ARMSTRONG WORLD INDUSTRIES INC - 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, 1998
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OR

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

For the transition period from to
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Commission file number 1-2116
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Armstrong World Industries, Inc.
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(Exact name of registrant as specified in its charter)

Pennsylvania 23-0366390
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2500 Columbia Avenue, Lancaster, Pennsylvania 17603
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (717) 397-0611
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Securities registered pursuant to Section 12(b) of the Act:

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

Preferred Stock Purchase Rights Pacific Stock Exchange, Inc. (a)

9-3/4% Debentures Due 2008 Philadelphia Stock Exchange, Inc. (a)
7.45% Senior Quarterly Interest Bonds
Due 2038
(a) Common Stock and Preferred
Stock Purchase Rights only

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
----- -----

1

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 registrant held by
non-affiliates of the registrant based on the closing price ($50.625 per share)
on the New York Stock Exchange on February 19, 1999, was approximately $1.7
billion. For purposes of determining this amount only, registrant has defined
affiliates as including (a) the executive officers named in Item 10 of this 10-K
Report, (b) all directors of registrant, and (c) each shareholder that has
informed registrant by February 15, 1999, as having sole or shared voting power
over 5% or more of the outstanding Common Stock of registrant as of December 31,
1998. As of February 19, 1999, the number of shares outstanding of registrant's
Common Stock was 40,023,675. This amount includes the 2,898,100 shares of Common
Stock as of December 31, 1998, held by Mellon Bank, N.A., as Trustee for the
employee stock ownership accounts of the Company's Retirement Savings and Stock
Ownership Plan.

Documents Incorporated by Reference

Portions of the Proxy Statement dated March 16, 1999, relative to the
April 26, 1999, annual meeting of the shareholders of registrant (the "Company's
1999 Proxy Statement") have been incorporated by reference into Part III of this
Form 10-K Report.

2

PART I
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Item 1. Business
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Armstrong World Industries, Inc. is a Pennsylvania corporation incorporated in
1891. The Company designs, manufactures and sells interior furnishings, most
notably floor coverings and ceiling systems. These products are sold primarily
for use in the furnishing, refurbishing, repair, modernization and construction
of residential, commercial and institutional buildings. The Company also
manufactures various industrial and other products, including pipe insulation,
gasket material and textile machine parts. On July 22, 1998, the Company
acquired Triangle Pacific Corp. ("Triangle Pacific"). Triangle Pacific
manufactures hardwood and other flooring and relevant products, as well as
kitchen and bathroom cabinets. Effective August 31, 1998, the Company acquired
93 percent of DLW Aktiengesellschaft ("DLW"), a German company, which
manufactures flooring and some office furniture in Europe. In 1998, the Company
also sold its equity investment in Dal-Tile International Inc. ("Dal-Tile"),
through which investment the Company participated in the ceramic tile market.
Unless the context indicates otherwise, the term "Company" means Armstrong World
Industries, Inc. and its consolidated subsidiaries.

Industry Segments

The Company's businesses include five reportable segments: floor coverings,
building products, wood products, insulation products, and all other.

NATURE OF OPERATIONS

INDUSTRY SEGMENTS

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For year ended 1998
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Floor Building Wood Insulation All
(millions) coverings products products products other Totals
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Net sales to external customers $ 1,317.6 $ 756.8 $ 346.0 $ 230.0 $ 95.8 $ 2,746.2
Intersegment sales -- -- -- -- 39.5 39.5
Equity (earnings) loss from affiliates 0.2 (14.2) -- -- 0.2 (13.8)
Segment operating income 176.5 116.6 38.6 46.3 9.1 387.1
Reorganization charges 53.5 10.1 -- 0.2 1.9 65.7
Segment assets 1,476.7 550.1 1,355.5 174.6 80.7 3,637.6
Depreciation and amortization 63.6 39.2 15.3 12.1 7.2 137.4
Equity investment 2.2 39.6 -- -- -- 41.8
Capital additions 93.6 42.5 12.4 11.3 5.9 165.7
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For year ended 1997
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Floor Building Wood Insulation All
(millions) coverings products products products other Totals
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Net sales to external customers $ 1,116.0 $ 754.5 $ -- $ 228.4 $ 99.8 $ 2,198.7
Intersegment sales -- -- -- -- 35.8 35.8
Equity (earnings) loss from affiliates 0.2 (12.9) -- -- 42.4 29.7
Segment operating income (loss) 186.5 122.3 -- 45.4 (2.6) 351.6
Segment assets 713.8 554.9 -- 165.1 219.2 1,653.0
Depreciation and amortization 65.5 37.5 -- 12.0 9.6 124.6
Equity investment 2.5 36.7 -- -- 135.7 174.9
Capital additions 76.6 54.4 -- 13.4 3.1 147.5
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For year ended 1996
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Floor Building Wood Insulation All
(millions) coverings products products products other Totals
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Net sales to external customers $ 1,091.8 $ 718.4 $ -- $ 246.8 $ 99.4 $ 2,156.4
Intersegment sales -- -- -- -- 40.9 40.9
Equity (earnings) loss from affiliates -- (9.1) -- -- (10.0) (19.1)
Segment operating income 195.4 103.4 -- 42.4 11.6 352.8
Reorganization and restructuring charges 14.5 8.3 -- 2.8 1.2 26.8
Segment assets 687.9 541.1 -- 184.0 257.5 1,670.5
Depreciation and amortization 53.9 37.0 -- 10.0 13.4 114.3
Equity investment -- 35.6 -- -- 168.7 204.3
Capital additions 117.7 67.7 -- 20.4 2.1 207.9
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Segment information has been prepared in accordance with Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures about Segments of an Enterprise and Related Information."
Segments were determined based on products and services provided by each
segment. 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 excluding reorganization and
restructuring charges, unusual gains and losses, and interest expense. The
Company accounts for intersegment sales and transfers as if the sales or
transfers were to third parties at current market prices.

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The table below provides a reconciliation of segment information to total
consolidated information.

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(millions) 1998 1997 1996
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Net sales:
Total segment sales $ 2,746.2 $ 2,198.7 $ 2,156.4
Intersegment sales 39.5 35.8 40.9
Elimination of intersegment sales (39.5) (35.8) (40.9)
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Total consolidated sales $ 2,746.2 $ 2,198.7 $ 2,156.4
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Operating income:
Total segment operating income $ 387.1 $ 351.6 $ 352.8
Segment reorganization and
restructuring charges (65.7) -- (26.8)
Corporate reorganization and
restructuring charges (8.9) -- (19.7)
Flooring discoloration charge -- -- (34.0)
Dal-Tile charge -- (29.7) --
Asbestos liability charge (274.2) -- --
Unallocated corporate (expense)
income 1.6 0.1 (16.4)
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Total consolidated operating income $ 39.9 $ 322.0 $ 255.9
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Assets:
Total assets for reportable
segments $ 3,637.6 $ 1,653.0 $ 1,670.5
Assets not assigned to business
segments 635.6 722.5 465.1
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Total consolidated assets $ 4,273.2 $ 2,375.5 $ 2,135.6
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Other significant items:
Depreciation and amortization
expense:
Segment totals $ 137.4 $ 124.6 $ 114.3
Unallocated corporate
depreciation and
amortization expense 5.3 8.1 9.4
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Total consolidated depreciation and
amortization expense $ 142.7 $ 132.7 $ 123.7
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Capital additions:
Segment totals $ 165.7 $ 147.5 $ 207.9
Unallocated corporate
capital additions 18.6 13.0 20.1
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Total consolidated capital additions $ 184.3 $ 160.5 $ 228.0
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Narrative Description of Business

The Company designs, manufactures and sells interior furnishings, including
floor coverings, building products (primarily ceiling systems), wood flooring
products, and a variety of specialty products for the building, automotive,
textile and other industries. The Company's activities extend worldwide.

Floor Coverings

The Company is a prominent worldwide manufacturer of floor coverings for the
interiors of homes and commercial and institutional buildings, with a broad
range of resilient flooring together with adhesives, installation and
maintenance materials and accessories. Resilient flooring, in both sheet and
tile form, together with laminate flooring, linoleum, carpet and sports
flooring, is made 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. Floor
covering products are sold to the commercial and residential market segments
through wholesalers, retailers (including large home centers), and contractors,
and to the hotel/motel and manufactured homes industries.

Building Products

A major producer of ceiling materials in the United States and abroad, the
Company markets both residential and commercial ceiling systems. Ceiling
materials for the home are offered in a variety of types and designs; most
provide noise reduction and incorporate Company-designed features intended to
permit ease of installation. These residential ceiling products are sold through
wholesalers and retailers (including large home centers). Commercial

4

ceiling systems, designed for use in shopping centers, offices, schools,
hospitals, and other commercial and institutional structures, are available in
numerous colors, performance characteristics and designs and offer
characteristics such as acoustical control, rated fire protection, and aesthetic
appeal. Commercial ceiling materials and accessories, along with acoustical wall
panels, are sold by the Company to ceiling systems contractors and to resale
distributors. Suspension ceiling systems products are manufactured and sold
through a joint venture with Worthington Industries.

