIdentification ~~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

Registrant’s telephone number, including area code

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 is a shell company (as defined in Rule 12b-2 of the Exchange 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 October 15 19, ~~2002~~2005 - 40,~~677~~664,~~392~~461.

TABLE OF CONTENTS

SECTION		PAGES
Cautionary Factors		3 – 4
Uncertainties Affecting Forward-Looking Statements		3 – 4
PART I—FINANCIAL INFORMATION
PART I – FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements
	Armstrong Holdings, Inc., and Subsidiaries	5 – 2630
	Independent Accountants’ Review Report	27
	Report of Independent Registered Public Accounting Firm	31
	Armstrong World Industries, Inc., and Subsidiaries	2832 – 4957
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5058 – 6273
Item 4.	Controls and Procedures	63
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	74
PART II—OTHER INFORMATION
Item 4.	Controls and Procedures	74
Item 1.	Legal Proceedings	64 – 69
PART II – OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K	70
Item 1.	Legal Proceedings	75
Signatures		71
Item 6.	Exhibits	76-81
Certifications		72 – 75
Signatures		82

~~Cautionary~~Uncertainties ~~Factors~~Affecting ~~That~~Forward-Looking ~~May~~Statements ~~Affect Future Results~~

~~(Cautionary~~Our ~~Statements~~disclosures ~~Under~~here and in other public documents and comments sometimes contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Those statements provide our future expectations or forecasts, and can be identified by our use of ~~1995)~~words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “outlook,” etc. in discussions of future operating or financial performance or the outcome of contingencies such as liabilities or legal proceedings.

~~The~~Any ~~disclosures~~of ~~and~~our ~~analysis~~forward-looking instatements ~~this~~may ~~report~~turn ~~contain~~out ~~some~~to ~~forward~~be wrong. Actual future results may differ materially. Forward-looking statements. ~~This~~involve ~~discussion~~risks ~~about~~and ~~those~~uncertainties ~~statements~~because isthey ~~provided~~relate into ~~accordance~~events and depend on ~~with~~circumstances that may or may not occur in the ~~Private~~future. ~~Securities~~We ~~Litigation~~undertake ~~Reform~~no ~~Act~~obligation ofto ~~1995~~update any forward-looking statement.

~~Forward-looking~~Risk ~~statements~~Factors give current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning in connection with discussions of future operating or financial performance. In particular, these include statements relating to future actions, prospective products, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. From time to time, we may also provide oral or written forward-looking statements in other materials released to the public.

~~Any~~Our orbusiness, ~~all~~operations ofand ~~the~~financial ~~forward-looking~~condition ~~statements~~are ~~made~~subject into ~~this~~various ~~report and~~risks. inYou ~~any~~should ~~other~~take ~~public~~them ~~statements~~into ~~may~~account ~~turn~~in ~~out~~evaluating toany beinvestment ~~incorrect.~~decision ~~They~~involving ~~can~~Armstrong. beIt ~~affected~~is bynot ~~inaccurate~~possible ~~assumptions~~to wepredict ~~may make~~ or byidentify ~~known~~all factors orthat ~~unknown~~could ~~risks~~cause ~~and~~actual ~~uncertainties.~~results ~~Consequently,~~to nodiffer ~~forward-looking~~materially ~~statement~~from ~~can~~expected beand ~~guaranteed.~~historical ~~Actual future~~ results. ~~may~~The ~~vary~~following ~~materially.~~discussion Weis ~~undertake~~a nosummary ~~obligation~~of towhat ~~update~~we ~~any~~believe ~~forward-looking~~to ~~statements,~~be ~~whether~~our asmost asignificant ~~result~~risk offactors ~~new~~and ~~information,~~is ~~future~~not ~~events~~a orcomplete ~~otherwise.~~list ~~However,~~of ~~you~~all ~~should~~risks ~~consult~~and uncertainties ~~any~~that ~~further~~might ~~disclosures~~affect weour ~~make~~future onresults. ~~related~~Related ~~subjects~~disclosures in ~~Forms~~ subsequent 10-~~Q, 8-~~K, 10-KQ orand ~~other~~8-K reports ~~filed~~should ~~with the SEC. Other factors besides those listed here could~~ also ~~adversely~~be ~~affect our businesses~~consulted.

~~These~~We ~~are~~try ~~some~~to ofreduce both the ~~factors~~likelihood that these risks will affect our businesses and the damage they could ~~potentially~~have ~~cause~~if ~~actual~~they ~~results~~do tooccur. ~~differ~~But, ~~materially~~no ~~from~~matter ~~expected~~how accurate our foresight, how well we evaluate risks, and ~~historical~~how ~~results:~~effective we are at mitigating them, it is still possible that one of these problems or some other issue could have serious consequences for us. See related discussions in this document and our other SEC filings for more details.

Asbestos and Chapter 11 ~~Filing~~

·Asbestos ~~Factors~~personal ~~relating~~injury toclaims ~~Armstrong~~are ~~World~~our ~~Industries,~~biggest ~~Inc~~risk.’s ~~(“AWI”)~~Our balance ~~Chapter~~sheet 11currently ~~Filing,~~reflects ~~such~~an ~~as:~~implied ~~the~~asbestos ~~possible~~liability ~~disruption~~for ofAWI ~~relationships~~that ~~with~~results ~~creditors,~~in ~~customers,~~negative ~~suppliers~~equity ~~and~~for ~~employees;~~ the ~~ultimate~~Company. The size of ~~AWI’s~~our asbestos~~-related~~ ~~and~~liability ~~other~~has ~~liabilities;~~not ~~the~~been ~~ability~~finally todetermined ~~confirm~~in ~~and~~our ~~implement~~Chapter a11 ~~plan~~reorganization ofcase. ~~reorganization;~~It could end up being substantially larger or smaller than the ~~availability~~amount ofcurrently ~~financing~~shown ~~and~~on ~~refinancing~~our balance sheet. Even if that liability should be substantially reduced (for ~~both~~example ~~AWI~~by ~~and~~federal ~~its~~legislation), ~~subsidiaries~~the ~~that~~Company ~~are~~may ~~not~~still ~~parties~~have tonegative ~~its~~equity. Consequently an investment in Armstrong’s stock during our Chapter 11 ~~Filing;~~case is highly uncertain and ~~AWI’s~~speculative. ~~ability~~See tothe ~~comply~~discussions ~~with~~of ~~covenants~~our Chapter 11 case and of proposed asbestos legislation in ~~its~~this ~~debtor-~~document and in~~-possession~~ ~~credit~~past ~~facility~~SEC ~~(the~~filings ~~“DIP~~for ~~Facility”)~~details.

~~Legal~~ Claims, Litigation and Regulatory Actions

·While ~~Claims~~we ofstrive ~~undetermined~~to ~~merit~~ensure that our products comply with applicable government regulatory standards and ~~amount~~internal ~~which~~requirements, ~~have~~and ~~been~~that ~~asserted~~our ~~against~~products usperform effectively and safely, customers from time to time could claim that our products do not meet contractual requirements, and users could be harmed by use or misuse of our products. This could give rise to breach of contract, warranty or recall claims, or claims for ~~various~~negligence, ~~legal~~product ~~matters~~liability, ~~including~~strict ~~AWI’s~~liability, ~~asbestos~~personal ~~related~~injury ~~litigation~~or property damage. ~~For~~The ~~more~~building ~~information~~materials onindustry ~~these~~has ~~matters~~been subject to claims relating to silicates, ~~see~~mold, ~~the~~PVC, ~~discussion~~formaldehyde, toxic fumes, fire-retardant properties and other issues, as well as for incidents of ~~Legal~~catastrophic ~~Proceedings~~loss, such as building fires. Product liability insurance coverage may not be available or adequate in ~~Part~~all circumstances. IIIn addition, ~~Item~~claims 1may arise related to patent infringement, environmental liabilities, distributor terminations, commercial contracts, antitrust or competition law, employment law and employee benefits issues, and other regulatory matters. While the company has in ~~this~~place ~~report~~processes and policies to mitigate these risks and to investigate and address such claims as they arise, the costs to defend or resolve such claims cannot be predicted.

Business Environment

· Changes in demand for public and private commercial and residential building construction and renovation, laws and regulations, foreign currency and interest rates, inflation or other related factors affecting our businesses. Despite our efforts to foresee and plan for the effects of changes in these circumstances, we can not predict their impact with certainty. For example, an economic downturn may lead our customers to delay or cancel construction plans. For more information on these matters, see the discussion of Market Risk in Item 7A of Armstrong Holdings, Inc. 2001 Form 10-K.

· Business combinations among our competitors or suppliers, which could affect our competitive position in any of our business units. 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 and those of our competitors.

·Construction ~~The~~activity ~~extent~~variability ~~to which we successfully achieve integration of~~ and ~~synergies from acquisitions as well as~~ the ~~impact~~size of ~~divestitures,~~our ~~restructuring~~market ~~and other unusual items that may result from evolving business strategies and organizational restructuring.~~opportunity

~~Retail~~Our businesses have greater sales opportunities when construction ~~Environment~~activity is strong and, conversely, have fewer opportunities when such activity declines. Construction activity tends to increase when economies are strong, interest rates are favorable, government spending is strong, and consumers are confident. Since most of our sales are in the U.S., its economy is the most important for our business, but conditions in Europe and Asia also are important.

·Raw ~~Business~~materials ~~decisions~~ and ~~business~~sourced ~~conditions~~product ~~that~~issues ~~affect our major customers and distribution networks. For example, a significant portion of our revenue in North America comes from sales to major home center retailers.~~

·The ~~Increased~~cost ~~retail~~and ~~trade~~availability ~~consolidation~~of raw materials, ~~especially~~packaging materials and energy are critical to our operations. For example, we use substantial quantities of natural gas, petroleum-based raw materials, hardwood lumber and mineral fiber in ~~markets~~our ~~such~~manufacturing asoperations. ~~the~~The ~~United~~cost ~~States~~of these items has been volatile and availability has sometimes been tight. We source some of these materials from a limited number of suppliers, ~~could~~which ~~make~~increases usthe ~~more~~risk ~~dependent~~of ~~upon~~unavailability. ~~key~~The ~~retailers~~impact ~~whose~~of ~~relative~~increased ~~bargaining~~costs ~~strength~~is ~~may~~greatest ~~increase~~where our ability to pass along increased costs is limited, whether due to competitive pressures or other factors.

·Consumer ~~Changes~~preference ~~in the policies of our retail trade customers, such as inventory shifts or fluctuations, limitations on access to shelf space~~ and ~~other~~competition ~~conditions. Many of our customers, particularly our high-volume retail trade customers have engaged in accelerated efforts to reduce inventory levels and change inventory delivery requirements.~~

~~International~~Our customers consider our products’ pricing, styling and performance, and our customer service when deciding whether to purchase our products. Shifting consumer preference, e.g. from residential vinyl products to other hard-surface flooring, styling preferences or inability to offer new competitive performance features could hurt our sales. These risks are inherent in our highly competitive markets. For certain products, there is excess industry capacity in several geographic markets, which tends to increase competition based on price as well as on other factors. And competition from overseas competitors who have a lower cost structure is a particular threat in some areas, such as our U.S. flooring businesses.

·International ~~Various~~trade ~~worldwide economic~~ and ~~political~~operations factors, 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. These factors could affect the end-use markets for our products in various parts of the world.

·A ~~Changes~~significant portion of our products move in ~~intellectual~~international ~~property~~trade, ~~legal~~particularly ~~protections~~among the U.S., Canada, Europe and ~~remedies~~Asia. Also, approximately 25% of our annual revenues are from operations outside the U.S. Our international trade ~~regulations,~~is ~~tariff~~subject ~~classifications~~to orcurrency ~~duty~~exchange ~~rates~~fluctuations, trade regulations, import duties, logistics costs and ~~procedures~~delays and ~~actions~~other ~~affecting~~related ~~production~~risks. In addition, ~~pricing~~our ~~and~~international ~~marketing~~business ofis ~~products~~subject to variable tax rates, ~~intergovernmental~~credit ~~disputes~~risks in emerging markets, ~~possible~~political ~~nationalization~~risks, and ~~unstable~~loss ~~governments~~of ~~and~~sales ~~legal~~to ~~systems~~local competitors following currency devaluations in countries where we import products for sale.

·Challenges ~~Changes~~ in ~~exchange~~executing ~~rates~~operational ~~can~~restructuring ~~significantly affect our reported results from one period to the next.~~actions

~~Raw~~We ~~Materials~~monitor how effectively and profitably our businesses service our customers. To stay competitive, we look for ways to make our operations more efficient and effective. We reduce, move or expand our plants and operations as needed, and we currently have several of these actions in various stages of completion. Each action generally involves substantial planning and capital investment. We can err in planning and executing our actions, which could create risks to our customer service and cause unplanned costs.

·Labor ~~Availability~~contracts of raw materials, energy, water and sourced products due to changes in business and legal conditions that impact our suppliers, including environmental conditions, laws and regulations, litigation involving our suppliers, transportation disruptions and/or business decisions made by our suppliers.

·Most ~~Raw~~of ~~material~~our ~~price~~manufacturing ~~increases~~employees ~~(for~~are ~~example~~represented ~~price~~by ~~increases~~unions inand ~~hardwood~~are ~~lumber,~~covered ~~limestone~~by collective bargaining or ~~petroleum-based~~similar ~~raw~~agreements ~~materials~~that ~~such~~must be periodically renegotiated. Although we believe that we will reach new contracts as ~~plasticizers~~older orones ~~PVCs)~~expire, ~~energy~~our ~~cost~~negotiations ~~increases~~may ~~(for~~result ~~example~~in ~~price~~a ~~increases~~significant increase in ~~natural~~our ~~gas)~~costs. Failure to reach new contracts could lead to work stoppages, ~~and~~which ~~changes~~could inhave ~~distribution~~a ~~and~~material ~~product~~adverse ~~mix~~effect on our operations.

Dependence on key customers

Some of our businesses are dependent on a few key customers. For example, much of our North America revenue comes from sales to home center retailers, including The Home Depot, Inc. and Lowe’s Companies, Inc. Together these customers account for over 20% of our consolidated total sales. We do not have long-term contracts with these customers. The loss of sales to one of these major customers, or changes in our business relationship with them, could have a material adverse impact on our results.

PART 1—I – FINANCIAL INFORMATION

Item 1—. Financial Statements

~~ARMSTRONG~~Armstrong ~~HOLDINGS~~Holdings, ~~INC~~Inc., ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~CONDENSED~~Condensed ~~CONSOLIDATED~~Consolidated ~~STATEMENTS~~Statements ~~OF EARNINGS~~of Earnings

(amounts in millions, except per share amounts)

Unaudited

	Three Months Ended September 30,						Nine Months Ended September 30,
	2002			2001			2002			2001
	2005			2004			2005			2004
Net sales	$	~~846~~937.0		$	~~804~~893.95		$	2,~~418~~696.87		$	2,~~399~~642.0
Cost of goods sold		~~640~~720.48			~~605~~699.73			12,~~811~~101.45			12,~~782~~046.18
Gross profit		~~205~~216.62			~~199~~194.2			~~607~~595.42			~~616~~595.92
Selling, general and administrative expenses		~~160~~158.02			~~150~~151.26			~~474~~495.96			~~450~~462.06
Charge for asbestos liability, net		—			16.0			—			22.0
Goodwill impairment		—			—			—			60.0
Restructuring and reorganization charges (reversals), net		(0.6	)		(1.1	)		2.1			3.0
Restructuring charges, net		1.4			1.9			17.0			5.0
Goodwill amortization		—			5.7			—			17.1
Equity (earnings) from joint venture		(9.9	)		(7.5	)		(28.2	)		(23.4	)
Equity (earnings) from affiliates, net		(6.2	)		(4.5	)		(18.1	)		(13.5	)
Operating income		66.5			48.2			110.8			91.0
Operating income		52.4			32.9			148.5			138.3
Interest expense (unrecorded contractual interest of $20.5, $21.7, $63.6, $65.1)		2.2			2.2			6.5			6.3
Interest expense (unrecorded contractual interest of $24.9, $25.0, $74.4, and $74.7)		3.7			3.3			10.5			10.2
Other non-operating expense		1.1			1.1			1.4			2.9
Other non-operating expense		0.8			3.6			2.4			8.7
Other non-operating (income)		(5.5	)		(1.4	)		(9.9	)		(4.7	)
Other non-operating income		(1.2	)		(2.3	)		(3.4	)		(8.1	)
Chapter 11 reorganization costs, net		1.5			2.3			4.5			6.6
Chapter 11 reorganization costs, net		6.6			3.7			19.1			6.2
Earnings from continuing operations before income taxes		67.2			44.0			108.3			79.9
Earnings from continuing operations before income taxes and cumulative effect of a change in accounting principle		42.5			24.6			119.9			121.3
Income tax expense		21.1			20.8			47.5			51.2
Income tax expense		13.1			10.3			40.9			47.3
Net earnings from continuing operations	$	46.1		$	23.2		$	60.8		$	28.7
Earnings from continuing operations before cumulative effect of a change in accounting principle		29.4			14.3			79.0			74.0
(Loss) from discontinued operations, net of tax of $0.2		—			—			—			(0.4	)
Cumulative effect of a change in accounting principle, net of tax of $2.2		—			—			(593.8	)		—
Net earnings	$	46.1		$	23.2		$	60.8		$	28.3
Earnings (loss) from continuing operations	$	29.4		$	14.3		$	(514.8	)	$	74.0
Net earnings per share of common stock, continuing operations:
Net loss on sale of discontinued business, net of tax of $0.0		—			(0.2	)		—			(1.1	)
Basic	$	1.14		$	0.57		$	1.50		$	0.71
Net loss on expected disposal of discontinued operations, net of tax of $0.0		—			—			—			(3.3	)
Diluted	$	1.13		$	0.57		$	1.49		$	0.71
Net reversal of income on discontinued operations no longer to be disposed, net of tax of $10.7		—			27.1			—			24.0
(Loss) per share of common stock, discontinued operations:
Earnings from discontinued operations		—			26.9			—			19.6
Basic	$	—		$	—		$	—		$	(0.01	)
Net earnings (loss)	$	29.4		$	41.2		$	(514.8	)	$	93.6
Diluted	$	—		$	—		$	—		$	(0.01	)
Earnings per share of common stock, continuing operations before cumulative effect of a change in accounting principle:
Net earnings per share of common stock:
Basic	$	01.7314		$	0.3557		$	1.9550		$	10.8370
Diluted	$	01.7213		$	0.3557		$	1.9449		$	10.8170
Loss per share of common stock, cumulative effect of a change inaccounting principle:
Basic	$	—		$	—		$	(14.66	)	$	—
Diluted	$	—		$	—		$	(14.66	)	$	—
Earnings per share of common stock, discontinued operations:
Basic	$	—		$	0.66		$	—		$	0.49
Diluted	$	—		$	0.66		$	—		$	0.48
Net earnings (loss) per share of common stock:
Basic	$	0.73		$	1.02		$	(12.71	)	$	2.32
Diluted	$	0.72		$	1.01		$	(12.71	)	$	2.29
Average number of common shares outstanding:
Basic		40.56			40.5			40.5			40.45
Diluted		40.7			40.87			40.7			40.87

See accompanying notes to condensed consolidated financial statements beginning on page 9.

~~ARMSTRONG~~Armstrong ~~HOLDINGS~~Holdings, ~~INC~~Inc., ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~CONDENSED~~Condensed ~~CONSOLIDATED~~Consolidated ~~BALANCE~~Balance ~~SHEETS~~Sheets

(amounts in millions, except share data)

	September 30, 2002			December 31, 2001
	Unaudited
ASSETS
	September 30,2005			December 31,2004
Assets
Current assets:
Cash and cash equivalents	$	~~369~~540.98		$	~~277~~515.49
Accounts and notes receivable, net		~~403~~405.36			~~316~~336.51
Inventories, net		~~429~~493.37			~~443~~535.1
Deferred income taxes		1415.06			1115.56
Other current assets		75.9			64.1
Income tax receivable		7.0			7.0
Total current assets		1,292.4			1,112.6
Other current assets		89.1			72.5
Property, plant and equipment, less accumulated depreciation and amortization of $1,238.1 and $1,143.3, respectively		1,277.8			1,278.6
Total current assets		1,551.8			1,482.2
Insurance receivable for asbestos-related liabilities, noncurrent		174.1			192.1
Property, plant and equipment, less accumulated depreciation and amortization of $1,562.5 and $1,540.7, respectively		1,149.6			1,208.8
Prepaid pension costs		426.9			392.9
Insurance receivable for asbestos-related liabilities, noncurrent		88.8			88.8
Investment in affiliates		42.8			39.6
Prepaid pension costs		488.9			480.9
Goodwill, net		234.9			822.8
Investment in affiliates		62.3			72.5
Other intangibles, net		88.2			94.1
Goodwill, net		134.3			136.0
Other noncurrent assets		106.8			105.4
Other intangibles, net		69.0			76.0
Total assets	$	3,643.9		$	4,038.1
Deferred income taxes, noncurrent		947.8			941.6
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other noncurrent assets		124.9			122.6
Total assets	$	4,617.4		$	4,609.4
Liabilities and Shareholders’ Equity
Current liabilities:
Short-term debt	$	2221.32		$	1811.91
Current installments of long-term debt		6.69			68.12
Accounts payable and accrued expenses		~~354~~406.98			~~298~~447.64
Income taxes		41.2			40.8
Income tax payable		35.4			20.3
Total current liabilities		425.0			364.4
Deferred income taxes		1.1			1.1
Liabilities subject to compromise		2,357.5			2,357.6
Total current liabilities		471.4			488.1
Long-term debt, less current installments		49.7			50.3
Liabilities subject to compromise		4,866.0			4,866.2
Postretirement and postemployment benefit liabilities		251.5			244.4
Long-term debt, less current installments		23.5			29.2
Pension benefit liabilities		168.5			148.9
Postretirement and postemployment benefit liabilities		260.8			262.6
Other long-term liabilities		85.1			84.9
Pension benefit liabilities		231.7			258.9
Deferred income taxes		26.4			18.4
Other long-term liabilities		88.2			87.6
Minority interest in subsidiaries		9.4			8.8
Deferred income taxes, noncurrent		19.2			19.2
Total noncurrent liabilities		2,948.1			2,913.3
Minority interest in subsidiaries		8.1			9.3
Shareholders’ equity:
Total noncurrent liabilities		5,497.5			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		167.97			~~166~~167.87
Reduction for ESOP loan guarantee		(142.2	)		(142.2	)
Retained earnings		729.5			1,244.3
Accumulated deficit		(957.8	)		(1,018.6	)
Accumulated other comprehensive loss		(23.0	)		(47.1	)
Accumulated other comprehensive income		42.2			42.8
Less common stock in treasury, at cost 2002—11,201,499 shares; 2001—11,176,617 shares		(513.3	)		(513.3	)
Less common stock in treasury, at cost 2005 – 11,214,004 shares and 2004 – 11,210,018 shares		(513.3	)		(513.3	)
Total shareholders’ equity		270.8			760.4
Total shareholders’ (deficit)		(1,351.5	)		(1,411.7	)
Total liabilities and shareholders’ equity	$	34,~~643~~617.94		$	4,~~038~~609.14

See accompanying notes to condensed consolidated financial statements beginning on page 9.

~~ARMSTRONG~~Armstrong ~~HOLDINGS~~Holdings, ~~INC~~Inc., ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~CONDENSED~~Condensed ~~CONSOLIDATED~~Consolidated ~~STATEMENTS~~Statements OFof ~~SHAREHOLDERS'~~Shareholders’ ~~EQUITY~~Equity

(amounts in millions , except per share ~~data~~amounts)

Unaudited

	2002						2001
	2005						2004
Common stock, $1 par value:
Balance at beginning of year and September 30	$	51.9					$	51.9
Capital in excess of par value:
Balance at beginning of year	$	~~166~~167.87					$	~~162~~167.29
Stock issuances and other		~~1.1~~—						6(0.12	)
Balance at September 30	$	167.97					$	~~168~~167.37
Reduction for ESOP loan guarantee:
Balance at beginning of year and September 30	$	(142.2	)				$	(142.2	)
Retained earnings:
Retained earnings (accumulated deficit):
Balance at beginning of year	$	(1,~~244~~018.36	)				$	~~1,151~~(937.58	)
Net earnings (loss) for the nine months		(514.8	)	$	(514.8	)		93.6		$	93.6
Net earnings for period		60.8		$	60.8			28.3		$	28.3
Balance at September 30	$	~~729~~(957.58	)				$	~~1,245~~(909.15	)
Accumulated other comprehensive income (loss):
Accumulated other comprehensive income:
Balance at beginning of year	$	~~(47~~42.18	)				$	~~(45~~43.23	)
Foreign currency translation adjustments		22(12.70	)					5(0.64	)
Derivative gain (loss), net		4.8						(3.6	)
Derivative gain, net		9.1						1.8
Investment impairment		—						2.0
Minimum pension liability adjustments		2.3						—
Minimum pension liability adjustments		(3.4	)					(0.8	)
Total other comprehensive (loss)/income		(0.6	)		(0.6	)		1.4			1.4
Total other comprehensive income		24.1			24.1			3.2			3.2
Balance at September 30	$	42.2					$	44.7
Balance at September 30	$	(23.0	)				$	(42.0	)
Comprehensive income				$	60.2					$	29.7
Comprehensive income (loss)				$	(490.7	)				$	96.8
Less treasury stock at cost:
Balance at beginning of year	$	513.3					$	513.1
Balance at beginning of year and September 30	$	(513.3	)				$	(513.3	)
Stock purchases		—						0.2
Total shareholders’ (deficit)	$	(1,351.5	)				$	(1,300.7	)
Stock issuance activity, net		—						(0.1	)
Balance at September 30	$	513.3					$	513.2
Total shareholders’ equity	$	270.8					$	767.9

See accompanying notes to condensed consolidated financial statements beginning on page 9.

~~ARMSTRONG~~Armstrong ~~HOLDINGS~~Holdings, ~~INC~~Inc., ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~CONDENSED~~Condensed ~~CONSOLIDATED~~Consolidated ~~STATEMENTS~~Statements OFof ~~CASH~~Cash ~~FLOWS~~Flows

(amounts in millions)

Unaudited

	Nine Months Ended September 30,
	2002			2001
	2005			2004
Cash flows from operating activities:
Net (loss) earnings	$	(514.8	)	$	93.6
Net earnings	$	60.8		$	28.3
Adjustments to reconcile net earnings to net cash provided by operating activities:
Cumulative effect of a change in accounting principle, net		593.8			—
Depreciation and amortization		106.7			105.4
Depreciation and amortization		100.9			114.5
Deferred income taxes		(11.1	)		(0.8	)
Reversal of loss on expected disposal of discontinued operations		—			(31.4	)
Equity (earnings) from affiliates, net		(27.5	)		(25.2	)
Loss on sale of businesses, net		—			0.9
Gain on sale of investment in affiliates		(3.4	)		—
Deferred income taxes		5.5			24.6
Chapter 11 reorganization costs, net		4.5			6.6
Equity (earnings) from affiliates, net		(18.1	)		(13.5	)
Chapter 11 reorganization costs payments		(9.2	)		(12.4	)
Chapter 11 reorganization costs, net		19.1			6.2
Restructuring charges, net of reversals		17.0			5.0
Chapter 11 reorganization payments		(17.0	)		(9.9	)
Restructuring payments		(22.0	)		(2.1	)
Restructuring and reorganization charges		2.1			3.0
Goodwill impairment		—			60.0
Restructuring and reorganization payments		(1.2	)		(9.3	)
Asbestos-related insurance recoveries		—			4.5
Impairment of long-lived assets		—			8.4
Cash effect of hedging activities		11.1			9.7
Recoveries for asbestos-related claims, net		16.0			32.2
Increase (decrease) in cash from change in:
Charge for asbestos liability, net		—			22.0
Receivables		(85.9	)		(58.3	)
Changes in operating assets and liabilities net of effects of reorganizations, restructuring, acquisitions and dispositions
Inventories		24.0			(54.4	)
Increase in receivables		(74.0	)		(26.6	)
Other current assets		5.5			13.5
(Increase)/decrease in inventories		32.8			(83.9	)
Other noncurrent assets		(26.8	)		(24.1	)
(Increase)/decrease in other current assets		(9.8	)		9.7
Accounts payable and accrued expenses		11.9			54.1
Increase in other noncurrent assets and prepaid pension costs		(32.4	)		(49.3	)
Income taxes payable		17.5			(11.4	)
Increase in accounts payable and accrued expenses		40.8			49.0
Other long-term liabilities		(3.0	)		9.2
Increase in income taxes payable		0.2			28.6
Other, net		(6.6	)		(4.7	)
Increase in other long-term liabilities		11.6			7.0
Net cash provided by operating activities		63.5			102.9
Other, net		(5.0	)		8.9
Cash flow from investing activities:
Net cash provided by operating activities		150.5			184.7
Purchases of property, plant and equipment and computer software		(83.4	)		(69.1	)
Cash flows from investing activities:
Distributions from equity affiliates		17.0			—
Purchases of property, plant and equipment and computer software		(79.6	)		(79.7	)
Proceeds from the sale of investment in affiliates		20.6			—
Acquisitions, net of cash acquired		—			(5.6	)
Proceeds from the sale of assets		4.7			4.6
Distributions from equity affiliates		15.0			13.5
Net cash (used for) investing activities		(41.1	)		(64.5	)
Proceeds from the sale of assets		3.3			5.7
Net cash used for investing activities		(61.3	)		(66.1	)
Cash flows from financing activities:
Increase/(decrease) in short-term debt, net		1.6			(6.8	)
Increase in short-term debt, net		12.1			12.3
Payments of long-term debt		(24.53	)		(116.41	)
Purchase of common stock for the treasury, net		—			(0.2	)
Other, net		—			(1.3	)
Other, net		(0.6	)		(3.1	)
Net cash provided by financing activities		7.8			4.9
Net cash used for financing activities		(1.5	)		(21.5	)
Effect of exchange rate changes on cash and cash equivalents		(5.3	)		1.0
Effect of exchange rate changes on cash and cash equivalents		4.8			(0.7	)
Net increase in cash and cash equivalents		24.9			44.3
Net increase in cash and cash equivalents	$	92.5		$	96.4
Cash and cash equivalents at beginning of year		515.9			484.3
Cash and cash equivalents at beginning of period		277.4			159.1
Cash and cash equivalents at end of period	$	540.8		$	528.6
Cash and cash equivalents at end of period	$	369.9		$	255.5

See accompanying notes to condensed consolidated financial statements beginning on page 9.

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, ~~which~~Inc. ~~together~~is ~~with~~a ~~its~~Pennsylvania ~~subsidiaries~~corporation isand ~~referred~~the topublicly ~~here as~~held ~~“Armstrong”.~~parent ~~Through~~holding ~~its~~company Uof AWI.S. ~~operations~~Armstrong ~~and~~Holdings, UInc.S.’s only significant asset and ~~international~~operation ~~subsidiaries~~is its indirect ownership, through Armstrong ~~designs~~Worldwide, ~~manufactures~~Inc. ~~and~~(a ~~sells~~Delaware ~~flooring~~Corporation), ~~products~~of ~~(resilient,~~all ~~wood~~of the capital stock of AWI. We include separate financial statements for Armstrong Holdings, ~~carpeting~~Inc. and ~~sports~~its ~~flooring)~~subsidiaries asand ~~well~~AWI asand ~~ceiling~~its ~~systems,~~subsidiaries ~~around~~in this report because both companies have public securities that are registered under the ~~world~~Securities Exchange Act of 1934. The difference between the financial statements of Armstrong ~~products~~Holdings, ~~are~~Inc. ~~sold~~and its subsidiaries and AWI and its subsidiaries is primarily ~~for~~due ~~use~~to transactions that occurred in 2000 related to the ~~finishing~~formation of Armstrong Holdings, ~~refurbishing~~Inc. and ~~repair~~to employee compensation-related stock activity. Due to the lack of ~~residential~~material differences in the financial statements, ~~commercial~~when ~~and~~we ~~institutional~~refer ~~buildings.~~in ~~Armstrong~~this ~~also~~document ~~designs~~to Armstrong Holdings, ~~manufactures~~Inc. and ~~sells~~its ~~kitchen~~subsidiaries as “AHI,” “Armstrong,” “we,” “us,” and ~~bathroom~~“ourselves,” ~~cabinets~~we are also effectively referring to ~~single~~AWI and ~~multi~~its ~~family~~subsidiaries. We use the term “AWI” when ~~homebuilders~~we ~~and~~are ~~remodelers~~referring solely to Armstrong World Industries, Inc.

