ARMSTRONG HOLDINGS INC /PA/ - 10-K Annual Report

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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2001

OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from _______ to _______

ARMSTRONG HOLDINGS, INC.
------------------------
(Exact name of registrant as specified in its charter)

Pennsylvania 333-32530 23-3033414
- --------------------------------------------------------------------------------
(State or other jurisdiction of Commission file (I.R.S. Employer
incorporation or organization) number 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
-----------------------------

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

Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common Stock ($1 par value) New York Stock Exchange, Inc.
Preferred Stock Purchase Rights

ARMSTRONG WORLD INDUSTRIES, INC.
--------------------------------
(Exact name of registrant as specified in its charter)

Pennsylvania 1-2116 23-0366390
- --------------------------------------------------------------------------------
(State or other jurisdiction of Commission file (I.R.S. Employer
incorporation or organization) number 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
-----------------------------

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

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
9-3/4% Debentures Due 2008 New York Stock Exchange, Inc.
7.45% Senior Quarterly Interest Bonds Due 2038

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.

Yes X No
------- --------

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

[_]

The aggregate market value of the Common Stock of Armstrong Holdings, Inc. held
by non-affiliates based on the closing price ($3.40 per share) on the New York
Stock Exchange (trading symbol ACK) on February 15, 2002, was approximately
$117.2 million. As of February 15, 2002, the number of shares outstanding of
registrant's Common Stock was 40,702,072. This amount includes the 1,911,533
shares of Common Stock as of December 31, 2001, held by JPMorgan Chase Bank, as
Trustee for the employee stock ownership accounts of the Company's Retirement
Savings and Stock Ownership Plan.

Documents Incorporated by Reference
- -----------------------------------

None

2

TABLE OF CONTENTS
-----------------

SECTION PAGES
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Cautionary Factors ...................................................................... 4 - 5

PART I
------

Item 1. Business ................................................................................ 6 - 13

Item 2. Properties .............................................................................. 14

Item 3. Legal Proceedings ....................................................................... 14 - 17

Item 4. Submission of Matters to a Vote of Security Holders ..................................... 18

PART II
-------

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ............... 19

Item 6. Selected Financial Data ................................................................. 20

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ... 21 - 38

Item 7a. Quantitative and Qualitative Disclosure about Market Risk ............................... 39 - 40

Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Schedules ...................................... 41
Quarterly Financial Information .................................................. 42 - 43
Armstrong Holdings, Inc. and Subsidiaries ........................................ 44 - 81
Armstrong World Industries, Inc. and Subsidiaries ................................ 82 - 118

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .... 119

PART III
--------

Item 10. Directors and Executive Officers ........................................................ 120 - 123

Item 11. Executive Compensation .................................................................. 124 - 130

Item 12. Security Ownership of Certain Beneficial Owners and Management .......................... 130 - 131

Item 13. Certain Relationships and Related Transactions .......................................... 131

PART IV
-------

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ......................... 132 - 139

3

Cautionary Factors That May Affect Future Results
- -------------------------------------------------
(Cautionary Statements Under the Private Securities Litigation Reform Act of
1995)

The disclosures and analysis in this report contain some forward-looking
statements. This discussion about those statements is provided in accordance
with the Private Securities Litigation Reform Act of 1995.

Forward-looking statements 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 or all of the forward-looking statements in this report and in any other
public statements made may turn out to be wrong. They can be affected by
inaccurate assumptions we might make or by known or unknown risks and
uncertainties. Consequently, no forward-looking statement can be guaranteed.
Actual future results may vary materially.

We undertake no obligation to update any forward-looking statements, whether as
a result of new information, future events or otherwise. However, you should
consult any further disclosures we make on related subjects in 10-Q, 8-K, 10-K
or other reports filed with the SEC. Also note the following cautionary
discussion of risks and uncertainties relevant to our businesses. These are some
of the factors that could potentially cause actual results to differ materially
from expected and historical results. Other factors besides those listed here
could also adversely affect our businesses.

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

. Claims of undetermined merit and amount have been asserted against us for
various legal, environmental and tax matters, including AWI's asbestos
related litigation. For more information on these matters, see the
discussion of Legal Proceedings in Item 3 in this report.

. Balancing investment to create future growth in the constraints of a
price-competitive market is a challenge.

. Revenues and earnings can be affected by the level of success of new
product introductions.

. Much of our revenues and earnings are exposed to changes in foreign
currency exchange rates. Where practical, we try to reduce these effects by
matching local currency revenues with costs and local currency assets with
liabilities. We also manage foreign exchange risk with foreign currency
forward contracts and with purchased foreign currency options.

. Notwithstanding our efforts to foresee and plan for the effects of changes
in fiscal circumstances, we cannot predict with certainty all changes in
currency and interest rates, inflation or other related factors affecting
our businesses. 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 this report.

. International operations could be affected by changes in intellectual
property legal protections and remedies, trade regulations, and procedures
and actions affecting production, pricing and marketing of products, as
well as by unstable governments and legal systems, intergovernmental
disputes and possible nationalization.

. Business combinations among our competitors or suppliers could affect our
competitive position in the hard surface floor covering, textile and sports
flooring, wood flooring, ceiling system and wood cabinet businesses.
Similarly, combinations or alliances among our major customers could
increase their purchasing power in dealing with us. And, of course, if we
should enter into one or more business combinations, our business, finances
and capital structure could be affected.

4

. Growth in costs and expenses, raw material price increases (for example
increases in wood prices or in petroleum-based raw materials such as
plasticizers or PVCs), energy cost increases, changes in distribution and
product mix, and the impact of divestitures, restructuring and other
unusual items that could result from evolving business strategies and
organizational restructuring could affect future results.

. Revenues and earnings could be affected by various worldwide economic and
political factors, including improved efficiencies in the European flooring
market, variations in residential and commercial building 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.

. Revenues and earnings could be affected by the extent to which we
successfully achieve integration of and synergies from acquisitions.

. Availability 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 and/or business decisions made by our suppliers
could affect future results.

. Revenues and earnings could be affected by business decisions and business
conditions that impact our major customers and distribution network.

5

PART I
------

ITEM 1. BUSINESS
- -----------------
Armstrong 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.

Armstrong Holdings, Inc. (sometimes referred to as "AHI") is the publicly held
parent holding company of Armstrong. AHI 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 AHI. AHI
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 AHI. The publicly-held
debt of AWI was not affected in the transaction. The following discussion of
Armstrong's business is applicable to AHI and AWI.

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 "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 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.

Three creditors' committees, one representing asbestos personal injury
claimants, one representing asbestos property damage claimants, and the other
representing other unsecured creditors, have been appointed in the Chapter 11
Case. In accordance with the provisions of the Bankruptcy Code, they have the
right to be heard on matters that come before the Court in the Chapter 11 Case.

During the fourth quarter of 2001, U.S. Third Circuit Court of Appeals assigned
U.S. District Judge Alfred M. Wolin of New Jersey to preside over the Chapter 11
Case in the District of Delaware. Judge Wolin also presides over four other
asbestos-related Chapter 11 cases pending in the District of Delaware. Judge
Wolin retained issues relating to asbestos personal injury claims and referred
other asbestos-related issues and bankruptcy-related matters to U.S. Bankruptcy
Judge Randall J. Newsome.

AWI intends to address all prepetition claims, including all asbestos-related
claims, in a plan of reorganization in its Chapter 11 Case. At this time, it is
impossible to predict how such a plan will treat such claims and how a plan will
impact the value of shares of common stock of AHI. Under the provisions of the
Bankruptcy Code, holders of equity interests may not participate under a plan of
reorganization unless the claims of creditors are satisfied in full or unless
creditors accept a reorganization plan which permits holders of equity interests
to participate. The formulation and implementation of a plan of reorganization
in the Chapter 11 Case could take a significant period of time. Currently, AWI
has the exclusive right to file a plan of reorganization until October 4, 2002,
and this date may be further extended by the Court.

6

AWI believes that progress is being made in the negotiations with the asbestos
personal injury claimants and the unsecured creditors committees with respect to
reaching resolution of the principal elements of a reorganization plan. However,
it is not possible to predict whether these negotiations will be successful.
Therefore, the timing of resolution of the Chapter 11 Case remains highly
uncertain.

Bar Date for Filing Claims
- --------------------------
The Court established August 31, 2001 as the bar date for all claims against AWI
except for certain 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 from the Chapter 11 Case. The Court extended the bar date for
claims from the U.S. Internal Revenue Service until March 29, 2002 and for
claims from several environmental agencies until the second quarter of 2002. In
March 2002, the Court ruled that the time to file claims related to asbestos
property damage would not be further extended, but allowed certain alleged
holders of asbestos property damage claims to file a class proof of claim
against AWI. Upon such filing, the Court will later determine whether the
proposed class should be certified. A bar date for asbestos-related personal
injury claims has not been set.

Approximately 4,400 proofs of claim totaling approximately $6.0 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 to determine their validity. 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 already identified and
successfully objected to approximately 900 claims totaling $1.4 billion. These
claims were, primarily, duplicate filings, amendments to previously filed claims
or claims that are not related to AWI. The Court disallowed these claims with
prejudice in January 2002.

In addition to the objected claims described above, approximately 1,000 proofs
of claim totaling approximately $1.9 billion were filed 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. AWI will address
all asbestos-related claims in the future within the Chapter 11 process. See
further discussion regarding AWI's liability for asbestos-related matters in
Item 3.

Approximately 500 proofs of claim totaling approximately $0.8 billion alleging
asbestos-related property damage were filed with the Court. Most of these claims
are new to AWI and many were submitted with insufficient documentation to assess
their validity. AWI has petitioned the Court to disallow approximately 50 claims
totaling approximately $0.5 billion. 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 Item 3.

Approximately 2,000 claims totaling approximately $1.9 billion alleging a right
to payment for financing, environmental, trade debt and other claims were filed
with the Court. AWI has identified approximately 200 of these claims totaling
approximately $20 million that it believes should be disallowed by the Court.
For these categories of claims, AWI has previously recorded approximately $1.6
billion in liabilities. AWI continues to investigate the claims to determine
their validity.

AWI continues to evaluate claims. AWI has recorded liability amounts for those
claims that can be reasonably estimated and for which it believes are probable
of being allowed by the Court. At this time, it is impossible to reasonably
estimate the value of all the claims 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.

7

Financing
- ---------
As of December 31, 2001, AWI had no outstanding debt borrowings under its $200
million debtor-in-possession credit facility (the "DIP Facility") and AWI had
$193.8 million of cash and cash equivalents, excluding cash held by its
non-debtor subsidiaries. As of December 31, 2001, AWI had approximately $8.4
million in letters of credit which were issued pursuant to the DIP Facility.
Borrowings are limited to an adjusted amount of receivables, inventories and
PP&E. AWI believes that the DIP Facility, together with cash generated from
operations, will be more than adequate to address its liquidity needs.
Borrowings under the DIP Facility, if any, and obligations to reimburse draws
upon the letters of credit constitute superpriority administrative expense
claims in the Chapter 11 Case. The DIP Facility is scheduled to expire on
December 6, 2002.

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

Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that
are subject to compromise and report them separately on the balance sheet. See
Note 4 in the Consolidated Financial Statements for detail of the liabilities
subject to compromise at December 31, 2001 and 2000. 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 consolidated
balance sheet based upon maturity date. AWI's estimated liability for personal
injury asbestos claims is also recorded in liabilities subject to compromise.
See Item 3 for further discussion of AWI's asbestos liability.

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.

SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as Chapter 11
reorganization costs, net. Accordingly, AWI recorded the following Chapter 11
reorganization activities in the fourth quarter and full year of 2001:

Three Months Ended Year Ended
(millions) December 31, 2001 December 31, 2001
- ---------- -------------------- -------------------

Professional fees $ 7.3 $ 24.5
Interest income, post petition (1.1) (5.1)
Reductions to prepetition liabilities - (2.0)
Termination of prepetition lease obligation - (5.9)
Other (income) expense directly related to bankruptcy, net 0.1 1.0
------- -------
Total Chapter 11 reorganization costs, net $ 6.3 $ 12.5
======= =======

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

Interest income in the above table is from short-term investments of cash earned
by AWI subsequent to the Filing.

Reductions to prepetition liabilities represent the difference between the
prepetition invoiced amount and the actual cash payment made to certain vendors
due to negotiated settlements. These payments of prepetition obligations were
made pursuant to authority granted by the Court.

Termination of prepetition lease obligation 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 rejection of the lease contract in the Chapter 11 Case. This
amount was previously accrued in the third quarter of 2000 as part of a
restructuring charge when the decision to vacate the premises was made.

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 consolidated financial statements.
Further, a plan of reorganization could materially change the amounts and
classifications reported in the consolidated financial statements.

8

Discontinued Operations
- -----------------------
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 and a
new review of the business, industry and overall economy conducted by new senior
management. Accordingly, this segment is no longer classified as a discontinued
operation and amounts have been reclassified into operations as required by
Emerging Issues Task Force ("EITF") Issue No. 90-16 - "Accounting for
Discontinued Operations Subsequently Retained". All previous periods have been
reclassified to conform to the current presentation.

On May 31, 2000, Armstrong completed its sale of all of the entities, assets and
certain liabilities comprising its Insulation Products segment to Orion
Einundvierzigste Beteiligungsgesellschaft Mbh, a subsidiary of the Dutch
investment firm Gilde Investment Management N.V. for $264 million. The
transaction resulted in an after tax gain of $114.8 million, or $2.86 per share
in 2000.

See Note 6 in the Consolidated Financial Statements for further discussion of
discontinued operations.

Industry Segments
- -----------------

Financial Information about Industry Segments
- ---------------------------------------------
See Note 3 in the Consolidated Financial Statements for financial information on
Armstrong's reportable industry segments.

Narrative Description of Business
- ---------------------------------
Armstrong conducts its business through the following business segments:

Resilient Flooring
- ------------------
Armstrong is a worldwide manufacturer of a broad range of resilient floor
coverings for homes and commercial and institutional buildings, which are sold
with adhesives, installation and maintenance materials and accessories.
Resilient flooring, in both sheet and tile forms, together with laminate
flooring and linoleum, are sold in a wide variety of types, designs, and colors.
Included are types of flooring that offer such features as ease of installation,
reduced maintenance (no-wax), and cushioning for greater underfoot comfort.
Resilient flooring products are sold to commercial, residential and
institutional customers through wholesalers, retailers (including large home
centers and buying groups), contractors, and to the hotel/motel and manufactured
homes industries.

Building Products
- -----------------
The Building Products segment includes commercial and residential ceiling
systems. Commercial suspended ceiling systems, designed for use in shopping
centers, offices, schools, hospitals, and other commercial and institutional
settings, are available in numerous colors, performance characteristics and
designs and offer characteristics such as acoustical control, accessibility to
the plenum (the area above the ceiling), rated fire protection, and aesthetic
appeal. Armstrong sells commercial ceiling materials and accessories to ceiling
systems contractors and to resale distributors. Ceiling materials for the home
provide noise reduction and incorporate features intended to permit ease of
installation. These residential ceiling products are sold through wholesalers
and retailers (including large home centers). Framework (grid) products for
Armstrong suspension ceiling systems products are manufactured through a joint
venture with Worthington Industries and are sold by both Armstrong and the joint
venture.

Wood Flooring
- -------------
The Wood Flooring segment manufactures and distributes wood and other flooring
products. The Wood Flooring segment also distributes laminate flooring products.
These products are used primarily in residential new construction and
remodeling, with some commercial applications such as stores and restaurants.
Wood Flooring sales are generally made through independent wholesale flooring
distributors and retailers (including large home centers and buying groups)
under the brand names Bruce, Hartco and Robbins.

Cabinets
- --------
The Cabinets segment manufactures kitchen and bathroom cabinetry and related
products, which are used primarily in residential new construction and
remodeling. Cabinets are sold through both independent and Armstrong-owned
distributors under the brand names Bruce and IXL.

9

Textiles & Sports Flooring
- --------------------------
The Textiles and Sports Flooring business segment manufactures carpeting and
sports flooring products that are mainly sold in Europe. The carpeting products
consist principally of carpet tiles and broadloom used in commercial
applications as well as the leisure and travel industry. The sports flooring
products include artificial turf surfaces and indoor gymnasium floors. Both
product groups are sold through wholesalers, retailers and contractors.

Major Customers
- ---------------
Armstrong businesses principally sell products through building products
distributors, who re-sell our products to retailers, builders, contractors,
installers and others. Armstrong also sells a significant portion of our
products to home center chains and industry buying groups. For example, in 2001,
Armstrong sales to The Home Depot, Inc. totaled approximately $340.8 million
compared to approximately $373.2 million and $344.8 million in 2000 and 1999,
respectively. No other customer accounted for more than 10% of Armstrong's
revenue.

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

Business Principal Raw Materials
- -------------------------- --------------------------------------------------

Resilient Flooring Synthetic resins, plasticizers, PVC, latex,
linseed oil, limestone, films, pigments and inks

Building Products Mineral fibers and fillers, clays, starches,
newspaper, and perlite, as well as steel used in
the production of metal ceilings and manufacturing
of ceiling grids

Wood Flooring Lumber, veneer, acrylics, and plywood

Cabinets Lumber, veneer, plywood, particleboard and
fiberboard

Textiles and Sports Yarn, latex, bitumen and wool
Flooring

Armstrong also purchases significant amounts of packaging materials for all
products and uses substantial amounts of energy such as electricity and natural
gas and water in our manufacturing operations. In general, adequate supplies of
raw materials were available to all of Armstrong's businesses. Armstrong cannot
guarantee that a significant shortage of one raw material or another will not
occur, however.

Customers' orders for Armstrong products are typically for immediate shipment.
Thus, in each business group, Armstrong keeps sufficient inventory on hand to
satisfy orders, or manufactures product to meet delivery dates specified in
orders. As a result, there historically has been no material backlog in any
industry segment.

Patent and Intellectual Property Rights
- ---------------------------------------
Patent protection is important to Armstrong's business in the United States and
other markets. Armstrong's competitive position has been enhanced by U.S. and
foreign patents on products and processes developed or perfected within
Armstrong or obtained through acquisition or license. In addition, Armstrong
also benefits from our trade secrets for certain products and processes.

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

10

Armstrong products are sold around the world under numerous brand-name
trademarks that are considered in the aggregate to be of material importance.
Certain of Armstrong trademarks, including without limitation, house marks
Armstrong, Bruce, Hartco, Robbins, and DLW, and product line marks Ceramaguard,
Cirrus, Corlon, Cortega, Designer Solarian, Excelon, Fundamentals, i-Ceilings,
Medintech, Minatone, Natural Inspirations, Second Look, Swiftlock, ToughGuard,
Traffic Zone, Travertone and Ultima are important to Armstrong's business
because of their significant brand name recognition. Trademark protection
continues in some countries as long as the mark is used, in other countries, as
long as it is registered. Registrations are generally for fixed, but renewable,
terms.

Competition
- -----------
There is strong competition in all of the industry segments in which Armstrong
does business. Competition in each industry segment and each geographic area
where Armstrong does business includes numerous companies. Principal methods of
competition include price, product performance and service. In addition, product
styling is a significant component of competition. Increasing competition in the
U.S. from worldwide producers is apparent in Armstrong's businesses. Over recent
years, there has continued to be excess production capacity in many geographic
markets, which tends to increase price competition.

Research & Development
- ----------------------
Research and development ("R&D") activities are important and necessary in
helping Armstrong improve its products. Principal research and development
functions include the development and improvement of products and manufacturing
processes.

Armstrong spent $56.3 million in 2001, $60.3 million in 2000 and $48.9 million
in 1999 on research and development activities worldwide.

Environmental Matters
- ---------------------
Most of Armstrong's manufacturing and certain of Armstrong's research facilities
are affected by various federal, state and local 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 incurred capital expenditures of approximately $8.4
million in 2001, $6.2 million in 2000 and $5.5 million in 1999 associated with
environmental compliance and control facilities. Armstrong anticipates that
annual expenditures for those purposes will not change materially from recent
experience. Armstrong does not anticipate that it will incur significant capital
expenditures in order to meet the requirements of the Clean Air Act of 1990 and
the final implementing regulations promulgated by various state agencies.
However, applicable requirements under the Clean Air Act and other 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.

As 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 sites.
In most cases, Armstrong 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 second quarter of
2002.

Estimates of Armstrong's future environmental liability at any of the Superfund
sites or current or former plant sites are based on evaluations of currently
available facts regarding each individual site and consider factors such as
Armstrong's 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 any Superfund site, Armstrong's 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 costs. As a result,
Armstrong's estimated liability reflects only Armstrong's expected share. In
determining the probability of contribution, Armstrong considers the solvency of
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.

11

Liabilities of $16.6 million at December 31, 2001 and $15.4 million at December
31, 2000 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 the liability, that estimate
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 December
31, 2001 and December 31, 2000 environmental liabilities are classified as
prepetition liabilities subject to compromise. As a general rule, such
prepetition liabilities that do not preserve company assets are addressed in the
Chapter 11 Case.

The 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 consolidated financial statements and are either
available through settlement or anticipated to be recovered through negotiation
or litigation.

Actual costs 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,
Armstrong believes that 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, liquidity or results of
operations, although the recording of future costs may be material to earnings
in such future period.

Employees
- ---------
As of December 31, 2001, we had approximately 16,700 full and part-time
employees around the world, of whom approximately 5,100 are located outside of
the United States. About 52% of the approximately 8,500 hourly or salaried
production and maintenance employees in the United States are represented by
labor unions.

Armstrong employee and labor relations remained good in 2001. In the fall of
2001, Armstrong concluded negotiation of a collective bargaining agreement with
the International Association of Machinists and Aerospace Workers at its
Lancaster, Pennsylvania plant. Throughout 2002, Armstrong will begin individual
negotiations of several collective bargaining agreements covering most of its
other represented locations.

Geographic Areas
- ----------------
See Note 3 in the Consolidated Financial Statements for financial information by
geographic areas.

Armstrong's non-U.S. operations are subject to local government laws concerning
restrictions on and transfers of investments, tariffs, personnel administration,
and other matters. In addition, consolidated earnings that originate outside the
U.S. are subject to both U.S. and non-U.S. tax laws, to certain exchange and
currency controls, and to the effects of currency fluctuations.

Financial Information Filed With the Court
- ------------------------------------------
As previously disclosed, on December 6, 2000, AWI and two of its subsidiaries
(collectively, the "Debtors") filed voluntary petitions for relief under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the District of Delaware ("the Court").

Armstrong reports its operating results and financial statements on a
consolidated basis. These public reports are available through the U.S.
Securities and Exchange Commission and other sources, and are also provided free
of charge to investors who contact Armstrong. However, under applicable
bankruptcy law, AWI is now required to file periodically with the Court various
documents, including certain financial information on an unconsolidated basis.
This information includes statements, schedules, and monthly operating reports
in forms prescribed by Federal Bankruptcy Law.

Armstrong cautions that such materials are prepared according to requirements
under Federal Bankruptcy Law. While they accurately provide then-current
information required under Bankruptcy Law, they are nonetheless unconsolidated,
unaudited, and are prepared in a format different from that used in Armstrong's
consolidated financial statements filed under the securities laws. Accordingly,
Armstrong believes the substance and format do not allow meaningful comparison
with Armstrong's regular publicly disclosed consolidated financial statements.
The materials filed with the Court are not prepared for the purpose of providing
a basis for an investment decision relating to the stock of AHI or the debt
securities of AWI, or for comparison with other financial information filed with
the SEC.

12

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

13

ITEM 2. PROPERTIES
- -------------------
Armstrong and AHI world headquarters are in Lancaster, Pennsylvania. Armstrong
owns a 100-acre, multi-building campus comprising the site of our corporate
headquarters, most operational headquarters, and our U.S. R&D operations and
marketing and service headquarters. Altogether, our headquarters operations
occupy over 986,000 square feet of floor space.

We produce and market Armstrong products and services throughout the world,
owning and operating 50 manufacturing plants in 15 countries. Twenty-nine of
these facilities are located throughout the United States. In addition,
Armstrong has an interest through joint ventures in 9 additional plants in 5
countries.

Number of
Business Segment Plants Location of Principal Facilities
- ---------------- ----------- -----------------------------------------

Resilient Flooring 14 California, Illinois, Oklahoma, Pennsylvania,
Canada, Germany, Sweden and the U.K.

Building Products 15 Alabama, Florida, Georgia, Oregon, Pennsylvania,
China, France, Germany and the U.K.

Wood Flooring 13 Arkansas, Tennessee, Texas and West Virginia

Cabinets 3 Nebraska, Pennsylvania and Tennessee

Textiles and 5 Belgium, Germany and The Netherlands
Sports Flooring

Sales offices are leased and owned worldwide, and leased facilities are utilized
to supplement Armstrong's owned warehousing facilities.

Productive capacity and the extent of utilization of Armstrong facilities are
difficult to quantify with certainty because in any one facility, maximum
capacity and utilization vary periodically depending upon the product that is
being manufactured, and individual facilities manufacture multiple products.
Armstrong believes its facilities have sufficient productive capacity to meet
its current and anticipated future needs. Armstrong believes that its various
facilities are adequate and suitable. Additional incremental investments in
plant facilities are made as appropriate to balance capacity with anticipated
demand, improve quality and service, and reduce costs.

ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Asbestos-related Litigation
- ---------------------------
AWI is a defendant in personal injury claims and property damage 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.

Background
- ----------
AWI's involvement in asbestos litigation relates primarily to its participation
in the insulation contracting business. From around 1910 to 1933, AWI
manufactured and installed some high-temperature insulation products, including
some that contained asbestos. In 1939, AWI expanded its contract installation
service to provide a greater range of high and low temperature contracting
services to its customers. AWI generally manufactured its own low temperature
insulation products, but did not manufacture the high temperature products used
in its contracting operations. Some of the high temperature products furnished
and installed in the contracting operations contained asbestos.

Effective January 1, 1958, AWI separated its insulation contracting business
into a separate, independent subsidiary, Armstrong Contracting and Supply
Corporation ("ACandS"). From January 1, 1958 through August 31, 1969, ACandS
operated as an independent subsidiary in the insulation contracting business.
During this time period, AWI licensed certain tradenames and trademarks to
ACandS, which ACandS placed on certain insulation products manufactured by
others. Other than two specific products, AWI did not manufacture or sell any
asbestos-containing thermal insulation products during this period. In August
1969, AWI sold the ACandS subsidiary to a group of ACandS management

14

employees and ACandS continues to operate independently as a subsidiary of Irex
Corporation. AWI had no involvement with any asbestos-containing insulation
materials after 1969.

In addition, AWI manufactured some resilient flooring that contained
encapsulated asbestos until the early 1980's. AWI also manufactured some gasket
materials that contained encapsulated asbestos until the mid-1980's.

Asbestos-Related Personal Injury Claims
- ---------------------------------------
Before filing for relief under the Bankruptcy Code, AWI pursued broad-based
settlements of asbestos-related personal injury claims through the Center for
Claims Resolution (the "Center"). The Center had reached Strategic Settlement
Program ("SSP") agreements with law firms that covered approximately 130,000
claims that named AWI as a defendant. As a result of the Filing, AWI's
obligations with respect to payments called for under these settlements will be
determined in its Chapter 11 Case.

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 with respect to
asbestos-related personal injury claims, including payments pursuant to the
outstanding SSP agreements. A separate creditors' committee representing the
interests of asbestos personal injury claimants has been appointed 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. AWI believes that the Chapter 11 process
provides it with the opportunity to comprehensively address its asbestos-related
personal injury liability in one forum. It is anticipated that all present and
future asbestos-related personal injury claims will be resolved in the Chapter
11 Case.

Asbestos-Related Personal Injury Liability
- ------------------------------------------
In evaluating its estimated asbestos-related personal injury liability prior to
the Filing, AWI reviewed, among other things, recent and historical settlement
amounts, the incidence of past and recent claims, the mix of the injuries and
occupations of the plaintiffs, the number of cases pending against it and the
status and results of broad-based settlement discussions. Based on this review,
AWI estimated its cost to defend and resolve probable asbestos-related personal
injury claims. This estimate was highly uncertain due to the limitations of the
available data and the difficulty of forecasting with any certainty the numerous
variables that could affect the range of the liability.

AWI believes the range of probable and estimable liability is more uncertain now
than previously. There are significant differences in the way the
asbestos-related personal injury claims may be addressed under the bankruptcy
process when compared to the tort system. Accordingly, AWI currently is unable
to ascertain how prior experience with the number of claims and the amounts to
settle claims will impact its ultimate liability in the context of its Chapter
11 Case.

As of September 30, 2000, AWI had recorded a liability of $758.8 million for its
asbestos-related personal injury liability that it determined was probable and
estimable through 2006. Due to the increased uncertainty created as a result of
the Filing, 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
December 31, 2001 and December 31, 2000 is $690.6 million, which is recorded in
liabilities subject to compromise. Due to the uncertainties created as a result
of the Filing and how the liability may be resolved, it is not possible to
reasonably estimate the ultimate liability. It is likely, however, that the
actual liability will be significantly higher than the recorded liability. As
the Chapter 11 Case proceeds, there should be more clarity as to the extent of
the liability.

Collateral Requirements
- -----------------------
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. Recently, Judge Alfred M. Wolin of the Federal District Court

15

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 property Damage Litigation
- -------------------------------------------
Over 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. The previous claims that were 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 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. Upon such filing, the Court will later determine whether
the proposed class should be certified. Consistent with prior periods and due to
increased uncertainty, AWI has not recorded any liability related to these
claims as of December 31, 2001. See Item 1 for further discussion of the
property damage claims received by the August 31, 2001 claims bar date 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 Recovery Proceedings
- ------------------------------
A 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 materials. AWI has entered into settlements with a number of
the carriers resolving its coverage issues. However, an alternative dispute
resolution ("ADR") procedure is under way against certain carriers to determine
the percentage of resolved and unresolved claims that are nonproducts claims, to
establish the entitlement to such coverage and to determine whether and how much
reinstatement of prematurely exhausted products hazard insurance is warranted.
The nonproducts coverage potentially available is substantial and includes
defense costs in addition to limits.

During 1999, AWI received preliminary decisions in the initial phases of the
trial proceeding of the ADR, which were generally favorable to AWI on a number
of issues related to insurance coverage. However, during the first quarter of
2001, a new trial judge was selected for the ADR. The new trial judge conducted
hearings in 2001 and determined not to rehear matters decided by the previous
judge. In the first quarter of 2002, the new trial judge concluded the ADR trial
proceeding with findings in favor of AWI on substantially all key issues. The
trial proceeding is subject to an appeal as part of the ADR process. One of the
insurance carriers, Reliance Insurance Company, was placed under an order of
rehabilitation by a state insurance department during May 2001 and an order of
liquidation during October 2001.

Another insurer (Century Indemnity Company), 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. 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 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. AWI believes it is highly unlikely the
insurer will prevail in this matter.

Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $214.1 million is recorded as of December 31, 2001 compared to $268.3 million
as of December 31, 2000. The reduction is due to cash receipts during the second
and third quarters of 2001 and management's current assessment of probable
insurance recoveries, which included the order of liquidation for Reliance
Insurance Company. Of the total recorded asset at December 31, 2001,
approximately $49.0 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

16

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 the
financial condition of the insurers, AWI may revise its estimate of probable
insurance recoveries. Approximately $82 million of the $214.1 million asset is
determined from agreed coverage in place and is therefore directly related to
the amount of the liability. Of the $214.1 million asset, $22.0 million has been
recorded as a current asset as of December 31, 2001 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.

Cash Flow Impact
- ----------------
As a result of the Chapter 11 Filing, AWI did not make any payments for
asbestos-related claims in December 2000 and all of 2001. In the first eleven
months of 2000, AWI paid $226.9 million for asbestos-related claims. AWI
received $32.2 million in asbestos-related insurance recoveries during 2001
compared to $27.7 million in 2000. 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.

Conclusion
- ----------
Many uncertainties exist surrounding the financial impact of AWI's involvement
with asbestos litigation. These uncertainties include the impact of the Filing
and the Chapter 11 process, the number of future claims to be filed, 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. AWI has not
revised its previously recorded liability for asbestos-related personal injury
claims. During 2001, AWI reduced its previously recorded insurance asset by
$32.2 million for cash receipts and by $22.0 million for management's current
assessment of probable insurance recoveries. The $22.0 million reduction was
recorded as a charge for asbestos liability, net, in the accompanying
consolidated statement of earnings. AWI will continue to review its
asbestos-related liability periodically, although it is likely that no changes
will be made to the liability until later in the Chapter 11 Case as significant
developments arise. Although not estimable, it is likely that AWI's total
exposure to asbestos-related personal injury claims will be significantly higher
than the recorded liability. Any adjustment to the estimated liability or
insurance asset could be material to the financial statements.

Environmental Matters
- ---------------------
See discussion of Environmental Matters under Item 1 of this report.

Other Litigation
- ----------------
About 350 former Armstrong employees that were separated in two divestitures in
2000 have brought a purported class action against the Retirement Committee of
AWI, named and unnamed members of the Retirement Committee, and the Retirement
Savings and Stock Ownership Plan (RSSOP). The case is pending in the United
States District Court (Eastern District of PA). A similar proof of claim has
been filed against AWI in the Chapter 11 Case. Plaintiffs allege breach of
Employee Retirement Income Security Act (ERISA) fiduciary duties and other
violations of ERISA pertaining to losses in their RSSOP accounts, which were
invested in Armstrong common stock. Losses are alleged to be in the range of
several million dollars. AHI believes there are strong substantive defenses to
the allegations.

17

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

AHI's Annual Meeting of Shareholders was held December 10, 2001. The only matter
addressed at the meeting was the election of three directors. The following
three directors whose terms expired at the 2001 annual meeting were re-elected:
Judith R. Haberkorn; James E. Marley; Jerre L. Stead. Continuing directors
include: H. Jesse Arnelle; Donald C. Clark; Michael D. Lockhart; Van C.
Campbell; John A. Krol; David W. Raisbeck; M. Edward Sellers.

The following table shows the voting tallies for each of the nominees:

---------------------------------------------------------------------------------------------------
Director Votes cast for Votes withheld/cast Number of abstentions and
against broker non-votes
---------------------------------------------------------------------------------------------------

Judith R. Haberkorn 29,427,301 968,156 0
---------------------------------------------------------------------------------------------------
James E. Marley 29,443,375 952,082 0
---------------------------------------------------------------------------------------------------
Jerre L. Stead 29,426,391 969,066 0
---------------------------------------------------------------------------------------------------

18

PART II
-------

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

Armstrong Holding's Common Stock is traded on the New York Stock Exchange, Inc.
As of February 15, 2002, there were approximately 7,213 holders of record of
Armstrong Holding's Common Stock.

During 2001, Armstrong issued a total of 2,472 shares of restricted Common Stock
to nonemployee directors of Armstrong pursuant to Armstrong's Restricted Stock
Plan for Nonemployee Directors. Given the small number of persons to whom these
shares were issued, applicable restrictions on transfer and the information
regarding Armstrong possessed by the directors, these shares were issued without
registration in reliance on Section 4(2) of the Securities Act of 1933, as
amended.

2001 First Second Third Fourth Total Year
---- --------- ---------- --------- ---------- --------------

Dividends per share of common stock $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Price range of common stock--high $ 5.69 $ 4.05 $ 3.74 $ 3.80 $ 5.69
Price range of common stock--low $ 2.06 $ 3.20 $ 2.20 $ 2.34 $ 2.06

2000
----

Dividends per share of common stock $ 0.48 $ 0.48 $ 0.48 $ 0.00 $ 1.44
Price range of common stock--high $36.81 $20.50 $17.38 $12.19 $36.81
Price range of common stock--low $16.06 $15.30 $11.81 $ 0.75 $ 0.75

The DIP Facility stipulates that AWI will not declare or pay any dividends,
directly or indirectly.

Pursuant to a review of the stock exchange listings of AHI, management concluded
that the listing with the New York Stock Exchange is sufficient to maintain an
effective and liquid market for AHI's securities. On February 25, 2002, the
Board of Directors authorized management to voluntarily de-list AHI's common
stock from the Philadelphia and Pacific stock exchanges.

19

ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------

The following data is presented for continuing operations.

(Dollars in millions except for per-share data) For Year 2001 2000 1999 1998 1997
- -------------------------------------------------------------- ---------- ----------- ---------- ---------- ----------

Income statement data:
Net sales $ 3,135.4 $ 3,249.4 $ 3,322.9 $ 2,592.9 $ 2,115.4
Cost of goods sold 2,361.8 2,384.8 2,290.5 1,805.7 1,498.3
Selling, general and administrative expenses 596.2 597.2 607.8 447.8 309.2
Charge for asbestos liability, net 22.0 236.0 335.4 274.2 --
Restructuring and reorganization charges (reversals), net 9.0 18.8 (1.4) 74.4 --
Goodwill amortization 22.8 23.9 25.5 10.7 1.6
Equity (earnings) loss from affiliates, net (16.5) (18.0) (16.8) (13.8) 29.7
---------- ----------- ---------- ---------- ----------
Operating income (loss) 140.1 6.7 81.9 (6.1) 276.6
Interest expense 13.1 102.9 105.2 62.2 28.0
Other (income), net (1.2) (76.7) (6.6) (1.7) (2.2)
---------- ----------- ---------- ---------- ----------
Earnings (loss) from continuing operations before
Chapter 11 reorganization costs and income taxes 128.2 (19.5) (16.7) (66.6) 250.8
Chapter 11 reorganization costs, net 12.5 103.3 -- -- --
---------- ----------- ---------- ---------- ----------
Earnings (loss) from continuing operations before
income taxes 115.7 (122.8) (16.7) (66.6) 250.8
Income tax expense (benefit) 42.5 (37.7) (0.5) (23.6) 94.4
---------- ----------- ---------- ---------- ----------
Earnings (loss) from continuing operations 73.2 (85.1) (16.2) (43.0) 156.4
Per common share - basic (a) 1.81 (2.12) (0.41) (1.08) 3.85
Per common share - diluted (a) 1.79 (2.12) (0.41) (1.08) 3.81
Net earnings (loss) 92.8 12.2 14.3 (9.3) 185.0
Per common share - basic (a) 2.29 0.30 0.36 (0.23) 4.55
Per common share - diluted (a) 2.27 0.30 0.36 (0.23) 4.50
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends declared per share of common stock -- 1.44 1.92 1.88 1.72
Capital expenditures 127.8 159.1 186.6 175.0 147.1
Aggregate cost of acquisitions, net of cash acquired 5.6 6.5 3.8 1,175.7 4.2
Depreciation and amortization 156.8 164.4 158.4 131.1 120.7
Average number of employees 16,777 16,456 16,912 13,865 9,280
Average number of common shares outstanding (millions) 40.5 40.2 39.9 39.8 40.6
- ------------------------------------------------------------------------------------------------------------------------------------
Balance sheet data (December 31):
Working capital $ 749.9 $ 610.4 $ 314.6 $ 445.4 $ 201.3
Net property, plant and equipment 1,283.7 1,321.0 1,357.5 1,411.9 885.6
Total assets 4,034.4 4,005.2 4,081.6 4,183.9 2,296.4
Liabilities subject to compromise 2,357.6 2,385.2 -- -- --
Net long-term debt (b) 50.3 56.9 1,412.9 1,562.8 223.1
Total debt as a percentage of total capital (c) 9.0% 14.3% 69.0% 73.0% 39.1%
Shareholders' equity $ 760.4 $ 665.1 $ 679.2 $ 709.7 $ 810.6
Book value per share of common stock 18.68 16.30 16.87 17.57 20.20
Number of shareholders 7,162 6,899 6,515 6,868 7,137
Common shares outstanding (millions) 40.7 40.8 40.3 39.8 40.1
Market value per common share $ 3.41 $ 2.06 $ 33.38 $ 60.31 $ 74.75

Notes:

Prior period amounts reflect reclassifications to conform with Emerging Issue
Task Force Issue Nos. 00-010, 00-014 and 00-022 (see Note 2 in the Consolidated
Financial Statements).

(a) See definition of basic and diluted earnings per share in Note 2 in the
Consolidated Financial Statements.
(b) 2001 and 2000 net long-term debt excludes debt subject to compromise.
(c) Total debt includes short-term debt, current installments of long-term debt
and long-term debt, but excludes debt subject to compromise in 2001 and
2000. Total capital includes total debt and total shareholders' equity.

From 1997 to July 1998, ceramic tile results were reported under the equity
method. From July 1998 to November 1998, ceramic tile operations were reported
under the cost method. Beginning in 1998, consolidated results include
Armstrong's acquisitions of Triangle Pacific (now reported as Wood Flooring and
Cabinets) and DLW (included in Resilient Flooring).

20

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

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

2001 COMPARED WITH 2000
- -----------------------

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 "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 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.

Three creditors' committees, one representing asbestos personal injury
claimants, one representing asbestos property damage claimants, and the other
representing other unsecured creditors, have been appointed in the Chapter 11
Case. In accordance with the provisions of the Bankruptcy Code, they have the
right to be heard on matters that come before the Court in the Chapter 11 Case.

During the fourth quarter of 2001, U.S. Third Circuit Court of Appeals assigned
U.S. District Judge Alfred M. Wolin of New Jersey to preside over the Chapter 11
Case in the District of Delaware. Judge Wolin also presides over four other
asbestos-related Chapter 11 cases pending in the District of Delaware. Judge
Wolin retained issues relating to asbestos personal injury claims and referred
other asbestos-related issues and bankruptcy-related matters to U.S. Bankruptcy
Judge Randall J. Newsome.

AWI intends to address all prepetition claims, including all asbestos-related
claims, in a plan of reorganization in its Chapter 11 Case. At this time, it is
impossible to predict how such a plan will treat such claims and how a plan will
impact the value of shares of common stock of AHI. Under the provisions of the
Bankruptcy Code, holders of equity interests may not participate under a plan of
reorganization unless the claims of creditors are satisfied in full or unless
creditors accept a reorganization plan which permits holders of equity interests
to participate. The formulation and implementation of a plan of reorganization
in the Chapter 11 Case could take a significant period of time. Currently, AWI
has the exclusive right to file a plan of reorganization until October 4, 2002,
and this date may be further extended by the Court.

AWI believes that progress is being made in the negotiations with the asbestos
personal injury claimants and the unsecured creditors committees with respect to
reaching resolution of the principal elements of a reorganization plan. However,
it is not possible to predict whether these negotiations will be successful.
Therefore, the timing of resolution of the Chapter 11 Case remains highly
uncertain.

Bar Date for Filing Claims
- --------------------------
The Court established August 31, 2001 as the bar date for all claims against AWI
except for certain 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 from the Chapter 11 Case. The Court extended the bar date for
claims from the U.S. Internal Revenue Service until March 29, 2002 and for
claims from several environmental agencies until the second quarter of 2002. In
March 2002,

21

the Court ruled that the time to file claims related to asbestos property damage
would not be further extended, but allowed certain alleged holders of asbestos
property damage claims to file a class proof of claim against AWI. Upon such
filing, the Court will later determine whether the proposed class should be
certified. A bar date for asbestos-related personal injury claims has not been
set.

Approximately 4,400 proofs of claim totaling approximately $6.0 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 to determine their validity. 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 already identified and
successfully objected to approximately 900 claims totaling $1.4 billion. These
claims were, primarily, duplicate filings, amendments to previously filed claims
or claims that are not related to AWI. The Court disallowed these claims with
prejudice in January 2002.

In addition to the objected claims described above, approximately 1,000 proofs
of claim totaling approximately $1.9 billion were filed 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. AWI will address
all asbestos-related claims in the future within the Chapter 11 process. See
further discussion regarding AWI's liability for asbestos-related matters in
Item 3.

Approximately 500 proofs of claim totaling approximately $0.8 billion alleging
asbestos-related property damage were filed with the Court. Most of these claims
are new to AWI and many were submitted with insufficient documentation to assess
their validity. AWI has petitioned the Court to disallow approximately 50 claims
totaling approximately $0.5 billion. 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 Item 3.

Approximately 2,000 claims totaling approximately $1.9 billion alleging a right
to payment for financing, environmental, trade debt and other claims were filed
with the Court. AWI has identified approximately 200 of these claims totaling
approximately $20 million that it believes should be disallowed by the Court.
For these categories of claims, AWI has previously recorded approximately $1.6
billion in liabilities. AWI continues to investigate the claims to determine
their validity.

AWI continues to evaluate claims. AWI has recorded liability amounts for those
claims that can be reasonably estimated and for which it believes are probable
of being allowed by the Court. At this time, it is impossible to reasonably
estimate the value of all the claims 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
- ---------
As of December 31, 2001, AWI had no outstanding debt borrowings under its $200
million debtor-in-possession credit facility (the "DIP Facility") and AWI had
$193.8 million of cash and cash equivalents, excluding cash held by its
non-debtor subsidiaries. As of December 31, 2001, AWI had approximately $8.4
million in letters of credit which were issued pursuant to the DIP Facility.
Borrowings are limited to an adjusted amount of receivables, inventories and
PP&E. AWI believes that the DIP Facility, together with cash generated from
operations, will be more than adequate to address its liquidity needs.
Borrowings under the DIP Facility, if any, and obligations to reimburse draws
upon the letters of credit constitute superpriority administrative expense
claims in the Chapter 11 Case. The DIP Facility is scheduled to expire on
December 6, 2002.

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.

22

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. See
Note 4 in the Consolidated Financial Statements for detail of the liabilities
subject to compromise at December 31, 2001 and 2000. 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 consolidated
balance sheet based upon maturity date. AWI's estimated liability for personal
injury asbestos claims is also recorded in liabilities subject to compromise.
See Item 3 for further discussion of AWI's asbestos liability.

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.

SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as Chapter 11
reorganization costs, net. Accordingly, AWI recorded the following Chapter 11
reorganization activities in the fourth quarter and full year of 2001:

Three Months Ended Year Ended
(millions) December 31, 2001 December 31, 2001
----------------- -----------------

Professional fees $ 7.3 $ 24.5
Interest income, post petition (1.1) (5.1)
Reductions to prepetition liabilities - (2.0)
Termination of prepetition lease obligation - (5.9)
Other (income) expense directly related to bankruptcy, net 0.1 1.0
------- -------
Total Chapter 11 reorganization costs, net $ 6.3 $ 12.5
======= =======

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

Interest income in the above table is from short-term investments of cash earned
by AWI subsequent to the Filing.

Reductions to prepetition liabilities represent the difference between the
prepetition invoiced amount and the actual cash payment made to certain vendors
due to negotiated settlements. These payments of prepetition obligations were
made pursuant to authority granted by the Court.

Termination of prepetition lease obligation 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 rejection of the lease contract in the Chapter 11 Case. This
amount was previously accrued in the third quarter of 2000 as part of a
restructuring charge when the decision to vacate the premises was made.

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 consolidated financial statements.
Further, a plan of reorganization could materially change the amounts and
classifications reported in the consolidated financial statements.