Wood Products

The Company, through Triangle Pacific, manufactures and sells hardwood flooring
and other flooring and related products. The wood products segment also
manufactures and distributes kitchen and bathroom cabinets. These products are
used primarily in residential new construction and remodeling, with some
commercial applications such as retail stores and restaurants. Flooring sales
are generally made through independent wholesale flooring distributors and the
cabinets are distributed through Company-operated distributors and directly to
the end-user. The business of this segment is seasonal, with demand for its
products generally the highest between the months of April and November.

Insulation Products

The Company manufactures insulation products for the technical insulation
market. Insulation products are made in a wide variety of types and designs to
satisfy various industrial and commercial applications with the majority of the
products comprising closed cell flexible foams. A broad range of cladding and
other related materials for the insulation contracting market are also produced.
Insulation products are sold primarily throughout Europe and North America, with
increasing markets in Asia and South America.

All Other

Other business units include the making of a variety of specialty products for
the automotive, textile and other industries worldwide. Gasket materials are
sold for new and replacement use in the automotive, farm equipment, appliance,
small engine, compressor and other industries. Textile products include cots and
aprons sold to equipment manufacturers and textile mills. Gasket and textile
products are sold, depending on type and ultimate use, to original equipment
manufacturers, contractors, wholesalers, fabricators and end users.
Approximately one third of the total sales of this segment relate to three
customers. Also, prior to the disposition of the Company's equity investment in
Dal-Tile in 1998, ceramic tile for floors, walls and countertops, together with
adhesives, installation and maintenance materials and accessories were sold
through home centers, independent ceramic and floor covering wholesalers and
sales service centers operated by Dal-Tile.

-----------------------------------

The principal raw materials used in the manufacture of the Company's products
are synthetic resins, plasticizers, latex, linseed oil, limestone, cork, mineral
fibers and fillers, clays, starches, perlite, rubber, films, pigments, inks, oak
lumber and logs, veneer, acrylics, plywood, particleboard and fiberboard. In
addition, the Company uses a wide variety of other raw materials. Most raw
materials are purchased from sources outside of the Company. The Company also
purchases significant amounts of packaging materials for the containment and
shipment of its various products. During 1998, adequate supplies of raw
materials were available to all of the Company's industry segments.

Customers' orders for the Company's products are typically for immediate
shipment. Thus, in each industry segment, the Company has implemented inventory
systems, including its "just in time" inventory system, pursuant to which orders
are promptly filled out of inventory on hand or the product is

5

manufactured to meet the delivery date specified in the order. As a result,
there historically has been no material backlog in any industry segment.

The competitive position of the Company has been enhanced by patents on products
and processes developed or perfected within the Company or obtained through
acquisition. Although the Company considers that, in the aggregate, its patents
constitute a valuable asset, it does not regard any industry segment as being
materially dependent upon any single patent or any group of related patents.

In addition, certain of the Company's trademarks, including Armstrong, Bruce,
Hartco, Robbins, and DLW, are important to the Company's business because of
their significant brand name recognition.

There is significant competition in all of the industry segments in which the
Company does business. Competition in each industry segment includes numerous
active companies (domestic and foreign), with emphasis on price, product
performance and service. In addition, with the exception of industrial and other
products and services, product styling is a significant method of competition in
the Company's industry segments. Increasing domestic competition from foreign
producers is apparent in certain industry segments and actions continue to be
taken to meet this competition.

Research and development activities are important and necessary in assisting the
Company to carry on and improve its businesses. Principal research and
development functions include the development of new products and processes and
the improvement of existing products and processes.

The Company spent $42.2 million in 1998, $47.8 million in 1997, and $55.2
million in 1996 on research and development activities worldwide for the
continuing businesses.

GEOGRAPHIC AREAS

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Net trade sales at December 31 (millions) 1998 1997 1996
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Americas:
United States $ 1,803.2 $ 1,412.2 $ 1,385.2
Canada 98.6 89.3 87.2
Other Americas 20.2 16.6 11.2
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Total Americas $ 1,922.0 $ 1,518.1 $ 1,483.6
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Europe:
Germany $ 182.5 $ 110.2 $ 142.4
England 142.5 130.3 129.5
France 65.9 53.1 63.2
Netherlands 57.0 33.1 37.2
Other Europe 183.4 161.7 123.0
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Total Europe $ 631.3 $ 488.4 $ 495.3
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Pacific area and other foreign $ 192.9 $ 192.2 $ 177.5
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Total net trade sales $ 2,746.2 $ 2,198.7 $ 2,156.4
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Sales are attributed to countries based on location of customer.

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Long-lived assets at December 31 (millions) 1998 1997 1996
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Americas:
United States $ 991.9 $ 746.3 $ 728.9
Canada 17.1 20.5 20.7
Other Americas 0.1 0.1 0.1
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Total Americas $ 1,009.1 $ 766.9 $ 749.7
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Europe:
Germany $ 270.3 $ 47.7 $ 58.0
England 52.7 54.7 51.4
Netherlands 42.3 13.0 16.8
Belgium 34.5 -- --
France 15.9 15.1 17.6
Other Europe 36.0 32.6 25.5
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Total Europe $ 451.7 $ 163.1 $ 169.3
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Pacific area:
China $ 34.0 $ 34.0 $ 34.9
Other Pacific area 7.2 8.2 10.1
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Total Pacific area $ 41.2 $ 42.2 $ 45.0
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Total long-lived assets $ 1,502.0 $ 972.2 $ 964.0
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6

The Company's foreign operations are subject to foreign government legislation
involving restrictions on investments (including transfers thereof), tariff
restrictions, personnel administration, and other actions by foreign
governments. In addition, consolidated earnings are subject to both U.S. and
foreign tax laws with respect to earnings of foreign subsidiaries, and to the
effects of currency fluctuations.

ACQUISITIONS

On July 22, 1998, the Company completed its acquisition of Triangle Pacific
Corp. ("Triangle Pacific"), a Delaware corporation. Triangle Pacific is a
leading U.S. manufacturer of hardwood flooring and other flooring and related
products and a substantial manufacturer of kitchen and bathroom cabinets. The
acquisition, recorded under the purchase method of accounting, included the
purchase of outstanding shares of common stock of Triangle Pacific at $55.50 per
share which, plus acquisition costs, resulted in a total purchase price of
$911.5 million. A portion of the purchase price has been allocated to assets
acquired and liabilities assumed based on estimated fair market value at the
date of acquisition while the balance of $831.1 million was recorded as goodwill
and is being amortized over forty years on a straight-line basis.

Effective August 31, 1998, the Company acquired approximately 93% of the
total share capital of DLW Aktiengesellschaft ("DLW"), a corporation organized
under the laws of the Federal Republic of Germany. DLW is a leading flooring
manufacturer in Germany. The acquisition, recorded under the purchase method of
accounting, included the purchase of 93% of the total share capital of DLW
which, plus acquisition costs resulted in a total purchase price of $289.9
million. A portion of the purchase price has been allocated to assets acquired
and liabilities assumed based on fair market value at the date of acquisition
while the balance of $117.2 million was recorded as goodwill and is being
amortized over forty years on a straight-line basis. In this purchase price
allocation, $49.6 million was allocated to the estimable net realizable value of
DLW's furniture business and a carpet manufacturing business in the Netherlands,
which the Company has identified as businesses held for sale.

The allocation of the purchase price to the businesses held for sale was
determined as follows:

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(millions) 1998
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Estimated sales price $54.3
Less: Estimated cash outflows through disposal date (2.2)
Allocated interest through disposal date (2.5)
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Total $49.6
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The final sales price and cash flows pertaining to these businesses may
differ from these amounts. Disposals of these businesses should occur in the
first half of 1999.

The table below reflects the adjustment to the carrying value of the
businesses held for sale relating to interest allocation, profits and cash flows
in 1998.

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(millions) 1998
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Carrying value at August 31, 1998 $49.6
Interest allocated September 1 - December 31, 1998 1.1
Effect of exchange rate change 2.8
Profits excluded from consolidated earnings (0.4)
Cash flows funded by parent 2.8
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Carrying value at December 31, 1998 $55.9
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The purchase price allocation for these acquisitions is preliminary and
further refinements are likely to be made based on the completion of final
valuation studies. The operating results of these acquired businesses have been
included in the Consolidated Statements of Earnings from the dates of
acquisition. Triangle Pacific's fiscal year ends on the Saturday closest to
December 31, which was January 2, 1999. The difference in Triangle Pacific's
fiscal year from that of the parent company was due to the difficulty in
changing its financial reporting systems to accommodate a calendar year end. No
events occurred between December 31 and January 2 at Triangle Pacific materially
affecting the Company's financial position or results of operations.

The table below reflects unaudited pro forma combined results of the
Company, Triangle Pacific and DLW as if the acquisitions had taken place at the
beginning of fiscal 1998 and 1997:

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(millions) 1998 1997
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Net sales $3,479.8 $3,350.0
Net earnings (14.2) 173.2
Net earnings per diluted share (0.36) 4.22
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In management's opinion, these unaudited pro forma amounts are not
necessarily indicative of what the actual combined results of operations might
have been if the acquisitions had been effective at the beginning of fiscal 1997
and 1998.