~~Armstrong~~The ~~Holdings,~~accounting policies ~~Inc.~~used ~~(which~~in ~~together~~preparing ~~with~~these ~~its~~statements ~~subsidiaries~~are isthe ~~referred~~same toas ~~here~~those asused ~~“AHI”)~~in ~~is the~~preparing ~~publicly~~AHI’s ~~held~~consolidated ~~parent~~financial ~~holding~~statements ~~company~~for ofthe ~~Armstrong.~~year ~~Armstrong~~ended ~~Holdings~~December 31, ~~Inc.~~2004, ~~became~~which includes the ~~parent~~accounts ~~company~~ of ~~Armstrong~~AHI onand ~~May~~its 1,majority-owned ~~2000,~~subsidiaries. ~~following~~These condensed ~~AWI~~consolidated ~~shareholder~~financial ~~approval~~statements ofshould abe ~~plan~~read ofin ~~exchange~~conjunction ~~under~~with ~~which~~the ~~each~~consolidated ~~share~~financial ofstatements ~~AWI~~and ~~was~~notes ~~automatically~~thereto ~~exchanged for~~included ~~one~~in ~~share~~AHI’s ofForm ~~Armstrong~~10-K ~~Holdings,~~for ~~Inc.~~the ~~Armstrong~~fiscal ~~Holdings~~year ended December 31, ~~Inc~~2004. ~~was~~In ~~formed~~the ~~for~~opinion ~~purposes~~ of ~~the~~management, all ~~share~~adjustments ~~exchange~~of ~~and~~a ~~holds~~normal norecurring ~~other~~nature ~~significant~~have ~~assets~~been orincluded ~~operations~~to ~~apart~~provide ~~from~~a ~~AWI~~fair ~~and~~statement ~~AWI’s~~of ~~subsidiaries.~~the ~~Stock~~results ~~certificates~~for ~~that~~the ~~formerly represented~~reporting ~~shares~~periods ofpresented. ~~AWI~~Quarterly ~~were~~results ~~automatically~~are ~~converted~~not ~~into~~necessarily ~~certificates~~indicative ~~representing~~of ~~the~~annual ~~same~~earnings, ~~number~~primarily ofdue ~~shares~~to the different level of ~~Armstrong~~sales ~~Holdings,~~in ~~Inc.~~each ~~The~~quarter ~~publicly~~of ~~held~~the ~~debt~~year ofand ~~AWI~~the ~~was~~possibility ~~not~~of ~~affected~~changes in ~~the~~general ~~transaction~~economic conditions.

~~Operating~~These ~~results~~financial ~~for~~statements ~~the~~are ~~third~~prepared ~~quarter~~in ~~and~~accordance ~~first~~with ~~nine~~generally ~~months~~accepted ofaccounting ~~2002~~principles and ~~the~~include ~~corresponding~~management ~~periods~~estimates ofand ~~2001~~judgments, ~~included~~where inappropriate. ~~this~~Management ~~report~~utilizes ~~are~~estimates ~~unaudited.~~to ~~However,~~record ~~these~~many items ~~condensed~~including ~~consolidated~~asbestos-related ~~financial~~liabilities ~~statements~~and ~~have~~insurance ~~been~~assets, ~~reviewed~~allowances byfor ~~AHI’s~~bad ~~independent~~debts, ~~public~~inventory ~~accountants~~obsolescence inand ~~accordance~~lower ~~with~~of ~~established~~cost ~~professional~~or ~~standards~~market changes, warranty, workers compensation, general liability and ~~procedures~~environmental ~~for~~claims. aWhen ~~limited~~preparing ~~review~~an estimate, ofmanagement ~~interim~~determines ~~financial~~the amount based upon considering relevant information. ~~Certain~~Management ~~prior year~~may ~~amounts~~confer ~~have~~with ~~been~~outside ~~reclassified~~parties, toincluding ~~conform~~outside tocounsel. ~~the~~Actual ~~current~~results ~~year~~may ~~presentation~~differ from these estimates.

InOperating ~~February~~results ~~2001,~~for ~~AHI determined to permanently exit~~ the ~~Textiles~~third ~~and~~quarter ~~Sports Flooring segment~~ and onfirst ~~February~~nine ~~20,~~months ~~2001 entered into negotiations to sell substantially all~~ of ~~the~~2005 ~~businesses~~and ~~comprising this segment to a private equity investor based in Europe. Based on these events,~~ the ~~segment was~~corresponding ~~classified~~periods ~~as a discontinued operation starting with the fourth quarter~~ of ~~2000.~~2004 Onincluded ~~June~~in ~~12, 2001, negotiations with~~ this ~~investor~~report ~~were~~are ~~terminated~~unaudited. ~~During the third quarter of 2001~~However, ~~AHI~~these ~~terminated~~condensed ~~its~~consolidated ~~plans~~financial tostatements ~~permanently~~have ~~exit~~been ~~this~~reviewed ~~segment.~~by ~~This decision~~an ~~was~~independent ~~based~~registered onpublic ~~the~~accounting ~~difficulty~~firm ~~encountered~~ in ~~selling~~accordance ~~the~~with ~~business,~~standards ~~the changed cash needs~~ of ~~AHI~~the ~~and~~Public aCompany ~~review of our European strategy. Accordingly, this segment is no longer classified as a discontinued operation and amounts have been~~Accounting ~~reclassified~~Oversight ~~into~~Board ~~operations~~(United asStates) ~~required by EITF Issue No. 90-16 – “Accounting~~ for ~~Discontinued~~a ~~Operations~~limited ~~Subsequently~~review ~~Retained”.~~of ~~All~~interim ~~prior~~financial ~~periods have been reclassified to conform to the current presentation. See Note 5 for further~~ information.

InCertain ~~accordance~~prior ~~with~~year ~~the~~amounts ~~Emerging~~have ~~Issues~~been ~~Task~~reclassified ~~Force~~to ~~(“EITF”)~~conform ~~Issue~~to Nothe current year presentation. ~~00-025,~~These ~~“Vendor~~reclassifications ~~Income~~were ~~Statement Characterization~~made ofto ~~Consideration~~the ~~from~~condensed aconsolidated ~~Vendor~~statement toof aearnings ~~Retailer,”~~and ~~effective~~primarily ~~January~~consisted 1,of ~~2002,~~reclassifying ~~AHI~~2004 ~~has~~amounts ~~reclassified~~from other ~~$0.4~~non-operating ~~million~~income and ~~$1.2~~other ~~million~~non-operating ~~from~~expense to selling, general and administrative ~~expenses~~(“SG&A”) toexpense ~~a reduction of net sales for the third quarter~~ and ~~first~~discontinued ~~nine months of 2001, respectively~~operations.

~~Effective~~There ~~January~~would 1,have ~~2002,~~been ~~AHI~~no ~~adopted~~effect ~~Statement~~on ofnet ~~Financial~~income ~~Accounting Standards (“SFAS”) No. 142, “Goodwill~~ and ~~Other~~earnings ~~Intangible~~per ~~Assets.”~~share Inif ~~the second quarter of 2002,~~ AHI ~~completed~~had anapplied ~~assessment~~the offair ~~goodwill~~value ~~and~~recognition ~~recorded~~provisions ~~a non-cash transitional impairment charge~~ of ~~$596.0~~FASB ~~million~~Statement ~~($593~~No.~~8 million~~ 123, ~~net of~~ ~~tax)~~“Accounting asfor ofStock-based ~~January 1~~Compensation,” ~~2002.~~to ~~See~~stock-based ~~Note~~employee 7compensation ~~for~~in ~~further~~2005 ~~information~~or 2004.

~~Effective~~NOTE ~~January 1, 2002, AHI adopted SFAS No~~2. ~~144,~~CHAPTER ~~“Accounting for~~11 ~~the~~REORGANIZATION Impairment or Disposal of Long-Lived Assets” which provides guidance on the accounting for the impairment or disposal of long-lived assets. AHI’s current results of operations and financial position have not been affected.

~~The~~Proceedings ~~accounting~~under ~~policies~~Chapter ~~used~~11 ~~in preparing these statements are the same as those used in preparing AHI’s consolidated financial statements for the year ended December 31, 2001, which includes the~~

~~accounts~~Armstrong of AHI and its majority-owned subsidiaries. The results of less than majority owned subsidiaries are accounted for under the equity method. 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 31Holdings, ~~2001~~Inc. ~~In the opinion of management~~, ~~all~~and ~~adjustments~~Subsidiaries ~~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.~~

~~NOTE~~Notes ~~2. CHAPTER~~to 11Condensed ~~REORGANIZATION~~Consolidated Financial Statements (Unaudited)

~~On December 6, 2000, AWI, the major operating subsidiary of AHI, filed a voluntary petition for relief~~ (~~the~~dollar ~~“Filing”)~~amounts ~~under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”)~~ in ~~the United States Bankruptcy Court for the District of Delaware (the~~ “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 Armstrong’s wholly-owned subsidiariesmillions, ~~Nitram~~except ~~Liquidators,~~share ~~Inc. (“Nitram”~~data) and Desseaux Corporation of North America, Inc. (“Desseaux,” and together with AWI and Nitram, the “Debtors”). The Chapter 11 cases are being jointly administered under case numbers 00-4469, 00-4470, and 00-4471 (the “Chapter 11 Case”).

~~AWI is operating its business and managing its properties as a debtor-in-possession subject~~ toDesseaux ~~the~~Corporation ~~provisions~~ of ~~the~~North ~~Bankruptcy~~America, ~~Code~~Inc. ~~Pursuant~~(“Desseaux”). toThe ~~the~~Chapter ~~provisions~~11 ofcases ~~the~~are ~~Bankruptcy~~being ~~Code,~~jointly ~~AWI~~administered isunder ~~not~~case ~~permitted~~number to00-4471 ~~pay any claims or obligations which arose prior to~~ (the “Chapter ~~Filing~~11 ~~date (prepetition claims~~Case”). ~~unless~~Shortly ~~specifically~~after ~~authorized~~its bycommencement, the ~~Court. Similarly,~~Chapter ~~claimants~~11 ~~may~~Case ~~not~~was ~~enforce~~assigned ~~any claims against AWI that arose prior~~ to ~~the~~Judge ~~date~~Randall ofJ. ~~the Filing unless specifically authorized by the Court~~Newsome. InHis ~~addition,~~appointment as a ~~debtor-in-possession,~~visiting ~~AWI~~judge ~~has~~in the ~~right,~~District ~~subject~~of toDelaware ~~the~~ended ~~Court’s~~on ~~approval~~December 31, ~~to assume or reject any executory contracts and unexpired leases in existence at the date of the Filing~~2003. ~~Parties~~On ~~having~~January 6, ~~claims~~2004, ~~as a result of any such rejection may file claims with~~ the Chapter ~~Court,~~11 ~~which~~Case ~~will~~was bereassigned ~~dealt~~to ~~with~~Judge asJudith ~~part~~K. ~~of the Chapter 11 Case~~Fitzgerald.

~~Three~~AHI ~~creditors~~and all of AWI’s ~~committees,~~other ~~one~~direct ~~representing~~and ~~asbestos~~indirect ~~personal~~subsidiaries, ~~injury~~including ~~claimants~~Armstrong ~~(the~~Wood ~~“Asbestos~~Products ~~Personal~~Inc. ~~Injury Claimants’~~(formerly ~~Committee”~~Triangle Pacific Corp.), ~~one~~WAVE ~~representing~~(AWI’s ~~asbestos~~ceiling ~~property~~grid ~~damage~~systems ~~claimants~~joint ~~(the~~venture ~~“Asbestos~~with ~~Property~~Worthington ~~Damage~~Industries, ~~Committee”~~Inc.), Armstrong Canada, and ~~the~~Armstrong ~~other~~DLW AG, ~~representing~~were ~~other~~not ~~unsecured~~a ~~creditors~~part (of the ~~“Unsecured~~Filing ~~Creditors’~~and ~~Committee”)~~accordingly, ~~have~~ ~~been~~except ~~appointed~~for inany ~~the~~asbestos-related ~~Chapter~~liability 11that ~~Case.~~also ~~In addition~~relates, andirectly ~~individual~~or ~~has~~indirectly, ~~been appointed~~ to ~~represent~~ the ~~interests~~pre-Filing activities of ~~future~~AWI, ~~asbestos personal injury claimants (~~the ~~“Future~~liabilities, ~~Claimants’~~including ~~Representative”).~~asbestos-related Inliability ~~accordance~~if ~~with~~any, ~~the provisions~~ of ~~the~~such companies ~~Bankruptcy~~will ~~Code,~~not ~~these~~be ~~parties~~resolved ~~have~~in ~~the~~AWI’s ~~right~~Chapter to11 beCase. ~~heard~~See onbelow ~~matters~~under ~~that~~“The ~~come~~Asbestos ~~before~~Personal ~~the~~Injury ~~Court~~Trust” inand ~~the~~Note ~~Chapter~~15 11under ~~Case~~“Asbestos-Related Litigation”.

~~Plan~~AWI is operating its business and managing its properties as a debtor-in-possession subject to the provisions of ~~Reorganization~~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.

OnThree ~~November~~creditors’ 4committees, ~~2002,~~one ~~AWI~~representing ~~filed~~asbestos apersonal ~~Plan~~injury ofclaimants ~~Reorganization~~ (~~“POR”) with~~ the ~~Court. The POR has been endorsed by AHI’s~~ ~~Board of Directors and is supported by the~~ “Asbestos Personal Injury Claimants’ Committee”), ~~the~~one ~~Unsecured~~representing ~~Creditors’~~asbestos ~~Committee~~property ~~and~~damage ~~the~~claimants ~~Future Claimants’ Representative. At present, AWI has not yet reached agreement with~~ (the “Asbestos Property Damage Committee”), ~~with respect to the terms~~ and ~~provisions of~~ the ~~POR.~~other ~~The~~representing ~~POR provides for, among~~ other ~~things,~~unsecured creditors (the ~~treatment~~“Unsecured Creditors’ ~~and discharge of all prepetition claims~~Committee”), ~~including~~were ~~all~~appointed ~~asbestos-related~~in ~~claims.~~the ~~The~~Chapter ~~POR~~11 ~~excludes Armstrong’s Nitram and Desseaux subsidiaries~~Case. ~~The~~In ~~POR~~addition, isan ~~available~~individual onwas aappointed ~~new~~to ~~Web~~represent ~~site,~~the ~~www.armstrongplan.com,~~interests ~~where~~of ~~additional~~future ~~information~~asbestos ~~will~~personal beinjury ~~posted~~claimants as(the it“Future ~~becomes~~Claimants’ ~~available~~Representative”). ~~Implementation~~In accordance ofwith the ~~POR~~provisions ~~and~~of the ~~treatment~~Bankruptcy ofCode, ~~claims~~these ~~and~~parties ~~interests~~have ~~as provided~~the ~~therein~~right ~~is subject~~ to ~~confirmation~~be ofheard ~~the~~on ~~POR~~matters inthat ~~accordance~~come ~~with~~before the ~~provisions~~Bankruptcy ofCourt in the ~~Bankruptcy~~Chapter ~~Code~~11 Case. ~~Therefore,~~Upon ~~the~~resolution ~~timing~~of ~~and~~all ~~terms~~asbestos ofproperty ~~resolution~~damage ofclaims, the ~~Chapter~~Asbestos 11Property Damage ~~Case~~Committee ~~remain~~was ~~uncertain~~disbanded.

~~Asbestos~~Plan ~~Personal~~of Reorganization ~~Injury~~and ~~Trust~~Disclosure Statement

AOn ~~principal~~November 4, ~~feature~~2002, AWI filed a Plan of Reorganization with the ~~POR~~Bankruptcy isCourt. Subsequently, AWI filed several amendments to the ~~creation~~plan, along with various exhibits. The Fourth Amended Plan of Reorganization, with certain exhibits, was filed on May 23, 2003 and, as aso ~~trust~~amended (and as modified by modifications filed with the ~~“Asbestos~~Bankruptcy PICourt ~~Trust”)~~on October 17, ~~pursuant~~2003, November 10, 2003 and December 3, 2004, is referred to ~~section~~in ~~524(g)~~this ofreport as the ~~Bankruptcy~~“POR”. ~~Code,~~The POR provides for AWI to ~~which~~continue to ~~all~~conduct ~~present~~its ~~and~~existing ~~future~~lines ~~asbestos-related~~of ~~personal~~business ~~injury~~with ~~claims~~a reorganized capital structure under which, ~~including~~among ~~contribution~~other ~~claims~~things, its existing shares of ~~co-defendants,~~stock will be ~~channeled.~~cancelled Inand ~~accordance with~~new ~~the~~common ~~“524(g)~~shares ~~injunction”~~and tonotes will be issued byto ~~the~~its ~~Court~~unsecured increditors ~~connection~~and ~~with~~to ~~the~~a ~~confirmation~~trust, as offurther ~~the~~discussed ~~POR~~below, ~~various~~to ~~entities~~be ~~will~~established beunder ~~protected~~the ~~from~~POR ~~suit~~for onthe ~~account~~benefit of ~~present~~AWI’s current and future asbestos-related personal injury claimants, in full satisfaction of their claims against AWI. ~~These~~References ~~entities include~~in this report to “reorganized Armstrong” are to AWI, ~~AHI~~as it would be reorganized under the POR, and its subsidiaries collectively. The POR excludes AWI’s ~~affiliates,~~Nitram and ~~their~~Desseaux ~~respective~~subsidiaries, ~~officers~~neither of which is material to Armstrong and ~~directors.~~which ~~Claims~~are ~~resolution~~pursuing ~~procedures~~separate resolutions toof betheir ~~utilized~~Chapter by11 ~~the~~cases ~~Asbestos~~that PIare ~~Trust~~expected ~~will~~to beresult ~~developed.~~in ~~These~~the ~~procedures~~winding ~~will~~up of their affairs.

~~govern~~Armstrong ~~the~~Holdings, ~~allowance and payment by the Asbestos PI Trust of all present and future asbestos-related personal injury claims~~Inc. ~~The Asbestos PI Trust will be funded with AWI’s rights to insurance providing coverage for asbestos-related personal injury claims~~, ~~as well as a share of cash, notes,~~ and ~~common~~Subsidiaries ~~stock to be issued under the POR to creditors, as described below.~~

~~Consideration~~Notes to BeCondensed ~~Distributed~~Consolidated ~~under~~Financial ~~the~~Statements ~~POR~~(Unaudited)

~~The~~(dollar ~~Asbestos~~amounts ~~PI Trust~~in ~~and~~millions, ~~the~~except ~~holders of unsecured claims will~~ share indata) ~~the POR consideration that is made up of the following components:~~

· of ~~Available~~the ~~Cash~~POR ~~(cash~~and ~~available~~AWI’s onability to continue operations upon its emergence from Chapter 11. On May 30, 2003, the ~~effective~~Bankruptcy ~~date~~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. ~~after~~The ~~reserving~~projected ~~$100~~financial ~~million~~information towas ~~fund~~prepared ~~ongoing~~for ~~operations~~the limited purposes of consideration by the Bankruptcy Court, creditors and ~~making~~other ~~provisions~~parties ~~for~~in ~~certain~~interest in ~~required~~the ~~payments~~Chapter ~~under~~11 Case of matters pertinent to the ~~POR~~case. As indicated in the disclosure statement, asthe ~~well~~projected financial information and various estimates of value therein provided should not be regarded as ~~any~~representations ~~cash~~or ~~drawn~~warranties by AWI, AHI ator 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 ~~sole~~anticipated ~~discretion~~future performance and with respect to prevailing and anticipated market and economic conditions, ~~under~~which anwere ~~exit~~and ~~finance~~remain ~~facility~~beyond ~~for~~our ~~the~~control ~~purpose~~and which may not materialize. Projections are inherently subject to significant and numerous uncertainties and to a wide variety of significant ~~funding~~business, ~~distributions~~economic ~~under~~and competitive risks and the ~~POR)~~assumptions underlying the projections may be wrong in a material respect. Actual results may vary significantly from those contemplated by the projections.

·During ~~New~~2003, ~~Notes~~the ofPOR ~~reorganized~~was submitted for a vote by AWI’s ~~with~~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 ~~term~~hearing on confirmation of 5the 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 10the ~~years~~Bankruptcy Court’s proposed findings of fact and conclusions of law and the proposed order of confirmation of the POR.

·In ~~Substantially~~order ~~all~~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 ~~outstanding~~POR, ~~common~~enter ~~stock~~or affirm an order confirming the POR and issue the “524(g) injunction” which is part of ~~reorganized~~the ~~AWI~~POR.

~~The~~Recent ~~total~~Developments ~~amount~~and ofNext ~~New~~Steps ~~Notes~~in ~~will be~~ the ~~greater~~Chapter of11 ~~(i)~~Process ~~$1.125 billion less Available Cash, or (ii) $775 million.~~

~~The~~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. ~~provides~~On February 23, 2005, Judge Robreno ruled that ~~each~~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 ~~creditor~~creditors ~~will~~voted ~~receive~~to ~~its~~reject ~~pro~~the ~~rata~~POR, ~~share~~the distribution of: warrants to existing equity holders under the POR violated the absolute priority rule.

·AWI 34filed a Notice of Appeal to the United States Court of Appeals for the Third Circuit on March 4, 2005.~~43%~~ On March 18, 2005, AWI filed a motion to expedite the appeal to the U.S. Court of Appeals. On April 28, 2005 the ~~new~~court ~~common~~granted ~~stock~~the motion. A motion to dismiss the appeal for alleged lack of jurisdiction was filed by the Committee of Unsecured Creditors on March 29, 2005. On October 24, 2005, the court held oral arguments on the appeal and the court has not yet issued its ruling. 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 15). AWI is unable to predict whether the POR will be confirmed or when AWI would emerge from Chapter 11.

·Asbestos ~~34.43%~~Personal ofInjury ~~the~~Trust ~~first $1.05 billion of Available Cash and New Notes,~~

·A principal ~~60%~~feature of the ~~next~~POR ~~$50~~is ~~million~~the creation of ~~Available~~a ~~Cash~~trust ~~and,~~(the if“Asbestos ~~such~~PI ~~Available~~Trust”), ~~Cash~~pursuant isto ~~less~~section ~~than~~524(g) ~~$50~~of ~~million~~the Bankruptcy Code, ~~then~~for ~~60%~~the purpose of ~~New~~addressing ~~Notes~~AWI’s inpersonal aninjury ~~amount~~(including ~~equal~~wrongful todeath) ~~the~~asbestos-related liability. ~~difference~~All ~~between~~present ~~$50~~and ~~million~~future ~~and~~asbestos-related ~~the~~personal ~~amount~~injury ofclaims ~~such~~against ~~Available~~AWI, ~~Cash~~including contribution claims of co-defendants, ~~and~~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.

· 34.43% of the remaining amount of Available Cash and New Notes.

The remaining amount of new common stock, Available Cash, and New Notes will be distributed to the Asbestos PI Trust.

Under the POR, unsecured creditors whose claims (other than debt securities) are less than $10,000 or who elect to reduce their claims to $10,000 will be treated as “convenience creditors” and will receive payment of 75% of their allowed claim amount in cash.

Asbestos property damage claims will be channeled to a separate trust (“Asbestos PD Trust”) under the POR. If the class of asbestos property damage claimants votes to accept the POR, the Asbestos PD Trust will be funded with $5 million in cash (which will be funded exclusively from the proceeds of insurance). If the class of asbestos property damage claimants rejects the POR, the Court will estimate the aggregate value of asbestos property damage claims, and the Asbestos PD Trust will be funded exclusively with rights to insurance in an amount sufficient to provide for payment in full of asbestos property damage claims, up to the aggregate amount estimated by the Court.

Under the POR, the existing equity interests in AWI will be cancelled. The POR provides for the potential distribution, with respect to existing equity, of warrants to purchase shares of reorganized AWI (the “Warrants”). The terms of the warrants would all be measured from the effective date of the POR. The Warrants:

· Would comprise 5% of the common stock of reorganized AWI on a fully diluted basis:

· Would have a 7-year exercisable term; and

· Would contain an exercise price equal to 125% of the per share equity value of reorganized AWI, as agreed among the financial advisers for AWI, the Asbestos Personal Injury Claimants’ Committee, the Unsecured Creditors’ Committee, and the Future Claimants’ Representative, and which will be set forth in the Court-approved disclosure statement for the POR.

The Warrants are expected to have a value on the effective date of the POR of approximately $40 million to $50 million.

~~AHI’s~~Armstrong ~~shareholders will have no actual vote on the POR. If the POR is implemented~~Holdings, ~~the only value that will be retained by AHI shareholders is the potential to receive their ratable share of the Warrants if AHI’s Plan of Liquidation (see discussion below) is approved~~Inc. ~~If the shareholders of AHI do not approve AHI’s Plan of Liquidation~~, ~~AHI~~and ~~will~~Subsidiaries ~~not receive any Warrants to distribute to its shareholders.~~

~~AHI’s~~Notes ~~Plan~~to ofCondensed ~~Liquidation~~Consolidated Financial Statements (Unaudited)

In(dollar ~~connection~~amounts ~~with the consummation of the POR, the existing equity interests~~ in ~~AWI will be cancelled, and the common stock of reorganized AWI will be held principally by AWI’s unsecured creditors and the Asbestos PI Trust. The~~ ~~POR contemplates that AHI will propose to its shareholders that it adopt a plan for winding up and dissolving itself. The POR provides that~~millions, inexcept ~~order~~share ~~for~~data) AHI to receive the Warrants, the shareholders of AHI must approve AHI’s Plan of Liquidation within one year after the occurrence of the effective date under the POR. If the AHI shareholders do not approve AHI’s Plan of Liquidation within this time frame, then AHI will not receive the Warrants. The POR provides that reorganized AWI will pay any costs and expenses incurred in connection with AHI’s Plan of Liquidation. More information regarding the contemplated dissolution and winding up of AHI will be made available to AHI shareholders in the future.

~~Structure~~In ofaccordance ~~Reorganized~~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.

InHowever, ~~connection~~although ~~with~~AWI’s ~~the~~domestic and foreign subsidiaries and other ~~consummation~~affiliates ofwould ~~the~~be ~~POR~~protected parties, ~~AWI~~asbestos-related ~~will~~personal ~~effectuate~~injury aclaims ~~“division”~~against ~~under~~them would be channeled to the ~~Pennsylvania~~Asbestos ~~Business~~PI ~~Corporation~~Trust ~~Law.~~only ~~Under~~to the ~~division~~extent such claims directly or indirectly relate to the pre-Filing manufacturing, ~~reorganized~~installation, distribution ~~AWI~~or ~~will~~other ~~separate~~activities ~~into~~of aAWI, ~~holding~~or ~~company~~AWI’s ~~and~~ownership ~~separate~~of ~~wholly-owned~~the subsidiaries ~~carrying~~or ~~out~~affiliates ~~its major~~(as ~~lines~~distinguished from independent activities of ~~business~~the subsidiaries or affiliates). See Note 15 under “Asbestos-Related Litigation.”

~~Next~~In ~~Steps~~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 ~~Process~~Case. Currently, AWI has three pending workers’ compensation claims, and its UK subsidiary has six employer liability claims involving alleged asbestos exposure.

AThere ~~disclosure~~also ~~statement~~is ~~with~~uncertainty ~~respect~~as to ~~the~~proceedings, ~~POR~~if ~~will be filed with the Court for approval. After the disclosure statement is approved by the Court~~any, ~~the~~brought ~~POR will be submitted to the appropriate parties~~ in ~~interest~~certain inforeign ~~AWI’s Chapter~~jurisdictions 11with ~~Case~~respect ~~for~~to ~~voting.~~the ~~Implementation~~effect of the ~~POR~~524(g) isinjunction ~~subject~~in toprecluding ~~its~~the ~~confirmation~~assertion in ~~accordance~~such ~~with~~jurisdictions ~~the provisions~~ of ~~the~~asbestos-related ~~Bankruptcy~~personal ~~Code.~~injury ~~At this time~~claims, ~~AWI~~proceedings isrelated ~~unable~~thereto toor ~~predict when and if~~ the ~~POR~~enforcement ~~will be confirmed. The timing~~ of ~~AWI’s~~judgments ~~emergence from~~rendered ~~Chapter~~in 11such ~~remains uncertain~~proceedings.

~~Common~~Management ~~Stock~~believes ~~and~~neither ~~Debt~~AWI ~~Securities~~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.

AsConsideration ato ~~result~~Be ofDistributed ~~filing~~under the POR on November 4, 2002, the New York Stock Exchange stopped trading on the Exchange of the common stock of AHI (traded under the ticker symbol “ACK”) and two debt securities of AWI (traded under the ticker symbols “AKK” and “ACK 08”). The Companies’ securities are expected to resume trading in alternative markets.

~~Bar~~The ~~Date~~Asbestos ~~for~~PI ~~Filing~~Trust ~~Claims~~and the holders of allowed unsecured claims would share in the following consideration to be distributed under the POR:

~~The~~• ~~Court~~AWI’s ~~established~~“Available ~~August 31~~Cash,” ~~2001~~which ~~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~~defined ~~date by which claims against AWI must be filed if the claimants wish to participate~~ in ~~any distribution in~~ the ~~Chapter~~POR 11 Case. The Court has extended the bar date for claims from several environmental agencies until the fourth quarter of 2002. On March 1, 2002, the Court allowed certain holders of alleged asbestos property damage claims to file a class proof of claim against AWI and extended the bar date for asbestos property damage claims to March 20, 2002. In July 2002, the Court denied the certification of the proposed class and held that the plaintiffs’ proof of claim shall only be effective as ~~to the named claimants. A bar date for asbestos-related personal injury claims (other than claims for contribution, indemnification, or subrogation) has not been set.~~ :

~~Approximately~~• ~~4,600~~Cash ~~proofs~~available ofon ~~claim (including late-filed claims) totaling approximately $6.1 billion alleging a right to payment from AWI were filed with~~ the ~~Court~~effective indate ~~response~~of to the ~~August~~POR ~~31,~~after ~~2001~~reserving ~~bar~~up ~~date,~~to ~~which~~$100 ~~are~~million ~~discussed~~(as ~~below.~~determined by AWI) ~~continues~~ to ~~investigate~~fund ~~claims.~~ongoing ~~The~~operations ~~Court will~~and ~~ultimately~~making ~~determine~~provisions ~~liability~~for ~~amounts~~certain ~~that~~required ~~will~~payments beunder ~~allowed as part of~~ the ~~Chapter 11 process.~~ POR,

In• ~~its~~Any ~~ongoing~~cash ~~review of the filed claims~~drawn, at AWI’s ~~has~~sole ~~identified and successfully objected to approximately 1~~discretion,~~300~~ ~~claims~~under ~~totaling~~a ~~$1.6~~credit ~~billion.~~facility ~~These~~to ~~claims~~be ~~were~~established ~~primarily~~as ~~duplicate~~provided ~~filings,~~by ~~claims~~the ~~that~~POR ~~were~~for ~~subsequently~~the ~~amended~~purpose orof ~~claims~~funding ~~that~~distributions ~~are~~under ~~not~~the ~~related~~POR, ~~to AWI. The Court disallowed these claims with prejudice.~~ and

~~Approximately~~• ~~1,000~~Certain ~~proofs~~insurance ofproceeds ~~claim totaling approximately $1.8 billion are pending with the 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~~environmental participation in the Center for Claims Resolution (the “Center”). 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. 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.