Discontinued Operations
- -----------------------
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 and a
new review of the business, industry and overall economy conducted by new senior
management. Accordingly, this segment is no longer classified as a discontinued
operation and amounts have been reclassified into operations as required by
Emerging Issue Task Force ("EITF") Issue No. 90-16 - "Accounting for
Discontinued Operations Subsequently Retained". All prior periods have been
reclassified to conform to the current presentation.

Based on the expected net realizable value of the business determined during the
negotiations to sell the business, AHI had recorded a pretax net loss of $34.5
million in the fourth quarter of 2000, $23.8 million net of tax benefit. AHI
also had recorded an additional net loss of $3.3 million in the first quarter of
2001, as a result of price adjustments

23

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 the 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, 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 AHI
anticipates lower demand in the future. Additionally, an inventory write-down of
$2.1 million was recorded in the third quarter of 2001 within cost of sales
related to certain products that will no longer be sold.

On May 31, 2000, Armstrong completed its sale of all of the entities, assets and
certain liabilities comprising its Insulation Products segment to Orion
Einundvierzigste Beteiligungsgesellschaft Mbh, a subsidiary of the Dutch
investment firm Gilde Investment Management N.V. for $264 million. The
transaction resulted in an after tax gain of $114.8 million, or $2.86 per share
in 2000. During 2001, AHI recorded a pretax loss of $1.1 million related to its
divestiture of its Insulation Products segment. This loss resulted from certain
post-closing adjustments.

Other Divestitures
- ------------------
On July 31, 2000, Armstrong completed the sale of its Installation Products
Group ("IPG") to subsidiaries of the German company Ardex GmbH, for $86 million
in cash. Ardex purchased substantially all of the assets and liabilities of IPG
including its shares of the W.W. Henry Company. The transaction resulted in an
after tax gain of $44.1 million ($60.2 million pretax) or $1.10 per share and
was recorded in other income. The financial results of IPG were reported as part
of the Resilient Flooring segment. The proceeds and gain are subject to a
post-closing working capital adjustment. Under the terms of the agreement and a
related supply agreement, Armstrong agreed to purchase some of its installation
products needs from Ardex for an initial term of eight years, subject to certain
minimums for the first five years after the sale. The agreement also calls for
price adjustments based upon changing market prices for raw materials, labor and
energy costs.

In November 2000, Armstrong sold a component of its Textiles and Sports Flooring
segment. As this divestiture included a business classified as held for sale
since its July 1998 acquisition, Armstrong had been recording the 2000 operating
losses of this business within selling, general and administrative ("SG&A")
expense. The overall 2000 impact was a reduction of SG&A expense of $0.7
million.

Acquisitions
- ------------
On May 18, 2000, Armstrong acquired privately-held Switzerland-based Gema
Holding AG ("Gema"), a leading manufacturer and installer of metal ceilings, for
$6 million plus certain contingent consideration not to exceed $25.5 million
based on results over the three year period ending December 31, 2002. Gema has
two manufacturing sites located in Austria and Switzerland and employs nearly
300 people. The acquisition was recorded under the purchase method of
accounting. The purchase price was allocated to the assets acquired and the
liabilities assumed based on the estimated fair market value at the date of
acquisition. Contingent consideration, when and if paid, will be accounted for
as additional purchase price. The fair market value of tangible and identifiable
intangible assets acquired exceeded the purchase price by $24.2 million and this
amount was recorded as a reduction of the fair value of property, plant, and
equipment.

During 2001, AHI spent $5.6 million to purchase some of the remaining minority
interest of already-consolidated entities within the Resilient Flooring segment.
Approximately $5.0 million of the purchase price was allocated to goodwill.

24

Financial Condition and Liquidity
- ---------------------------------
As shown on the Consolidated Balance Sheets, Armstrong had cash and cash
equivalents of $277.4 million at December 31, 2001, compared with $159.1 million
at the end of 2000. The ratio of current assets to current liabilities was 3.06
to 1 as of December 31, 2001, compared with 2.48 to 1 as of December 31, 2000.
The increases were primarily the result of: cash increases, due to no payments
on liabilities subject to compromise in 2001, except approximately $9.7 million
made to certain vendors in negotiated settlements and authorized by the Court
for payment; and $92.3 million less of interest payments during 2001 compared to
2000; and larger inventory balances; and reductions in short-term debt.

Long-term debt, excluding debt subject to compromise, was $50.3 million, or 6.0%
of total capital at December 31, 2001, compared with $56.9 million, or 7.3% of
total capital, at the end of 2000. All other outstanding prepetition long-term
debt is owed by entities that filed for Chapter 11 protection, and therefore has
been classified as liabilities subject to compromise at December 31, 2001 and
2000.

As shown on the Consolidated Statements of Cash Flows, net cash provided by
operating activities for the year ended December 31, 2001, was $272.1 million
compared with $27.8 million in 2000. The increase was primarily due to the
absence of asbestos-related claims payments in 2001.

Net cash used for investing activities was $113.9 million for the year ended
December 31, 2001, compared with cash provided by investing activities of $179.3
million in 2000. The decrease was primarily due to $329.9 million of proceeds
from the sales of businesses in 2000.

Net cash used for financing activities was $37.9 million for the year ended
December 31, 2001, compared with $70.9 million in 2000. The decrease was
primarily due to no dividend payments in 2001, compared with $58.1 million of
dividend payments in 2000, offset by net debt payments of $33.4 million in 2001
compared with net debt payments of $16.9 million in 2000.

AHI's liquidity needs for operations vary throughout the year. Therefore, AHI
retains lines of credit to draw upon as needed to meet these needs. In 2001, the
DIP Facility was available, but was not needed or used.

DIP Facility
- ------------
The Court previously approved a $300 million the DIP Facility provided by a bank
group led by the J P Morgan Chase Bank. During the second quarter of 2001, AWI
reduced the amount of the DIP Facility to $200 million. Borrowings under the DIP
Facility, if any, and obligations to reimburse draws upon the letters of credit
constitute a superpriority administrative expense claim in the Chapter 11 Case.
As of December 31, 2001, AWI had no borrowings under the DIP Facility, but had
approximately $8.4 million in letters of credit which were issued pursuant to
the DIP Facility. Borrowings are limited to an adjusted amount of receivables,
inventories and PP&E. Depending on the amount of borrowings, the DIP Facility
carries an interest rate range of either J P Morgan Chase's Alternate Bank Rate
plus 50 to 100 basis points or LIBOR plus 150 to 200 basis points. The DIP
Facility also contains several covenants including, among other things, limits
on asset sales, capital expenditures and a required ratio of debt to cash flow.
The DIP Facility is scheduled to expire on December 6, 2002.

Asbestos-related litigation
- ---------------------------
AWI is a defendant in personal injury claims and property damage 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.

Background
- ----------
AWI's involvement in asbestos litigation relates primarily to its participation
in the insulation contracting business. From around 1910 to 1933, AWI
manufactured and installed some high-temperature insulation products, including
some that contained asbestos. In 1939, AWI expanded its contract installation
service to provide a greater range of high and low temperature contracting
services to its customers. AWI generally manufactured its own low temperature
insulation products, but did not manufacture the high temperature products used
in its contracting operations. Some of the high temperature products furnished
and installed in the contracting operations contained asbestos.

Effective January 1, 1958, AWI separated its insulation contracting business
into a separate, independent subsidiary, Armstrong Contracting and Supply
Corporation ("ACandS"). From January 1, 1958 through August 31, 1969, ACandS
operated as an independent subsidiary in the insulation contracting business.
During this time period, AWI licensed

25

certain tradenames and trademarks to ACandS, which ACandS placed on certain
insulation products manufactured by others. Other than two specific products,
AWI did not manufacture or sell any asbestos-containing thermal insulation
products during this period. In August 1969, AWI sold the ACandS subsidiary to a
group of ACandS management employees and ACandS continues to operate
independently as a subsidiary of Irex Corporation. AWI had no involvement with
any asbestos-containing insulation materials after 1969.

In addition, AWI manufactured some resilient flooring that contained
encapsulated asbestos until the early 1980's. AWI also manufactured some gasket
materials that contained encapsulated asbestos until the mid-1980's.

Asbestos-Related Personal Injury Claims
- ---------------------------------------
Before filing for relief under the Bankruptcy Code, AWI pursued broad-based
settlements of asbestos-related personal injury claims through the Center for
Claims Resolution (the "Center"). The Center had reached Strategic Settlement
Program ("SSP") agreements with law firms that covered approximately 130,000
claims that named AWI as a defendant. As a result of the Filing, AWI's
obligations with respect to payments called for under these settlements will be
determined in its Chapter 11 Case.

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 with respect to
asbestos-related personal injury claims, including payments pursuant to the
outstanding SSP agreements. A separate creditors' committee representing the
interests of asbestos personal injury claimants has been appointed 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. AWI believes that the Chapter 11 process
provides it with the opportunity to comprehensively address its asbestos-related
personal injury liability in one forum. It is anticipated that all present and
future asbestos-related personal injury claims will be resolved in the Chapter
11 Case.

Asbestos-Related Personal Injury Liability
- ------------------------------------------
In evaluating its estimated asbestos-related personal injury liability prior to
the Filing, AWI reviewed, among other things, recent and historical settlement
amounts, the incidence of past and recent claims, the mix of the injuries and
occupations of the plaintiffs, the number of cases pending against it and the
status and results of broad-based settlement discussions. Based on this review,
AWI estimated its cost to defend and resolve probable asbestos-related personal
injury claims. This estimate was highly uncertain due to the limitations of the
available data and the difficulty of forecasting with any certainty the numerous
variables that could affect the range of the liability.

AWI believes the range of probable and estimable liability is more uncertain now
than previously. There are significant differences in the way the
asbestos-related personal injury claims may be addressed under the bankruptcy
process when compared to the tort system. Accordingly, AWI currently is unable
to ascertain how prior experience with the number of claims and the amounts to
settle claims will impact its ultimate liability in the context of its Chapter
11 Case.

As of September 30, 2000, AWI had recorded a liability of $758.8 million for its
asbestos-related personal injury liability that it determined was probable and
estimable through 2006. Due to the increased uncertainty created as a result of
the Filing, 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
December 31, 2001 and December 31, 2000 is $690.6 million, which is recorded in
liabilities subject to compromise. Due to the uncertainties created as a result
of the Filing and how the liability may be resolved, it is not possible to
reasonably estimate the ultimate liability. It is likely, however, that the
actual liability will be significantly higher than the recorded liability. As
the Chapter 11 Case proceeds, there should be more clarity as to the extent of
the liability.

Collateral Requirements
- -----------------------
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

26

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. Recently, 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 property Damage Litigation
- ------------------------------------------- Over 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. The
previous claims that were 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 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. Upon such
filing, the Court will later determine whether the proposed class should be
certified. Consistent with prior periods and due to increased uncertainty, AWI
has not recorded any liability related to these claims as of December 31, 2001.
See Item 1 for further discussion of the property damage claims received by the
August 31, 2001 claims bar date 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 Recovery Proceedings
- ------------------------------
A 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 materials. AWI has entered into settlements with a number of
the carriers resolving its coverage issues. However, an alternative dispute
resolution ("ADR") procedure is under way against certain carriers to determine
the percentage of resolved and unresolved claims that are nonproducts claims, to
establish the entitlement to such coverage and to determine whether and how much
reinstatement of prematurely exhausted products hazard insurance is warranted.
The nonproducts coverage potentially available is substantial and includes
defense costs in addition to limits.

During 1999, AWI received preliminary decisions in the initial phases of the
trial proceeding of the ADR, which were generally favorable to AWI on a number
of issues related to insurance coverage. However, during the first quarter of
2001, a new trial judge was selected for the ADR. The new trial judge conducted
hearings in 2001 and determined not to rehear matters decided by the previous
judge. In the first quarter of 2002, the new trial judge concluded the ADR trial
proceeding with findings in favor of AWI on substantially all key issues. The
trial proceeding is subject to an appeal as part of the ADR process. One of the
insurance carriers, Reliance Insurance Company, was placed under an order of
rehabilitation by a state insurance department during May 2001 and an order of
liquidation during October 2001.

Another insurer (Century Indemnity Company), 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. 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 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. AWI believes it is highly unlikely the
insurer will prevail in this matter.

Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $214.1 million is recorded as of December 31, 2001 compared to $268.3 million
as of December 31, 2000. The reduction is due to cash receipts during the second
and third quarters of 2001 and management's current assessment of probable
insurance recoveries, which included the order of liquidation for Reliance
Insurance Company. Of the total recorded asset at December 31,

27

2001, approximately $49.0 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 the
financial condition of the insurers, AWI may revise its estimate of probable
insurance recoveries. Approximately $82 million of the $214.1 million asset is
determined from agreed coverage in place and is therefore directly related to
the amount of the liability. Of the $214.1 million asset, $22.0 million has been
recorded as a current asset as of December 31, 2001 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.

Cash Flow Impact
- ----------------
As a result of the Chapter 11 Filing, AWI did not make any payments for
asbestos-related claims in December 2000 and all of 2001. In the first eleven
months of 2000, AWI paid $226.9 million for asbestos-related claims. AWI
received $32.2 million in asbestos-related insurance recoveries during 2001
compared to $27.7 million in 2000. 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.

Conclusion
- ----------
Many uncertainties exist surrounding the financial impact of AWI's involvement
with asbestos litigation. These uncertainties include the impact of the Filing
and the Chapter 11 process, the number of future claims to be filed, 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. AWI has not
revised its previously recorded liability for asbestos-related personal injury
claims. During 2001, AWI reduced its previously recorded insurance asset by
$32.2 million for cash receipts and by $22.0 million for management's current
assessment of probable insurance recoveries. The $22.0 million reduction was
recorded as a charge for asbestos liability, net, in the accompanying
consolidated statement of earnings. AWI will continue to review its
asbestos-related liability periodically, although it is likely that no changes
will be made to the liability until later in the Chapter 11 Case as significant
developments arise. Although not estimable, it is likely that AWI's total
exposure to asbestos-related personal injury claims will be significantly higher
than the recorded liability. Any adjustment to the estimated liability or
insurance asset could be material to the financial statements.

Consolidated Results
- --------------------
The following discussions of consolidated results are on a continuing operations
basis.

Net sales in 2001 of $3.14 billion were 3.5% lower when compared with net sales
of $3.25 billion in 2000. Resilient Flooring net sales decreased 6.0%. Building
Products net sales decreased by 0.3%. Wood Flooring net sales decreased by 4.4%.
Cabinets increased by 3.2%. Textiles and Sports Flooring decreased 5.1%. Net
sales decreased 3.5%, 1.3% and 18.0% in the Americas, Europe, and the Pacific
Area, respectively. Excluding the effect of foreign exchange, Europe net sales
increased 3.1%. (See Industry Segment Results for further discussion.)

Operating income in 2001 was $140.1 million compared to $6.7 million in 2000.
(See Industry Segment Results for further discussion.)

Cost of goods sold in 2001 was 75.3% of net sales, compared to cost of goods
sold of 73.4% in 2000. In 2001, the Textiles and Sports Flooring segment
recorded an $8.4 million impairment charge on certain assets to cost of goods
sold and a $2.1 million charge for write-downs related to certain products that
will no longer be sold. Excluding these charges, cost of goods sold was 75.0% in
2001. In 2000, excluding a $17.6 million charge to cost of goods sold for
write-downs of production-line assets related to the reorganization efforts that
were not categorized as restructuring

28

costs, the cost of goods sold was 72.9%. These write-downs of production-line
assets primarily related to changes in production facilities and product
offerings. While the amount of cost of goods sold in 2001 was lower than 2000,
it did not decrease enough to maintain the same percentage of net sales as in
2000. Increases in the price of raw materials, such as natural gas and wood,
offset the general savings experienced in cost of goods sold due to the lower
sales.

SG&A expenses in 2001 were $596.2 million, or 19.0% of net sales compared to
$597.2 million, or 18.4% of net sales in 2000. While 2001 net sales decreased
from 2000 amounts, a significant amount of sales and promotional expense,
including branding and market development, was incurred in 2001, primarily in
the Resilient and Wood Flooring segments. Additionally, 2001 contained higher
employee incentive bonus accruals than 2000. These items resulted in an increase
in SG&A as a percentage of net sales. SG&A expenses in 2000 contained $18.3
million for CEO and management transition costs, expenses related to the
reorganization of European flooring business, asset write-downs related to the
decision to vacate office space in Lancaster, PA and write-downs related to
product samples.

During 2001, Armstrong recorded non-cash charges of $22.0 million related to
management's current assessment of probable asbestos-related insurance asset
recoveries. 2000 included a $236.0 million non-cash charge to increase the
asbestos-related liability.

Armstrong also recorded net restructuring costs of $9.0 million in 2001, which
included $11.8 for severance payments and pension benefits for approximately 75
employees, including the former Chief Operating Officer of AHI, and a $1.7
million reversal of previous restructuring charges for certain severance
accruals that were no longer necessary as certain individuals remained employed
by Armstrong. These reorganizations are expected to result in lower
manufacturing costs of approximately $0.3 million per year and lower SG&A
expenses of approximately $7.1 million per year. AHI expects to record an
additional charge of approximately $0.6 million in the first quarter of 2002
related to a further streamlining of the textiles and sports flooring business.
Armstrong also reversed $1.1 million related to a formerly occupied building for
which AHI no longer believes it will incur any additional costs. This compares
to net restructuring and reorganization charges in 2000 of $18.8 million, which
included $12.0 million for severance payments and pension benefits for
approximately 200 employees and a $1.4 million reversal, comprising severance
accruals that were no longer necessary as certain individuals remained employed
by Armstrong. In 2000, Armstrong also recorded a $8.2 charge primarily related
to the remaining payments on a noncancelable-operating lease for an office
facility in the U.S.

Interest expense of $13.1 million in 2001 was lower than interest expense of
$102.9 million in 2000. In accordance with SOP 90-7, Armstrong did not record
contractual interest expense on prepetition debt after the Chapter 11 filing
date. This unrecorded interest expense was $86.0 million in 2001 and $6.0
million in 2000.

Other income, net of $1.2 million in 2001 included a gain of $3.5 million
resulting from the demutualization of an insurance company (Prudential Insurance
Co.) with whom Armstrong has company-owned life insurance policies, a loss of
$3.2 million resulting from the impairment of certain equity investments, and a
$2.0 million impairment charge of a note receivable related to a previous
divestiture. Other income, net in 2000 of $76.7 million includes a $60.2 million
gain from the sale of IPG, which was part of the Resilient Flooring segment, a
gain of $5.2 million resulting from the demutualization of an insurance company
(Metropolitan Life Insurance Company) with whom Armstrong has company-owned life
insurance policies and $7.0 million from foreign currency transaction gains.

Armstrong recorded $12.5 million of Chapter 11 reorganization costs, net in 2001
compared to $103.3 million in 2000. See Item 1 for details of the Chapter 11
reorganization costs, net.

Earnings from continuing operations in 2001 were $73.2 million, or $1.79 per
diluted share, which compares to a loss of $85.1 million, or $2.12 per share, in
2000.

Effective November 1, 2000, an amendment to the Retirement Income Plan (RIP), a
qualified U.S. defined benefit plan, established an additional benefit known as
the ESOP Pension Account to partially compensate active employee and retiree
ESOP shareholders for the decline in the market value of AHI's Stock. The effect
of this amendment had no material impact to the financial position or results of
operations in 2000, but increased the benefit obligation by $92.2 million and
decreased the pension credit by $11.7 million in 2001. The RIP document was
revised to reflect these changes.

The 2001 effective tax rate from continuing operations was 36.7% versus a tax
benefit rate of 30.7% for 2000. Excluding the impact of the asbestos charge, the
gain on sale of IPG, the restructuring charges and other related expenses and
the Chapter 11 reorganization costs, net in 2000, the 2000 effective tax rate
was 39.6%.

29

The decrease from 39.6% to 36.7%, was due to improved foreign tax credit
utilization and lower foreign taxes partially offset by the negative impact of
lower earnings on permanent differences between book and tax. In addition, the
2001 tax provision reflects the reversal of certain state tax and other accruals
no longer required due to completion of state tax audit and/or the expiration of
statutes of limitation partially offset by certain non-deductible expenses.

Armstrong reported net earnings of $92.8 million, or $2.27 per diluted share in
2001, compared to net earnings of $12.2 million, or $0.30 per share in 2000.

New Accounting Pronouncements
- -----------------------------
In the third quarter of 2001, the Emerging Issues Task Force ("EITF") released
EITF Issue No. 00-025, "Vendor Income Statement Characterization of
Consideration from a Vendor to a Retailer." This pronouncement requires
consideration paid to a reseller or retailer to be shown as a reduction of
revenue unless the vendor receives an identifiable separate benefit and that
benefit's fair value can be reasonably estimated. This pronouncement is
effective January 1, 2002. AHI anticipates reclassifying approximately $1.9
million of annual costs previously recorded as selling, general and
administrative expenses to net sales. The change will have no effect on
operating margins or retained earnings as of any date.

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other
Intangible Assets." Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Statement 141 also specifies criteria that intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill. Statement 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually. Impairment losses, if any, will be
measured as of January 1, 2002 and recognized as the cumulative effect of a
change in accounting principle in 2002. Statement 142 will also require that
intangible assets with determinable useful lives be amortized over their
respective estimated useful lives to their estimated residual values and
reviewed for impairment in accordance with Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The adoption of FAS 141 in the third quarter of 2001 had no impact on AHI's
financial statements. AHI is required to adopt the provisions of Statement 142
effective January 1, 2002. AHI will be required to test goodwill for impairment
in accordance with the provisions of Statement 142 and record any impairment
charges to any affected assets by the end of 2002.

As of January 1, 2002, AHI has unamortized goodwill of $822.8 million and
unamortized identifiable intangible assets in the amount of $89.0 million, all
of which will be subject to the transition provisions of Statement 142.
Amortization expense related to goodwill was $22.8 million for the year ended
December 31, 2001. Armstrong is currently in the process of analyzing the impact
of Statement 142. The Wood Flooring segment has $717.2 million of unamortized
goodwill on its books as of December 31, 2001. Based on preliminary assessments
of the impact of adopting Statement 142, AHI believes that a significant portion
of this goodwill will be considered impaired under the new accounting standard.
AHI has not yet determined the amount of any impairment, but expects to complete
its analysis, including valuations of tangible and intangible assets, in the
first half of 2002. Due to the complexity, timing and scale of the process, AHI
is currently unable to precisely determine the amount of the goodwill impairment
charge but expects the impairment charge in 2002 to be in excess of $300
million.

In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." The statement establishes standards for accounting for
an obligation associated with the retirement of a long-lived asset. The standard
is effective for fiscal years beginning after June 15, 2002. While AHI is
finalizing its review of this statement, adoption of this statement is not
expected to have a material impact on AHI's consolidated results of operations
or financial condition.

In October 2001, the FASB issued Statement 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. This statement
is effective for fiscal years beginning after December 15, 2001. While AHI is
finalizing its review of this statement, adoption of this statement is not
expected to have a material impact on AHI's consolidated results of operations
or financial condition.

INDUSTRY SEGMENT RESULTS
- ------------------------

Resilient Flooring
- ------------------
Resilient Flooring net sales were $1,162.3 million and $1,236.3 million in 2001
and 2000, respectively. Net sales in the Americas decreased 5.0% from the prior
year as a result of lower sales of commercial tile (volume and pricing pressure)
and residential sheet products (product mix) and the impact of the third quarter
2000 IPG divestiture.

30

Excluding the impact of the IPG divestiture, sales in the Americas decreased
2.6%. Excluding the unfavorable effects of foreign exchange rates, net sales in
Europe were 3.7% below last year primarily due to weaker sales of cushion vinyl
products. Pacific area net sales decreased $4.9 million versus 2000. Operating
income of $70.8 million in 2001 compared to $80.4 million in 2000. Operating
income in 2001 includes $2.8 million of income from the reversal of previously
accrued potential preference claims that have been resolved as well as $2.8
million of environmental and building demolition expenses at one manufacturing
facility. Excluding expenses associated with reorganizing the European business
and other management changes, operating income was $108.9 million in 2000. The
operating income reduction was driven primarily by lower sales and higher
selling and promotional expenses, including brand and market development
expenses and the impact of the IPG divestiture, partially offset by lower
production costs.

Outlook
Net sales in 2002 are expected to increase slightly over 2001 due to higher
retail growth through the independent channel and the introduction of new
products. Operating income is expected to also increase due to the impact of
higher sales, improved manufacturing productivity and lower selling and
promotional expenses offsetting rising medical costs.

Building Products
- -----------------
Building Products net sales of $830.7 million in 2001 decreased slightly from
$833.3 million in 2000 as the full year impact of the Gema acquisition helped to
offset the slow down experienced in the commercial construction markets.
Excluding the net sales of Gema, net sales decreased 2.9%. Net sales in the
Americas decreased 2.4% versus 2000 due to unit volume in the U.S. commercial
business partially offset by improvements in the price/product mix as well as
sales from new product lines. Excluding the impact of unfavorable foreign
exchange rates and incremental net sales from Gema, net sales in Europe remained
flat compared to 2000. Pacific area net sales decreased $4.1 million versus
2000. Operating income decreased $21.5 million to $92.4 million in 2001
primarily due to higher energy costs and lower unit volume.

Outlook
Net sales in 2002 are expected to decline slightly, because the slowdown in
commercial construction around the world is expected to continue with some
recovery not anticipated until late in the year. Operating income is expected to
remain essentially flat, as cost reduction initiatives and product mix
improvements offset the impact of lower demand and higher medical costs.

Wood Flooring
- -------------
Wood Flooring net sales of $654.3 million in 2001 decreased from net sales of
$684.6 million in 2000. This 4.4% decrease was driven primarily by lower sales
volume and pricing within the independent wholesaler channel. Operating income
of $0.9 million in 2001 compared to operating income of $57.8 million in 2000.
The decrease was primarily driven by competitive pricing pressure, lower sales,
higher lumber costs, product quality issues, and higher selling and promotional
expenses.

Outlook
Net sales in 2002 are expected to increase slightly over 2001 due to anticipated
volume gains in the home center market. Operating income is expected to increase
significantly due to improved manufacturing productivity, anticipated stable
lumber prices, improved quality and the impact of higher sales.

Cabinets
- --------
Cabinets net sales of $225.2 million in 2001 increased from net sales of $218.2
million in 2000 due to a favorable product mix and volume growth. Operating
income of $15.2 million in 2001 compared to operating income of $16.5 million in
2000. Excluding restructuring charges of $1.1 million in 2001, operating income
was $16.3 million, which is comparable to 2000. The 2001 net sales increase was
offset by higher selling expenses and additional allocations of general and
administrative expenses shared with the Wood Flooring segment.

Outlook
Net sales in 2002 are expected to remain flat with 2001. Flat sales, nominal
cost inflation and improved operating costs are expected to result in a slight
increase in operating income.

Textiles and Sports Flooring
- ----------------------------
Textiles and Sports Flooring net sales of $262.9 million in 2001 compared to
$277.0 million in 2000. Excluding the impact of unfavorable foreign exchange
rates, net sales decreased 2.2% primarily due to a weak European market.

31

An operating loss of $0.7 million in 2001 was incurred compared to operating
income of $5.2 million in 2000. The 2001 operating loss was due to an $8.4
million fixed asset impairment charge and a $2.1 million inventory write-down
recorded during the third quarter. Excluding these charges, 2001 operating
income would have been $9.8 million. Operating income in 2000 included
approximately $3.0 million for employee severance accruals.

Outlook
Net sales in 2002 are expected to remain consistent with 2001. Operating income
is expected to remain consistent with the 2001 amount, excluding the $8.4
million fixed asset impairment charge and the $2.1 million inventory write-down.

Other
- -----
Excluding charges for asbestos liability, net, unallocated corporate expense of
$16.8 million in 2001 compared to $31.2 million of expense in 2000. The 2001
expense includes a U.S. pension credit of $56.8 million compared to a 2000
credit of $63.9 million. The 2000 expense also includes $19.7 million in
expenses related to the CEO transition and other management changes and the
decision to vacate an office facility in the U.S.

Outlook
Unallocated corporate expenses for 2002 will be negatively affected by a $25.0
million lower pension credit due to the combination of a lower discount rate and
lower expected long-term return on plan assets, and by higher medical costs, due
primarily to the lower discount rate and increase of medical inflation rate,
affecting retiree medical costs.

Geographic Areas
- ----------------
Net sales of $2.32 billion in the Americas in 2001 were lower, compared to $2.41
billion in 2000, primarily due to lower Resilient Flooring sales. Net sales in
Europe in 2001 were $711.2 million, compared to $720.3 million in 2000, as the
full year impact of the Gema acquisition partially offset declines in the
Resilient Flooring and Building Products segments. Net sales to the Pacific area
of $99.6 million compared to $121.4 million in 2000 due to volume declines in
the Resilient Flooring and Building Products segments.

Long-lived assets in the Americas in 2001 were $962.3 million compared to $974.6
million in 2000. Long-lived assets in Europe in 2001 were $291.4 million
compared to $314.4 million in 2000. The decrease was primarily due to an $8.4
million fixed asset impairment charge in the Textiles and Sports Flooring
segment and the divestiture of certain physical assets. Long-lived assets in the
Pacific area in 2001 were $30.0 million compared to $32.0 million in 2000.

2000 COMPARED WITH 1999
- -----------------------
The results for 2000 compared with 1999 have been reclassified to reflect
continuing operations.

Divestitures
- ------------
On May 28, 1999, Armstrong's subsidiary, DLW, sold its furniture business for
total cash proceeds of $38.1 million. Armstrong acquired this business as part
of the acquisition of DLW in the third quarter of 1998 and had classified the
business as held for sale. There was no gain or loss on the transaction.

On June 22, 1999, Armstrong sold its interest in the assets of Martin Surfacing,
Inc. Armstrong acquired this interest as part of its acquisition of DLW during
the third quarter of 1998. There was no material gain or loss on the
transaction.

On June 30, 1999, Armstrong sold 65% of its ownership in AISI, its gasket
products subsidiary, to a group of investors including Citicorp Venture Capital
Ltd. and the management of AISI for a cash purchase price of approximately $36.1
million. The sale resulted in a gain of approximately $6.0 million, or $0.15 per
share, which was recorded in other income.

On September 30, 1999, Armstrong completed the sale of its Textile Products
Operations to Day International Group, Inc. The sale resulted in a loss of $3.2
million, or $0.08 per share, which was recorded in other income.

In November 2000, Armstrong sold a component of its Textiles and Sports Flooring
segment. As this divestiture included a business classified as held for sale
since its July 1998 acquisition, Armstrong had been recording the 2000 operating
losses of this business within SG&A expense. The overall 2000 impact was a
reduction of SG&A expense of $0.7 million.

32

Financial Condition
- -------------------
As shown on the Consolidated Statements of Cash Flows, net cash provided by
operating activities for the year ended December 31, 2000, was $27.8 million
compared with $347.5 million in 1999. The decrease was due to several items
including lower net income excluding the gain on sale of businesses and changes
in working capital, primarily accounts payable and accrued expenses.

Net cash provided by investing activities was $179.3 million for the year ended
December 31, 2000, compared with net cash used for investing activities of $62.0
million in 1999. The increase was primarily due to significantly higher proceeds
from the sales of businesses in 2000 than in 1999.

Net cash used for financing activities was $70.9 million for the year ended
December 31, 2000, compared with $281.9 million in 1999. The decrease was
primarily due to net debt payments of $16.9 million in 2000 compared with net
debt payments of $202.1 million in 1999.

Consolidated Results
- --------------------
Net sales in 2000 of $3.25 billion were slightly lower compared with net sales
of $3.32 billion in 1999. Excluding the impact of unfavorable foreign exchange
rates in 2000 and the divestitures of the gasket and textile businesses in 1999,
net sales in 2000 were $79.7 million, or 2.5% above 1999. Resilient Flooring net
sales decreased 7.0%. Building Products net sales increased 5.2%. Wood Flooring
net sales increased 8.8%. Cabinets net sales increased 5.3%. Textiles and Sports
Flooring net sales decreased 11.6%. Further, excluding the 1999 divestitures,
sales increased 1.0% in the Americas and declined 3.1% in the Pacific Area.
European sales decreased 4.9%, but would have increased 11.9% without the impact
of unfavorable foreign exchange rates.

Operating income in 2000 was $6.7 million compared to operating income of $81.9
million in 1999.

Cost of goods sold in 2000 was 73.4% of net sales, compared to cost of goods
sold of 68.9% in 1999. Higher raw material costs primarily in Resilient
Flooring, Wood Flooring and Cabinets and higher energy costs in Building
Products were the primary drivers of the increase. Armstrong also recorded $17.6
million to cost of goods sold in 2000 for write-downs of inventory and
production-line assets that were not categorized as restructuring costs. The
inventory write-downs were related to changes in product offerings while the
write-downs of production-line assets primarily related to changes in production
facilities and product offerings.

SG&A expenses in 2000 were $597.2, or 18.4% of net sales. In 1999, SG&A expenses
were $607.8 million, or 18.3% of net sales. SG&A expenses in 2000 contained
lower employee incentive bonus accruals and lower selling expense offset by CEO
and management transition costs, expenses related to the reorganization of
European flooring business, asset write-downs related to the decision to vacate
office space in Lancaster, PA and inventory write-downs related to samples.

Armstrong recorded charges to increase the estimated liability for
asbestos-related claims of $236.0 million in 2000 and $335.4 million in 1999.

In 2000, Armstrong recorded restructuring and reorganization charges of $18.8
million, which is described in the 2001 Compared to 2000 - Consolidated Results.
This compares to a reversal of $1.4 million recorded in 1999 related to certain
severance and benefit accruals that were no longer necessary.

Interest expense of $102.9 million in 2000 was lower than interest expense of
$105.2 million in 1999. In accordance with SOP 90-7, in 2000 Armstrong did not
record $6.0 million of contractual interest expense on prepetition debt after
the Chapter 11 filing date.

Other income, net in 2000 of $76.7 million includes a $60.2 million gain from
the sale of IPG, which was part of the Resilient Flooring segment, a gain of
$5.2 million resulting from the demutualization of an insurance company
(Metropolitan Life Insurance Company) with whom Armstrong has company-owned life
insurance policies, and $7.0 million from foreign currency translation gains.
Other income, net in 1999 of $6.6 million includes a gain of $6.0 million on the
divestiture of 65% of AISI and a loss of $5.0 million on the divestiture of
Textile Products. Other income in 1999 also reflects proceeds from the
settlement of various legal actions totaling $3 million and a gain of $2.6
million resulting from the demutualization of an insurance company (Manulife)
with whom Armstrong has company-owned life insurance policies.

33

During 2000, Armstrong recorded $103.3 million of Chapter 11 reorganization
costs, net. See Item 1 for details of the Chapter 11 reorganization costs, net.

Armstrong's 2000 effective tax rate benefit from continuing operations was 30.7%
versus 3.0% for 1999. Excluding the impact of the asbestos charge, the gain on
sale of Installation Products, the reorganization charge and other related
expense in 2000, the 2000 effective tax rate was 39.6%. Excluding the asbestos
charge and the divestitures of the gaskets and textiles businesses, the 1999
effective tax rate from continuing operations was 37.7%. The increase was due to
nondeductible goodwill and foreign source income.

Armstrong reported net earnings of $12.2 million, or $0.30 per share in 2000,
compared to net earnings of $14.3 million, or $0.36 per share in 1999.

INDUSTRY SEGMENT RESULTS
- ------------------------

Resilient Flooring
- ------------------
Resilient Flooring net sales in 2000 of $1,236.3 million were $93.5 million, or
7.0%, below prior year. Net sales in the Americas were 4.3% below 1999. European
net sales were 17.7% below prior year as a result of unfavorable foreign
exchange rate translation, lower prices and a less favorable mix driven by
continued market weakness. Excluding the effects of foreign exchange rate
translation, net sales in Europe were 6.9% below last year. Pacific area net
sales were flat with 1999.

Operating income of $80.4 million in 2000 compared to $211.2 million in 1999.
Excluding expenses associated with reorganizing the European business, other
management changes and the $7.5 million fourth quarter impairments of production
line assets and samples inventory, the 2000 operating income was $108.9 million.
1999 operating income was $206.7 million excluding $4.8 million for insurance
settlements for past product claims, net of inventory write-offs, $3.3 million
of costs associated with changes in the production location for some product
lines and a net benefit of $3.0 million from changes in employee compensation
policies. The annual operating margin decline is primarily related to lower
sales volume and the impact of higher production costs, primarily higher raw
material prices.

Building Products
- -----------------
Building Products net sales in 2000 were $833.3 million compared to $791.8
million in 1999. Excluding the impact of the Gema acquisition in 2000, net sales
increased 1.4%. Higher sales in the U.S., primarily in the U.S. commercial
channel, were mostly offset by lower European sales. Pacific area net sales
increased 1.9%.

Operating income in 2000 was $113.9 million compared to $120.0 million in 1999.
The operating income decrease was primarily related to higher natural gas
prices, partially offset by positive earnings from the Gema acquisition. Results
from Armstrong's WAVE grid joint venture with Worthington Industries improved
11% over 1999.

Wood Flooring
- -------------
Wood Flooring net sales in 2000 were $684.6 million compared to $629.3 million
in 1999, driven primarily by volume growth and improved pricing. Operating
income in 2000 was $57.8 million compared to $62.8 million in 1999. The decrease
was due to higher lumber costs that offset sales volume growth.

Cabinets
- --------
Cabinets net sales in 2000 were $218.2 million compared to $207.2 million in
1999, due to higher volume. Operating income in 2000 was $16.5 million compared
to $22.2 million in 1999. The decrease was due to higher costs that offset sales
volume growth.

Textiles and Sports Flooring
- ----------------------------
Textiles and Sports Flooring net sales in 2000 were $277.0 million compared to
$313.3 million in 1999. The reduction was primarily due to the unfavorable
effects of foreign exchange rates, and the impact of the second quarter 1999
divestiture of Martin Surfacing, Inc. Operating income in 2000 was $5.2 million
compared to $11.7 million in 1999. The decline in operating income was due to
lower sales and increased general and administrative expenses, which included
approximately $3.0 million of employee severance accruals in 2000.

All Other
- ---------
Net sales reported in this segment during 1999 comprised gasket materials
(through June 30, 1999) and textile mill supplies (through September 30, 1999).
Armstrong sold the textiles business and 65% of the gaskets business during
1999. Operating income in 2000 related to Armstrong's remaining 35% interest in
Interface Solutions Inc.

34

Excluding charges for asbestos liability, net, unallocated corporate expense of
$31.2 million in 2000 compared to $16.6 million of expense in 1999. The 2000
expense includes $19.7 million in expenses related to the CEO transition and
other management changes and the decision to vacate an office facility in the
U.S.

Geographic Areas
- ----------------
Net sales in the Americas in 2000 were $2.41 billion, compared to $2.44 billion
in 1999. Net sales in Europe in 2000 were $720.3 million, compared to $757.4
million in 1999 due to lower Resilient Flooring sales. Net sales in the Pacific
area of $121.4 million compared to $129.1 million in 1999.

Long-lived assets in the Americas in 2000 were $974.6 million compared to $971.9
million in 1999. Long-lived assets in Europe in 2000 were $314.4 million
compared to $350.7 million in 1999. The decrease was primarily due lower foreign
currency exchange rates in 2000. Long-lived assets in the Pacific area in 2000
were $32.0 million compared to $34.9 million in 1999.

Critical Accounting Policies
- ----------------------------
AHI utilizes estimates to record many items including asbestos-related liability
and insurance asset recoveries, allowances for bad debts, inventory obsolescence
and lower of cost or market changes, warranty, workers compensation, general
liability and environmental claims. In assessing approximate estimates,
management considers all known relevant information and confers with outside
parties, including outside counsel, where appropriate.

The following are the critical accounting policies that management believes
could have a significant impact to the financial statements if the estimates and
judgments used by management turn out to be incorrect based on the actual
outcome of future events covered by these estimates.

Asbestos Related Estimates - Prior to its Chapter 11 Filing, AWI estimated its
- --------------------------
probable asbestos-related personal injury liability based upon a variety of
factors including historical settlement amounts, the incidence of past claims,
the mix of the injuries and occupations of the plaintiffs, the number of cases
pending against it and the status and results of broad-based settlement
discussions. AWI believes its previous range of probable and estimable liability
is more uncertain now than before. There are significant differences in the way
the asbestos-related personal injury claims may be addressed under the
bankruptcy process when compared to the tort system. Accordingly, AWI currently
is unable to estimate its ultimate liability in the context of its Chapter 11
Case. Although not estimable, it is likely that the actual liability will be
significantly higher than the recorded liability. As the Chapter 11 Case
proceeds, there should be more clarity as to the extent of the liability.

Additionally, AHI has recorded $214.1 million of estimated insurance recoveries
as of December 31, 2001 related to its asbestos liability. Of the total recorded
asset at December 31, 2001, approximately $49.0 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%. Approximately
$82 million of the $214.1 million asset is determined from agreed coverage in
place and is therefore directly related to the amount of the asbestos liability.
The total amount recorded reflects the belief in the availability of insurance
in this amount, based upon prior 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. The estimate of probable recoveries
may be revised depending on the developments in the matters discussed above as
well as events that occur in AWI's Chapter 11 Case.

U.S. Pension Credit - Due to the significantly overfunded status of AHI's U.S.
- -------------------
pension plan, AHI recorded a U.S. pension credit of $56.8 million, $63.9 million
and $67.2 million in 2001, 2000 and 1999, respectively. These amounts have been
consistently calculated and determined based upon a number of assumptions. These
assumptions are determined in accordance with FASB Statement No. 87 -
"Employers' Accounting for Pensions" ("FAS 87"). Each assumption represents
management's best estimate of anticipated future experience. The assumptions
that have the most significant impact on reported results are the discount rate
and the estimated long-term return on plan assets.

The discount rate is used in the measurement of the retirement liabilities and
the interest cost component of net periodic pension cost. AHI's actuary provides
the modified duration of AHI's liabilities. Using this approach, management
determines the appropriate discount rate by referencing the yield on high
quality fixed income securities of a similar duration as well as the yield for
Moody's AA-rated corporate bonds. As of December 31, 2001, AHI assumed a
discount rate of 7.00%.

35

The expected long-term return on plan assets represents a long-term view
(approximately 5-10 years) of the estimated investment return performance of the
pension plan's assets that will be used to satisfy future retirement benefit
payments. This percentage is determined by analyzing the composition and
allocation of the assets in the pension plan, the current performance and
expectation of future performance. AHI also receives input from investment
professionals and academic sources for outside opinions on the expected
performance of the equity and bond markets. As of December 31, 2001, AHI assumed
a return on plan assets of 8.75%.

Actual results that differ from these estimates are captured as actuarial
gains/losses and will be amortized into future earnings over the expected
remaining service period of active plan participants in accordance with FAS 87.
Changes in assumptions could have significant effects on credits to be
recognized in future years. As discussed previously, 2002 operating income will
be negatively affected by a $25.0 million lower pension credit due to the
combination of a lower discount rate and lower expected long-term return on plan
assets.

Impairments of Tangible and Intangible Assets - AHI periodically reviews
- ---------------------------------------------
significant tangible and intangible assets, including goodwill, for impairment
under the guidelines of FASB Statement No. 121 - "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". In accordance
with this Statement, AHI reviews its businesses for indicators of impairment
such as operating losses and/or negative cash flows. If an indication of
impairment exists, AHI will estimate future undiscounted cash flows for
comparison to the carrying value of the asset. If the cumulative estimated
undiscounted cash flows are less than the carrying value of the asset, AHI
records an impairment loss equal to the difference between the fair value and
carrying value of the asset. These cash flow estimates are based on management's
best estimates and rely on information available at the time of the analysis.
Actual cash flows that do not materialize in the manner that management
estimates could lead to significant future impairments, if the actual cash flows
are lower than originally estimated.

During 2001, AHI recorded an impairment charge of $8.4 million in cost of sales
within the Textiles and Sports Flooring. The impairment was related to property,
plant and equipment that produce certain products for which AHI anticipates
lower demand in the future.

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

AHI also maintains numerous customer relationships that incorporate sales
incentive programs, primarily volume rebates and promotions. The rebates will
vary by customer, but usually include tiered incentives based on the level of
customer's purchases. Certain promotional allowances are also tied to customer
purchase volumes. AHI estimates the amount of expected annual sales during the
course of the year and uses the projected sales amount to estimate the cost of
the incentive programs.

The amount of actual experience related to these accruals could differ
significantly from the estimated amounts. If this occurs, AHI will adjust its
accruals accordingly. AHI maintained sales-related accruals of $63.0 million and
$59.2 million as of December 31, 2001 and 2000, respectively. AHI records the
costs of these accruals as a reduction of gross sales.

36

Contractual Obligations
- -----------------------
As part of its normal operations, AHI enters into numerous contractual
obligations that require specific payments during the term of the various
agreements. The following table includes amounts ongoing under contractual
obligations existing as of December 31, 2001. Only known payments that are
merely dependent on the passage of time are included. Obligations from contracts
that contain minimum payment amounts are shown at the minimum payment amount.
Contracts that still require performance to be rendered by AHI or the
counter-party, or have variable payment structures without minimum payments, are
excluded. Amounts are presented below based upon the currently scheduled payment
terms. Actual future payments may differ from the amounts presented below due to
changes in payment terms or events leading to payments in addition to the
minimum contractual amounts.

(millions) 2002 2003 2004 2005 2006 Thereafter Total
- ---------- ------ ------ ------ ------ ------ ---------- -------

Long-Term Debt/(1)/ $ 6.1 $ 1.2 $ 3.0 $ 1.1 $ 15.6 $ 29.4 $ 56.4
Capital Lease Obligations/(2)/ 1.3 1.4 2.5 1.5 0.9 0.8 8.4
Operating Lease Obligations/(2)/ 9.9 7.3 5.6 3.2 2.3 10.1 38.4
Unconditional Purchase Obligations/(3)/ 1.9 3.0 3.0 1.8 -- -- 9.7
Other Long-Term Obligations/(4)/ 5.6 2.9 1.8 -- -- -- 10.3
------ ------ ------ ------ ------ ------- -------
Total Contractual Obligations $ 24.8 $ 15.8 $ 15.9 $ 7.6 $ 18.8 $ 40.3 $ 123.2
====== ====== ====== ====== ====== ======= =======

/(1)/ Payments for long-term debt obligations exclude debt subject to
compromise.
/(2)/ Capital and operating lease obligations include the minimum lease
payments due under existing lease agreements with noncancelable lease
terms in excess of one year. AWI has issued financial guarantees to
assure payment on behalf of AWI's subsidiaries in the event of default
on various debt and lease obligations in the table above. AHI and AWI
have not issued any guarantees on behalf of joint-venture or unrelated
businesses.
/(3)/ Unconditional purchase obligations include purchase contracts whereby
AHI must make guaranteed minimum payments of a specified amount
regardless of how little material is actually purchased ("take or pay"
contracts). Included in this amount are payments due to Ardex, the
purchaser of Armstrong's former adhesive business that was divested in
2000, under a supply agreement. See "Related Parties" section for
further discussion.
/(4)/ Other long-term obligations include payments under employee service and
severance agreements as well as retainer payments to advisors within the
Chapter 11 Case.