REORGANIZATION AND OTHER ACTIONS

In 1998 the Company recognized charges of $65.6 million, or $42.6 million after
tax, related to severance and enhanced retirement benefits for more than 650
positions, approximately 75% of which were salaried positions. In addition, the
Company recorded an estimated loss of $9.0 million, or $5.9 million after tax,
related to redundant flooring products machinery and equipment held for
disposal. Reorganization actions include corporate and business unit staff
reductions reflecting reorganization of engineering, research and development
and product styling and design; realignment of support activities in connection
with implementation of a new corporate logistics and financial software system;
changes to production processes in the Company's Lancaster flooring plant; and
elimination of redundant positions in formation of a new combined business
organization for Floor Products, Corporate Retail Accounts and Installation
Products. Approximately $28.6 million is cash expenditures for severance which
will occur over the next 12 months. The remainder is a noncash charge for
enhanced retirement benefits.

A second-quarter 1996 restructuring charge related primarily to the
reorganization of corporate and business unit staff positions; realignment and
consolidation of the Armstrong and W.W. Henry installation products businesses;
restructuring of production processes in the Munster, Germany, ceilings
facility; early retirement opportunities for employees in the Fulton, New York,
gasket and specialty paper products facility; and write-downs of assets. These
actions affected approximately 500 employees, about two-thirds of whom were in
staff positions. The majority of the cash outflow occurred within the following
12 months. As of December 31, 1998, an immaterial amount remained in the 1996
reserve related to a non-cancelable operating lease.

Severance payments of $10.4 million were made in 1998 for the elimination
of 209 positions related to the 1996 and 1998 reorganization and restructuring
actions.

EQUITY INVESTMENTS

Investments in affiliates were $41.8 million at December 31, 1998, a decrease of
$133.1 million, reflecting the sale of the Company's ownership of Dal-Tile,
somewhat offset by an increase in the Company's 50% interest in its WAVE joint
venture with Worthington Industries.

Equity earnings from affiliates for 1998 primarily comprised income from a
50% interest in the WAVE joint venture and the Company's share of a net loss at
Dal-Tile and amortization of the excess of the Company's investment in Dal-Tile
over the underlying equity in net assets. Equity losses from affiliates in 1997
included $8.4 million for the Company's share of operating losses incurred by
Dal-Tile; a $29.7 million loss for the Company's share of a charge incurred by
Dal-Tile, primarily for uncollectible receivables and overstocked inventories;
and $4.3 million for the amortization of Armstrong's initial investment in
Dal-Tile over the underlying equity in net assets. Equity earnings from
affiliates for 1996 primarily comprised the Company's after-tax share of the net
income of the Dal-Tile International Inc. business combination, amortization of
the excess of the Company's investment in Dal-Tile over the underlying equity in
net assets, and earnings from its 50% interest in the WAVE joint venture.

In 1995 the Company entered into a business combination with Dal-Tile
whereby the Company exchanged cash and the stock of its ceramic tile operations,
consisting primarily of American Olean Tile company, a wholly-owned subsidiary,
for ownership of 37% of the shares of Dal-Tile. In August 1996, Dal-Tile issued
new shares in a public offering decreasing the Company's ownership share from
37% to 33%. During 1997, the Company purchased additional shares of Dal-Tile
stock, increasing the Company's ownership to 34%.

In 1996 Dal-Tile refinanced all of its existing debt and recorded an
extraordinary loss. The Company's share of the extraordinary loss was $8.9
million after tax or $0.21 per diluted share.

In 1998 the Company announced its intention to dispose of its investment in
Dal-Tile. In July the Company sold 10.35 million shares of Dal-Tile at $8.50 per
share before commission and fees. Since this sale reduced the Company's
ownership of Dal-Tile below 20%, remaining shares were classified as
available-for-sale under the terms of Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." An unrealized holding gain arising from valuing the securities at
market price was excluded from income and recognized as a separate component of
shareholders' equity.

In October and November, the Company sold its remaining 8.02 million shares
of Dal-Tile at $8.50 per share before commission and fees. The Company recorded
a total gain of $12.8 million after tax, classified as "Other income," in the
last half of 1998 on these sales.

8

ENVIRONMENTAL MATTERS

The Company incurred capital expenditures of approximately $6.7 million in 1998,
$1.2 million in 1997 and $3.0 million in 1996 for environmental compliance and
control facilities and anticipates comparable annual expenditures for those
purposes for the years 1999 and 2000. The Company does not anticipate that it
will incur significant capital expenditures in order to meet the requirements of
the Clean Air Act of 1990 ("CAA") and the final implementing regulations
promulgated by various state agencies. Until all new CAA regulatory requirements
are known, uncertainty will remain regarding future estimates of capital
expenditures.

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 voluntarily agreed to jointly fund the required investigation and
remediation of each site. 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. The Company is also
remediating environmental contamination resulting from past industrial activity
at certain of its current and former plant sites.

Estimates of future liability are based on an evaluation of currently
available facts regarding each individual site and consider factors including
existing technology, presently enacted laws and regulations and prior Company
experience in remediation of 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, the Company's estimated liability reflects only the Company's
expected share. In determining the probability of contribution, the Company
considers the solvency of the parties, whether responsibility is being disputed,
the terms of any existing agreements and experience regarding similar matters.
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.

Reserves of $18.3 million at December 31, 1998, and $9.3 million at
December 31, 1997, were for potential environmental liabilities that the Company
considers probable and for which a reasonable estimate of the probable liability
could be made. Where existing data is sufficient to estimate the amount of 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 a result, the Company has accrued,
before agreed-to insurance coverage, $18.3 million to reflect its estimated
undiscounted liability for environmental remediation. As assessments and
remediation activities progress at each individual site, these liabilities are
reviewed to reflect additional information as it becomes available.

Actual costs to be incurred at identified sites in the future may vary from
the estimates, given the inherent uncertainties in evaluating environmental
liabilities. Subject to the imprecision in estimating environmental remediation
costs, the Company 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.

As of December 31, 1998, the Company had approximately 18,900 active employees,
of whom approximately 6,800 are located outside the United States. About 50% of
the Company's approximately 8,800 hourly or salaried production and maintenance
employees in the United States are represented by labor unions. In February,
1999, the Company began to negotiate a new collective bargaining agreement with
the United Steel Workers of America at its Lancaster, Pennsylvania, plant.

9

Item 2. Properties
- -------------------

The Company produces and markets its products and services throughout the world,
owning and operating 69 manufacturing plants in 15 countries (including 5 plants
acquired as part of the DLW acquisition which are currently held for sale).
Forty of these facilities are located throughout the United States. The Company
also has an interest through joint ventures in an additional 17 plants in 7
countries.

Floor covering products and adhesives are produced at 27 plants with principal
manufacturing facilities located in Lancaster, Pennsylvania; Kankakee, Illinois;
Stillwater, Oklahoma; and Bietigheim-Bissingen, and Delmenhorst, Germany.
Building products are produced at 20 plants with principal facilities in Macon,
Georgia; the Florida-Alabama Gulf Coast area; and Marietta, Pennsylvania. Wood
products are produced at 17 plants, comprised of 13 wood flooring and 4 cabinet
facilities. Principal wood products facilities include Beverly, West Virginia;
Nashville and Oneida, Tennessee; and Thompsontown, Pennsylvania. Insulation
products are produced at 13 plants with the principal facility located at
Munster, Germany. Textile mill supplies, fiber gasket materials and specialty
papers and other products for industry are manufactured at 8 plants with
principal manufacturing facilities at Munster, Germany, and Fulton, New York.

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

Productive capacity and extent of utilization of the Company's 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 more than one type of
product. Certain manufacturing locations also provide for the manufacture of
products for more than one industry segment. In this context, the Company
estimates that the production facilities in each of its industry segments were
effectively utilized during 1998 at 80% to 90% of overall productive capacity in
meeting market conditions. Remaining productive capacity is sufficient to meet
expected customer demands.

The Company believes its various facilities are adequate and suitable.
Additional incremental investments in plant facilities are being made as
appropriate to balance capacity with anticipated demand, improve quality and
service, and reduce costs.

Item 3. Legal Proceedings
- --------------------------

ASBESTOS-RELATED LITIGATION

PERSONAL INJURY LITIGATION

The Company is one of many defendants in approximately 154,000 pending claims as
of December 31, 1998, alleging personal injury from exposure to asbestos.

Nearly all claims seek general and punitive damages arising from alleged
exposures, at various times, from World War II onward, to asbestos-containing
products. Claims against the Company generally involve allegations of
negligence, strict liability, breach of warranty and conspiracy with respect to
its involvement with asbestos-containing insulation products. The Company
discontinued the sale of all such products in 1969. The claims also allege that
injury may be determined many years (up to 40 years) after first exposure to
asbestos. Nearly all suits name many defendants, and over 100 different
companies are reportedly involved. The Company believes that many current
plaintiffs are unimpaired. A large number of claims have been settled,
dismissed, put on inactive lists or otherwise resolved, and the Company
generally is involved in all stages of claims resolution and litigation,
including individual trials, consolidated trials and appeals. Neither the rate
of future filings and resolutions nor the total number of future claims can be
predicted at this time with a high degree of certainty.