~~All~~Armstrong ~~asbestos-related~~Holdings, ~~personal injury claims will be addressed in the future pursuant to the procedures to be developed in connection with the POR~~Inc., ~~See~~and ~~further~~Subsidiaries ~~discussion regarding AWI’s liability for asbestos-related matters in Note 10 of the condensed consolidated financial statements.~~

~~Approximately~~Notes ~~600 proofs of claim totaling approximately $0.8 billion alleging asbestos-related property damage are pending with the Court. Most of these claims were new~~ to ~~AWI~~Condensed ~~and~~Consolidated ~~many~~Financial ~~were~~Statements ~~submitted~~(Unaudited) with insufficient documentation to assess their validity. As part of determining whether AWI asbestos containing resilient floor covering products give rise to property damage liability, the Court conducted an initial hearing on September 26 – 27, 2002 to decide the type of scientific testing allowable under the Federal Rules of Evidence to prove or disprove whether such products cause building contamination. On October 22, 2002, the Court granted AWI’s requested relief and ruled that the methodology offered by the Asbestos Property Damage Committee in support of its claims is not a scientifically valid method of quantifying the level of asbestos contamination in a building. On November 1, 2002, the Court directed that all property damage claimants provide, in support of their claims, substantiation that Armstrong flooring products were used in the claimants’ buildings. AWI expects to continue vigorously defending any asserted asbestos-related property damage claims in the Court. AWI believes that it has a significant amount of existing insurance coverage available for asbestos-related property damage liability, with the amount ultimately available dependent upon, among other things, the profile of the claims that may be allowed by the Court. AWI’s history of property damage litigation prior to the Chapter 11 filing is described in Note 10 of the condensed consolidated financial statements.

~~Approximately~~(dollar ~~1,700~~amounts ~~claims totaling approximately $1.9 billion alleging a right to payment for financing, environmental, trade debt and other claims are pending with the Court. For these categories of~~in ~~claims~~millions, ~~AWI~~except ~~has~~share ~~previously~~data) ~~recorded approximately $1.6 billion in liabilities. AWI continues to investigate the claims to determine their validity.~~

~~AWI~~ proceeds ~~continues~~at toleast ~~evaluate~~equal ~~claims~~to ~~filed~~the inamount of the ~~Chapter~~Plan 11Notes ~~Case~~prescribed by the Plan. ~~AWI~~If ~~has~~the ~~recorded~~private ~~liability~~offerings ~~amounts~~are ~~for~~successful, ~~claims~~the ~~whose~~Plan ~~value~~Notes ~~can~~would not be ~~reasonably~~issued. If ~~estimated~~the ~~and~~offerings ~~which~~yield itproceeds ~~believes~~less ~~are~~than ~~probable~~the amount of ~~being~~the ~~allowed~~Plan Notes prescribed by the ~~Court.~~Plan, AtPlan ~~this~~Notes ~~time,~~equal ~~it is~~to ~~impossible~~the todifference ~~reasonably~~will ~~estimate~~be issued. If only the ~~value~~Plan ofNotes ~~all~~are ~~the~~issued, ~~claims~~reorganized ~~that~~Armstrong ~~will~~expects ~~ultimately~~to beissue ~~allowed~~an byaggregate ~~the~~amount ~~Court~~of $775 million of Plan Notes. ~~However,~~These itPlan isNotes ~~likely~~would ~~the~~consist ~~value~~of (i) a tranche of ~~the~~notes ~~claims~~with ~~ultimately~~a ~~allowed~~seven-year bymaturity ~~the~~and ~~Court~~a ~~will~~fixed beinterest inrate, ~~excess~~(ii) a tranche of ~~amounts~~notes ~~presently~~with ~~recorded~~a byten-year ~~AWI~~maturity and ~~will~~ bea ~~material~~fixed tointerest ~~AWI’s~~rate ~~financial~~and ~~position~~(iii) a ~~and~~tranche ~~the~~of floating ~~results~~rate notes with a maturity of ~~its~~not ~~operations.~~less ~~However~~than five years, ~~AWI~~but isno ~~not~~more ~~able~~than toten ~~determine~~years, structured in a ~~range~~manner ofsimilar ~~possible~~to, ~~liability~~and ~~with~~as ~~any~~liquid ~~reasonable~~as, ~~degree~~marketable ofbank ~~accuracy,~~debt ~~due~~which tosatisfy the ~~uncertainties~~requirements of the ~~Chapter~~POR 11and ~~process~~are on terms and conditions that are satisfactory to AWI, the ~~in-progress~~ ~~state~~Asbestos ofPersonal ~~AWI~~Injury Claimants’s ~~investigation~~Committee, ofand ~~submitted~~the ~~claims~~Future ~~and~~Claimants’ Representative. To the ~~lack~~extent Plan Notes of ~~documentation~~more ~~submitted~~than inone ~~support~~type are issued, a pro rata share of ~~many~~each tranche would be issued to the Asbestos PI Trust and the holders of unsecured claims.

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

On• November 1, 2002, the Court announced it had approved AWI’s motion to reduce the amount of its debtor-in-possession credit facility (the “DIP Facility”) from $200 million to $75 million, eliminate the revolving credit borrowing feature, retain the letter of credit issuance facility and extend the maturity date to December 8, 200334.43% As of September 30, 2002, AWI had no outstanding debt borrowings under its DIP Facility and AWI had $205.9 million of cash and cash equivalents, excluding cash held by its non-debtor subsidiaries. As of September 30, 2002, AWI had approximately $24.7 million in letters of credit which were issued pursuant to the ~~DIP~~new ~~Facility.~~common ~~AWI~~stock believes that the DIP Facility, together with cash on hand and generated from operations, will be adequate to address its foreseeable liquidity needs. Obligations under the DIP Facility, including reimbursement of ~~draws~~reorganized ~~under the letters of credit~~Armstrong, ~~if any, constitute superpriority administrative expense claims in the Chapter 11 Case.~~

~~Accounting~~• ~~Impact~~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:

~~AICPA~~• ~~Statement~~Up ofto ~~Position~~$300 ~~90-7,~~million ~~“Financial~~of ~~Reporting~~Available byCash 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 condensed consolidated financial statements. 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 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.

~~Pursuant~~Armstrong ~~to SOP 90-7~~Holdings, ~~AWI is required to segregate prepetition liabilities that are subject to compromise and report them separately on the balance sheet~~Inc. ~~See Note 3 for detail of the liabilities subject to compromise at September 30~~, ~~2002~~ and ~~December~~Subsidiaries 31, 2001. 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 prepetition debt, now in default, is recorded at face value and is classified within liabilities subject to compromise. Obligations of Armstrong subsidiaries not covered by the Filing remain classified on the condensed 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 10 for further discussion of AWI’s asbestos liability.

~~Additional~~Notes ~~prepetition~~to ~~claims~~Condensed ~~(liabilities~~Consolidated ~~subject~~Financial toStatements ~~compromise~~(Unaudited) ~~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~~(dollar ~~90-7 also~~amounts ~~requires separate reporting of all revenues~~in millions, ~~expenses,~~except ~~realized~~share ~~gains~~data) 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 in the first nine months of 2002 and 2001:

	Nine Months Ended September 30, 2002			Nine Months Ended September 30, 2001
	(amounts in millions)
Professional fees	$	22.5		$	17.2
Interest income, post petition		(2.7	)		(4.0	)
Reductions to prepetition liabilities		(0.9	)		(2.0	)
Termination of prepetition lease obligation		—			(5.9	)
Other expense directly related to bankruptcy, net		0.2			0.9
Total Chapter 11 reorganization costs, net	$	19.1		$	6.2

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.

~~Professional~~Valuation ~~fees~~of ~~represent~~Consideration ~~legal~~to ~~and~~be ~~financial~~Distributed ~~advisory~~under ~~fees and expenses directly related to~~ the ~~Filing.~~POR

~~Interest~~Based ~~income~~upon ismany ~~earned~~assumptions ~~from~~(see ~~short~~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-~~term~~point ~~investments~~of the range of ~~cash~~estimated values of $2.4 billion and $3.0 billion that was estimated by AWI ~~subsequent~~and toits financial advisors during the ~~Filing~~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:

~~Reductions~~• toNew ~~prepetition~~common ~~liabilities~~stock ~~represent~~at $30 a share, which is the ~~difference~~approximate ~~between~~mid-point of the ~~prepetition~~range ~~invoiced~~of ~~amount~~estimated ~~and~~values ~~the~~of ~~actual~~$24.66 ~~cash~~and ~~payment~~$35.30 ~~made~~per toshare, ~~certain vendors~~assuming ~~due~~a todistribution ~~negotiated~~of ~~settlements~~56.4 ~~These~~million ~~payments~~shares of ~~prepetition~~new ~~obligations~~common ~~were~~stock ~~made~~to ~~pursuant~~holders toof ~~authority~~unsecured ~~granted~~claims byand the ~~Court.~~Asbestos PI Trust;

~~Termination~~• ofPlan ~~prepetition~~Notes ~~lease obligation represents the reversal of an accrual for future lease payments for office space~~ in the ~~U.S.~~aggregate ~~that~~principal ~~AWI will not pay due to the termination of the lease contract. This~~ amount ~~was previously accrued in the third quarter~~ of ~~2000~~$775 asmillion, ~~part~~that ofare aworth ~~restructuring~~their ~~charge~~face ~~when the decision to vacate the premises was made.~~ value;

As• aAvailable ~~result~~Cash of ~~the~~ ~~Filing,~~approximately ~~realization~~$350 ofmillion ~~assets~~that ~~and liquidation of liabilities are subject to uncertainty. While operating as a debtor-in-possession,~~ AWI ~~may~~expects sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the condensed consolidated financial statements. Although a POR has been filed with the Court, implementation of the POR is subject to confirmation of the POR in accordance with the provisions of the Bankruptcy Code. At this time, AWI is unable to predict when and if the POR will be confirmed and, accordingly, the timing of its emergence from Chapter 11. Further, a plan of reorganization could materially change the amounts and classifications reported in the condensed consolidated financial statements. However, no such material changes have; ~~occurred to the amounts~~ and ~~classifications in the September 30, 2002 financial statements.~~

•

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 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

~~NOTE~~Armstrong 3Holdings, Inc. ~~LIABILITIES~~, ~~SUBJECT~~and TOSubsidiaries ~~COMPROMISE~~

AsNotes ato ~~result of~~Condensed ~~AWI’s~~Consolidated ~~Chapter~~Financial 11Statements ~~filing~~ (~~see Note 2~~Unaudited), 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 AHI subsidiaries 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. Prior to its Chapter 11 Filing, AWI estimated a range for the asbestos-related personal injury liability AWI would most likely be subject to during the following six years, based upon a variety of factors including historical settlement amounts, the incidence of past claims, the mix of the injuries of the plaintiffs, the number of cases pending against AWI and the status and results of broad-based settlement discussions. This range was large due to the limitations of the available data and the difficulty of forecasting with any certainty the numerous variables that could have affected AWI’s liability. AWI concluded that no amount within the range was more likely than any other, and therefore reflected the low end of the range as the liability in the condensed consolidated financial statements, in accordance with generally accepted accounting principles. The Chapter 11 process will address AWI’s total liability for asbestos-related personal injury claims, which AWI never believed it could accurately estimate. There are significant differences between the way asbestos-related personal injury claims may be addressed in the bankruptcy process and the historical way AWI’s claims were resolved. See Note 2 for further discussion on how the Chapter 11 process may address AWI’s liability for asbestos-related personal injury claims. If the POR, as described in Note 2, is confirmed and becomes effective, AWI would record a pre-tax charge in excess of $2.4 billion, net of insurance coverage, to increase its Subject to Compromise liability. This charge would be before recognition of gains from the settlement of liabilities, which will arise out of the Chapter 11 process. However, at this time, AWI is unable to predict when and if the POR will be confirmed. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. Accordingly, AWI has not adjusted its asbestos-related personal injury liability during the third quarter of 2002. It is likely that the total liability as determined in the Chapter 11 process will be significantly higher than the recorded liability and the liability will be material to the financial statements. See Note 10 for further discussion of AWI’s asbestos liability.

~~Liabilities~~(dollar ~~subject~~amounts ~~to compromise at September 30, 2002 and~~in ~~December 31~~millions, ~~2001~~except ~~are~~share asdata) ~~follows:~~

	September 30, 2002		December 31, 2001
	(amounts in millions)
Debt (at face value)	$	1,400.7	$	1,400.7
Asbestos-related liability		690.6		690.6
Prepetition trade payables		52.8		52.2
Prepetition other payables and accrued interest		55.7		56.4
ESOP loan guarantee		157.7		157.7
Total liabilities subject to compromise	$	2,357.5	$	2,357.6

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.

~~Additional~~Approximately ~~prepetition~~4,800 ~~claims~~proofs of claim (~~liabilities~~including ~~subject~~late-filed ~~to compromise~~claims) ~~may~~totaling ~~arise~~approximately ~~due~~$6.3 billion, alleging a right to payment from AWI, were filed with the ~~rejection~~ ofBankruptcy ~~executory~~Court ~~contracts~~in orresponse ~~unexpired~~to ~~leases~~the August 31, or2001 asbar adate. ~~result~~The disposition of these claims under the ~~allowance~~POR is discussed below. AWI continues the process of ~~contingent~~investigating orand ~~disputed~~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 15.

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, 2006. As of September 30, 2005, AWI had approximately $43.4 million in letters of credit, which were issued pursuant to the DIP Facility. As of September 30, 2005, AWI had $306.9 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.

~~NOTE~~Armstrong 4Holdings, Inc. ~~SEGMENT~~, ~~RESULTS~~and Subsidiaries

	Three Months Ended September 30,				Nine Months Ended September 30,
	2002		2001		2002		2001
	(amounts in millions)
Net sales to external customers
Resilient Flooring	$	314.6	$	303.2	$	899.0	$	902.6
Building Products		225.8		214.9		626.4		637.4
Wood Flooring		180.3		158.9		531.2		487.9
Cabinets		56.7		55.8		179.5		170.2
Textiles and Sports Flooring		68.6		72.1		182.7		200.9
Total sales to external customers	$	846.0	$	804.9	$	2,418.8	$	2,399.0

Notes to Condensed Consolidated Financial Statements (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2002			2001			2002			2001
	(amounts in millions)
Segment operating income (loss)
Resilient Flooring	$	21.5		$	29.2		$	61.1		$	77.1
Building Products		34.6			31.1			81.8			75.3
Wood Flooring		10.0			(4.9	)		37.2			8.8
Cabinets		(0.3	)		3.1			3.5			13.2
Textiles and Sports Flooring		(1.1	)		(7.2	)		(3.3	)		(1.3	)
All Other		0.5			0.2			1.9			0.7
Total segment operating income		65.2			51.5			182.2			173.8
Charge for asbestos liability, net		—			(16.0	)		—			(22.0	)
Unallocated Corporate (expense)		(12.8	)		(2.6	)		(33.7	)		(13.5	)
Total consolidated operating income	$	52.4		$	32.9		$	148.5		$	138.3

(dollar amounts in millions, except share data)

	September 30, 2002		December 31, 2001
	(amounts in millions)
Segment assets
Resilient Flooring	$	916.2	$	855.3
Building Products		537.3		527.0
Wood Flooring		639.1		1,260.6
Cabinets		117.2		108.0
Textiles and Sports Flooring		204.1		177.8
All Other		18.2		16.3
Total segment assets		2,432.1		2,945.0
Assets not assigned to segments		1,211.8		1,093.1
Total consolidated assets	$	3,643.9	$	4,038.1

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 September 30, 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 15 for further discussion of AWI’s asbestos liability.

~~The~~Additional ~~decrease~~pre-Filing inclaims ~~the~~(liabilities ~~assets~~subject ofto ~~the~~compromise) ~~Wood~~may ~~Flooring~~arise ~~segment is primarily~~ due to the ~~$590.0 million~~rejection ~~goodwill~~of ~~impairment~~executory ~~write~~contracts ~~down~~or ~~recorded~~unexpired leases, or as a ~~cumulative~~result ~~effect~~ of athe ~~change~~allowance ~~in accounting principle as~~ of ~~January~~contingent 1,or ~~2002.~~disputed ~~See Note 7 for further details~~claims.

~~NOTE~~SOP 590-7 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. ~~DISCONTINUED~~ ~~OPERATIONS~~Accordingly, AWI recorded the following Chapter 11 reorganization activities through September of 2005 and 2004:

In February 2001, AHI determined to permanently exit the Textiles and Sports Flooring segment and on February 20, 2001 entered into negotiations to sell substantially all of the businesses comprising this segment to a private equity investor based in Europe. Based on these events, the segment was classified as a discontinued operation starting with the fourth quarter of 2000. On June 12, 2001, negotiations with this investor were terminated. During the third quarter of 2001, AHI terminated its plans to permanently exit this segment. This decision was based on the difficulty encountered in selling the business, the changed cash needs of AHI and a review of our European strategy. Accordingly, this segment is no


	Three Months Ended September 30						Nine Months Ended September 30
	2005			2004			2005			2004
Professional fees	$	4.7		$	3.6		$	11.8		$	9.6
Interest income, post-Filing		(3.2	)		(1.4	)		(7.5	)		(3.1	)
Adjustments to pre-Filing liabilities					—			0.1			—
Other expense directly related to bankruptcy, net		—			0.1			0.1			0.1

Total Chapter 11 reorganization costs, net	$	1.5		$	2.3		$	4.5		$	6.6

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.

~~longer~~Armstrong ~~classified~~Holdings, asInc., ~~a discontinued operation~~ and ~~amounts~~Subsidiaries have been reclassified into operations as required by EITF Issue No. 90-16 – “Accounting for Discontinued Operations Subsequently Retained”. All prior periods have been reclassified to conform to the current presentation.

~~Based~~Notes ~~on the expected net realizable value of the business determined during the negotiations~~ to ~~sell~~Condensed ~~the~~Consolidated ~~business,~~Financial ~~AHI~~Statements recorded a pre-tax net loss of $34.5 million in the fourth quarter of 2000, $23.8 million net of tax benefit. AHI also recorded an additional net loss of $3.3 million in the first quarter of 2001, as a result of price adjustments resulting from the negotiations. Concurrent with the decision to no longer classify the business as a discontinued operation, the remaining accrued loss of $37.8 million (~~$27.1 million net of tax~~Unaudited) was reversed in the third quarter of 2001 and recorded as part of earnings from discontinued operations. Additionally, the segment’s net income of $3.1 million for the first and second quarter of 2001 was reclassified into earnings from continuing operations for those periods.

~~During~~(dollar ~~the~~amounts ~~third quarter of 2001, AHI concluded there were indicators of impairment related to certain assets~~ in ~~this segment, and accordingly, an impairment evaluation was conducted at the end of the third quarter under the guidelines of SFAS No. 121 –~~ ~~“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”. This evaluation led to an impairment charge of $8.4 million~~millions, ~~representing~~except ~~the~~share ~~excess~~data) of book value over estimated fair value which was determined using a net discounted cash flows approach. The charge was included in cost of sales. The impairment was related to property, plant and equipment that produce certain products for which AHI anticipates lower demand in the future. Additionally, an inventory write-down of $2.1 million was also recorded in the third quarter of 2001 within cost of sales related to certain products that will no longer be sold.

~~During~~NOTE ~~the second quarter of 2001, AHI also recorded a pre-tax loss of $0~~3.9 ~~million~~SEGMENT ~~related~~RESULTS ~~to its 2000 divestiture of its Insulation Products segment, resulting from certain post-closing adjustments.~~

NOTE 6. INVENTORIES


	Three Months Ended September 30,				Nine Months Ended September 30,
Net sales to external customers	2005		2004		2005		2004
Resilient Flooring	$	311.5	$	308.1	$	914.0	$	934.1
Wood Flooring		220.2		209.4		624.9		620.9
Textiles and Sports Flooring		79.7		70.0		211.4		197.4
Building Products		268.2		250.2		784.5		727.5
Cabinets		57.4		55.8		161.9		162.1

Total sales to external customers	$	937.0	$	893.5	$	2,696.7	$	2,642.0

	September 30, 2002			December 31, 2001
	Three Months Ended September 30,						Nine Months Ended September 30,
	(amounts in millions)
Segment operating income (loss)	2005			2004			2005			2004
Finished goods	$	267.7		$	269.6
Resilient Flooring	$	7.7		$	10.8		$	(5.8	)	$	(13.3	)
Goods in process		59.2			45.8
Wood Flooring		25.7			7.1			54.4			38.5
Raw materials and supplies		168.5			182.9
Textiles and Sports Flooring		3.2			2.8			(3.2	)		(0.8	)
Less LIFO and other reserves		(66.1	)		(55.2	)
Building Products		43.1			40.0			116.0			106.3
Total inventories, net	$	429.3		$	443.1
Cabinets		(0.3	)		2.8			(9.5	)		4.9
Unallocated Corporate (expense)		(12.9	)		(15.3	)		(41.1	)		(44.6	)
Total consolidated operating income	$	66.5		$	48.2		$	110.8		$	91.0

NOTE 7. GOODWILL AND INTANGIBLE ASSETS


Segment assets	September 30, 2005		December 31, 2004
Segment assets	September 30, 2005		December 31, 2004
Resilient Flooring	$	708.2	$	737.9
Wood Flooring		653.0		663.6
Textiles and Sports Flooring		207.7		218.1
Building Products		608.3		596.3
Cabinets		104.9		102.2

Total segment assets		2,282.1		2,318.1
Assets not assigned to segments		2,335.3		2,291.3

Total consolidated assets	$	4,617.4	$	4,609.4

~~Effective~~NOTE ~~January 1, 2002, AHI adopted SFAS No~~4. ~~142,~~LIABILITIES ~~“Goodwill~~SUBJECT ~~and~~TO ~~Other~~COMPROMISE Intangible Assets” (“FAS 142”), which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. FAS 142 also requires that intangible assets with determinable useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment.

As a result of AWI’s ~~January~~Chapter 1,11 ~~2002,~~filing ~~AHI~~(see ~~had~~Note ~~unamortized~~2), ~~goodwill~~pursuant ofto ~~$822.8~~SOP ~~million~~90-7, ofAWI ~~which~~is ~~$717.2~~required ~~million was attributable~~ to ~~the~~segregate ~~Wood~~prepetition ~~Flooring~~liabilities ~~segment.~~that Inare ~~the~~subject ~~second~~to ~~quarter~~compromise ofand ~~2002,~~report ~~AHI~~them ~~completed~~separately on the ~~assessment~~balance ofsheet. ~~goodwill~~Liabilities ~~and~~that ~~recorded~~may abe ~~$590.0~~affected ~~million~~by ~~non-cash~~a ~~transitional~~plan ~~impairment~~of reorganization ~~charge~~are ~~related~~recorded toat the ~~Wood~~amount ~~Flooring~~of ~~segment.~~the ~~The~~expected ~~impairment~~allowed ~~charge~~claims, ~~is presented~~even inif ~~the~~they ~~income~~may ~~statement~~be assettled afor ~~cumulative~~lesser ~~effect~~amounts. ofSubstantially aall ~~change~~of inAWI’s ~~accounting~~prepetition ~~principle~~debt, asnow ofin ~~January 1~~default, ~~2002.~~is ~~The~~recorded ~~impairment~~at ~~charge~~face ~~arose~~value ~~from~~and ~~the~~is ~~Wood~~classified ~~Flooring~~within liabilities ~~segment’s~~subject ~~fair~~to ~~value~~compromise. ~~being~~Obligations ~~lower~~of ~~than~~our ~~its~~subsidiaries ~~carrying~~that ~~value.~~are ~~The~~not ~~Wood~~covered ~~Flooring segment’s~~by ~~fair~~the ~~value~~Filing ~~was~~remain ~~determined~~classified ~~using~~on athe ~~combination~~condensed ofconsolidated ~~discounted~~balance ~~cash~~sheet ~~flows,~~based ~~values~~upon ~~implicit~~maturity indate. ~~precedent~~AWI’s ~~business~~asbestos ~~combinations~~liability ofis ~~similar~~also ~~companies~~recorded in liabilities ~~the~~subject ~~building~~to ~~products~~compromise. ~~industry~~See ~~and~~Note ~~stock~~2 ~~market~~for ~~multiples~~further ofdiscussion ~~publicly-traded~~on ~~flooring companies.~~how ~~The~~the ~~fair~~Chapter ~~value~~11 ~~was~~process ~~negatively~~may ~~affected~~address byAWI’s ~~lower~~liabilities ~~operating~~subject ~~profits~~to compromise and ~~cash~~Note ~~flows~~15 ~~than~~for ~~were~~further ~~assumed~~discussion ~~at the time~~ of ~~the~~AWI’s ~~acquisition~~asbestos ~~in 1998~~liability. ~~The shortfalls were caused by a~~

~~combination~~Armstrong ofHoldings, ~~lower sales plus higher manufacturing costs~~Inc. ~~Under previous accounting rules~~, noand ~~goodwill~~Subsidiaries ~~impairment would have been recorded at January 1, 2002.~~

~~The~~Notes ~~following~~to ~~table~~Condensed ~~represents~~Consolidated ~~the~~Financial ~~changes~~Statements in(Unaudited) ~~goodwill since December 31, 2001.~~

	January 1, 2002		Adjustments, net(1)		Impairments			September 30, 2002
	(amounts in millions)
Goodwill by segment
Resilient Flooring	$	82.9	$	1.1		—		$	84.0
Building Products		10.1		1.0		—			11.1
Wood Flooring		717.2		—	$	(590.0	)		127.2
Cabinets		12.6		—		—			12.6
Total consolidated goodwill	$	822.8	$	2.1	$	(590.0	)	$	234.9

(dollar amounts in millions, except share data)

~~(1) Primarily~~Liabilities ~~consists~~subject ofto ~~the~~compromise ~~effects~~at ofSeptember 30, ~~foreign~~2005 ~~exchange~~ and ~~resolution~~December 31, of2004 ~~pre-acquisition~~are ~~tax~~as ~~and~~follows: ~~other contingencies.~~

As of January 1, 2002, AHI had unamortized identifiable intangible assets of $94.1 million. It was determined that the fair value of one of Wood Flooring’s trademarks was lower than its carrying value. The fair value of the trademark was estimated using a discounted cash flow methodology. Accordingly, a non-cash transitional impairment charge of $6.0 million ($3.8 million, net of tax) was calculated and is presented in the income statement as a cumulative effect of a change in accounting principle as of January 1, 2002.


	September 30, 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		58.1		58.9
Prepetition other payables and accrued interest		71.0		70.4
ESOP loan guarantee		157.7		157.7

Total liabilities subject to compromise	$	4,866.0	$	4,866.2

~~The~~(1) ~~following table~~In ~~details~~accordance ~~amounts~~with ~~related~~SOP to90-7, ~~AHI’s~~we ~~intangible~~did ~~assets~~not asrecord contractual interest expense on prepetition debt after the Chapter 11 filing date. This unrecorded interest expense was $20.5 million and $63.6 million in the third quarter and first nine months of ~~September~~2005, 30respectively, ~~2002~~and $21.7 million and $65.1 million in the third quarter and the first nine months of 2004, respectively.

	September 30, 2002
	Gross Carrying Amount		Accumulated Amortization
	(amounts in millions)
Amortized intangible assets
Computer software	$	96.4	$	40.1
Land use rights and other		3.6		0.7
Total	$	100.0	$	40.8
Unamortized intangible assets
Trademarks and brand names	$	29.0
Total intangible assets	$	129.0
Aggregate Amortization Expense
For the nine months ended September 30, 2002	$	10.4

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.

~~The~~NOTE ~~annual~~5. ~~amortization~~DISCONTINUED ~~expense~~OPERATIONS ~~expected for the years 2002 through 2006 is as follows:~~

2002	$	14.9
2003		14.6
2004		12.6
2005		10.8
2006		7.1

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


	September 30, 2005			December 31, 2004
Finished goods	$	325.5		$	362.9
Goods in process		48.2			49.3
Raw materials and supplies		187.7			212.8
Less LIFO and other reserves		(67.7	)		(89.9	)

Total inventories, net	$	493.7		$	535.1

NOTE 7. NATURAL GAS HEDGES

We purchase natural gas for use in the manufacture of ceiling tiles and other products and to heat many of our facilities. As a result, we are exposed to movements in the price of natural gas. We have a policy of reducing short term cost volatility by purchasing natural gas hedging instruments. These instruments are designated as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted. The mark-to-market gain or loss on qualifying hedges is included in other comprehensive income to the extent the hedge is considered effective as defined by SFAS 133, and reclassified into cost of goods sold in the period during which the underlying products are sold. The mark-to-market gains or losses on ineffective portions of hedges are recognized in cost of goods sold immediately. The fair value of these instruments at September 30, 2005 was a $28.0 million asset compared to a $5.3 million asset at December 31, 2004, due to the price of natural gas increasing during the year.

~~Comparison~~Armstrong toHoldings, ~~prior~~Inc., ~~year~~and ~~“As~~Subsidiaries ~~Adjusted”~~

~~The~~Notes ~~following table presents prior year reported amounts adjusted~~ to ~~eliminate~~Condensed ~~the~~Consolidated ~~effect~~Financial ofStatements ~~goodwill~~(Unaudited) ~~and certain identifiable intangible asset amortization in accordance with FAS 142.~~

	Three Months Ended September 30,				Nine Months Ended September 30,
	2002		2001		2002			2001
	(in millions except per share amounts)
Reported net income (loss)	$	29.4	$	41.2	$	(514.8	)	$	93.6
Add back: Goodwill amortization		—		5.7		—			17.1
Add back: Trademark and brand names amortization		—		0.2		—			0.6
Adjusted net income (loss)	$	29.4	$	47.1	$	(514.8	)	$	111.3
Basic net earnings (loss) per share:
Reported net income (loss)	$	0.73	$	1.02	$	(12.71	)	$	2.32
Goodwill amortization		—		0.14		—			0.42
Trademark and brand names amortization		—		—		—			0.01
Adjusted net income (loss)	$	0.73	$	1.16	$	(12.71	)	$	2.75
Diluted net earnings (loss) per share:
Reported net income (loss)	$	0.72	$	1.01	$	(12.71	)	$	2.29
Goodwill amortization		—		0.14		—			0.42
Trademark and brand names amortization		—		—		—			0.01
Adjusted net income (loss)	$	0.72	$	1.15	$	(12.71	)	$	2.72

(dollar amounts in millions, except share data)

NOTE 8. ~~RESTRUCTURING~~ ~~AND~~EQUITY ~~OTHER~~INVESTMENTS ~~ACTIONS~~

~~The~~Investments ~~following~~in ~~table~~affiliates ~~summarizes~~of ~~activity~~$62.3 inmillion ~~the~~at ~~reorganization~~September 30, ~~and~~2005 ~~restructuring~~reflected ~~accruals~~the ~~for~~equity interest ~~the~~in ~~first~~our ~~nine~~50% ~~months~~investment ofin ~~2002~~our ~~and~~WAVE ~~2001~~joint venture. The ~~net~~balance ~~amount~~decreased $10.2 million from December 31, 2004, primarily due to the August 2005 sale of ~~charges~~our ~~and~~equity ~~reversals~~interest in ~~the~~Interface ~~table~~Solutions, ~~does~~Inc. partially offset by our equity ~~not~~interest ~~agree~~in toWAVE’s ~~the~~net ~~income~~undistributed ~~statement~~earnings. ~~due~~Condensed toincome ~~non-cash~~statement ~~charges~~data for ~~enhanced~~WAVE, ~~retirement~~our ~~benefits~~joint ~~that~~venture ~~did~~accounted ~~not~~for ~~affect~~under the ~~restructuring~~equity ~~accrual~~method ~~accounts.~~of accounting, is summarized below:

	Beginning Balance		Cash Payments				Charges			Reversals			Other			Ending Balance
	Three Months Ended September 30,					Nine Months Ended September 30,
	(amounts in millions)
	2005		2004			2005			2004
2002	$	8.9	$	(1.2	)		$	2.3		$	(0.6	)	$	0.3		$	9.7
Net sales	$	77.6	$	68.2		$	230.0		$	209.9
2001		22.2		(9.3	)			4.1			(2.7	)		(6.2	)		8.1
Gross profit		24.9		21.1			70.9			64.0
Net earnings		19.9		14.9			56.4			46.7

ANOTE $09.5 ~~million~~GOODWILL ~~restructuring~~AND ~~charge~~INTANGIBLE ~~was~~ASSETS recorded in the first quarter of 2002. The charge related to severance benefits for eleven employees in the Textiles and Sports Flooring segment, to reflect staffing needs for current business conditions and continued efforts initiated in the fourth quarter of 2001.