As of December 31, 2001, Armstrong maintained agreements with the lending
institutions of several of its distributors. Under these agreements, if a
distributor were to default on its borrowings and the lender foreclosed on the
assets, the bank could return a large part of any Armstrong product still at the
distributor (subject to certain quality and roll size minimums) for a refund of
original cost. At December 31, 2001, the maximum inventory amount that Armstrong
could have been required to accept back was less than $10 million. No claim has
been made under any of these agreements and AHI does not anticipate any such
claims in the future.

As part of its executive compensation plan, AHI offers certain executives the
ability to participate in a split-dollar insurance program where AHI is
responsible for remitting the premiums. As of December 31, 2001, AHI carried a
cash surrender value asset of $4.6 million related to this program. Should AHI
discontinue making premium payments, the affected insured executives have the
right to the entire policy cash surrender value. AHI has no intention of
discontinuing these payments at this time.

AHI utilizes other commercial commitments in order to ensure that adequate funds
are available to meet operating requirements. Letters of credit are issued to
third party suppliers, insurance and financial institutions and can only be
drawn upon in the event of AHI's failure to pay its obligations to the
beneficiary. This table summarizes the commitments AHI has available for use and
has outstanding. Standby letters of credit are currently arranged through AWI's
DIP Facility with JP Morgan Chase. Certain standby letters of credit arranged
with Wachovia prior to the Filing have been renewed at their schedule expiration
date.

Total Less
Other Commercial Amounts Than 1 1 - 3 4 - 5 Over 5
Commitments Committed Year Years Years Years
- ------------------------------ --------- ------ ----- ----- ------

Standby Letter of Credit $45.5 $45.5 -- -- --

In addition, AHI has lines of credit totaling $239.6 million, of which $22.6
million was used at December 31, 2001 and $217.0 million was available to ensure
funds are available to meet operating requirements.

37

Related Parties
- ---------------
Armstrong sold 65% of its ownership in its gasket products subsidiary, (now
known as Interface Solutions, Inc. or "ISI") on June 30, 1999. Armstrong still
retains 35% ownership of this business as of December 31, 2001. As part of the
divestiture, Armstrong agreed to continue to purchase a portion of the felt
products used in the manufacturing of resilient flooring from ISI for an initial
term of eight years. Currently, Armstrong is required to purchase at least 75%
of its felt requirements from ISI. The purchase price for these felt products
was initially set during the divestiture negotiations and were roughly
equivalent to the prevailing market prices from other suppliers at that time.
The sale agreement also stipulated quarterly felt price adjustments that are
based upon changing market prices for the felt. Since July 1, 1999, the felt
price increases and decreases have been immaterial. Armstrong can purchase felt
products from another supplier if ISI's prices are more than 10% higher than
another supplier's prices. Armstrong continues to monitor the relationship of
ISI's prices to other suppliers. Armstrong and ISI are required to cooperate in
product reformulation and new product development, but Armstrong is free to seek
alternatives to felt products. Additionally, Armstrong receives nominal monthly
payments from ISI for some logistics and administrative services under an
agreement that expires in 2002. ISI has filed a proof of claim in Armstrong's
Chapter 11 Case requesting payment for Armstrong's prepetition obligations. This
claim is treated as an unsecured creditor claim.

Armstrong sold its flooring adhesives business, IPG, to a subsidiary of a German
company ("Ardex") on July 31, 2000. Under the terms of the sale agreement and a
related supply agreement, Armstrong agreed to purchase some of its adhesives
from Ardex for an initial term of eight years, subject to certain minimums for
the first five years after the sale. Failure to meet the required minimum
purchase levels would result in Armstrong paying Ardex a penalty of between 12%
and 23% of the purchase shortfall. Armstrong has met the minimum purchase
requirements through 2001 and believes that it is likely that the minimum
purchase amount will be met in the future. The agreement also calls for price
adjustments based upon changing market prices for raw materials, labor and
energy costs. Ardex and Armstrong are currently in negotiations regarding the
term and raw material pricing under the supply agreement, environmental
liabilities and post-closing working capital adjustments. Ardex has filed a
proof of claim in Armstrong's Chapter 11 Case requesting payment for Armstrong's
prepetition obligations. This claim is treated as an unsecured creditor claim.

Armstrong purchases some grid products from WAVE, its 50%-owned joint venture
with Worthington Industries. The total amount of these purchases was
approximately $38 million, $41 million and $42 million for the years ended
December 31, 2001, 2000 and 1999, respectively. Armstrong also provides certain
selling and administrative processing services to WAVE for which it receives
reimbursement. Additionally, WAVE leases certain land and buildings from
Armstrong. The terms of these transactions are such that there is no material
profit recorded by Armstrong when they occur.

Armstrong receives nominal monthly payments from Armacell, the purchaser of its
former Insulation Products business, for some logistics and administrative
services under an agreement that currently expires in 2002.

As discussed in Item 13, AHI did not have any material related party
transactions with any of its outside directors.

38

Item 7A. Quantitative and Qualitative Disclosure About Market Risk
- -------------------------------------------------------------------

Market Risk
- -----------
Armstrong is exposed to market risk from changes in foreign currency exchange
rates, interest rates and commodity prices that could impact its results of
operations and financial condition. Armstrong uses financial instruments,
including fixed and variable rate debt, as well as swap, forward and option
contracts to finance its operations and to hedge interest rate, currency and
commodity exposures. Armstrong regularly monitors developments in the capital
markets and only enters into currency and swap transactions with established
counterparties having investment-grade ratings. Exposure to individual
counterparties is controlled, and thus Armstrong considers the risk of
counterparty default to be negligible. Swap, forward and option contracts are
entered into for periods consistent with underlying exposure and do not
constitute positions independent of those exposures. Armstrong uses derivative
financial instruments as risk management tools and not for speculative trading
purposes. In addition, derivative financial instruments are entered into with a
diversified group of major financial institutions in order to manage Armstrong's
exposure to nonperformance on such instruments.

Interest Rate Sensitivity
- -------------------------
Due to AWI's Chapter 11 Filing, all affected debt has been classified as
liabilities subject to compromise. All such debt will be addressed in the
Chapter 11 Case and during the pendency thereof, AWI does not expect to pay any
principal, interest or other payments in respect thereof. The table below
provides information about Armstrong's long-term debt obligations as of December
31, 2001, and December 31, 2000. The table presents principal cash flows and
related weighted-average interest rates by scheduled maturity dates.
Weighted-average variable rates are based on implied forward rates in the yield
curve at the reporting date. The information is presented in U.S. dollar
equivalents, which is Armstrong's reporting currency. The amounts below reflect
only post-petition debt and debt of entities that are not a part of the Chapter
11 Filing.

After
Scheduled maturity date 2002 2003 2004 2005 2006 2007 Total
---- ---- ---- ---- ---- ---- -----

($ millions)
- ------------
As of December 31, 2001
Long-term debt:
Fixed rate $ 6.1 $ 1.2 $ 3.0 $ 1.1 $15.6 $19.4 $46.4
Avg. interest rate 6.12% 5.26% 6.34% 7.50% 6.04% 5.37% 5.80%
- -----------------------------------------------------------------------------------------------------------------------------
Variable rate -- -- -- -- -- $10.0 $10.0
Avg. interest rate -- -- -- -- -- 2.20% 2.20%

After
2001 2002 2003 2004 2005 2006 Total
---- ---- ---- ---- ---- ---- -----

As of December 31, 2000
Long-term debt:
Fixed rate $16.5 $ 3.1 $ 3.2 $ 2.6 $ 1.0 $37.0 $63.4
Avg. interest rate 5.48% 5.44% 6.98% 4.99% 7.63% 6.08% 5.92%
- -----------------------------------------------------------------------------------------------------------------------------
Variable rate $ 2.0 -- -- -- -- $10.0 $12.0
Avg. interest rate 7.65% -- -- -- -- 5.30% 5.69%

Armstrong historically managed its ratio of fixed to floating rate debt with the
objective of achieving a mix that management believed to be appropriate. To
manage this mix in a cost effective manner, Armstrong, from time to time,
entered into interest rate swap agreements, in which it agreed to exchange
various combinations of fixed and/or variable interest rates based on
agreed-upon notional amounts. Because a significant portion of Armstrong's
pre-Chapter 11 debt has been classified as liabilities subject to compromise to
be addressed in the Chapter 11 Case, Armstrong does not currently maintain any
interest rate swap agreements.

Exchange Rate Sensitivity
- -------------------------
Armstrong manufactures and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in foreign
currency exchange rates. To a large extent, Armstrong's global manufacturing and
sales provide a natural hedge of foreign currency exchange rate movement, as
foreign currency expenses generally offset foreign currency revenues. At
December 31, 2001, Armstrong's major foreign currency exposures are to the
Canadian dollar, the Euro and the British pound.

39

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

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

The table below details Armstrong's outstanding currency instruments, all of
which have scheduled maturity before December 31, 2002.

Notional Amount (millions): December 31, 2001 December 31, 2000
- --------------------------- ----------------- -----------------
Forward contracts $189.9 $36.1
Fair Value (millions):
- ----------------------
Forward contracts $ 1.7 $ 1.7

Commodity Price Sensitivity
- ---------------------------
Armstrong purchases natural gas for use in the manufacture of ceiling tiles and
other products, as well as to heat many of its facilities. As a result,
Armstrong is exposed to movements in the price of natural gas. Armstrong has a
policy of minimizing natural gas cost volatility through derivative instruments,
including swap contracts, purchased call options, and zero-cash collars. The
table below provides information about Armstrong's natural gas contracts as of
December 31, 2001 that are sensitive to changes in commodity prices. Notional
amounts are in millions of Btu's (MMBtu) and price ranges. As of December 31,
2000, there were no outstanding natural gas contracts.

Maturing in:
---------------------------------------------------
On balance sheet commodity related derivatives 2002 2003 Total
------------- ------------- -------------

As of December 31, 2001
- -----------------------
Zero-cash collars:
Contract amounts (MMBtu) 5,500,000 1,740,000 7,240,000
Contract price range ($/MMBtu) $3.54 - $4.40 $2.89 - $4.23 $2.89 - $4.40
Liabilities at fair value (millions) $4.8 $0.4 $5.2

40

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------

INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
- -------------------------------------------

ARMSTRONG HOLDINGS, INC. AND SUBSIDIARIES
- -----------------------------------------

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

Consolidated Balance Sheets as of December 31, 2001 and 2000

Consolidated Statements of Earnings for the Years Ended December 31, 2001, 2000
and 1999

Consolidated Statements of Cash Flows for the Years Ended December 31, 2001,
2000 and 1999

Consolidated Statements of Shareholders' Equity for the Years Ended December 31,
2001, 2000 and 1999

Notes to Consolidated Financial Statements

Schedule II - Valuation and Qualifying Reserves

ARMSTRONG WORLD INDUSTRIES, INC. AND SUBSIDIARIES
- -------------------------------------------------

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

Consolidated Balance Sheets as of December 31, 2001 and 2000

Consolidated Statements of Earnings for the Years Ended December 31, 2001, 2000
and 1999

Consolidated Statements of Cash Flows for the Years Ended December 31, 2001,
2000 and 1999

Consolidated Statements of Shareholder's Equity for the Years Ended December 31,
2001, 2000 and 1999

Notes to Consolidated Financial Statements

Schedule II - Valuation and Qualifying Reserves

41

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
ARMSTRONG HOLDINGS, INC.

(millions except for per share data) First Second Third Fourth Total year
- ------------------------------------ ------- ------- ------- ------- ----------

2001 Net sales $ 780.3 $ 813.9 $ 804.7 $ 736.5 $ 3,135.4
- ----
Gross profit 197.6 219.7 198.9 157.4 773.6
Net earnings (loss) 20.3 32.1 41.2 (0.8) 92.8
Per share of common stock:
Basic: Net earnings (loss) 0.50 0.79 1.02 (0.02) 2.29
Diluted: Net earnings (loss) 0.50 0.78 1.01 (0.02) 2.27
Dividends per share of common stock 0.00 0.00 0.00 0.00 0.00
Price range of common stock--high 5.69 4.05 3.74 3.80 5.69
Price range of common stock--low 2.06 3.20 2.20 2.34 2.06

2000 Net sales $ 800.3 $ 863.4 $ 864.1 $ 721.6 $ 3,249.4
- ----
Gross profit 229.5 250.6 231.4 153.1 864.6
Net earnings (loss) 30.7 7.5 74.3 (100.3) 12.2
Per share of common stock:
Basic: Net earnings (loss) 0.77 0.19 1.84 (2.48) 0.30
Diluted: Net earnings (loss) 0.76 0.19 1.83 (2.48) 0.30
Dividends per share of common stock 0.48 0.48 0.48 0.00 1.44
Price range of common stock--high 36.81 20.50 17.38 12.19 36.81
Price range of common stock--low 16.06 15.30 11.81 0.75 0.75

Quarterly financial information for Armstrong is identical to the AHI
information above except for net 2000 earnings (loss) which is detailed below.
Per share information is not applicable to AWI since it does not have any
publicly traded stock.

(millions) First Second Third Fourth Total year
- ---------- ------- ------ ------- -------- ----------

2000 Net earnings $ 30.7 $ 7.1 $ 74.3 ($100.3) $ 11.8

The difference between the net earnings of AHI and Armstrong in the second
quarter of 2000 is primarily due to transactions that occurred related to the
formation of Armstrong Holdings, Inc.

Note: The net sales and gross profit amounts reported above are reported on a
continuing operations basis. These amounts differ from those previously reported
on Form 10-Q due to the reporting of discontinued operations. Net sales are also
impacted from the implementation of EITF Issue Nos. 00-010, 00-014 and 00-022
(see Note 2). The sum of the quarterly earnings per share data does not equal
the total year amounts due to changes in the average shares outstanding and, for
diluted data, the exclusion of the antidilutive effect in certain quarters.

Fourth Quarter 2001 Compared With Fourth Quarter 2000
- -----------------------------------------------------
Net sales of $736.5 million increased from sales of $721.6 million in the fourth
quarter of 2000. Resilient Flooring and Cabinet sales increased by 12.5% and
11.5%, respectively. Resilient Flooring sales in the Americas increased 18.2%
due to improved volumes and price mix, while Europe experienced a slight
increase of 1.4%. Cabinet sales increased due to favorable product mix and
volume growth. Textiles and Sports Flooring decreased 13.8% due to the weak
European market and a decline in demand from the leisure and travel industry.
Building Products decreased 6.2% due to a soft U.S. commercial market. Wood
Flooring increased 1.8% due to higher sales to the independent channel, while
sales to the home center market were flat.

Operating income from continuing operations of $1.8 million in the fourth
quarter of 2001 compared to an operating loss from continuing operations of $2.1
million in the fourth quarter of 2000. This increase was due to increased sales
and decreased SG&A expenses, offset by increased net restructuring costs.

For the fourth quarter, the cost of goods sold was 78.6% of sales in 2001
compared to 78.8% in 2000. In 2000, excluding a $5.4 million charge to cost of
goods sold for write-downs of production-line assets related to the
reorganization efforts that were not categorized as restructuring costs, the
fourth quarter cost of goods sold was

42

78.1%. These write-downs of production-line assets primarily related to changes
in production facilities and product offerings.

During the fourth quarter of 2001, a charge of $5.5 million was recorded to
revise management's best estimate for the accrual of workers compensation
claims. Additionally, the fourth quarter of 2001 includes $2.8 million of income
from the reversal of previously-accrued potential preference claims that have
been resolved, as well as $2.8 million of environmental and building demolition
expenses at one manufacturing facility.

Operating income in the fourth quarter of 2000 included a $4.2 million gain from
the divestiture of a component of the Textiles and Sports Flooring segment.

The fourth quarter of 2001 included $6.3 million in Chapter 11 reorganization
costs, net compared to $103.3 million in the fourth quarter of 2000. See Item 1
for further details.

Other income, net in 2001 included a $3.5 million gain from the demutualization
of an insurance company (Prudential Insurance Co.) with whom Armstrong has
company-owned life insurance policies.

When compared to the fourth quarter of 2000, the tax benefit rate for the fourth
quarter 2001 increased from 31.1% to 85.7% due primarily to the impact of lower
operating losses on permanent differences between book and tax. Other items
accounting for the remaining increase in the tax benefit rate included improved
foreign tax credit utilization and lower foreign taxes. The 2001 tax provision
reflects the reversal of certain state tax and other accruals no longer required
due to the completion of state tax audits and/or expiration of statutes of
limitation partially offset by certain nondeductible expenses.

A net loss of $0.8 million, or $0.02 per share, in the fourth quarter of 2001
compared to a net loss of $100.3 million, or $2.48 per share, in the fourth
quarter of 2000.

43

Armstrong Holdings, Inc., and Subsidiaries
Consolidated Statements of Earnings
(in millions, except per share amounts)

Years Ended December 31
2001 2000 1999
---- ---- ----

Net sales $3,135.4 $3,249.4 $3,322.9
Cost of goods sold 2,361.8 2,384.8 2,290.5
-------- -------- --------
Gross profit 773.6 864.6 1,032.4

Selling, general and administrative expenses 596.2 597.2 607.8
Charge for asbestos liability, net 22.0 236.0 335.4
Restructuring and reorganization charges (reversals), net 9.0 18.8 (1.4)
Goodwill amortization 22.8 23.9 25.5
Equity (earnings) from affiliates, net (16.5) (18.0) (16.8)
-------- -------- --------
Operating income 140.1 6.7 81.9

Interest expense (unrecorded contractual interest of $86.0, $6.0 and $0.0) 13.1 102.9 105.2
Other (income), net (1.2) (76.7) (6.6)
-------- -------- --------
Income (loss) from continuing operations before Chapter 11 reorganization costs
and income tax expense (benefit) 128.2 (19.5) (16.7)
Chapter 11 reorganization costs, net 12.5 103.3 -
-------- -------- --------

Earnings (loss) from continuing operations before income tax expense (benefit) 115.7 (122.8) (16.7)
Income tax expense (benefit) 42.5 (37.7) (0.5)
-------- -------- --------

Earnings (loss) from continuing operations $ 73.2 $ (85.1) $ (16.2)
-------- -------- --------

Income from discontinued operations, net of tax of $0.0, $3.9 and $15.4, respectively - 6.3 30.5
Gain (loss) on sale of discontinued operations, net of tax of $0.0 and $39.2, respectively (1.1) 114.8 -
Net loss on expected disposal of discontinued operations, net of tax of $0.0 and $10.7, respectively (3.3) (23.8) -
Net reversal of loss on discontinued operations no longer to be disposed, net of tax of $10.7 24.0 - -
-------- -------- --------
Earnings from discontinued operations 19.6 97.3 30.5
-------- -------- --------

Net earnings $ 92.8 $ 12.2 $ 14.3
======== ======== ========

Earnings (loss) per share of common stock, continuing operations:
Basic $ 1.81 $ (2.12) $ (0.41)
Diluted $ 1.79 $ (2.12) $ (0.41)

Earnings per share of common stock, discontinued operations:
Basic $ 0.48 $ 2.42 $ 0.76
Diluted $ 0.48 $ 2.42 $ 0.76

Net earnings per share of common stock:
Basic $ 2.29 $ 0.30 $ 0.36
Diluted $ 2.27 $ 0.30 $ 0.36

Average number of common shares outstanding:
Basic 40.5 40.2 39.9
Diluted 40.8 40.5 40.2

See accompanying notes to consolidated financial statements beginning on page
48.

44

Armstrong Holdings, Inc., and Subsidiaries
Consolidated Balance Sheets
(amounts in millions, except share and per share amounts)

As of December 31,
Assets 2001 2000
------ ---- ----

Current assets:
Cash and cash equivalents $ 277.4 $ 159.1
Accounts and notes receivable, net 316.5 369.0
Inventories, net 443.1 399.9
Deferred income taxes 11.5 10.0
Other current assets 65.8 84.0
-------- --------
Total current assets 1,114.3 1,022.0

Property, plant and equipment, less accumulated depreciation and
amortization of $1,143.3 and $1,091.0, respectively 1,283.7 1,321.0

Insurance receivable for asbestos-related liabilities, noncurrent 192.1 236.1
Prepaid pension costs 391.1 337.4
Investment in affiliates 39.6 37.3
Goodwill, net 822.8 846.0
Other intangibles, net 89.0 92.7
Deferred income tax assets, noncurrent - 6.8
Other noncurrent assets 101.8 105.9
-------- --------
Total assets $4,034.4 $4,005.2
======== ========

Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Short-term debt $ 18.9 $ 35.9
Current installments of long-term debt 6.1 18.5
Accounts payable and accrued expenses 298.6 292.0
Income taxes 40.8 30.7
Accrued loss on expected disposal of discontinued operations - 34.5
-------- --------
Total current liabilities 364.4 411.6
-------- --------

Liabilities subject to compromise 2,357.6 2,385.2

Long-term debt, less current installments 50.3 56.9
Postretirement and postemployment benefit liabilities 242.7 244.8
Pension benefit liabilities 147.2 156.8
Other long-term liabilities 84.6 77.9
Deferred income taxes 18.4 -
Minority interest in subsidiaries 8.8 6.9
-------- --------
Total noncurrent liabilities 2,909.6 2,928.5

Shareholders' 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 166.8 162.2
Reduction for ESOP loan guarantee (142.2) (142.2)
Retained earnings 1,244.3 1,151.5
Accumulated other comprehensive loss (47.1) (45.2)
Less common stock in treasury, at cost
2001 - 11,176,617 shares; 2000 - 11,034,325 shares (513.3) (513.1)
-------- --------
Total shareholders' equity 760.4 665.1
-------- --------

Total liabilities and shareholders' equity $4,034.4 $4,005.2
======== ========

See accompanying notes to consolidated financial statements beginning on page
48.

45

Armstrong Holdings, Inc., and Subsidiaries
Consolidated Statements of Shareholders' Equity
(amounts in millions, except per share amounts)

2001 2000 1999
---- ---- ----

Common stock, $1 par value:
- --------------------------
Balance at beginning and end of year $ 51.9 $ 51.9 $ 51.9
--------- -------- --------

Capital in excess of par value:
- ------------------------------
Balance at beginning of year $ 162.2 $ 176.4 $ 173.0
Stock issuances and other 4.6 (8.9) 3.4
Contribution of treasury stock to ESOP - (5.3) -
--------- -------- --------
Balance at end of year $ 166.8 $ 162.2 $ 176.4
--------- -------- --------

Reduction for ESOP loan guarantee:
- ---------------------------------
Balance at beginning of year $ (142.2) $ (190.3) $ (199.1)
Principal paid - 13.2 23.3
Loans to ESOP - (7.3) (12.8)
Interest on loans to ESOP - (1.1) (1.3)
Contribution of treasury stock to ESOP - (4.1) (5.8)
Impairment of loans to ESOP - 43.3 -
Accrued compensation - 4.1 5.4
--------- -------- --------
Balance at end of year $ (142.2) $ (142.2) $ (190.3)
--------- -------- --------

Retained earnings:
- -----------------
Balance at beginning of year $ 1,151.5 $1,196.2 $1,257.0
Net earnings for year 92.8 $ 92.8 12.2 $ 12.2 14.3 $ 14.3
Tax benefit on dividends paid on unallocated ESOP common shares - 1.2 1.8
--------- -------- --------
Total $ 1,244.3 $1,209.6 $1,273.1
Less common stock dividends (per share
$0.00 in 2001; $1.44 in 2000; $1.92 in 1999) - 58.1 76.9
--------- -------- --------
Balance at end of year $ 1,244.3 $1,151.5 $1,196.2
--------- -------- --------

Accumulated other comprehensive income (loss):
- ---------------------------------------------
Balance at beginning of year $ (45.2) $ (16.5) $ (25.4)
Foreign currency translation adjustments (3.3) (17.2) (3.4)
Derivative loss, net (3.3) - -
Impairment loss on available for sale securities 2.0 - -
Unrealized loss on available for sale securities - (2.0) -
Minimum pension liability adjustments 2.7 (9.5) 12.3
--------- -------- --------
Total other comprehensive income (loss) (1.9) (1.9) (28.7) (28.7) 8.9 8.9
--------- -------- -------- -------- -------- --------
Balance at end of year $ (47.1) $ (45.2) $ (16.5)
--------- -------- --------

Comprehensive income (loss) $ 90.9 $ (16.5) $ 23.2
- -------------------------- ======== ======== ========

Less treasury stock at cost:
- ---------------------------
Balance at beginning of year $ 513.1 $ 538.5 $ 547.7
Stock purchases 0.3 1.6 1.3
Stock issuance activity, net (0.1) (17.6) (2.6)
Contribution of treasury stock to ESOP - (9.4) (7.9)
--------- -------- --------
Balance at end of year $ 513.3 $ 513.1 $ 538.5
--------- -------- --------

Total shareholders' equity $ 760.4 $ 665.1 $ 679.2
========= ======== ========

See accompanying notes to consolidated financial statements beginning on page
48.

46

Armstrong Holdings, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
(amounts in millions)

Years Ended December 31,
2001 2000 1999
-------- -------- --------

Cash flows from operating activities:
Net earnings $ 92.8 $ 12.2 $ 14.3
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization, continuing operations 156.8 164.4 158.4
Depreciation and amortization, discontinued operations - 4.1 10.8
Loss (gain) on sale of businesses, net 0.9 (183.9) (1.0)
Reversal of loss on expected disposal of discontinued business (31.4) - -
Deferred income taxes 23.7 (35.7) (38.3)
Equity (earnings) from affiliates, net (16.5) (18.0) (16.8)
Chapter 11 reorganization costs, net 12.5 103.3 -
Chapter 11 reorganization costs payments (15.0) (2.6) -
Restructuring and reorganization charges (reversals) 9.0 18.8 (1.4)
Restructuring and reorganization payments (14.1) (7.9) (16.9)
Recoveries (payments) for asbestos-related claims, net 32.2 (199.2) (114.4)
Charge for asbestos liability, net 22.0 236.0 335.4
Impairment of long-lived assets 8.4 - -
Decrease in net assets of discontinued operations - - 0.6
Changes in operating assets and liabilities net of effects of
reorganizations, restructuring, acquisitions and dispositions
(Increase)/decrease in receivables 45.3 37.2 (23.1)
(Increase)/decrease in inventories (50.2) 13.8 (9.9)
(Increase)/decrease in other current assets 23.9 (12.6) 30.1
(Increase) in other noncurrent assets (60.4) (41.6) (52.6)
Increase/(decrease) in accounts payable and accrued expenses 10.6 (76.6) 86.0
Increase/(decrease) in income taxes payable 10.1 25.9 (12.2)
Increase/(decrease) in other long-term liabilities 3.7 (27.0) 15.1
Other, net 7.8 17.2 (16.6)
-------- -------- --------
Net cash provided by operating activities 272.1 27.8 347.5
-------- -------- --------

Cash flows from investing activities:
Purchases of property, plant and equipment, continuing operations (112.9) (147.1) (175.0)
Purchases of property, plant and equipment, discontinued operations - (3.0) (8.6)
Investment in computer software (14.9) (12.0) (11.6)
Acquisitions, net of cash acquired (5.6) (6.5) (3.8)
Distributions from equity affiliates 13.5 12.7 40.8
Proceeds from the sale of businesses - 329.9 88.3
Proceeds from the sale of assets 6.0 5.3 7.9
-------- -------- --------
Net cash (used for) provided by investing activities (113.9) 179.3 (62.0)
-------- -------- --------

Cash flows from financing activities:
Increase/(decrease) in short-term debt, net (15.8) 16.0 (69.7)
Issuance of long-term debt - 3.4 200.0
Payments of long-term debt (17.6) (36.3) (332.4)
Cash dividends paid - (58.1) (76.9)
Purchase of common stock for the treasury, net (0.3) (1.6) (1.3)
Proceeds from exercised stock options - 0.1 1.2
Other, net (4.2) 5.6 (2.8)
-------- -------- --------
Net cash used for financing activities (37.9) (70.9) (281.9)
-------- -------- --------

Effect of exchange rate changes on cash and cash equivalents (2.0) (3.7) (2.9)
-------- -------- --------

Net increase in cash and cash equivalents $ 118.3 $ 132.5 $ 0.7
Cash and cash equivalents at beginning of year 159.1 26.6 25.9
-------- -------- --------

Cash and cash equivalents at end of year $ 277.4 $ 159.1 $ 26.6
======== ======== ========

See accompanying notes to consolidated financial statements beginning on page
48.

47

Armstrong Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements

NOTE 1. BUSINESS AND CHAPTER 11 REORGANIZATION
- ----------------------------------------------
Armstrong 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.

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.

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 "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 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.

Three creditors' committees, one representing asbestos personal injury
claimants, one representing asbestos property damage claimants, and the other
representing other unsecured creditors, have been appointed in the Chapter 11
Case. In accordance with the provisions of the Bankruptcy Code, they have the
right to be heard on matters that come before the Court in the Chapter 11 Case.

During the fourth quarter of 2001, U.S. Third Circuit Court of Appeals assigned
U.S. District Judge Alfred M. Wolin of New Jersey to preside over the Chapter 11
Case in the District of Delaware. Judge Wolin also presides over four other
asbestos-related Chapter 11 cases pending in the District of Delaware. Judge
Wolin retained issues relating to asbestos personal injury claims and referred
other asbestos-related issues and bankruptcy-related matters to U.S. Bankruptcy
Judge Randall J. Newsome.

AWI intends to address all prepetition claims, including all asbestos-related
claims, in a plan of reorganization in its Chapter 11 Case. At this time, it is
impossible to predict how such a plan will treat such claims and how a plan will
impact the value of shares of common stock of AHI. Under the provisions of the
Bankruptcy Code, holders of equity interests may not participate under a plan of
reorganization unless the claims of creditors are satisfied in full or unless
creditors accept a reorganization plan which permits holders of equity interests
to participate. The formulation and implementation of a plan of reorganization
in the Chapter 11 Case could take a significant period of time. Currently, AWI
has the exclusive right to file a plan of reorganization until October 4, 2002,
and this date may be further extended by the Court.

AWI believes that progress is being made in the negotiations with the asbestos
personal injury claimants and the unsecured creditors committees with respect to
reaching resolution of the principal elements of a reorganization plan. However,
it is not possible to predict whether these negotiations will be successful.
Therefore, the timing of resolution of the Chapter 11 Case remains highly
uncertain.

48

Bar Date for Filing Claims
- --------------------------
The Court established August 31, 2001 as the bar date for all claims against AWI
except for certain 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 from the Chapter 11 Case. The Court extended the bar date for
claims from the U.S. Internal Revenue Service until March 29, 2002 and for
claims from several environmental agencies until the second quarter of 2002. In
March 2002, the Court ruled that the time to file claims related to asbestos
property damage would not be further extended, but allowed certain alleged
holders of asbestos property damage claims to file a class proof of claim
against AWI. Upon such filing, the Court will later determine whether the
proposed class should be certified. A bar date for asbestos-related personal
injury claims has not been set.

Approximately 4,400 proofs of claim totaling approximately $6.0 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 to determine their validity. 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 already identified and
successfully objected to approximately 900 claims totaling $1.4 billion. These
claims were, primarily, duplicate filings, amendments to previously filed claims
or claims that are not related to AWI. The Court disallowed these claims with
prejudice in January 2002.

In addition to the objected claims described above, approximately 1,000 proofs
of claim totaling approximately $1.9 billion were filed 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. AWI will address
all asbestos-related claims in the future within the Chapter 11 process. See
further discussion regarding AWI's liability for asbestos-related matters in
Note 28.

Approximately 500 proofs of claim totaling approximately $0.8 billion alleging
asbestos-related property damage were filed with the Court. Most of these claims
are new to AWI and many were submitted with insufficient documentation to assess
their validity. AWI has petitioned the Court to disallow approximately 50 claims
totaling approximately $0.5 billion. 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 28.

Approximately 2,000 claims totaling approximately $1.9 billion alleging a right
to payment for financing, environmental, trade debt and other claims were filed
with the Court. AWI has identified approximately 200 of these claims totaling
approximately $20 million that it believes should be disallowed by the Court.
For these categories of claims, AWI has previously recorded approximately $1.6
billion in liabilities. AWI continues to investigate the claims to determine
their validity.

AWI continues to evaluate claims. AWI has recorded liability amounts for those
claims that can be reasonably estimated and for which it believes are probable
of being allowed by the Court. At this time, it is impossible to reasonably
estimate the value of all the claims 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
- ---------
As of December 31, 2001, AWI had no outstanding debt borrowings under its $200
million debtor-in-possession credit facility (the "DIP Facility") and AWI had
$193.8 million of cash and cash equivalents, excluding cash held by its
non-debtor subsidiaries. As of December 31, 2001, AWI had approximately $8.4
million in letters of credit which were issued pursuant to the DIP Facility.
Borrowings are limited to an adjusted amount of receivables, inventories and
PP&E. AWI believes that the DIP Facility, together with cash generated from
operations, will be more than adequate to address its liquidity needs.
Borrowings under the DIP Facility, if any, and obligations to reimburse draws
upon the letters of credit constitute superpriority administrative expense
claims in the Chapter 11 Case. The DIP Facility is scheduled to expire on
December 6, 2002.

49

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

Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that
are subject to compromise and report them separately on the balance sheet. See
Note 4 for detail of the liabilities subject to compromise at December 31, 2001
and 2000. 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 consolidated balance sheet based upon maturity date.
AWI's estimated liability for personal injury asbestos claims is also recorded
in liabilities subject to compromise. See Note 28 for further discussion of
AWI's asbestos liability.

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.

SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as Chapter 11
reorganization costs, net. Accordingly, AWI recorded the following Chapter 11
reorganization activities in the fourth quarter and full year of 2001:

Three Months Ended Year Ended
(millions) December 31, 2001 December 31, 2001
- --------- ----------------- -----------------

Professional fees $ 7.3 $ 24.5
Interest income, post petition (1.1) (5.1)
Reductions to prepetition liabilities - (2.0)
Termination of prepetition lease obligation - (5.9)
Other (income) expense directly related to bankruptcy, net 0.1 1.0
------- -------
Total Chapter 11 reorganization costs, net $ 6.3 $ 12.5
======= =======

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

Interest income in the above table is from short-term investments of cash earned
by AWI subsequent to the Filing.

Reductions to prepetition liabilities represent the difference between the
prepetition invoiced amount and the actual cash payment made to certain vendors
due to negotiated settlements. These payments of prepetition obligations were
made pursuant to authority granted by the Court.

Termination of prepetition lease obligation 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 rejection of the lease contract in the Chapter 11 Case. This
amount was previously accrued in the third quarter of 2000 as part of a
restructuring charge when the decision to vacate the premises was made.

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 consolidated financial statements.
Further, a plan of reorganization could materially change the amounts and
classifications reported in the consolidated financial statements.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------

Use of Estimates. These financial statements are prepared in accordance with
- ----------------
generally accepted accounting principles and include management estimates and
judgments, where appropriate. Management utilizes estimates to record many items
including asbestos-related liabilities and insurance asset recoveries and
reserves for bad debts, inventory obsolescence, warranty, workers compensation,
general liability and environmental claims. Management determines the amount of
necessary reserves based upon all known relevant information. Management also
confers with outside parties, including outside counsel, where appropriate.
Actual results may differ from these estimates.

50

Consolidation Policy. The consolidated financial statements and accompanying
- --------------------
data in this report include the accounts of AHI and its majority-owned
subsidiaries. All significant intercompany transactions have been eliminated
from the consolidated financial statements. Certain prior year amounts have been
reclassified to conform to the current year presentation.

Revenue Recognition. Substantially all of AHI revenue from the sale of products
- -------------------
and the related accounts receivable is recorded as title transfers, generally on
the date of shipment. A provision is made for the estimated cost of rebates and
promotional programs that includes some estimates of applicable sales.
Provisions for estimated discounts and bad debt losses are based on knowledge of
specific customers and a review of outstanding accounts receivable balances.

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

Segments. AHI accounts for operating business segments based upon products and
- --------
services provided in accordance with SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." See Note 3 for segment descriptions and
required disclosure.

Advertising Costs. AHI recognizes advertising expenses as they are incurred.
- -----------------

Shipping and Handling Costs. Starting with the fourth quarter of 2000, AHI
- ---------------------------
applied the provisions of EITF Issue No. 00-010, "Accounting for Shipping and
Handling Fees and Costs". Consequently, in 2000 shipping and handling costs of
approximately $141.8 million and $136.6 million in 2000 and 1999, respectively,
have been reclassified from net sales to cost of goods sold (increasing both).
This change had no effect on gross margins or retained earnings as of any date.

Sales Incentives. In accordance with EITF Issue No. 00-014, "Accounting for
- ----------------
Certain Sales Incentives", in 2000 AHI reclassified certain sales incentives
from Selling, General and Administrative ("SG&A") expense to net sales (reducing
both) by $1.3 million and $1.2 million in 2000 and 1999, respectively. In
accordance with EITF Issue No. 00-022, "Accounting for `Points' and Certain
Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free
Products or Services to Be Delivered in the Future," in 2001 AHI reclassified
certain sales volume incentives from SG&A expense to net sales (reducing both)
by $30.0 million and $30.6 million in 2000 and 1999, respectively.

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

Taxes. Deferred tax assets and liabilities are recognized using enacted tax
- -----
rates for expected future tax consequences of events recognized in the financial
statements or tax returns. The tax benefit for dividends paid on unallocated
shares of stock held by the ESOP was recognized in shareholders' equity.

Gains and Losses on Divestitures. AHI generally records the gain or loss on
- --------------------------------
divested businesses in other income. Cash and Cash Equivalents. Short-term
investments that have maturities of three months or less when purchased are
considered to be cash equivalents.

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

Long-Lived Assets. Property, plant and equipment values are stated at
- -----------------
acquisition cost less accumulated depreciation and amortization. Depreciation
charges for financial reporting purposes are determined on the straight-line
basis at rates calculated to provide for the retirement of assets at the end of
their useful lives, generally as follows: buildings, 20 to 40 years; machinery
and equipment, 3 to 20 years. Impairment losses are recorded when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. For purposes of
calculating any impairment, fair values are determined using a net discounted
cash flows approach. When assets are disposed of or retired, their costs and
related depreciation are removed

51

from the financial statements and any resulting gains or losses normally are
reflected in "Selling, general and administrative expenses."

Costs of the construction of certain long-lived assets include capitalized
interest which is amortized over the estimated useful life of the related asset.
There was no capitalized interest recorded in 2001 due to the Chapter 11 Filing.
Capitalized interest was $0.4 million in 2000 and $4.3 million in 1999.

Goodwill and Other Intangibles. Goodwill and other intangibles are amortized on
- ------------------------------
a straight-line basis over periods from 3 to 40 years. On a periodic basis, AHI
estimates the future undiscounted cash flows of the businesses to which goodwill
relates in order to ensure that the carrying value of goodwill and other
intangibles has not been impaired.

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other
Intangible Assets." Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Statement 141 also specifies criteria that intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill. Statement 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually. Impairment losses, if any, will be
measured as of January 1, 2002 and recognized as the cumulative effect of a
change in accounting principle in 2002. Statement 142 will also require that
intangible assets with determinable useful lives be amortized over their
respective estimated useful lives to their estimated residual values and
reviewed for impairment in accordance with Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The adoption of FAS 141 in the third quarter of 2001 had no impact on AHI's
financial statements. AHI is required to adopt the provisions of Statement 142
effective January 1, 2002. AHI will be required to test goodwill for impairment
in accordance with the provisions of Statement 142 and record any impairment
charges to any affected assets by the end of 2002.

As of January 1, 2002, AHI has unamortized goodwill of $822.8 million and
unamortized identifiable intangible assets in the amount of $89.0 million, all
of which will be subject to the transition provisions of Statement 142.
Amortization expense related to goodwill was $22.8, $23.9 and $25.5 million for
the years ended December 31, 2001, 2000 and 1999, respectively. Armstrong is
currently in the process of analyzing the impact of Statement 142. The Wood
Flooring segment has $717.2 million of unamortized goodwill on its books as of
December 31, 2001. Based on preliminary assessments of the impact of adopting
Statement 142, AHI believes that a significant portion of this goodwill will be
considered impaired under the new accounting standard. AHI has not yet
determined the amount of any impairment, but expects to complete its analysis,
including valuations of tangibles and intangible assets, in the first half of
2002. Due to the complexity, timing and scale of the process, AHI is currently
unable to precisely determine the amount of the goodwill impairment charge but
expects the impairment charge in 2002 to be in excess of $300 million.

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

Financial Instruments and Derivatives. AHI uses derivatives and other financial
- -------------------------------------
instruments to diversify or offset the effect of currency, interest rate and
commodity price variability. See Note 17 for further discussion.

Fiscal Periods. The fiscal years of the Wood Flooring and Cabinets segments end
- --------------
on the Saturday closest to December 31, which was December 29, 2001, December
30, 2000, and January 2, 2000. No events occurred between these dates and
December 31 materially affecting AHI's financial position or results of
operations.

52

NOTE 3. NATURE OF OPERATIONS
- ----------------------------
Industry Segments
- -----------------

Textiles
&
For the year ended 2001 Resilient Building Wood Sports All Unallocated
-----------------------
Flooring Products Flooring Cabinets Flooring Other Corporate Total
-------- -------- -------- -------- -------- ----- --------- -----
(millions)
- ---------

Net sales to external customers $1,162.3 $ 830.7 $ 654.3 $ 225.2 $ 262.9 - - $3,135.4
Equity (earnings) from affiliates (0.1) (16.1) - - - $ (0.3) - (16.5)
Segment operating income (loss) 70.8 92.4 0.9 15.2 (0.7) 0.3 $ (38.8) 140.1
Restructuring and reorganization
charges, net of reversals 0.2 1.1 4.1 1.1 1.2 - 1.3 9.0
Segment assets 867.6 527.0 1,260.6 108.0 162.9 16.3 1,092.0 4,034.4
Depreciation and amortization 57.3 33.0 36.0 2.3 4.7 - 23.5 156.8
Investment in affiliates 0.9 22.4 - - - 16.3 - 39.6
Capital additions 43.9 32.2 22.7 2.1 8.6 - 18.3 127.8

Textiles
&
For the year ended 2000 Resilient Building Wood Sports All Unallocated
-----------------------
Flooring Products Flooring Cabinets Flooring Other Corporate Total
-------- -------- -------- -------- -------- ----- --------- -----
(millions)
--------

Net sales to external customers $1,236.3 $ 833.3 $ 684.6 $ 218.2 $ 277.0 - - $3,249.4
Intersegment sales 4.2 - - - - - - 4.2
Equity (earnings) from affiliates - (17.9) - - - $ (0.1) - (18.0)
Segment operating income (loss) 80.4 113.9 57.8 16.5 5.2 0.1 $ (267.2) 6.7
Restructuring and reorganization
charges, net of reversals 7.9 0.2 1.3 0.4 0.8 - 8.2 18.8
Segment assets 897.6 568.5 1,255.1 103.5 200.3 16.3 963.9 4,005.2
Depreciation and amortization 70.1 32.8 34.7 2.3 3.5 - 21.0 164.4
Investment in affiliates 1.1 19.9 - - - 16.3 - 37.3
Capital additions 52.0 43.6 32.5 6.2 11.1 - 13.7 159.1

Textiles
&
For the year ended 1999 Resilient Building Wood Sports All Unallocated
-----------------------
Flooring Products Flooring Cabinets Flooring Other Corporate Total
-------- -------- -------- -------- -------- ----- --------- -----
(millions)
- ---------

Net sales to external customers $1,329.8 $ 791.8 $ 629.3 $ 207.2 $ 313.3 $ 51.5 - $3,322.9
Intersegment sales 2.7 - - - - 20.7 - 23.4
Equity (earnings) from affiliates 0.1 (16.1) - - - (0.8) - (16.8)
Segment operating income (loss) 211.2 120.0 62.8 22.2 11.7 6.0 $ (352.0) 81.9
Restructuring and reorganization
reversals (1.1) (0.3) - - - - - (1.4)
Segment assets 1,071.4 535.1 1,206.3 101.7 211.2 16.0 939.9 4,081.6
Depreciation and amortization 71.2 34.1 33.9 2.2 3.5 2.8 10.7 158.4
Investment in affiliates 3.3 14.9 - - - 16.0 - 34.2
Capital additions 71.9 45.5 34.8 6.7 8.5 2.7 16.5 186.6

Due to certain management and organizational changes during the fourth quarter
of 2001, AHI redefined its segments and reclassified all prior periods to
conform with the current presentation. Accordingly, AHI recognized Wood Flooring
and Cabinets as separate reportable segments. Previously, these segments were
reported together as Wood Products.

Accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Performance of the segments is
evaluated on operating income before income taxes, restructuring charges,
unusual gains and losses, and interest expense. AHI accounts for intersegment
sales and transfers based upon its internal transfer pricing policy.

53

Resilient Flooring
- ------------------
Armstrong is a worldwide manufacturer of a broad range of resilient floor
coverings for homes and commercial and institutional buildings, which are sold
with adhesives, installation and maintenance materials and accessories.
Resilient flooring, in both sheet and tile forms, together with laminate
flooring and linoleum, are sold in a wide variety of types, designs, and colors.
Included are types of flooring that offer such features as ease of installation,
reduced maintenance (no-wax), and cushioning for greater underfoot comfort.
Resilient flooring products are sold to commercial, residential and
institutional customers through wholesalers, retailers (including large home
centers and buying groups), contractors, and to the hotel/motel and manufactured
homes industries.

Building Products
- -----------------
The Building Products segment includes commercial and residential ceiling
systems. Commercial suspended ceiling systems, designed for use in shopping
centers, offices, schools, hospitals, and other commercial and institutional
settings, are available in numerous colors, performance characteristics and
designs and offer characteristics such as acoustical control, accessibility to
the plenum (the area above the ceiling), rated fire protection, and aesthetic
appeal. Armstrong sells commercial ceiling materials and accessories to ceiling
systems contractors and to resale distributors. Ceiling materials for the home
provide noise reduction and incorporate features intended to permit ease of
installation. These residential ceiling products are sold through wholesalers
and retailers (including large home centers). Framework (grid) products for
Armstrong suspension ceiling systems products are manufactured through a joint
venture with Worthington Industries and are sold by both Armstrong and the joint
venture. Through a joint venture with a Chinese partner, a plant in Shanghai
manufactures ceilings for the Pacific area. During 2000, AHI acquired privately
held Switzerland-based Gema Holding AG ("Gema"), a manufacturer and installer of
metal ceilings. See Note 5 for further discussion.

Wood Flooring
- -------------
The Wood Flooring segment manufactures and distributes wood and other flooring
products. The Wood Flooring segment also distributes laminate flooring products.
These products are used primarily in residential new construction and
remodeling, with some commercial applications such as stores and restaurants.
Wood Flooring sales are generally made through independent wholesale flooring
distributors and retailers (including large home centers and buying groups)
under the brand names Bruce, Hartco and Robbins.