Attention has been given by various parties to securing a comprehensive
resolution of the litigation. In 1991, the Judicial Panel for Multidistrict
Litigation ordered the transfer of federal cases to the Eastern District of
Pennsylvania in Philadelphia for pretrial purposes. The Company supported this
transfer. Some cases are periodically released for trial, although the issue of
punitive damages is retained by the transferee court. That court has been
instrumental in having the parties resolve large numbers of cases in various
jurisdictions and has been receptive to different approaches to the resolution
of claims. Claims in state courts have not been directly affected by the
transfer, although most recent cases have been filed in state courts.

Amchem Settlement Class Action

Georgine v. Amchem ("Amchem") was a settlement class action filed in the Eastern
- ------------------
District of Pennsylvania on January 15, 1993, that included essentially all
future personal injury claims against members of the Center for Claims
Resolution ("Center"), including the Company. It was designed to establish a
nonlitigation system for the resolution of such claims, and offered a method for
prompt compensation to claimants who were occupationally exposed to asbestos if
they met certain exposure and medical criteria. Compensation amounts were
derived from historical settlement data and no punitive damages were to be paid.
The settlement was designed to, among other things, minimize transactional
costs, including attorneys' fees, expedite compensation to claimants with
qualifying claims, and relieve the courts of the burden of handling future
claims.

10

The District Court, after exhaustive discovery and testimony, approved the
settlement class action and issued a preliminary injunction that barred class
members from pursuing claims against Center members in the tort system. The U.S.
Court of Appeals for the Third Circuit reversed that decision, and the reversal
was sustained by the U.S. Supreme Court on June 25, 1997, holding that the
settlement class did not meet the requirements for class certification under
Federal Rule of Civil Procedure 23. The preliminary injunction was vacated on
July 21, 1997, resulting in the immediate reinstatement of enjoined cases and a
loss of the bar against the filing of claims in the tort system. The Company
believes that an alternative claims resolution mechanism similar to Amchem is
likely to emerge.

Recent Events

During 1998, pending claims increased by 71,000 claims. This increase was higher
than previously anticipated. The Company and its outside counsel believe the
increase in claims filed during 1998 was partially due to acceleration of
pending claims as a result of the Supreme Court's decision on Amchem and
additional claims that had been filed in the tort system against other
defendants (and not against Center members) while Amchem was pending.

Asbestos-Related Liability

The Company continually evaluates the nature and amount of recent claim
settlements and their impact on the Company's projected asbestos resolution and
defense costs. In doing so, the Company reviews, among other things, its recent
and 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, the previous estimates based on the Amchem projection and its recent
experience. Subject to the uncertainties, limitations and other factors referred
to above and based upon its experience, the Company has estimated its share of
liability to defend and resolve probable asbestos-related personal injury
claims. The Company's estimation of such liability that is probable and
estimable through 2004 ranges from $424.7 million to $813 million. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has reflected $424.7 million as a liability in the accompanying
consolidated financial statements. This estimate includes an assumption that the
number of new claims filed annually will be less than the number filed in 1998
as discussed above under "Recent Events." Of this amount, management expects to
incur approximately $80.0 million in 1999 and has reflected this amount as a
current liability. The Company believes it can reasonably estimate the number
and nature of future claims that may be filed during the next six years. However
for claims that may be filed beyond that period, management believes that the
level of uncertainty is too great to provide for reasonable estimation of the
number of future claims, the nature of such claims, or the cost to resolve them.
Accordingly, it is reasonably possible that the total exposure to personal
injury claims may be greater than the recorded liability. The increase in
recorded liability of $274.2 million in 1998 is primarily reflective of the
increases in claims filed in 1998, recent settlement experience and current
expectations about future claims.

Because of the uncertainties related to the number of claims, the ultimate
settlement amounts, and similar matters, it is extremely difficult to obtain
reasonable estimates of the amount of the ultimate liability. The Company's
evaluation of the range of probable liability is primarily based on known
pending claims and an estimate of potential claims that are likely to occur and
can be reasonably estimated. The estimate of likely claims to be filed in the
future is subject to a greater degree of uncertainty each year into the future.
As additional experience is gained regarding claims and settlements or other new
information becomes available regarding the potential liability, the Company
will reassess its potential liability and revise the estimates as appropriate.

Because, among other things, payment of the liability will extend over many
years, management believes that the potential additional costs for claims net of
any potential insurance recoveries, will not have a material after-tax effect on
the financial condition of the Company or its liquidity, although the net
after-tax effect of any future liabilities recorded in excess of insurance
assets could be material to earnings in a future period.

CODEFENDANT BANKRUPTCIES

Certain codefendant companies have filed for reorganization under Chapter 11 of
the Federal Bankruptcy Code. As a consequence, litigation against them (with
some exceptions) has been stayed or restricted. Due to the uncertainties
involved, the long-term effect of these proceedings on the litigation cannot be
predicted.

PROPERTY DAMAGE LITIGATION

The Company is also one of many defendants in eight pending claims as of
December 31, 1998, brought by public and private building owners. These claims
include allegations of damage to 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. Among the lawsuits that have been resolved are four class
actions, which involve public and private schools, Michigan state public and
private schools, colleges and universities, and private property owners who
leased facilities to the federal government. The Company vigorously denies the
validity of the allegations against it in these claims. These suits and claims
are not handled by the Center. Insurance coverage has been resolved and is
expected to cover almost all costs of these claims.

11

INSURANCE COVERAGE

The Company's primary and excess insurance policies provide product hazard and
nonproducts (general liability) coverages for personal injury claims, and
product hazard coverage for property damage claims. Certain policies also
provide coverage to ACandS, Inc., a former subsidiary of the Company. The
Company and ACandS, Inc., share certain limits that both have accessed and have
entered into an agreement that reserved for ACandS, Inc., a certain amount of
excess insurance.

The insurance carriers that provide personal injury products hazard,
nonproducts or property damage coverages include the following: Reliance
Insurance Company; Aetna (now Travelers) Casualty and Surety Company; Liberty
Mutual Insurance Company; Travelers Insurance Company; Fireman's Fund Insurance
Company; Insurance Company of North America; Lloyds of London; various London
market companies; Fidelity and Casualty Insurance Company; First State Insurance
Company; U.S. Fire Insurance Company; Home Insurance Company; Great American
Insurance Company; American Home Assurance Company and National Union Fire
Insurance Company (now part of AIG); Central National Insurance Company;
Interstate Insurance Company; Puritan Insurance Company; and Commercial Union
Insurance Company. Midland Insurance Company, an excess carrier that provided
$25 million of personal injury coverage, certain London companies, and certain
excess carriers providing only property damage coverage are insolvent. The
Company is pursuing claims against insolvents in a number of forums.

Wellington Agreement

In 1985, the Company and 52 other companies (asbestos defendants and insurers)
signed the Wellington Agreement. This Agreement settled nearly all disputes
concerning personal injury insurance coverage with most of the Company's
carriers, provided broad coverage for both defense and indemnity and addressed
both products hazard and nonproducts (general liability) coverages.

California Insurance Coverage Lawsuit

Trial court decisions in the insurance lawsuit filed by the Company in
California held that the trigger of coverage for personal injury claims was
continuous from exposure through death or filing of a claim, that a triggered
insurance policy should respond with full indemnification up to policy limits,
and that any defense obligation ceases upon exhaustion of policy limits.
Although not as comprehensive, another decision established favorable defense
and indemnity coverage for property damage claims, providing coverage during the
period of installation and any subsequent period in which a release of fibers
occurred. The California appellate courts substantially upheld the trial court,
and that insurance coverage litigation is now concluded. The Company has
resolved most personal injury products hazard coverage matters with its solvent
carriers through the Wellington Agreement, referred to above, or other
settlements. In 1989, a settlement with a carrier having both primary and excess
coverages provided for certain minimum and maximum percentages of costs for
personal injury claims to be allocated to nonproducts (general liability)
coverage, the percentage to be determined by negotiation or in alternative
dispute resolution ("ADR").

Asbestos Claims Facility ("Facility") and Center for Claims Resolution

The Wellington Agreement established the Facility to evaluate, settle, pay and
defend all personal injury claims against member companies. Resolution and
defense costs were allocated by formula. The Facility subsequently dissolved,
and the Center was created in October 1988 by 21 former Facility members,
including the Company. Insurance carriers, while not members, are represented ex
officio on the Center's governing board and have agreed annually to provide a
portion of the Center's operational costs. The Center adopted many of the
conceptual features of the Facility and has addressed the claims in a manner
consistent with the prompt, fair resolution of meritorious claims. Resolution
and defense costs are allocated by formula; adjustments over time have resulted
in some increased share for the Company.