AAs ~~$2.2 million restructuring charge was recorded in the second quarter~~ of ~~2002. The charge primarily related to severance benefits for approximately 120~~January 1, ~~employees~~2005, inwe ~~the~~had ~~European~~goodwill ~~Resilient Flooring business due to a slow European economy and a consolidation~~ of ~~worldwide~~approximately ~~research and development activities. Of the~~ $~~2.2~~136 million~~, $0~~.4 ~~million~~Goodwill ~~represented~~is arequired ~~non-cash~~to ~~charge~~be tested for ~~enhanced~~impairment ~~retirement benefits,~~at ~~which~~least isannually. ~~accounted~~We ~~for~~perform asour anannual ~~increase~~assessment toin ~~pension~~the ~~benefit~~fourth ~~liabilities~~quarter.

InThe ~~the~~following ~~third~~table ~~quarter~~represents ofthe ~~2002,~~changes ~~$0.6~~in ~~million~~goodwill offor the ~~remaining~~ ~~accrual related to the~~ first ~~quarter~~nine ~~2002~~months ~~and~~of ~~fourth quarter 2001 charges in the Textiles and Sports Flooring segment was reversed, comprising certain severance accruals that were no longer necessary~~2005.


Goodwill by segment	January 1, 2005		Adjustments, net⁽¹⁾			Impairments	September 30, 2005
Wood Flooring	$	108.2		—		—	$	108.2
Building Products		15.2	$	(1.7	)	—		13.5
Cabinets		12.6		—		—		12.6

Total consolidated goodwill	$	136.0	$	(1.7	)	—	$	134.3

⁽¹⁾	Consists of the effects of foreign exchange.

During the second quarter of 2004, we recorded a $60 million goodwill impairment charge in our European resilient flooring unit. This charge was caused by lowered financial projections for this business due to significant operating losses.

The following table details amounts related to intangible assets as of September 30, 2005 and December 31, 2004.


	September 30, 2005				December 31, 2004
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets
Computer software	$	112.8	$	76.5	$	109.8	$	66.4
Land use rights and other		4.5		1.1		4.4		1.0

Total	$	117.3	$	77.6	$	114.2	$	67.4

Unamortized intangible assets
Trademarks and brand names	$	29.3			$	29.2

Other intangible assets, gross	$	146.6			$	143.4

Aggregate Amortization Expense
For the nine months ended September 30, 2005			$	12.8
For the nine months ended September 30, 2004			$	11.5

AArmstrong $5.4 million restructuring charge was recorded in the first quarter of 2001. The charge related to severance and enhanced retirement benefits for more than 50 corporate and line-of-business salaried staff positionsHoldings, ~~to reflect staffing needs for current business conditions~~Inc. ~~Of the $5.4 million~~, ~~$1.6~~and ~~million~~Subsidiaries ~~represented a non-cash charge for enhanced retirement benefits, which is accounted for as a reduction of the prepaid pension asset.~~

InNotes ~~the second quarter of 2001, a $1.1 million reversal was recorded related~~ to aCondensed ~~formerly~~Consolidated ~~occupied~~Financial ~~building~~Statements ~~for~~(Unaudited) which AHI no longer believes it will incur any additional costs. In addition, $0.2 million of the remaining accrual for the first quarter 2001 reorganization was reversed, comprising certain severance accruals that were no longer necessary as certain individuals remained employed by AHI.

In(dollar ~~the~~amounts ~~third~~in ~~quarter of 2001~~millions, aexcept ~~$1.4~~share ~~million~~data) ~~reversal was recorded related to certain severance and benefit accruals that were no longer necessary and a $0.3 million pre-tax charge was recorded for additional severance payments.~~

~~The~~NOTE ~~amount in “other” for 2002 is primarily related to foreign currency translation~~10. InRESTRUCTURING ~~2001,~~AND ~~the~~OTHER ~~amount~~ACTIONS in “other” is primarily related to the termination of an operating lease for an office facility in the U.S. These lease costs were previously accrued in the third quarter of 2000 as part of the restructuring charge when the decision to vacate the premises was made. The $5.9 million reversal is recorded as a reduction of Chapter 11 reorganization costs in accordance with SOP 90-7. See Note 2 for further discussion. The 2001 remaining amount in “other” is related to foreign currency translation.

~~Substantially~~Net ~~all of the remaining balance of the~~ restructuring ~~accrual~~charges as of ~~September~~$17.0 ~~30,~~million ~~2002~~and ~~relates~~$5.0 tomillion ~~rental~~were ~~commitments~~recorded ~~for~~in ~~unused~~the ~~space~~first ~~under~~nine ~~the~~months ~~terms~~ of a2005 ~~noncancelable-operating lease, which extends through 2017,~~ and ~~severance for terminated employees with extended payouts~~2004, ~~the~~respectively. ~~majority~~These ofcharges ~~which~~are ~~will~~summarized bein ~~paid by~~ the ~~second~~following ~~quarter~~table: ~~of 2003.~~

NOTE 9. SUPPLEMENTAL CASH FLOW INFORMATION


	Net Charge/(Reversal)										Segment
	Three Months Ended September 30,				Nine Months Ended September 30,
Action Title	2005		2004		2005			2004
Lancaster Plant	$	0.2		—	$	11.3			—		Resilient Flooring
Hoogezand		1.1	$	1.9		5.1		$	5.8		Building Products
North America SG&A		—		—		(0.1	)		—		Resilient Flooring
Morristown		0.1		—		0.4			—		Cabinet Products
Searcy		—		—		0.1			—		Wood Flooring
Oss		—		—		0.2			—		Textiles & Sports Flooring
European consolidation		—		—		—			(0.8	)	Resilient Flooring, Textiles & Sports Flooring

Total	$	1.4	$	1.9	$	17.0		$	5.0

	Nine Months Ended September 30,
	2002		2001
	(amounts in millions)
Interest paid	$	4.2	$	3.6
Income taxes paid, net	$	35.9	$	2.1

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 $11.3 million charge in 2005, $10.5 million is a non-cash charge related to termination benefits to be paid through the U.S. pension plan. The other $0.8 million is comprised of severance and related costs. We have incurred project-to-date restructuring charges of $12.3 million related primarily to severance and pension related costs. We expect to incur an additional $27 million of restructuring charges starting in the fourth quarter of 2005 and continuing through 2008, with the majority of charges to be incurred in 2005 and 2006. Additionally, we recorded $5.3 million of accelerated depreciation and $2.7 million of other related costs in the first nine months of 2005, both in cost of goods sold.

~~NOTE~~Hoogezand: 10These charges are related to the first quarter 2004 decision to close the manufacturing facility and are comprised of severance and related costs. ~~LITIGATION~~ ~~AND~~Closure ~~RELATED~~of ~~MATTERS~~the plant was completed in the first quarter of 2005. The production was transferred to another Building Products location in Münster, Germany and resulted in a net reduction of approximately 72 positions. We have incurred project-to-date restructuring charges of $16.0 million, and expect to incur an additional $0.8 million in the fourth quarter of 2005. Additionally, we recorded $0.5 million and $1.5 million of accelerated depreciation in cost of goods sold in the first nine months of 2005 and 2004, respectively. We also recorded $0.6 million and $0.2 million of other related costs in cost of goods sold in the first nine months of 2005 and 2004, respectively.

~~ASBESTOS~~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 was completed in the second quarter of 2005. We incurred project-~~RELATED~~to-date ~~LITIGATION~~restructuring charges of $5.2 million and do not expect to incur any additional charges.

Morristown: The ~~following~~2005 ischarge related to the fourth quarter 2004 decision to close a ~~summary~~plant ~~update~~in Tennessee in the first quarter of 2005. ~~asbestos~~Manufacturing was consolidated at two existing plants in the United States. We have incurred project-to-date restructuring charges of $0.4 million for severance related ~~litigation;~~charges ~~see~~and ~~Item~~$0.4 3million of ~~Armstrong’s~~related ~~2001~~shutdown ~~Form~~costs ~~10-K~~and ~~filing~~expect ~~for~~to incur an additional ~~information~~$0.1 million of shutdown costs in the remainder of 2005. Additionally, we recorded $0.2 million of accelerated depreciation and $0.9 million of other related costs in 2005, both in cost of goods sold.

~~AWI~~Searcy: isThe acharge ~~defendant~~related ~~in personal~~to ~~injury~~the ~~claims~~fourth ~~and~~quarter ~~property~~2004 ~~damage~~decision ~~claims~~to ~~related~~cease toproduction ~~asbestos~~at a ~~containing~~solid ~~products.~~hardwood Onflooring ~~December~~location 6,in ~~2000,~~Arkansas ~~AWI~~in ~~filed~~the afirst ~~voluntary~~quarter ~~petition~~of ~~for~~2005 ~~relief~~and ~~(“the~~was ~~Filing”)~~comprised ~~under~~of ~~Chapter~~severance 11benefits ofand ~~the~~related Ucosts.S. ~~Bankruptcy~~We ~~Code~~continue to ~~use~~manufacture ~~the~~solid ~~court supervised~~wood ~~reorganization~~flooring ~~process~~at toother ~~achieve~~plants aacross ~~final~~the ~~resolution~~United ~~of its asbestos liability~~States.

Asbestos-Related Personal Injury Claims

Prior to filing for relief under the Bankruptcy Code, AWI was a member of the Center for Claims Resolution (the “Center”) which handled the defense and settlement of asbestos-related personal injury claims on behalf of its members. The Center 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~~Armstrong ~~to the Filing~~Holdings, ~~holders of asbestos-related personal injury claims are stayed from continuing to prosecute pending litigation and from commencing new lawsuits against AWI~~Inc. ~~In addition~~, ~~AWI~~and ~~ceased~~Subsidiaries making payments to the Center with respect to asbestos-related personal injury claims, including payments pursuant to the outstanding SSP agreements. AWI’s obligations with respect to payments called for under these settlements will be determined in its Chapter 11 Case.

~~A creditors’~~Notes ~~committee representing the interests of asbestos personal injury claimants and an individual has been appointed~~ to ~~represent~~Condensed ~~the~~Consolidated ~~interests~~Financial ofStatements ~~future~~(Unaudited) personal injury claimants in the Chapter 11 Case. AWI’s present and future asbestos liability will be addressed in its Chapter 11 Case rather than through the Center and a multitude of lawsuits in different jurisdictions throughout the U.S. It is anticipated that all of AWI’s present and future asbestos-related personal injury claims will be resolved in the Chapter 11 Case.

~~Asbestos-Related~~(dollar ~~Personal~~amounts ~~Injury~~in millions, ~~Liability~~except share data)

~~In evaluating its potential asbestos-related personal injury liability prior to the Filing, AWI reviewed information provided by the Center including, among other things, recent and~~ ~~historical~~We ~~settlement~~incurred ~~amounts,~~$0.9 ~~the~~million ~~incidence~~ of ~~past~~restructuring ~~and~~charges ~~recent~~for ~~claims,~~ the ~~mix of the injuries of the plaintiffs, the number of cases pending against it and the status and results of broad~~project-~~based settlement discussions. Based on this review, AWI developed an estimated range for its cost~~ to-date ~~defend~~ and ~~resolve~~do ~~asbestos-related~~not ~~personal~~expect ~~injury claims for six years, through 2006. This estimated range was large due~~ to ~~the~~incur ~~limitations of the available data and the difficulty of forecasting with~~ any ~~certainty~~additional ~~the numerous variables that could have affected AWI’s actual liability for this period~~charges. AWI concluded that no amount within the range was more likely than any other, and therefore reflected the low end of the range as the liability in the condensed consolidated financial statements, in accordance with generally accepted accounting principles.

ItOss: ~~is expected~~The ~~that~~2005 ~~the~~charge ~~Chapter~~was 11recorded ~~process~~to ~~will~~reflect ~~deal~~shutdown ~~with~~costs ~~all current and future asbestos-~~related ~~personal~~to ~~injury~~a ~~claims~~plant ~~against~~closure in ~~AWI~~The Netherlands. ~~There~~The ~~are~~related ~~significant~~severance ~~differences~~charges ~~between~~were ~~the~~recorded ~~way~~during the ~~asbestos-related~~third ~~personal~~quarter ~~injury~~of ~~claims~~2003 ~~may~~when ~~be addressed under~~ the ~~bankruptcy~~ ~~process~~plant ~~and~~closure ~~the~~was ~~historical way AWI’s claims were resolved~~announced. ~~See~~We ~~Note~~will 2continue ~~for~~to ~~further~~manufacture ~~discussion~~carpet onat ~~how~~other ~~the~~plants ~~Chapter~~across ~~11 process may address AWI’s asbestos-related personal injury claims~~Europe. ~~Therefore,~~We ~~AWI~~incurred ~~is unable~~ project-to-date ~~accurately predict~~restructuring ~~what~~charges ~~the~~of ~~Chapter~~$4.9 11million ~~process will determine is AWI’s total liability~~ and ~~AWI~~do isnot ~~unable~~expect to ~~reasonably~~incur ~~estimate~~any aadditional ~~range~~costs ofin ~~liability~~the ~~for asbestos-related personal injury claims~~future.

AsEuropean ofconsolidation: ~~September~~The ~~30,~~net ~~2000,~~reversals ~~AWI~~in ~~had~~2004 ~~recorded~~comprised acertain ~~liability~~severance ofaccruals ~~$758.8 million for its asbestos-related personal injury liability~~ that itwere ~~determined~~no ~~was~~longer ~~probable~~necessary ~~and~~in ~~estimable through 2006. Due to~~ the ~~increased~~ ~~uncertainty~~remaining ~~created~~accruals asfrom ~~a result of~~ the ~~Filing,~~2003 ~~no change has been made to the previously recorded liability except to record payments of $68.2 million against that accrual in October~~ and ~~November 2000. The asbestos-related personal injury liability balance recorded at September 30,~~ 2002 ~~and~~charges ~~December 31, 2001 is $690.6 million, which is recorded~~ in ~~liabilities subject to compromise. If~~ the ~~POR,~~Resilient asFlooring ~~described in Note 2, is confirmed and becomes effective, AWI would record a pre-tax charge in excess of~~ ($20.45 ~~billion,~~million) net of insurance coverage, to increase its Subject to Compromise liability. This charge would be before recognition of gains from the settlement of liabilities, which will arise out of the Chapter 11 process. However, at this time, AWI is unable to predict when and ifTextiles ~~the POR will be confirmed. Therefore, the timing~~ and ~~terms of resolution of the Chapter 11 Case remain uncertain. Accordingly, AWI has not adjusted its asbestos-related personal injury~~ ~~liability~~Sports ~~during~~Flooring ~~the third quarter of 2002~~($0.3 Itmillion) ~~is likely that the total liability as determined in the Chapter 11 process will be significantly higher than the recorded liability and the liability will be material to the financial statements~~segments.

~~Collateral~~The ~~Requirements~~following table summarizes activity in the restructuring accruals for the first nine months of 2005 and 2004.


	Beginning Balance		Cash Payments			Net Charges		Other			Ending Balance
2005	$	24.8	$	(22.0	)	$	6.5	$	(1.0	)	$	8.3
2004		10.0		(2.1	)		5.0		0.1			13.0

The amount in “other” for 2005 and 2004 is related to the effects of foreign currency translation.

Of the September 30, 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 September 30, 2005 relates to a noncancelable operating lease which extends through 2017, a lease for office space in the U.S. which is expected to be settled as part of our Chapter 11 emergence process, and severance for terminated employees, the majority of which will be paid in 2005.

NOTE 11. INCOME TAX EXPENSE


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Earnings from continuing operations before income taxes	$	67.2		$	44.0		$	108.3		$	79.9
Income tax expense		21.1			20.8			47.5			51.2
Effective tax rate		31.4	%		47.3	%		43.9	%		64.1	%

The 2005 effective tax rates for the third quarter and first nine months are lower than the comparable 2004 periods primarily due to the favorable conclusion of I.R.S. audit and appeals issues for $3.7 million in 2005 and the impact of the AJCA dividends as described below. In addition, the nine-month tax rate for 2004 included a $60 million non-taxable goodwill impairment charge.

On October 22, 2004, the American Jobs Creation Act (“the AJCA”) was signed into law. The AJCA includes a deduction of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. During the third quarter of 2005, AWI approved a dividend plan whereby $5.1 million of qualified and $17.1 million of base dividends were declared. AWI reported a $2.9 million tax benefit in the third quarter of 2005 for this event due to the utilization of additional deemed-paid foreign tax credits and the release of deferred tax liabilities previously recorded on the underlying earnings. AWI is evaluating further dividends, which may be declared in the fourth quarter of 2005. The range of possible amounts that we are

~~granted.~~Armstrong ~~On March 28~~Holdings, ~~2001, the surety filed an amended complaint in the Court seeking similar relief~~Inc. ~~The Center has filed a motion to dismiss the amended complaint. The Court has not yet ruled on the Center’s motion or the complaint. In addition~~, ~~on April 27, 2001, AWI filed a complaint~~ and aSubsidiaries motion with the Court seeking an order, among other things, enjoining the Center from drawing on the bond or, in the event the Center is permitted to draw on the bond, requiring that the proceeds of any such draw be deposited into a Court-approved account subject to further order of the Court. Judge Alfred M. Wolin of the Federal District Court for the District of New Jersey, who is also presiding over AWI’s Chapter 11 Case, indicated he would determine these matters. Judge Wolin has not yet ruled on these matters.

~~Asbestos-Related~~Notes ~~Property~~to ~~Damage~~Condensed ~~Litigation~~Consolidated Financial Statements (Unaudited)

~~Over~~(dollar ~~the~~amounts ~~years, AWI was one of many defendants~~ in asbestos-related property damage claims that were filed by public and private building owners, with six claims pending as of June 30, 2001. The claims that were resolved prior to the Filing resulted in aggregate indemnity obligations ~~of less than $10 million. To date~~millions, ~~all~~except ~~payments~~share ofdata) these obligations have been entirely covered by insurance. The pending cases present allegations of damage to the plaintiffs’ buildings caused by asbestos-containing products and generally seek compensatory and punitive damages and equitable relief, including reimbursement of expenditures for removal and replacement of such products. In the second quarter of 2000, AWI was served with a lawsuit seeking class certification of Texas residents who own property with asbestos-containing products. This case includes allegations that AWI asbestos-containing products caused damage to buildings and generally seeks compensatory damages and equitable relief, including testing, reimbursement for removal and diminution of property value. AWI vigorously denies the validity of the allegations against it in these actions and, in any event, believes that any costs will be covered by insurance. Continued prosecution of these actions and the commencement of any new asbestos property damage actions are stayed due to the Filing. In March 2002, the Court allowed certain alleged holders of asbestos property damage claims to file a class proof of claim against AWI. In July 2002, the Court denied the certification of the proposed class and held that the plaintiffs’ proof of claim shall only be effective as to the named claimants. As part of determining whether AWI asbestos containing resilient floor covering products give rise to property damage liability, the Court conducted an initial hearing on September 26 – 27, 2002 to decide the type of scientific testing allowable under the Federal Rules of Evidence to prove or disprove whether such products cause building contamination. On October 22, 2002, the Court granted AWI’s requested relief and ruled that the methodology offered by the Asbestos Property Damage Committee in support of its claims is not a scientifically valid method of quantifying the level of asbestos contamination in a building. On November 1, 2002, the Court directed that all property damage claimants provide, in support of their claims, substantiation that Armstrong flooring products were used in the claimants’ buildings.

~~Consistent with prior periods and due to increased uncertainty, AWI has not recorded any liability related to these claims as of~~ ~~September~~considering ~~30, 2002. See Note 2~~ for ~~further~~repatriation ~~discussion~~under ofthis ~~property~~provision ~~damage~~is ~~claims~~between inzero ~~the~~and ~~Chapter~~$60 ~~11 Case~~million. AThe ~~separate~~related ~~creditors’~~potential ~~committee~~range ~~representing the interests~~ of ~~property~~income ~~damage~~tax ~~asbestos~~expense ~~claimants~~is ~~has~~between ~~been~~zero ~~appointed~~and ~~in the Chapter 11 Case~~$3.6 million.

~~Insurance~~In ~~Recovery~~December ~~Proceedings~~2004, the FASB issued FSP FAS No. 109-2 “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004”. This FSP, which became effective upon issuance, allows an enterprise additional time beyond the financial reporting period of enactment of the AJCA to evaluate the effect of this act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FAS No. 109.

ANOTE substantial portion of AWI’s primary and excess remaining insurance asset is nonproducts (general liability) insurance for personal injury claims, including among others, those that involve alleged exposure during AWI’s installation of asbestos insulation materials12. ~~AWI~~PENSIONS 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~~Following ~~1999,~~are ~~AWI received preliminary decisions in~~ the ~~initial~~components ~~phases~~ of ~~the~~net ~~trial~~periodic ~~proceeding~~benefit ofcosts: 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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
U.S. defined-benefit plans
Pension Benefits
Service cost of benefits earned	$	6.2		$	5.8		$	18.5		$	17.4
Interest cost on projected benefit obligation		24.0			22.8			71.9			68.5
Expected return on plan assets		(39.4	)		(36.9	)		(118.4	)		(110.8	)
Amortization of prior service cost		4.1			4.3			12.4			13.0
Recognized net actuarial loss		0.3			0.4			1.1			1.2

Net periodic pension (credit)	$	(4.8	)	$	(3.6	)	$	(14.5	)	$	(10.7	)

Retiree Health and Life Insurance Benefits
Service cost of benefits earned	$	0.7		$	0.6		$	2.1		$	1.9
Interest cost on projected benefit obligation		5.2			5.5			15.5			16.5
Amortization of prior service benefit		(1.4	)		(1.3	)		(4.2	)		(4.1	)
Recognized net actuarial loss		2.9			2.4			8.9			7.3

Net periodic postretirement benefit cost	$	7.4		$	7.2		$	22.3		$	21.6

Non-U.S. defined-benefit plans
Pension Benefits
Service cost of benefits earned	$	2.4		$	2.4		$	7.6		$	7.1
Interest cost on projected benefit obligation		5.3			5.2			16.5			15.7
Expected return on plan assets		(3.8	)		(3.6	)		(11.9	)		(10.9	)
Amortization of transition obligation		—			—			(0.1	)		—
Amortization of prior service cost		0.1			0.1			0.2			0.2
Recognized net actuarial loss		0.4			0.1			1.4			0.3

Net periodic pension cost	$	4.4		$	4.2		$	13.7		$	12.4

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 September 30, 2005, $20.3 million of contributions have been made. We presently anticipate contributing an additional $5.5 million to fund our non-U.S. pension plans in 2005 for a total of $25.8 million.

ofArmstrong ~~2002~~Holdings, ~~the new trial judge concluded the ADR trial proceeding with findings in favor of AWI on substantially all key issues~~Inc. ~~Liberty Mutual~~, ~~the~~ ~~only insurer that is still a party to the ADR, has appealed that final judgment. Appellate argument originally scheduled for October 2002 was adjourned~~ and ~~has~~Subsidiaries not yet been rescheduled. In July 2002, AWI filed a lawsuit against Liberty Mutual in the Federal 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.

~~One~~Notes ~~of the insurance carriers, Reliance Insurance Company, was placed under an order of liquidation by a state insurance department during October 2001 due~~ to ~~financial~~Condensed ~~difficulties.~~Consolidated ~~The order~~Financial ofStatements ~~liquidation~~(Unaudited) prohibits Reliance from making any claim payments under the insurance policies until the liquidation occurs. AWI intends to file a proof of claim against Reliance by the December 2003 deadline. It is uncertain when AWI will receive proceeds from Reliance under these insurance policies.

~~Another insurer~~ (~~Century~~dollar ~~Indemnity~~amounts ~~Company), who previously settled its~~in ~~coverage issues with AWI~~millions, ~~has~~except ~~made~~share some of its required payments under the settlement to a trust of which AWI is a beneficiary. During January 2002, this insurer filed an adversary action in AWI’s Chapter 11 Case. Among other things, the action requests the Court to (1data) declare that the settlement agreement is an executory contract and to compel assumption or rejection of the agreement; (2) declare that the insurer need not make its present and future scheduled payments unless AWI assumes the agreement; (3) declare that the insurer is entitled to indemnification from AWI against any liabilities that the insurer may incur in certain unrelated litigation in which the insurer is involved; and (4) enjoin the disposition of funds previously paid by the insurer to the trust pending an adjudication of the insurer’s rights. These issues are before the Court for determination and AWI believes it is highly unlikely the insurer will prevail in this matter.

~~Insurance~~NOTE ~~Asset~~13. PRODUCT WARRANTIES

AnWe ~~insurance~~provide ~~asset~~direct incustomer ~~respect~~and ofend-user ~~asbestos~~warranties ~~personal injury~~for ~~claims~~our ~~in the amount of $198~~products.1 ~~million~~These iswarranties ~~recorded~~cover manufacturing asdefects ofthat ~~September~~would ~~30,~~prevent ~~2002 compared to $214.1 million as of December 31, 2001. Of~~ the ~~total~~product ~~recorded~~from ~~asset~~performing ~~at September 30, 2002, approximately $35.6 million represents partial settlement for previous claims that will be paid~~ in aline ~~fixed~~with ~~and~~its ~~determinable~~intended ~~flow~~ and ismarketed ~~reported at its net present value discounted at 6~~use.~~50%.~~ ~~The~~Generally, ~~total amount recorded reflects AWI’s belief in~~ the ~~availability~~terms of ~~insurance~~these inwarranties ~~this~~range ~~amount,~~up ~~based~~to ~~upon AWI’s~~25 ~~success~~years inand ~~insurance recoveries, recent settlement agreements that~~ provide ~~such~~for ~~coverage,~~ the ~~nonproducts~~repair ~~recoveries by other companies and the opinion of outside counsel. Such insurance is either available through settlement~~ or ~~probable of~~replacement ~~recovery through negotiation, litigation or resolution~~ of the ~~ADR~~defective ~~process~~product. ~~Depending~~We collect onand ~~further~~analyze ~~progress~~warranty ofclaims ~~the~~data ~~ADR, activities such as settlement discussions~~ with ~~insurance~~a ~~carriers~~focus ~~party~~on to the ~~ADR~~historic ~~and~~amount ~~those~~of ~~not~~claims, ~~party to~~ the ~~ADR~~products involved, the ~~final determination~~amount of ~~coverage~~time ~~shared~~between ~~with ACandS (~~the ~~former~~warranty ~~AWI~~claims ~~insulation contracting subsidiary that was sold in August 1969~~ and ~~which~~their ~~filed~~respective ~~for~~sales ~~relief under Chapter 11 of the Bankruptcy Code in September 2002)~~ and the ~~financial~~amount ~~condition~~ of ~~the insurers,~~current ~~AWI may revise its estimate of probable insurance recoveries~~sales. ~~Approximately~~The ~~$80~~following ~~million~~table of summarizes the ~~$198.1~~activity ~~million~~for ~~asset is determined from agreed coverage in place and is therefore directly related to~~ the ~~amount~~accrual of ~~the~~product ~~liability.~~warranties Offor the ~~$198.1 million~~first ~~asset,~~nine ~~$24.0~~months ~~million has been recorded as a current asset as~~ of ~~September~~2005 ~~30,~~and ~~2002~~2004: ~~reflecting management’s estimate of the minimum insurance payments to be received in the next 12 months.~~

A significant part of the recorded asset relates to insurance that AWI believes is probable and will be obtained through settlements with the various carriers. Due to the Filing, the settlement process may be delayed, pending further clarification as to the asbestos liability. While AWI believes the Chapter 11 process will strengthen its position on resolving disputed insurance and may therefore result in higher settlement amounts than recorded, there has been no increase in the recorded amounts due to the uncertainties created by the Filing. Accordingly, this asset could also change significantly based upon events which occur in the Court. Management estimates that the timing of future cash payments for the recorded asset may extend beyond 10 years.


	2005			2004
Balance at January 1	$	22.6		$	25.5
Reductions for payments		(28.5	)		(28.4	)
Current year warranty accruals		29.7			27.1
Preexisting warranty accrual changes		(0.2	)		(0.7	)
Effects of foreign exchange translation		(1.0	)		(0.1	)

Balance at September 30	$	22.6		$	23.4

NOTE 14. SUPPLEMENTAL CASH FLOW INFORMATION


	Nine Months Ended September 30,
	2005		2004
Interest paid	$	1.5	$	1.7
Income taxes paid, net	$	41.1	$	63.2

NOTE 15. LITIGATION AND RELATED MATTERS

ASBESTOS-RELATED LITIGATION

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

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

Asbestos-Related Personal Injury Claims

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

Due to the Filing, holders of asbestos-related personal injury claims are stayed from continuing to prosecute pending litigation and from commencing new lawsuits against AWI. In addition, AWI ceased making payments to the CCR with respect to asbestos-related personal injury claims, including payments pursuant to the outstanding SSP agreements. A creditors’ committee representing the interests of

~~Cash~~Armstrong ~~Flow~~Holdings, ~~Impact~~Inc., and Subsidiaries

AsNotes a result of the Chapter 11 Filing, AWI did not make any payments for asbestos-related claims in 2002 or 2001. AWI received $16.0 million and $32.2 million in asbestos-related insurance recoveries during the first nine months of 2002 and 2001, respectively. During the pendency of the Chapter 11 Case, AWI does not expect to ~~make~~Condensed ~~any~~Consolidated ~~further~~Financial ~~cash~~Statements ~~payments~~(Unaudited) ~~for asbestos-related claims, but AWI expects to continue to receive insurance proceeds under the terms of various settlement agreements.~~

~~Conclusion~~(dollar amounts in millions, except share data)

~~Many uncertainties exist about the financial~~ ~~impact of AWI’s involvement with~~ asbestos-related ~~litigation.~~personal ~~These~~injury ~~uncertainties~~claimants ~~include the impact of the Filing~~ and ~~the~~an ~~Chapter~~individual 11representing ~~process,~~ the ~~number~~interests of future ~~claims~~claimants tohave be filed, the ultimate value of the asbestos liability, the impact of any potential legislation, the impact of the ADR proceedings on the insurance asset and the financial condition of AWI’s insurance carriers. Additionally, although a POR has been ~~filed~~appointed ~~with the Court, implementation of the POR is subject to confirmation of the POR~~ in ~~accordance with~~ the ~~provisions of the Bankruptcy Code. At this time, AWI is unable to predict when and if the POR will be confirmed and, accordingly, the timing of its emergence from~~ Chapter 11. ~~Therefore, the timing and terms of resolution of the Chapter 11~~ Case ~~remain uncertain~~. ~~Accordingly,~~ AWI’s ~~has~~present ~~not~~and ~~revised~~future ~~its previously recorded liability for~~ asbestos-related ~~personal~~liability ~~injury claims. It is likely that no changes~~ will be ~~made~~addressed ~~to the liability until later~~ in ~~the~~ its Chapter 11 Case. ~~Although~~See ~~not~~Note ~~currently~~2 ~~estimable,~~regarding AWI’s ~~total~~Chapter ~~exposure~~11 ~~to asbestos-related personal injury claims is likely to be significantly higher than the recorded liability and to be material to the financial statements~~proceeding. ~~Any adjustment to the insurance asset could also be material to the financial statements.~~

~~ENVIRONMENTAL~~During ~~LIABILITIES~~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”.