Cabinets
- --------
The Cabinets segment manufactures kitchen and bathroom cabinetry and related
products, which are used primarily in residential new construction and
remodeling. Cabinets are sold through both independent and Armstrong-owned
distributors under the brand names Bruce and IXL.

Textiles & Sports Flooring
- --------------------------
The Textiles and Sports Flooring business segment manufactures carpeting and
sports flooring products that are mainly sold in Europe. The carpeting products
consist principally of carpet tiles and broadloom used in commercial
applications as well as the leisure and travel industry. The sports flooring
products include artificial turf surfaces and indoor gymnasium floors. Both
product groups are sold through wholesalers, retailers and contractors.

All Other
- ---------
During most of 1999, "all other" included business units making a variety of
specialty products for the building, automotive, textile and other industries
worldwide. Gasket materials were sold for new and replacement use in automotive,
construction and farm equipment, appliance, small engine and compressor
industries. On June 30, 1999, Armstrong sold 65% of the gaskets business. Since
the divestiture, AHI has accounted for the gaskets business under the equity
method within the "all other" segment. Textile mill supplies, including cots and
aprons, were sold to equipment manufacturers and textile mills. On September 30,
1999, Armstrong sold the textiles business.

Concentration of Credit Risk
- ----------------------------
During 2001, AHI recognized revenue of approximately $340.8 million from The
Home Depot, Inc., from sales in the resilient flooring, building products and
wood flooring segments compared to approximately $373.2 million and $344.8
million in 2000 and 1999, respectively. No other customer represented more than
10% of AHI's revenue.

54

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

Geographic Areas
- ----------------
Net trade sales (millions) 2001 2000 1999
- -------------------------- ---------- ---------- ----------

Americas:
United States $ 2,187.6 $ 2,259.5 $ 2,291.4
Canada 113.5 122.7 118.8
Other Americas 23.5 25.5 26.2
---------- ---------- ----------
Total Americas $ 2,324.6 $ 2,407.7 $ 2,436.4
---------- ---------- ----------
Europe:
England $ 133.7 $ 130.3 $ 141.6
France 67.8 74.6 80.5
Germany 182.2 191.6 213.3
Italy 31.1 31.9 35.6
Netherlands 87.1 92.5 106.0
Russia 25.9 21.1 11.8
Switzerland 34.1 22.0 8.4
Other Europe 149.3 156.3 160.2
---------- ---------- ----------
Total Europe $ 711.2 $ 720.3 $ 757.4
---------- ---------- -----------
Pacific area:
Australia $ 25.3 $ 24.7 $ 28.1
China 24.1 27.7 23.9
Other Pacific area 50.2 69.0 77.1
---------- ---------- ----------
Total Pacific area $ 99.6 $ 121.4 $ 129.1
---------- ---------- ----------

Total net trade sales $ 3,135.4 $ 3,249.4 $ 3,322.9
========== ========== ==========

Long-lived assets (property, plant and equipment)
- -------------------------------------------------
at December 31 (millions) 2001 2000
------------------------- ---------- ----------
Americas:
United States $ 947.6 $ 960.3
Canada 14.6 14.2
Other Americas 0.1 0.1
---------- ----------
Total Americas $ 962.3 $ 974.6
---------- ----------
Europe:
Germany $ 166.9 $ 178.6
England 35.7 39.3
Netherlands 41.0 43.3
Belgium 23.8 30.2
France 11.5 11.9
Sweden 8.0 9.4
Other Europe 4.5 1.7
---------- ----------
Total Europe $ 291.4 $ 314.4
---------- ----------
Pacific area:
China $ 24.6 $ 26.2
Other Pacific area 5.4 5.8
---------- ----------
Total Pacific area $ 30.0 $ 32.0
---------- ----------
Total long-lived assets $ 1,283.7 $ 1,321.0
========== ==========

55

NOTE 4. LIABILITIES SUBJECT TO COMPROMISE
- -----------------------------------------
As a result of AWI's Chapter 11 filing (see Note 1), pursuant to SOP 90-7, AWI
is required to segregate prepetition liabilities that are subject to compromise
and report them separately on the balance sheet. Liabilities that may be
affected by a plan of reorganization are recorded at the amount of the expected
allowed claims, even if they may be settled for lesser amounts. Substantially
all of AWI's prepetition debt, now in default, is recorded at face value and is
classified within liabilities subject to compromise. Obligations of AHI
subsidiaries not covered by the Filing remain classified on the consolidated
balance sheet based upon maturity date. AWI's asbestos liability is also
recorded in liabilities subject to compromise. Prior to its Chapter 11 Filing,
AWI estimated its probable asbestos-related personal injury liability based upon
a variety of factors including historical settlement amounts, the incidence of
past claims, the mix of the injuries and occupations of the plaintiffs, the
number of cases pending against it and the status and results of broad-based
settlement discussions. AWI believes its previous range of probable and
estimable liability is more uncertain now than before. There are significant
differences in the way the asbestos-related personal injury claims may be
addressed under the bankruptcy process when compared to the tort system.
Accordingly, AWI currently is unable to estimate its ultimate liability in the
context of its Chapter 11 Case. Although not estimable, it is likely that the
actual liability will be significantly higher than the recorded liability. As
the Chapter 11 Case proceeds, there should be more clarity as to the extent of
the liability. See Note 28 for further discussion of AWI's asbestos liability.

Liabilities subject to compromise at December 31, 2001 and December 31, 2000 are
as follows:

(millions) 2001 2000
-------- --------- --------
Debt (at face value) $ 1,400.7 $1,400.4
Asbestos-related liability 690.6 690.6
Prepetition trade payables 52.2 60.1
Prepetition other payables and accrued interest 56.4 76.4
ESOP loan guarantee 157.7 157.7
--------- --------
Total liabilities subject to compromise $ 2,357.6 $2,385.2
========= ========

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

See Note 15 for detail of debt subject to compromise.

NOTE 5. ACQUISITIONS
- --------------------
On May 18, 2000, AHI acquired privately-held Switzerland-based Gema Holding AG
("Gema"), a manufacturer and installer of metal ceilings, for $6 million plus
certain contingent consideration not to exceed $25.5 million based on results
over the three year period ending December 31, 2002. Gema has two manufacturing
sites located in Austria and Switzerland and employs nearly 300 people. The
acquisition was recorded under the purchase method of accounting. The purchase
price was allocated to the assets acquired and the liabilities assumed based on
the estimated fair market value at the date of acquisition. Contingent
consideration, when and if paid, will be accounted for as additional purchase
price. The fair market value of tangible and identifiable intangible assets
acquired exceeded the purchase price by $24.2 million and this amount was
recorded as a reduction of the fair value of property, plant and equipment.

During 2001, AHI spent $5.6 million to purchase some of the remaining minority
interest of already-consolidated entities within the Resilient Flooring segment.
Approximately $5.0 million of the purchase price was allocated to goodwill.

NOTE 6. DISCONTINUED OPERATIONS
- -------------------------------
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 and a
new review of the business, industry and overall economy conducted by new senior
management. 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

56

Subsequently Retained". All prior periods have been reclassified to conform to
the current presentation. In addition to the information provided in Note 3, the
Textiles and Sports Flooring segment had liabilities of $142.6 million as of
December 31, 2000.

Based on the expected net realizable value of the business determined during the
negotiations to sell the business, AHI had recorded a pretax net loss of $34.5
million in the fourth quarter of 2000, $23.8 million net of tax benefit. AHI
also had 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 the 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, 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 AHI
anticipates lower demand in the future. Additionally, an inventory write-down of
$2.1 million was recorded in the third quarter of 2001 within cost of sales
related to certain products that will no longer be sold.

On May 31, 2000, Armstrong completed its sale of all of the entities, assets and
certain liabilities comprising its Insulation Products segment to Orion
Einundvierzigste Beteiligungsgesellschaft Mbh, a subsidiary of the Dutch
investment firm Gilde Investment Management N.V. for $264 million. The
transaction resulted in an after tax gain of $114.8 million, or $2.86 per share
in 2000. During 2001, AHI recorded a pretax loss of $1.1 million related to its
divestiture of its Insulation Products segment. This loss resulted from certain
post-closing adjustments.

NOTE 7. OTHER DIVESTITURES
- --------------------------
In November 2000, Armstrong sold a component of its Textiles and Sports Flooring
segment. As this divestiture included a business classified as held for sale
since its July 1998 acquisition, Armstrong had been recording the 2000 operating
losses of this business within SG&A expense. The overall 2000 impact was a
reduction of SG&A expense of $0.7 million.

On July 31, 2000, AHI completed the sale of its Installation Products Group
("IPG") to subsidiaries of the German company Ardex GmbH, for $86 million in
cash. Ardex purchased substantially all of the assets and liabilities of IPG
including its shares of the W.W. Henry Company. The transaction resulted in a
gain of $44.1 million ($60.2 million pretax) or $1.10 per share and was recorded
in other income. The financial results of IPG were reported as part of the
Resilient Flooring segment. The proceeds and gain are subject to a post-closing
working capital adjustment. Under the terms of the agreement and a related
supply agreement, AHI will purchase some of its installation products needs from
Ardex for an initial term of eight years, subject to certain minimums for the
first five years after the sale. The agreement also calls for price adjustments
based upon changing market prices for raw materials, labor and energy costs.

On September 30, 1999, Armstrong completed the sale of its Textile Products
Operations to Day International Group, Inc. The sale resulted in a loss of $3.2
million, or $0.08 per share, which was recorded in other income.

On June 30, 1999, Armstrong sold 65% of its ownership in Armstrong Industrial
Specialties, Inc. ("AISI"), its gasket products subsidiary, to a group of
investors including Citicorp Venture Capital Ltd. and the management of AISI for
a cash purchase price of approximately $36.1 million. The sale resulted in a
gain of approximately $6.0 million, or $0.15 per share, which was recorded in
other income.

On June 22, 1999, Armstrong sold its interest in the assets of Martin Surfacing,
Inc. Armstrong acquired this interest as part of its acquisition of DLW during
the third quarter of 1998. There was no material gain or loss on the
transaction.

57

On May 28, 1999, Armstrong's subsidiary DLW sold its furniture business for
total cash proceeds of $38.1 million. Armstrong acquired this business as part
of the acquisition of DLW in the third quarter of 1998 and had classified the
business as held for sale. There was no gain or loss on the transaction.

NOTE 8. RESTRUCTURING AND OTHER ACTIONS
- ---------------------------------------

The following table summarizes activity in the restructuring accruals for 2001
and 2000:

Beginning Cash Ending
(millions) Balance Payments Charges Reversals Other Balance
- ---------- ------------- ------------ --------------- ---------------- ----------- -----------

2001 $ 22.2 $ (14.1) $ 9.7 $ (2.8) $ (6.1) $ 8.9
2000 12.1 (7.9) 20.1 (1.4) (0.7) 22.2

A $5.4 million pre-tax 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, as a result of
streamlining the organization, 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.

In the second quarter of 2001, a $1.1 million reversal was recorded related to a
formerly occupied building for 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 the third quarter of 2001, a $1.4 million reversal was recorded related to
certain 2000 severance and benefit accruals that were no longer necessary and a
$0.3 million pre-tax charge was recorded for additional severance payments.

A $6.1 million pre-tax restructuring charge was recorded in the fourth quarter
of 2001. $5.2 million of the charge, which was allocated between Wood Flooring
and Cabinets, related to severance and enhanced retirement benefits for six
salaried employees, as a result of the on-going integration of the wood flooring
and resilient flooring operations. Of the $5.2 million, $0.5 million represented
non-cash charges for enhanced retirement benefits, which is accounted for as a
reduction of the prepaid pension asset, and accelerated vesting of restricted
stock awards. The remaining $0.9 million of the $6.1 million charge related to
severance benefits for more than twenty positions in the textiles and sports
flooring business, as a result of streamlining the organization. Also in the
fourth quarter of 2001, a $0.1 million reversal was recorded related to certain
severance and benefit accruals that were no longer necessary.

The amount 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 lease was rejected as part of
the Chapter 11 process. Accordingly, the $5.9 million reversal is recorded as a
reduction of Chapter 11 reorganization costs in accordance with SOP 90-7. See
Note 1 for further discussion. The remaining amount in "other" is related to
foreign currency translation.

Substantially all of the remaining balance of the restructuring accrual as of
December 31, 2001 relates to a noncancelable-operating lease, which extends
through 2017, and severance for terminated employees with extended payouts, the
majority of which will be paid by the second quarter of 2002.

A $20.2 million pre-tax reorganization charge was recorded in 2000, of which
$9.4 million related to severance and enhanced retirement benefits for more than
180 positions (approximately 66% related to salaried positions) within the
European resilient flooring and textiles and sports flooring businesses.
Reorganization actions include staff reductions due to the elimination of
administrative positions, the consolidation and closing of sales offices in
Europe and the closure of the Team Valley, England commercial tile plant. $2.6
million of the charge related to severance and enhanced retirement benefits for
15 corporate and line-of-business staff positions (all salaried positions) as a
result of streamlining the organization to reflect staffing needs for current
business conditions. Of the $2.6 million, $0.1 million represented a non-cash
charge for enhanced retirement benefits. $8.2 million of the charge primarily
related to the remaining payments on a noncancelable-operating lease for an
office facility in the U.S. The employees who occupied this office facility were
relocated to the corporate headquarters.

58

In addition, $1.4 million of the remaining accrual for the $74.4 million 1998
reorganization charge was reversed in 2000, comprising certain severance
accruals that were no longer necessary.

AHI also recorded a $17.6 million charge to cost of goods sold in 2000 for
write-downs of inventory and production-line assets related to the
reorganization efforts that were not categorized as restructuring costs. The
inventory write-downs were related to changes in product offerings, while the
write-downs of production-line assets primarily related to changes in production
facilities and product offerings.

During 2000, AHI also recorded costs within selling, general and administrative
expense of $3.8 million for severance payments to approximately 100 employees,
that were not classified as restructuring costs, and $2.3 million for fixed
asset impairments related to the decision to vacate certain office space in the
U.S.

NOTE 9. EQUITY INVESTMENTS
- --------------------------
Investments in affiliates were $39.6 million at December 31, 2001, an increase
of $2.3 million, primarily reflecting the equity earnings of AHI's 50% interest
in its WAVE joint venture and its remaining 35% interest in Interface Solutions,
Inc. ("ISI"). AHI continues to purchase certain raw materials from ISI under a
long-term supply agreement. Equity earnings from affiliates for 2001, 2000 and
1999 consisted primarily of income from a 50% interest in the WAVE joint venture
and the 35% interest in ISI.

AHI purchases some grid products from WAVE, its 50%-owned joint venture with
Worthington Industries. The total amount of these purchases was approximately
$38 million, $41 million and $42 million for the years ended December 31, 2001,
2000 and 1999, respectively. AHI also provides certain selling and
administrative processing services to WAVE for which it receives reimbursement.
Additionally, WAVE leases certain land and buildings from AHI. The terms of
these transactions are such that there is no material profit recorded by AHI
when they occur.

Condensed financial data for significant investments in affiliates accounted for
under the equity method of accounting are summarized below:

(millions) 2001 2000
- ---------- -------- --------

Current assets $ 72.4 $ 68.3
Non-current assets 32.3 34.4
Current liabilities 15.0 18.2
Long-term debt 50.0 50.0
Other non-current liabilities 1.2 0.4

(millions) 2001 2000 1999
- ---------- -------- -------- --------

Net sales $ 200.1 $ 212.2 $ 202.1
Gross profit 57.1 60.3 53.7
Net earnings 32.3 35.5 32.3

NOTE 10. ACCOUNTS AND NOTES RECEIVABLE
- --------------------------------------

(millions) 2001 2000
- ---------- -------- --------

Customer receivables $ 343.5 $ 401.0
Customer notes 7.7 10.8
Miscellaneous receivables 14.5 8.3
Less allowance for discounts and losses (49.2) (51.1)
-------- --------
Net accounts and notes receivable $ 316.5 $ 369.0
======== ========

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

59

NOTE 11. INVENTORIES
- --------------------
Approximately 41% of AHI's total inventory in 2001 and 42% in 2000 were valued
on a LIFO (last-in, first-out) basis. Inventory values were lower than would
have been reported on a total FIFO (first-in, first-out) basis, by $46.2 million
at the end of 2001 and $47.8 million at year-end 2000.

(millions) 2001 2000
- ---------- --------- ---------

Finished goods $ 269.6 $ 244.7
Goods in process 45.8 49.0
Raw materials and supplies 182.9 158.0
Less LIFO and other reserves (55.2) (51.8)
--------- ---------
Total inventories, net $ 443.1 $ 399.9
========= =========

NOTE 12. PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------

(millions) 2001 2000
- ---------- --------- ---------

Land $ 85.6 $ 92.4
Buildings 582.8 571.6
Machinery and equipment 1,698.2 1,676.2
Construction in progress 60.4 71.8
Less accumulated depreciation and amortization (1,143.3) (1,091.0)
--------- ---------
Net property, plant and equipment $ 1,283.7 $ 1,321.0
========= =========

NOTE 13. GOODWILL AND OTHER INTANGIBLES
- ----------------------------------------

(millions) 2001 2000
- ---------- --------- ---------

Goodwill $ 907.7 $ 908.9
Less accumulated amortization (84.9) (62.9)
Total goodwill, net $ 822.8 $ 846.0
-------- ---------

Other intangibles $ 128.1 $ 122.8
Less accumulated amortization (39.1) (30.1)
--------- ---------
Total other intangibles, net $ 89.0 $ 92.7
========= =========

Goodwill decreased by $23.2 million in 2001, primarily reflecting scheduled
amortization of $22.8 million. Unamortized computer software costs included in
other intangibles were $50.3 million at December 31, 2001, and $50.7 million at
December 31, 2000. See Note 2 for discussion of the impact of FASB Statement No.
142 "Goodwill and Other Intangible Assets."

NOTE 14. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- ----------------------------------------------

(millions) 2001 2000
- ---------- --------- ---------

Payables, trade and other $ 179.0 $ 175.2
Employment costs 47.5 41.2
Reorganization and severance payments, current portion (see Note 8) 2.0 2.7
Other 70.1 72.9
--------- ---------
Total accounts payable and accrued expenses $ 298.6 $ 292.0
========= =========

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

60

NOTE 15. DEBT
- -------------
(See Note 4 regarding treatment of prepetition debt.)

Average Average
year-end year-end
($ millions) 2001 interest rate 2000 interest rate
- ------------ -------- --------------- -------- ---------------

Borrowings under lines of credit $ 450.0 7.18% $ 450.0 7.18%
DIP Facility - - 5.0 9.50%
Commercial paper 50.0 6.75% 49.7 6.75%
Foreign banks 18.9 5.16% 31.0 6.00%
Bank loans due 2002-2006 39.5 5.47% 55.0 5.77%
9.00% medium-term notes due 2001 7.5 9.00% 7.5 9.00%
6.35% senior notes due 2003 200.0 6.35% 200.0 6.35%
6.50% senior notes due 2005 150.0 6.50% 150.0 6.50%
9.75% debentures due 2008 125.0 9.75% 125.0 9.75%
7.45% senior notes due 2029 200.0 7.45% 200.0 7.45%
7.45% senior quarterly interest bonds due 2038 180.0 7.45% 180.0 7.45%
Industrial development bonds 21.0 4.95% 21.3 5.64%
Capital lease obligations 6.3 7.25% 7.1 7.25%
Other 27.8 10.56% 30.1 10.27%
-------- --------------- -------- ---------------
Subtotal 1,476.0 7.24% 1,511.7 7.24%
Less debt subject to compromise 1,400.7 7.35% 1,400.4 7.35%
Less current portion and short-term debt 25.0 6.01% 54.4 6.22%
-------- --------------- -------- ---------------
Total long-term debt, less current portion $ 50.3 4.92% $ 56.9 5.51%
======== =============== ======== ===============

Approximately $42.8 million of the $75.3 million of total debt not subject to
compromise outstanding as of December 31, 2001 was secured with buildings and
other assets. As of December 31, 2000, approximately $58.9 million of the $111.3
million of total debt not subject to compromise outstanding was secured with
buildings and other assets.

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

2002 $ 6.1 2005 $ 1.1
2003 1.2 2006 15.6
2004 3.0

In accordance with SOP 90-7, AWI stopped recording interest expense on unsecured
prepetition debt effective December 6, 2000.

Debt from the table above included in liabilities subject to compromise
consisted of the following at December 31, 2001 and 2000.

($ millions) 2001 2000
- ------------ --------- ----------
Borrowings under lines of credit $ 450.0 $ 450.0
Commercial paper 50.0 49.7
9.00% medium-term notes due 2001 7.5 7.5
6.35% senior notes due 2003 200.0 200.0
6.50% senior notes due 2005 150.0 150.0
9.75% debentures due 2008 125.0 125.0
7.45% senior notes due 2029 200.0 200.0
7.45% senior quarterly interest bonds due 2038 180.0 180.0
Industrial development bonds 11.0 11.0
Other 27.2 27.2
--------- ---------
Total debt subject to compromise $ 1,400.7 $ 1,400.4
========= =========

Borrowings under the DIP Facility, if any, and obligations to reimburse draws
upon the letters of credit constitute a superpriority administrative expense
claim in the Chapter 11 Case. The $5.0 million which was outstanding under the
DIP Facility as of December 31, 2000 (drawn to pay fees related to
implementation of the DIP Facility) was repaid in January of 2001. At December
31, 2001, AWI had no borrowings under the DIP Facility, but did have
approximately $8.4 million in letters of credit issued pursuant to the DIP
Facility. Borrowings under the DIP Facility are limited to an

61

adjusted amount of receivables, inventories and property, plant and equipment.
Depending on the amount of borrowings, the DIP Facility carries an interest rate
range of either JP Morgan Chase's Alternate Bank Rate plus 50 to 100 basis
points or LIBOR plus 150 to 200 basis points. The DIP Facility also contains
several covenants including, among other things, limits on dividends and asset
sales, capital expenditures and a required ratio of debt to cash flow. The DIP
Facility is scheduled to expire on December 6, 2002.

On May 19, 1999, AWI completed a public offering of $200 million aggregate
principal amount of 7.45% senior notes due 2029. The net proceeds from this
offering were used to repay other indebtedness of AWI.

Other debt includes an $18.6 million zero-coupon note due in 2013 that was fully
amortized to its face value due to the Chapter 11 filing.

In addition, AHI's foreign subsidiaries have approximately $25.4 million of
unused short-term lines of credit available from banks. The credit lines are
subject to immaterial annual commitment fees.

In order to maintain the ratio of fixed to floating rate debt which management
believes is appropriate, AHI maintained $150 million of interest rate swaps
during most of 2000. AHI received fixed rates and paid floating rates on these
swaps. However, all but one of the interest rate swap agreements was terminated
when AHI defaulted on its commercial paper obligations on November 22, 2000. The
interest rate swap which had been outstanding at December 31, 2000 in the
notional amount of $20.0 million was terminated by the counter-party on February
26, 2001. There are no interest rate swap agreements outstanding at December 31,
2001.

NOTE 16. FINANCIAL INSTRUMENTS
- ------------------------------
AHI does not hold or issue financial instruments for trading purposes. The
estimated fair values of AHI's financial instruments are as follows:

2001 2000
-------------------------- ---------------------------
Carrying Estimated Carrying Estimated
(millions at December 31) amount fair value amount fair value
- ------------------------- ----------- ------------ ----------- -------------

Assets:
Foreign currency contract obligations $ 1.7 $ 1.7 -- --
Liabilities:
Debt subject to compromise 1,400.7 739.6 $ 1,400.4 $ 386.6
Long-term debt, including current portion 56.4 56.4 75.4 75.4
Natural gas contracts 5.2 5.2 -- --
Off-balance sheet financial instruments:
Foreign currency contract obligations -- -- -- 1.7
Interest rate swaps -- -- -- 0.3

The carrying amounts of cash and cash equivalents, receivables, accounts payable
and accrued expenses, short-term debt and current installments of long-term debt
approximate, fair value because of the short-term maturity of these instruments.
The fair value estimates of long-term debt were based upon quotes from major
financial institutions taking into consideration current rates offered to AHI
for debt of the same remaining maturities. Foreign currency contract obligations
and options, as well as interest rate swap fair values, are estimated by
obtaining quotes from major financial institutions.

AHI utilizes lines of credit and other commercial commitments in order to ensure
that adequate funds are available to meet operating requirements. On December
31, 2001, AHI had available lines of credit totaling $217.0 million and letters
of credit totaling $45.5 million. Lines of credit include AHI's foreign
subsidiaries unused short-term lines of credit of approximately $25.4 million
and the available DIP Facility of $191.6 million. Letters of credit are issued
to third party suppliers, insurance and financial institutions and can only be
drawn upon in the event of AHI's failure to pay its obligations to the
beneficiary. Standby letters of credit are currently arranged through AWI's DIP
Facility with JP Morgan Chase. Certain standby letters of credit arranged with
Wachovia prior to the Filing have been renewed at their scheduled expiration
date.

62

NOTE 17. DERIVATIVE FINANCIAL INSTRUMENTS
- -----------------------------------------
Effective January 1, 2001, AHI adopted Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), as
amended, which requires that all derivative instruments be reported on the
balance sheet at fair value and establishes criteria for designation and
effectiveness of hedging relationships. The cumulative effect of adopting FAS
133 as of January 1, 2001 was not material to AHI's financial statements.

AHI is exposed to market risk from changes in foreign currency exchange rates,
interest rates and commodity prices that could impact its results of operations
and financial condition. AHI uses financial instruments, including fixed and
variable rate debt, as well as swap, forward and option contracts to finance its
operations and to hedge interest rate, currency and commodity exposures. AHI
regularly monitors developments in the capital markets and only enters into
currency and swap transactions with established counter-parties having
investment grade ratings. Swap, forward and option contracts are entered into
for periods consistent with underlying exposure and do not constitute positions
independent of those exposures. AHI uses derivative financial instruments as
risk management tools and not for speculative trading purposes.

Interest Rate Risk - Due to AWI's Chapter 11 Filing, all affected debt was
- ------------------
classified as liabilities subject to compromise. All such debt will be addressed
in the Chapter 11 Case and during the pendency thereof, AWI does not expect to
pay any principal, interest or other payments in respect thereof. However, AHI
also has debt of entities that were not a part of the Chapter 11 filing, which
are being paid on schedule. At December 31, 2001, AHI had no open interest rate
swap contracts. Prior to the Chapter 11 filing, AHI managed its ratio of fixed
to floating rate debt with the objective of achieving a mix that management
believed to be appropriate. To manage this mix in a cost-effective manner, AHI,
from time to time, entered into interest rate swap agreements, in which it
agreed to exchange various combinations of fixed and/or variable interest rates
based on agreed-upon notional amounts.

Currency Rate Risk - AHI manufactures and sells its products in a number of
- ------------------
countries throughout the world and, as a result, is exposed to movements in
foreign currency exchange rates. To a large extent, AHI's global manufacturing
and sales provide a natural hedge of foreign currency exchange rate movement, as
foreign currency expenses generally offset foreign currency revenues. At
December 31, 2001, AHI's major foreign currency exposures are to the Canadian
dollar, the Euro and the British pound.

AHI has used foreign currency forward exchange contracts and purchased options
to reduce its exposure to the risk that the eventual net cash inflows and
outflows, resulting from the sale of product to foreign customers and purchases
from foreign suppliers, will be adversely affected by changes in exchange rates.
These derivative instruments are used for forecasted transactions and are
classified as cash flow hedges. These transactions allow AHI to further reduce
its overall exposure to exchange rate movements, since the gains and losses on
these contracts offset losses and gains on the transactions being hedged. Gains
and losses on these instruments are deferred in other comprehensive income until
the underlying transaction is recognized in earnings. The net fair value of
these instruments at December 31, 2001 was an asset of less than $0.1 million,
all of which is expected to be charged to earnings in the next twelve months.
The earnings impact is reported in either net sales or cost of goods sold to
match the underlying transaction being hedged. The earnings impact of these
hedges was not material during 2001.

AHI also uses foreign currency forward exchange contracts to hedge exposures
created by cross-currency inter-company loans. The underlying inter-company
loans are classified as short-term and translation adjustments related to these
loans are recorded in other income. The related derivative contracts are
classified as fair value hedges and the offsetting gains and losses on these
contracts are also recorded in other income. The fair value of these instruments
at December 31, 2001 was a $1.7 million asset, all of which is expected to be
charged to earnings in the next twelve months. During 2001, the net earnings
impact of these hedges was $0.5 million, recorded in other income, which was
comprised of a gain of approximately $8.6 million from the foreign currency
forward exchange contracts substantially offset by the 2001 translation
adjustment of approximately $8.1 million for the underlying inter-company loans.

Commodity Price Risk - AHI purchases natural gas for use in the manufacture of
- --------------------
many of its products and to heat many of its facilities. As a result, AHI is
exposed to movements in the price of natural gas. AHI has a policy of minimizing
cost volatility by purchasing natural gas forward contracts, option contracts,
and zero-cash collars. These instruments are designated as cash flow hedges. The
mark-to-market gain or loss on qualifying hedges is included in other
comprehensive income to the extent effective, and reclassified into cost of
goods sold in the period during which the underlying products are sold. The
mark-to-market gains or losses on ineffective portions of hedges are recognized
in cost of goods sold immediately. The fair value of these instruments at
December 31, 2001 was a $5.2 million liability, of which $4.8 million is
expected to be charged to earnings in the next twelve months. The earnings
impact of

63

these hedges, recorded in cost of goods sold, was a $8.8 million expense during
2001. The earnings impact of the ineffective portion of these hedges was not
material during 2001.

NOTE 18. INCOME TAXES
- ---------------------
The tax effects of principal temporary differences between the carrying amounts
of assets and liabilities and their tax bases are summarized in the table below.
Management believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize deferred tax
assets, except for certain foreign tax credit and net operating loss
carryforwards for which AHI has provided a valuation allowance of $95.8 million.
The $8.6 million of U.S. foreign tax credit will expire in 2005. AHI has
$1,058.3 million of state net operating losses with expirations between 2002 and
2021, and $110.1 million of foreign net operating losses, which will be carried
forward indefinitely. The valuation allowance increased by $26.0 million
primarily because of additional foreign and state net operating losses in
addition to increases in foreign tax credits and other basis adjustments.

Deferred income tax assets (liabilities) (millions) 2001 2000
- --------------------------------------------------- ---------- ----------

Postretirement and postemployment benefits $ 86.5 $ 92.0
Chapter 11 reorganization costs and restructuring costs 19.6 35.9
Asbestos-related liabilities 241.7 241.7
Foreign tax credit carryforward 8.6 6.4
Net operating losses 119.8 94.6
Other 79.0 87.3
---------- ----------
Total deferred tax assets 555.2 557.9
Valuation allowance (95.8) (69.8)
---------- ----------
Net deferred tax assets 459.4 488.1

Accumulated depreciation (186.6) (181.1)
Pension costs (118.1) (106.4)
Insurance for asbestos-related liabilities (72.1) (85.4)
Tax on unremitted earnings (27.0) (27.0)
Other (62.5) (71.4)
---------- ----------
Total deferred income tax liabilities (466.3) (471.3)
---------- ----------
Net deferred income tax (liabilities) assets (6.9) 16.8
Deferred income tax asset - current 11.5 10.0
---------- ----------
Deferred income tax (liability) asset - noncurrent $ (18.4) $ 6.8
========== ==========

Details of taxes (millions) 2001 2000 1999
- --------------------------- --------- --------- ---------

Earnings (loss) from continuing operations before income taxes:
Domestic $ 117.1 $ (135.9) $ 45.8
Foreign 14.1 23.0 57.0
Eliminations (15.5) (9.9) (119.5)
--------- --------- ---------
Total $ 115.7 $ (122.8) $ (16.7)
========= ========= =========
Income tax provision (benefit):
Current:
Federal $ 5.0 $ (12.2) $ 15.8
Foreign 13.2 7.6 6.6
State (0.6) 1.8 3.0
--------- --------- ---------
Total current 17.6 (2.8) 25.4
--------- --------- ---------
Deferred:
Federal 33.3 (32.7) (36.6)
Foreign (8.4) (2.5) 10.2
State -- 0.3 0.5
--------- --------- ---------
Total deferred 24.9 (34.9) (25.9)
--------- --------- ---------
Total income taxes (benefit) $ 42.5 $ (37.7) $ (0.5)
========= ========= =========

64

At December 31, 2001, unremitted earnings of subsidiaries outside the U.S. were
$259.2 million (at December 31, 2001 balance sheet exchange rates). AHI expects
to repatriate $77.0 million of earnings for which $27.0 million of U.S. taxes
were provided in 2000. No U.S. taxes have been provided on the remaining
unremitted earnings as it is AHI's intention to invest these earnings
permanently. If such earnings were to be remitted without offsetting tax credits
in the U.S., withholding taxes would be $5.8 million. The 2001 tax provision
reflects the reversal of certain state tax and other accruals no longer required
due to the completion of state tax audits and/or expiration of statutes of
limitation partially offset by certain nondeductible expenses.

Reconciliation to U.S. statutory tax rate (millions) 2001 2000 1999
- ---------------------------------------------------- -------- -------- --------

Continuing operations tax (benefit) at statutory rate $ 40.5 $ (43.4) $ (5.8)
State income taxes, net of federal benefit 2.0 1.8 2.0
(Benefit) on ESOP dividend -- (1.0) (1.3)
Tax on foreign and foreign-source income (6.5) 4.4 3.4
Goodwill 6.7 9.9 7.1
Change in valuation allowance -- -- (4.0)
Sale of subsidiary -- (9.1) --
Other items, net (0.2) (0.3) (1.9)
-------- -------- --------
Tax expense (benefit) at effective rate $ 42.5 $ (37.7) $ (0.5)
======== ======== ========

Other taxes (millions) 2001 2000 1999
- ---------------------- -------- -------- --------

Payroll taxes $ 74.2 $ 73.9 $ 81.1
Property, franchise and capital stock taxes 15.7 20.0 15.9

NOTE 19. OTHER LONG-TERM LIABILITIES
- ------------------------------------

(millions) 2001 2000
- ---------- -------- --------
Long-term deferred compensation arrangements $ 42.2 $ 44.9
Environmental liabilities not subject to compromise 10.2 8.8
Other 32.2 24.2
-------- --------
Total other long-term liabilities $ 84.6 $ 77.9
======== ========

NOTE 20. RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN (RSSOP)
- ------------------------------------------------------------
In 1989, Armstrong established an Employee Stock Ownership Plan ("ESOP") that
borrowed $270 million from banks and insurance companies, repayable over 15
years and guaranteed by AWI. The ESOP used the proceeds to purchase 5,654,450
shares of a new series of convertible preferred stock issued by Armstrong. In
1996, the ESOP was merged with the Retirement Savings Plan for salaried
employees (a defined-contribution pension plan) to form the Retirement Savings
and Stock Ownership Plan ("RSSOP"). On July 31, 1996, the trustee of the ESOP
converted the preferred stock held by the trust into approximately 5.1 million
shares of common stock at a one-for-one ratio.

The number of shares released for allocation to participant accounts has been
based on the proportion of principal and interest paid to the total amount of
debt service remaining to be paid over the life of the borrowings. Through
December 31, 2001, the RSSOP allocated 2,732,000 shares to participants that
remain outstanding, participants retired 1,693,000 shares, AHI contributed an
additional 437,000 shares from its treasury and the trustee purchased 243,000
shares on the open market to allocate to employees. As of December 31, 2001,
there were approximately 1,912,000 shares in the RSSOP that had yet to be
allocated to participants.

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

The RSSOP currently covers parent company nonunion employees and some union
employees.

65

Details of ESOP debt service payments (millions) 2000 1999
- ------------------------------------------------ -------- --------
Common stock dividends paid $ 4.5 $ 8.9
Employee contributions 1.2 7.7
Company contributions 7.0 8.9
Company loans to ESOP 7.3 12.9
------ ------
Debt service payments made by ESOP trustee $ 20.0 $ 38.4
====== ======

AHI recorded costs for the RSSOP of $3.5 million in 2001, $10.5 million in 2000
and $13.1 million in 1999, which related to company contributions.

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

During the fourth quarter of 2000, AWI amended the RSSOP to provide for a cash
match of employee contributions in lieu of the stock match. AHI recorded an
expense of $3.5 million in 2001 and $0.5 million in 2000 related to the cash
match.

The trustee borrowed from AWI $7.3 million in 2000 and $12.9 million in 1999.
These loans were made to ensure that the financial arrangements provided to
employees remained consistent with the original intent of the RSSOP. Such loans
receivable were included as a component of shareholders' equity. In December
2000, in connection with the Chapter 11 Filing of AWI and default on RSSOP loan
obligations, AHI recorded an impairment charge of $43.3 million related to these
loans receivable in view of the fact that the only asset of the RSSOP consisted
of the stock of AHI which had diminished substantially in value. The impairment
was recorded as a component of Chapter 11 reorganization costs. In July 2001,
the Court in AWI's Chapter 11 Case authorized the Board of Directors of
Armstrong to forgive the entire amount of all principal and interest on
outstanding loans to the RSSOP.

NOTE 21. STOCK-BASED COMPENSATION PLANS
- ---------------------------------------
Awards under the 1993 Long-Term Stock Incentive Plan ("1993 Plan") were made in
the form of stock options, stock appreciation rights in conjunction with stock
options, performance restricted shares and restricted stock awards. No
additional awards may be issued under the 1993 Plan.

During 1999, AHI adopted the 1999 Long-Term Incentive Plan ("1999 Plan") which
replaced the 1993 Plan. The 1999 Plan is similar to the 1993 Plan in that it
provides for the granting of incentive stock options, nonqualified stock
options, stock appreciation rights, performance-restricted shares and restricted
stock awards. The 1999 Plan also incorporates stock awards and cash incentive
awards. No more than 3,250,000 shares of common stock may be issued under the
1999 Plan, and no more than 300,000 of the shares may be awarded in the form of
performance restricted shares, restricted stock awards or stock awards. No
awards under the 1999 Plan will be granted after April 25, 2009. Pre-1999 grants
made under predecessor plans will be governed under the provisions of those
plans.

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

Approximately 1,702,000 stock options were cancelled as a result of a restricted
stock for stock option exchange program offered to employees in 2000. Employees
other than the CEO holding stock options were given a one-time opportunity to
exchange their stock options with exercise prices above $50 per share for shares
of AHI restricted stock based on specified conversion ratios. The shares issued
under this exchange program were issued under the 2000 Plan and will be fully
vested by August 2002. Expenses related to this event were $0.7 million in 2001
and $1.5 million in 2000.

66

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

Changes in option shares outstanding
(thousands except for share price) 2001 2000 1999
- ---------------------------------- -------- --------- --------
Option shares at beginning of year 2,777.5 3,509.5 2,783.7
Options granted 100.0 1,818.5 829.7
Option shares exercised -- -- (54.5)
Stock appreciation rights exercised -- -- (0.2)
Options cancelled (194.9) (2,550.5) (49.2)
-------- --------- --------
Option shares at end of year 2,682.6 2,777.5 3,509.5

Option shares exercisable at end of year 1,551.7 973.3 1,828.0
Shares available for grant 4,161.5 4,068.7 3,307.3

Weighted average price per share:
Options outstanding $ 30.36 $ 30.69 $ 58.48
Options exercisable 39.51 48.92 57.12
Options granted 3.60 18.24 50.70
Option shares exercised N/A N/A 36.17

The table below summarizes information about stock options outstanding at
December 31, 2001.
(thousands except for life and share price)

Options outstanding Options exercisable
----------------------------------------------------- --------------------------------
Weighted-
Number average Weighted- Number Weighted-
Range of outstanding remaining average exercisable average
exercise prices at 12/31/01 contractual life exercise price at 12/31/01 exercise price
- --------------- ----------- ---------------- -------------- ----------- --------------

$1.19 - $18.00 300.0 8.9 $ 7.05 66.7 $ 8.78
$18.01 - $19.50 1,382.3 8.2 19.44 525.7 19.44
$19.51 - $46.00 393.4 2.6 40.09 387.9 40.28
$46.01 - $60.00 427.7 4.5 55.11 393.9 55.57
$60.01 - $84.00 179.2 5.9 73.14 177.5 73.17
---------- ----------
2,682.6 1,551.7
========== ==========

Performance restricted shares issuable under the 1993 and 1999 plans entitle
certain key executive employees to earn shares of AHI's common stock, but only
if the total company or individual business units meet certain predetermined
performance measures during defined performance periods (generally three years).
At the end of performance periods, common stock awarded may carry additional
restriction periods, during which time AHI will hold the shares in custody until
the expiration or termination of restrictions. Compensation expense is charged
to earnings over the performance period. There were only 563 shares of
performance restricted common stock outstanding at December 31, 2001, with no
accumulated dividend equivalent shares. The performance period for these shares
has ended, but the restriction period does not end until 2002.

Restricted stock awards can be used for the purposes of recruitment, special
recognition and retention of key employees. No award of restricted stock shares
was granted in 2001. At the end of 2001, there were 195,934 restricted shares of
common stock outstanding with 4,720 accumulated dividend equivalent shares.

67

SFAS No. 123, "Accounting for Stock-Based Compensation," permits entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
earnings and pro forma earnings per share disclosures. Had compensation costs
for these plans been determined consistent with SFAS No. 123, AHI's net earnings
and earnings per share would have been reduced to the following pro forma
amounts.

(millions) 2001 2000 1999
- ---------- -------- -------- --------
Net earnings:
- -------------
As reported $92.8 $12.2 $14.3
Pro forma 90.6 7.0 7.0

Basic earnings per share:
- -------------------------
As reported 2.29 0.30 0.36
Pro forma 2.24 0.17 0.18

Diluted earnings per share:
- ---------------------------
As reported 2.27 0.30 0.36
Pro forma 2.22 0.17 0.17

The fair value of grants was estimated on the date of grant using the
Black-Scholes option pricing model with the weighted-average assumptions for
2001, 2000 and 1999 presented in the table below. The weighted-average fair
value of stock options granted in 2001, 2000 and 1999 was $1.21, $2.08 and $9.75
per share, respectively.

2001 2000 1999
-------- -------- --------
Risk-free interest rate 4.57% 6.48% 6.34%
Dividend yield 0% 9.50% 5.75%
Expected life 5 years 5 years 5 years
Volatility 28% 28% 28%

Because the SFAS No. 123 method of accounting has not been applied to grants
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.

NOTE 22. EMPLOYEE COMPENSATION
- ------------------------------
Employee compensation is presented in the table below. Charges for severance
costs and early retirement incentives to terminated employees (otherwise
recorded as restructuring charges) have been excluded.

Employee compensation cost (millions) 2001 2000 1999
- ------------------------------------- -------- -------- --------
Wages and salaries $ 685.3 $ 669.3 $ 669.9
Payroll taxes 74.2 73.9 81.1
Pension credits, net (32.0) (38.4) (29.7)
Insurance and other benefit costs 92.3 70.8 64.2
Stock-based compensation 2.7 4.4 4.2
-------- -------- --------
Total $ 822.5 $ 780.0 $ 789.7
======== ======== ========

The increases in insurance and other benefit costs are primarily related to
increased medical benefit costs.

NOTE 23. PENSION AND OTHER BENEFIT PROGRAMS
- -------------------------------------------
Armstrong and a number of its subsidiaries have pension plans and postretirement
medical and insurance benefit plans covering eligible employees worldwide.
Armstrong also has defined-contribution pension plans (including the Retirement
Savings and Stock Ownership Plan, as described in Note 20) for eligible
employees. Benefits from pension plans, which cover substantially all employees,
are based on an employee's compensation and years of service. When necessary,
pension plans are funded by Armstrong. Postretirement benefits are funded by
Armstrong on a pay-as-you-go basis, with the retiree paying a portion of the
cost for health care benefits by means of deductibles and contributions.
Armstrong announced in 1989 and 1990 a 15-year phase-out of its health care
benefits for certain future retirees. These future retirees include parent
company nonunion employees and some union employees. Shares of RSSOP common
stock were allocated to eligible active employees through June 2000, based on
employee age and years to expected retirement, to help

68

employees offset their future postretirement medical costs. The RSSOP was
amended in November 2000 to suspend future allocations and in December 2000,
Armstrong used cash to fund this benefit. In 2001, an equity share allocation
was made to all eligible active full-time employees as of July 26, 2001. The
allocation was made as a result of Armstrong's forgiveness of loans receivable
from the RSSOP.

Effective November 1, 2000, an amendment to the Retirement Income Plan (RIP), a
qualified U.S. defined benefit plan, established an additional benefit known as
the ESOP Pension Account to partially compensate active employee and retiree
ESOP shareholders for the decline in the market value of AHI's stock. The effect
of this amendment had no material impact to the financial position or results of
operations in 2000, but increased the benefit obligation by $92.2 million and
decreased the pension credit by $11.7 million in 2001. The RIP document was
revised to reflect these changes.

The following tables summarize the balance sheet impact, as well as the benefit
obligations, assets, funded status and rate assumptions associated with the
pension and postretirement benefit plans. The plan assets are primarily stocks,
mutual funds and bonds. Included in these assets were 1,426,751 shares of AHI
common stock at year-end 2001 and 2000. The pension benefits disclosures include
both the RIP and the Retirement Benefit Equity Plan, which is a nonqualified,
unfunded plan designed to provide pension benefits in excess of the limits
defined under Sections 415 and 401(a)(17) of the Internal Revenue Code.

Retiree Health and Life
Pension Benefits Insurance Benefits
------------------------ -----------------------
U.S. defined-benefit plans (millions) 2001 2000 2001 2000
- ------------------------------------- --------- --------- -------- --------

Change in benefit obligation:
Benefit obligation as of January 1 $ 1,132.4 $ 1,079.4 $ 258.6 $ 233.3
Service cost 14.9 13.9 3.5 2.8
Interest cost 93.0 84.0 20.1 18.7
Plan participants' contributions -- -- 3.7 3.4
Plan amendments 79.6 25.8 -- --
Divestitures -- (4.0) -- (0.1)
Effect of settlements -- (5.9) -- --
Effect of special termination benefits 2.9 1.4 -- --
Actuarial gain 92.7 33.0 128.6 26.6
Benefits paid (91.1) (95.2) (29.9) (26.1)
--------- --------- -------- --------
Benefit obligation as of December 31 $ 1,324.4 $ 1,132.4 $ 384.6 $ 258.6
========= ========= ======== ========

Change in plan assets:
Fair value of plan assets as of January 1 $ 1,790.6 $ 1,748.3 -- --
Actual return on plan assets 32.9 137.9 -- --
Divestitures -- (3.7) -- --
Effect of settlements -- (5.9) -- --
Employer contribution 3.5 9.2 $ 26.2 $ 22.7
Plan participants' contributions --- -- 3.7 3.4
Benefits paid (91.1) (95.2) (29.9) (26.1)
--------- --------- -------- --------
Fair value of plan assets as of December 31 $ 1,735.9 $ 1,790.6 $ 0.0 $ 0.0
========= ========= ======== ========

Funded status $ 411.5 $ 658.2 $ (384.6) $ (258.6)
Unrecognized net actuarial loss (gain) (187.2) (422.7) 160.8 48.6
Unrecognized transition asset (2.1) (8.3) -- --
Unrecognized prior service cost (benefit) 148.5 86.1 9.9 (4.2)
--------- --------- -------- --------
Net amount recognized $ 370.7 $ 313.3 $ (213.9) $ (214.2)
========= ========= ======== ========

69

The funded status of U.S. defined-benefit plans was determined using the
assumptions presented in the table below.