Insurance Recovery Proceedings

A substantial portion of the Company's primary and excess insurance asset is
nonproducts (general liability) insurance for personal injury claims, including
among others, those that involve exposure during installation of asbestos
materials. The Wellington Agreement and the 1989 settlement agreement referred
to above have provisions for such coverage. An ADR process under the Wellington
Agreement is underway 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, for some policies, includes
defense costs in addition to limits. The carriers have raised various defenses,
including waiver, laches, statutes of limitations and contractual defenses. One
primary carrier alleges that it is no longer bound by the Wellington Agreement,
and another alleges that the Company agreed to limit its claims for nonproducts
coverage against that carrier when the Wellington Agreement was signed. The ADR
process is in the trial phase of binding arbitration. The Company has entered
into a settlement with a number of the carriers resolving its access to
coverage.

12

Other proceedings against non-Wellington carriers may become necessary.

An insurance asset in the amount of $264.8 million is recorded on the
Consolidated Balance Sheet. Of this amount, approximately $26 million represents
partial settlement for previous claims which will be paid in a fixed and
determinable flow and is reported at its net present value discounted at 6.35%.
The total amount recorded reflects the Company's belief in the availability of
insurance in this amount, based upon the Company'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 which is in the
trial phase of binding arbitration. Of the $264.8 million asset, $16.0 million
has been recorded as a current asset reflecting management's estimate of the
minimum insurance payments to be received in 1999.

CONCLUSIONS

The Company does not know how many claims will be filed against it in the
future, or the details thereof or of pending suits not fully reviewed, or the
defense and resolution costs that may ultimately result therefrom, or whether an
alternative to the Amchem settlement vehicle may emerge, or the scope of its
insurance coverage ultimately deemed available.

The Company continually evaluates the nature and amount of recent claim
settlements and their impact on the Company's projected asbestos resolution and
defense costs. In doing so, the Company reviews, among other things, its recent
and 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, the previous estimates based on the Amchem projection and its recent
experience. Subject to the uncertainties, limitations and other factors referred
to above and based upon its experience, the Company has estimated its share of
liability to defend and resolve probable asbestos-related personal injury
claims. The Company's estimation of such liability that is probable and
estimable through 2004 ranges from $424.7 million to $813 million. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has reflected $424.7 million as a liability in the accompanying
consolidated financial statements. Of this amount, management expects to incur
approximately $80.0 million in 1999 and has reflected this amount as a current
liability. The Company believes it can reasonably estimate the number and nature
of future claims that may be filed during the next six years. However for claims
that may be filed beyond that period, management believes that the level of
uncertainty is too great to provide for reasonable estimation of the number of
future claims, the nature of such claims, or the cost to resolve them.
Accordingly, it is reasonably possible that the total exposure to personal
injury claims may be greater than the recorded liability. The increase in
recorded liability of $274.2 million in 1998 is primarily reflective of the
increases in claims filed in 1998, recent settlement experience and current
expectations about future claims.

Because of the uncertainties related to asbestos litigation, it is not
possible to precisely estimate the number of personal injury claims that may
ultimately be filed or their cost. It is reasonably possible there will be
additional claims beyond management's estimates. Management believes that the
potential additional costs for such additional claims, net of any potential
insurance recoveries, will not have a material after-tax effect on the financial
condition of the Company or its liquidity, although the net after-tax effect of
any future liabilities recorded in excess of insurance assets could be material
to earnings in a future period.

An insurance asset in the amount of $264.8 million is recorded on the
Consolidated Balance Sheet and reflects the Company's belief in the availability
of insurance in this amount, based upon the Company's success in insurance
recoveries, settlement agreements that provide such coverage, the nonproducts
recoveries by other companies, and the opinion of outside counsel. Such
insurance is either available through settlement or probable of recovery through
the ADR process, negotiation or litigation.

The Company believes that a claims resolution mechanism alternative to the
Amchem settlement will eventually emerge, but the liability is likely to be
higher than the projection in Amchem.

Subject to the uncertainties, limitations and other factors referred to
elsewhere in this note and based upon its experience, the Company believes it is
probable that substantially all of the defense and resolution costs of property
damage claims will be covered by insurance.

Even though uncertainties remain as to the potential number of unasserted
claims and the liability resulting therefrom, and after consideration of the
factors involved, including the ultimate scope of its insurance coverage, the
Wellington Agreement and other settlements with insurance carriers, the results
of the California insurance coverage litigation, the establishment of the
Center, the likelihood that an alternative to the Amchem settlement will
eventually emerge, and its experience, the Company believes the asbestos-related
claims against the Company would not be material either to the financial
condition of the Company or to its liquidity, although the net after-tax effect
of any future liabilities recorded in excess of insurance assets could be
material to earnings in such future period.

13

Recent Developments
- -------------------

On February 26, 1999, the Company received a preliminary decision in the initial
phase of the trial proceeding of the ADR which was favorable to the Company on a
number of issues related to insurance coverage. The decision, while favorable,
relates to the initial phase of the ADR proceeding. The Company has not yet
determined the financial implications of the decision.

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

Not applicable.

Executive Officers of the Registrant
- ------------------------------------

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

PART II
-------

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

The Company's Common Stock is traded on the New York Stock Exchange, Inc., the
Philadelphia Stock Exchange, Inc., and the Pacific Stock Exchange, Inc. As of
March 1, 1999, there were approximately 6,829 holders of record of the Company's
Common Stock.

During 1998, the Company issued a total of 2,400 shares of restricted Common
Stock to nonemployee directors of the Company pursuant to the Company'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 the Company possessed by the directors, these
shares were issued without registration in reliance on Section 4(2) of the
Securities Act of 1933, as amended.

Quarterly Financial Information

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

1998 Dividends per share of common stock 0.44 0.48 0.48 0.48 1.88
Price range of common stock --high 87 7/8 90 68 3/8 70 1/4 90
Price range of common stock -- low 69 7/8 67 3/8 46 15/16 50 1/2 46 15/16
- -----------------------------------------------------------------------------------------------------------------------------
1997 Dividends per share of common stock 0.40 0.44 0.44 0.44 1.72
Price range of common stock --high 72 1/4 75 1/4 74 9/16 75 3/8 75 3/8
Price range of common stock -- low 64 3/4 61 1/2 64 3/8 64 1/8 61 1/2
- -----------------------------------------------------------------------------------------------------------------------------

Item 6. Selected Financial Data

ELEVEN-YEAR SUMMARY

(Dollars in millions except for
per-share data) For year 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------

Net sales 2,746.2 2,198.7 2,156.4 2,325.0
Cost of goods sold 1,838.6 1,461.7 1,459.9 1,581.1
Total selling, general and
administrative expenses and
goodwill amortization 532.7 385.3 413.2 457.0
Equity (earnings) loss from
affiliates (13.8) 29.7 (19.1) (6.2)
Reorganization and restructuring
charges 74.6 -- 46.5 71.8
Charge for asbestos liability 274.2 -- -- --
Loss from ceramic tile business
formation/(gain) from sales
of woodlands -- -- -- 177.2
Operating income (loss) 39.9 322.0 255.9 44.1
Interest expense 62.2 28.0 22.6 34.0
Other expense (income), net (1.7) (2.2) (6.9) 1.9
Earnings (loss) from continuing
businesses before income taxes (20.6) 296.2 240.2 8.2
Income taxes (11.3) 111.2 75.4 (5.4)
Earnings (loss) from continuing
businesses (9.3) 185.0 164.8 13.6
As a percentage of sales -0.3% 8.4% 7.6% 0.6%
As a percentage of average
monthly assets (a) -0.3% 9.0% 8.5% 0.7%
Earnings (loss) from continuing
businesses applicable to
common stock (b) (9.3) 185.0 158.0 (0.7)
Per common share-- basic (c) (0.23) 4.55 4.04 (0.02)
Per common share-- diluted (c) (0.23) 4.50 3.82 (0.02)
Net earnings (loss) (9.3) 185.0 155.9 123.3
As a percentage of sales -0.3% 8.4% 7.2% 5.3%
Net earnings (loss) applicable
to common stock (b) (9.3) 185.0 149.1 109.0
As a percentage of average
shareholders' equity -1.2% 22.3% 19.6% 15.0%
Per common share-- basic (c) (0.23) 4.55 3.81 2.94
Per common share-- diluted (c) (0.23) 4.50 3.61 2.68
Dividends declared per share of
common stock 1.88 1.72 1.56 1.40
Capital expenditures 184.3 160.5 228.0 182.7
Aggregate cost of acquisitions 1,175.7 4.2 -- 20.7
Total depreciation and amortization 142.7 132.7 123.7 123.1
Average number of employees--
continuing businesses 13,881 10,643 10,572 13,433
Average number of common shares
outstanding (millions) 39.8 40.6 39.1 37.1
- ------------------------------------------------------------------------------------------------
Year-end position
Working capital--continuing businesses 367.8 128.5 243.5 346.8
Net property, plant and equipment--
continuing businesses 1,502.0 972.2 964.0 878.2
Total assets 4,273.2 2,375.5 2,135.6 2,149.8
Net long-term debt 1,562.8 223.1 219.4 188.3
Total debt as a percentage of
total capital (d) 73.1% 39.2% 37.2% 38.5%
Shareholders' equity 709.7 810.6 790.0 775.0
Book value per share of common stock 17.57 20.20 19.19 20.10
Number of shareholders (e) 6,868 7,137 7,424 7,084
Common shares outstanding (millions) 39.8 40.1 41.2 36.9
Market value per common share 60 5/16 74 3/4 69 1/2 62
- ------------------------------------------------------------------------------------------------

Notes:

(a) Assets exclude insurance recoveries for asbestos-related liabilities
(b) After deducting preferred dividend requirements and adding the tax benefits
for unallocated preferred shares.
(c) See definition of basic and diluted earnings per share on page 31.
(d) Total debt includes short-term debt, current installments of long-term
debt, long-term debt and ESOP loan guarantee. Total capital includes total
debt and total shareholders' equity.
(e) Includes one trustee who is the shareholder of record on behalf of
approximately 6,000 to 6,500 employees for years 1988 through 1996.