~~Most~~Before ofthe ~~Armstrong’s~~POR ~~manufacturing~~may ~~and~~be ~~certain~~implemented, ofit ~~Armstrong’s~~must ~~research~~be ~~facilities~~confirmed ~~are~~by ~~affected~~order byof ~~various~~the ~~federal,~~Bankruptcy ~~state~~Court and ~~local~~the ~~environmental~~U.S. ~~requirements~~District ~~relating~~Court. toIn ~~the discharge~~addition, consummation of ~~materials~~the orPOR is subject to the ~~protection~~satisfaction after confirmation of certain conditions, as provided by the ~~environment~~POR. ~~Armstrong~~On ~~has~~February 23, ~~made~~2005, ~~and~~the ~~intends~~U.S. toDistrict ~~continue~~Court toJudge ~~make,~~Eduardo ~~necessary~~C. ~~expenditures~~Robreno ~~for~~ruled ~~compliance~~that ~~with~~the ~~applicable~~POR, ~~environmental~~in ~~requirements~~its atcurrent ~~its~~form, ~~operating~~could ~~facilities~~not be confirmed. ~~Armstrong~~AWI ~~anticipates~~filed a Notice of ~~that~~Appeal ~~annual~~to ~~expenditures~~the ~~for~~U.S. ~~those~~Court ~~purposes~~of ~~will~~Appeals ~~not~~for ~~change~~the ~~materially~~Third ~~from~~Circuit ~~recent~~on ~~experience~~March 4, 2005. ~~However~~On March 18, ~~applicable~~2005, ~~federal~~AWI ~~and~~filed ~~state~~a ~~environmental~~motion ~~laws~~to ~~continue~~expedite the appeal to ~~change~~the U.S. ~~Until~~Court ~~all~~of ~~new~~Appeals. ~~regulatory~~A ~~requirements~~motion ~~are~~to ~~known,~~dismiss ~~Armstrong~~the ~~cannot~~appeal ~~predict~~was filed by the Committee of Unsecured ~~with~~Creditors ~~certainty~~on ~~future~~March 29, ~~capital~~2005. ~~expenditures~~AWI ~~associated~~is ~~with~~also ~~compliance~~reviewing ~~with~~other ~~environmental~~options ~~requirements~~to resolve its Chapter 11 Case. See Note 2 for further discussion of AWI’s Chapter 11 process.

AsA ~~with~~principal ~~many~~feature ~~industrial companies,~~of ~~Armstrong~~the POR is ~~currently~~the ~~involved~~creation inof ~~proceedings~~a ~~under~~trust (the ~~Comprehensive~~“Asbestos ~~Environmental~~PI ~~Response, Compensation and Liability Act (“Superfund~~Trust”), ~~and~~pursuant ~~similar~~to ~~state~~section ~~laws at approximately 22 sites. In most cases, Armstrong is one of many potentially responsible parties~~ 524(~~“PRPs”~~g) ~~which~~of ~~have~~the ~~potential~~Bankruptcy Code, ~~liability~~ for the ~~required~~purpose ~~investigation and remediation~~ of ~~each~~addressing ~~site,~~AWI’s ~~and~~personal ~~which~~injury in(including ~~some~~wrongful ~~cases,~~death) ~~have~~asbestos-related ~~agreed~~liability. toAll ~~jointly~~present ~~fund that required investigation~~ and ~~remediation. With~~future ~~regard~~asbestos-related topersonal ~~some~~injury ~~sites,~~claims ~~however,~~against ~~Armstrong disputes the liability~~AWI, ~~the~~including ~~proposed~~contribution ~~remedy~~claims ~~or the proposed cost allocation among the PRPs. Armstrong may also have rights~~ of ~~contribution~~co-defendants, orarising directly ~~reimbursement from other parties~~ or ~~coverage~~indirectly ~~under~~out ~~applicable insurance policies. Armstrong has also been remediating environmental contamination resulting from past industrial activity at certain~~ of ~~its former plant sites.~~ AWI’s ~~payments~~pre-Filing ~~and~~use ~~remediation work on such sites for which AWI is the potentially responsible party is under review in light~~ of ~~the~~or ~~Chapter~~other 11activities ~~Filing.~~involving ~~The~~asbestos ~~bar~~would ~~date~~be ~~for~~channeled ~~claims~~to ~~from several environmental agencies has been extended into~~ the ~~fourth~~Asbestos ~~quarter~~PI ~~of 2002~~Trust.

~~Estimates~~In ofaccordance ~~Armstrong’s~~with ~~future~~the ~~environmental~~524(g) ~~liability~~injunction atif ~~any of~~ the ~~Superfund~~POR ~~sites~~goes orinto ~~current~~effect, orvarious ~~former~~entities ~~plant~~would ~~sites~~be ~~are~~protected ~~based~~from onsuch ~~evaluations~~present ofand ~~currently~~future ~~available~~asbestos-related ~~facts~~personal ~~regarding each~~injury ~~individual~~claims. ~~site~~These ~~and~~entities ~~consider~~include, ~~factors~~among ~~such as Armstrong’s activities in conjunction with the site~~others, ~~existing~~reorganized ~~technology~~AWI, ~~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 any Superfund site~~AHI, ~~Armstrong~~AWI’s ~~contribution~~subsidiaries toand ~~the remediation of these sites is expected to be limited by the number of~~ other ~~companies~~affiliates ~~also identified~~ (as ~~potentially~~defined ~~liable~~in ~~for~~the ~~site costs. As a result~~POR), ~~Armstrong’s~~and ~~estimated~~their ~~liability~~respective ~~reflects~~officers ~~only~~and ~~Armstrong’s expected share~~directors. InUpon ~~determining~~emergence ~~the~~from ~~probability~~Chapter ~~of contribution~~11, ~~Armstrong~~AWI ~~considers~~would ~~the~~not ~~solvency~~have ofany responsibility ~~the~~for ~~parties,~~these ~~whether~~claims ~~liability~~(including isclaims ~~being~~against ~~disputed,~~AWI ~~the~~based ~~terms of~~solely ~~any~~on ~~existing~~its ~~agreements~~ownership ~~and~~of ~~experience~~a ~~with~~subsidiary ~~similar~~or ~~matters.~~other ~~The~~affiliate), ~~Chapter~~nor 11would ~~Case~~it ~~also~~participate ~~may~~in ~~affect~~their ~~the ultimate amount of such contributions~~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 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 six employer liability claims involving alleged asbestos exposure.

~~AWI~~Armstrong 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. HelensHoldings, Oregon facility, as well as the adjacent Scappoose Bay. AWI has denied liability for the 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. ~~Owens Corning has entered into a settlement in principle with the DEQ. Pursuant to the proposed settlement~~, ~~OC will make a lump sum payment to the DEQ in exchange for contribution protection (including protection against common law~~ and ~~statutory~~Subsidiaries contribution claims by AWI against OC) and a covenant not to sue. AWI is currently negotiating with the DEQ regarding how these funds will be made available for the investigation and remedial action for the site. AWI has recorded an environmental liability with respect to the St. Helens remedial investigations and feasibility study at its facility, but not for Scappoose Bay because AWI continues to dispute responsibility for any contamination in Scappoose Bay.

~~Liabilities~~Notes of $16.1 million at September 30, 2002 and $16.6 million at December 31, 2001 were for potential environmental liabilities that Armstrong considers probable and for which a reasonable estimate of the probable liability could be made. Where existing data is sufficient to ~~estimate~~Condensed ~~the~~Consolidated ~~liability,~~Financial ~~that~~Statements ~~estimate~~(Unaudited) has been used; where only a range of probable liability 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, $6.4 million of the September 30, 2002 and December 31, 2001 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~~(dollar ~~estimated~~amounts ~~liabilities do not take into account any claims for recoveries from insurance or third parties. Such recoveries, where~~in ~~probable~~millions, ~~have~~except ~~been~~share ~~recorded~~data) ~~as an asset in the condensed consolidated financial statements and are either available through settlement or anticipated to be recovered through negotiation or litigation.~~

~~Actual~~There ~~costs~~also tois beuncertainty ~~incurred~~as atto ~~identified~~proceedings, ~~sites~~if ~~may vary from the estimates~~any, ~~given~~brought ~~the inherent uncertainties~~ in ~~evaluating~~certain ~~environmental~~foreign ~~liabilities.~~jurisdictions ~~Subject~~with ~~to the~~respect ~~imprecision in estimating environmental remediation costs, Armstrong believes that any sum it may have~~ to ~~pay~~the effect inof ~~connection~~the ~~with~~524(g) ~~environmental~~injunction ~~matters~~ in ~~excess~~precluding of the ~~amounts~~assertion ~~noted~~in ~~above~~such ~~would~~jurisdictions ~~not~~of ~~have~~asbestos-related apersonal ~~material~~injury ~~adverse~~claims, ~~effect~~proceedings onrelated ~~its~~thereto ~~financial condition,~~ or ~~liquidity, although~~ the ~~recording~~enforcement of ~~future~~judgments ~~costs~~rendered ~~may be material to earnings~~ in such ~~future period~~proceedings.

~~PATENT~~Management believes that neither AWI nor any of its subsidiaries or other affiliates is ~~INFRINGEMENT~~subject ~~CLAIMS~~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.

~~Armstrong~~Asbestos-Related isLiability a defendant in two related lawsuits claiming patent infringement related to some of Armstrong’s laminate products. The plaintiffs have claimed unspecified monetary damages. Armstrong is being defended and indemnified by its supplier for all costs and potential damages related to the litigation.

~~FORMER~~Based ~~EMPLOYEES~~upon ~~CLAIM~~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 September 30, 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.

~~About~~AWI ~~370~~is ~~former~~unable ~~Armstrong~~to ~~employees~~predict ~~that~~whether ~~were~~the ~~separated~~POR inwill ~~two~~be ~~business~~confirmed ~~divestitures~~or inwhen ~~2000~~AWI ~~have brought two purported~~would ~~class~~emerge ~~actions~~from ~~against~~Chapter ~~the~~11. ~~Retirement Committee of AWI~~Therefore, ~~certain~~the ~~current~~timing and ~~former~~terms ~~members~~ of ~~the~~resolution ~~Retirement Committee, the Retirement Savings and Stock Ownership Plan (RSSOP), AHI and the trustee bank~~ of the ~~RSSOP.~~Chapter ~~The~~11 ~~cases~~Case ~~are~~remain ~~pending in the United States District Court (Eastern District of PA)~~uncertain. AAs ~~similar~~long ~~proof~~as ofthis ~~claim~~uncertainty ~~has~~exists, ~~been~~future ~~filed~~changes ~~against~~to ~~AWI in~~ the ~~Chapter~~recorded 11asbestos-related ~~Case.~~liability ~~Plaintiffs~~are ~~allege~~possible ~~breach~~and ofcould ~~Employee~~be ~~Retirement~~material ~~Income~~to AWI’s ~~Security~~financial ~~Act~~position ~~(ERISA) fiduciary duties~~ and ~~other~~the ~~violations~~results of ~~ERISA~~ ~~pertaining~~its tooperations. ~~losses~~Management inwill ~~their~~continue ~~RSSOP~~to ~~accounts,~~review ~~which~~the ~~were~~recorded ~~invested~~liability in ~~Armstrong~~light ~~common~~of ~~stock.~~future ~~Losses~~developments ~~are alleged to be~~ in the ~~range~~Chapter of11 ~~several~~Case ~~million~~and ~~dollars.~~make ~~AHI~~changes ~~believes there are substantive defenses~~ to the ~~allegations and therefore has not~~ recorded ~~any~~ liability ~~related~~if toand ~~this~~when ~~matter~~it is appropriate.

~~DEPARTMENT~~Insurance OFRecovery Proceedings ~~LABOR DISCUSSIONS~~

~~Subsequent~~A tosubstantial anportion ~~audit~~of byAWI’s ~~the~~primary ~~United~~and ~~States~~remaining excess ~~Department~~insurance ofasset ~~Labor~~is nonproducts (~~“DOL”~~general liability), ~~Armstrong~~insurance for personal injury claims. AWI has ~~been~~entered ~~informed~~into ~~that~~settlements with a number of the ~~DOL~~carriers isresolving ~~considering~~its ~~challenging~~coverage issues. However, an alternative dispute resolution (“ADR”) procedure was commenced against certain carriers to determine the ~~validity~~percentage of resolved and unresolved claims that are nonproducts claims, to establish the ~~use~~entitlement ofto ~~certain~~such ~~contributions~~coverage and to ~~fund~~determine ~~debt~~whether ~~payments~~and how much ~~made~~reinstatement byof ~~the~~prematurely ~~Armstrong~~exhausted ~~Employee~~products ~~Stock~~hazard ~~Ownership~~insurance ~~Plan~~is ~~(“ESOP”),~~warranted. asThe ~~provided~~nonproducts ~~for~~coverage bypotentially ~~that~~available is substantial and includes defense costs in addition to limits.

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

~~plan.~~ Armstrong isHoldings, ~~cooperating with the DOL to address its questions and concerns about those transactions~~Inc. ~~Armstrong believes that it fully complied with all applicable laws and regulations governing the plan~~, and ~~therefore~~Subsidiaries ~~has not recorded any liability related to this matter.~~

~~OTHER~~Notes ~~CLAIMS~~to Condensed Consolidated Financial Statements (Unaudited)

~~Additionally,~~(dollar ~~AHI,~~amounts ~~through AWI and AWI’s subsidiaries, is involved~~ in ~~various other claims and legal actions involving product~~ ~~liability~~millions, ~~patent~~except ~~infringement,~~share ~~distributor~~data) 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, AHI does not expect that any sum that may have to be paid in connection with these matters will have a materially adverse effect on its consolidated financial position or liquidity, however it could be material to the results of operations in the particular period that a matter is resolved.

~~NOTE~~In 11July 2002, AWI filed a lawsuit against Liberty Mutual in the U. ~~ACQUISITIONS~~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.

~~During~~On June 13, 2003, the ~~first~~New ~~nine~~Hampshire ~~months~~Insurance ofDepartment ~~2001,~~placed ~~AHI~~The ~~spent~~Home ~~$5.6~~Insurance Company ~~million~~(“Home”) tounder ~~purchase~~an ~~some~~order of ~~the~~liquidation. ~~remaining~~Less ~~minority~~than ~~equity~~$10 ~~interest~~million of ~~majority~~AWI’s ~~owned~~recorded ~~entities~~insurance ~~consolidated~~asset ~~within~~is ~~the~~based ~~Resilient~~on ~~Flooring~~policies ~~segment.~~with ~~Approximately~~Home, $5which management believes is probable of recovery.0 ~~million~~AWI filed a proof of ~~the~~claim against Home during ~~purchase~~June ~~price~~2004. ~~was~~It ~~allocated~~is touncertain ~~goodwill~~when AWI will receive proceeds from Home under these insurance policies.

~~NOTE~~Insurance ~~12.~~Asset ~~DIFFERENCES BETWEEN ARMSTRONG HOLDINGS INC. AND ARMSTRONG WORLD INDUSTRIES, INC.~~

An insurance asset in respect of asbestos claims in the amount of $98.6 million was recorded as of September 30, 2005 and December 31, 2004. The ~~difference~~total ~~between~~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 ~~condensed~~nonproducts ~~consolidated~~recoveries ~~financial~~by ~~statements~~other companies and the opinion of outside counsel. Such insurance, in our opinion, is ~~primarily~~either ~~due~~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 ~~stock~~the ~~activity~~ADR and ~~intercompany~~those ~~transactions~~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 September 30, 2005 reflecting management’s estimate of the minimum insurance payments to be received in the next 12 months.

~~NOTE~~Many ~~13. EARNINGS~~uncertainties ~~PER~~remain ~~SHARE~~in the insurance recovery process; therefore, AWI did not increase the estimated insurance recovery asset in the first nine months of 2005.

~~The~~Cash ~~difference~~Flow ~~between~~Impact the average number of basic and diluted common shares outstanding is due to contingently issuable shares and the effect of dilutive stock options. Earnings per share components may not add due to rounding.

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 nine months of 2005 but received $4.5 million during the first nine months of 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. On May 26, 2005 the bill was reported out of committee and is currently awaiting consideration from the full Senate. 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

~~Independent~~Armstrong ~~Accountants’~~Holdings, ~~Review~~Inc., ~~Report~~and Subsidiaries

~~The~~Notes ~~Board~~to ofCondensed ~~Directors~~Consolidated ~~and Shareholders~~Financial Statements (Unaudited)

~~Armstrong~~(dollar ~~Holdings~~amounts in millions, ~~Inc.:~~except share data)

We have reviewed the accompanying condensed consolidated balance sheet of Armstrong Holdings, Inc., and subsidiaries (“the Company”) as of September 30, 2002, and the related condensed consolidated statements of earnings ~~for~~such ~~the three and nine-month periods ended September 30~~circumstances, ~~2002~~or ~~and~~if ~~2001,~~such ~~and~~reorganization ~~the~~would ~~condensed~~result ~~consolidated~~in ~~statements~~existing ofAHI ~~cash flows and~~ shareholders’ ~~equity~~receiving ~~for~~or ~~the~~retaining ~~nine-month~~any ~~periods~~equity ~~ended~~value ~~September~~in ~~30,~~AWI ~~2002~~upon ~~and 2001. These condensed consolidated~~AWI’s ~~financial~~emergence ~~statements~~from ~~are~~Chapter ~~the responsibility of the Company’s management~~11.

~~We conducted our review in accordance with standards~~Conclusion established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, 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~~Many onuncertainties ~~our~~continue ~~review,~~to weexist ~~are~~about ~~not~~the ~~aware~~matters ofimpacting AWI’s ~~any~~asbestos-related ~~material~~liability ~~modifications~~and ~~that~~insurance ~~should~~asset. beThese ~~made to~~uncertainties ~~the~~include ~~condensed~~when ~~consolidated~~and ~~financial~~if ~~statements~~the ~~referred~~POR towill ~~above~~be ~~for~~confirmed ~~them~~by tothe beU.S. inDistrict ~~conformity~~Court, ~~with~~the ~~accounting~~impact ~~principles~~of ~~generally~~any ~~accepted~~potential inlegislation, and the ~~United~~financial ~~States~~condition of ~~America~~AWI’s insurance carriers.

WeAdditionally, ~~have~~if ~~previously~~the ~~audited,~~POR inis ~~accordance~~confirmed, ~~with~~AWI ~~auditing~~is ~~standards~~unable ~~generally~~to ~~accepted~~predict inwhen it ~~the~~will ~~United~~be ~~States~~implemented. ~~of America~~Therefore, the ~~consolidated~~timing ~~balance~~and ~~sheet~~terms of ~~Armstrong~~resolution ~~Holdings,~~of ~~Inc.,~~the ~~and~~Chapter ~~subsidiaries~~11 asCase ~~of December~~remain ~~31,~~uncertain. ~~2001,~~As ~~and~~long ~~the~~as ~~related~~this ~~consolidated~~uncertainty ~~statements of earnings~~exists, ~~cash~~future ~~flows~~changes ~~and~~to ~~shareholders’ equity for~~ the ~~year~~recorded ~~then~~liability ~~ended (not presented herein);~~ and ininsurance ~~our~~asset ~~report~~are ~~dated~~possible ~~February~~and ~~22,~~could ~~2002,~~be wematerial ~~expressed an unqualified opinion on those~~to ~~consolidated~~AWI’s financial ~~statements.~~position Inand ~~our~~the ~~opinion,~~results ~~the~~of ~~information~~its ~~set~~operations. ~~forth~~Management inwill ~~the~~continue ~~accompanying~~to ~~condensed~~review ~~consolidated~~the ~~balance~~recorded ~~sheet~~liability asand ofinsurance ~~December~~asset ~~31,~~in ~~2001,~~light isof ~~fairly~~future ~~stated,~~developments in ~~all~~the ~~material~~Chapter ~~respects,~~11 inCase ~~relation~~and make changes to the ~~consolidated~~recorded ~~balance~~amounts ~~sheet~~if and ~~from~~when ~~which~~ it ~~has~~is ~~been derived~~appropriate.

~~Our report dated February 22, 2002, on the consolidated financial statements of Armstrong Holdings,~~ENVIRONMENTAL ~~Inc.,~~MATTERS and subsidiaries as of and for the year ended December 31, 2001, 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. The condensed consolidated balance sheet as of December 31, 2001, does not include any adjustments that might result from the outcome of these uncertainties.

~~/s/ KPMG~~Environmental ~~LLP~~Expenditures

~~Philadelphia~~Most of our manufacturing and certain of our research facilities are affected by various federal, ~~Pennsylvania~~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 Heaters Act, became effective in November, 82004, ~~2002~~and requires compliance by September 13, 2007. While we are finalizing our review of this regulation, adoption of this regulation is not expected to have a material impact on our consolidated results of operations or financial condition.

Environmental Remediation

Summary

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

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

~~ARMSTRONG~~Armstrong ~~WORLD INDUSTRIES~~Holdings, ~~INC~~Inc., ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~CONDENSED~~Notes ~~CONSOLIDATED~~to ~~STATEMENTS~~Condensed ~~OF EARNINGS~~Consolidated Financial Statements (Unaudited)

(indollar amounts in millions, except ~~per~~ share ~~amounts~~data)

~~Unaudited~~ Effects of Chapter 11

	Three Months Ended September 30,						Nine Months Ended September 30,
	2002			2001			2002			2001
Net sales	$	846.0		$	804.9		$	2,418.8		$	2,399.0
Cost of goods sold		640.4			605.7			1,811.4			1,782.1
Gross profit		205.6			199.2			607.4			616.9
Selling, general and administrative expenses		160.0			150.2			474.9			450.0
Charge for asbestos liability, net		—			16.0			—			22.0
Restructuring and reorganization charges (reversals), net		(0.6	)		(1.1	)		2.1			3.0
Goodwill amortization		—			5.7			—			17.1
Equity (earnings) from affiliates, net		(6.2	)		(4.5	)		(18.1	)		(13.5	)
Operating income		52.4			32.9			148.5			138.3
Interest expense (unrecorded contractual interest of $24.9, $25.0, $74.4, and $74.7)		3.7			3.3			10.5			10.2
Other non-operating expense		0.8			3.6			2.4			8.7
Other non-operating income		(1.2	)		(2.3	)		(3.4	)		(8.1	)
Chapter 11 reorganization costs, net		6.6			3.7			19.1			6.2
Earnings from continuing operations before income taxes and cumulative effect of a change in accounting principle		42.5			24.6			119.9			121.3
Income tax expense		13.1			10.3			40.9			47.3
Earnings from continuing operations before cumulative effect of a change in accounting principle		29.4			14.3			79.0			74.0
Cumulative effect of a change in accounting principle, net of tax of $2.2		—			—			(593.8	)		—
Earnings (loss) from continuing operations	$	29.4		$	14.3		$	(514.8	)	$	74.0
Net loss on sale of discontinued business, net of tax of $0.0		—			(0.2	)		—			(1.1	)
Net loss on expected disposal of discontinued operations, net of tax of $0.0		—			—			—			(3.3	)
Net reversal of income on discontinued operations no longer to be disposed, net of tax of $10.7		—			27.1			—			24.0
Earnings from discontinued operations		—			26.9			—			19.6
Net earnings (loss)	$	29.4		$	41.2		$	(514.8	)	$	93.6

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.

~~See~~Monetary ~~accompanying~~claims ~~notes~~with respect to ~~condensed~~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 ~~consolidated~~federal ~~financial~~or ~~statements~~state ~~beginning~~agency onalleging ~~page~~that 32AWI 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 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. On April 8, 2005, AWI and EPA filed a joint motion with the Bankruptcy Court seeking approval of the Settlement Agreement. Liberty Mutual Insurance Company and Travelers Indemnity Company and Travelers Casualty and Surety Company filed objections to the joint motion with the Bankruptcy Court. Following negotiations with the insurers, AWI entered into a Stipulation with each of them resolving their objections. The EPA Settlement Approval Order was entered by the Bankruptcy Court in October 2005.

~~ARMSTRONG~~Armstrong ~~WORLD INDUSTRIES~~Holdings, ~~INC~~Inc., ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~CONDENSED~~Notes ~~CONSOLIDATED~~to ~~BALANCE~~Condensed ~~SHEETS~~Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

	Unaudited
	September 30, 2002			December 31, 2001
ASSETS
Current assets:
Cash and cash equivalents	$	369.9		$	277.4
Accounts and notes receivable, net		403.3			316.5
Inventories, net		429.3			443.1
Deferred income taxes		14.0			11.5
Other current assets		75.9			64.1
Total current assets		1,292.4			1,112.6
Property, plant and equipment, less accumulated depreciation and amortization of $1,238.1 and $1,143.3, respectively		1,277.8			1,278.6
Insurance receivable for asbestos-related liabilities, noncurrent		174.1			192.1
Prepaid pension costs		426.9			392.9
Investment in affiliates		42.8			39.6
Goodwill, net		234.9			822.8
Other intangibles, net		88.2			94.1
Other noncurrent assets		106.8			105.4
Total assets	$	3,643.9		$	4,038.1
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Short-term debt	$	22.3		$	18.9
Current installments of long-term debt		6.6			6.1
Accounts payable and accrued expenses		354.9			298.6
Short term amounts due to affiliates		9.5			8.4
Income taxes		41.4			41.0
Total current liabilities		434.7			373.0
Liabilities subject to compromise		2,362.1			2,362.2
Long-term debt, less current installments		49.7			50.3
Postretirement and postemployment benefit liabilities		251.5			244.4
Pension benefit liabilities		168.5			148.9
Other long-term liabilities		85.1			84.9
Deferred income taxes		26.4			18.4
Minority interest in subsidiaries		9.4			8.8
Total noncurrent liabilities		2,952.7			2,917.9
Shareholder’s equity:
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		173.2			173.2
Reduction for ESOP loan guarantee		(142.2	)		(142.2	)
Retained earnings		725.1			1,239.9
Accumulated other comprehensive loss		(23.0	)		(47.1	)
Less common stock in treasury, at cost 2002 and 2001—11,393,170 shares		(528.5	)		(528.5	)
Total shareholder’s equity		256.5			747.2
Total liabilities and shareholder’s equity	$	3,643.9		$	4,038.1

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.

~~See~~A ~~accompanying~~foreign ~~notes~~subsidiary of AWI sold a manufacturing facility in 1990, which was prior to ~~condensed~~AWI’s ~~consolidated~~acquisition ~~financial~~of ~~statements~~the subsidiary. Under the terms of the sales agreement, an ~~beginning~~environmental onindemnification ~~page~~was 32provided to the buyer of the facility. During the third quarter of 2005, the facility owner discovered additional areas of soil contamination that require additional remediation. Accordingly, a $3.1 million charge was recorded within SG&A expense to increase our probable liability. As additional sampling efforts and meetings with local government authorities continue, further increases to our recorded liability are possible.

Summary of Financial Position

Liabilities of $28.9 million and $28.0 million at September 30, 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 September 30, 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 $2.3 million at September 30, 2005 and $2.4 million at 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 costs and potential damages related to the litigation.

BREACH OF CONTRACT CLAIM

Since 2003, we have been pursuing a breach of contract claim against a former laminate flooring supplier. An arbitration hearing was held in March 2005. On July 29, 2005, the tribunal communicated that it intended to rule in Armstrong’s favor. A hearing to address an award amount had been scheduled in September 2005. Prior to this scheduled hearing, the parties reached a settlement in which the supplier agreed to pay $6.75 million to Armstrong to resolve all existing and potential claims between the parties. The Bankruptcy Court approved the settlement in late October 2005. Under the settlement agreement, payment of the settlement amount (now in escrow) is to be made to Armstrong within approximately one

~~ARMSTRONG~~Armstrong ~~WORLD INDUSTRIES~~Holdings, ~~INC~~Inc., ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~CONDENSED~~Notes ~~CONSOLIDATED~~to ~~STATEMENTS~~Condensed OFConsolidated ~~SHAREHOLDER’S~~Financial ~~EQUITY~~Statements (Unaudited)

(dollar amounts in millions, except ~~per~~ share data)

~~Unaudited~~ week following certification by Armstrong that the appeal period has passed and the approval order has become final. Accordingly, we recorded a net gain in the third quarter of 2005 of $6.4 million in our Resilient Flooring ($5.2 million) and Wood Flooring ($1.2 million) segments.

	2002						2001
Common stock, $1 par value:
Balance at beginning of year and September 30	$	51.9					$	51.9
Capital in excess of par value:
Balance at beginning of year and September 30	$	173.2					$	173.4
Reduction for ESOP loan guarantee:
Balance at beginning of year and September 30	$	(142.2	)				$	(142.2	)
Retained earnings:
Balance at beginning of year	$	1,239.9					$	1,147.1
Net earnings (loss) for the nine months		(514.8	)	$	(514.8	)		93.6		$	93.6
Balance at September 30	$	725.1					$	1,240.7
Accumulated other comprehensive income (loss):
Balance at beginning of year	$	(47.1	)				$	(45.2	)
Foreign currency translation adjustments		22.7						5.6
Derivative gain (loss), net		4.8						(3.6	)
Investment impairment		—						2.0
Minimum pension liability adjustments		(3.4	)					(0.8	)
Total other comprehensive income		24.1			24.1			3.2			3.2
Balance at September 30	$	(23.0	)				$	(42.0	)
Comprehensive income (loss)				$	(490.7	)				$	96.8
Less treasury stock at cost:
Balance at beginning of year and September 30	$	528.5					$	528.5
Total shareholder’s equity	$	256.5					$	753.3

OTHER CLAIMS

~~See~~Additionally, ~~accompanying~~we ~~notes~~are involved in various other claims and legal actions involving product liability, patent infringement, breach of contract, distributor termination, employment law issues and other actions arising in the ordinary course of business. While complete assurance cannot be given to ~~condensed~~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 ~~statements~~position ~~beginning~~or onliquidity, ~~page~~however 32it could be material to the results of operations in the particular period in which a matter is resolved.

NOTE 16. EARNINGS PER SHARE

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.

~~ARMSTRONG~~Report of ~~WORLD~~Independent ~~INDUSTRIES,~~Registered ~~INC.,~~Public ~~AND~~Accounting ~~SUBSIDIARIES~~Firm

~~CONDENSED~~The ~~CONSOLIDATED~~Board ~~STATEMENTS~~of OFDirectors ~~CASH~~and ~~FLOWS~~Shareholders

~~(amounts~~Armstrong inHoldings, ~~millions)~~Inc.:

~~Unaudited~~We have reviewed the accompanying condensed consolidated balance sheet of Armstrong Holdings, Inc., and subsidiaries (“the Company”) as of September 30, 2005, the related condensed consolidated statements of earnings for the three and nine-month periods ended September 30, 2005 and 2004, and the related condensed consolidated statements of cash flows and shareholders’ equity for the nine-month periods ended September 30, 2005 and 2004. These condensed consolidated financial statements are the responsibility of the Company’s management.