Retiree Health and Life
Pension Benefits Insurance Benefits
----------------------- -----------------------
U.S. defined-benefit plans 2001 2000 2001 2000
- -------------------------- ---------- ---------- ---------- ----------

Weighted-average assumption as of
December 31:
Discount rate 7.00% 7.50% 7.00% 7.50%
Expected return on plan assets 8.75% 9.50% n/a n/a
Rate of compensation increase 4.00% 4.25% 4.00% 4.25%

Amounts recognized in the consolidated balance sheets consist of:

Retiree Health and Life
Pension Benefits Insurance Benefits
----------------------- -----------------------
(millions) 2001 2000 2001 2000
- ---------- ---------- ---------- ---------- ----------

Prepaid benefit costs $ 386.9 $ 333.6
Accrued benefit liability (30.4) (34.5) $ (213.9) $ (214.2)
Intangible asset 1.2 1.6 -- --
Other comprehensive income 13.0 12.6 -- --
---------- ---------- ---------- ----------
Net amount recognized $ 370.7 $ 313.3 $ (213.9) $ (214.2)
========== ========== ========== ==========

Pension Benefits
-----------------------
U.S. pension plans with benefit obligations in excess of assets (millions) 2001 2000
- -------------------------------------------------------------------------- ---------- ----------

Projected benefit obligation, December 31 $ 33.2 $ 44.7
Accrued benefit obligation, December 31 30.4 34.5
Fair value of plan assets, December 31 -- --

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

The components of pension credit are as follows:

Pension Benefits
----------------------------------------
U.S. defined-benefit plans (millions) 2001 2000 1999
- ------------------------------------- ----------- ------------- ------------

Service cost of benefits earned during the year $ 14.9 $ 13.9 $ 16.7
Interest cost on projected benefit obligation 93.0 84.0 76.6
Expected return on plan assets (164.4) (153.6) (147.0)
Amortization of transition asset (6.2) (6.2) (6.2)
Amortization of prior service cost 17.5 11.9 10.0
Recognized net actuarial gain (11.6) (13.9) (17.3)
----------- ------------- ------------
Net periodic pension credit $ (56.8) $ (63.9) $ (67.2)
=========== ============= ============

Costs for other funded and unfunded pension plans were $11.8 million in 2001,
$5.6 million in 2000 and $7.1 million in 1999.

The components of postretirement benefit cost are as follows:

Retiree Health and
Life Insurance Benefits
----------------------------------------
U.S. defined-benefit plans (millions) 2001 2000 1999
- ------------------------------------- ----------- ------------- ------------

Service cost of benefits earned during the year $ 3.5 $ 2.8 $ 3.2
Interest cost on accumulated postretirement benefit obligation 20.1 18.7 17.0
Amortization of prior service cost (benefit) 0.3 (0.9) (0.9)
Recognized net actuarial loss 2.2 1.0 0.6
----------- ------------- ------------
Net periodic postretirement benefit cost $ 26.1 $ 21.6 $ 19.9
=========== ============= ============

70

For measurement purposes, an average rate of 12% annual increase in the per
capita cost of covered health care benefits was assumed for 2002, decreasing 1%
per year to an ultimate rate of 6%. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects:

One percentage point
-----------------------------
U.S. retiree health and life insurance benefit plans (millions) Increase Decrease
- --------------------------------------------------------------- -------------- --------------

Effect on total of service and interest cost components $ 2.4 $ (2.0)
Effect on postretirement benefit obligation 36.5 (30.8)

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

Pension Benefits
----------------------
Non-U.S. defined-benefit plans (millions) 2001 2000
- ----------------------------------------- -------- --------
Change in benefit obligation:
Benefit obligation as of January 1 $ 290.8 $ 300.6
Service cost 7.9 7.2
Interest cost 15.5 14.6
Plan participants' contributions 2.2 2.1
Plan amendments 1.8 0.7
Acquisitions -- 22.7
Divestitures -- (0.6)
Effect of settlements -- (33.6)
Effect of special termination benefits 0.3 (0.7)
Foreign currency translation adjustment (11.2) (24.4)
Actuarial loss (gain) (8.4) 15.3
Benefits paid (13.6) (13.1)
-------- --------
Benefit obligation as of December 31 $ 285.3 $ 290.8
======== ========

Change in plan assets:
Fair value of plan assets as of January 1 $ 179.2 $ 163.4
Actual return on plan assets (18.1) 2.4
Acquisitions -- 22.1
Divestitures -- (0.6)
Employer contributions 11.8 44.4
Plan participants' contributions 2.2 2.1
Effect of settlements -- (33.6)
Foreign currency translation adjustment (4.7) (7.9)
Benefits paid (13.6) (13.1)
-------- --------
Fair value of plan assets as of December 31 $ 156.8 $ 179.2
======== ========

Funded status $(128.5) $(111.6)
Unrecognized net actuarial gain 13.5 (3.6)
Unrecognized transition obligation (asset) 0.2 (1.3)
Unrecognized prior service cost 5.7 3.9
-------- --------
Net amount recognized $(109.1) $(112.6)
======== ========

71

Amounts recognized in the consolidated balance sheets consist of:

Pension Benefits
----------------------
(millions) 2001 2000
- ---------- -------- --------
Prepaid benefit cost $ 5.9 $ 5.6
Accrued benefit liability (121.3) (126.0)
Intangible asset 0.7 0.1
Other comprehensive income 5.6 7.7
-------- --------
Net amount recognized $ (109.1) $ (112.6)
======== ========

Non-U.S. pension plans with benefit obligations Pension Benefits
----------------------
in excess of assets (millions) 2001 2000
- ------------------------------ -------- --------
Projected benefit obligation, December 31 $ 124.7 $ 128.7
Accrued benefit obligation, December 31 119.5 124.3
Fair value of plan assets, December 31 2.3 2.7

The components of pension cost are as follows:

Non-U.S. defined-benefit plans (millions) 2001 2000 1999
- ----------------------------------------- --------- --------- ---------

Service cost of benefits earned during the year $ 7.9 $ 7.2 $ 8.4
Interest cost on projected benefit obligation 15.5 14.6 18.1
Expected return on plan assets (11.0) (9.9) (8.0)
Amortization of transition obligation 0.3 0.2 0.2
Amortization of prior service cost 0.4 1.0 0.4
Recognized net actuarial gain (0.1) (0.1) (0.1)
--------- --------- ---------
Net periodic pension cost $ 13.0 $ 13.0 $ 19.0
========= ========= =========

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

Pension Benefits
-----------------------
Non-U.S. defined-benefit plans 2001 2000
- ------------------------------ --------- ---------
Weighted-average assumption as of December 31:
Discount rate 5.49% 5.69%
Expected return on plan assets 5.57% 6.43%
Rate of compensation increase 3.71% 3.85%

72

NOTE 24. LEASES
- ---------------
AHI rents certain real estate and equipment. Several leases include options for
renewal or purchase, and contain clauses for payment of real estate taxes and
insurance. In most cases, management expects that in the normal course of
business, leases will be renewed or replaced by other leases. As part of the
Chapter 11 Case, AWI must decide whether to assume, assume and assign, or reject
prepetition unexpired leases and other prepetition executory contracts. AWI has
been granted an extension until April 8, 2002 by the Court to make these
decisions with respect to prepetition unexpired leases of real property and this
date may be further extended. With respect to prepetition executory contracts
and unexpired leases not related to real estate, AWI has until confirmation of a
reorganization plan to make these decisions unless such time is shortened by the
Court. The accompanying financial statements do not reflect any adjustment
related to assumption or rejection of such agreements.

Rental expense was $15.7 million in 2001, $17.7 million in 2000 and $19.5
million in 1999. Future minimum payments at December 31, 2001, by year and in
the aggregate, having noncancelable lease terms in excess of one year were as
follows:

Capital Operating
Scheduled minimum lease payments (millions) Leases Leases
- ------------------------------------------- ----------- -------------
2002 $ 1.3 $ 9.9
2003 1.4 7.3
2004 2.5 5.6
2005 1.5 3.2
2006 0.9 2.3
Thereafter 0.8 10.1
----------- -------------
Total $ 8.4 $ 38.4
=========== =============

AHI has capital leases that have lease payments that extend until 2018. Assets
under capital leases are included in the consolidated balance sheets as follows:

(millions) 2001 2000
- ---------- ----------- -------------
Land $ 3.8 $ 3.8
Building 4.1 4.5
Machinery 26.1 26.2
Less accumulated amortization (10.0) (12.1)
----------- -------------
Net assets $ 24.0 $ 22.4
=========== =============

NOTE 25. SHAREHOLDERS' EQUITY
- -----------------------------
Treasury share changes for 2001, 2000 and 1999 are as follows:

Years ended December 31 (thousands) 2001 2000 1999
- ----------------------------------- ----------- ------------- -------------

Common shares
Balance at beginning of year 11,034.3 11,628.7 11,856.7
Stock purchases 145.3 90.8 33.8
Stock issuance activity, net (3.0) (685.2) (261.8)
----------- ------------- -------------
Balance at end of year 11,176.6 11,034.3 11,628.7
=========== ============= =============

Stock purchases include small unsolicited buybacks of shares, shares received
under share tax withholding transactions and open market purchases of stock
through brokers.

73

The balance of each component of accumulated other comprehensive loss as of
December 31, 2001 and 2000, is presented in the table below.

(millions) 2001 2000
- ---------- -------- --------
Foreign currency translation adjustments $ 32.6 $ 29.3
Derivative loss, net 3.3 --
Unrealized loss on available for sale securities -- 2.0
Minimum pension liability adjustments 11.2 13.9
------- -------
Total $ 47.1 $ 45.2
======= =======

The related tax effects allocated to each component of other comprehensive
income (loss) are presented in the table below.

(millions) Pre-tax Tax After tax
- ---------- amount Benefit amount
------- ------- ---------

Foreign currency translation adjustments $ (3.3) $ -- $ (3.3)
Derivative loss, net (5.1) 1.8 (3.3)
Impairment loss on available for sale securities 2.0 -- 2.0
Minimum pension liability adjustments 0.9 1.8 2.7
------- ------- ---------
Total $ (5.5) $ 3.6 $ (1.9)
======= ======= =========

NOTE 26. SUPPLEMENTAL FINANCIAL INFORMATION
- -------------------------------------------
(millions)
--------
Selected operating expenses 2001 2000 1999
- --------------------------- ------- ------- ---------

Maintenance and repair costs $ 112.2 $ 114.6 $ 113.1
Research and development costs 56.3 60.3 48.9
Advertising costs 49.8 43.7 47.0

Other expense (income), net

Interest and dividend income $ (2.8) $ (5.6) $ (2.1)
Loss (gain) on sale of businesses, net 0.3 (60.2) (1.0)
Demutualization proceeds (3.5) (5.2) (2.6)
Foreign currency transaction gain (0.5) (7.0) (0.2)
Impairment loss on available for sale securities 3.2 -- --
Impairment of note receivable from previous divestiture 2.0 -- --
Other 0.1 1.3 (0.7)
------- ------- ---------
Total $ (1.2) $ (76.7) $ (6.6)
======= ======= =========

NOTE 27. SUPPLEMENTAL CASH FLOW INFORMATION
- -------------------------------------------

(millions) 2001 2000 1999
--------- ------- ------- ---------

Interest paid $ 9.2 $ 101.5 $ 104.5
Income taxes paid 13.3 14.7 48.2
Acquisitions:
Fair value of assets acquired $ 0.6 $ 55.6 $ 3.8
Cost in excess of net assets acquired 5.0 -- --
Less:
Net assets in excess of consideration -- 24.2 --
Liabilities assumed -- 24.9 --
------- ------- ---------
Cash paid, net of cash acquired $ 5.6 $ 6.5 $ 3.8
======= ======= =========

74

NOTE 28. LITIGATION AND RELATED MATTERS
- ---------------------------------------

Asbestos-related litigation

AWI is a defendant in personal injury claims and property damage 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.

Background
- ----------
AWI's involvement in asbestos litigation relates primarily to its participation
in the insulation contracting business. From around 1910 to 1933, AWI
manufactured and installed some high-temperature insulation products, including
some that contained asbestos. In 1939, AWI expanded its contract installation
service to provide a greater range of high and low temperature contracting
services to its customers. AWI generally manufactured its own low temperature
insulation products, but did not manufacture the high temperature products used
in its contracting operations. Some of the high temperature products furnished
and installed in the contracting operations contained asbestos.

Effective January 1, 1958, AWI separated its insulation contracting business
into a separate, independent subsidiary, Armstrong Contracting and Supply
Corporation ("ACandS"). From January 1, 1958 through August 31, 1969, ACandS
operated as an independent subsidiary in the insulation contracting business.
During this time period, AWI licensed certain tradenames and trademarks to
ACandS, which ACandS placed on certain insulation products manufactured by
others. Other than two specific products, AWI did not manufacture or sell any
asbestos-containing thermal insulation products during this period. In August
1969, AWI sold the ACandS subsidiary to a group of ACandS management employees
and ACandS continues to operate independently as a subsidiary of Irex
Corporation. AWI had no involvement with any asbestos-containing insulation
materials after 1969.

In addition, AWI manufactured some resilient flooring that contained
encapsulated asbestos until the early 1980's. AWI also manufactured some gasket
materials that contained encapsulated asbestos until the mid-1980's.

Asbestos-Related Personal Injury Claims
- ---------------------------------------
Before filing for relief under the Bankruptcy Code, AWI pursued broad-based
settlements of asbestos-related personal injury claims through the Center for
Claims Resolution (the "Center"). The Center had reached Strategic Settlement
Program ("SSP") agreements with law firms that covered approximately 130,000
claims that named AWI as a defendant. As a result of the Filing, AWI's
obligations with respect to payments called for under these settlements will be
determined in its Chapter 11 Case.

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 with respect to
asbestos-related personal injury claims, including payments pursuant to the
outstanding SSP agreements. A separate creditors' committee representing the
interests of asbestos personal injury claimants has been appointed 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. AWI believes that the Chapter 11 process
provides it with the opportunity to comprehensively address its asbestos-related
personal injury liability in one forum. It is anticipated that all present and
future asbestos-related personal injury claims will be resolved in the Chapter
11 Case.

Asbestos-Related Personal Injury Liability
- ------------------------------------------
In evaluating its estimated asbestos-related personal injury liability prior to
the Filing, AWI reviewed, among other things, recent and historical settlement
amounts, the incidence of past and recent claims, the mix of the injuries and
occupations of the plaintiffs, the number of cases pending against it and the
status and results of broad-based settlement discussions. Based on this review,
AWI estimated its cost to defend and resolve probable asbestos-related personal
injury claims. This estimate was highly uncertain due to the limitations of the
available data and the difficulty of forecasting with any certainty the numerous
variables that could affect the range of the liability.

AWI believes the range of probable and estimable liability is more uncertain now
than previously. There are significant differences in the way the
asbestos-related personal injury claims may be addressed under the bankruptcy
process when compared to the tort system. Accordingly, AWI currently is unable
to ascertain how prior experience with the number of claims and the amounts to
settle claims will impact its ultimate liability in the context of its Chapter
11 Case.

75

As of September 30, 2000, AWI had recorded a liability of $758.8 million for its
asbestos-related personal injury liability that it determined was probable and
estimable through 2006. Due to the increased uncertainty created as a result of
the Filing, 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
December 31, 2001 and December 31, 2000 is $690.6 million, which is recorded in
liabilities subject to compromise. Due to the uncertainties created as a result
of the Filing and how the liability may be resolved, it is not possible to
reasonably estimate the ultimate liability. It is likely, however, that the
actual liability will be significantly higher than the recorded liability. As
the Chapter 11 Case proceeds, there should be more clarity as to the extent of
the liability.

Collateral Requirements
- -----------------------
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. Recently, 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 property Damage Litigation
- -------------------------------------------
Over 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. The previous claims that were 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 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. Upon such filing, the Court will later determine whether
the proposed class should be certified. Consistent with prior periods and due to
increased uncertainty, AWI has not recorded any liability related to these
claims as of December 31, 2001. See Note 1 for further discussion of the
property damage claims received by the August 31, 2001 claims bar date 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 Recovery Proceedings
- ------------------------------
A 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 materials. AWI has entered into settlements with a number of
the carriers resolving its coverage issues. However, an alternative dispute
resolution ("ADR") procedure is under way against certain carriers to determine
the percentage of resolved and unresolved claims that are nonproducts claims, to
establish the entitlement to such coverage and to determine whether and how much
reinstatement of prematurely exhausted products hazard insurance is warranted.
The nonproducts coverage potentially available is substantial and includes
defense costs in addition to limits.

During 1999, AWI received preliminary decisions in the initial phases of the
trial proceeding of the ADR, which were generally favorable to AWI on a number
of issues related to insurance coverage. However, during the first quarter of
2001, a new trial judge was selected for the ADR. The new trial judge conducted
hearings in 2001 and determined not to rehear matters decided by the previous
judge. In the first quarter of 2002, the new trial judge concluded the ADR

76

trial proceeding with findings in favor of AWI on substantially all key issues.
The trial proceeding is subject to an appeal as part of the ADR process. One of
the insurance carriers, Reliance Insurance Company, was placed under an order of
rehabilitation by a state insurance department during May 2001 and an order of
liquidation during October 2001.

Another insurer (Century Indemnity Company), 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. 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 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. AWI believes it is highly unlikely the
insurer will prevail in this matter.

Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $214.1 million is recorded as of December 31, 2001 compared to $268.3 million
as of December 31, 2000. The reduction is due to cash receipts during the second
and third quarters of 2001 and management's current assessment of probable
insurance recoveries, which included the order of liquidation for Reliance
Insurance Company. Of the total recorded asset at December 31, 2001,
approximately $49.0 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 the
financial condition of the insurers, AWI may revise its estimate of probable
insurance recoveries. Approximately $82 million of the $214.1 million asset is
determined from agreed coverage in place and is therefore directly related to
the amount of the liability. Of the $214.1 million asset, $22.0 million has been
recorded as a current asset as of December 31, 2001 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.

Cash Flow Impact
- ----------------
As a result of the Chapter 11 Filing, AWI did not make any payments for
asbestos-related claims in December 2000 and all of 2001. In the first eleven
months of 2000, AWI paid $226.9 million for asbestos-related claims. AWI
received $32.2 million in asbestos-related insurance recoveries during 2001
compared to $27.7 million in 2000. 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.

Conclusion
- ----------
Many uncertainties exist surrounding the financial impact of AWI's involvement
with asbestos litigation. These uncertainties include the impact of the Filing
and the Chapter 11 process, the number of future claims to be filed, 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. AWI has not
revised its previously recorded liability for asbestos-related personal injury
claims. During 2001, AWI reduced its previously recorded insurance asset by
$32.2 million for cash receipts and by $22.0 million for management's current
assessment of probable insurance recoveries. The $22.0 million reduction was
recorded as a charge for asbestos liability, net, in the accompanying
consolidated statement of earnings. AWI will continue to review its
asbestos-related liability periodically, although it is likely that no changes
will be made to the liability until later in the Chapter 11 Case as significant
developments arise. Although not estimable, it is likely that AWI's total
exposure to asbestos-related personal injury claims will be significantly higher
than the

77

recorded liability. Any adjustment to the estimated liability or insurance asset
could be material to the financial statements.

Environmental Matters

Most of Armstrong's manufacturing and certain of Armstrong's research facilities
are affected by various federal, state and local 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 incurred capital expenditures of approximately $8.4
million in 2001, $6.2 million in 2000 and $5.5 million in 1999 associated with
environmental compliance and control facilities. Armstrong anticipates that
annual expenditures for those purposes will not change materially from recent
experience. Armstrong does not anticipate that it will incur significant capital
expenditures in order to meet the requirements of the Clean Air Act of 1990 and
the final implementing regulations promulgated by various state agencies.
However, applicable requirements under the Clean Air Act and other 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.

As 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 sites.
In most cases, Armstrong is one of many potentially responsible parties ("PRPs")
who have potential liability for the required investigation and remediation of
each site and who, 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 second quarter of
2002.

Estimates of Armstrong's future environmental liability at any of the Superfund
sites or current or former plant sites are based on evaluations of currently
available facts regarding each individual site and consider factors such as
Armstrong's 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 any Superfund site, Armstrong's 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 costs. As a result,
Armstrong's estimated liability reflects only Armstrong's expected share. In
determining the probability of contribution, Armstrong considers the solvency of
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.

Liabilities of $16.6 million at December 31, 2001 and $15.4 million at December
31, 2000 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 the liability, that estimate
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 December
31, 2001 and December 31, 2000 environmental liabilities are classified as
prepetition liabilities subject to compromise. As a general rule, such
prepetition liabilities that do not preserve company assets are addressed in the
Chapter 11 Case.

The 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 consolidated financial statements and are either
available through settlement or anticipated to be recovered through negotiation
or litigation.

Actual costs 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,
Armstrong believes that 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, liquidity or results of
operations, although the recording of future costs may be material to earnings
in such future period.

78

Other Litigation

About 350 former Armstrong employees that were separated in two divestitures in
2000 have brought a purported class action against the Retirement Committee of
AWI, named and unnamed members of the Retirement Committee, and the Retirement
Savings and Stock Ownership Plan (RSSOP). The case is pending in the United
States District Court (Eastern District of PA). A similar proof of claim has
been filed against AWI in the Chapter 11 Case. Plaintiffs allege breach of
Employee Retirement Income Security Act (ERISA) fiduciary duties and other
violations of ERISA pertaining to losses in their RSSOP accounts, which were
invested in Armstrong common stock. Losses are alleged to be in the range of
several million dollars. AHI believes there are strong substantive defenses to
the allegations.

NOTE 29 - DIFFERENCES BETWEEN ARMSTRONG HOLDINGS INC. AND ARMSTRONG WORLD
- -------------------------------------------------------------------------
INDUSTRIES, INC.
----------------
The difference between the financial statements of AHI and Armstrong is
primarily due to transactions that occurred in 2000 related to the formation of
Armstrong Holdings, Inc. and stock activity.

NOTE 30. EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS
- -------------------------------------------------------------
The table below provides a reconciliation of the numerators and denominators of
the basic and diluted per share calculations for net earnings (loss). The
diluted earnings (loss) per share computations for 2000 and 1999 use the basic
number of shares due to the loss from continuing operations.

Net Per share
Millions except for per-share data Earnings/(Loss) Shares Amount
- ---------------------------------- --------------- ---------- ------------

For the year ended 2001
-----------------------
BASIC EARNINGS PER SHARE
Earnings from continuing operations $ 73.2 40.5 $ 1.81
DILUTED EARNINGS PER SHARE
Dilutive options 0.3 (0.02)
--------- --------- ---------
Earnings from continuing operations $ 73.2 40.8 $ 1.79
========= ========= =========
For the year ended 2000
-----------------------
BASIC LOSS PER SHARE
Loss from continuing operations $ (85.1) 40.2 $ (2.12)
DILUTED LOSS PER SHARE
Dilutive options 0.3
--------- --------- ---------
Loss from continuing operations $ (85.1) 40.5 $ (2.12)
========= ========= =========
For the year ended 1999
-----------------------
BASIC LOSS PER SHARE
Loss from continuing operations $ (16.2) 39.9 $ (0.41)
DILUTED LOSS PER SHARE
Dilutive options 0.3
--------- --------- ---------
Loss from continuing operations $ (16.2) 40.2 $ (0.41)
========= ========= =========

79

NOTE 31. PREFERRED STOCK PURCHASE RIGHTS PLAN
- ---------------------------------------------
AHI has a shareholder rights plan under a Rights Agreement dated as of March 14,
2000 and in connection therewith distributed one right for each share of its
common stock outstanding. In general, the rights become exercisable at $300 per
right for a fractional share of a new series of Class A preferred stock 10 days
after a person or group, other than certain affiliates of AHI either acquires
beneficial ownership of shares representing 20% or more of the voting power of
AHI or announces a tender or exchange offer that could result in such person or
group beneficially owning shares representing 28% or more of the voting power of
AHI. If thereafter any person or group becomes the beneficial owner of 28% or
more of the voting power of AHI, or if AHI is the surviving company in a merger
with a person or group that owns 20% or more of the voting power of AHI, then
each owner of a right (other than such 20% shareholder) would be entitled to
purchase shares of company common stock having a value equal to twice the
exercise price of the right. Should AHI be acquired in a merger or other
business combination, or sell 50% or more of its assets or earnings power, each
right would entitle the holder to purchase, at the exercise price, common shares
of the acquirer having a value of twice the exercise price of the right. The
exercise price was determined on the basis of the Board's view of the long-term
value of AHI `s common stock. The rights have no voting power nor do they
entitle a holder to receive dividends. At AHI's option, the rights are
redeemable prior to becoming exercisable at five cents per right. The rights
expire on March 21, 2006, unless extended or earlier redeemed by the AHI Board
of Directors.

80

Independent Auditors' Report

The Board of Directors and Shareholders,
Armstrong Holdings, Inc.:

We have audited the accompanying consolidated financial statements of Armstrong
Holdings, Inc. and subsidiaries ("the Company") as listed in the accompanying
index on page 41. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index on page 41. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Armstrong Holdings,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 of the
consolidated financial statements, three of the Company's domestic subsidiaries,
including Armstrong World Industries, Inc., the Company's major operating
subsidiary, filed separate voluntary petitions for relief under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court on
December 6, 2000. Armstrong World Industries, Inc. has also defaulted on certain
debt obligations. Although these operating subsidiaries are currently operating
their businesses as debtors-in-possession under the jurisdiction of the
Bankruptcy Court, the continuation of their businesses as going concerns is
contingent upon, among other things, the ability to formulate a plan of
reorganization which will gain approval of the creditors and confirmation by the
Bankruptcy Court. The filing under Chapter 11 and the resulting increased
uncertainty regarding the Company's potential asbestos liabilities, as discussed
in Note 28 of the consolidated financial statements, raise substantial doubt
about the Company's ability to continue as a going concern. The accompanying
consolidated financial statements and financial statement schedule do not
include any adjustments that might result from the outcome of these
uncertainties.

/s/ KPMG LLP

February 22, 2002
Philadelphia, Pennsylvania

81

Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Earnings
(in millions, except per share amounts)

Years Ended December 31
2001 2000 1999
---- ---- ----

Net sales $3,135.4 $3,249.4 $3,322.9
Cost of goods sold 2,361.8 2,384.8 2,290.5
-------- -------- --------
Gross profit 773.6 864.6 1,032.4

Selling, general and administrative expenses 596.2 596.7 607.8
Charge for asbestos liability, net 22.0 236.0 335.4
Restructuring and reorganization charges (reversals), net 9.0 18.8 (1.4)
Goodwill amortization 22.8 23.9 25.5
Equity (earnings) from affiliates, net (16.5) (18.0) (16.8)
-------- -------- --------
Operating income 140.1 7.2 81.9

Interest expense (unrecorded contractual interest of $86.0, $6.0 and $0.0) 13.1 102.9 105.2
Other (income), net (1.2) (76.7) (6.6)
-------- -------- --------
Income (loss) from continuing operations before Chapter 11 reorganization costs
and income tax expense (benefit) 128.2 (19.0) (16.7)
Chapter 11 reorganization costs, net 12.5 103.3 -
-------- -------- --------

Earnings (loss) from continuing operations before income tax expense (benefit) 115.7 (122.3) (16.7)
Income tax expense (benefit) 42.5 (36.8) (0.5)
-------- -------- --------

Earnings (loss) from continuing operations $ 73.2 $ (85.5) $ (16.2)
-------- -------- --------

Income from discontinued operations, net of tax of $0.0, $3.9 and $15.4, respectively - 6.3 30.5
Gain (loss) on sale of discontinued operations, net of tax of $0.0 and $39.2, respectively (1.1) 114.8 -
Net loss on expected disposal of discontinued operations, net of tax of $0.0 and $10.7, respectively (3.3) (23.8) -
Net reversal of loss on discontinued operations no longer to be disposed, net of tax of $10.7 24.0 - -
-------- -------- --------
Earnings from discontinued operations 19.6 97.3 30.5
-------- -------- --------

Net earnings $ 92.8 $ 11.8 $ 14.3
======== ======== ========

See accompanying notes to consolidated financial statements beginning on page
86.

82

Armstrong World Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
(amounts in millions, except share and per share amounts)

As of December 31,
Assets 2001 2000
------ ---- ----

Current assets:
Cash and cash equivalents $ 277.4 $ 159.1
Accounts and notes receivable, net 316.5 369.0
Inventories, net 443.1 399.9
Deferred income taxes 11.5 10.0
Other current assets 65.8 84.0
--------- ---------
Total current assets 1,114.3 1,022.0

Property, plant and equipment, less accumulated depreciation and
amortization of $1,143.3 and $1,091.0, respectively 1,283.7 1,321.0

Insurance receivable for asbestos-related liabilities, noncurrent 192.1 236.1
Prepaid pension costs 391.1 337.4
Investment in affiliates 39.6 37.3
Goodwill, net 822.8 846.0
Other intangibles, net 89.0 92.7
Deferred income tax assets, noncurrent - 6.8
Other noncurrent assets 101.8 105.9
--------- ---------
Total assets $ 4,034.4 $ 4,005.2
========= =========

Liabilities and Shareholder's Equity
------------------------------------
Current liabilities:
Short-term debt $ 18.9 $ 35.9
Current installments of long-term debt 6.1 18.5
Accounts payable and accrued expenses 298.6 292.0
Short-term amounts due to affiliates 8.4 2.4
Income taxes 41.0 32.2
Accrued loss on expected disposal of discontinued operations - 34.5
--------- ---------
Total current liabilities 373.0 415.5
--------- ---------

Liabilities subject to compromise 2,362.2 2,389.9

Long-term debt, less current installments 50.3 56.9
Postretirement and postemployment benefit liabilities 242.7 244.8
Pension benefit liabilities 147.2 156.8
Other long-term liabilities 84.6 77.9
Deferred income taxes 18.4 -
Minority interest in subsidiaries 8.8 6.9
--------- ---------
Total noncurrent liabilities 2,914.2 2,933.2

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 173.2 173.4
Reduction for ESOP loan guarantee (142.2) (142.2)
Retained earnings 1,239.9 1,147.1
Accumulated other comprehensive loss (47.1) (45.2)
Less common stock in treasury, at cost
2001 and 2000 - 11,393,170 shares (528.5) (528.5)
--------- ---------
Total shareholder's equity 747.2 656.5
--------- ---------

Total liabilities and shareholder's equity $ 4,034.4 $ 4,005.2
========= =========

See accompanying notes to consolidated financial statements beginning on page
86.

83

Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Shareholder's Equity
(amounts in millions, except per share amounts)

2001 2000 1999
---- ---- ----

Common stock, $1 par value:
- --------------------------
Balance at beginning and end of year $ 51.9 $ 51.9 $ 51.9
-------- ------- --------

Capital in excess of par value:
- ------------------------------
Balance at beginning of year $ 173.4 $ 176.4 $ 173.0
Stock issuances and other (0.2) 2.3 3.4
Contribution of treasury stock to ESOP - (5.3) -
-------- --------- --------
Balance at end of year $ 173.2 $ 173.4 $ 176.4
-------- --------- --------

Reduction for ESOP loan guarantee:
- ---------------------------------
Balance at beginning of year $ (142.2) $ (190.3) $ (199.1)
Principal paid - 13.2 23.3
Loans to ESOP - (7.3) (12.8)
Interest on loans to ESOP - (1.1) (1.3)
Contribution of treasury stock to ESOP - (4.1) (5.8)
Impairment of loans to ESOP - 43.3 -
Accrued compensation - 4.1 5.4
-------- --------- --------
Balance at end of year $ (142.2) $ (142.2) $ (190.3)
-------- --------- --------

Retained earnings:
- -----------------
Balance at beginning of year $1,147.1 $ 1,196.2 $1,257.0
Net earnings for year 92.8 $ 92.8 11.8 $ 11.8 14.3 $ 14.3
Tax benefit on dividends paid on unallocated ESOP common shares - 1.2 1.8
-------- --------- --------
Total $1,239.9 $ 1,209.2 $1,273.1
Less rights redemptions - 2.0 -
Less common stock dividends (per share
$0.00 in 2001; $1.44 in 2000; $1.92 in 1999) - 60.1 76.9
-------- --------- --------
Balance at end of year $1,239.9 $ 1,147.1 $1,196.2
-------- --------- --------

Accumulated other comprehensive income (loss):
- ---------------------------------------------
Balance at beginning of year $ (45.2) $ (16.5) $ (25.4)
Foreign currency translation adjustments (3.3) (17.2) (3.4)
Derivative loss, net (3.3) - -
Impairment loss on available for sale securities 2.0 - -
Unrealized loss on available for sale securities - (2.0) -
Minimum pension liability adjustments 2.7 (9.5) 12.3
-------- --------- --------
Total other comprehensive income (loss) (1.9) (1.9) (28.7) (28.7) 8.9 8.9
-------- -------- --------- -------- -------- ------
Balance at end of year $ (47.1) $ (45.2) $ (16.5)
-------- --------- --------

Comprehensive income (loss) $ 90.9 $ (16.9) $ 23.2
- --------------------------- -------- -------- ------

Less treasury stock at cost:
- ---------------------------
Balance at beginning of year $ 528.5 $ 538.5 $ 547.7
Stock purchases - - 1.3
Stock issuance activity, net - (0.6) (2.6)
Contribution of treasury stock to ESOP - (9.4) (7.9)
-------- --------- --------
Balance at end of year $ 528.5 $ 528.5 $ 538.5
-------- --------- --------

Total shareholder's equity $ 747.2 $ 656.5 $ 679.2
======== ========= ========

See accompanying notes to consolidated financial statements beginning on page
86.

84

Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
(amounts in millions)

Years Ended December 31,
2001 2000 1999
---- ---- ----

Cash flows from operating activities:
Net earnings $ 92.8 $ 11.8 $ 14.3
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization, continuing operations 156.8 164.4 158.4
Depreciation and amortization, discontinued operations - 4.1 10.8
Loss (gain) on sale of businesses, net 0.9 (183.9) (1.0)
Reversal of loss on expected disposal of discontinued business (31.4) - -
Deferred income taxes 23.7 (35.7) (38.3)
Equity (earnings) from affiliates, net (16.5) (18.0) (16.8)
Chapter 11 reorganization costs, net 12.5 103.3 -
Chapter 11 reorganization costs payments (15.0) (2.6) -
Restructuring and reorganization charges (reversals) 9.0 18.8 (1.4)
Restructuring and reorganization payments (14.1) (7.9) (16.9)
Recoveries (payments) for asbestos-related claims, net 32.2 (199.2) (114.4)
Charge for asbestos liability, net 22.0 236.0 335.4
Impairment of long-lived assets 8.4 - -
Decrease in net assets of discontinued operations - - 0.6
Changes in operating assets and liabilities net of effects of
reorganizations, restructuring, acquisitions and dispositions
(Increase)/decrease in receivables 45.3 37.2 (23.1)
(Increase)/decrease in inventories (50.2) 13.8 (9.9)
(Increase)/decrease in other current assets 23.9 (12.6) 30.1
(Increase) in other noncurrent assets (60.4) (41.6) (52.6)
Increase/(decrease) in accounts payable and accrued expenses 10.6 (75.8) 86.0
Increase/(decrease) in income taxes payable 10.1 27.6 (12.2)
Increase/(decrease) in other long-term liabilities 3.7 (27.0) 15.1
Other, net 7.8 15.1 (16.6)
-------- -------- --------
Net cash provided by operating activities 272.1 27.8 347.5
-------- -------- --------

Cash flows from investing activities:
Purchases of property, plant and equipment, continuing operations (112.9) (147.1) (175.0)
Purchases of property, plant and equipment, discontinued operations - (3.0) (8.6)
Investment in computer software (14.9) (12.0) (11.6)
Acquisitions, net of cash acquired (5.6) (6.5) (3.8)
Distributions from equity affiliates 13.5 12.7 40.8
Proceeds from the sale of businesses - 329.9 88.3
Proceeds from the sale of assets 6.0 5.3 7.9
-------- -------- --------
Net cash provided by (used for) investing activities (113.9) 179.3 (62.0)
-------- -------- --------

Cash flows from financing activities:
Increase/(decrease) in short-term debt, net (15.8) 16.0 (69.7)
Issuance of long-term debt - 3.4 200.0
Payments of long-term debt (17.6) (36.3) (332.4)
Cash dividends paid - (58.1) (76.9)
Purchase of common stock for the treasury, net - (1.6) (1.3)
Proceeds from exercised stock options - 0.1 1.2
Other, net (4.5) 5.6 (2.8)
-------- -------- --------
Net cash used for financing activities (37.9) (70.9) (281.9)
-------- -------- --------

Effect of exchange rate changes on cash and cash equivalents (2.0) (3.7) (2.9)
-------- -------- --------

Net increase in cash and cash equivalents $ 118.3 $ 132.5 $ 0.7
Cash and cash equivalents at beginning of year 159.1 26.6 25.9
-------- -------- --------

Cash and cash equivalents at end of year $ 277.4 $ 159.1 $ 26.6
======== ======== ========

See accompanying notes to consolidated financial statements beginning on page
86.

85

Armstrong World Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

NOTE 1. BUSINESS AND CHAPTER 11 REORGANIZATION
- ----------------------------------------------
Armstrong 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.

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.

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 "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 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.

Three creditors' committees, one representing asbestos personal injury
claimants, one representing asbestos property damage claimants, and the other
representing other unsecured creditors, have been appointed in the Chapter 11
Case. In accordance with the provisions of the Bankruptcy Code, they have the
right to be heard on matters that come before the Court in the Chapter 11 Case.

During the fourth quarter of 2001, U.S. Third Circuit Court of Appeals assigned
U.S. District Judge Alfred M. Wolin of New Jersey to preside over the Chapter 11
Case in the District of Delaware. Judge Wolin also presides over four other
asbestos-related Chapter 11 cases pending in the District of Delaware. Judge
Wolin retained issues relating to asbestos personal injury claims and referred
other asbestos-related issues and bankruptcy-related matters to U.S. Bankruptcy
Judge Randall J. Newsome.

AWI intends to address all prepetition claims, including all asbestos-related
claims, in a plan of reorganization in its Chapter 11 Case. At this time, it is
impossible to predict how such a plan will treat such claims and how a plan will
impact the value of shares of common stock of AHI. Under the provisions of the
Bankruptcy Code, holders of equity interests may not participate under a plan of
reorganization unless the claims of creditors are satisfied in full or unless
creditors accept a reorganization plan which permits holders of equity interests
to participate. The formulation and implementation of a plan of reorganization
in the Chapter 11 Case could take a significant period of time. Currently, AWI
has the exclusive right to file a plan of reorganization until October 4, 2002,
and this date may be further extended by the Court.

AWI believes that progress is being made in the negotiations with the asbestos
personal injury claimants and the unsecured creditors committees with respect to
reaching resolution of the principal elements of a reorganization plan. However,
it is not possible to predict whether these negotiations will be successful.
Therefore, the timing of resolution of the Chapter 11 Case remains highly
uncertain.

86

Bar Date for Filing Claims
- --------------------------
The Court established August 31, 2001 as the bar date for all claims against AWI
except for certain 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 from the Chapter 11 Case. The Court extended the bar date for
claims from the U.S. Internal Revenue Service until March 29, 2002 and for
claims from several environmental agencies until the second quarter of 2002. In
March 2002, the Court ruled that the time to file claims related to asbestos
property damage would not be further extended, but allowed certain alleged
holders of asbestos property damage claims to file a class proof of claim
against AWI. Upon such filing, the court will later determine whether the
proposed class should be certified. A bar date for asbestos-related personal
injury claims has not been set.

Approximately 4,400 proofs of claim totaling approximately $6.0 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 to determine their validity. 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 already identified and
successfully objected to approximately 900 claims totaling $1.4 billion. These
claims were, primarily, duplicate filings, amendments to previously filed claims
or claims that are not related to AWI. The Court disallowed these claims with
prejudice in January 2002.

In addition to the objected claims described above, approximately 1,000 proofs
of claim totaling approximately $1.9 billion were filed 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. AWI will address
all asbestos-related claims in the future within the Chapter 11 process. See
further discussion regarding AWI's liability for asbestos-related matters in
Note 28.

Approximately 500 proofs of claim totaling approximately $0.8 billion alleging
asbestos-related property damage were filed with the Court. Most of these claims
are new to AWI and many were submitted with insufficient documentation to assess
their validity. AWI has petitioned the Court to disallow approximately 50 claims
totaling approximately $0.5 billion. 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 28.

Approximately 2,000 claims totaling approximately $1.9 billion alleging a right
to payment for financing, environmental, trade debt and other claims were filed
with the Court. AWI has identified approximately 200 of these claims totaling
approximately $20 million that it believes should be disallowed by the Court.
For these categories of claims, AWI has previously recorded approximately $1.6
billion in liabilities. AWI continues to investigate the claims to determine
their validity.

AWI continues to evaluate claims. AWI has recorded liability amounts for those
claims that can be reasonably estimated and for which it believes are probable
of being allowed by the Court. At this time, it is impossible to reasonably
estimate the value of all the claims 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
- ---------
As of December 31, 2001, AWI had no outstanding debt borrowings under its $200
million debtor-in-possession credit facility (the "DIP Facility") and AWI had
$193.8 million of cash and cash equivalents, excluding cash held by its
non-debtor subsidiaries. As of December 31, 2001, AWI had approximately $8.4
million in letters of credit which were issued pursuant to the DIP Facility.
Borrowings are limited to an adjusted amount of receivables, inventories and
PP&E. AWI believes that the DIP Facility, together with cash generated from
operations, will be more than adequate to address its liquidity needs.
Borrowings under the DIP Facility, if any, and obligations to reimburse draws
upon the letters of credit constitute superpriority administrative expense
claims in the Chapter 11 Case. The DIP Facility is scheduled to expire on
December 6, 2002.

87

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

Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that
are subject to compromise and report them separately on the balance sheet. See
Note 4 for detail of the liabilities subject to compromise at December 31, 2001
and 2000. 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 consolidated balance sheet based upon maturity date.
AWI's estimated liability for personal injury asbestos claims is also recorded
in liabilities subject to compromise. See Note 28 for further discussion of
AWI's asbestos liability.

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.

SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as Chapter 11
reorganization costs, net. Accordingly, AWI recorded the following Chapter 11
reorganization activities in the fourth quarter and full year of 2001:

Three Months Ended Year Ended
(millions) December 31, 2001 December 31, 2001
- ---------- ---------------------- ---------------------

Professional fees $ 7.3 $ 24.5
Interest income, post petition (1.1) (5.1)
Reductions to prepetition liabilities - (2.0)
Termination of prepetition lease obligation - (5.9)
Other (income) expense directly related to bankruptcy, net 0.1 1.0
-------- --------
Total Chapter 11 reorganization costs, net $ 6.3 $ 12.5
======== ========

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

Interest income in the above table is from short-term investments of cash earned
by AWI subsequent to the Filing.

Reductions to prepetition liabilities represent the difference between the
prepetition invoiced amount and the actual cash payment made to certain vendors
due to negotiated settlements. These payments of prepetition obligations were
made pursuant to authority granted by the Court.

Termination of prepetition lease obligation 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 rejection of the lease contract in the Chapter 11 Case. This
amount was previously accrued in the third quarter of 2000 as part of a
restructuring charge when the decision to vacate the premises was made.

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 consolidated financial statements.
Further, a plan of reorganization could materially change the amounts and
classifications reported in the consolidated financial statements.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------

Use of Estimates. These financial statements are prepared in accordance with
- ----------------
generally accepted accounting principles and include management estimates and
judgments, where appropriate. Management utilizes estimates to record many items
including asbestos-related liabilities and insurance asset recoveries and
reserves for bad debts, inventory obsolescence, warranty, workers compensation,
general liability and environmental claims. Management determines the amount of
necessary reserves based upon all known relevant information. Management also
confers with outside parties, including outside counsel, where appropriate.
Actual results may differ from these estimates.

88

Consolidation Policy. The consolidated financial statements and accompanying
- --------------------
data in this report include the accounts of Armstrong and its majority-owned
subsidiaries. All significant intercompany transactions have been eliminated
from the consolidated financial statements. Certain prior year amounts have been
reclassified to conform to the current year presentation.

Revenue Recognition. Substantially all of Armstrong revenue from the sale of
- -------------------
products and the related accounts receivable is recorded as title transfers,
generally on the date of shipment. A provision is made for the estimated cost of
rebates and promotional programs that includes some estimates of applicable
sales. Provisions for estimated discounts and bad debt losses are based on
knowledge of specific customers and a review of outstanding accounts receivable
balances.

Segments. AHI accounts for operating business segments based upon products and
- --------
services provided in accordance with SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." See Note 3 for segment descriptions and
required disclosure.

Advertising Costs. Armstrong recognizes advertising expenses as they are
- -----------------
incurred.

Shipping and Handling Costs. Starting with the fourth quarter of 2000,
- ---------------------------
Armstrong applied the provisions of EITF Issue No. 00-010, "Accounting for
Shipping and Handling Fees and Costs". Consequently, in 2000 shipping and
handling costs of approximately $141.8 million and $136.6 million in 2000 and
1999, respectively, have been reclassified from net sales to cost of goods sold
(increasing both). This change had no effect on gross margins or retained
earnings as of any date.

Sales Incentives. In accordance with EITF Issue No. 00-014, "Accounting for
- ----------------
Certain Sales Incentives", in 2000 Armstrong reclassified certain sales
incentives from Selling, General and Administrative ("SG&A") expense to net
sales (reducing both) by $1.3 million and $1.2 million in 2000 and 1999,
respectively. In accordance with EITF Issue No. 00-022, "Accounting for `Points'
and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers
for Free Products or Services to Be Delivered in the Future," in 2001 Armstrong
reclassified certain sales volume incentives from SG&A expense to net sales
(reducing both) by $30.0 million and $30.6 million in 2000 and 1999,
respectively.

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

Taxes. Deferred tax assets and liabilities are recognized using enacted tax
- -----
rates for expected future tax consequences of events recognized in the financial
statements or tax returns. The tax benefit for dividends paid on unallocated
shares of stock held by the ESOP was recognized in shareholder's equity.

Gains and Losses on Divestitures. Armstrong generally records the gain or loss
- --------------------------------
on divested businesses in other income.