14

From 1996 to July 1998, ceramic tile results were reported under the equity
method, whereas prior to 1996, ceramic tile operations were reported on a
consolidated or line item basis.

From July 1998 to November 1998, ceramic tile operations were reported under the
cost method.

Beginning in 1998, consolidated results include the Company's acquisitions of
Triangle Pacific and DLW.

(Dollars in millions except for
per-share data) For year 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------

Net sales 2,226.0 2,075.7 2,111.4 2,021.4 2,082.4 2,050.4 1,843.4
Cost of goods sold 1,483.9 1,453.7 1,536.1 1,473.7 1,469.8 1,423.2 1,287.6
Total selling, general and
administrative expenses and
goodwill amortization 449.2 435.6 446.6 415.1 404.0 380.7 331.3
Equity (earnings) loss from
affiliates (1.7) (1.4) (0.2) -- -- -- --
Reorganization and restructuring
charges -- 89.3 160.8 12.5 6.8 5.9 --
Charge for asbestos liability -- -- -- -- -- -- --
Loss from ceramic tile business
formation/(gain) from sales
of woodlands -- -- -- -- (60.4) (9.5) (1.9)
Operating income (loss) 294.6 98.5 (31.9) 120.1 262.2 250.1 226.4
Interest expense 28.3 38.0 41.6 45.8 37.5 40.5 25.8
Other expense (income), net 0.5 (6.1) (7.2) (8.5) 19.7 (5.7) (13.1)
Earnings (loss) from continuing
businesses before income taxes 265.8 66.6 (66.3) 82.8 205.0 215.3 213.7
Income taxes 78.6 17.6 (2.9) 32.7 69.5 74.6 79.4
Earnings (loss) from continuing
businesses 187.2 49.0 (63.4) 50.1 135.5 140.7 134.3
As a percentage of sales 8.4% 2.4% -3.0% 2.5% 6.5% 6.9% 7.3%
As a percentage of average
monthly assets (a) 10.7% 2.8% -3.3% 2.7% 7.5% 8.6% 10.4%
Earnings (loss) from continuing
businesses applicable to
common stock (b) 173.1 35.1 (77.2) 30.7 116.0 131.0 133.9
Per common share-- basic (c) 4.62 0.95 (2.08) 0.83 2.98 2.88 2.90
Per common share-- diluted (c) 4.09 0.93 (2.08) 0.83 2.73 2.75 2.88
Net earnings (loss) 210.4 63.5 (227.7) 48.2 141.0 187.6 162.7
As a percentage of sales 9.5% 3.1% -10.8% 2.4% 6.8% 9.1% 8.8%
Net earnings (loss) applicable
to common stock (b) 196.3 49.6 (241.5) 28.8 121.5 177.9 162.3
As a percentage of average
shareholders' equity 31.3% 9.0% -33.9% 3.3% 13.0% 17.9% 17.0%
Per common share-- basic (c) 5.24 1.34 (6.51) 0.78 3.12 3.92 3.51
Per common share-- diluted (c) 4.62 1.27 (6.51) 0.78 2.86 3.72 3.50
Dividends declared per share of
common stock 1.26 1.20 1.20 1.19 1.135 1.045 0.975

Capital expenditures 138.4 110.3 109.8 129.7 186.5 216.9 167.8
Aggregate cost of acquisitions -- -- 4.2 -- 16.1 -- 355.8
Total depreciation and amortization 120.7 117.0 123.4 122.1 116.5 121.6 99.4
Average number of employees--
continuing businesses 13,784 14,796 16,045 16,438 16,926 17,167 15,016
Average number of common shares
outstanding (millions) 37.5 37.2 37.1 37.1 38.9 45.4 46.2
- ------------------------------------------------------------------------------------------------------------------------------------

Year-end position
Working capital--continuing businesses 384.4 279.3 239.8 353.8 305.2 449.4 260.6
Net property, plant and equipment--
continuing businesses 966.4 937.6 967.2 1,042.8 1,032.7 944.0 930.4
Total assets 2,159.0 1,869.2 1,944.3 2,125.7 2,124.4 2,008.9 2,073.1
Net long-term debt 237.2 256.8 266.6 301.4 233.2 181.3 185.9
Total debt as a percentage of
total capital (d) 41.4% 52.2% 57.2% 46.9% 45.7% 36.1% 35.9%
Shareholders' equity 735.1 569.5 569.2 885.5 899.2 976.5 1,021.8
Book value per share of common stock 18.97 14.71 14.87 23.55 24.07 23.04 21.86
Number of shareholders (e) 7,473 7,963 8,611 8,896 9,110 9,322 10,355
Common shares outstanding (millions) 37.2 37.2 37.1 37.1 37.1 42.3 46.3
Market value per common share 38 1/2 53 1/4 31 7/8 29 1/4 25 37 1/4 35
- ------------------------------------------------------------------------------------------------------------------------------------

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

1998 COMPARED WITH 1997

ACQUISITIONS

On July 22, 1998, Armstrong completed its acquisition of Triangle Pacific Corp.
("Triangle Pacific"). Triangle Pacific is a leading U.S. manufacturer of
hardwood flooring and other flooring and related products and a substantial
manufacturer of kitchen and bathroom cabinets. The acquisition, recorded under
the purchase method of accounting, included the purchase of outstanding shares
of common stock of Triangle Pacific at $55.50 per share which, plus acquisition
costs, resulted in a total purchase price of $911.5 million. A portion of the
purchase price has been allocated to assets acquired and liabilities assumed
based on fair market value at the date of acquisition, while the balance of
$831.1 million was recorded as goodwill and is being amortized over forty years
on a straight-line basis.

Effective August 31, 1998, Armstrong acquired approximately 93% of the
total share capital of DLW Aktiengesellschaft ("DLW"), a leading flooring
manufacturer in Germany. The acquisition, recorded under the purchase method of
accounting, included the purchase of 93% of the total share capital of DLW
which, plus acquisition costs, resulted in a total purchase price of $289.9
million. A portion of the purchase price has been allocated to assets acquired
and liabilities assumed based on fair market value at the date of acquisition,
while the balance of $117.2 million was recorded as goodwill and is being
amortized over forty years on a straight-line basis. In this purchase price
allocation, $49.6 million was allocated to the estimable net realizable value of
DLW's furniture business and of a carpet manufacturing business in the
Netherlands, which the Company has identified as businesses held for sale.
Disposals of these businesses should occur in the first half of 1999. Earnings
in these businesses, which have been excluded from the Company's operating
results, were $0.4 million in 1998. Interest costs of $1.1 million were
allocated to these businesses in 1998.

The allocation of purchase price to the assets and liabilities of Triangle
Pacific and DLW was still preliminary at December 31, 1998, and further
refinements are possible. The operating results of these acquired businesses
have been included in the Consolidated Statements of Earnings from the dates of
acquisition. Triangle Pacific results are included in Armstrong's wood products
segment and DLW results are included in Armstrong's floor coverings segment.

15

SALE OF DAL-TILE STOCK

In 1995 the Company entered into a business combination with Dal-Tile
International Inc. ("Dal-Tile") whereby the Company exchanged cash and the stock
of its ceramic tile operations, consisting primarily of American Olean Tile
Company, a wholly-owned subsidiary, for ownership of 37% of the shares of
Dal-Tile. In August 1996, Dal-Tile issued new shares in a public offering
there by decreasing the Company's ownership share from 37% to 33%. During 1997
the Company purchased additional shares of Dal-Tile stock, increasing the
Company's ownership to 34%.

In 1998 the Company announced its intention to dispose of its investment in
Dal-Tile. In July the Company settled its sale of 10.35 million shares of
Dal-Tile at $8.50 per share before commission and fees. In October and November,
the Company sold its remaining 8.02 million shares of Dal-Tile at $8.50 per
share before commission and fees. The Company reported a gain of $12.8 million
after tax in 1998 on these sales.

FINANCING

On July 13, 1998, the Company entered into a new commercial paper program and
subsequently issued $1.0 billion of commercial paper. This commercial paper,
secured by lines of credit under a bank credit facility entered into on July 17,
1998, has maturities of up to 364 days and bears interest at rates between
approximately 5.0% and 5.25% at the beginning of 1999.