	Nine Months Ended September 30,
	2002			2001
Cash flows from operating activities:
Net (loss) earnings	$	(514.8	)	$	93.6
Adjustments to reconcile net earnings to net cash provided by operating activities:
Cumulative effect of a change in accounting principle, net		593.8			—
Depreciation and amortization		100.9			114.5
Reversal of loss on expected disposal of discontinued operations		—			(31.4	)
Loss on sale of businesses, net		—			0.9
Deferred income taxes		5.5			24.6
Equity (earnings) from affiliates, net		(18.1	)		(13.5	)
Chapter 11 reorganization costs, net		19.1			6.2
Chapter 11 reorganization payments		(17.0	)		(9.9	)
Restructuring and reorganization charges		2.1			3.0
Restructuring and reorganization payments		(1.2	)		(9.3	)
Impairment of long-lived assets		—			8.4
Recoveries for asbestos-related claims, net		16.0			32.2
Charge for asbestos liability, net		—			22.0
Changes in operating assets and liabilities net of effects of reorganizations, restructuring, acquisitions and dispositions
Increase in receivables		(74.0	)		(26.6	)
(Increase)/decrease in inventories		32.8			(83.9	)
(Increase)/decrease in other current assets		(9.8	)		9.7
Increase in other noncurrent assets and prepaid pension costs		(32.4	)		(49.3	)
Increase in accounts payable and accrued expenses		40.8			49.0
Increase in income taxes payable		0.2			28.6
Increase in other long-term liabilities		11.6			7.0
Other, net		(5.0	)		8.9
Net cash provided by operating activities		150.5			184.7
Cash flows from investing activities:
Purchases of property, plant and equipment and computer software		(79.6	)		(79.7	)
Acquisitions, net of cash acquired		—			(5.6	)
Distributions from equity affiliates		15.0			13.5
Proceeds from the sale of assets		3.3			5.7
Net cash used for investing activities		(61.3	)		(66.1	)
Cash flows from financing activities:
Increase/(decrease) in short-term debt, net		1.6			(6.8	)
Payments of long-term debt		(2.5	)		(11.4	)
Purchase of common stock for the treasury, net		—			(0.2	)
Other, net		(0.6	)		(3.1	)
Net cash used for financing activities		(1.5	)		(21.5	)
Effect of exchange rate changes on cash and cash equivalents		4.8			(0.7	)
Net increase in cash and cash equivalents	$	92.5		$	96.4
Cash and cash equivalents at beginning of period		277.4			159.1
Cash and cash equivalents at end of period	$	369.9		$	255.5

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.

~~See~~Based ~~accompanying~~on ~~notes~~our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements ~~beginning~~ onreferred ~~page~~to 32above 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

October 24, 2005

Armstrong World Industries, Inc., and Subsidiaries

~~Notes to~~ Condensed Consolidated ~~Financial~~ Statements of Earnings

~~NOTE~~(amounts ~~1. BASIS~~in ~~OF PRESENTATION~~millions)

~~Armstrong~~Unaudited World Industries, Inc. (“AWI”) is a Pennsylvania corporation incorporated in 1891, which together with its subsidiaries is referred to here as “Armstrong”. Through its U.S. operations and U.S. and international subsidiaries, Armstrong designs, manufactures and sells flooring products (resilient, wood, carpeting and sports flooring) as well as ceiling systems, around the world. Armstrong products are sold primarily for use in the finishing, refurbishing and repair of residential, commercial and institutional buildings. Armstrong also designs, manufactures and sells kitchen and bathroom cabinets to single and multi family homebuilders and remodelers.

Armstrong Holdings, Inc. (which together with its subsidiaries is referred to here as “AHI”) is the publicly held parent holding company of Armstrong. Armstrong Holdings, Inc. became the parent company of Armstrong on May 1, 2000, following AWI shareholder approval of a plan of exchange under which each share of AWI was automatically exchanged for one share of Armstrong Holdings, Inc. Armstrong Holdings, Inc. was formed for purposes of the share exchange and holds no other significant assets or operations apart from AWI and AWI’s subsidiaries. Stock certificates that formerly represented shares of AWI were automatically converted into certificates representing the same number of shares of Armstrong Holdings, Inc. The publicly held debt of AWI was not affected in the transaction.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net sales	$	937.0		$	893.5		$	2,696.7		$	2,642.0
Cost of goods sold		720.8			699.3			2,101.5			2,046.8

Gross profit		216.2			194.2			595.2			595.2
Selling, general and administrative expenses		158.2			151.6			496.2			462.6
Goodwill impairment		—			—			—			60.0
Restructuring charges, net		1.4			1.9			17.0			5.0
Equity (earnings) from joint venture		(9.9	)		(7.5	)		(28.2	)		(23.4	)

Operating income		66.5			48.2			110.2			91.0
Interest expense (unrecorded contractual interest of $20.5, $21.7, $63.6, $65.1)		2.2			2.2			6.4			6.3
Other non-operating expense		1.1			1.1			1.4			2.9
Other non-operating (income)		(5.5	)		(1.4	)		(9.8	)		(4.7	)
Chapter 11 reorganization costs, net		1.5			2.3			4.5			6.6

Earnings from continuing operations before income taxes		67.2			44.0			107.7			79.9
Income tax expense		21.1			20.8			47.5			51.2

Net earnings from continuing operations	$	46.1		$	23.2		$	60.2		$	28.7
(Loss) from discontinued operations, net of tax of $0.2		—			—			—			(0.4	)

Net earnings	$	46.1		$	23.2		$	60.2		$	28.3

~~Operating~~See ~~results~~accompanying ~~for the third quarter and first nine months of 2002 and the corresponding periods of 2001 included in this report are unaudited. Certain prior~~notes ~~year~~to ~~amounts~~condensed ~~have~~consolidated ~~been~~financial ~~reclassified~~statements tobeginning ~~conform~~on topage ~~the current year presentation~~36.

In February 2001, Armstrong determined to permanently exit the Textiles and Sports Flooring segment and on February 20, 2001 entered into negotiations to sell substantially all of the businesses comprising this segment to a private equity investor based in Europe. Based on these events, the segment was classified as a discontinued operation starting with the fourth quarter of 2000. On June 12, 2001, negotiations with this investor were terminated. During the third quarter of 2001, Armstrong terminated its plans to permanently exit this segment. This decision was based on the difficulty encountered in selling the business, the changed cash needs of Armstrong and a review of our European strategy. Accordingly, this segment is no longer classified as a discontinued operation and amounts have been reclassified into operations as required by EITF Issue No. 90-16 – “Accounting for Discontinued Operations Subsequently Retained”. All prior periods have been reclassified to conform to the current presentation. See Note 5 for further information.

In accordance with the Emerging Issues Task Force (“EITF”) Issue No. 00-025, “Vendor Income Statement Characterization of Consideration from a Vendor to a Retailer,” effective January 1, 2002, Armstrong has reclassified $0.4 million and $1.2 million from selling, general and administrative expenses to a reduction of net sales for the third quarter and first nine months of 2001, respectively.

Effective January 1, 2002, Armstrong adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” In the second quarter of 2002, Armstrong completed an assessment of goodwill and recorded a non-cash transitional impairment charge of $596.0 million ($593.8 million, net of tax) as of January 1, 2002. See Note 7 for further information.

Effective January 1, 2002, Armstrong adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” which provides guidance on the accounting for the impairment or disposal of long-lived assets. Armstrong’s current results of operations and financial position have not been affected.

The accounting policies used in preparing these statements are the same as those used in preparing Armstrong’s consolidated financial statements for the year ended December 31, 2001, which includes the accounts of Armstrong and its majority-owned subsidiaries. The results of less than majority owned subsidiaries are accounted for under the equity method. These condensed consolidated financial

~~statements should be read in conjunction with the consolidated financial statements and notes thereto included in~~ Armstrong’s ~~Form~~World ~~10-K for the fiscal year ended December 31~~Industries, ~~2001~~Inc. ~~In the opinion of management~~, ~~all~~and ~~adjustments~~Subsidiaries ~~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.~~

~~NOTE~~Condensed ~~2. CHAPTER~~Consolidated 11Balance ~~REORGANIZATION~~ Sheets

~~On December 6, 2000, AWI, the major operating subsidiary of AHI, filed a voluntary petition for relief~~ (~~the~~amounts ~~“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 “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 Armstrong’s wholly-owned subsidiariesmillions, ~~Nitram~~except ~~Liquidators,~~share ~~Inc. (“Nitram”~~data) ~~and Desseaux Corporation of North America, Inc. (“Desseaux,” and together with AWI and Nitram, the “Debtors”).~~ ~~The Chapter 11 cases are being jointly administered under case numbers 00-4469, 00-4470, and 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. 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 Court. Similarly, claimants may not enforce any claims against AWI that arose prior to the date of the Filing unless specifically authorized by the Court. In addition, as a debtor-in-possession, AWI has the right, subject to the Court’s approval, to assume or reject any executory contracts and unexpired leases in existence at the date of the Filing. Parties having claims as a result of any such rejection may file claims with the Court, which will be dealt with as part of the Chapter 11 Case.


	Unaudited
	September 30, 2005			December 31, 2004
Assets
Current assets:
Cash and cash equivalents	$	540.8		$	515.9
Accounts and notes receivable, net		405.6			336.1
Inventories, net		493.7			535.1
Deferred income taxes		15.6			15.6
Income tax receivable		7.0			7.0
Other current assets		89.1			72.5

Total current assets		1,551.8			1,482.2
Property, plant and equipment, less accumulated depreciation and amortization of $1,562.5 and $1,540.7, respectively		1,149.6			1,208.8
Insurance receivable for asbestos-related liabilities, noncurrent		88.8			88.8
Prepaid pension costs		488.9			480.9
Investment in affiliates		62.3			72.5
Goodwill, net		134.3			136.0
Other intangibles, net		69.0			76.0
Deferred income taxes, noncurrent		947.8			941.6
Other noncurrent assets		124.9			122.6

Total assets	$	4,617.4		$	4,609.4

Liabilities and Shareholder’s Equity
Current liabilities:
Short-term debt	$	21.2		$	11.1
Current installments of long-term debt		6.9			8.2
Accounts payable and accrued expenses		406.8			447.4
Short term amounts due to affiliates		13.3			13.3
Income tax payable		31.0			15.3
Deferred income taxes		1.1			1.1

Total current liabilities		480.3			496.4
Liabilities subject to compromise		4,870.7			4,870.9
Long-term debt, less current installments		23.5			29.2
Postretirement and postemployment benefit liabilities		260.8			262.6
Pension benefit liabilities		231.7			258.9
Other long-term liabilities		88.2			87.6
Deferred income taxes, noncurrent		19.8			19.8
Minority interest in subsidiaries		8.1			9.3

Total noncurrent liabilities		5,502.8			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		(961.7	)		(1,021.9	)
Accumulated other comprehensive income		42.2			42.8
Less common stock in treasury, at cost 2005 and 2004 – 11,393,170 shares		(528.5	)		(528.5	)

Total shareholder’s (deficit)		(1,365.7	)		(1,425.3	)

Total liabilities and shareholder’s equity	$	4,617.4		$	4,609.4

~~Three~~See ~~creditors’ committees,~~accompanying one representing asbestos personal injury claimants (the “Asbestos Personal Injury Claimants’ Committee”), one representing asbestos property damage claimants (the “Asbestos Property Damage Committee”), and thenotes ~~other representing other unsecured creditors (the “Unsecured Creditors’ Committee”), have been appointed in the Chapter 11 Case. In addition, an individual has been appointed~~ to ~~represent~~condensed ~~the~~consolidated ~~interests~~financial ofstatements ~~future~~beginning ~~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~~page ~~that come before the Court in the Chapter 11 Case~~36.

Plan of Reorganization

On November 4, 2002, AWI filed a Plan of Reorganization (“POR”) with the Court. The POR has been endorsed by AHI’s Board of Directors and is supported by the Asbestos Personal Injury Claimants’ Committee, the Unsecured Creditors’ Committee and the Future Claimants’ Representative. At present, AWI has not yet reached agreement with the Asbestos Property Damage Committee with respect to the terms and provisions of the POR. The POR provides for, among other things, the treatment and discharge of all prepetition claims, including all asbestos-related claims. The POR excludes Armstrong’s Nitram and Desseaux subsidiaries. The POR is available on a new Web site, www.armstrongplan.com, where additional information will be posted as it becomes available. Implementation of the POR and the treatment of claims and interests as provided therein is subject to confirmation of the POR in accordance with the provisions of the Bankruptcy Code. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain.

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, to which all present and future asbestos-related personal injury claims, including contribution claims of co-defendants, will be channeled. In accordance with the “524(g) injunction” to be issued by the Court in connection with the confirmation of the POR, various entities will be protected from suit on account of present and future asbestos-related personal injury claims. These entities include reorganized AWI, AHI, AWI’s affiliates, and their respective officers and directors. Claims resolution procedures to be utilized by the Asbestos PI Trust will be developed. These procedures will govern the allowance and payment by the Asbestos PI Trust of all present and future asbestos-related

~~personal~~Armstrong ~~injury~~World ~~claims. The Asbestos PI Trust will be funded with AWI’s rights to insurance providing coverage for asbestos-related personal injury claims~~Industries, ~~as well as a share of cash~~Inc., ~~notes,~~ and ~~common~~Subsidiaries ~~stock to be issued under the POR to creditors, as described below.~~

~~Consideration~~Condensed toConsolidated BeStatements ~~Distributed~~of ~~under~~Shareholder’s ~~the~~Equity ~~POR~~

~~The~~(amounts ~~Asbestos PI Trust and the holders of unsecured claims will share~~ in ~~the~~millions, ~~POR~~except ~~consideration~~per ~~that~~share isamounts) ~~made up of the following components:~~

•Unaudited Available Cash (cash available on the effective date of the POR after reserving $100 million to fund ongoing operations and making provisions for certain required payments under the POR, as well as any cash drawn, at AWI’s sole discretion, under an exit finance facility for the purpose of funding distributions under the POR)

• New Notes of reorganized AWI with a term of 5 to 10 years


	2005						2004
Common stock, $1 par value:
Balance at beginning of year and September 30	$	51.9					$	51.9

Capital in excess of par value:
Balance at beginning of year and September 30	$	172.6					$	172.7

Reduction for ESOP loan guarantee:
Balance at beginning of year and September 30	$	(142.2	)				$	(142.2	)

Retained earnings (accumulated deficit):
Balance at beginning of year	$	(1,021.9	)				$	(942.2	)
Net earnings for period		60.2		$	60.2			28.3		$	28.3

Balance at September 30	$	(961.7	)				$	(913.9	)

Accumulated other comprehensive income:
Balance at beginning of year	$	42.8					$	43.3
Foreign currency translation adjustments		(12.0	)					(0.4	)
Derivative gain, net		9.1						1.8
Minimum pension liability adjustments		2.3						—

Total other comprehensive (loss)/income		(0.6	)		(0.6	)		1.4			1.4

Balance at September 30	$	42.2					$	44.7

Comprehensive income				$	59.6					$	29.7

Less treasury stock at cost:
Balance at beginning of year and September 30	$	(528.5	)				$	(528.5	)

Total shareholder’s (deficit)	$	(1,365.7	)				$	(1,315.3	)

•See ~~Substantially~~accompanying ~~all~~notes to ofcondensed ~~the~~consolidated ~~outstanding~~financial ~~common~~statements ~~stock~~beginning ofon ~~reorganized~~page ~~AWI~~36.

The total amount of New Notes will be the greater of (i) $1.125 billion less Available Cash, or (ii) $775 million.

The POR provides that each unsecured creditor will receive its pro rata share of:

• 34.43% of the new common stock,

• 34.43% of the first $1.05 billion of Available Cash and New Notes,

• 60% of the next $50 million of Available Cash and, if such Available Cash is less than $50 million, then 60% of New Notes in an amount equal to the difference between $50 million and the amount of such Available Cash, and

• 34.43% of the remaining amount of Available Cash and New Notes.

The remaining amount of new common stock, Available Cash, and New Notes will be distributed to the Asbestos PI Trust.

• Would comprise 5% of the common stock of reorganized AWI on a fully diluted basis:

• Would have a 7-year exercisable term; and

• Would contain an exercise price equal to 125% of the per share equity value of reorganized AWI, as agreed among the financial advisers for AWI, the Asbestos Personal Injury Claimants’ Committee, the Unsecured Creditors’ Committee, and the Future Claimants’ Representative, and which will be set forth in the Court-approved disclosure statement for the POR.

The Warrants are expected to have a value on the effective date of the POR of approximately $40 million to $50 million.

~~AHI’s~~Armstrong ~~shareholders~~World ~~will have no actual vote on the POR. If the POR is implemented~~Industries, ~~the only value that will be retained by AHI shareholders is the potential to receive their ratable share of the Warrants if AHI’s Plan of Liquidation (see discussion below) is approved~~Inc. ~~If the shareholders of AHI do not approve AHI’s Plan of Liquidation~~, ~~AHI~~ ~~will~~and ~~not~~Subsidiaries ~~receive any Warrants to distribute to its shareholders.~~

~~AHI’s~~Condensed ~~Plan~~Consolidated Statements of ~~Liquidation~~Cash Flows

In(amounts ~~connection with the consummation of the POR, the existing equity interests~~ in ~~AWI~~millions) will be cancelled, and the common stock of reorganized AWI will be held principally by AWI’s unsecured creditors and the Asbestos PI Trust. The POR contemplates that AHI will propose to its shareholders that it adopt a plan for winding up and dissolving itself. The POR provides that, in order for AHI to receive the Warrants, the shareholders of AHI must approve AHI’s Plan of Liquidation within one year after the occurrence of the effective date under the POR. If the AHI shareholders do not approve AHI’s Plan of Liquidation within this time frame, then AHI will not receive the Warrants. The POR provides that reorganized AWI will pay any costs and expenses incurred in connection with AHI’s Plan of Liquidation. More information regarding the contemplated dissolution and winding up of AHI will be made available to AHI shareholders in the future.

~~Structure~~Unaudited ~~of Reorganized AWI~~

In connection with the consummation of the POR, AWI will effectuate a “division” under the Pennsylvania Business Corporation Law. Under the division, reorganized AWI will separate into a holding company and separate wholly-owned subsidiaries carrying out its major lines of business.


	Nine Months Ended September 30,
	2005			2004
Cash flows from operating activities:
Net earnings	$	60.2		$	28.3
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		106.7			105.4
Deferred income taxes		(11.1	)		(0.8	)
Equity (earnings) from affiliates, net		(27.5	)		(25.2	)
Gain on sale of investment in affiliates		(3.4	)		—
Chapter 11 reorganization costs, net		4.5			6.6
Chapter 11 reorganization costs payments		(9.2	)		(12.4	)
Restructuring charges, net of reversals		17.0			5.0
Restructuring payments		(22.0	)		(2.1	)
Goodwill impairment		—			60.0
Asbestos-related insurance recoveries		—			4.5
Cash effect of hedging activities		11.1			9.7
Increase (decrease) in cash from change in:
Receivables		(85.9	)		(58.3	)
Inventories		24.0			(54.4	)
Other current assets		5.5			13.5
Other noncurrent assets		(26.8	)		(24.1	)
Accounts payable and accrued expenses		11.9			54.1
Income taxes payable		18.1			(11.4	)
Other long-term liabilities		(3.0	)		9.2
Other, net		(6.6	)		(4.7	)

Net cash provided by operating activities		63.5			102.9

Cash flow from investing activities:
Purchases of property, plant and equipment and computer software		(83.4	)		(69.1	)
Distributions from equity affiliates		17.0			—
Proceeds from the sale of investment in affiliates		20.6			—
Proceeds from the sale of assets		4.7			4.6

Net cash (used for) investing activities		(41.1	)		(64.5	)

Cash flows from financing activities:
Increase in short-term debt, net		12.1			12.3
Payments of long-term debt		(4.3	)		(6.1	)
Other, net		—			(1.3	)

Net cash provided by financing activities		7.8			4.9

Effect of exchange rate changes on cash and cash equivalents		(5.3	)		1.0

Net increase in cash and cash equivalents		24.9			44.3
Cash and cash equivalents at beginning of year		515.9			484.3

Cash and cash equivalents at end of period	$	540.8		$	528.6

~~Next~~See ~~Steps~~accompanying innotes ~~the~~to ~~Chapter~~condensed 11consolidated ~~Process~~financial statements beginning on page 36.

A disclosure statement with respect to the POR will be filed with the Court for approval. After the disclosure statement is approved by the Court, the POR will be submitted to the appropriate parties in interest in AWI’s Chapter 11 Case for voting. Implementation of the POR is subject to its confirmation in accordance with the provisions of the Bankruptcy Code. At this time, AWI is unable to predict when and if the POR will be confirmed. The timing of AWI’s emergence from Chapter 11 remains uncertain.

Common Stock and Debt Securities

As a result of filing the POR on November 4, 2002, the New York Stock Exchange stopped trading on the Exchange of the common stock of AHI (traded under the ticker symbol “ACK”) and two debt securities of AWI (traded under the ticker symbols “AKK” and “ACK 08”). The Companies’ securities are expected to resume trading in alternative markets.

Bar Date for Filing Claims

The 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. The Court has extended the bar date for claims from several environmental agencies until the fourth quarter of 2002. On March 1, 2002, the Court allowed certain holders of alleged asbestos property damage claims to file a class proof of claim against AWI and extended the bar date for asbestos property damage claims to March 20, 2002. In July 2002, the Court denied the certification of the proposed class and held that the plaintiffs’ proof of claim shall only be effective as to the named claimants. A bar date for asbestos-related personal injury claims (other than claims for contribution, indemnification, or subrogation) has not been set.

Approximately 4,600 proofs of claim (including late-filed claims) totaling approximately $6.1 billion alleging a right to payment from AWI were filed with the Court in response to the August 31, 2001 bar date, which are discussed below. AWI continues to investigate claims. The Court will ultimately determine liability amounts that will be allowed as part of the Chapter 11 process.

In its ongoing review of the filed claims, AWI has identified and successfully objected to approximately 1,300 claims totaling $1.6 billion. These claims were primarily duplicate filings, claims that were subsequently amended or claims that are not related to AWI. The Court disallowed these claims with prejudice.

Approximately 1,000 proofs of claim totaling approximately $1.8 billion are pending with the 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 (the “Center”). 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. All asbestos-related personal injury claims will be addressed in the future pursuant to the procedures to be

~~developed~~Armstrong inWorld ~~connection~~Industries, ~~with the POR~~Inc., ~~See~~and ~~further~~Subsidiaries ~~discussion regarding AWI’s liability for asbestos-related matters in Note 10 of the condensed consolidated financial statements.~~

~~Approximately~~Notes ~~600 proofs of claim totaling approximately $0.8 billion alleging asbestos-related property damage are pending with the Court. Most of these claims were new~~ to ~~AWI~~Condensed ~~and~~Consolidated ~~many~~Financial ~~were~~Statements submitted with insufficient documentation to assess their validity. As part of determining whether AWI asbestos containing resilient floor covering products give rise to property damage liability, the Court conducted an initial hearing on September 26 – 27, 2002 to decide the type of scientific testing allowable under the Federal Rules of Evidence to prove or disprove whether such products cause building contamination. On October 22, 2002, the Court granted AWI’s requested relief and ruled that the methodology offered by the Asbestos Property Damage Committee in support of its claims is not a scientifically valid method of quantifying the level of asbestos contamination in a building. On November 1, 2002, the Court directed that all property damage claimants provide, in support of their claims, substantiation that Armstrong flooring products were used in the claimants’ buildings. AWI expects to continue vigorously defending any asserted asbestos-related property damage claims in the Court. AWI believes that it has a significant amount of existing insurance coverage available for asbestos-related property damage liability, with the amount ultimately available dependent upon, among other things, the profile of the claims that may be allowed by the Court. AWI’s history of property damage litigation prior to the Chapter 11 filing is described in Note 10 of the condensed consolidated financial statements.

~~Approximately 1,700~~(dollar ~~claims~~amounts ~~totaling~~in ~~approximately $1.9 billion alleging a right to payment for financing~~millions, ~~environmental, trade debt and other claims are pending with the Court. For these categories of claims, AWI has previously recorded approximately $1.6 billion~~ inexcept ~~liabilities.~~share ~~AWI~~data) ~~continues to investigate the claims to determine their validity.~~

~~AWI~~NOTE ~~continues to evaluate claims filed in the Chapter 11 Case~~1. ~~AWI~~BASIS has recorded liability amounts for claims whose value can be reasonably estimated and which it believes are probable of being allowed by the Court. At this time, it is impossible to reasonably estimate the value of all theOF ~~claims~~PRESENTATION that will ultimately be allowed by the Court. However, it is likely the value of the claims ultimately allowed by the Court will be in excess of amounts presently recorded by AWI and will be material to AWI’s financial position and the results of its operations. However, AWI is not able to determine a range of possible liability with any reasonable degree of accuracy, due to the uncertainties of the Chapter 11 process, the in-progress state of AWI’s investigation of submitted claims and the lack of documentation submitted in support of many claims.

~~Financing~~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.

OnThe ~~November~~accounting policies 1,used ~~2002,~~in ~~the~~preparing ~~Court~~these ~~announced~~statements itare ~~had~~the ~~approved~~same ~~AWI’s~~as ~~motion~~those toused ~~reduce~~in ~~the~~preparing ~~amount~~AHI’s ofconsolidated ~~its~~financial ~~debtor-in-possession~~statements ~~credit~~for ~~facility (~~the ~~“DIP~~year ~~Facility”)~~ended ~~from $200 million to $75 million~~December 31, ~~eliminate the revolving credit borrowing feature~~2004, ~~retain~~which includes the ~~letter~~accounts of ~~credit~~AHI ~~issuance facility~~ and ~~extend~~its ~~the~~majority-owned ~~maturity date to December 8, 2003~~subsidiaries. AsThese condensed ofconsolidated ~~September~~financial ~~30,~~statements ~~2002,~~should ~~AWI~~be ~~had~~read noin ~~outstanding~~conjunction ~~debt~~with ~~borrowings~~the ~~under~~consolidated ~~its~~financial ~~DIP~~statements ~~Facility~~ and ~~AWI~~ ~~had~~notes ~~$205.9~~thereto ~~million~~included ofin ~~cash~~AHI’s ~~and~~Form ~~cash~~10-K ~~equivalents,~~for ~~excluding~~the ~~cash~~fiscal ~~held~~year byended ~~its~~December 31, ~~non-debtor subsidiaries~~2004. AsIn ofthe ~~September~~opinion ~~30,~~of ~~2002~~management, all ~~AWI~~adjustments ~~had~~of ~~approximately~~a ~~$24.7~~normal ~~million~~recurring innature ~~letters~~have ofbeen ~~credit~~included ~~which~~to ~~were~~provide ~~issued~~a ~~pursuant~~fair tostatement of the ~~DIP~~results ~~Facility.~~for ~~AWI believes that~~ the ~~DIP~~reporting ~~Facility,~~periods ~~together~~presented. ~~with~~Quarterly ~~cash~~results onare ~~hand~~not ~~and~~necessarily ~~generated~~indicative ~~from~~of ~~operations~~annual earnings, ~~will~~primarily bedue ~~adequate~~ to ~~address its foreseeable liquidity needs. Obligations under~~ the ~~DIP~~different ~~Facility, including reimbursement~~ level of ~~draws~~sales ~~under~~in ~~the~~each ~~letters~~quarter of ~~credit,~~the ifyear ~~any, constitute~~and ~~superpriority~~the ~~administrative~~possibility ~~expense~~of ~~claims~~changes in ~~the~~general ~~Chapter~~economic ~~11 Case~~conditions.

~~Accounting~~These ~~Impact~~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.

~~AICPA~~Operating ~~Statement~~results offor ~~Position 90-7, “Financial Reporting by Entities in Reorganization under~~ the ~~Bankruptcy~~third ~~Code”~~quarter ~~(“SOP~~and ~~90-7”)~~first ~~provides~~nine ~~financial~~months ~~reporting~~of ~~guidance~~2005 ~~for~~and ~~entities~~the ~~that~~corresponding ~~are~~periods ~~reorganizing~~of ~~under~~2004 ~~the~~included ~~Bankruptcy Code. This guidance is implemented~~ in ~~the~~this ~~accompanying~~report ~~condensed~~are ~~consolidated financial statements~~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.

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 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

~~Pursuant~~Armstrong toWorld ~~SOP 90-7~~Industries, ~~AWI is required to segregate prepetition liabilities that are subject to compromise and report them separately on the balance sheet~~Inc. ~~See Note 3 for detail of the liabilities subject to compromise at September 30~~, ~~2002~~ and ~~December~~Subsidiaries 31, 2001. 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 prepetition debt, now in default, is recorded at face value and is classified within liabilities subject to compromise. Obligations of Armstrong subsidiaries not covered by the Filing remain classified on the condensed 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 10 for further discussion of AWI’s asbestos liability.

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

~~SOP~~(dollar ~~90-7~~amounts ~~also~~in ~~requires separate reporting of all revenues~~millions, ~~expenses,~~except ~~realized~~share ~~gains~~data) 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 in the first nine months of 2002 and 2001:

	Nine Months Ended September 30, 2002			Nine Months Ended September 30, 2001
	(amounts in millions)
Professional fees	$	22.5		$	17.2
Interest income, post petition		(2.7	)		(4.0	)
Reductions to prepetition liabilities		(0.9	)		(2.0	)
Termination of prepetition lease obligation		—			(5.9	)
Other expense directly related to bankruptcy, net		0.2			0.9
Total Chapter 11 reorganization costs, net	$	19.1		$	6.2

District of Delaware ended on December 31, 2003. On January 6, 2004, the Chapter 11 Case was reassigned to Judge Judith K. Fitzgerald.

~~Professional~~AHI ~~fees~~and ~~represent~~all ~~legal~~of AWI’s other direct and ~~financial~~indirect ~~advisory~~subsidiaries, ~~fees~~including Armstrong Wood Products Inc. (formerly Triangle Pacific Corp.), WAVE (AWI’s ceiling grid systems joint venture with Worthington Industries, Inc.), Armstrong Canada, and ~~expenses~~Armstrong ~~directly~~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 15 under “Asbestos-Related Litigation”.

~~Interest~~AWI ~~income~~ is ~~earned~~operating ~~from~~its ~~short~~business and managing its properties as a debtor-~~term~~in-possession ~~investments~~subject to the provisions of ~~cash~~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 ~~subsequent~~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.

~~Reductions~~Three tocreditors’ ~~prepetition~~committees, ~~liabilities~~one ~~represent~~representing asbestos personal injury claimants (the ~~difference~~“Asbestos ~~between~~Personal Injury Claimants’ Committee”), one representing asbestos property damage claimants (the ~~prepetition~~“Asbestos ~~invoiced~~Property ~~amount~~Damage Committee”), and the ~~actual~~other ~~cash~~representing ~~payment~~other ~~made~~unsecured tocreditors ~~certain~~(the “Unsecured Creditors’ Committee”), were appointed in ~~vendors~~the ~~due~~Chapter 11 Case. In addition, an individual was appointed to ~~negotiated~~represent ~~settlements~~the interests of future asbestos personal injury claimants (the “Future Claimants’ Representative”). ~~These~~In ~~payments~~accordance with the provisions of ~~prepetition~~the ~~obligations~~Bankruptcy ~~were~~Code, these ~~made~~parties ~~pursuant~~have the right to ~~authority~~be ~~granted~~heard byon 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.