Cash and Cash Equivalents. Short-term investments that have maturities of three
- -------------------------
months or less when purchased are considered to be cash equivalents.

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

Long-Lived Assets. Property, plant and equipment values are stated at
- -----------------
acquisition cost less accumulated depreciation and amortization. Depreciation
charges for financial reporting purposes are determined on the straight-line
basis at rates calculated to provide for the retirement of assets at the end of
their useful lives, generally as follows: buildings, 20 to 40 years; machinery
and equipment, 3 to 20 years. Impairment losses are recorded when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. For purposes of
calculating an impairment, fair values are determined using a net discounted
cash flows approach. When assets are disposed of or retired, their costs and
related depreciation are removed from the financial statements and any resulting
gains or losses normally are reflected in "Selling, general and administrative
expenses."

89

Costs of the construction of certain long-lived assets include capitalized
interest which is amortized over the estimated useful life of the related asset.
There was no capitalized interest recorded in 2001 due to the Chapter 11 Filing.
Capitalized interest was $0.4 million in 2000 and $4.3 million in 1999.

Goodwill and Other Intangibles. Goodwill and other intangibles are amortized on
- ------------------------------
a straight-line basis over periods from 3 to 40 years. On a periodic basis,
Armstrong estimates the future undiscounted cash flows of the businesses to
which goodwill relates in order to ensure that the carrying value of goodwill
and other intangibles has not been impaired.

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other
Intangible Assets." Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Statement 141 also specifies criteria that intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill. Statement 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually. Impairment losses, if any, will be
measured as of January 1, 2002 and recognized as the cumulative effect of a
change in accounting principle in 2002. Statement 142 will also require that
intangible assets with determinable useful lives be amortized over their
respective estimated useful lives to their estimated residual values and
reviewed for impairment in accordance with Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The adoption of FAS 141 in the third quarter of 2001 had no impact on
Armstrong's financial statements. Armstrong is required to adopt the provisions
of Statement 142 effective January 1, 2002. Armstrong will be required to test
goodwill for impairment in accordance with the provisions of Statement 142 and
record any impairment charges to any affected assets by the end of 2002.

As of January 1, 2002, Armstrong has unamortized goodwill of $822.8 million and
unamortized identifiable intangible assets in the amount of $89.0 million, all
of which will be subject to the transition provisions of Statement 142.
Amortization expense related to goodwill was $22.8, $23.9 and $25.5 million for
the years ended December 31, 2001, 2000 and 1999, respectively. Armstrong is
currently in the process of analyzing the impact of Statement 142. The Wood
Flooring segment has $717.2 million of unamortized goodwill on its books as of
December 31, 2001. Based on preliminary assessments of the impact of adopting
Statement 142, Armstrong believes that a significant portion of this goodwill
will be considered impaired under the new accounting standard. Armstrong has not
yet determined the amount of any impairment, but expects to complete its
analysis, including valuations of tangibles and intangible assets, in the first
half of 2002. Due to the complexity, timing and scale of the process, Armstrong
is currently unable to precisely determine the amount of the goodwill impairment
charge but estimates the impairment charge in 2002 to be in excess of $300
million.

Foreign Currency Transactions. Assets and liabilities of Armstrong's
- -----------------------------

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

Financial Instruments and Derivatives. Armstrong uses derivatives and other
- -------------------------------------
financial instruments to diversify or offset the effect of currency, interest
rate and commodity price variability. See Note 17 for further discussion.

Fiscal Periods. The fiscal years of the Wood Flooring and Cabinets segments end
- --------------
on the Saturday closest to December 31, which was December 29, 2001, December
30, 2000, and January 2, 2000. No events occurred between these dates and
December 31 materially affecting Armstrong's financial position or results of
operations.

90

NOTE 3. NATURE OF OPERATIONS
- ----------------------------
Industry Segments
- -----------------

For the year ended 1999 Textiles
----------------------- Resilient Building Wood & Sports All Unallocated
Flooring Products Flooring Cabinets Flooring Other Corporate Total
----------- ---------- ---------- ---------- ---------- ------- ------------- --------

(millions)
- ----------
Net sales to external customers $1,162.3 $ 830.7 $ 654.3 $ 225.2 $ 262.9 - - $3,135.4
Equity (earnings) from affiliates (0.1) (16.1) - - - $ (0.3) - (16.5)
Segment operating income (loss) 70.8 92.4 0.9 15.2 (0.7) 0.3 $ (38.8) 140.1
Restructuring and reorganization
charges, net of reversals 0.2 1.1 4.1 1.1 1.2 - 1.3 9.0
Segment assets 867.6 527.0 1,260.6 108.0 162.9 16.3 1,092.0 4,034.4
Depreciation and amortization 57.3 33.0 36.0 2.3 4.7 - 23.5 156.8
Investment in affiliates 0.9 22.4 - - - 16.3 - 39.6
Capital additions 43.9 32.2 22.7 2.1 8.6 - 18.3 127.8

For the year ended 2000 Textiles
----------------------- Resilient Building Wood & Sports All Unallocated
Flooring Products Flooring Cabinets Flooring Other Corporate Total
----------- ---------- ---------- ---------- ---------- ------- ------------- --------

(millions)
- ----------
Net sales to external customers $1,236.3 $ 833.3 $ 684.6 $ 218.2 $ 277.0 - - $3,249.4
Intersegment sales 4.2 - - - - - - 4.2
Equity (earnings) from affiliates - (17.9) - - - $ (0.1) - (18.0)
Segment operating income (loss) 80.4 113.9 57.8 16.5 5.2 0.1 $ (266.7) 7.2
Restructuring and reorganization
charges, net of reversals 7.9 0.2 1.3 0.4 0.8 - 8.2 18.8
Segment assets 897.6 568.5 1,255.1 103.5 200.3 16.3 963.9 4,005.2
Depreciation and amortization 70.1 32.8 34.7 2.3 3.5 - 21.0 164.4
Investment in affiliates 1.1 19.9 - - - 16.3 - 37.3
Capital additions 52.0 43.6 32.5 6.2 11.1 - 13.7 159.1

For the year ended 1999 Textiles
----------------------- Resilient Building Wood & Sports All Unallocated
Flooring Products Flooring Cabinets Flooring Other Corporate Total
----------- ---------- ---------- ---------- ---------- ------- ------------- --------

(millions)
- ----------
Net sales to external customers $1,329.8 $ 791.8 $ 629.3 $ 207.2 $ 313.3 $ 51.5 - $3,322.9
Intersegment sales 2.7 - - - - 20.7 - 23.4
Equity (earnings) from affiliates 0.1 (16.1) - - - (0.8) - (16.8)
Segment operating income (loss) 211.2 120.0 62.8 22.2 11.7 6.0 $ (352.0) 81.9
Restructuring and reorganization
reversals (1.1) (0.3) - - - - - (1.4)
Segment assets 1,071.4 535.1 1,206.3 101.7 211.2 16.0 939.9 4,081.6
Depreciation and amortization 71.2 34.1 33.9 2.2 3.5 2.8 10.7 158.4
Investment in affiliates 3.3 14.9 - - - 16.0 - 34.2
Capital additions 71.9 45.5 34.8 6.7 8.5 2.7 16.5 186.6

Due to certain management and organizational changes during the fourth quarter
of 2001, Armstrong redefined its segments and reclassified all prior periods to
conform with the current presentation. Accordingly, Armstrong recognized Wood
Flooring and Cabinets as separate reportable segments. Previously, these
segments were reported together as Wood Products.

Accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Performance of the segments is
evaluated on operating income before income taxes, restructuring charges,
unusual gains and losses, and interest expense. Armstrong accounts for
intersegment sales and transfers based upon its internal transfer pricing
policy.

91

Resilient Flooring
- ------------------
Armstrong is a worldwide manufacturer of a broad range of resilient floor
coverings for homes and commercial and institutional buildings, which are sold
with adhesives, installation and maintenance materials and accessories.
Resilient flooring, in both sheet and tile forms, together with laminate
flooring and linoleum, are sold in a wide variety of types, designs, and colors.
Included are types of flooring that offer such features as ease of installation,
reduced maintenance (no-wax), and cushioning for greater underfoot comfort.
Resilient flooring products are sold to commercial, residential and
institutional customers through wholesalers, retailers (including large home
centers and buying groups), contractors, and to the hotel/motel and manufactured
homes industries.

Building Products
- -----------------
The Building Products segment includes commercial and residential ceiling
systems. Commercial suspended ceiling systems, designed for use in shopping
centers, offices, schools, hospitals, and other commercial and institutional
settings, are available in numerous colors, performance characteristics and
designs and offer characteristics such as acoustical control, accessibility to
the plenum (the area above the ceiling), rated fire protection, and aesthetic
appeal. Armstrong sells commercial ceiling materials and accessories to ceiling
systems contractors and to resale distributors. Ceiling materials for the home
provide noise reduction and incorporate features intended to permit ease of
installation. These residential ceiling products are sold through wholesalers
and retailers (including large home centers). Framework (grid) products for
Armstrong suspension ceiling systems products are manufactured through a joint
venture with Worthington Industries and are sold by both Armstrong and the joint
venture. Through a joint venture with a Chinese partner, a plant in Shanghai
manufactures ceilings for the Pacific area. During 2000, Armstrong acquired
privately held Switzerland-based Gema Holding AG ("Gema"), a manufacturer and
installer of metal ceilings. See Note 5 for further discussion.

Wood Flooring
- -------------
The Wood Flooring segment manufactures and distributes wood and other flooring
products. The Wood Flooring segment also distributes laminate flooring products.
These products are used primarily in residential new construction and
remodeling, with some commercial applications such as stores and restaurants.
Wood Flooring sales are generally made through independent wholesale flooring
distributors and retailers (including large home centers and buying groups)
under the brand names Bruce, Hartco and Robbins.

Cabinets
- --------
The Cabinets segment manufactures kitchen and bathroom cabinetry and related
products, which are used primarily in residential new construction and
remodeling. Cabinets are sold through both independent and Armstrong-owned
distributors under the brand names Bruce and IXL.

Textiles & Sports Flooring
- --------------------------
The Textiles and Sports Flooring business segment manufactures carpeting and
sports flooring products that are mainly sold in Europe. The carpeting products
consist principally of carpet tiles and broadloom used in commercial
applications as well as the leisure and travel industry. The sports flooring
products include artificial turf surfaces and indoor gymnasium floors. Both
product groups are sold through wholesalers, retailers and contractors.

All Other
- ---------
During most of 1999, "all other" included business units making a variety of
specialty products for the building, automotive, textile and other industries
worldwide. Gasket materials were sold for new and replacement use in automotive,
construction and farm equipment, appliance, small engine and compressor
industries. On June 30, 1999, Armstrong sold 65% of the gaskets business. Since
the divestiture, Armstrong has accounted for the gaskets business under the
equity method within the "all other" segment. Textile mill supplies, including
cots and aprons, were sold to equipment manufacturers and textile mills. On
September 30, 1999, Armstrong sold the textiles business.

Concentration of Credit Risk
- ----------------------------
During 2001, Armstrong recognized revenue of approximately $340.8 million from
The Home Depot, Inc., from sales in the resilient flooring, building products
and wood flooring segments compared to approximately $373.2 million and $344.8
million in 2000 and 1999, respectively. No other customer represented more than
10% of Armstrong's revenue.

92

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

Geographic Areas
- ----------------
Net trade sales (millions) 2001 2000 1999
-------------------------- --------- --------- ---------

Americas:
United States $ 2,187.6 $ 2,259.5 $ 2,291.4
Canada 113.5 122.7 118.8
Other Americas 23.5 25.5 26.2
--------- --------- ---------
Total Americas $ 2,324.6 $ 2,407.7 $ 2,436.4
--------- --------- ---------

Europe:
England $ 133.7 $ 130.3 $ 141.6
France 67.8 74.6 80.5
Germany 182.2 191.6 213.3
Italy 31.1 31.9 35.6
Netherlands 87.1 92.5 106.0
Russia 25.9 21.1 11.8
Switzerland 34.1 22.0 8.4
Other Europe 149.3 156.3 160.2
--------- --------- ---------
Total Europe $ 711.2 $ 720.3 $ 757.4
--------- --------- ---------

Pacific area:
Australia $ 25.3 $ 24.7 $ 28.1
China 24.1 27.7 23.9
Other Pacific area 50.2 69.0 77.1
--------- --------- ---------
Total Pacific area $ 99.6 $ 121.4 $ 129.1
--------- --------- ---------

Total net trade sales $ 3,135.4 $ 3,249.4 $ 3,322.9
========= ========= =========

Long-lived assets (property, plant and equipment)
- -------------------------------------------------
at December 31 (millions) 2001 2000
------------------------- ---------- ----------

Americas:
United States $ 947.6 $ 960.3
Canada 14.6 14.2
Other Americas 0.1 0.1
--------- ---------
Total Americas $ 962.3 $ 974.6
--------- ---------

Europe:
Germany $ 166.9 $ 178.6
England 35.7 39.3
Netherlands 41.0 43.3
Belgium 23.8 30.2
France 11.5 11.9
Sweden 8.0 9.4
Other Europe 4.5 1.7
--------- ---------
Total Europe $ 291.4 $ 314.4
--------- ---------

Pacific area:
China $ 24.6 $ 26.2
Other Pacific area 5.4 5.8
--------- ---------
Total Pacific area $ 30.0 $ 32.0
--------- ---------

Total long-lived assets $ 1,283.7 $ 1,321.0
========= =========

93

NOTE 4. LIABILITIES SUBJECT TO COMPROMISE
- -----------------------------------------
As a result of AWI's Chapter 11 filing (see Note 1), pursuant to SOP 90-7, AWI
is required to segregate prepetition liabilities that are subject to compromise
and report them separately on the balance sheet. Liabilities that may be
affected by a plan of reorganization are recorded at the amount of the expected
allowed claims, even if they may be settled for lesser amounts. Substantially
all of AWI's prepetition debt, now in default, is recorded at face value and is
classified within liabilities subject to compromise. Obligations of Armstrong
subsidiaries not covered by the Filing remain classified on the consolidated
balance sheet based upon maturity date. AWI's asbestos liability is also
recorded in liabilities subject to compromise. Prior to its Chapter 11 Filing,
AWI estimated its probable asbestos-related personal injury liability based upon
a variety of factors including historical settlement amounts, the incidence of
past claims, the mix of the injuries and occupations of the plaintiffs, the
number of cases pending against it and the status and results of broad-based
settlement discussions. AWI believes its previous range of probable and
estimable liability is more uncertain now than before. There are significant
differences in the way the asbestos-related personal injury claims may be
addressed under the bankruptcy process when compared to the tort system.
Accordingly, AWI currently is unable to estimate its ultimate liability in the
context of its Chapter 11 Case. Although not estimable, it is likely that the
actual liability will be significantly higher than the recorded liability. As
the Chapter 11 Case proceeds, there should be more clarity as to the extent of
the liability. See Note 28 for further discussion of AWI's asbestos liability.

Liabilities subject to compromise at December 31, 2001 and December 31, 2000 are
as follows:

(millions) 2001 2000
- ---------- -------- --------
Debt (at face value) $1,400.7 $1,400.4
Asbestos-related liability 690.6 690.6
Prepetition trade payables 52.2 60.1
Prepetition other payables and accrued interest 56.4 76.4
Amounts due to affiliates 4.6 4.7
ESOP loan guarantee 157.7 157.7
-------- --------
Total liabilities subject to compromise $2,362.2 $2,389.9
======== ========

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

See Note 15 for detail of debt subject to compromise.

NOTE 5. ACQUISITIONS
- --------------------
On May 18, 2000, Armstrong acquired privately-held Switzerland-based Gema
Holding AG ("Gema"), a manufacturer and installer of metal ceilings, for $6
million plus certain contingent consideration not to exceed $25.5 million based
on results over the three year period ending December 31, 2002. Gema has two
manufacturing sites located in Austria and Switzerland and employs nearly 300
people. The acquisition was recorded under the purchase method of accounting.
The purchase price was allocated to the assets acquired and the liabilities
assumed based on the estimated fair market value at the date of acquisition.
Contingent consideration, when and if paid, will be accounted for as additional
purchase price. The fair market value of tangible and identifiable intangible
assets acquired exceeded the purchase price by $24.2 million and this amount was
recorded as a reduction of the fair value of property, plant and equipment.

During 2001, Armstrong spent $5.6 million to purchase some of the remaining
minority interest of already-consolidated entities within the Resilient Flooring
segment. Approximately $5.0 million of the purchase price was allocated to
goodwill.

NOTE 6. DISCONTINUED OPERATIONS
- -------------------------------
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 and a new review of the business, industry and overall economy
conducted by new senior management. Accordingly, this segment is no longer
classified as a discontinued operation and amounts

94

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. In
addition to the information provided in Note 3, the Textiles and Sports Flooring
segment had liabilities of $142.6 million as of December 31, 2000.

Based on the expected net realizable value of the business determined during the
negotiations to sell the business, Armstrong had recorded a pretax net loss of
$34.5 million in the fourth quarter of 2000, $23.8 million net of tax benefit.
Armstrong also had 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 the third quarter of 2001, Armstrong 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, 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 recorded in the third quarter of 2001 within cost
of sales related to certain products that will no longer be sold.

On May 31, 2000, Armstrong completed its sale of all of the entities, assets and
certain liabilities comprising its Insulation Products segment to Orion
Einundvierzigste Beteiligungsgesellschaft Mbh, a subsidiary of the Dutch
investment firm Gilde Investment Management N.V. for $264 million. The
transaction resulted in an after tax gain of $114.8 million in 2000. During
2001, AHI recorded a pretax loss of $1.1 million related to its divestiture of
its Insulation Products segment. This loss resulted from certain post-closing
adjustments.

NOTE 7. OTHER DIVESTITURES
- --------------------------
In November 2000, Armstrong sold a component of its Textiles and Sports Flooring
segment. As this divestiture included a business classified as held for sale
since its July 1998 acquisition, Armstrong had been recording the 2000 operating
losses of this business within SG&A expense. The overall 2000 impact was a
reduction of SG&A expense of $0.7 million.

On July 31, 2000, Armstrong completed the sale of its Installation Products
Group ("IPG") to subsidiaries of the German company Ardex GmbH, for $86 million
in cash. Ardex purchased substantially all of the assets and liabilities of IPG
including its shares of the W.W. Henry Company. The transaction resulted in a
gain of $44.1 million ($60.2 million pretax) and was recorded in other income.
The financial results of IPG were reported as part of the Resilient Flooring
segment. The proceeds and gain are subject to a post-closing working capital
adjustment. Under the terms of the agreement and a related supply agreement,
Armstrong will purchase some of its installation products needs from Ardex for
an initial term of eight years, subject to certain minimums for the first five
years after the sale. The agreement also calls for price adjustments based upon
changing market prices for raw materials, labor and energy costs.

On September 30, 1999, Armstrong completed the sale of its Textile Products
Operations to Day International Group, Inc. The sale resulted in a loss of $3.2
million, which was recorded in other income.

On June 30, 1999, Armstrong sold 65% of its ownership in Armstrong Industrial
Specialties, Inc. ("AISI"), its gasket products subsidiary, to a group of
investors including Citicorp Venture Capital Ltd. and the management of AISI for
a cash purchase price of approximately $36.1 million. The sale resulted in a
gain of approximately $6.0 million, which was recorded in other income.

On June 22, 1999, Armstrong sold its interest in the assets of Martin Surfacing,
Inc. Armstrong acquired this interest as part of its acquisition of DLW during
the third quarter of 1998. There was no material gain or loss on the
transaction.

95

On May 28, 1999, Armstrong's subsidiary DLW sold its furniture business for
total cash proceeds of $38.1 million. Armstrong acquired this business as part
of the acquisition of DLW in the third quarter of 1998 and had classified the
business as held for sale. There was no gain or loss on the transaction.

NOTE 8. RESTRUCTURING AND OTHER ACTIONS
- ---------------------------------------

The following table summarizes activity in the restructuring accruals for 2001
and 2000:

Beginning Cash Ending
(millions) Balance Payments Charges Reversals Other Balance
- ---------- ------------- ------------ ------------- ------------- ----------- -----------

2001 $ 22.2 $ (14.1) $ 9.7 $ (2.8) $ (6.1) $ 8.9
2000 12.1 (7.9) 20.1 (1.4) (0.7) 22.2

A $5.4 million pre-tax 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, as a result of
streamlining the organization, 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.

In the second quarter of 2001, a $1.1 million reversal was recorded related to a
formerly occupied building for which Armstrong 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 Armstrong.

In the third quarter of 2001, a $1.4 million reversal was recorded related to
certain 2000 severance and benefit accruals that were no longer necessary and a
$0.3 million pre-tax charge was recorded for additional severance payments.

A $6.1 million pre-tax restructuring charge was recorded in the fourth quarter
of 2001. $5.2 million of the charge, which was allocated between Wood Flooring
and Cabinets, related to severance and enhanced retirement benefits for six
salaried employees, as a result of the on-going integration of the wood flooring
and resilient flooring operations. Of the $5.2 million, $0.5 million represented
non-cash charges for enhanced retirement benefits, which is accounted for as a
reduction of the prepaid pension asset, and accelerated vesting of restricted
stock awards. The remaining $0.9 million of the $6.1 million charge related to
severance benefits for more than twenty positions in the textiles and sports
flooring business, as a result of streamlining the organization. Also in the
fourth quarter of 2001, a $0.1 million reversal was recorded related to certain
severance and benefit accruals that were no longer necessary.

The amount 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 lease was rejected as part of
the Chapter 11 process. Accordingly, the $5.9 million reversal is recorded as a
reduction of Chapter 11 reorganization costs in accordance with SOP 90-7. See
Note 1 for further discussion. The remaining amount in "other" is related to
foreign currency translation.

Substantially all of the remaining balance of the restructuring accrual as of
December 31, 2001 relates to a noncancelable-operating lease, which extends
through 2017, and severance for terminated employees with extended payouts, the
majority of which will be paid by the second quarter of 2002.

A $20.2 million pre-tax reorganization charge was recorded in 2000, of which
$9.4 million related to severance and enhanced retirement benefits for more than
180 positions (approximately 66% related to salaried positions) within the
European resilient flooring and textiles and sports flooring businesses.
Reorganization actions include staff reductions due to the elimination of
administrative positions, the consolidation and closing of sales offices in
Europe and the closure of the Team Valley, England commercial tile plant. $2.6
million of the charge related to severance and enhanced retirement benefits for
15 corporate and line-of-business staff positions (all salaried positions) as a
result of streamlining the organization to reflect staffing needs for current
business conditions. Of the $2.6 million, $0.1 million represented a non-cash
charge for enhanced retirement benefits. $8.2 million of the charge primarily
related to the remaining payments on a noncancelable-operating lease for an
office facility in the U.S. The employees who occupied this office facility were
relocated to the corporate headquarters.

96

In addition, $1.4 million of the remaining accrual for the $74.4 million 1998
reorganization charge was reversed in 2000, comprising certain severance
accruals that were no longer necessary.

Armstrong also recorded a $17.6 million charge to cost of goods sold in 2000 for
write-downs of inventory and production-line assets related to the
reorganization efforts that were not categorized as restructuring costs. The
inventory write-downs were related to changes in product offerings, while the
write-downs of production-line assets primarily related to changes in production
facilities and product offerings.

During 2000, Armstrong also recorded costs within selling, general and
administrative expense of $3.8 million for severance payments to approximately
100 employees, that were not classified as restructuring costs, and $2.3 million
for fixed asset impairments related to the decision to vacate certain office
space in the U.S.

NOTE 9. EQUITY INVESTMENTS
- --------------------------
Investments in affiliates were $39.6 million at December 31, 2001, an increase
of $2.3 million, primarily reflecting the equity earnings of Armstrong's 50%
interest in its WAVE joint venture and its remaining 35% interest in Interface
Solutions, Inc. ("ISI"). Armstrong continues to purchase certain raw materials
from ISI under a long-term supply agreement. Equity earnings from affiliates for
2001, 2000 and 1999 consisted primarily of income from a 50% interest in the
WAVE joint venture and the 35% interest in ISI.

Armstrong purchases some grid products from WAVE, its 50%-owned joint venture
with Worthington Industries. The total amount of these purchases was
approximately $38 million, $41 million and $42 million for the years ended
December 31, 2001, 2000 and 1999, respectively. Armstrong also provides certain
selling and administrative processing services to WAVE for which it receives
reimbursement. Additionally, WAVE leases certain land and buildings from
Armstrong. The terms of these transactions are such that there is no material
profit recorded by Armstrong when they occur.

Condensed financial data for significant investments in affiliates accounted for
under the equity method of accounting are summarized below:

(millions) 2001 2000
- ---------- -------- --------
Current assets $ 72.4 $ 68.3
Non-current assets 32.3 34.4
Current liabilities 15.0 18.2
Long-term debt 50.0 50.0
Other non-current liabilities 1.2 0.4

(millions) 2001 2000 1999
- ---------- -------- -------- --------
Net sales $ 200.1 $ 212.2 $ 202.1
Gross profit 57.1 60.3 53.7
Net earnings 32.3 35.5 32.3

NOTE 10. ACCOUNTS AND NOTES RECEIVABLE
- --------------------------------------

(millions) 2001 2000
- ---------- -------- --------
Customer receivables $ 343.5 $ 401.0
Customer notes 7.7 10.8
Miscellaneous receivables 14.5 8.3
Less allowance for discounts and losses (49.2) (51.1)
--------- ---------
Net accounts and notes receivable $ 316.5 $ 369.0
========= =========

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

97

NOTE 11. INVENTORIES
- --------------------
Approximately 41% of Armstrong's total inventory in 2001 and 42% in 2000 were
valued on a LIFO (last-in, first-out) basis. Inventory values were lower than
would have been reported on a total FIFO (first-in, first-out) basis, by $46.2
million at the end of 2001 and $47.8 million at year-end 2000.

(millions) 2001 2000
- ---------- ---------- -----------

Finished goods $ 269.6 $ 244.7
Goods in process 45.8 49.0
Raw materials and supplies 182.9 158.0
Less LIFO and other reserves (55.2) (51.8)
---------- -----------
Total inventories, net $ 443.1 $ 399.9
========== ===========

NOTE 12. PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------

(millions) 2001 2000
- ---------- ---------- -----------

Land $ 85.6 $ 92.4
Buildings 582.8 571.6
Machinery and equipment 1,698.2 1,676.2
Construction in progress 60.4 71.8
Less accumulated depreciation and amortization (1,143.3) (1,091.0)
---------- -----------
Net property, plant and equipment $ 1,283.7 $ 1,321.0
========== ===========

NOTE 13. GOODWILL AND OTHER INTANGIBLES
- ----------------------------------------

(millions) 2001 2000
- ---------- ---------- -----------

Goodwill $ 907.7 $ 908.9
Less accumulated amortization (84.9) (62.9)
---------- -----------
Total goodwill, net $ 822.8 $ 846.0
========== ==========

Other intangibles $ 128.1 $ 122.8
Less accumulated amortization (39.1) (30.1)
---------- -----------
Total other intangibles, net $ 89.0 $ 92.7
========== ===========

Goodwill decreased by $23.2 million in 2001, primarily reflecting scheduled
amortization of $22.8 million. Unamortized computer software costs included in
other intangibles were $50.3 million at December 31, 2001, and $50.7 million at
December 31, 2000. See Note 2 for discussion of the impact of FASB Statement No.
142 "Goodwill and Other Intangible Assets."

NOTE 14. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- ----------------------------------------------

(millions) 2001 2000
- ---------- ---------- ---------

Payables, trade and other $ 179.0 $ 175.2
Employment costs 47.5 41.2
Reorganization and severance payments, current portion (see Note 8) 2.0 2.7
Other 70.1 72.9
---------- ---------
Total accounts payable and accrued expenses $ 298.6 $ 292.0
========== =========

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

98

NOTE 15. DEBT
- -------------
(See Note 4 regarding treatment of prepetition debt.)

Average Average
year-end year-end
($ millions) 2001 interest rate 2000 Interest rate
- ------------ ---------- -------------- -------- --------------

Borrowings under lines of credit $ 450.0 7.18% $ 450.0 7.18%
DIP Facility - - 5.0 9.50%
Commercial paper 50.0 6.75% 49.7 6.75%
Foreign banks 18.9 5.16% 31.0 6.00%
Bank loans due 2002-2006 39.5 5.47% 55.0 5.77%
9.00% medium-term notes due 2001 7.5 9.00% 7.5 9.00%
6.35% senior notes due 2003 200.0 6.35% 200.0 6.35%
6.50% senior notes due 2005 150.0 6.50% 150.0 6.50%
9.75% debentures due 2008 125.0 9.75% 125.0 9.75%
7.45% senior notes due 2029 200.0 7.45% 200.0 7.45%
7.45% senior quarterly interest bonds due 2038 180.0 7.45% 180.0 7.45%
Industrial development bonds 21.0 4.95% 21.3 5.64%
Capital lease obligations 6.3 7.25% 7.1 7.25%
Other 27.8 10.56% 30.1 10.27%
---------- -------------- -------- --------------
Subtotal 1,476.0 7.24% 1,511.7 7.24%
Less debt subject to compromise 1,400.7 7.35% 1,400.4 7.35%
Less current portion and short-term debt 25.0 6.01% 54.4 6.22%
---------- -------------- -------- --------------
Total long-term debt, less current portion $ 50.3 4.92% $ 56.9 5.51%
========== ============== ======== ==============

Approximately $42.8 million of the $75.3 million of total debt not subject to
compromise outstanding as of December 31, 2001 was secured with buildings and
other assets. As of December 31, 2000, approximately $58.9 million of the $111.3
million of total debt not subject to compromise outstanding was secured with
buildings and other assets.

Scheduled payments of long-term debt, excluding debt subject to compromise
(millions)

2002 $ 6.1 2005 $ 1.1
2003 1.2 2006 15.6
2004 3.0

In accordance with SOP 90-7, AWI stopped recording interest expense on
unsecured prepetition debt effective December 6, 2000.

Debt from the table above included in liabilities subject to compromise
consisted of the following at December 31, 2001 and 2000.

($ millions) 2001 2000
- ------------ --------- ---------

Borrowings under lines of credit $ 450.0 $ 450.0
Commercial paper 50.0 49.7
9.00% medium-term notes due 2001 7.5 7.5
6.35% senior notes due 2003 200.0 200.0
6.50% senior notes due 2005 150.0 150.0
9.75% debentures due 2008 125.0 125.0
7.45% senior notes due 2029 200.0 200.0
7.45% senior quarterly interest bonds due 2038 180.0 180.0
Industrial development bonds 11.0 11.0
Other 27.2 27.2
--------- ---------
Total debt subject to compromise $ 1,400.7 $ 1,400.4
========= =========

Borrowings under the DIP Facility, if any, and obligations to reimburse draws
upon the letters of credit constitute a superpriority administrative expense
claim in the Chapter 11 Case. The $5.0 million which was outstanding under the
DIP Facility as of December 31, 2000 (drawn to pay fees related to
implementation of the DIP Facility) was repaid in January of 2001. At December
31, 2001, AWI had no borrowings under the DIP Facility, but did have
approximately $8.4 million in letters of credit issued pursuant to the DIP
Facility. Borrowings under the DIP Facility are limited to an

99

adjusted amount of receivables, inventories and property, plant and equipment.
Depending on the amount of borrowings, the DIP Facility carries an interest rate
range of either JP Morgan Chase's Alternate Bank Rate plus 50 to 100 basis
points or LIBOR plus 150 to 200 basis points. The DIP Facility also contains
several covenants including, among other things, limits on dividends and asset
sales, capital expenditures and a required ratio of debt to cash flow. The DIP
Facility is scheduled to expire on December 6, 2002.

On May 19, 1999, AWI completed a public offering of $200 million aggregate
principal amount of 7.45% senior notes due 2029. The net proceeds from this
offering were used to repay other indebtedness of AWI.

Other debt includes an $18.6 million zero-coupon note due in 2013 that was fully
amortized to its face value due to the Chapter 11 filing.

In addition, Armstrong's foreign subsidiaries have approximately $25.4 million
of unused short-term lines of credit available from banks. The credit lines are
subject to immaterial annual commitment fees.

In order to maintain the ratio of fixed to floating rate debt which management
believes is appropriate, Armstrong maintained $150 million of interest rate
swaps during most of 2000. Armstrong received fixed rates and paid floating
rates on these swaps. However, all but one of the interest rate swap agreements
was terminated when Armstrong defaulted on its commercial paper obligations on
November 22, 2000. The interest rate swap which had been outstanding at December
31, 2000 in the notional amount of $20.0 million was terminated by the
counter-party on February 26, 2001. There are no interest rate swap agreements
outstanding at December 31, 2001.

NOTE 16. FINANCIAL INSTRUMENTS
- ------------------------------
Armstrong does not hold or issue financial instruments for trading purposes. The
estimated fair values of Armstrong's financial instruments are as follows:

2001 2000
-------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
(millions at December 31) amount fair value amount fair value
- ------------------------- ---------------- ------------- --------------- --------------

Assets:
Foreign currency contract obligations $ 1.7 $ 1.7 -- --
Liabilities:
Debt subject to compromise 1,400.7 739.6 $ 1,400.4 $ 386.6
Long-term debt, including current portion 56.4 56.4 75.4 75.4
Natural gas contracts 5.2 5.2 -- --
Off-balance sheet financial instruments:
Foreign currency contract obligations -- -- -- 1.7
Interest rate swaps -- -- -- 0.3

The carrying amounts of cash and cash equivalents, receivables, accounts payable
and accrued expenses, short-term debt and current installments of long-term debt
approximate, fair value because of the short-term maturity of these instruments.
The fair value estimates of long-term debt were based upon quotes from major
financial institutions taking into consideration current rates offered to
Armstrong for debt of the same remaining maturities. Foreign currency contract
obligations and options, as well as interest rate swap fair values, are
estimated by obtaining quotes from major financial institutions.

Armstrong utilizes lines of credit and other commercial commitments in order to
ensure that adequate funds are available to meet operating requirements. On
December 31, 2001, Armstrong had available lines of credit totaling $217.0
million and letters of credit totaling $45.5 million. Lines of credit include
Armstrong's foreign subsidiaries unused short-term lines of credit of
approximately $25.4 million and the available DIP Facility of $191.6 million.
Letters of credit are issued to third party suppliers, insurance and financial
institutions and can only be drawn upon in the event of Armstrong's failure to
pay its obligations to the beneficiary. Standby letters of credit are currently
arranged through AWI's DIP Facility with JP Morgan Chase. Certain standby
letters of credit arranged with Wachovia prior to the Filing have been renewed
at their scheduled expiration date.

100

NOTE 17. DERIVATIVE FINANCIAL INSTRUMENTS
- -----------------------------------------
Effective January 1, 2001, Armstrong adopted Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"),
as amended, which requires that all derivative instruments be reported on the
balance sheet at fair value and establishes criteria for designation and
effectiveness of hedging relationships. The cumulative effect of adopting FAS
133 as of January 1, 2001 was not material to Armstrong's financial statements.

Armstrong is exposed to market risk from changes in foreign currency exchange
rates, interest rates and commodity prices that could impact its results of
operations and financial condition. Armstrong uses financial instruments,
including fixed and variable rate debt, as well as swap, forward and option
contracts to finance its operations and to hedge interest rate, currency and
commodity exposures. Armstrong regularly monitors developments in the capital
markets and only enters into currency and swap transactions with established
counter-parties having investment grade ratings. Swap, forward and option
contracts are entered into for periods consistent with underlying exposure and
do not constitute positions independent of those exposures. Armstrong uses
derivative financial instruments as risk management tools and not for
speculative trading purposes.

Interest Rate Risk - Due to AWI's Chapter 11 Filing, all affected debt was
- ------------------
classified as liabilities subject to compromise. All such debt will be addressed
in the Chapter 11 Case and during the pendency thereof, AWI does not expect to
pay any principal, interest or other payments in respect thereof. However,
Armstrong also has debt of entities that were not a part of the Chapter 11
filing, which are being paid on schedule. At December 31, 2001, Armstrong had no
open interest rate swap contracts. Prior to the Chapter 11 filing, Armstrong
managed its ratio of fixed to floating rate debt with the objective of achieving
a mix that management believed to be appropriate. To manage this mix in a
cost-effective manner, Armstrong, from time to time, entered into interest rate
swap agreements, in which it agreed to exchange various combinations of fixed
and/or variable interest rates based on agreed-upon notional amounts.

Currency Rate Risk - Armstrong manufactures and sells its products in a number
- ------------------
of countries throughout the world and, as a result, is exposed to movements in
foreign currency exchange rates. To a large extent, Armstrong's global
manufacturing and sales provide a natural hedge of foreign currency exchange
rate movement, as foreign currency expenses generally offset foreign currency
revenues. At December 31, 2001, Armstrong's major foreign currency exposures are
to the Canadian dollar, the Euro and the British pound.

Armstrong has used foreign currency forward exchange contracts and purchased
options to reduce its exposure to the risk that the eventual net cash inflows
and outflows, resulting from the sale of product to foreign customers and
purchases from foreign suppliers, will be adversely affected by changes in
exchange rates. These derivative instruments are used for forecasted
transactions and are classified as cash flow hedges. These transactions allow
Armstrong to further reduce its overall exposure to exchange rate movements,
since the gains and losses on these contracts offset losses and gains on the
transactions being hedged. Gains and losses on these instruments are deferred in
other comprehensive income until the underlying transaction is recognized in
earnings. The net fair value of these instruments at December 31, 2001 was an
asset of less than $0.1 million, all of which is expected to be charged to
earnings in the next twelve months. The earnings impact is reported in either
net sales or cost of goods sold to match the underlying transaction being
hedged. The earnings impact of these hedges was not material during 2001.

Armstrong also uses foreign currency forward exchange contracts to hedge
exposures created by cross-currency inter-company loans. The underlying
inter-company loans are classified as short-term and translation adjustments
related to these loans are recorded in other income. The related derivative
contracts are classified as fair value hedges and the offsetting gains and
losses on these contracts are also recorded in other income. The fair value of
these instruments at December 31, 2001 was a $1.7 million asset, all of which is
expected to be charged to earnings in the next twelve months. During 2001, the
net earnings impact of these hedges was $0.5 million, recorded in other income,
which was comprised of a gain of approximately $8.6 million from the foreign
currency forward exchange contracts, substantially offset by the 2001
translation adjustment of approximately $8.1 million for the underlying
inter-company loans.

Commodity Price Risk - Armstrong purchases natural gas for use in the
- --------------------
manufacture of many of its products and to heat many of its facilities. As a
result, Armstrong is exposed to movements in the price of natural gas. Armstrong
has a policy of minimizing cost volatility by purchasing natural gas forward
contracts, option contracts, and zero-cash collars. These instruments are
designated as cash flow hedges. The mark-to-market gain or loss on qualifying

101

hedges is included in other comprehensive income to the extent effective, and
reclassified into cost of goods sold in the period during which the underlying
products are sold. The mark-to-market gains or losses on ineffective portions of
hedges are recognized in cost of goods sold immediately. The fair value of these
instruments at December 31, 2001 was a $5.2 million liability, of which $4.8
million is expected to be charged to earnings in the next twelve months. The
earnings impact of these hedges, recorded in cost of goods sold, was a $8.8
million expense during 2001. The earnings impact of the ineffective portion of
these hedges was not material during 2001.

NOTE 18. INCOME TAXES
- ---------------------
The tax effects of principal temporary differences between the carrying amounts
of assets and liabilities and their tax bases are summarized in the table below.
Management believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize deferred tax
assets, except for certain foreign tax credit and net operating loss
carryforwards for which Armstrong has provided a valuation allowance of $95.8
million. The $8.6 million of U.S. foreign tax credit will expire in 2005.
Armstrong has $1,058.3 million of state net operating losses with expirations
between 2002 and 2021, and $110.1 million of foreign net operating losses, which
will be carried forward indefinitely. The valuation allowance increased by $26.0
million primarily because of additional foreign and state net operating losses
in addition to increases in foreign tax credits and other basis adjustments.

Deferred income tax assets (liabilities) (millions) 2001 2000
- --------------------------------------------------- ---------- ----------

Postretirement and postemployment benefits $ 86.5 $ 92.0
Chapter 11 reorganization costs and restructuring costs 19.6 35.9
Asbestos-related liabilities 241.7 241.7
Foreign tax credit carryforward 8.6 6.4
Net operating losses 119.8 94.6
Other 79.0 87.3
---------- ----------
Total deferred tax assets 555.2 557.9
Valuation allowance (95.8) (69.8)
---------- ----------
Net deferred tax assets 459.4 488.1

Accumulated depreciation (186.6) (181.1)
Pension costs (118.1) (106.4)
Insurance for asbestos-related liabilities (72.1) (85.4)
Tax on unremitted earnings (27.0) (27.0)
Other (62.5) (71.4)
---------- ----------
Total deferred income tax liabilities (466.3) (471.3)
---------- ----------
Net deferred income tax (liabilities) assets (6.9) 16.8
Deferred income tax - asset - current 11.5 10.0
---------- ----------
Deferred income tax (liability) asset - noncurrent $ (18.4) $ 6.8
========== ==========

Details of taxes (millions) 2001 2000 1999
- --------------------------- --------- ---------- ----------

Earnings (loss) from continuing operations before income taxes:
Domestic $ 117.1 $ (135.4) $ 45.8
Foreign 14.1 23.0 57.0
Eliminations (15.5) (9.9) (119.5)
--------- ---------- ----------
Total $ 115.7 $ (122.3) $ (16.7)
========= ========== ==========
Income tax provision (benefit):
Current:
Federal $ 5.0 $ (11.3) $ 15.8
Foreign 13.2 7.6 6.6
State (0.6) 1.8 3.0
--------- ---------- ----------
Total current 17.6 (1.9) 25.4
--------- ---------- ----------
Deferred:
Federal 33.3 (32.7) (36.6)
Foreign (8.4) (2.5) 10.2
State -- 0.3 0.5
--------- ---------- ----------
Total deferred 24.9 (34.9) (25.9)
--------- ---------- ----------
Total income taxes (benefit) $ 42.5 $ (36.8) $ (0.5)
========= ========== ==========

102

At December 31, 2001, unremitted earnings of subsidiaries outside the U.S. were
$259.2 million (at December 31, 2001 balance sheet exchange rates). Armstrong
expects to repatriate $77.0 million of earnings for which $27.0 million of U.S.
taxes were provided in 2000. No U.S. taxes have been provided on the remaining
unremitted earnings as it is Armstrong's intention to invest these earnings
permanently. If such earnings were to be remitted without offsetting tax credits
in the U.S., withholding taxes would be $5.8 million. The 2001 tax provision
reflects the reversal of certain state tax and other accruals no longer required
due to the completion of state tax audits and/or expiration of statutes of
limitation partially offset by certain nondeductible expenses.

Reconciliation to U.S. statutory tax rate (millions) 2001 2000 1999
- ---------------------------------------------------- -------- -------- --------

Continuing operations tax (benefit) at statutory rate $ 40.5 $ (43.3) $ (5.8)
State income taxes, net of federal benefit 2.0 1.8 2.0
(Benefit) on ESOP dividend -- (1.0) (1.3)
Tax on foreign and foreign-source income (6.5) 4.4 3.4
Goodwill 6.7 9.9 7.1
Change in valuation allowance -- -- (4.0)
Sale of subsidiary -- (9.1) --
Other items, net (0.2) 0.5 (1.9)
------- -------- --------
Tax expense (benefit) at effective rate $ 42.5 $ (36.8) $ (0.5)
======= ======== ========

Other taxes (millions) 2001 2000 1999
- ---------------------- -------- -------- --------

Payroll taxes $ 74.2 $ 73.9 $ 81.1
Property, franchise and capital stock taxes 15.7 20.0 15.9

NOTE 19. OTHER LONG-TERM LIABILITIES
- ------------------------------------

(millions) 2001 2000
- ---------- -------- --------

Long-term deferred compensation arrangements $ 42.2 $ 44.9
Environment liabilities not subject to compromise 10.2 8.8
Other 32.2 24.2
------- --------
Total other long-term liabilities $ 84.6 $ 77.9
======= ========

NOTE 20. RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN (RSSOP)
- ------------------------------------------------------------
In 1989, Armstrong established an Employee Stock Ownership Plan ("ESOP") that
borrowed $270 million from banks and insurance companies, repayable over 15
years and guaranteed by Armstrong. The ESOP used the proceeds to purchase
5,654,450 shares of a new series of convertible preferred stock issued by
Armstrong. In 1996, the ESOP was merged with the Retirement Savings Plan for
salaried employees (a defined-contribution pension plan) to form the Retirement
Savings and Stock Ownership Plan ("RSSOP"). On July 31, 1996, the trustee of the
ESOP converted the preferred stock held by the trust into approximately 5.1
million shares of common stock at a one-for-one ratio.

The number of shares released for allocation to participant accounts has been
based on the proportion of principal and interest paid to the total amount of
debt service remaining to be paid over the life of the borrowings. Through
December 31, 2001, the RSSOP allocated 2,732,000 shares to participants that
remain outstanding, participants retired 1,693,000 shares, Armstrong contributed
an additional 437,000 shares from its treasury and the trustee purchased 243,000
shares on the open market to allocate to employees. As of December 31, 2001,
there were approximately 1,912,000 shares in the RSSOP that had yet to be
allocated to participants.

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

103

The RSSOP currently covers parent company nonunion employees and some union
employees.

Details of ESOP debt service payments (millions) 2000 1999
- ------------------------------------------------ ------- -------

Common stock dividends paid $ 4.5 $ 8.9
Employee contributions 1.2 7.7
Company contributions 7.0 8.9
Company loans to ESOP 7.3 12.9
------ ------
Debt service payments made by ESOP trustee $ 20.0 $ 38.4
====== ======

Armstrong recorded costs for the RSSOP of $3.5 million in 2001, $10.5 million in
2000 and $13.1 million in 1999, which related to company contributions.

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

During the fourth quarter of 2000, Armstrong amended the RSSOP to provide for a
cash match of employee contributions in lieu of the stock match. Armstrong
recorded an expense of $3.5 million in 2001 and $0.5 million in 2000 related to
the cash match.

The trustee borrowed from Armstrong $7.3 million in 2000 and $12.9 million in
1999. These loans were made to ensure that the financial arrangements provided
to employees remained consistent with the original intent of the RSSOP. Such
loans receivable were included as a component of shareholders' equity. In
December 2000, in connection with the Chapter 11 Filing of AWI and default on
RSSOP loan obligations, Armstrong recorded an impairment charge of $43.3 million
related to these loans receivable in view of the fact that the only asset of the
RSSOP consisted of the stock of AHI which had diminished substantially in value.
The impairment was recorded as a component of Chapter 11 reorganization costs,
net. In July 2001, the Court in AWI's Chapter 11 Case authorized the Board of
Directors of Armstrong to forgive the entire amount of all principal and
interest on outstanding loans to the RSSOP.