On July 15, 1998, Standard & Poor's ("S&P") lowered the ratings of the
Company's corporate credit, senior unsecured debt and revolving credit facility
to A minus from A and lowered its commercial paper rating on the Company to A-2
from A-1. On July 16, 1998, Moody's Investors Service ("Moody's") lowered the
Company's corporate credit, senior unsecured debt and revolving credit facility
ratings to Baa1 from A2 and lowered its commercial paper rating on the Company
to P-2 from P-1. Both Moody's and S&P cited factors relating to the acquisitions
of Triangle Pacific and DLW as the major reasons for their actions. It is
management's opinion that the Company has sufficient financial strength to
warrant any required support from lending institutions and financial markets.

On August 11, 1998, the Company completed an offering of $200 million of
6.35% Senior Notes due 2003 and a concurrent offering of $150 million of 6.5%
Senior Notes due 2005. On October 28, 1998, the Company completed an offering of
$180 million of 7.45% Senior Quarterly Interest Bonds due 2038. The Company used
the proceeds to repay outstanding commercial paper.

On October 29, 1998, the Company completed a new bank credit facility for
$900 million which comprise a $450 million line of credit expiring in 364 days
and a $450 million line of credit expiring in five years. This facility replaced
a $1.0 billion, 364-day bank credit facility entered into on July 17, 1998.

FINANCIAL CONDITION

As shown on the Consolidated Balance Sheets on page 28, the Company had cash and
cash equivalents of $38.2 million at December 31, 1998. As a result of
additional current assets added with the acquisitions of Triangle Pacific and
DLW, working capital at December 31, 1998, was $367.8 million compared with
$128.5 million recorded at the end of 1997. The ratio of current assets to
current liabilities was 1.49 to 1 as of December 31, 1998, compared with 1.27 to
1 as of December 31, 1997. The increase in this ratio from December 31, 1997,
primarily reflected asset and liability changes resulting from the acquisitions
of Triangle Pacific and DLW.

Long-term debt, excluding the Company's guarantee of an ESOP loan,
increased $1,339.7 million in 1998 due to the public debt offerings mentioned
above and classification of $750.0 million of commercial paper supported by
long-term bank credit facilities as long-term debt. At December 31, 1998,
long-term debt of $1,562.8 million, or 59.3 percent of total capital, compared
with $223.1 million, or 16.7 percent of total capital, at the end of 1997. For
the periods ended December 31, 1998, and December 31, 1997, ratios of total debt
(including the Company's guarantee of an ESOP loan) as a percent of total
capital were 73.1 percent and 39.2 percent, respectively.

As shown on the Consolidated Statements of Cash Flows on page 29, net cash
provided by operating activities for the year ended December 31, 1998, was
$252.2 million compared with $246.6 million in 1997. The increase is explained
by substantial reductions in Armstrong's pre-acquisition business units' current
assets partially offset by higher payments for asbestos claim payments prior to
insurance recoveries.

Net cash used for investing activities was $1,209.7 million for the year
ended December 31, 1998, compared with $152.8 million in 1997. The increase was
primarily due to expenditures for acquisitions and was partially offset by the
sale of the Company's investment in Dal-Tile.

Net cash provided by financing activities was $937.3 million for the year
ended December 31, 1998, primarily due to the commercial paper issuance and the
three public debt offerings mentioned above. In the prior year, net cash used
for financing activities, including a net reduction in debt and the repurchase
of common shares, was $98.6 million.

Under plans approved by the Company's Board of Directors for the repurchase
of 5.5 million shares of common stock, the Company had repurchased approximately
4,017,000 shares through June 30, 1998. In June 1998, the Company halted open
market purchases of its common shares upon the announcement of its intent to
purchase Triangle Pacific and DLW.

The Company is constantly evaluating its various business units and may
from time to time dispose of, or restructure, those units. On February 2, 1999,
the Company announced its intent to form a joint venture in the worldwide
technical insulation business with NMC (USA)/Nomaco (Belgium) and Thermaflex
(Netherlands).

[BAR CHART APPEARS HERE]

16

ASBESTOS-RELATED LITIGATION

The Company is involved in significant asbestos-related litigation which is
described more fully on pages 47-50 and which should be read in connection with
this discussion and analysis. The Company does not know how many claims will be
filed against it in the future, nor the details thereof, nor of pending suits
not fully reviewed, nor the defense and resolution costs that may ultimately
result therefrom, nor whether an alternative to the Amchem settlement vehicle
may emerge, nor the scope of its insurance coverage ultimately deemed available.

The Company continually evaluates the nature and amount of recent claim
settlements and their impact on the Company's projected asbestos resolution and
defense costs. Subject to the uncertainties, limitations and other factors
referred to above and based upon its experience, the Company has estimated its
share of liability to defend and resolve probable asbestos-related personal
injury claims. The Company's estimation of such liability that is probable and
estimable through 2004 ranges from $424.7 million to $813 million. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has recorded $424.7 million as a liability in the accompanying
consolidated financial statements. The increase of $274.2 million in recorded
liability in 1998 is primarily reflective of the increases in claims filed in
1998, recent settlement experience and current expectations about future claims.

Management estimates that the timing of the cash flows required to resolve the
recorded liability will extend beyond 2004.

Because of the uncertainties related to asbestos litigation, it is not
possible to estimate precisely the number or cost of personal injury claims that
may ultimately be filed. The Company believes it can reasonably estimate the
number and nature of future claims that may be filed during the next six years.
However for claims that may be filed beyond that period, management believes
that the level of uncertainty is too great to provide for reasonable estimation
of the number of future claims, the nature of such claims, or the cost to
resolve them. Accordingly, it is reasonably possible that the total exposure to
personal injury claims may be greater than the recorded liability. Management
believes that the potential additional costs for such additional claims, net of
any potential insurance recoveries, will not have a material after-tax effect on
the financial condition or liquidity of the Company, although the net after-tax
effect of any future liabilities recorded in excess of insurance assets could be
material to earnings in a future period.

An insurance asset in the amount of $264.8 million, recorded on the
Consolidated Balance Sheet, reflects the Company's belief in the availability of
insurance in this amount based upon the Company's success in insurance
recoveries, settlement agreements that provide such coverage, nonproducts
recoveries by other companies, the opinion of outside counsel, and a recent
agreement with a number of carriers. Such insurance is either available due to
settlement or probable of recovery through negotiation, litigation or resolution
of an alternative dispute resolution (ADR) process which is in the trial phase
of binding arbitration. Further, depending on the Company's future assessment of
the conclusion of the trial phase of the ADR expected in early 1999, additional
insurance assets may be available. Of the $264.8 million asset, $16.0 million
has been recorded as a current asset reflecting management's estimate of the
minimum insurance payments to be received in 1999. However, the actual amount of
payments to be received in 1999 is dependent upon the actual liability incurred
and the nature and result of settlement discussions. Management estimates that
the timing of future cash payments for the remainder of the recorded asset may
extend beyond 10 years.

The Company believes that a claims resolution mechanism alternative to the
Amchem settlement will eventually emerge, but any liability is likely to be
higher than the projection in Amchem.

Subject to the uncertainties, limitations and other factors previously
stated and based upon its experience, the Company believes it is probable that
substantially all of the defense and resolution costs of property damage claims
will be covered by insurance.

Even though uncertainties remain as to the potential number of unasserted
claims and the liability resulting therefrom, and after consideration of the
factors involved, including the ultimate scope of its insurance coverage, the
Wellington Agreement and other settlements with insurance carriers, the results
of the California insurance coverage litigation, the establishment of the Center
for Claims Resolution, the likelihood that an alternative to the Amchem
settlement will eventually emerge, and its experience, the Company believes
asbestos-related claims against the Company will not be material either to the
financial condition or liquidity of the Company, although the net after-tax
effect of any future liabilities recorded in excess of insurance assets could be
material to earnings in such future period.

17

ACTIVITIES RELATED TO DOMCO INC.

In the fourth quarter of 1998, the Company declined to extend its cash tender
offer for all of the outstanding voting stock of Domco Inc. ("Domco"), a
Canadian flooring manufacturer. In June 1997, the Company commenced litigation
against Sommer Allibert, S.A. ("Sommer"), the majority shareholder of Domco,
alleging, among other things, that Sommer misused confidential information
provided to it by the Company and that Sommer breached a confidentiality
agreement with the Company in connection with earlier negotiations between the
Company and Sommer. That litigation remains pending in the U.S. District Court
for the Eastern District of Pennsylvania, although Sommer's counterclaim against
the Company and certain of its officers and certain of the Company's claims have
been dismissed. The Company intends to pursue its claim for damages, including
punitive damages, from Sommer. A trial date has not been set.

The Company recognized expenses arising from activities involving Domco and
Sommer totaling $12.3 million pretax, or $8.0 million after tax, in 1998.

CONSOLIDATED RESULTS

Net sales in 1998 of $2.75 billion were 24.9% higher when compared with net
sales of $2.20 billion in 1997. Triangle Pacific contributed $346.0 million of
sales and DLW $193.0 million of sales to the Company's business sales figure
before acquisitions of $2.21 billion.