~~Termination~~Plan of ~~prepetition~~Reorganization ~~lease~~and ~~obligation~~Disclosure ~~represents the reversal of an accrual for future lease payments for office space in the U.S. that AWI will not pay due to the termination of the lease contract. This amount was previously~~Statement ~~accrued in the third quarter of 2000 as part of a restructuring charge when the decision to vacate the premises was made.~~

AsOn November 4, 2002, AWI filed a ~~result~~Plan of Reorganization with the Bankruptcy ~~Filing~~Court. Subsequently, ~~realization~~AWI offiled ~~assets~~several ~~and~~amendments ~~liquidation~~to ofthe ~~liabilities~~plan, ~~are~~along ~~subject~~with tovarious ~~uncertainty~~exhibits. ~~While~~The ~~operating~~Fourth asAmended aPlan ~~debtor-in-possession~~of Reorganization, ~~AWI~~with ~~may~~certain ~~sell~~exhibits, orwas ~~otherwise~~filed ~~dispose~~on ofMay 23, ~~assets~~2003 and, ~~liquidate~~as orso ~~settle~~amended ~~liabilities~~and ~~for~~as ~~amounts~~modified ~~other than those~~by ~~reflected~~modifications infiled with the ~~condensed~~Bankruptcy ~~consolidated~~Court ~~financial~~on ~~statements.~~October 17, ~~Although~~2003, November 10, a2003 ~~POR~~and ~~has~~December 3, ~~been~~2004, ~~filed~~is ~~with~~referred ~~the~~to ~~Court,~~in ~~implementation~~this ofreport as the “POR”. isThe ~~subject~~POR provides for AWI to ~~confirmation~~continue ofto ~~the~~conduct ~~POR~~its inexisting ~~accordance~~lines of business with ~~the~~a ~~provisions~~reorganized ofcapital ~~the~~structure ~~Bankruptcy~~under ~~Code.~~which, Atamong ~~this~~other ~~time~~things, ~~AWI is~~its ~~unable~~existing toshares ~~predict~~of ~~when~~stock will be cancelled and ifnew ~~the~~common ~~POR~~shares and notes will be ~~confirmed~~issued to its unsecured creditors and to a trust, ~~accordingly~~as further discussed below, to be established under the ~~timing~~POR for the benefit of ~~its~~AWI’s ~~emergence~~current ~~from~~and ~~Chapter~~future ~~11.~~asbestos-related ~~Further~~personal injury claimants, ain ~~plan~~full satisfaction of ~~reorganization~~their ~~could~~claims ~~materially~~against ~~change~~AWI. ~~the~~References ~~amounts~~in ~~and~~this ~~classifications~~report ~~reported~~to in“reorganized ~~the~~Armstrong” ~~condensed~~are to AWI as ~~consolidated~~it ~~financial~~would ~~statements~~be reorganized under the POR, and its subsidiaries collectively. ~~However~~The POR excludes AWI’s Nitram and Desseaux subsidiaries, noneither ~~such~~of which is material ~~changes~~to ~~have~~Armstrong ~~occurred~~and towhich ~~the~~are ~~amounts~~pursuing ~~and~~separate ~~classifications~~resolutions of their Chapter 11 cases that are expected to result in the ~~September~~winding ~~30,~~up ~~2002~~of ~~financial~~their ~~statements~~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

~~NOTE~~Armstrong 3.World ~~LIABILITIES~~Industries, ~~SUBJECT~~Inc., TOand ~~COMPROMISE~~Subsidiaries

AsNotes ~~a result of AWI’s Chapter 11 filing (see Note 2), pursuant~~ to ~~SOP~~Condensed ~~90-7,~~Consolidated ~~AWI~~Financial isStatements 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 Armstrong subsidiaries 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. Prior to its Chapter 11 Filing, AWI estimated a range for the asbestos-related personal injury liability AWI would most likely be subject to during the following six years, based upon a variety of factors including historical settlement amounts, the incidence of past claims, the mix of the injuries of the plaintiffs, the number of cases pending against AWI and the status and results of broad-based settlement discussions. This range was large due to the limitations of the available data and the difficulty of forecasting with any certainty the numerous variables that could have affected AWI’s liability. AWI concluded that no amount within the range was more likely than any other, and therefore reflected the low end of the range as the liability in the condensed consolidated financial statements, in accordance with generally accepted accounting principles. The Chapter 11 process will address AWI’s total liability for asbestos-related personal injury claims, which AWI never believed it could accurately estimate. There are significant differences between the way asbestos-related personal injury claims may be addressed in the bankruptcy process and the historical way AWI’s claims were resolved. See Note 2 for further discussion on how the Chapter 11 process may address AWI’s liability for asbestos-related personal injury claims. If the POR, as described in Note 2, is confirmed and becomes effective, AWI would record a pre-tax charge in excess of $2.4 billion, net of insurance coverage, to increase its Subject to Compromise liability. This charge would be before recognition of gains from the settlement of liabilities, which will arise out of the Chapter 11 process. However, at this time, AWI is unable to predict when and if the POR will be confirmed. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. Accordingly, AWI has not adjusted its asbestos-related personal injury liability during the third quarter of 2002. It is likely that the total liability as determined in the Chapter 11 process will be significantly higher than the recorded liability and the liability will be material to the financial statements. See Note 10 for further discussion of AWI’s asbestos liability.

~~Liabilities~~(dollar ~~subject~~amounts toin ~~compromise at September 30~~millions, ~~2002~~except ~~and~~share ~~December~~data) ~~31, 2001 are as follows:~~

	September 30, 2002		December 31, 2001
	(amounts in millions)
Debt (at face value)	$	1,400.7	$	1,400.7
Asbestos-related liability		690.6		690.6
Prepetition trade payables		52.8		52.2
Prepetition other payables and accrued interest		55.7		56.4
Amounts due to affiliates		4.6		4.6
ESOP loan guarantee		157.7		157.7
Total liabilities subject to compromise	$	2,362.1	$	2,362.2

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.

~~Additional~~During ~~prepetition~~2003, ~~claims~~the ~~(liabilities~~POR ~~subject~~was tosubmitted ~~compromise)~~for ~~may~~a ~~arise~~vote by ~~due~~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 ~~executory~~the ~~contracts~~POR orby ~~unexpired~~the ~~leases~~class of unsecured creditors. On December 29, or2003, asthe Unsecured aCreditors’ ~~result~~Committee filed an objection to the Bankruptcy Court’s proposed findings of fact and conclusions of law and the ~~allowance~~proposed order of ~~contingent~~confirmation orof ~~disputed~~the ~~claims~~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.

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. On April 28, 2005 the court granted the motion. A motion to dismiss the appeal for alleged lack of jurisdiction was filed by the Committee of Unsecured Creditors on March 29, 2005. On October 24, 2005, the court held oral arguments on the appeal and the court has not yet issued its ruling. 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 15). 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

~~NOTE~~Armstrong 4World Industries, Inc. ~~SEGMENT~~, ~~RESULTS~~and Subsidiaries

	Three Months Ended September 30,				Nine Months Ended September 30,
	2002		2001		2002		2001
	(amounts in millions)
Net sales to external customers
Resilient Flooring	$	314.6	$	303.2	$	899.0	$	902.6
Building Products		225.8		214.9		626.4		637.4
Wood Flooring		180.3		158.9		531.2		487.9
Cabinets		56.7		55.8		179.5		170.2
Textiles and Sports Flooring		68.6		72.1		182.7		200.9
Total sales to external customers	$	846.0	$	804.9	$	2,418.8	$	2,399.0

Notes to Condensed Consolidated Financial Statements

	Three Months Ended September 30,						Nine Months Ended September 30,
	2002			2001			2002			2001
	(amounts in millions)
Segment operating income (loss)
Resilient Flooring	$	21.5		$	29.2		$	61.1		$	77.1
Building Products		34.6			31.1			81.8			75.3
Wood Flooring		10.0			(4.9	)		37.2			8.8
Cabinets		(0.3	)		3.1			3.5			13.2
Textiles and Sports Flooring		(1.1	)		(7.2	)		(3.3	)		(1.3	)
All Other		0.5			0.2			1.9			0.7
Total segment operating income		65.2			51.5			182.2			173.8
Charge for asbestos liability, net		—			(16.0	)		—			(22.0	)
Unallocated Corporate (expense)		(12.8	)		(2.6	)		(33.7	)		(13.5	)
Total consolidated operating income	$	52.4		$	32.9		$	148.5		$	138.3

(dollar amounts in millions, except share data)

	September 30, 2002		December 31, 2001
	(amounts in millions)
Segment assets
Resilient Flooring	$	916.2	$	855.3
Building Products		537.3		527.0
Wood Flooring		639.1		1,260.6
Cabinets		117.2		108.0
Textiles and Sports Flooring		204.1		177.8
All Other		18.2		16.3
Total segment assets		2,432.1		2,945.0
Assets not assigned to segments		1,211.8		1,093.1
Total consolidated assets	$	3,643.9	$	4,038.1

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.

~~The~~However, ~~decrease~~although inAWI’s domestic and foreign subsidiaries and other affiliates would be protected parties, asbestos-related personal injury claims against them would be channeled to the ~~assets~~Asbestos ofPI Trust only to the ~~Wood~~extent ~~Flooring~~such ~~segment~~claims isdirectly ~~primarily~~or ~~due~~indirectly relate to the ~~$590.0 million~~pre-Filing ~~goodwill~~manufacturing, ~~impairment~~installation, ~~write~~distribution ~~down~~or ~~recorded~~other asactivities aof ~~cumulative~~AWI, ~~effect~~or ofAWI’s aownership ~~change~~of inthe ~~accounting~~subsidiaries ~~principle~~or affiliates (as distinguished from independent activities of ~~January~~the 1,subsidiaries ~~2002~~or affiliates). See Note 715 ~~for~~under ~~further~~“Asbestos-Related ~~details~~Litigation.”

~~NOTE~~In 5addition, 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. ~~DISCONTINUED~~ ~~OPERATIONS~~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 six employer liability claims involving alleged asbestos exposure.

InThere ~~February~~also ~~2001,~~is ~~Armstrong~~uncertainty ~~determined~~as to ~~permanently~~proceedings, ~~exit~~if ~~the~~any, ~~Textiles~~brought ~~and~~in ~~Sports~~certain ~~Flooring~~foreign ~~segment and~~jurisdictions onwith ~~February~~respect ~~20, 2001 entered into negotiations~~ to ~~sell~~the ~~substantially~~effect ~~all~~ of the ~~businesses~~524(g) ~~comprising~~injunction ~~this segment to a private equity investor based~~ in ~~Europe.~~precluding ~~Based on these events,~~ the ~~segment was classified as a discontinued operation~~ ~~starting~~assertion ~~with~~in ~~the~~such ~~fourth~~jurisdictions ~~quarter~~ of ~~2000.~~asbestos-related Onpersonal ~~June~~injury 12claims, ~~2001,~~proceedings ~~negotiations~~related ~~with~~thereto ~~this~~or ~~investor were terminated. During~~ the ~~third~~enforcement ~~quarter~~ of ~~2001,~~judgments ~~Armstrong~~rendered ~~terminated its plans to permanently exit this segment. This decision was based on the difficulty encountered~~ in ~~selling~~such ~~the business, the changed cash needs of Armstrong and a review of our European strategy~~proceedings. ~~Accordingly,~~

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

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

•

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

~~this~~Armstrong ~~segment~~World isIndustries, noInc., ~~longer classified as a discontinued operation~~ and ~~amounts~~Subsidiaries have been reclassified into operations as required by EITF Issue No. 90-16 – “Accounting for Discontinued Operations Subsequently Retained”. All prior periods have been reclassified to conform to the current presentation.

~~Based~~Notes ~~on the expected net realizable value of the business determined during the negotiations~~ to ~~sell~~Condensed ~~the~~Consolidated ~~business,~~Financial ~~Armstrong~~Statements recorded a pre-tax net loss of $34.5 million in the fourth quarter of 2000, $23.8 million net of tax benefit. Armstrong also recorded an additional net loss of $3.3 million in the first quarter of 2001, as a result of price adjustments resulting from the negotiations. Concurrent with the decision to no longer classify the business as a discontinued operation, the remaining accrued loss of $37.8 million ($27.1 million net of tax) was reversed in the third quarter of 2001 and recorded as part of earnings from discontinued operations. Additionally, the segment’s net income of $3.1 million for the first and second quarter of 2001 was reclassified into earnings from continuing operations for those periods.

~~During~~(dollar ~~the~~amounts ~~third quarter of 2001, Armstrong concluded there were indicators of impairment related to certain assets~~ in ~~this segment~~millions, ~~and~~except ~~accordingly,~~share andata) impairment evaluation was conducted at the end of the third quarter under the guidelines of SFAS No. 121 – “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”. This evaluation led to an impairment charge of $8.4 million, representing the excess of book value over estimated fair value which was determined using a net discounted cash flows approach. The charge was included in cost of sales. The impairment was related to property, plant and equipment that produce certain products for which Armstrong anticipates lower demand in the future. Additionally, an inventory write-down of $2.1 million was also recorded in the third quarter of 2001 within cost of sales related to certain products that will no longer be sold.

~~During~~ fixed ~~the~~interest ~~second~~rate, ~~quarter~~(ii) a tranche of ~~2001,~~notes ~~Armstrong~~with ~~also~~a ~~recorded~~ten-year maturity and a ~~pre-tax~~fixed ~~loss~~interest rate and (iii) a tranche of ~~$0.9~~floating ~~million~~rate ~~related~~notes with a maturity of not less than five years, but no more than ten years, structured in a manner similar to, ~~its~~and ~~2000~~as ~~divestiture~~liquid as, marketable bank debt which satisfy the requirements of ~~its~~the ~~Insulation~~POR ~~Products~~and ~~segment~~are on terms and conditions that are satisfactory to AWI, the ~~resulting~~Asbestos ~~from~~Personal ~~certain~~Injury ~~post-closing~~Claimants’ ~~adjustments~~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.

~~NOTE~~The 6.POR ~~INVENTORIES~~provides that unsecured creditors, other than convenience creditors described below, would receive their pro rata share of:

	September 30, 2002			December 31, 2001
	(amounts in millions)
Finished goods	$	267.7		$	269.6
Goods in process		59.2			45.8
Raw materials and supplies		168.5			182.9
Less LIFO and other reserves		(66.1	)		(55.2	)
Total inventories, net	$	429.3		$	443.1

•

34.43% of the new common stock of reorganized Armstrong,

~~NOTE~~• 734.43% ~~GOODWILL~~of ~~AND~~the ~~INTANGIBLE~~first ~~ASSETS~~$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:

~~Effective~~• ~~January~~Up 1, 2002, Armstrong adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. FAS 142 also requires that intangible assets with determinable useful lives be amortized over their respective estimated useful lives to ~~their~~$300 ~~estimated residual~~million ~~values~~of ~~and~~Available ~~reviewed~~Cash ~~for impairment.~~ and

As• of January 1, 2002, Armstrong had unamortized goodwill of $822.8 million, of which $717.2 million was attributable to the Wood Flooring segment. In the second quarter of 2002, Armstrong completed the assessment of goodwill and recorded a $590.0 million non-cash transitional impairment charge related to the Wood Flooring segment. The ~~impairment~~balance ~~charge is presented~~ in ~~the~~principal ~~income~~amount ~~statement as a cumulative effect~~ of aPlan ~~change~~Notes or in ~~accounting~~net ~~principle~~cash asproceeds ~~of January 1, 2002. The impairment charge arose~~ from ~~the~~any ~~Wood~~private ~~Flooring~~offerings ~~segment’s fair value being lower than its carrying value. The Wood Flooring segment’s fair value was determined using a combination~~ of ~~discounted~~debt ~~cash~~securities ~~flows,~~made ~~values implicit~~ in ~~precedent~~lieu ~~business combinations~~ of ~~similar~~issuing ~~companies~~Plan ~~in the building products industry and stock market multiples of publicly-traded flooring companies~~Notes. ~~The fair value was negatively affected by lower operating profits and cash flows than were assumed at the time of the acquisition in 1998. The shortfalls were~~

•

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

•

~~caused~~Armstrong byWorld aIndustries, ~~combination of lower sales plus higher manufacturing costs~~Inc. ~~Under previous accounting rules~~, noand ~~goodwill~~Subsidiaries ~~impairment would have been recorded at January 1, 2002.~~

~~The~~Notes ~~following~~to ~~table~~Condensed ~~represents~~Consolidated ~~the~~Financial ~~changes~~Statements ~~in goodwill since December 31, 2001.~~

	January 1, 2002		Adjustments, net(1)		Impairments			September 30, 2002
	(amounts in millions)
Goodwill by segment
Resilient Flooring	$	82.9	$	1.1		—		$	84.0
Building Products		10.1		1.0		—			11.1
Wood Flooring		717.2		—	$	(590.0	)		127.2
Cabinets		12.6		—		—			12.6
Total consolidated goodwill	$	822.8	$	2.1	$	(590.0	)	$	234.9

(dollar amounts in millions, except share data)

~~(1) Primarily~~ voted ~~consists~~to ofreject the ~~effects~~POR, the distribution of ~~foreign~~warrants ~~exchange~~to ~~and~~existing ~~resolution~~equity ofholders ~~pre-acquisition~~under ~~tax~~the ~~and~~POR ~~other contingencies~~violated the absolute priority rule.

AsValuation of ~~January~~Consideration 1,to ~~2002,~~be ~~Armstrong~~Distributed ~~had~~under ~~unamortized identifiable intangible assets of $94.1 million. It was determined that~~ the fair value of one of Wood Flooring’s trademarks was lower than its carrying value. The fair value of the trademark was estimated using a discounted cash flow methodology. Accordingly, a non-cash transitional impairment charge of $6.0 ~~million~~POR ~~($3.8 million, net of tax) was calculated and is presented in the income statement as a cumulative effect of a change in accounting principle as of January 1, 2002.~~

~~The~~Based ~~following~~upon ~~table~~many ~~details~~assumptions ~~amounts~~(see ~~related~~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 ~~intangible~~estimated ~~assets~~value asof the consideration to be distributed under the POR to the Asbestos PI Trust, holders of ~~September~~allowed 30unsecured claims and AWI’s existing common stock, ~~2002.~~is:

	September 30, 2002
	Gross Carrying Amount		Accumulated Amortization
	(amounts in millions)
Amortized intangible assets
Computer software	$	96.4	$	40.1
Land use rights and other		3.6		0.7
Total	$	100.0	$	40.8
Unamortized intangible assets
Trademarks and brand names	$	29.0
Total intangible assets	$	129.0
Aggregate Amortization Expense
For the nine months ended September 30, 2002	$	10.4

•

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;

~~The~~• ~~annual~~Plan ~~amortization~~Notes ~~expense~~in ~~expected~~the ~~for~~aggregate ~~the~~principal ~~years~~amount ~~2002~~of ~~through~~$775 ~~2006~~million, isthat asare ~~follows:~~ worth their face value;

2002	$	14.9
2003		14.6
2004		12.6
2005		10.8
2006		7.1

•

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

•

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

AHI’s Plan of Dissolution, Winding Up and Distribution (“Plan of Dissolution”)

Common Stock and Debt Securities

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

~~Comparison~~Armstrong toWorld ~~prior~~Industries, ~~year~~Inc., ~~“As~~and ~~Adjusted”~~Subsidiaries

~~The~~Notes ~~following table presents prior year reported amounts adjusted~~ to ~~eliminate~~Condensed ~~the~~Consolidated ~~effect~~Financial ofStatements ~~goodwill and certain identifiable intangible asset amortization in accordance with FAS 142.~~

	Three Months Ended September 30,				Nine Months Ended September 30,
	2002		2001		2002			2001
	(amounts in millions)
Reported net income (loss)	$	29.4	$	41.2	$	(514.8	)	$	93.6
Add back: Goodwill amortization		—		5.7		—			17.1
Add back: Trademark and brand names amortization		—		0.2		—			0.6
Adjusted net income (loss)	$	29.4	$	47.1	$	(514.8	)	$	111.3

(dollar amounts in millions, except share data)

~~NOTE~~ investigating 8and resolving these claims. ~~RESTRUCTURING~~ ~~AND~~The ~~OTHER~~Bankruptcy Court will ultimately determine the claims and related liability amounts that will be allowed as ~~ACTIONS~~part of the Chapter 11 process if the parties cannot agree.

~~The~~In ~~following~~its ~~table~~ongoing review ~~summarizes activity in the reorganization and restructuring accruals for the first nine months~~ of ~~2002 and 2001. The net amount of charges and reversals in~~ the ~~table~~filed ~~does~~claims, ~~not~~AWI ~~agree~~ to ~~the~~date ~~income~~has ~~statement~~objected ~~due~~ to ~~non-cash~~approximately ~~charges~~2,200 ~~for~~claims ~~enhanced~~totaling ~~retirement~~$2.7 ~~benefits~~billion. ~~that~~The ~~did~~Bankruptcy ~~not~~Court ~~affect~~disallowed ~~the~~these ~~restructuring~~claims ~~accrual~~with ~~accounts~~prejudice.

	Beginning Balance		Cash Payments			Charges		Reversals			Other			Ending Balance
	(amounts in millions)
2002	$	8.9	$	(1.2	)	$	2.3	$	(0.6	)	$	0.3		$	9.7
2001		22.2		(9.3	)		4.1		(2.7	)		(6.2	)		8.1

AApproximately 1,100 proofs of claim totaling approximately $01.53 ~~million~~billion ~~restructuring~~are ~~charge~~pending ~~was~~with ~~recorded~~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 ~~first~~Center ~~quarter~~for Claims Resolution. As stated above, the bar date of ~~2002~~August 31, 2001 did not apply to asbestos-related personal injury claims other than claims for contribution, indemnification, or subrogation. The ~~charge~~ POR contemplates that all AWI asbestos-related topersonal ~~severance~~injury ~~benefits~~claims, including claims for ~~eleven~~contribution, indemnification, ~~employees~~or subrogation, will be addressed in the ~~Textiles~~future ~~and~~pursuant ~~Sports~~to ~~Flooring~~the ~~segment,~~procedures relating to ~~reflect~~the ~~staffing~~Asbestos ~~needs~~PI ~~for~~Trust ~~current~~developed ~~business~~in ~~conditions~~connection ~~and~~with ~~continued~~the ~~efforts~~POR. ~~initiated~~See infurther ~~the~~discussion ~~fourth~~regarding ~~quarter~~AWI’s ofliability ~~2001~~for asbestos-related matters in Note 15.

AApproximately ~~$2.2~~1,100 ~~million~~claims ~~restructuring~~totaling ~~charge~~approximately ~~was recorded in the second quarter of 2002~~$1.6 ~~The~~billion alleging ~~charge~~a ~~primarily~~right ~~related~~ to ~~severance~~payment ~~benefits~~ for ~~approximately~~financing, ~~120 employees~~environmental, intrade ~~the~~debt ~~European~~and ~~Resilient~~other ~~Flooring~~claims ~~business~~remain. ~~due~~For tothese acategories ~~slow European economy and a consolidation~~ of ~~worldwide~~claims, ~~research~~AWI ~~and~~has ~~development~~previously ~~activities.~~recorded Ofapproximately ~~the~~ $21.26 ~~million,~~billion ~~$0.4~~in ~~million represented a non-cash charge for enhanced retirement benefits, which is accounted for as an increase to pension benefit~~ liabilities.

InAWI 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 ~~third~~Bankruptcy ~~quarter~~Court. The final value of ~~2002,~~all $0the claims that will ultimately be allowed by the Bankruptcy Court is not known at this time.6 ~~million~~However, it is likely the value of the claims ~~remaining~~ultimately ~~accrual~~allowed ~~related~~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 ~~first~~results ~~quarter~~of ~~2002~~its ~~and~~operations. ~~fourth~~Management ~~quarter~~will ~~2001~~continue ~~charges~~to review the recorded liability in light of future developments in the ~~Textiles~~Chapter ~~and~~11 ~~Sports~~Case ~~Flooring~~and ~~segment~~make ~~was~~changes ~~reversed,~~to ~~comprising~~the ~~certain~~recorded ~~severance~~liability ~~accruals~~if ~~that~~and ~~were~~when noit ~~longer~~is ~~necessary~~appropriate.

AFinancing $5.4 million restructuring charge was recorded in the first quarter of 2001. The charge related to severance and enhanced retirement benefits for more than 50 corporate and line-of-business salaried staff positions, to reflect staffing needs for current business conditions. Of the $5.4 million, $1.6 million represented a non-cash charge for enhanced retirement benefits, which is accounted for as a reduction of the prepaid pension asset.

InAWI ~~the~~has ~~second~~a ~~quarter~~$75.0 million debtor-in-possession credit facility that currently is limited to issuances of ~~2001~~letters of credit. This facility is scheduled to mature on December 8, a2006. As of September 30, 2005, AWI had approximately $143.14 million ~~reversal~~in ~~was~~letters ~~recorded~~of ~~related~~credit, which were issued pursuant to athe ~~formerly~~DIP Facility. As of September 30, 2005, AWI had $306.9 million of cash and cash equivalents, ~~occupied~~excluding ~~building~~cash ~~for~~held ~~which~~by ~~Armstrong~~its nonon-debtor ~~longer~~subsidiaries. AWI believes itthat ~~will~~cash ~~incur~~on ~~any~~hand ~~additional~~and ~~costs.~~generated Infrom ~~addition~~operations and dividends from its subsidiaries, ~~$0.2~~together ~~million~~with subsidiary lines of credit and the ~~remaining~~DIP ~~accrual~~Facility, ~~for~~will ~~the~~be ~~first~~adequate ~~quarter~~to ~~2001~~address ~~reorganization~~its foreseeable ~~was~~liquidity ~~reversed~~needs. Obligations under the DIP Facility, ~~comprising~~including ~~certain~~reimbursement ~~severance~~of ~~accruals~~draws ~~that~~under ~~were no~~the ~~longer~~letters ~~necessary~~of ascredit, ~~certain~~if ~~individuals~~any, ~~remained~~constitute ~~employed~~superpriority byadministrative ~~Armstrong~~expense claims in the Chapter 11 Case.

InAccounting ~~the~~Impact third quarter of 2001, a $1.4 million reversal was recorded related to certain severance and benefit accruals that were no longer necessary and a $0.3 million pre-tax charge was recorded for additional severance payments.

~~The~~Armstrong ~~amount~~World inIndustries, ~~“other” for 2002 is primarily related to foreign currency translation~~Inc. ~~In 2001~~, ~~the~~ ~~amount~~and inSubsidiaries “other” is primarily related to the termination of an operating lease for an office facility in the U.S. These lease costs were previously accrued in the third quarter of 2000 as part of the restructuring charge when the decision to vacate the premises was made. The $5.9 million reversal is recorded as a reduction of Chapter 11 reorganization costs in accordance with SOP 90-7. See Note 2 for further discussion. The 2001 remaining amount in “other” is related to foreign currency translation.

~~Substantially~~Notes ~~all of the remaining balance of the restructuring accrual as of September 30, 2002 relates~~ to ~~rental~~Condensed ~~commitments~~Consolidated ~~for~~Financial ~~unused~~Statements space under the terms of a noncancelable-operating lease, which extends through 2017, and severance for terminated employees with extended payouts, the majority of which will be paid by the second quarter of 2003.

~~NOTE~~(dollar ~~9. SUPPLEMENTAL~~amounts ~~CASH~~in ~~FLOW~~millions, ~~INFORMATION~~except share data)

	Nine Months Ended September 30,
	2002		2001
	(amounts in millions)
Interest paid	$	4.2	$	3.6
Income taxes paid, net	$	35.9	$	2.1

liability for asbestos-related personal injury claims is also recorded in liabilities subject to compromise. See Note 15 for further discussion of AWI’s asbestos liability.

~~NOTE~~Additional ~~10. LITIGATION~~pre-Filing ~~AND~~claims ~~RELATED~~(liabilities subject to ~~MATTERS~~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.

~~ASBESTOS~~SOP 90-~~RELATED~~7 ~~LITIGATION~~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 through September of 2005 and 2004:

The following is a summary update of asbestos-related litigation; see Item 3 of Armstrong’s 2001 Form 10-K filing for additional information.


	Three Months Ended September 30						Nine Months Ended September 30
	2005			2004			2005			2004
Professional fees	$	4.7		$	3.6		$	11.8		$	9.6
Interest income, post-Filing		(3.2	)		(1.4	)		(7.5	)		(3.1	)
Adjustments to pre-Filing liabilities					—			0.1			—
Other expense directly related to bankruptcy, net		—			0.1			0.1			0.1

Total Chapter 11 reorganization costs, net	$	1.5		$	2.3		$	4.5		$	6.6

~~AWI~~Professional isfees arepresent ~~defendant~~legal inand financial ~~personal~~advisory ~~injury~~fees ~~claims~~ and ~~property~~expenses ~~damage~~directly ~~claims~~ 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 final resolution of its asbestos liability.~~

~~Asbestos~~Interest income is earned from short-~~Related~~term ~~Personal~~investments ~~Injury~~subsequent ~~Claims~~to the Filing.

~~Prior~~As toa result ~~filing~~of ~~for relief under~~ the ~~Bankruptcy Code~~Filing, ~~AWI~~realization ~~was a member~~ of ~~the~~assets ~~Center for Claims Resolution (the “Center”) which handled the defense~~ and ~~settlement~~liquidation of ~~asbestos-related~~liabilities ~~personal~~are ~~injury~~subject ~~claims~~to ~~on behalf of its members~~uncertainty. ~~The~~While ~~Center~~operating ~~pursued~~as ~~broad-based settlements~~a ~~of asbestos~~debtor-~~related~~in-possession, ~~personal~~AWI ~~injury~~may ~~claims~~sell ~~under~~or ~~the~~otherwise ~~Strategic~~dispose ~~Settlement~~of ~~Program~~assets ~~(“SSP”)~~ and ~~had~~liquidate ~~reached~~or ~~agreements~~settle ~~with~~liabilities ~~law~~for ~~firms~~amounts ~~that~~other ~~covered~~than those ~~approximately~~reflected ~~130,000~~in ~~claims~~the ~~that~~condensed ~~named~~consolidated ~~AWI~~financial ~~as a defendant~~statements.

~~Due~~If toand when the ~~Filing,~~POR ~~holders~~is ofconfirmed ~~asbestos-related personal injury claims are stayed from continuing to prosecute pending litigation~~ and ~~from~~made ~~commencing new~~effective, ~~lawsuits~~reorganized ~~against~~ AWI.’s Incondensed ~~addition,~~consolidated ~~AWI~~financial ~~ceased~~statements ~~making~~will ~~payments~~change tomaterially ~~the~~in ~~Center~~amounts ~~with~~and ~~respect~~classifications tothrough ~~asbestos-related~~the ~~personal~~implementation ~~injury~~of ~~claims, including payments pursuant to~~ the ~~outstanding~~fresh ~~SSP~~start ~~agreements.~~accounting ~~AWI’s~~rules ~~obligations~~of ~~with~~SOP ~~respect to payments called for under these settlements will be determined in its Chapter 11 Case~~90-7.

AConclusion creditors’ committee representing the interests of asbestos personal injury claimants and an individual has been appointed to represent the interests of future personal injury claimants in the Chapter 11 Case. AWI’s present and future asbestos liability will be addressed in its Chapter 11 Case rather than through the Center and a multitude of lawsuits in different jurisdictions throughout the U.S. It is anticipated that all of AWI’s present and future asbestos-related personal injury claims will be resolved in the Chapter 11 Case.

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.

~~Asbestos-Related~~Armstrong ~~Personal~~World ~~Injury~~Industries, ~~Liability~~Inc., and Subsidiaries

InNotes ~~evaluating its potential asbestos-related personal injury liability prior~~ to ~~the~~Condensed ~~Filing,~~Consolidated ~~AWI~~Financial ~~reviewed~~Statements information provided by the Center including, among other things, recent and historical settlement amounts, the incidence of past and recent claims, the mix of the injuries of the plaintiffs, the number of cases pending against it and the status and results of broad-based settlement discussions. Based on this review, AWI developed an estimated range for its cost to defend and resolve asbestos-related personal injury claims for six years, through 2006. This estimated range was large due to the limitations of the available data and the difficulty of forecasting with any certainty the numerous variables that could have affected AWI’s actual liability for this period. AWI concluded that no amount within the range was more likely than any other, and therefore reflected the low end of the range as the liability in the condensed consolidated financial statements, in accordance with generally accepted accounting principles.