NOTE 21. STOCK-BASED COMPENSATION PLANS
- ---------------------------------------
Awards under the 1993 Long-Term Stock Incentive Plan ("1993 Plan") were made in
the form of stock options, stock appreciation rights in conjunction with stock
options, performance restricted shares and restricted stock awards. No
additional awards may be issued under the 1993 Plan.

During 1999, Armstrong adopted the 1999 Long-Term Incentive Plan ("1999 Plan")
which replaced the 1993 Plan. The 1999 Plan is similar to the 1993 Plan in that
it provides for the granting of incentive stock options, nonqualified stock
options, stock appreciation rights, performance-restricted shares and restricted
stock awards. The 1999 Plan also incorporates stock awards and cash incentive
awards. No more than 3,250,000 shares of common stock may be issued under the
1999 Plan, and no more than 300,000 of the shares may be awarded in the form of
performance restricted shares, restricted stock awards or stock awards. No
awards under the 1999 Plan will be granted after April 25, 2009. Pre-1999 grants
made under predecessor plans will be governed under the provisions of those
plans.

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

Approximately 1,702,000 stock options were cancelled as a result of a restricted
stock for stock option exchange program offered to employees in 2000. Employees
other than the CEO holding stock options were given a one-time opportunity to
exchange their stock options with exercise prices above $50 per share for shares
of AHI restricted stock based on specified conversion ratios. The shares issued
under this exchange program were issued under the 2000 Plan and will be fully
vested by August 2002. Expenses related to this event were $0.7 million in 2001
and $1.5 million in 2000.

104

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

Changes in option shares outstanding
(thousands except for share price) 2001 2000 1999
- ---------------------------------- ------- -------- --------

Option shares at beginning of year 2,777.5 3,509.5 2,783.7
Options granted 100.0 1,818.5 829.7
Option shares exercised -- -- (54.5)
Stock appreciation rights exercised -- -- (0.2)
Options cancelled (194.9) (2,550.5) (49.2)
------- -------- --------
Option shares at end of year 2,682.6 2,777.5 3,509.5

Option shares exercisable at end of year 1,551.7 973.3 1,828.0
Shares available for grant 4,161.5 4,068.7 3,307.3

Weighted average price per share:
Options outstanding $ 30.36 $ 30.69 $ 58.48
Options exercisable 39.51 48.92 57.12
Options granted 3.60 18.24 50.70
Option shares exercised N/A N/A 36.17

The table below summarizes information about stock options outstanding at
December 31, 2001. (thousands except for life and share price)

Options outstanding Options exercisable
------------------------------------------------------- -----------------------------------
Weighted-
Number average Weighted- Number Weighted-
Range of outstanding remaining average exercisable average
exercise prices at 12/31/01 contractual life exercise price at 12/31/01 exercise price
- --------------- ----------- ---------------- -------------- ----------- --------------

$1.19 - $18.00 300.0 8.9 $ 7.05 66.7 $ 8.78
$18.01 - $19.50 1,382.3 8.2 19.44 525.7 19.44
$19.51 - $46.00 393.4 2.6 40.09 387.9 40.28
$46.01 - $60.00 427.7 4.5 55.11 393.9 55.57
$60.01 - $84.00 179.2 5.9 73.14 177.5 73.17
--------- ---------
2,682.6 1,551.7
========= =========

Performance restricted shares issuable under the 1993 and 1999 plans entitle
certain key executive employees to earn shares of AHI's common stock, but only
if the total company or individual business units meet certain predetermined
performance measures during defined performance periods (generally three years).
At the end of performance periods, common stock awarded may carry additional
restriction periods, during which time Armstrong will hold the shares in custody
until the expiration or termination of restrictions. Compensation expense is
charged to earnings over the performance period. There were only 563 shares of
performance restricted common stock outstanding at December 31, 2001, with no
accumulated dividend equivalent shares. The performance period for these shares
has ended, but the restriction period does not end until 2002.

Restricted stock awards can be used for the purposes of recruitment, special
recognition and retention of key employees. No award of restricted stock shares
was granted in 2001. At the end of 2001, there were 195,934 restricted shares of
common stock outstanding with 4,720 accumulated dividend equivalent shares.

105

SFAS No. 123, "Accounting for Stock-Based Compensation," permits entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
earnings disclosures. Had compensation costs for these plans been determined
consistent with SFAS No. 123, Armstrong's net earnings would have been reduced
to the following pro forma amounts.

(millions) 2001 2000 1999
- ---------- -------- --------- --------

Net earnings:
- -------------
As reported $92.8 $11.8 $14.3
Pro forma 90.6 5.4 7.0

The fair value of grants was estimated on the date of grant using the
Black-Scholes option pricing model with the weighted-average assumptions for
2001, 2000 and 1999 presented in the table below. The weighted-average fair
value of stock options granted in 2001, 2000 and 1999 was $1.21, $2.08 and $9.75
per share, respectively.

2001 2000 1999
-------- --------- --------

Risk-free interest rate 4.57% 6.48% 6.34%
Dividend yield 0% 9.50% 5.75%
Expected life 5 years 5 years 5 years
Volatility 28% 28% 28%

Because the SFAS No. 123 method of accounting has not been applied to grants
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.

NOTE 22. EMPLOYEE COMPENSATION
- ------------------------------
Employee compensation is presented in the table below. Charges for severance
costs and early retirement incentives to terminated employees (otherwise
recorded as restructuring charges) have been excluded.

Employee compensation cost (millions) 2001 2000 1999
- ------------------------------------- -------- --------- --------

Wages and salaries $ 685.3 $ 669.3 $ 669.9
Payroll taxes 74.2 73.9 81.1
Pension credits, net (32.0) (38.4) (29.7)
Insurance and other benefit costs 92.3 70.8 64.2
Stock-based compensation 2.7 4.4 4.2
-------- --------- --------
Total $ 822.5 $ 780.0 $ 789.7
======== ========= ========

The increases in insurance and other benefit costs are primarily related to
increased medical benefit costs.

NOTE 23. PENSION AND OTHER BENEFIT PROGRAMS
- -------------------------------------------
Armstrong and a number of its subsidiaries have pension plans and postretirement
medical and insurance benefit plans covering eligible employees worldwide.
Armstrong also has defined-contribution pension plans (including the Retirement
Savings and Stock Ownership Plan, as described in Note 20) for eligible
employees. Benefits from pension plans, which cover substantially all employees,
are based on an employee's compensation and years of service. Pension plans are
funded by Armstrong. Postretirement benefits are funded by Armstrong on a
pay-as-you-go basis, with the retiree paying a portion of the cost for health
care benefits by means of deductibles and contributions. Armstrong announced in
1989 and 1990 a 15-year phase-out of its health care benefits for certain future
retirees. These future retirees include parent company nonunion employees and
some union employees. Shares of RSSOP common stock were allocated to eligible
active employees through June 2000, based on employee age and years to expected
retirement, to help employees offset their future postretirement medical costs.
The RSSOP was amended in November 2000 to suspend future allocations and in
December 2000, Armstrong used cash to fund this benefit. In 2001, an equity
share allocation was made to all eligible active full-time employees as of July
26, 2001. The allocation was made as a result of Armstrong's forgiveness of
loans receivable from the RSSOP.

Effective November 1, 2000, an amendment to the Retirement Income Plan (RIP), a
qualified U.S. defined benefit plan, established an additional benefit known as
the ESOP Pension Account to partially compensate active employee and retiree
ESOP shareholders for the decline in the market value of AHI'S stock. The effect
of this amendment had no material impact to the financial position or

106

results of operations in 2000, but increased the benefit obligation by $92.2
million and decreased the pension credit by $11.7 million in 2001. The RIP
document was revised to reflect these changes.

The following tables summarize the balance sheet impact, as well as the benefit
obligations, assets, funded status and rate assumptions associated with the
pension and postretirement benefit plans. The plan assets are primarily stocks,
mutual funds and bonds. Included in these assets were 1,426,751 shares of AHI
common stock at year-end 2001 and 2000. The pension benefits disclosures include
both the RIP and the Retirement Benefit Equity Plan, which is a nonqualified,
unfunded plan designed to provide pension benefits in excess of the limits
defined under Sections 415 and 401(a)(17) of the Internal Revenue Code.

Retiree Health and Life
Pension Benefits Insurance Benefits
------------------------ ----------------------------
U.S. defined-benefit plans (millions) 2001 2000 2001 2000
- ------------------------------------- --------- --------- ----------- -----------

Change in benefit obligation:
Benefit obligation as of January 1 $ 1,132.4 $ 1,079.4 $ 258.6 $ 233.3
Service cost 14.9 13.9 3.5 2.8
Interest cost 93.0 84.0 20.1 18.7
Plan participants' contributions -- -- 3.7 3.4
Plan amendments 79.6 25.8 -- --
Divestitures -- (4.0) -- (0.1)
Effect of settlements -- (5.9) -- --
Effect of special termination benefits 2.9 1.4 -- --
Actuarial gain 92.7 33.0 128.6 26.6
Benefits paid (91.1) (95.2) (29.9) (26.1)
--------- ---------- ----------- -----------
Benefit obligation as of December 31 $ 1,324.4 $ 1,132.4 $ 384.6 $ 258.6
========= ========== =========== ===========
Change in plan assets:
Fair value of plan assets as of January 1 $ 1,790.6 $ 1,748.3 -- --
Actual return on plan assets 32.9 137.9 -- --
Divestitures -- (3.7) -- --
Effect of settlements -- (5.9) -- --
Employer contribution 3.5 9.2 $ 26.2 $ 22.7
Plan participants' contributions --- -- 3.7 3.4
Benefits paid (91.1) (95.2) (29.9) (26.1)
--------- ---------- ----------- -----------
Fair value of plan assets as of December 31 $ 1,735.9 $ 1,790.6 $ 0.0 $ 0.0
========= ========== =========== ===========

Funded status $ 411.5 $ 658.2 $ (384.6) $ (258.6)
Unrecognized net actuarial loss (gain) (187.2) (422.7) 160.8 48.6
Unrecognized transition asset (2.1) (8.3) -- --
Unrecognized prior service cost (benefit) 148.5 86.1 9.9 (4.2)
--------- ---------- ----------- -----------
Net amount recognized $ 370.7 $ 313.3 $ (213.9) $ (214.2)
========= ========== =========== ===========

107

The funded status of U.S. defined-benefit plans was determined using the
assumptions presented in the table below.

Retiree Health and Life
Pension Benefits Insurance Benefits
----------------- -----------------------
U.S. defined-benefit plans 2001 2000 2001 2000
- -------------------------- ------ ------ ------ --------

Weighted-average assumption as of
December 31:
Discount rate 7.00% 7.50% 7.00% 7.50%
Expected return on plan assets 8.75% 9.50% n/a n/a
Rate of compensation increase 4.00% 4.25% 4.00% 4.25%

Amounts recognized in the consolidated balance sheets consist of:

Retiree Health and Life
Pension Benefits Insurance Benefits
----------------------- -----------------------
(millions) 2001 2000 2001 2000
- ---------- -------- -------- --------- ---------

Prepaid benefit costs $ 386.9 $ 333.6
Accrued benefit liability (30.4) (34.5) $ (213.9) $ (214.2)
Intangible asset 1.2 1.6 -- --
Other comprehensive income 13.0 12.6 -- --
------- ------- -------- --------
Net amount recognized $ 370.7 $ 313.3 $ (213.9) $ (214.2)
======= ======= ======== ========

Pension Benefits
----------------------
U.S. pension plans with benefit obligations in excess of assets (millions) 2001 2000
- -------------------------------------------------------------------------- ------ ------

Projected benefit obligation, December 31 $ 33.2 $ 44.7
Accrued benefit obligation, December 31 30.4 34.5
Fair value of plan assets, December 31 -- --

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

The components of pension credit are as follows:

Pension Benefits
-----------------------------------
U.S. defined-benefit plans (millions) 2001 2000 1999
- ------------------------------------- ------- -------- -------

Service cost of benefits earned during the year $ 14.9 $ 13.9 $ 16.7
Interest cost on projected benefit obligation 93.0 84.0 76.6
Expected return on plan assets (164.4) (153.6) (147.0)
Amortization of transition asset (6.2) (6.2) (6.2)
Amortization of prior service cost 17.5 11.9 10.0
Recognized net actuarial gain (11.6) (13.9) (17.3)
-------- -------- --------
Net periodic pension credit $ (56.8) $ (63.9) $ (67.2)
======== ======== ========

Costs for other funded and unfunded pension plans were $11.8 million in 2001,
$5.6 million in 2000 and $7.1 million in 1999.

The components of postretirement benefit cost are as follows:

Retiree Health and
Life Insurance Benefits
---------------------------------
U.S. defined-benefit plans (millions) 2001 2000 1999
- ------------------------------------- ------ ------- -------

Service cost of benefits earned during the year $ 3.5 $ 2.8 $ 3.2
Interest cost on accumulated postretirement benefit obligation 20.1 18.7 17.0
Amortization of prior service cost (benefit) 0.3 (0.9) (0.9)
Recognized net actuarial loss 2.2 1.0 0.6
------ ------- -------
Net periodic postretirement benefit cost $ 26.1 $ 21.6 $ 19.9
====== ======= =======

108

For measurement purposes, an average rate of 12% annual increase in the per
capita cost of covered health care benefits was assumed for 2002, decreasing 1%
per year to an ultimate rate of 6%. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects:

One percentage point
----------------------
U.S. retiree health and life insurance benefit plans (millions) Increase Decrease
- --------------------------------------------------------------- -------- --------

Effect on total of service and interest cost components $ 2.4 $ (2.0)
Effect on postretirement benefit obligation 36.5 (30.8)

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

Pension Benefits
----------------------
Non-U.S. defined-benefit plans (millions) 2001 2000
- ----------------------------------------- -------- --------
Change in benefit obligation:
Benefit obligation as of January 1 $ 290.8 $ 300.6
Service cost 7.9 7.2
Interest cost 15.5 14.6
Plan participants' contributions 2.2 2.1
Plan amendments 1.8 0.7
Acquisitions -- 22.7
Divestitures -- (0.6)
Effect of settlements -- (33.6)
Effect of special termination benefits 0.3 (0.7)
Foreign currency translation adjustment (11.2) (24.4)
Actuarial loss (gain) (8.4) 15.3
Benefits paid (13.6) (13.1)
------- -------
Benefit obligation as of December 31 $ 285.3 $ 290.8
======= =======

Change in plan assets:
Fair value of plan assets as of January 1 $ 179.2 $ 163.4
Actual return on plan assets (18.1) 2.4
Acquisitions -- 22.1
Divestitures -- (0.6)
Employer contributions 11.8 44.4
Plan participants' contributions 2.2 2.1
Effect of settlements -- (33.6)
Foreign currency translation adjustment (4.7) (7.9)
Benefits paid (13.6) (13.1)
------- -------
Fair value of plan assets as of December 31 $ 156.8 $ 179.2
======= =======

Funded status $(128.5) $(111.6)
Unrecognized net actuarial gain 13.5 (3.6)
Unrecognized transition obligation (asset) 0.2 (1.3)
Unrecognized prior service cost 5.7 3.9
------- -------
Net amount recognized $(109.1) $(112.6)
======= =======

109

Amounts recognized in the consolidated balance sheets consist of:

Pension Benefits
---------------------
(millions) 2001 2000
- ---------- -------- --------
Prepaid benefit cost $ 5.9 $ 5.6
Accrued benefit liability (121.3) (126.0)
Intangible asset 0.7 0.1
Other comprehensive income 5.6 7.7
-------- --------
Net amount recognized $ (109.1) $ (112.6)
======== ========

Pension Benefits
Non-U.S. pension plans with benefit obligations ---------------------
in excess of assets (millions) 2001 2000
- ------------------------------ -------- --------
Projected benefit obligation, December 31 $ 124.7 $ 128.7
Accrued benefit obligation, December 31 119.5 124.3
Fair value of plan assets, December 31 2.3 2.7

The components of pension cost are as follows:

Non-U.S. defined-benefit plans (millions) 2001 2000 1999
- ----------------------------------------- -------- -------- --------

Service cost of benefits earned during the year $ 7.9 $ 7.2 $ 8.4
Interest cost on projected benefit obligation 15.5 14.6 18.1
Expected return on plan assets (11.0) (9.9) (8.0)
Amortization of transition obligation 0.3 0.2 0.2
Amortization of prior service cost 0.4 1.0 0.4
Recognized net actuarial gain (0.1) (0.1) (0.1)
------- ------ ------
Net periodic pension cost $ 13.0 $ 13.0 $ 19.0
======= ====== ======

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

Pension Benefits
-------------------
Non-U.S. defined-benefit plans 2001 2000
- ------------------------------ ------ ------
Weighted-average assumption as of December 31:
Discount rate 5.49% 5.69%
Expected return on plan assets 5.57% 6.43%
Rate of compensation increase 3.71% 3.85%

NOTE 24. LEASES
- ---------------
Armstrong rents certain real estate and equipment. Several leases include
options for renewal or purchase, and contain clauses for payment of real estate
taxes and insurance. In most cases, management expects that in the normal course
of business, leases will be renewed or replaced by other leases. As part of the
Chapter 11 Case, AWI must decide whether to assume, assume and assign, or reject
prepetition unexpired leases and other prepetition executory contracts. AWI has
been granted an extension until April 8, 2002 by the Court to make these
decisions with respect to prepetition unexpired leases of real property and this
date may be further extended. With respect to prepetition executory contracts
and unexpired leases not related to real estate, AWI has until confirmation of a
reorganization plan to make these decisions unless such time is shortened by the
Court. The accompanying financial statements do not reflect any adjustment
related to assumption or rejection of such agreements.

110

Rental expense was $15.7 million in 2001, $17.7 million in 2000 and $19.5
million in 1999. Future minimum payments at December 31, 2001, by year and in
the aggregate, having noncancelable lease terms in excess of one year were as
follows:

Capital Operating
Scheduled minimum lease payments (millions) Leases Leases
- ------------------------------------------- ------- ---------
2002 $ 1.3 $ 9.9
2003 1.4 7.3
2004 2.5 5.6
2005 1.5 3.2
2006 0.9 2.3
Thereafter 0.8 10.1
----- ------
Total $ 8.4 $ 38.4
===== ======

AHI has capital leases that have lease payments that extend until 2018. Assets
under capital leases are included in the consolidated balance sheets as follows:

(millions) 2001 2000
- ---------- ------- -------
Land $ 3.8 $ 3.8
Building 4.1 4.5
Machinery 26.1 26.2
Less accumulated amortization (10.0) (12.1)
------ ------
Net assets $ 24.0 $ 22.4
====== ======

NOTE 25. SHAREHOLDERS' EQUITY
- -----------------------------
Treasury share changes for 2001, 2000 and 1999 are as follows:

Years ended December 31 (thousands) 2001 2000 1999
- ----------------------------------- -------- --------- ---------

Common shares
Balance at beginning of year 11,393.2 11,628.7 11,856.7
Stock purchases -- 56.4 33.8
Stock issuance activity, net -- (291.9) (261.8)
-------- --------- ---------
Balance at end of year 11,393.2 11,393.2 11,628.7
======== ========= =========

Stock purchases include small unsolicited buybacks of shares, shares received
under share tax withholding transactions and open market purchases of stock
through brokers.

The balance of each component of accumulated other comprehensive loss as of
December 31, 2001 and 2000, is presented in the table below.

(millions) 2001 2000
- ---------- ------ ------
Foreign currency translation adjustments $ 32.6 $ 29.3
Derivative loss, net 3.3 --
Unrealized loss on available for sale securities -- 2.0
Minimum pension liability adjustments 11.2 13.9
------ ------
Total $ 47.1 $ 45.2
====== ======

111

The related tax effects allocated to each component of other comprehensive
income (loss) are presented in the table below.

Pre-tax Tax After tax
(millions) amount Benefit amount
- ---------- -------- ------- ---------

Foreign currency translation adjustments $ (3.3) $ -- $ (3.3)
Derivative loss, net (5.1) 1.8 (3.3)
Impairment loss on available for sale securities 2.0 -- 2.0
Minimum pension liability adjustments 0.9 1.8 2.7
------- ------ -------
Total $ (5.5) $ 3.6 $ (1.9)
======= ====== =======

NOTE 26. SUPPLEMENTAL FINANCIAL INFORMATION
- -------------------------------------------

(millions)
- ---------
Selected operating expenses 2001 2000 1999
- --------------------------- -------- ------- --------

Maintenance and repair costs $ 112.2 $ 114.6 $ 113.1
Research and development costs 56.3 60.3 48.9
Advertising costs 49.8 43.7 47.0

Other expense (income), net
- ---------------------------
Interest and dividend income $ (2.8) $ (5.6) $ (2.1)
Loss (gain) on sale of businesses, net 0.3 (60.2) (1.0)
Demutualization proceeds (3.5) (5.2) (2.6)
Foreign currency transaction gain (0.5) (7.0) (0.2)
Impairment loss on available for sale securities 3.2 -- --
Impairment of note receivable from previous divestiture 2.0 -- --
Other 0.1 1.3 (0.7)
------- ------- -------
Total $ (1.2) $ (76.7) $ (6.6)
======= ======= =======

NOTE 27. SUPPLEMENTAL CASH FLOW INFORMATION
- -------------------------------------------

(millions) 2001 2000 1999
- ---------- ----- ------ ------

Interest paid $ 9.2 $101.5 $104.5
Income taxes paid 13.3 14.7 48.2
Acquisitions:
Fair value of assets acquired $ 0.6 $ 55.6 $ 3.8
Cost in excess of net assets acquired 5.0 -- --
Less:
Net assets in excess of consideration -- 24.2 --
Liabilities assumed -- 24.9 --
----- ------ ------
Cash paid, net of cash acquired $ 5.6 $ 6.5 $ 3.8
===== ====== ======

NOTE 28. LITIGATION AND RELATED MATTERS
- ---------------------------------------

Asbestos-related litigation

AWI is a defendant in personal injury claims and property damage 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.

Background
- ----------
AWI's involvement in asbestos litigation relates primarily to its participation
in the insulation contracting business. From around 1910 to 1933, AWI
manufactured and installed some high-temperature insulation products, including
some that contained asbestos. In 1939, AWI expanded its contract installation
service to provide a greater range of

112

high and low temperature contracting services to its customers. AWI generally
manufactured its own low temperature insulation products, but did not
manufacture the high temperature products used in its contracting operations.
Some of the high temperature products furnished and installed in the contracting
operations contained asbestos.

Effective January 1, 1958, AWI separated its insulation contracting business
into a separate, independent subsidiary, Armstrong Contracting and Supply
Corporation ("ACandS"). From January 1, 1958 through August 31, 1969, ACandS
operated as an independent subsidiary in the insulation contracting business.
During this time period, AWI licensed certain tradenames and trademarks to
ACandS, which ACandS placed on certain insulation products manufactured by
others. Other than two specific products, AWI did not manufacture or sell any
asbestos-containing thermal insulation products during this period. In August
1969, AWI sold the ACandS subsidiary to a group of ACandS management employees
and ACandS continues to operate independently as a subsidiary of Irex
Corporation. AWI had no involvement with any asbestos-containing insulation
materials after 1969.

In addition, AWI manufactured some resilient flooring that contained
encapsulated asbestos until the early 1980's. AWI also manufactured some gasket
materials that contained encapsulated asbestos until the mid-1980's.

Asbestos-Related Personal Injury Claims
- ---------------------------------------
Before filing for relief under the Bankruptcy Code, AWI pursued broad-based
settlements of asbestos-related personal injury claims through the Center for
Claims Resolution (the "Center"). The Center had reached Strategic Settlement
Program ("SSP") agreements with law firms that covered approximately 130,000
claims that named AWI as a defendant. As a result of the Filing, AWI's
obligations with respect to payments called for under these settlements will be
determined in its Chapter 11 Case.

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 with respect to
asbestos-related personal injury claims, including payments pursuant to the
outstanding SSP agreements. A separate creditors' committee representing the
interests of asbestos personal injury claimants has been appointed 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. AWI believes that the Chapter 11 process
provides it with the opportunity to comprehensively address its asbestos-related
personal injury liability in one forum. It is anticipated that all present and
future asbestos-related personal injury claims will be resolved in the Chapter
11 Case.

Asbestos-Related Personal Injury Liability
- ------------------------------------------
In evaluating its estimated asbestos-related personal injury liability prior to
the Filing, AWI reviewed, among other things, recent and historical settlement
amounts, the incidence of past and recent claims, the mix of the injuries and
occupations of the plaintiffs, the number of cases pending against it and the
status and results of broad-based settlement discussions. Based on this review,
AWI estimated its cost to defend and resolve probable asbestos-related personal
injury claims. This estimate was highly uncertain due to the limitations of the
available data and the difficulty of forecasting with any certainty the numerous
variables that could affect the range of the liability.

AWI believes the range of probable and estimable liability is more uncertain now
than previously. There are significant differences in the way the
asbestos-related personal injury claims may be addressed under the bankruptcy
process when compared to the tort system. Accordingly, AWI currently is unable
to ascertain how prior experience with the number of claims and the amounts to
settle claims will impact its ultimate liability in the context of its Chapter
11 Case.

As of September 30, 2000, AWI had recorded a liability of $758.8 million for its
asbestos-related personal injury liability that it determined was probable and
estimable through 2006. Due to the increased uncertainty created as a result of
the Filing, 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
December 31, 2001 and December 31, 2000 is $690.6 million, which is recorded in
liabilities subject to compromise. Due to the uncertainties created as a result
of the Filing and how the liability may be resolved, it is not possible to
reasonably estimate the ultimate liability. It is likely, however, that the
actual liability will be significantly higher than the recorded liability. As
the Chapter 11 Case proceeds, there should be more clarity as to the extent of
the liability.

113

Collateral Requirements
- -----------------------
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. Recently, 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 Property Damage Litigation
- -------------------------------------------
Over 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. The previous claims that were 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 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. Upon such filing, the Court will later determine whether
the proposed class should be certified. Consistent with prior periods and due to
increased uncertainty, AWI has not recorded any liability related to these
claims as of December 31, 2001. See Note 1 for further discussion of the
property damage claims received by the August 31, 2001 claims bar date 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 Recovery Proceedings
- ------------------------------
A 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 materials. AWI has entered into settlements with a number of
the carriers resolving its coverage issues. However, an alternative dispute
resolution ("ADR") procedure is under way against certain carriers to determine
the percentage of resolved and unresolved claims that are nonproducts claims, to
establish the entitlement to such coverage and to determine whether and how much
reinstatement of prematurely exhausted products hazard insurance is warranted.
The nonproducts coverage potentially available is substantial and includes
defense costs in addition to limits.

During 1999, AWI received preliminary decisions in the initial phases of the
trial proceeding of the ADR, which were generally favorable to AWI on a number
of issues related to insurance coverage. However, during the first quarter of
2001, a new trial judge was selected for the ADR. The new trial judge conducted
hearings in 2001 and determined not to rehear matters decided by the previous
judge. In the first quarter of 2002, the new trial judge concluded the ADR trial
proceeding with findings in favor of AWI on substantially all key issues. The
trial proceeding is subject to an appeal as part of the ADR process. One of the
insurance carriers, Reliance Insurance Company, was placed under an order of
rehabilitation by a state insurance department during May 2001 and an order of
liquidation during October 2001.

Another insurer (Century Indemnity Company), 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. 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 to compel assumption or rejection of the agreement; (2) declare
that the insurer need not make its present and future scheduled payments unless
AWI

114

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. AWI believes it is highly unlikely the
insurer will prevail in this matter.

Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $214.1 million is recorded as of December 31, 2001 compared to $268.3 million
as of December 31, 2000. The reduction is due to cash receipts during the second
and third quarters of 2001 and management's current assessment of probable
insurance recoveries, which included the order of liquidation for Reliance
Insurance Company. Of the total recorded asset at December 31, 2001,
approximately $49.0 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 the
financial condition of the insurers, AWI may revise its estimate of probable
insurance recoveries. Approximately $82 million of the $214.1 million asset is
determined from agreed coverage in place and is therefore directly related to
the amount of the liability. Of the $214.1 million asset, $22.0 million has been
recorded as a current asset as of December 31, 2001 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.

Cash Flow Impact
- ----------------
As a result of the Chapter 11 Filing, AWI did not make any payments for
asbestos-related claims in December 2000 and all of 2001. In the first eleven
months of 2000, AWI paid $226.9 million for asbestos-related claims. AWI
received $32.2 million in asbestos-related insurance recoveries during 2001
compared to $27.7 million in 2000. 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.

Conclusion
- ----------
Many uncertainties exist surrounding the financial impact of AWI's involvement
with asbestos litigation. These uncertainties include the impact of the Filing
and the Chapter 11 process, the number of future claims to be filed, 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. AWI has not
revised its previously recorded liability for asbestos-related personal injury
claims. During 2001, AWI reduced its previously recorded insurance asset by
$32.2 million for cash receipts and by $22.0 million for management's current
assessment of probable insurance recoveries. The $22.0 million reduction was
recorded as a charge for asbestos liability, net, in the accompanying
consolidated statement of earnings. AWI will continue to review its
asbestos-related liability periodically, although it is likely that no changes
will be made to the liability until later in the Chapter 11 Case as significant
developments arise. Although not estimable, it is likely that AWI's total
exposure to asbestos-related personal injury claims will be significantly higher
than the recorded liability. Any adjustment to the estimated liability or
insurance asset could be material to the financial statements.

Environmental Matters

Most of Armstrong's manufacturing and certain of Armstrong's research facilities
are affected by various federal, state and local 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 incurred capital expenditures of approximately $8.4
million in 2001, $6.2 million in 2000 and $5.5 million in 1999 associated with
environmental compliance and control

115

facilities. Armstrong anticipates that annual expenditures for those purposes
will not change materially from recent experience. Armstrong does not anticipate
that it will incur significant capital expenditures in order to meet the
requirements of the Clean Air Act of 1990 and the final implementing regulations
promulgated by various state agencies. However, applicable requirements under
the Clean Air Act and other 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.

As 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 sites.
In most cases, Armstrong is one of many potentially responsible parties ("PRPs")
who have potential liability for the required investigation and remediation of
each site and who, 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 second quarter of
2002.

Estimates of Armstrong's future environmental liability at any of the Superfund
sites or current or former plant sites are based on evaluations of currently
available facts regarding each individual site and consider factors such as
Armstrong's 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 any Superfund site, Armstrong's 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 costs. As a result,
Armstrong's estimated liability reflects only Armstrong's expected share. In
determining the probability of contribution, Armstrong considers the solvency of
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.

Liabilities of $16.6 million at December 31, 2001 and $15.4 million at December
31, 2000 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 the liability, that estimate
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 December
31, 2001 and December 31, 2000 environmental liabilities are classified as
prepetition liabilities subject to compromise. As a general rule, such
prepetition liabilities that do not preserve company assets are addressed in the
Chapter 11 Case.

The 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 consolidated financial statements and are either
available through settlement or anticipated to be recovered through negotiation
or litigation.

Actual costs 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,
Armstrong believes that 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, liquidity or results of
operations, although the recording of future costs may be material to earnings
in such future period.

Other Litigation

About 350 former Armstrong employees that were separated in two divestitures in
2000 have brought a purported class action against the Retirement Committee of
AWI, named and unnamed members of the Retirement Committee, and the Retirement
Savings and Stock Ownership Plan (RSSOP). The case is pending in the United
States District Court (Eastern District of PA). A similar proof of claim has
been filed against AWI in the Chapter 11 Case. Plaintiffs allege breach of ERISA
fiduciary duties and other violations of ERISA pertaining to losses in their
RSSOP accounts, which were invested in Armstrong common stock. Losses are
alleged to be in the range of several million dollars. Armstrong believes there
are strong substantive defenses to the allegations.

116

NOTE 29 - DIFFERENCES BETWEEN ARMSTRONG HOLDINGS INC. AND ARMSTRONG WORLD
- -------------------------------------------------------------------------
INDUSTRIES, INC.
----------------
The difference between the financial statements of AHI and Armstrong is
primarily due to transactions that occurred in 2000 related to the formation of
Armstrong Holdings, Inc. and stock activity.

117

Independent Auditors' Report

The Board of Directors,
Armstrong World Industries, Inc.:

We have audited the accompanying consolidated financial statements of Armstrong
World Industries, Inc. and subsidiaries ("the Company") as listed in the
accompanying index on page 41. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedule as
listed in the accompanying index on page 41. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Armstrong World
Industries, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 of the
consolidated financial statements, the Company and two of its domestic
subsidiaries filed separate voluntary petitions for relief under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court on
December 6, 2000. The Company has also defaulted on certain debt obligations.
Although the Company and these operating subsidiaries are currently operating
their businesses as debtors-in-possession under the jurisdiction of the
Bankruptcy Court, the continuation of their businesses as going concerns is
contingent upon, among other things, the ability to formulate a plan of
reorganization which will gain approval of the creditors and confirmation by the
Bankruptcy Court. The filing under Chapter 11 and the resulting increased
uncertainty regarding the Company's potential asbestos liabilities, as discussed
in Note 28 of the consolidated financial statements, raise substantial doubt
about the Company's ability to continue as a going concern. The accompanying
consolidated financial statements and financial statement schedule do not
include any adjustments that might result from the outcome of these
uncertainties.

/s/ KPMG LLP

February 22, 2002
Philadelphia, Pennsylvania

118

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

Not applicable.

119

PART III
--------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
- ------------------------------------------

The following information is current as of January 31, 2002. Each executive
officer serves a one-year term until reelected or until his or her earlier
death, resignation, retirement or replacement.

Directors of Armstrong Holdings, Inc.
- -------------------------------------
H. Jesse Arnelle - Age 68; Director since July 1995; Member--Audit Committee and
Finance Committee. Mr. Arnelle is Of Counsel with the law firm of Womble Carlyle
Sandridge & Rice, PLLC since October 1997 and former senior partner and
co-founder of Arnelle, Hastie, McGee, Willis & Greene, a San Francisco-based
corporate law firm from which he retired in 1996. He is a graduate of
Pennsylvania State University and the Dickinson School of Law. Armstrong has
retained Womble Carlyle Sandridge & Rice, PLLC for many years, including 2001
and 2002. Mr. Arnelle served as Vice Chairman (1992-1995) and Chairman
(1996-1998) of the Board of Trustees of the Pennsylvania State University. He
serves on the Boards of Waste Management, Inc., FPL Group, Inc., Eastman
Chemical Company, Textron, Inc., Gannett Corporation and Metropolitan Life's
Series Fund Board.

Van C. Campbell - Age 63; Director since March 1991; Member--Audit Committee and
Finance Committee (Chairman). Mr. Campbell graduated from Cornell University and
holds an MBA degree from Harvard University. He retired in 1999 as Vice Chairman
of Corning Incorporated (glass and ceramic products) and a member of its Board
of Directors. He also serves on the Board of Quest Diagnostics Incorporated. Mr.
Campbell is a Trustee of the Corning Museum of Glass.

Donald C. Clark - Age 70; Director since April 1996; Member--Board Affairs and
Governance Committee (Chairman) and Management Development and Compensation
Committee. Mr. Clark is a graduate of Clarkson University and Northwestern
University where he earned his MBA degree. He joined Household International,
Inc. (consumer financial services) in 1955 and, after holding a number of
managerial and executive positions, was elected Chief Executive Officer in 1982
and Chairman of the Board in 1984. In 1994, he relinquished the title of Chief
Executive Officer and retired as a Director and Chairman of the Board in May
1996, as a result of reaching Household's mandatory retirement age for employee
directors. Mr. Clark is a life trustee of Northwestern University and Chairman
of the Board of Trustees of Clarkson University. He is also a Director of The
PMI Group, Inc. and a life director of Evanston Northwestern Healthcare.

Judith R. Haberkorn - Age 55; Director since July 1998; Member--Board Affairs
and Governance Committee and Management Development and Compensation Committee.
Ms. Haberkorn is a graduate of Briarcliff (N.Y.) College and completed the
Advanced Management Program at Harvard Business School. From 1998 until her
retirement in June 2000, she served as President - Consumer Sales & Service for
Bell Atlantic (telecommunications). She previously served as President - Public
& Operator Services (1997-1998), also at Bell Atlantic, and Vice President -
Material Management (1990-1997) for NYNEX Telesector Resources Group
(telecommunications). Ms. Haberkorn is a director of Enesco Corporation and
serves on the advisory board of Norfolk Southern. She is chair Emerita of the
Committee of 200 and a member of The International Women's Forum and The Harvard
Business School Network of Women Alumnae. She is a Vice President Emerita of the
Harvard Business School Alumni Advisory Board and a member of the Visiting
Committee.

John A. Krol - Age 65; Director since February 1998; Member--Board Affairs and
Governance Committee and Management Development and Compensation Committee. Mr.
Krol is a graduate of Tufts University where he also received a master's degree
in chemistry. From 1997 until his retirement in 1998, he was Chairman of the
Board of DuPont (chemicals, fibers, petroleum, life sciences and diversified
businesses), which he joined in 1963, and where he also served as Chief
Executive Officer (1995-1998), Vice Chairman (1992-1995), and Senior Vice
President of DuPont Fibers (1990-1992). He is a director of Mead Corporation,
Milliken & Company, Molecular Circuitry, Inc. and ACE Limited Insurance Co. Mr.
Krol also serves on the Boards of Trustees of the Tufts University and the
University of Delaware. He is on the advisory Boards of Teijin Limited and
Bechtel Corporation. He is a trustee of the Hagley Museum. He is also the former
president of GEM: The National Consortium for Graduate Degrees for Minorities in
Engineering and Science, Inc.

120

Michael D. Lockhart - Age 52; Chairman of the Board and Chief Executive Officer
of AHI since August 2000. Director since November 2000 and Chairman of the Board
and President since March 2001 of Armstrong World Industries, Inc. Mr. Lockhart
previously served as Chairman and Chief Executive Officer of General Signal (a
diversified manufacturer) headquartered in Stamford, Connecticut from September
1995 until it was acquired in October 1998. He joined General Signal as
President and Chief Operating Officer in September 1994. From 1981 until 1994,
Mr. Lockhart worked for General Electric in various executive capacities in the
GE Credit Corporation (now GE Capital), GE Transportation Systems and GE
Aircraft Engines. He is a member of the Business Council for the Graduate School
of Business at the University of Chicago.

James E. Marley - Age 66; Director since November 1988; Member--Audit Committee
(Chairman) and Finance Committee, also Director--Armstrong World Industries,
Inc. Mr. Marley is a graduate of Pennsylvania State University and earned a
master's degree in mechanical engineering from Drexel University. From 1993
until his retirement (August 1998), he served as Chairman of the Board of AMP
Incorporated (electrical/electronic connection devices), which he joined in 1963
and where he served as President and Chief Operating Officer (1990-1992) and
President (1986-1990). He also serves on the Board of Arvin Meritor, Inc.

David W. Raisbeck - Age 52; Director since July 1997; Member--Audit Committee
and Finance Committee. Mr. Raisbeck is a graduate of Iowa State University and
the executive MBA program at the University of Southern California. He joined
Cargill, Incorporated (agricultural trading and processing businesses) in 1971
and has held a variety of merchandising and management positions focused
primarily in the commodity and the financial trading businesses. Mr. Raisbeck
was elected President of Cargill's Trading Sector in June 1993, a director of
Cargill's Board in August 1994, Executive Vice President in August 1995 and Vice
Chairman in November 1999. He is a member of the Executive Committee and the
ESOP Committee of the Cargill Board. He also serves as a Director of Eastman
Chemical. Mr. Raisbeck is a member of the Chicago Mercantile Exchange and
Minneapolis Grain Exchange. He is a governor of the Iowa State University
Foundation and a member of the Dean's Advisory Council for the College of
Business at Iowa State University. He serves on the board of the Greater
Minneapolis YMCA.

M. Edward Sellers - Age 57; Director since May 2001; Member - Board Affairs and
Governance Committee and Management Development and Compensation Committee. Mr.
Sellers is a graduate of Vanderbilt University and received his MBA from Harvard
Business School. Mr. Sellers joined Blue Cross and Blue Shield of South Carolina
(a health, life, property and casualty insurance company with related services
and functions) in 1987, serving as President and Chief Operating Officer until
1992 when he assumed the role of President and Chief Executive Officer. He
served as past Chairman of the Board of the South Carolina State Chamber of
Commerce, Chairman of the Board of Columbia College and Chairman of the Palmetto
Business Forum. He also serves on the following Boards: Open Networks
Technologies, Inc.; Palmetto Conservation Foundation; National Bank of South
Carolina; American Red Cross; ETV (Educational Television) Endowment of South
Carolina; Central Carolina Economic Development Alliance and Central Carolina
Community Foundation.

Jerre L. Stead - Age 59; Director since April 1992; Member--Board Affairs and
Governance Committee and Management Development and Compensation Committee
(Chairman). Mr. Stead is a graduate of the University of Iowa and was a
participant in the Advanced Management Program, Harvard Business School. From
August 1996 until June 2000 he served as Chairman and Chief Executive Officer of
Ingram Micro, Inc. (technology products and services). During 1995, he served as
Chairman, President and Chief Executive Officer of Legent Corporation
(integrated product and service software solutions) until its sale late in 1995.
He was Executive Vice President, American Telephone and Telegraph Company
(telecommunications) and Chairman and Chief Executive Officer of AT&T Global
Information Solutions (computers and communicating), formerly NCR Corp.
(1993-1994). He was President of AT&T Global Business Communications Systems
(communications) (1991-1993) and Chairman, President and Chief Executive Officer
(1989-1991) and President (1987-1989) of Square D Company (industrial control
and electrical distribution products). In addition, he held numerous positions
during a 21-year career at Honeywell. He is a Director of Thomas & Betts,
Conexant Systems, Inc., Brightpoint Inc. and Mobility Electronics, Inc. Mr.
Stead is also Chairman of the Board and Director of WorkWell Systems, Inc.

121

Executive Officers of Armstrong Holdings, Inc.
- ----------------------------------------------
Michael D. Lockhart - (See description, above.)

Matthew J. Angello - Age 42; Senior Vice President, Corporate Human Resources
since October 2000. Previously Vice President, Human Resources, Floor Products
Operations, Armstrong World Industries, Inc. January 1997 - September 2000; Vice
President and Senior Director, Human Resources, The Restaurant Company (food
service) 1992 - January 1997.

Leonard A. Campanaro - Age 53; Senior Vice President and Chief Financial Officer
since April 2001. Previously President, Chief Operating Officer and board member
of Harsco Corporation (provider of industrial services and products) January
1998 - July 2000. Served Harsco for over 20 years in a variety of financial and
operations positions before assuming the role of President of Harsco, served as
Senior Vice President and Chief Financial Officer from 1992-1997.

John N. Rigas - Age 52; Senior Vice President, Secretary and General Counsel
since November 2000. Senior Vice President, Secretary and General Counsel of
Armstrong World Industries, Inc. since May 2001. Previously Deputy General
Counsel-Litigation, Armstrong World Industries, Inc. March 1999 - November 2000;
worked for Dow Corning Corporation (specialty chemical company) October 1982 -
March 1999, his last title being Senior Managing Counsel.

Stephen E. Stockwell - Age 56; Senior Vice President, Armstrong Strategic
Relations since February 2002. Senior Vice President, Armstrong Strategic
Relations, Armstrong World Industries, Inc. since July 2001. Previously served
Armstrong World Industries, Inc. as Vice President, Corporate Alliances,
December 2000 - June 2001; Senior Vice President, Floor Products, Americas,
Residential Sales, July 1998 - December 2000; President, Corporate Retail
Accounts Division, November 1994 - July 1998; Vice President, Corporate Retail
Accounts, July 1994 - November 1994; General Manager, Residential Sales, Floor
Division, January 1994 - July 1994; Field Sales Manager, Floor Division,
1988-1994.

April L. Thornton - Age 40; Senior Vice President and Chief Marketing Officer
since April 2001. Previously Vice President, Marketing and Sales for Capitol
Wire, Inc. (online interactive news service) May 2000 - March 2001; Vice
President, Marketing, Worldwide Building Products Operations, Armstrong World
Industries, Inc. September 1997 - May 2000; Marketing Director, New Beverage
Product Strategy and Development, Pepsi Cola Company (snack food, soft drink and
juice) April 1992 - August 1997.

William C. Rodruan - Age 47; Vice President and Controller since July 1999.
Previously Director, Corporate Transformation and Shared Services February 1997
- - July 1999 and Vice President of Finance, Corporate Retail Accounts, Armstrong
World Industries, Inc. July 1994 - February 1997.

Barry M. Sullivan - Age 56; Vice President and Treasurer since February 2002.
Vice President and Treasurer of Armstrong World Industries, Inc. since May 2001.
Previously Vice President and Treasurer for RailWorks Corporation (engineering
and construction firm focused on rail transit) January 2000 - May 2001; Vice
President and Treasurer for Harsco Corporation (provider of industrial services
and products) October 1993 - September 1999.

Directors of Armstrong World Industries, Inc.
- ---------------------------------------------
Michael D. Lockhart - (See description, above.)

James E. Marley - (See description, above.)

John. N. Rigas - (See description, above.)

122

Executive Officers of Armstrong World Industries, Inc.
- ------------------------------------------------------
Michael D. Lockhart - (See description, above.)

Chuck Engle - Age 58; President and Chief Executive Officer, Armstrong Cabinet
Products, Armstrong World Industries, Inc. since February 2002. Previously held
the following positions with Armstrong Wood Products, Inc.: President, Cabinet
Division, from January 1996 - February 2002; Vice President, Sales, from
September 1979 - January 1996; Sales Representative from August 1972 to
September 1979.

Chan W. Galbato - Age 39; President and Chief Executive Officer, Armstrong Floor
Products, Armstrong World Industries, Inc. since July 2001. Previously,
President and Chief Executive Officer of ChoiceParts LLC (provider of integrated
virtual exchange services for auto parts industry) from June 2000 - June 2001.
Held senior management positions at various divisions of General Electric,
including most recently President and Chief Executive Officer of Coregis (GE
capital insurance company) February 1999 - June 2000.

Stephen J. Senkowski - Age 50; President and Chief Executive Officer, Armstrong
Building Products Operations, Armstrong World Industries, Inc. since October
2000. Previously, Senior Vice President, Americas, Building Products Operations,
Armstrong World Industries, Inc. April 2000 - October 2000; President/Chief
Executive Officer, WAVE July 1997 - April 2000; Vice President, Innovation
Process, Building Products Operations 1994 - July 1997.

Stephen E. Stockwell - (See description, above.)

Leonard A. Campanaro - (See description, above.)

John N. Rigas - (See description, above.)

William C. Rodruan - (See description, above.)

Involvement in Certain Legal Proceedings
- ----------------------------------------
On December 6, 2000, the Company's subsidiary, Armstrong World Industries, Inc.
and two of Armstrong World Industries' wholly-owned subsidiaries, Nitram
Liquidators, Inc. and Desseaux Corporation of North America, Inc., filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. Several of the
Company's officers and directors are also officers or directors of Armstrong
World Industries or the subsidiaries of Armstrong World Industries that filed
for reorganization under Chapter 11. In addition, all present directors of the
Company, except Mr. Sellers, were or are directors of Armstrong World
Industries. As such, these executive officers and directors have been associated
with a corporation that filed a petition under the federal bankruptcy laws
within the last five years.

Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Securities and Exchange Commission ("SEC") regulations require Company directors
and executive officers, and any persons beneficially owning more than ten
percent of its common stock to report to the SEC their ownership of this stock
and any changes in that ownership. SEC regulations also require these persons to
furnish the Company with copies of these reports. The proxy rules require the
Company to report any failure to timely file those reports in the previous
fiscal year.

Based solely upon review of copies of reports furnished to the Company and
written representations from its directors and executive officers that no other
reports were required, the Company believes that all of these filing
requirements were satisfied by Armstrong's directors and executive officers
during 2001.

123

Item 11. Executive Compensation
- --------------------------------

Executive Officers' Compensation
- --------------------------------
The following table shows the compensation received by the Chief Executive
Officer and the four other highest paid individuals who served as executive
officers during 2001. The data reflects compensation for services rendered to
AHI and Armstrong and its subsidiaries in each of the last three fiscal years.

TABLE 1: SUMMARY COMPENSATION TABLE

- ----------------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------------------------------------------
Awards Payout
------------------------------------
Other AHI AHI
Annual Restricted Securities All Other
Compen- Stock Underlying LTIP Compen
Name and Current Year Salary Bonus sation Awards Options/ Payouts -sation
Principal Position ($) ($)/3/ ($)/4/ ($)/5/ SARs(#) ($) ($)/6/
- ----------------------------------- ------------ --------------- ---------- ------------- --------------- ---------- ------------

M. D. Lockhart, 2001 845,000 941,188 178,955 ---- 100,000 ---- 20,276
Chairman of the 2000 321,212 5,401,640 ---- 2,456,250 200,000 ----- 115
Board and Chief
Executive Officer of
AHI; Director,
Chairman of the
Board and President
of Armstrong
- ----------------------------------------------------------------------------------------------------------------------------------
C. W. Galbato, President 2001 234,375/1/ 965,000 99,015 ---- ---- ---- 18
and Chief Executive
Officer, Armstrong Floor
Products, Armstrong
- ----------------------------------------------------------------------------------------------------------------------------------
S. J. Senkowski, 2001 376,250 387,523 ---- ---- ---- ---- 22,098
President and Chief 2000 219,583 309,322 ---- 26,804 13,000 ---- 6,104
Executive Officer, 1999 133,830 172,925 ---- ---- 6,500 ---- 4,800
Armstrong Building
Products, Armstrong
- ----------------------------------------------------------------------------------------------------------------------------------
A. L. Thornton, Senior 2001 195,985/2/ 460,000 ---- ---- ---- ---- 95
Vice President and Chief 2000 75,275 16,989 ---- 38,875 10,250 ---- 45
Marketing Officer, AHI 1999 181,779 131,661 ---- ---- 5,110 ---- 15,120
- ----------------------------------------------------------------------------------------------------------------------------------
M. J. Angello, Senior 2001 336,250 296,162 ---- ---- ---- ---- 21,880
Vice President, Corporate 2000 227,122 147,500 ---- 41,319 10,570 ---- 18,107
Human Resources, AHI 1999 189,375 172,254 ---- 25,469 5,500 ---- 17,72
- ----------------------------------------------------------------------------------------------------------------------------------

/1/ Mr. Galbato's employment commenced June 25, 2001.
/2/ Ms. Thornton had a break in company service from May 23, 2000 to March 30,
2001.
/3/ The amounts disclosed for 2001 include payments under the Management
Achievement Plan and where applicable, signing bonuses and cash retention
payments.
/4/ Except for the income related to Mr. Lockhart and Mr. Galbato during 2001,
the aggregate value does not exceed the lesser of $50,000 or 10% of shown
salary and bonus. Mr. Lockhart had relocation income of $83,333 and income
related to personal use of company aircraft of $48,596. Mr. Galbato had
relocation income of $98,092.
/5/ The number and value of restricted stock held by each as of January 31,
2002 is as follows: M. D. Lockhart - 100,000 ($359,000); S. J. Senkowski -
668 ($2,398); M. J. Angello - 2,160 ($7,755).
/6/ Includes the following amount of non-elective contribution by Armstrong to
each individual's Bonus Replacement Retirement Plan account: M. D.
Lockhart - $20,000; S. J. Senkowski - $19,647; M. J. Angello - $19,332.

124

Includes the following present value costs of Armstrong's portion of 2001
premiums for split-dollar life insurance: S. J. Senkowski - $2,451; M. J.
Angello - $2,370.

Includes the following amount in the Retirement Savings and Stock Ownership
Plan for members Equity and Match accounts: M. D. Lockhart - $325; C. W.
Galbato - $325; S. J. Senkowski - $4,853; A. L. Thornton - $4,244; M. J.
Angello - $5,168.

Includes taxable income related to company-paid term life insurance
benefits: M. D. Lockhart - $276; C. W. Galbato - $18; A. L. Thornton - $95.

Includes above market interest of $178 credited to M. J. Angello's
Armstrong Deferred Compensation Plan account.

Change in Control Agreements
- ----------------------------
Armstrong and AHI have entered into change in control ("CIC") agreements with a
group of senior executives, including M. D. Lockhart, S. J. Senkowski and M. J.
Angello. These agreements provide severance benefits in the event of a change in
control of AHI or its major subsidiary, Armstrong World Industries, Inc. The
purpose of the agreements is to foster stability in AHI's management ranks in
the face of a possible change in control.

The severance benefits are payable if the executive is involuntarily terminated
or terminates employment for good reason within three years following a change
in control. Good reason to terminate employment exists if there are significant
changes in the nature of the employment following the change in control. For
example, a reduction in compensation, a change in responsibility, or a
relocation of the place of employment would constitute significant changes. For
the most senior officers, the agreement includes a provision where the executive
may choose to terminate employment for any reason during the thirty-day period
beginning twelve months following a qualifying change in control and receive
severance benefits. The qualifying change in control must meet the definitions
in (2) and (3) shown below. The agreement has an automatic renewal feature,
meaning the agreements will continue in effect unless either Armstrong, AHI or
the executive elects not to extend the agreement.

For the purposes of these agreements, a change in control includes the
following: (1) acquisition by a person (excluding certain qualified owners) of
beneficial ownership of 20% or more of AHI's common stock; (2) change in the
composition of the Board of AHI, so that existing Board members and their
approved successors do not constitute a majority of the Board; (3) consummation
of a merger or consolidation of AHI, unless shareholders of voting securities
immediately prior to the merger or consolidation continue to hold 66-2/3% or
more of the voting securities of the resulting entity; and (4) shareholder
approval of a liquidation or dissolution of AHI or sale of substantially all of
AHI's assets.

Severance benefits under the agreements depend on the position the executive
holds, but generally include: (1) a lump severance payment equal to two or three
times the sum of the officer's annual base salary and the higher of either (a)
the officer's highest annual bonus earned in the three years prior to
termination or prior to the change in control, or (b) the annual target bonus
for the year in which the change in control occurs; (2) a lump payment of the
portion of the target incentive award calculated by multiplying the target award
by the fractional number of months completed in the performance award period;
(3) payment of remaining premium payments for split-dollar life insurance
policies; (4) enhanced retirement benefits payable as a lump sum; (5)
continuation of life, disability, accident and health insurance benefits for
three years following termination; (6) full reimbursement for the payment of
excise taxes; and (7) payment of legal fees in connection with a good faith
dispute involving the agreement.

The Court in Armstrong World Industries' Chapter 11 case authorized Armstrong
World Industries to assume the CIC agreements subject to certain modifications.
The modifications limit in certain respects (i) what constitutes a change in
control under the CIC agreements; and (ii) with respect to the CIC agreements
for the most senior officers, what constitutes a qualifying change of control
that would enable the executive to terminate employment.

Employment Agreements
- ---------------------
AHI and Armstrong World Industries entered into a three-year employment
agreement with Michael D. Lockhart effective August 7, 2000, in which Mr.
Lockhart agreed to serve as Chairman of the Board and Chief Executive Officer of
AHI at an initial base salary of $800,000 per year and a $5,000,000 one-time
signing bonus. This contract was subsequently approved by the Court in Armstrong
World Industries' Chapter 11 case. Portions of the signing bonus must be repaid
to AHI if Mr. Lockhart terminates employment for any reason other than death,
disability or good reason or is terminated for cause. The employment agreement
is automatically renewed for an additional one-year

125

term on the third anniversary of the date of the agreement and each successive
anniversary, unless AHI gives notice not to extend the agreement at least 180
days prior to the anniversary date. If AHI terminates the employment agreement
with Mr. Lockhart without "cause" or if Mr. Lockhart terminates his employment
for "good reason" prior to the third year of the employment contract, Mr.
Lockhart is entitled to receive (1) a lump-sum cash payment equal to his base
salary, plus the higher of (i) his target bonus in the year of termination, or
(ii) the highest bonus award earned during the last three years, including the
year of termination, multiplied by either the number of years remaining in his
employment agreement or by two ("2"), whichever is larger and (2) continuation
of certain benefits for a period equal to the greater of two years or the
remaining term of the agreement. If AHI terminates the employment agreement with
Mr. Lockhart without "cause" or if Mr. Lockhart terminates his employment for
"good reason" after the third year of the employment contact, Mr. Lockhart is
entitled to receive (1) a lump-sum cash payment equal to his base salary, plus
the higher of (i) his bonus in the year of termination at target performance
levels, or (ii) the highest bonus award paid during the last three years,
multiplied by either the number of years remaining in his employment agreement
or by one ("1"), whichever is larger and (2) continuation of certain benefits.
Mr. Lockhart's employment agreement also contains a non-competition provision
that bars him from competing with AHI or any subsidiaries or affiliates for a
period of two years following his termination. The agreement also provides Mr.
Lockhart with the opportunity to participate in all short-term and long-term
incentive plans offered by AHI and Armstrong World Industries, including an
annual cash incentive opportunity and an annual long-term incentive award under
AHI's long-term incentive plan. The agreement further provides that the value of
his annual long-term incentive award on the grant date is required to equal 150%
of Mr. Lockhart's target annual cash compensation for the year.

Armstrong World Industries entered into an employment agreement with Chan W.
Galbato effective May 2, 2001, that was subsequently approved by the Court in
its Chapter 11 Case. In the contract, Mr. Galbato agreed to serve as President
and Chief Executive Officer of Armstrong Floor Products Operations at an initial
base salary of $450,000 per year and a $200,000 one-time signing bonus. The
signing bonus must be repaid to Armstrong World Industries if Mr. Galbato
voluntarily terminates employment within one year of his start date. Mr. Galbato
is eligible to participate in the Management Achievement Plan with a minimum
bonus of $270,000 for 2001. The agreement also provides Mr. Galbato the
opportunity to participate in long-term incentive plans offered to senior
officers. The agreement calls for severance pay for Mr. Galbato at one and
one-half times the sum of the base salary and target bonus, provided that during
the period of the Chapter 11 reorganization, Mr. Galbato is eligible to
participate at the maximum level in the cash retention and enhanced severance
benefit programs of Armstrong World Industries.

Severance Pay Plan for Salaried Employees
- -----------------------------------------
The Severance Pay Plan for Armstrong World Industries' Salaried Employees was
adopted in 1990. This plan is designed to cushion the effects of unemployment
for certain salaried employees. The benefits are payable if a covered employee
is terminated under certain circumstances. All salaried employees of AHI and
Armstrong World Industries, including the officers named in the Summary
Compensation Table, are eligible to participate in the plan. A participant will
be entitled to severance pay if they are terminated and an exclusion does not
apply. The employee is not entitled to severance pay if the reason for the
termination is the following: (1) voluntary separation; (2) the employee accepts
employment with the successor organization in connection with the sale of a
plant, unit, division or subsidiary; (3) the employee rejects the offer of a
similar position with comparable compensation in the same geographic area made
by AHI or Armstrong World Industries, their subsidiaries or any successor
organization; or (4) misconduct or unsatisfactory performance. Severance
benefits will be offset by payments made under CIC agreements or individual
employment agreements.

Under the plan, the scheduled amount of the payment is based on the employee's
length of service, reason for termination and base salary level. The amount of
the payment ranges from a minimum of two weeks base salary to a maximum of 39
weeks base salary. Subject to certain limitations, benefits may be paid by
salary continuation or lump sum payments. A participant may also choose a
combination of periodic and lump-sum payments. The Severance Pay Committee
retains the right to depart from the severance pay schedule where factors
justify an upward or downward adjustment in the level of benefits. In no event
may the severance benefit exceed two times the participant's annual
compensation.

126

TABLE 2: OPTION/SAR GRANTS IN LAST FISCAL YEAR

The following table sets forth information regarding the grant of stock options
during 2001 under Armstrong's Long-Term Stock Incentive Plan to each of the
named executives:

- --------------------------------------------------------------------------------------------------------------
Individual Grants
- --------------------------------------------------------------------------------------------------------------
AHI Securities Percent of
Underlying Total Options/
Options/SARs SARs Granted Exercise Or Grant Date
Granted/1/ To Employees Base Price Expiration Present
Name (#) In Fiscal Year ($/share) Date Value/2/ ($)
- --------------------------------------------------------------------------------------------------------------

M. D. Lockhart 100,000 100% 3.60 4/7/11 $121,000
- --------------------------------------------------------------------------------------------------------------

/1/ These options were granted in M. D. Lockhart's August 2000 employment
agreement and become exercisable in equal installments at one, two and three
years from the date of grant. The exceptions are in the case of death or
disability and a defined change in control event. All stock options become
exercisable immediately upon a change in control of AHI.

/2/ In accordance with Securities and Exchange Commission rules, the numbers in
the column titled, "Grant Date Present Value" were determined using the
Black-Scholes model. These are not AHI or Armstrong's predictions. However, the
following material weighted-average assumptions and adjustments were necessary:
(1) an option term of five years; (2) a volatility of 28%; (3) a dividend yield
of 0%; and (4) a risk free interest rate of 4.57%.

Whether these options ever have actual value will depend on the future market
price of AHI's stock. We cannot forecast this with any reasonable certainty.

TABLE 3: AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES

The following table sets forth information regarding the exercise of stock
options during 2001 and the unexercised options held as of the end of 2001 by
each of the named executives:

- ----------------------------------------------------------------------------------------------------------------------------
Securities Underlying Value of Unexercised In-The-Money
Value Realized Unexercised Options/SARs At Options/SARs At Fiscal Year-End
AHI Shares (market price at Fiscal Year-End (#) ($)
Acquired exercise less --------------------------------------------------------------------
On Exercise exercise price) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------------------

M. D. Lockhart 0 0 66,666 233,334 74,083 148,167
- ----------------------------------------------------------------------------------------------------------------------------
C. W. Galbato 0 0 0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------
S.J. Senkowski 0 0 5,988 8,667 0 0
- ----------------------------------------------------------------------------------------------------------------------------
M.J. Angello 0 0 3,523 7,047 0 0
- ----------------------------------------------------------------------------------------------------------------------------
A.L. Thornton 0 0 0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------

127

TABLE 4: LONG TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR

The following table sets forth information regarding the long-term incentive
plan awards during 2001 to each of the named executives:

- --------------------------------------------------------------------------------------------------------------
Name Performance Period Estimated Future Payouts Under Non-Stock Price-Based Plans/1/
Until Maturation or ----------------------------------------------------------------
Payout Threshold ($) Target ($) Maximum ($)
- --------------------------------------------------------------------------------------------------------------

M. D. Lockhart 1/1/2001 - 12/31/2002 810,000 2,700,000 See footnote 2.
- --------------------------------------------------------------------------------------------------------------
C. W. Galbato 1/1/2001 - 12/31/2002 270,000 900,000 See footnote 2.
- --------------------------------------------------------------------------------------------------------------
S. J. Senkowski 1/1/2001 - 12/31/2002 210,000 700,000 See footnote 2.
- --------------------------------------------------------------------------------------------------------------
M. J. Angello 1/1/2001 - 12/31/2002 112,140 373,800 See footnote 2.
- --------------------------------------------------------------------------------------------------------------
A. L. Thornton 1/1/2001 - 12/31/2002 62,400 208,000 See footnote 2.
- --------------------------------------------------------------------------------------------------------------

/1/ Cash incentive awards will be earned on the basis of cumulative operating
income (adjusted for working capital variance from budget) for 2001 and 2002
measured against a pre-established target. The target and actual results exclude
the impact of interest expense/income, bankruptcy-related expense/income,
restructuring charges and significant unusual items. The Management Development
and Compensation Committee has established an award achievement schedule that
sets an upper limit on the payment amount at varying levels of financial
performance. The threshold payout requires that Armstrong achieve 70% of the
operating income target. Cash payments earned will be paid in early 2003.

/2/ Under the terms of the 1999 Long Term Incentive Plan, the maximum amount
payable to any one participant pursuant to a Cash Incentive Award with respect
to any one year is $3 million.

RETIREMENT INCOME PLAN BENEFITS

The following table shows the estimated pension benefits payable to a
participant at normal retirement age under Armstrong's Retirement Income Plan
and Retirement Benefit Equity Plan. The Retirement Income Plan is a qualified
defined benefit pension plan. The Retirement Benefit Equity Plan is an unfunded,
nonqualified supplemental pension plan. It provides participants with benefits
that would otherwise be denied by reason of certain Internal Revenue Code
limitations on qualified plan benefits. The amounts shown in Table 5 are based
on compensation that is covered under the plans and years of service with
Armstrong and its subsidiaries.

128

TABLE 5: PENSION PLAN TABLE
ANNUAL RETIREMENT BENEFIT BASED ON SERVICE/1/

- -------------------------------------------------------------------------------------------------------------
Renumeration/2/ 15 20 25 30 35 40
Years Years Years Years Years Years
- -------------------------------------------------------------------------------------------------------------

$ 200,000 $ 44,000 $ 58,000 $ 73,000 $ 87,000 $ 102,000 $ 114,000
- -------------------------------------------------------------------------------------------------------------
$ 400,000 $ 90,000 $120,000 $150,000 $ 180,000 $ 210,000 $ 234,000
- -------------------------------------------------------------------------------------------------------------
$ 600,000 $137,000 $182,000 $228,000 $ 273,000 $ 319,000 $ 355,000
- -------------------------------------------------------------------------------------------------------------
$ 800,000 $183,000 $244,000 $305,000 $ 366,000 $ 427,000 $ 475,000
- -------------------------------------------------------------------------------------------------------------
$1,000,000 $230,000 $306,000 $383,000 $ 459,000 $ 536,000 $ 596,000
- -------------------------------------------------------------------------------------------------------------
$1,200,000 $276,000 $368,000 $460,000 $ 552,000 $ 644,000 $ 716,000
- -------------------------------------------------------------------------------------------------------------
$1,400,000 $323,000 $430,000 $538,000 $ 645,000 $ 753,000 $ 837,000
- -------------------------------------------------------------------------------------------------------------
$1,600,000 $369,000 $492,000 $615,000 $ 738,000 $ 861,000 $ 957,000
- -------------------------------------------------------------------------------------------------------------
$1,800,000 $416,000 $554,000 $693,000 $ 831,000 $ 970,000 $1,078,000
- -------------------------------------------------------------------------------------------------------------
$2,000,000 $462,000 $616,000 $770,000 $ 924,000 $1,078,000 $1,198,000
- -------------------------------------------------------------------------------------------------------------
$2,200,000 $509,000 $678,000 $848,000 $1,017,000 $1,187,000 $1,319,000
- -------------------------------------------------------------------------------------------------------------

/1/ Benefits shown assume retirement in 2001. The benefits are computed as a
straight life annuity beginning at age 65 and are not subject to deduction for
Social Security or other offsets.

/2/ Calculated as the average annual compensation in the three highest paid
years during the 10 years prior to retirement. Annual compensation equals the
total of the amounts reported under the columns captioned "Salary" and "Bonus"
in the Summary Compensation Table (excluding the signing bonuses and cash
retention payments) as well as Armstrong contributions under the Bonus
Replacement Retirement Plan.

The 2001 annual compensation and estimated years of service for plan purposes
for each of the executives named in the Summary Compensation Table were as
follows:

M. D. Lockhart - $1,246,640 (2.8 years); C.W. Galbato - $234,375 (11.5 years);
S. J. Senkowski - $636,451 (28.6 years); M.J. Angello - $498,750 (18.9 years)
and A. L. Thornton - $195,985 (13.4 years). Mr. Lockhart receives two years of
service credit for every one year of actual service toward the calculation of
his pension benefits under the Retirement Benefit Equity Plan. Estimated years
of service include credit for prior service awarded to C.W. Galbato (11 years),
M.J. Angello (14 years) and A. L. Thornton (10 years) upon their employment with
Armstrong. The Armstrong retirement benefit will be reduced by the value of any
defined benefit pension payable by previous employers for the respective period
of the prior service credit.

Special provisions apply if the Retirement Income Plan is terminated within five
years following an Extraordinary Event, as this item is defined in the Plan. In
that event, Plan liabilities will first be satisfied; then, remaining Plan
assets will be applied to increase retirement income to employees. The amount of
the increase is based on the assumption that the employee would have continued
employment with Armstrong until retirement. The executives named in the Summary
Compensation Table would be entitled to this benefit.

Special provisions also apply in the event that a salaried member is terminated
other than for cause or resigns for good reason, as those terms are defined in
the plan, within two years following a change in control of Armstrong. If those
members have at least 10 years of service and are at least 50 years in age, they
would be eligible for early retirement without certain normal reductions
applying. Those members would also receive some Social Security replacement
benefits. Members with 15 or more years of service would also receive credit
under the plan for an additional five years of service.

Compensation of Directors
- --------------------------
AHI and Armstrong do not separately compensate directors who are employees for
services as a director. AHI and Armstrong pay directors a retainer of $50,000
per year. Shared directors receive only a single retainer. AHI directors receive
$1,200 for each Board and $1,000 for each Committee (other than Executive
Committee) meeting attended. Shared directors receive $1,200 for each Armstrong
Board meeting attended and $1,000 for each Committee meeting attended only when
there is no AHI Board or Committee meeting held on the same day. Directors of
the AHI Executive Committee and AHI committee chairpersons receive an annual fee
of $3,000. AHI and Armstrong directors are paid $2,500 per day plus reasonable
expenses for special assignments in connection with Board activity.

129

Management Development and Compensation Committee
- -------------------------------------------------
The Management Development and Compensation Committee members are Jerre L. Stead
(Chairperson); Donald C. Clark; Judith R. Haberkorn; John A. Krol; and M. Edward
Sellers. The Management Development and Compensation Committee establishes the
overall philosophy and policies governing compensation programs, including those
subject to Section 162(m) of the Internal Revenue Code, for AHI and Armstrong
management.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------

Stock Ownership of Certain Beneficial Owners

AHI indirectly owns all of the capital stock of Armstrong. The following table1
sets forth, as of December 31, 2001, each person or entity known to AHI that may
be deemed to have beneficial ownership of more than 5% of the outstanding AHI
common stock. All Armstrong stock is owned by AHI, except for 11.6 million
shares in Armstrong's treasury.

--------------------------------------------------------------------------------
Name And Address Of Beneficial Amount And Nature Of Percent Of Class
Owner Beneficial Ownership Outstanding/2/
--------------------------------------------------------------------------------

JP Morgan Chase/3/
270 Park Ave. 6,056,748 14.89%
New York, NY 10017
--------------------------------------------------------------------------------

/1/ In accordance with applicable rules of the Securities and Exchange
Commission, this information is based on Section 13(g) information filed in
February 2002.

/2 In accordance with applicable rules of the Securities and Exchange
Commission, this percentage is based upon the total 40,702,293 shares of AHI's
common stock that were outstanding on December 31, 2001.

/3/ JP Morgan Chase serves as the trustee of the Armstrong World Industries,
Inc. Master Retirement Plan and the trustee of the Stock Ownership Armstrong
Holdings Stock Fund of the Retirement Savings and Stock Ownership Plan (RSSOP).
As trustee, JP Morgan Chase may be deemed to be the beneficial owner of
6,056,748 shares held in the trusts. JP Morgan Chase is obligated to vote,
tender, or exchange any Common Stock beneficially owned by the RSSOP Trust as
directed by participants in RSSOP. JP Morgan Chase votes these shares in
accordance with the participant's direction. Shares that are unallocated and any
allocated shares for which no instructions are received, are voted in the same
proportion as the shares of Common Stock for which instructions are received. JP
Morgan Chase directly votes the shares beneficially owned by the Master
Retirement Plan.

130

Security Ownership of Management
- --------------------------------
The following table shows the amount of AHI stock that each director (and
nominee), each individual named in the Summary Compensation Table and all
directors and executive officers owned as a group. The ownership rights in these
shares consist of sole voting and investment power, except where otherwise
indicated. This information is as of January 31, 2002.

-----------------------------------------------------------------------------------------------------------
Stock Options
Exercisable Total Beneficial Deferred Stock
Name Stock/1/ w/in 60 days Ownership Units/2/
-----------------------------------------------------------------------------------------------------------

H. Jesse Arnelle 2,358 0 2,358 1,703
-----------------------------------------------------------------------------------------------------------
Van C. Campbell 2,200 5,330 7,530 9,915
-----------------------------------------------------------------------------------------------------------
Donald C. Clark 4,448 12,080 16,528 1,794
-----------------------------------------------------------------------------------------------------------
Judith R. Haberkorn 1,184 4,970 6,154 1.910
-----------------------------------------------------------------------------------------------------------
John A. Krol 1,433 2,990 4,423 644
-----------------------------------------------------------------------------------------------------------
Michael D. Lockhart 128,375 66,666 195,041 0
-----------------------------------------------------------------------------------------------------------
James E. Marley 4,697 1,410 6,107 8,086
-----------------------------------------------------------------------------------------------------------
David W. Raibeck 1,436 0 1,436 11,880
-----------------------------------------------------------------------------------------------------------
M. Edward Sellers 0 0 0 0
-----------------------------------------------------------------------------------------------------------
Jerre L. Stead 4,400 3,260 7,660 2,094
-----------------------------------------------------------------------------------------------------------
Chan W. Galbato 3,750 0 3,750 0
-----------------------------------------------------------------------------------------------------------
Stephen J. Senkowski 1,484 10,321 11,805 1,327
-----------------------------------------------------------------------------------------------------------
Matthew J. Angello. 3,204 7,046 10,250 596
-----------------------------------------------------------------------------------------------------------
April L. Thornton 232 0 232 0
-----------------------------------------------------------------------------------------------------------
Director and officers as a
group (20 persons) 178,405 174,492 352,897 42,356
-----------------------------------------------------------------------------------------------------------

/1/ Includes the following shares that may be determined to be owned by the
employee through the employee stock ownership accounts of AHI's Retirement
Savings and Stock Ownership Plan ("RSSOP"): M. D. Lockhart - 124; C. W. Galbato
- - 124; S. J. Senkowski - 2,186; A. L. Thornton - 1,030; M. J. Angello - 1,407;
and executive officers as a group - 10,460.
Includes the following shares indirectly owned and held in the savings
accounts of the RSSOP accounts of the following individuals: S. J. Senkowski -
38; A. L. Thornton - 310; M. J. Angello - 563; and executive officers as a group
- - 1,909.
Includes the following shares indirectly owned and held in the Bonus
Replacement Retirement Plan accounts: A. L. Thornton -9; M. J. Angello - 292;
and executive officers as group - 301.

/2/ Includes phantom shares held in a stock subaccount under the Deferred
Compensation Plan. The participants have no voting or investment power.

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Mr. H. Jesse Arnelle is Of Counsel with the law firm of Womble Carlyle Sandridge
& Rice, PLLC. Armstrong has retained Womble Carlyle Sandridge & Rice, PLLC for
many years, including 2001 and 2002.

131

PART IV
-------

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

The financial statements filed as a part of this Annual Report on Form 10-K are
listed in the "Index to Financial Statements and Schedules" on page 41.

a. The following exhibits are filed as a part of this Annual Report on Form
10-K:

Exhibits
--------
No. 3(a) Armstrong Holdings, Inc.'s Amended and Restated Articles of
Incorporation are incorporated herein by reference from Exhibit
3.1(i) to Armstrong Holdings, Inc.'s Report on Form 8-K dated May
9, 2000.

No. 3(b) Armstrong Holdings, Inc.'s Bylaws, effective May 1, 2000
incorporated herein by reference from 2000 Annual Report on Form
10-K wherein they appear as Exhibit 3(b).

No. 3(c) Armstrong World Industries, Inc.'s restated Articles of
Incorporation, as amended, are incorporated by reference herein
from Armstrong World Industries, Inc.'s 1994 Annual Report on
Form 10-K wherein they appear as Exhibit 3(b).

No. 3(d) Armstrong World Industries, Inc.'s Bylaws as amended November 9,
2000 incorporated herein by reference from 2000 Annual Report on
Form 10-K wherein they appear as Exhibit 3(d).

No. 4(a) Armstrong Holdings, Inc.'s Shareholder Summary of Rights
to Purchase Preferred Stock dated as of March, 14, 2000 is
incorporated by reference herein from Armstrong Holdings, Inc.'s
registration statement on Form 8-K dated May 9, 2000, wherein it
appeared as Exhibit 99.2.

No. 4(b) Armstrong World Industries, Inc.'s Retirement Savings and Stock
Ownership Plan effective as of October 1, 1996, as amended April
12, 2001 is incorporated by reference herein from Armstrong World
Industries, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001, wherein it appeared as Exhibit 4.*

No. 4(c) Armstrong World Industries, Inc.'s $450,000,000 Credit Agreement
(5-year) dated as of October 29, 1998, among Armstrong World
Industries, Inc., The Chase Manhattan Bank, as administrative
agent, and the banks listed therein, is incorporated herein by
reference from Armstrong World Industries, Inc.'s 1998 Annual
Report on Form 10-K, wherein it appeared as Exhibit 4(f).

No. 4(d) Armstrong World Industries, Inc.'s Indenture, dated as of August
6, 1996, between Armstrong World Industries, Inc. and The Chase
Manhattan Bank, formerly known as Chemical Bank, as successor to
Mellon Bank, N.A., as Trustee, is incorporated herein by
reference from Armstrong World Industries, Inc.'s registration
statement on Form S-3/A dated August 14, 1996, wherein it
appeared as Exhibit 4.1.

No. 4(e) Instrument of Resignation, Appointment and Acceptance dated
as of December 1, 2000 among Armstrong World Industries, Inc.,
The Chase Manhattan Bank and Wells Fargo Bank Minnesota, National
Association, regarding Armstrong World Industries, Inc.'s
Indenture, dated as of August 6, 1996, between Armstrong World
Industries, Inc. and The Chase Manhattan Bank, formerly known as
Chemical Bank, as successor to Mellon Bank, N.A., as Trustee, is
incorporated herein by reference from 2000 Annual Report on Form
10-K wherein they appear as Exhibit 4(e).

No. 4(f) Copy of portions of Armstrong World Industries, Inc.'s Board
of Directors' Pricing Committee's resolutions establishing the
terms and conditions of $200,000,000 of 6.35% Senior Notes Due
2003 and $150,000,000 of 6 1/2% Senior Notes Due 2005, is
incorporated herein by reference from Armstrong World Industries,
Inc.'s 1998 Annual Report on Form 10-K, wherein it appeared as
Exhibit 4(h).

132

No. 4(g) Copy of portions of Armstrong World Industries, Inc.'s Board
of Directors' Pricing Committee's resolutions establishing
the terms and conditions of $180,000,000 of 7.45% Senior
Quarterly Interest Bonds Due 2038, is incorporated herein by
reference from Armstrong World Industries, Inc.'s 1998
Annual Report on Form 10-K, wherein it appeared as Exhibit
4(i).

No. 4(h) Note Purchase Agreement dated June 19, 1989 for 8.43% Series A
Guaranteed Serial ESOP Notes due 1989 -2001 and 9.00% Series B
Guaranteed Serial ESOP Notes due 2000-2004 for the Armstrong
World Industries, Inc. Employee Stock Ownership Plan ("Share
in Success Plan") Trust, with Armstrong World Industries, Inc.
as guarantor is incorporated by reference herein from
Armstrong Holdings, Inc. and Armstrong World Industries,
Inc.'s registration statement on Form 10-Q for the quarter
ended September 30, 2000, wherein it appeared as Exhibit 4(a).

No. 4(i) Armstrong World Industries, Inc.'s $300,000,000 Revolving
Credit and Guarantee Agreement dated December 6, 2000, between
Armstrong World Industries, Inc. and The Chase Manhattan Bank
and the banks referenced therein; the First Amendment to this
Agreement, dated February 2, 2001; and the Amendment Letter to
this Agreement, dated February 28, 2001, is incorporated
herein by reference from 2000 Annual Report on Form 10-K
wherein they appear as Exhibit 4(i).

Armstrong Holdings, Inc. and Armstrong World Industries, Inc.
agree to furnish to the Commission upon request copies of
instruments defining the rights of holders of long-term debt
of the registrants and their subsidiaries which are not filed
herewith in accordance with applicable rules of the Commission
because the total amount of securities authorized thereunder
does not exceed 10% of the total assets of the registrants and
their subsidiaries on a consolidated basis.

No. 10(i)(a) Armstrong World Industries, Inc.'s Agreement Concerning
Asbestos-Related Claims dated June 19, 1985, (the "Wellington
Agreement") among Armstrong World Industries, Inc. and other
companies is incorporated by reference herein from Armstrong
World Industries, Inc.'s 1997 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(i)(a).

No. 10(i)(b) Producer Agreement concerning Center for Claims Resolution, as
amended, among Armstrong World Industries, Inc. and other
companies is incorporated by reference herein from Armstrong
World Industries, Inc.'s 1999 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(i)(b).

No. 10(i)(c) Indenture, dated as of March 15, 1988, between Armstrong World
Industries, Inc. and Morgan Guaranty Trust Company of New
York, as Trustee, as to which The First National Bank of
Chicago is successor trustee, (relating to Armstrong World
Industries, Inc.'s $125 million 9-3/4% Debentures due 2008 and
Series A Medium Term Notes) is incorporated herein by
reference from Armstrong World Industries, Inc.'s 1995 Annual
Report on Form 10-K wherein it appeared as Exhibit 4(c).

No. 10(i)(d) Senior Indenture dated as of December 23, 1998 between
Armstrong World Industries, Inc. and First National Bank of
Chicago, as Trustee, is incorporated herein by reference from
Armstrong World Industries, Inc.'s Registration Statement on
Form S-3 (File No. 333- 74501) dated March 16, 1999, wherein
it appeared as Exhibit 4.3.

No. 10(i)(e) Global Note representing $200 million of 7.45% Senior Notes
due 2029 is incorporated by reference herein from Armstrong
World Industries, Inc.'s Report on Form 8-K which was filed
with the Commission on May 29, 1999, wherein it appeared as
Exhibit 4.2.

No. 10(i)(f) Agreement and Plan of Merger dated as of June 12, 1998, among
Armstrong World Industries, Inc., Triangle Pacific Corp., and
Sapling Acquisition, Inc., is incorporated by reference herein
from Armstrong World Industries, Inc.'s Form 8-K filed on June
15, 1998, wherein it appeared as Exhibit 10.1.

No. 10(i)(g) Agreement and Plan of Merger, dated as of June 30, 1999 by and
among AISI Acquisition Corp. and Armstrong World Industries,
Inc and Armstrong Industrial Specialties, Inc. is incorporated
by reference herein from Armstrong World Industries, Inc.'s
Report on Form 8- K filed on July 14, 1999, wherein it
appeared as Exhibit 1.

133

No. 10(iii)(a) Armstrong World Industries, Inc.'s Long-Term Stock Option
Plan for Key Employees, as amended, is incorporated by
reference herein from Armstrong World Industries, Inc.'s
1995 Annual Report on Form 10-K wherein it appeared as
Exhibit 10(iii)(a). *

No. 10(iii)(b) Armstrong World Industries, Inc.'s Long Term Stock Incentive
Plan is incorporated by reference herein from Armstrong
World Industries, Inc.'s 1998 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(iii)(j). *

No. 10(iii)(c) Armstrong World Industries, Inc.'s Directors' Retirement
Income Plan, as amended, is incorporated by reference herein
from Armstrong World Industries, Inc.'s 1996 Annual Report
on Form 10-K wherein it appeared as Exhibit 10(iii)(c).*

No. 10(iii)(d) Armstrong World Industries, Inc. and Armstrong Holdings,
Inc.'s Management Achievement Plan for Key Executives, as
amended February 26, 2001, is incorporated herein by
reference from 2000 Annual Report on Form 10-K wherein they
appear as Exhibit 10(iii)(d). *

No. 10(iii)(e) Armstrong World Industries, Inc.'s Retirement Benefit Equity
Plan (formerly known as the Excess Benefit Plan), as amended
January 1, 2000 is incorporated by reference herein from
Armstrong World Industries, Inc.'s 1999 Annual Report on
Form 10-K wherein it appeared as Exhibit 10(iii)(e).*

No. 10(iii)(f) Armstrong Holdings, Inc.'s Deferred Compensation Plan, as
amended May 1, 2000, is incorporated herein by reference
from 2000 Annual Report on Form 10-K wherein they appear as
Exhibit 10(iii)(f).*

No. 10(iii)(g) Armstrong World Industries, Inc.'s Employment Protection
Plan for Salaried Employees of Armstrong World Industries,
Inc., as amended, is incorporated by reference herein from
Armstrong World Industries, Inc.'s 1994 Annual Report on
Form 10-K wherein it appeared as Exhibit 10(iii)(g). *

No. 10(iii)(h) Armstrong World Industries, Inc.'s Restricted Stock Plan For
Non-employee Directors, as amended, is incorporated by
reference herein from Armstrong World Industries, Inc.'s
1996 Annual Report on Form 10-K wherein it appeared as
Exhibit 10(iii)(h). *

No. 10(iii)(i) Armstrong World Industries, Inc.'s Severance Pay Plan for
Salaried Employees, as amended October 31, 2000, is
incorporated herein by reference from 2000 Annual Report on
Form 10-K wherein they appear as Exhibit 10(iii)(i). *

No. 10(iii)(j) Armstrong World Industries, Inc.'s 1999 Long Term Stock
Incentive Plan is incorporated by reference herein from
Armstrong World Industries, Inc.'s 1999 Annual Report on
Form 10-K wherein it appeared as Exhibit 10(iii)(j).*

No. 10(iii)(k) Form of Agreement between Armstrong World Industries, Inc.
and certain of its Executive Officers, together with a
schedule identifying those executives and the material
differences among the agreements to which each executive is
a party, is incorporated herein by reference from 2000
Annual Report on Form 10-K wherein they appear as Exhibit
10(iii)(k). *

No. 10(iii)(l) Agreement between Armstrong Holdings, Inc. and Michael D.
Lockhart, dated August 7, 2000 is incorporated by reference
herein from Armstrong Holdings, Inc. and Armstrong World
Industries, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000, wherein it appeared as
Exhibit 10(e). *

No. 10(iii)(m) Form of Indemnification Agreement between Armstrong
Holdings, Inc., Armstrong World Industries, Inc. and certain
of its Directors and Officers, together with a schedule
identifying those Directors and Officers, is incorporated by
reference herein from Armstrong Holdings, Inc. and Armstrong
World Industries, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000, wherein it appeared as
Exhibit 10(iii)(a). *

No. 10(iii)(n) Amendment to August 7, 2000 employment agreement between
Armstrong Holdings, Inc. and Michael D. Lockhart is
incorporated by reference herein from Armstrong Holdings,
Inc. and

134

Armstrong World Industries, Inc.'s Quarterly Report on Form
10-Q for the quarter ended March 31, 2001, wherein it
appeared as Exhibit 10. *

No. 10(iii)(o) Form of Indemnification Agreement between Armstrong
Holdings, Inc. and certain of its Directors and Officers
dated October 20, 2000, together with a schedule identifying
those Directors and Officers and the material differences
among the agreements to which each executive is a party, is
incorporated herein by reference from 2000 Annual Report on
Form 10-K wherein they appear as Exhibit 10(iii)(o). *

No. 10(iii)(p) Form of Indemnification Agreement between Armstrong World
Industries, Inc. and certain of its Directors and Officers,
together with a schedule identifying those Directors and
Officers dated October 20, 2000 and the material differences
among the agreements to which each executive is a party, is
incorporated herein by reference from 2000 Annual Report on
Form 10-K wherein they appear as Exhibit 10(iii)(p). *

No. 10(iii)(q) Armstrong World Industries, Inc.'s Bonus Replacement
Retirement Plan, dated as of January 1, 1998, as amended, is
incorporated by reference herein from Armstrong World
Industries, Inc.'s 1998 Annual Report on Form 10-K wherein
it appeared as Exhibit 10(iii)(m). *

No. 10(iii)(r) Employment agreement between Armstrong World Industries,
Inc. and Chan W. Galbato dated May 2, 2001 is incorporated
by reference herein from Armstrong World Industries, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2001, wherein it appeared as Exhibit 10. *

No. 10(iii)(s) Form of Indemnification Agreement between Armstrong
Holdings, Inc. and M. Edward Sellers, dated May 1, 2001.

No. 10(iii)(t) Employment Agreement between Armstrong Holdings, Inc. and
Michael D. Lockhart dated August 7, 2000 is incorporated
herein by reference from Armstrong Holdings, Inc. and
Armstrong World Industries, Inc.'s Quarterly Report on Form
10-Q for the quarter ended September 30, 2000 wherein it
appeared as Exhibit 10(a). *

No. 10(iii)(u) Order Authorizing and Approving Retention Program for Key
Employees and Approving Assumption of Executory Contracts
dated April 18, 2001.

No. 10(iii)(v) Armstrong Holdings, Inc.'s Stock Award Plan is incorporated
by reference herein from Armstrong Holdings, Inc.'s
registration statement on form S-8 filed August 16, 2000,
wherein it appeared as Exhibit 4.1. *

No. 10(iii)(w) Terms of Restricted Stock for Stock Option Exchange Program
Offered to Employees and Schedule of Participating Officers
is incorporated by reference herein from Armstrong Holdings,
Inc. and Armstrong World Industries, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000
wherein it appeared as Exhibit 10(i). *

No. 10(iii)(x) Management Services Agreement between Armstrong Holdings,
Inc. and Armstrong World Industries, Inc., dated August 7,
2000 is incorporated by reference herein from Armstrong
Holdings, Inc. and Armstrong World Industries, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 wherein it appeared as Exhibit 10(g).
World Industries, Inc. and Triangle Pacific Corp. dated
November 14, 2000 is incorporated herein by reference from
2000 Annual Report on Form 10-K wherein they appear as
Exhibit 10(iii)(bb). *

No. 11(a) Computation for basic earnings per share.

No. 11(b) Computation for diluted earnings per share.

No. 21 List of Armstrong Holdings, Inc. and Armstrong World
Industries, Inc.'s domestic and foreign subsidiaries.

135

No. 23 Consent of Independent Auditors.

No. 24 Powers of Attorney and authorizing resolutions.

* Compensatory Plan

b. No reports on Form 8-K were filed during the last quarter of 2001.

136

SIGNATURES

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

ARMSTRONG HOLDINGS, INC.
------------------------
(Registrant)

By: /s/ Michael D. Lockhart
---------------------------
Chairman and Chief Executive Officer

Date: March 8, 2002
--------------------

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

Directors and Principal Officers of the registrant AHI:

Michael D. Lockhart Chairman and Chief Executive Officer
(Principal Executive Officer)

Leonard A. Campanaro Senior Vice President and Chief Financial Officer
(Principal Financial Officer)

William C. Rodruan Vice President and Controller
(Principal Accounting Officer)

H. Jesse Arnelle Director

Van C. Campbell Director

Donald C. Clark Director

Judith R. Haberkorn Director

John A. Krol Director

James E. Marley Director

David W. Raisbeck Director

M. Edward Sellers Director

Jerre L. Stead Director

By: /s/ Michael D. Lockhart
---------------------------
(Michael D. Lockhart, as
attorney-in-fact for AHI directors and on his
own behalf)
As of March 8, 2002

By: /s/ Leonard A. Campanaro
----------------------------
(Leonard A. Campanaro)
As of March 8, 2002

By: /s/ William C. Rodruan
--------------------------
(William C. Rodruan)
As of March 8, 2002

137

SIGNATURES

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

ARMSTRONG WORLD INDUSTRIES, INC.
--------------------------------
(Registrant)

By: /s/ Michael D. Lockhart
---------------------------
Chairman and Chief Executive Officer

Date: March 8, 2002
--------------------

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

Directors and Principal Officers of the registrant Armstrong:

Michael D. Lockhart Director and Chairman
(Principal Executive Officer)

Leonard A. Campanaro Senior Vice President and Chief Financial Officer
(Principal Financial Officer)

William C. Rodruan Vice President and Controller
(Principal Accounting Officer)

James E. Marley Director

John N. Rigas Director

By: /s/ Michael D. Lockhart
---------------------------
(Michael D. Lockhart, as
attorney-in-fact for James E. Marley and
on his own behalf)
As of March 8, 2002

By: /s/ Leonard A. Campanaro
----------------------------
(Leonard A. Campanaro)
As of March 8, 2002

By: /s/ William C. Rodruan
--------------------------
(William C. Rodruan)
As of March 8, 2002

By: /s/ John N. Rigas
---------------------
(John N. Rigas)
As of March 8, 2002

138

SCHEDULE II
-----------

Armstrong Holdings, Inc. and Armstrong World Industries, Inc.
Valuation and Qualifying Reserves of Accounts Receivable
--------------------------------------------------------

For Years Ended December 31
---------------------------
(amounts in millions)

Provision for Losses 2001 2000 1999
- -------------------- -------- -------- ---------

Balance at beginning of year $ 24.0 $ 21.6 $ 15.0
Additions Charged to earnings 12.8 13.4 11.6
Deductions (17.4) (11.0) (4.9)
Balances via acquisitions/(divestitures) -- -- (0.1)
-------- -------- ---------
Balance at end of year $ 19.4 $ 24.0 $ 21.6
======== ======== =========

Provision for Discounts
- -----------------------
Balance at beginning of year $ 27.1 $ 22.1 $ 31.3
Additions charged to earnings 258.4 258.5 247.7
Deductions (255.7) (254.5) (256.4)
Balance via acquisitions/(divestitures) -- 1.0 (0.5)
-------- -------- ---------
Balance at end of year $ 29.8 $ 27.1 $ 22.1
======== ======== =========

Total Provision for Discounts and Losses
- ----------------------------------------
Balance at beginning of year $ 51.1 $ 43.7 $ 46.3
Additions charged to earnings 271.2 271.9 259.3
Deductions (273.1) (265.5) (261.3)
Balances via acquisitions/(divestitures) -- 1.0 (0.6)
-------- -------- ---------
Balance at end of year $ 49.2 $ 51.1 $ 43.7
======== ======== =========

139