It(dollar isamounts ~~expected~~in that the Chapter 11 process will deal with all current and future asbestos-related personal injury claims against AWI. There are significant differences between the way the asbestos-related personal injury claims may be addressed under the bankruptcy process and the historical way AWI’s claims were resolved. See Note 2 for further discussion on how the Chapter 11 process may address AWI’s asbestos-related personal injury claims. Thereforemillions, ~~AWI~~except isshare ~~unable~~data) ~~to accurately predict what the Chapter 11 process will determine is AWI’s total liability and AWI is unable to reasonably estimate a range of liability for asbestos-related personal injury claims.~~

AsNOTE ~~of September 30, 2000, AWI had recorded a liability of $758~~3.8 ~~million~~SEGMENT ~~for~~RESULTS its asbestos-related personal injury liability that it determined was probable and estimable through 2006. Due to the increased uncertainty created as a result of the Filing, no change has been made to the previously recorded liability except to record payments of $68.2 million against that accrual in October and November 2000. The asbestos-related personal injury liability balance recorded at September 30, 2002 and December 31, 2001 is $690.6 million, which is recorded in liabilities subject to compromise. If the POR, as described in Note 2, is confirmed and becomes effective, AWI would record a pre-tax charge in excess of $2.4 billion, net of insurance coverage, to increase its Subject to Compromise liability. This charge would be before recognition of gains from the settlement of liabilities, which will arise out of the Chapter 11 process. However, at this time, AWI is unable to predict when and if the POR will be confirmed. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. Accordingly, AWI has not adjusted its asbestos-related personal injury liability during the third quarter of 2002. It is likely that the total liability as determined in the Chapter 11 process will be significantly higher than the recorded liability and the liability will be material to the financial statements.

Collateral Requirements


	Three Months Ended September 30,				Nine Months Ended September 30,
Net sales to external customers	2005		2004		2005		2004
Resilient Flooring	$	311.5	$	308.1	$	914.0	$	934.1
Wood Flooring		220.2		209.4		624.9		620.9
Textiles and Sports Flooring		79.7		70.0		211.4		197.4
Building Products		268.2		250.2		784.5		727.5
Cabinets		57.4		55.8		161.9		162.1

Total sales to external customers	$	937.0	$	893.5	$	2,696.7	$	2,642.0

During 2000, AWI had secured a bond for $56.2 million to meet minimum collateral requirements established by the Center with respect to asbestos-related personal injury claims asserted against AWI. On October 27, 2000, the insurance company that underwrote the surety bond informed AWI and the Center of its intention not to renew the surety bond effective February 28, 2001. On February 6, 2001, the Center advised the surety of the Center’s demand for payment of the face value of the bond. The surety filed a motion with the Court seeking to restrain the Center from drawing on the bond. The motion was not granted. On March 28, 2001, the surety filed an amended complaint in the Court seeking similar relief. The Center has filed a motion to dismiss the amended complaint. The Court has not yet ruled on the Center’s motion or the complaint. In addition, on April 27, 2001, AWI filed a complaint and a motion with the Court seeking an order, among other things, enjoining the Center from drawing on the bond or, in the event the Center is permitted to draw on the bond, requiring that the proceeds of any such draw be deposited into a Court-approved account subject to further order of the Court. Judge Alfred M. Wolin of the Federal District Court for the District of New Jersey, who is also presiding over AWI’s Chapter 11 Case, indicated he would determine these matters. Judge Wolin has not yet ruled on these matters.


	Three Months Ended September 30,						Nine Months Ended September 30,
Segment operating income (loss)	2005			2004			2005			2004
Resilient Flooring	$	7.7		$	10.8		$	(5.8	)	$	(13.3	)
Wood Flooring		25.7			7.1			54.4			38.5
Textiles and Sports Flooring		3.2			2.8			(3.2	)		(0.8	)
Building Products		43.1			40.0			116.0			106.3
Cabinets		(0.3	)		2.8			(9.5	)		4.9
Unallocated Corporate (expense)		(12.9	)		(15.3	)		(41.7	)		(44.6	)

Total consolidated operating income	$	66.5		$	48.2		$	110.2		$	91.0

Asbestos-Related Property Damage Litigation


Segment assets	September 30, 2005		December 31, 2004
Resilient Flooring	$	708.2	$	737.9
Wood Flooring		653.0		663.6
Textiles and Sports Flooring		207.7		218.1
Building Products		608.3		596.3
Cabinets		104.9		102.2

Total segment assets		2,282.1		2,318.1
Assets not assigned to segments		2,335.3		2,291.3

Total consolidated assets	$	4,617.4	$	4,609.4

~~Over~~NOTE ~~the years, AWI was one of many defendants in asbestos-related property damage claims that were filed by public and private building owners, with six claims pending as of June 30, 2001~~4. ~~The~~LIABILITIES ~~claims~~SUBJECT ~~that~~TO ~~were~~COMPROMISE ~~resolved prior to the Filing resulted in aggregate indemnity obligations of less than $10 million. To date, all payments of these obligations have been entirely covered by insurance. The pending cases~~

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 15 for further discussion of AWI’s asbestos liability.

~~present~~Armstrong ~~allegations~~World ~~of damage to the plaintiffs’ buildings caused by asbestos-containing products and generally seek compensatory and punitive damages and equitable relief~~Industries, ~~including reimbursement of expenditures for removal and replacement of such products~~Inc. ~~In the second quarter of 2000~~, AWI was served with a lawsuit seeking class certification of Texas residents who own property with asbestos-containing products. This case includes allegations that AWI asbestos-containing products caused damage to buildings and ~~generally~~Subsidiaries seeks compensatory damages and equitable relief, including testing, reimbursement for removal and diminution of property value. AWI vigorously denies the validity of the allegations against it in these actions and, in any event, believes that any costs will be covered by insurance. Continued prosecution of these actions and the commencement of any new asbestos property damage actions are stayed due to the Filing. In March 2002, the Court allowed certain alleged holders of asbestos property damage claims to file a class proof of claim against AWI. In July 2002, the Court denied the certification of the proposed class and held that the plaintiffs’ proof of claim shall only be effective as to the named claimants. As part of determining whether AWI asbestos containing resilient floor covering products give rise to property damage liability, the Court conducted an initial hearing on September 26 – 27, 2002 to decide the type of scientific testing allowable under the Federal Rules of Evidence to prove or disprove whether such products cause building contamination. On October 22, 2002, the Court granted AWI’s requested relief and ruled that the methodology offered by the Asbestos Property Damage Committee in support of its claims is not a scientifically valid method of quantifying the level of asbestos contamination in a building. On November 1, 2002, the Court directed that all property damage claimants provide, in support of their claims, substantiation that Armstrong flooring products were used in the claimants’ buildings.

~~Consistent~~Notes ~~with prior periods and due~~ to ~~increased~~Condensed ~~uncertainty,~~Consolidated ~~AWI~~Financial ~~has~~Statements not recorded any liability related to these claims as of September 30, 2002. See Note 2 for further discussion of property damage claims in the Chapter 11 Case. A separate creditors’ committee representing the interests of property damage asbestos claimants has been appointed in the Chapter 11 Case.

~~Insurance~~(dollar ~~Recovery~~amounts ~~Proceedings~~in millions, except share data)

~~A substantial~~Liabilities ~~portion~~subject ofto ~~AWI’s~~compromise ~~primary~~at ~~and excess remaining insurance asset is nonproducts (general liability) insurance for personal injury claims~~September 30, ~~including~~2005 ~~among~~and ~~others~~December 31, ~~those~~2004 that involve alleged exposure during AWI’s installation of asbestos insulation materials. 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~~as ~~claims,~~follows: 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.


	September 30, 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		58.1		58.9
Prepetition other payables and accrued interest		71.0		70.4
Amounts due to affiliates		4.7		4.7
ESOP loan guarantee		157.7		157.7

Total liabilities subject to compromise	$	4,870.7	$	4,870.9

~~One~~(1) ofIn ~~the~~accordance ~~insurance~~with ~~carriers,~~SOP ~~Reliance Insurance Company~~90-7, ~~was~~we ~~placed~~did ~~under~~not anrecord ~~order~~contractual ofinterest ~~liquidation~~expense byon aprepetition ~~state~~debt ~~insurance~~after ~~department~~the ~~during~~Chapter ~~October 2001~~11 ~~due~~filing ~~to financial difficulties~~date. ~~The~~This ~~order~~unrecorded ofinterest ~~liquidation~~expense ~~prohibits~~was ~~Reliance~~$20.5 ~~from~~million ~~making~~and ~~any~~$63.6 ~~claim~~million ~~payments~~in ~~under~~ the ~~insurance~~third ~~policies~~quarter ~~until~~and ~~the~~first ~~liquidation~~nine ~~occurs.~~months ~~AWI intends to file a proof~~ of ~~claim~~2005, ~~against~~respectively, ~~Reliance~~and by$21.7 ~~the~~million ~~December~~and ~~2003 deadline~~$65.1 Itmillion isin ~~uncertain~~the ~~when~~third ~~AWI~~quarter ~~will~~and ~~receive~~the ~~proceeds~~first ~~from~~nine ~~Reliance~~months ~~under~~of ~~these~~2004, ~~insurance policies~~respectively.

NOTE 5. DISCONTINUED OPERATIONS

NOTE 6. INVENTORIES


	September 30, 2005			December 31, 2004
Finished goods	$	325.5		$	362.9
Goods in process		48.2			49.3
Raw materials and supplies		187.7			212.8
Less LIFO and other reserves		(67.7	)		(89.9	)

Total inventories, net	$	493.7		$	535.1

NOTE 7. NATURAL GAS HEDGES

~~Another~~Armstrong ~~insurer~~World ~~(Century Indemnity Company)~~Industries, ~~who previously settled its coverage issues with AWI, has made some of its required payments under the settlement to a trust of which AWI is a beneficiary~~Inc. ~~During January 2002~~, ~~this insurer filed an adversary action in AWI’s Chapter 11 Case. Among other things, the action requests the Court to (1) declare that the settlement agreement is an executory contract~~ and toSubsidiaries compel assumption or rejection of the agreement; (2) declare that the insurer need not make its present and future scheduled payments unless AWI assumes the agreement; (3) declare that the insurer is entitled to indemnification from AWI against any liabilities that the insurer may incur in certain unrelated litigation in which the insurer is involved; and (4) enjoin the disposition of funds previously paid by the insurer to the trust pending an adjudication of the insurer’s rights. These issues are before the Court for determination and AWI believes it is highly unlikely the insurer will prevail in this matter.

~~Insurance~~Notes ~~Asset~~to Condensed Consolidated Financial Statements

An(dollar ~~insurance~~amounts ~~asset~~ in ~~respect of asbestos personal injury claims in the amount of $198.1 million is recorded as of September 30~~millions, ~~2002~~except ~~compared~~share to $214.1 million as of December 31, 2001. Of the total recorded asset at September 30, 2002, approximately $35.6 million represents partial settlement for previous claims that will be paid in a fixed and determinable flow and is reported at its net present value discounted at 6.50%. The total amount recorded reflects AWI’s belief in the availability of insurance in this amount, based upon AWI’s success in insurance recoveries, recent settlement agreements that provide such coverage, the nonproducts recoveries by other companies and the opinion of outside counsel. Such insurance is either available through settlement or probable of recovery through negotiation, litigation or resolution of the ADR process. 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 2002data) and the financial condition of the insurers, AWI may revise its estimate of probable insurance recoveries. Approximately $80 million of the $198.1 million asset is determined from agreed coverage in place and is therefore directly related to the amount of the liability. Of the $198.1 million asset, $24.0 million has been recorded as a current asset as of September 30, 2002 reflecting management’s estimate of the minimum insurance payments to be received in the next 12 months.

ANOTE ~~significant part of the recorded asset relates to insurance that AWI believes is probable and will be obtained through settlements with the various carriers~~8. ~~Due~~EQUITY toINVESTMENTS the Filing, the settlement process may be delayed, pending further clarification as to the asbestos liability. While AWI believes the Chapter 11 process will strengthen its position on resolving disputed insurance and may therefore result in higher settlement amounts than recorded, there has been no increase in the recorded amounts due to the uncertainties created by the Filing. Accordingly, this asset could also change significantly based upon events which occur in the Court. Management estimates that the timing of future cash payments for the recorded asset may extend beyond 10 years.

~~Cash~~Investments ~~Flow~~in ~~Impact~~affiliates of $62.3 million at September 30, 2005 reflected the equity interest in our 50% investment in our WAVE joint venture. The balance decreased $10.2 million from December 31, 2004, primarily due to the August 2005 sale of our equity interest in Interface Solutions, Inc. partially offset by our equity interest in WAVE’s net undistributed earnings. Condensed income statement data for WAVE, our joint venture accounted for under the equity method of accounting, is summarized below:

As a result of the Chapter 11 Filing, AWI did not make any payments for asbestos-related claims in 2002 or 2001. AWI received $16.0 million and $32.2 million in asbestos-related insurance recoveries during the first nine months of 2002 and 2001, respectively. 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.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Net sales	$	77.6	$	68.2	$	230.0	$	209.9
Gross profit		24.9		21.1		70.9		64.0
Net earnings		19.9		14.9		56.4		46.7

~~Conclusion~~NOTE 9. GOODWILL AND INTANGIBLE ASSETS

~~Many~~As ~~uncertainties exist about the financial impact~~ of ~~AWI’s~~ ~~involvement with asbestos litigation. These uncertainties include the impact of the Filing and the Chapter 11 process~~January 1, ~~the number of future claims to be filed, the ultimate value of the asbestos liability, the impact of any potential~~ ~~legislation~~2005, ~~the~~we ~~impact~~had ofgoodwill ~~the ADR proceedings on the insurance asset and the financial condition~~ of ~~AWI’s~~approximately ~~insurance~~$136 ~~carriers~~million. ~~Additionally,~~Goodwill ~~although a POR has been filed with the Court, implementation of the POR~~ is ~~subject~~required to ~~confirmation of the POR in accordance with the provisions of the Bankruptcy Code. At this time, AWI is unable to predict when and if the POR will~~ be ~~confirmed~~tested ~~and,~~for ~~accordingly,~~impairment ~~the~~at ~~timing~~least ~~of its emergence from Chapter 11~~annually. ~~Therefore,~~We ~~the~~perform ~~timing~~our ~~and~~annual ~~terms~~assessment ~~of resolution~~in of the ~~Chapter~~fourth ~~11 Case remain uncertain~~quarter. ~~Accordingly, AWI has not revised its previously recorded liability for asbestos-related personal injury~~

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


Goodwill by segment	January 1, 2005		Adjustments, net⁽¹⁾			Impairments	September 30, 2005
Wood Flooring	$	108.2		—		—	$	108.2
Building Products		15.2	$	(1.7	)	—		13.5
Cabinets		12.6		—		—		12.6

Total consolidated goodwill	$	136.0	$	(1.7	)	—	$	134.3

⁽¹⁾	Consists of the effects of foreign exchange.

The following table details amounts related to intangible assets as of September 30, 2005 and December 31, 2004.


	September 30, 2005				December 31, 2004
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets
Computer software	$	112.8	$	76.5	$	109.8	$	66.4
Land use rights and other		4.5		1.1		4.4		1.0

Total	$	117.3	$	77.6	$	114.2	$	67.4

Unamortized intangible assets
Trademarks and brand names	$	29.3			$	29.2

Other intangible assets, gross	$	146.6			$	143.4

Aggregate Amortization Expense
For the nine months ended September 30, 2005			$	12.8
For the nine months ended September 30, 2004			$	11.5

~~claims.~~Armstrong ItWorld isIndustries, ~~likely that no changes will be made to the liability until later in the Chapter 11 Case~~Inc. ~~Although not currently estimable~~, ~~AWI’s total exposure to asbestos-related personal injury claims is likely to be significantly higher than the recorded liability~~ and toSubsidiaries ~~be material to the financial statements. Any adjustment to the insurance asset could also be material to the financial statements.~~

~~ENVIRONMENTAL~~Notes ~~LIABILITIES~~to Condensed Consolidated Financial Statements

~~Most~~(dollar ofamounts ~~Armstrong’s~~in ~~manufacturing and certain of Armstrong’s research facilities are affected by various federal~~millions, ~~state~~except ~~and~~share ~~local~~data) environmental requirements relating to the discharge of materials or the protection of the environment. Armstrong has made, and intends to continue to make, necessary expenditures for compliance with applicable environmental requirements at its operating facilities. Armstrong anticipates that annual expenditures for those purposes will not change materially from recent experience. However, applicable federal and state environmental laws continue to change. Until all new regulatory requirements are known, Armstrong cannot predict with certainty future capital expenditures associated with compliance with environmental requirements.

AsNOTE with many industrial companies, Armstrong is currently involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act (“Superfund”), and similar state laws at approximately 22 sites10. InRESTRUCTURING ~~most~~AND ~~cases,~~OTHER ~~Armstrong~~ACTIONS is 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, Armstrong disputes the liability, the proposed remedy or the proposed cost allocation among the PRPs. Armstrong may also have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies. Armstrong has also been remediating environmental contamination resulting from past industrial activity at certain of its former plant sites. AWI’s payments and remediation work on such sites for which AWI is the potentially responsible party is under review in light of the Chapter 11 Filing. The bar date for claims from several environmental agencies has been extended into the fourth quarter of 2002.

~~Estimates~~Net ofrestructuring ~~Armstrong’s~~charges ~~future environmental liability at any~~ of ~~the~~$17.0 ~~Superfund~~million ~~sites or current or former plant sites are based on evaluations of currently available facts regarding each individual site~~ and ~~consider factors~~$5.0 ~~such~~million aswere ~~Armstrong’s~~recorded ~~activities~~ in ~~conjunction with~~ the ~~site,~~first ~~existing technology, presently enacted laws and regulations and prior company experience in remediating contaminated sites. Although current law imposes joint and several~~nine ~~liability~~months ~~on all parties at any Superfund site, Armstrong’s contribution to the remediation~~ of ~~these~~2005 ~~sites~~and ~~is expected to be limited by the number of other companies also identified as potentially liable for site costs. As a result~~2004, ~~Armstrong’s~~ ~~estimated liability reflects only Armstrong’s expected share~~respectively. InThese ~~determining~~charges ~~the~~are ~~probability~~summarized ofin ~~contribution, Armstrong considers~~ the ~~solvency~~following oftable: the parties, whether liability is being disputed, the terms of any existing agreements and experience with similar matters. The Chapter 11 Case also may affect the ultimate amount of such contributions.

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 the 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. Owens Corning has entered into a settlement in principle with the DEQ. Pursuant to the proposed settlement, OC will make 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 is currently negotiating with the DEQ regarding how these funds will be made available for the investigation and remedial action for the site. AWI has recorded an environmental liability with respect to the St. Helens remedial investigations and feasibility study at its facility, but not for Scappoose Bay because AWI continues to dispute responsibility for any contamination in Scappoose Bay.


	Net Charge/(Reversal)
	Three Months Ended September 30,				Nine Months Ended September 30,
Action Title	2005		2004		2005			2004			Segment
Lancaster Plant	$	0.2		—	$	11.3			—		Resilient Flooring
Hoogezand		1.1	$	1.9		5.1		$	5.8		Building Products
North America SG&A		—		—		(0.1	)		—		Resilient Flooring
Morristown		0.1		—		0.4			—		Cabinet Products
Searcy		—		—		0.1			—		Wood Flooring
Oss		—		—		0.2			—		Textiles & Sports Flooring
European consolidation		—		—		—			(0.8	)	Resilient Flooring, Textiles & Sports Flooring

Total	$	1.4	$	1.9	$	17.0		$	5.0

~~Liabilities~~Lancaster ofPlant: 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 $1611.13 million atcharge ~~September~~in 302005, ~~2002~~$10.5 million ~~and~~is a non-cash charge related to termination benefits to be paid through the U.S. pension plan. The other $160.68 million atis ~~December~~comprised ~~31,~~of ~~2001~~severance ~~were~~and ~~for potential~~related ~~environmental~~costs. ~~liabilities~~We ~~that~~have ~~Armstrong~~incurred ~~considers~~project-to-date ~~probable~~restructuring charges of $12.3 million related primarily to severance and ~~for~~pension ~~which~~related acosts. ~~reasonable~~We ~~estimate~~expect to incur an additional $27 million of restructuring charges starting in the ~~probable~~fourth ~~liability~~quarter ~~could~~of 2005 and continuing through 2008, with the majority of charges to be ~~made~~incurred in 2005 and 2006. ~~Where~~Additionally, ~~existing~~we ~~data~~recorded is$5.3 ~~sufficient~~million toof ~~estimate~~accelerated depreciation and $2.7 million of other related costs in the ~~liability~~first nine months of 2005, ~~that~~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 was transferred to another Building Products location in Münster, Germany and resulted in a net reduction of approximately 72 positions. We have incurred project-to-date restructuring charges of $16.0 million, and expect to incur an additional $0.8 million in the fourth quarter of 2005. Additionally, we recorded $0.5 million and $1.5 million of accelerated depreciation in cost of goods sold in the first nine months of 2005 and 2004, respectively. We also recorded $0.6 million and $0.2 million of other related costs in cost of goods sold in the first nine months of 2005 and 2004, respectively.

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 was completed in the second quarter of 2005. We incurred project-to-date restructuring charges of $5.2 million 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 project-to-date restructuring charges of $0.4 million for severance related charges and $0.4 million of related shutdown costs and expect to incur an additional $0.1 million of shutdown costs in the remainder of 2005. Additionally, we recorded $0.2 million of accelerated depreciation and $0.9 million of other related costs in 2005, both in cost of goods sold.

Searcy: The charge related to the fourth quarter 2004 decision to cease production at a solid hardwood flooring location in Arkansas in the first quarter of 2005 and was comprised of severance benefits and related costs. We continue to manufacture solid wood flooring at other plants across the United States.

~~estimate~~Armstrong ~~has~~World ~~been used; where only a range of probable liability is available and no amount within that range is more likely than any other~~Industries, ~~the lower end of the range has been used~~Inc. ~~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, $6.4 million of the September 30, 2002~~ and ~~December~~Subsidiaries 31, 2001 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~~Notes estimated liabilities 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 condensed consolidated financial statements and are either available through settlement or anticipated to beCondensed ~~recovered~~Consolidated ~~through~~Financial ~~negotiation~~Statements ~~or litigation.~~

~~Actual~~(dollar ~~costs~~amounts ~~to be incurred at identified sites may vary from the estimates, given the inherent uncertainties~~ in ~~evaluating environmental liabilities. Subject to the imprecision in estimating environmental remediation costs~~millions, ~~Armstrong~~except ~~believes~~share ~~that~~data) any sum it may have to pay in connection with environmental matters in excess of the amounts noted above would not have a material adverse effect on its financial condition, or liquidity, although the recording of future costs may be material to earnings in such future period.

~~PATENT~~ We ~~INFRINGEMENT~~incurred ~~CLAIMS~~$0.9 million of restructuring charges for the project-to-date and do not expect to incur any additional charges.

~~Armstrong~~Oss: isThe a2005 ~~defendant~~charge inwas ~~two~~recorded ~~related~~to ~~lawsuits~~reflect ~~claiming~~shutdown ~~patent~~costs ~~infringement~~ related to ~~some~~a ofplant ~~Armstrong’s laminate~~closure ~~products~~in The Netherlands. The ~~plaintiffs~~related ~~have~~severance ~~claimed~~charges ~~unspecified~~were ~~monetary~~recorded ~~damages~~during the third quarter of 2003 when the plant closure was announced. ~~Armstrong~~We iswill ~~being~~continue ~~defended~~to ~~and~~manufacture ~~indemnified~~carpet byat ~~its~~other ~~supplier~~plants ~~for~~across ~~all~~Europe. ~~costs~~We incurred project-to-date restructuring charges of $4.9 million and ~~potential~~do ~~damages~~not ~~related~~expect to incur any additional costs in the ~~litigation~~future.

~~FORMER~~European ~~EMPLOYEES~~consolidation: ~~CLAIM~~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 ($0.5 million) and Textiles and Sports Flooring ($0.3 million) segments.

~~About~~The ~~370~~following ~~former~~table ~~Armstrong employees that were separated in two business divestitures~~summarizes inactivity 2000 have brought two purported class actions against the Retirement Committee of AWI, certain current and former members of the Retirement Committee, the Retirement Savings and Stock Ownership Plan (RSSOP), AHI and the trustee bank of the RSSOP. The cases are pending in the ~~United~~restructuring ~~States~~accruals ~~District~~for ~~Court (Eastern District of PA). A similar proof of claim has been filed against AWI in~~ the ~~Chapter~~first 11nine ~~Case.~~months ~~Plaintiffs allege breach~~ of ~~Employee~~2005 ~~Retirement Income Security Act (ERISA) fiduciary duties~~ and ~~other violations of ERISA pertaining to losses in their RSSOP accounts, which were invested in Armstrong common stock~~2004. ~~Losses are alleged to be in the range of several million dollars. AHI believes there are substantive defenses to the allegations and therefore has not recorded any liability related to this matter.~~

DEPARTMENT OF LABOR DISCUSSIONS


	Beginning Balance		Cash Payments			Net Charges		Other			Ending Balance
2005	$	24.8	$	(22.0	)	$	6.5	$	(1.0	)	$	8.3
2004		10.0		(2.1	)		5.0		0.1			13.0

~~Subsequent~~The toamount anin ~~audit by the United States Department of Labor (~~“~~DOL~~other”), ~~Armstrong has been informed that the DOL is considering challenging the validity of the use of certain~~for ~~contributions~~2005 toand ~~fund~~2004 ~~debt payments made by the Armstrong Employee Stock Ownership Plan (“ESOP”), as provided for by that plan. Armstrong~~ is ~~cooperating~~related ~~with the DOL~~ to ~~address its questions and concerns about those transactions. Armstrong believes that it fully complied with all applicable laws and regulations governing~~ the ~~plan,~~effects ~~and~~of ~~therefore~~foreign ~~has~~currency ~~not recorded any liability related to this matter~~translation.

~~OTHER~~Of the ~~CLAIMS~~September 30, 2005 and 2004 ending balances, $1.3 million is reported in liabilities subject to compromise.

~~Additionally,~~Substantially ~~Armstrong~~all isof ~~involved~~the inending ~~various~~balance ~~other~~of ~~claims~~the ~~and~~restructuring ~~legal~~accrual ~~actions~~as ~~involving~~of ~~product liability~~September 30, ~~patent~~2005 ~~infringement, distributor~~relates ~~termination,~~to ~~employment~~a ~~law~~noncancelable ~~issues~~operating ~~and~~lease ~~other~~which ~~actions~~extends ~~arising~~through in2017, a ~~the~~lease ~~ordinary~~for ~~course~~office ofspace ~~business.~~in ~~While complete assurance cannot be given to~~ the ~~outcome~~U.S. ofwhich ~~these~~is ~~claims,~~expected ~~Armstrong does not expect that any sum that may have~~ to be ~~paid~~settled ~~in connection~~as ~~with~~part ~~these~~of ~~matters~~our ~~will~~Chapter ~~have~~11 aemergence ~~materially~~process, ~~adverse~~and ~~effect~~severance onfor ~~its~~terminated ~~consolidated financial position or liquidity~~employees, ~~however it could be material to~~ the ~~results~~majority of ~~operations~~which inwill ~~the~~be ~~particular~~paid ~~period~~in ~~that a matter is resolved~~2005.

NOTE 11. ~~ACQUISITIONS~~ INCOME TAX EXPENSE

During the first nine months of 2001, Armstrong spent $5.6 million to purchase some of the remaining minority equity interest of majority owned entities consolidated within the Resilient Flooring segment. Approximately $5.0 million of the purchase price was allocated to goodwill.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Earnings from continuing operations before income taxes	$	67.2		$	44.0		$	107.7		$	79.9
Income tax expense		21.1			20.8			47.5			51.2
Effective tax rate		31.4	%		47.3	%		44.1	%		64.1	%

~~NOTE~~Armstrong ~~12.~~World ~~DIFFERENCES~~Industries, ~~BETWEEN ARMSTRONG HOLDINGS INC~~Inc., ~~AND~~and ~~ARMSTRONG~~Subsidiaries ~~WORLD INDUSTRIES, INC.~~

~~The~~Notes ~~difference between the condensed consolidated financial statements is primarily due~~ to ~~stock~~Condensed ~~activity~~Consolidated ~~and~~Financial ~~intercompany~~Statements ~~transactions.~~

(dollar amounts in millions, except share data)

considering for repatriation under this provision is between zero and $60 million. The related potential range of income tax expense is between zero and $3.6 million.

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

NOTE 12. PENSIONS

Following are the components of net periodic benefit costs:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
U.S. defined-benefit plans
Pension Benefits
Service cost of benefits earned	$	6.2		$	5.8		$	18.5		$	17.4
Interest cost on projected benefit obligation		24.0			22.8			71.9			68.5
Expected return on plan assets		(39.4	)		(36.9	)		(118.4	)		(110.8	)
Amortization of prior service cost		4.1			4.3			12.4			13.0
Recognized net actuarial loss		0.3			0.4			1.1			1.2

Net periodic pension (credit)	$	(4.8	)	$	(3.6	)	$	(14.5	)	$	(10.7	)


Retiree Health and Life Insurance Benefits
Service cost of benefits earned	$	0.7		$	0.6		$	2.1		$	1.9
Interest cost on projected benefit obligation		5.2			5.5			15.5			16.5
Amortization of prior service benefit		(1.4	)		(1.3	)		(4.2	)		(4.1	)
Recognized net actuarial loss		2.9			2.4			8.9			7.3

Net periodic postretirement benefit cost	$	7.4		$	7.2		$	22.3		$	21.6


Non-U.S. defined-benefit plans
Pension Benefits
Service cost of benefits earned	$	2.4		$	2.4		$	7.6		$	7.1
Interest cost on projected benefit obligation		5.3			5.2			16.5			15.7
Expected return on plan assets		(3.8	)		(3.6	)		(11.9	)		(10.9	)
Amortization of transition obligation		—			—			(0.1	)		—
Amortization of prior service cost		0.1			0.1			0.2			0.2
Recognized net actuarial loss		0.4			0.1			1.4			0.3

Net periodic pension cost	$	4.4		$	4.2		$	13.7		$	12.4

~~Item~~Armstrong ~~2. Management’s~~World ~~Discussion~~Industries, ~~and~~Inc., ~~Analysis of Financial Condition~~ and ~~Results~~Subsidiaries ~~of Operations~~

~~The~~Notes ~~following discussion and analysis corresponds~~ to ~~AHI~~Condensed ~~financial~~Consolidated ~~statements.~~Financial ~~Since~~Statements ~~there are no material differences between the financial statements of AHI and Armstrong, the following discussion and analysis pertains to both AHI and Armstrong.~~

~~Proceedings~~(dollar ~~under~~amounts ~~Chapter~~in 11millions, except share data)

OnNOTE ~~December 6, 2000, AWI, the major operating subsidiary of AHI, filed a voluntary petition for relief (the “Filing”) under Chapter 11 of the U~~13.S. ~~Bankruptcy~~PRODUCT ~~Code~~WARRANTIES (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “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 Armstrong’s wholly-owned subsidiaries, Nitram Liquidators, Inc. (“Nitram”) and Desseaux Corporation of North America, Inc. (“Desseaux,” and together with AWI and Nitram, the “Debtors”). The Chapter 11 cases are being jointly administered under case numbers 00-4469, 00-4470, and 00-4471 (the “Chapter 11 Case”).

~~AWI~~We isprovide ~~operating~~direct ~~its~~customer ~~business~~ and ~~managing its properties as a debtor~~end-~~in-possession~~user ~~subject to~~warranties ~~the~~for ~~provisions~~our ofproducts. ~~the~~These ~~Bankruptcy~~warranties ~~Code.~~cover manufacturing ~~Pursuant~~defects tothat ~~the~~would ~~provisions~~prevent of the ~~Bankruptcy~~product ~~Code,~~from ~~AWI~~performing isin ~~not~~line ~~permitted~~with toits ~~pay~~intended ~~any~~and ~~claims~~marketed

Filing Compare · ARMSTRONG HOLDINGS INC /PA/