Sales were affected unfavorably by economic developments in emerging
markets. For the Company's business before acquisitions, sales increased less
than 1% in each of floor coverings, building products and insulation products.
Pacific area sales were 13.5% below 1997, although insulation products increased
both domestic sales and exports from its Panyu, China, plant. In Europe, despite
a cessation of sales to Russia in August by all business units, floor coverings
increased sales to other customers including those in Eastern Europe. In total,
emerging market turmoil reduced 1998 sales by an estimated $14.7 million versus
last year, with over three-quarters of this total from lower Russian sales.

The Company reported a net loss of $9.3 million, or $0.23 per share,
including losses of $1.2 million related to Triangle Pacific and $2.8 million
related to DLW as well as after-tax charges of $178.2 million for an increase in
the estimated liability for asbestos-related claims and $48.5 million for cost
savings and reorganization. These results compare to net earnings of $185.0
million, or $4.50 per diluted share, in 1997.

The Company's Economic Value Added (EVA) performance as measured by return
on EVA capital of 13.6% in 1998 exceeded the Company's cost of capital of 11%
and the return on EVA capital of 13.3% in 1997. EVA calculations exclude
financial activity related to asbestos liability claims, while reorganization
charges are treated as investments upon which a return must be earned.

Cost of goods sold in 1998 was 67.0% of sales, higher than cost of goods
sold of 66.5% in 1997. The change reflected required purchase price accounting
adjustments related to Triangle Pacific and DLW. The Company's pre-acquisition
business had a cost of goods sold of 65.9% in 1998 due to manufacturing
efficiencies and lower raw material costs. The cost of goods sold also benefited
from several efficiency and policy savings related to the implementation of the
SAP Corporate Enterprise System, including a change in vacation policy resulting
in a $5.2 million benefit in the fourth quarter.

Selling, general and administrative (SG&A) expenses in 1998 were $522.0
million, or 19% of sales, primarily reflecting higher advertising costs. In
1997, SG&A expenses were $383.5 million, or 17.4% of sales.

In the fourth-quarter 1998, a noncash pretax charge of $274.2 million, or
$178.2 million after tax, was recorded for an increase in the estimated
liability for asbestos-related claims. This change primarily arose from a
greater-than-anticipated increase in personal injury filings since the Amchem
class settlement was invalidated in 1997, the Company's assessment of future
claims and recent settlements with plaintiffs' counsels. The Company also
recognized cost reduction and reorganization charges of $65.6 million, or $42.6
million after tax. This charge encompassed severance and enhanced retirement
benefits related to the termination of more than 650 positions, approximately
75% of which were salaried positions. In addition the Company recorded an
estimated loss of $9.0 million related to redundant flooring products machinery
and equipment held for disposal. Reorganization actions include corporate and
business unit staff reductions reflecting reorganization of engineering,
research and development and product styling and design; realignment of support
activities in connection with implementation of a new corporate logistics and
financial software system; changes to production processes in the Company's
Lancaster flooring plant; and elimination of redundant positions in formation of
a new combined business organization for Floor Products, Corporate Retail
Accounts and Installation Products. Approximately $28.6 million of the pretax
amount is for cash expenditures for severance which will occur over the next 12
months. The remainder is a noncash charge for enhanced retirement benefits.
Management believes that anticipated savings from the reorganization should
permit recovery of these charges in approximately two years. Severance payments
of $10.4 million in 1998 were made for the elimination of 209 positions related
to 1996 and 1998 restructuring and reorganization actions.

Interest expense of $62.2 million in 1998 was higher than interest expense
of $28.0 million in 1997 due to higher levels of short- and long-term debt used
to finance acquisitions.

The Company's 1998 tax benefit was generated by the charge for the increase
in asbestos liability, cost reduction and reorganization charges, and a tax
benefit associated with the gain on the sale of the Dal-Tile shares, partially
offset by the nondeductibility of goodwill in the Company's reported earnings.

18

INDUSTRY SEGMENT RESULTS (see pages 32 and 33)

FLOOR COVERINGS

Worldwide floor coverings sales in 1998 of $1,317.6 million included sales of
$193.0 million from DLW. Excluding DLW, flooring sales grew over 2% in the
Americas due to strong laminate sales that more than offset a decline to
residential vinyl markets. Sales through the home center channel continued to
capture significant volume with sales increases of 16.6% over 1997. In Europe
and the Pacific area, sales were down 8%. Sales for installation products rose
3.8% over 1997.

[BAR CHART APPEARS HERE]

Operating income of $176.5 million in 1998, which excluded cost reduction and
reorganization charges of $53.5 million and included a loss related to DLW of
$0.7 million, compared to $186.5 million in 1997. Lower operating margins were
due to pricing pressure in North America, an unfavorable product mix, and higher
advertising expenses only partially offset by lower raw material and other
costs. The cost reduction and reorganization charges of $53.5 million relate to
reductions of hourly and salaried staff in the U.S. and foreign operations and
changes to production processes in the Company's Lancaster flooring plant.

OUTLOOK

Sales in 1999 are expected to increase modestly due to a better mix in
the Americas in residential sheet flooring and laminates. European sales results
are anticipated to be slightly lower with weaker sales in Western Europe
reflecting price competition partially offset by more robust sales in Eastern
Europe. A more aggressive marketing program in Asia should increase sales in
that region. Operating income should improve, driven by announced cost
reductions and a favorable product mix.

BUILDING PRODUCTS

Building products sales of $756.8 million were slightly higher than the $754.5
million in 1997, as strong sales in the U.S. commercial segments and a favorable
mix were offset by weakness in emerging markets, principally Russia and the
Pacific area, down 29.4% compared to 1997.

Operating income of $116.6 million, which excluded cost reduction and
reorganization charges of $10.1 million, compared to $122.3 million in 1997. The
operating income decline reflected weaker performance by the business's metal
and soft fiber joint ventures in Europe and lower volumes to emerging markets,
partially offset by lower raw material and other costs. Results from the
Company's WAVE grid joint venture with Worthington Industries continue to be
strong, showing an 11% improvement over 1997. The cost reduction and
reorganization charges of $10.1 million relate to reductions of hourly and
salaried staff in the U.S. and foreign operations.

OUTLOOK

Sales in 1999 are expected to exceed those of 1998 with the largest growth
in U.S. commercial sales. Sales are anticipated to increase in Europe with the
exception of Russia, and sales in Asia should continue to reflect depressed
market conditions. Operating income should increase in 1999 reflecting lower
manufacturing and administrative costs and improved operating income from WAVE.

[BAR CHART APPEARS HERE]

WOOD PRODUCTS

This segment contributed $346.0 million to sales for the period from July 22,
1998, from which time Triangle Pacific's results were consolidated in the
Company's financial statements. Sales for Triangle Pacific in 1998, although
approximately 11% ahead of sales reported by Triangle Pacific in the comparable
period in 1997, reflected competitive pricing pressures created by falling
lumber prices and imported products.

Operating income from the date of consolidation of $38.6 million included
the amortization of acquisition goodwill and the costs of nonrecurring purchase
price adjustments related to inventory. On a comparable basis, operating income
for Triangle Pacific in 1998 was approximately 35% above operating income
reported by Triangle Pacific in 1997.

OUTLOOK

Triangle Pacific anticipates sales growth through its expansion of
dealer programs, continued growth of new products and improved product finishes.
Lower lumber prices, increases in sales volumes and continuing production
efficiencies should positively affect operating income. The integration of
Triangle Pacific should result in synergies as early as 1999.

19

INSULATION PRODUCTS

Sales of $230.0 million increased from $228.4 million in 1997. Sales in Europe
and the U.S. were level. Despite difficulties in the Pacific area, sales
increased from last year due to strong performance from the business's Panyu,
China, plant. Operating income of $46.3 million increased from $45.4 million in
1997, excluding cost reduction and reorganization charges of $0.2 million,
primarily due to cost cutting and SG&A expense reductions.

OUTLOOK

Price pressures in the markets for insulation products are expected to continue
into 1999. However, volume growth in sales of these products should offset this
negative pressure and result in a small operating income increase for this
business unit.

ALL OTHER

Sales reported in this segment comprise gasket materials and textile mill
supplies. Sales of $95.8 million decreased 4% compared to 1997. The major
influence on gasket products sales was the General Motors strike. Textile sales
declined due to slow sales to European textile machinery manufacturers.
Operating income reported in this segment comprises operating income from gasket
and textile products and ceramic tile. Operating income of $9.1 million
excluding cost reduction and reorganization charges of $1.9 million compared
with a loss of $2.6 million in 1997 reflecting the absence of losses from
Dal-Tile.

OUTLOOK

Sales of gasket products are anticipated to continue to reflect weakness in the
automotive sector and a downturn in the diesel market. Cost containment efforts
in gasket manufacturing should offset the effect of the sales volume decline.
Textile products are expected to be affected by price pressures in 1999.

GEOGRAPHIC AREAS (SEE PAGE 33)

Net sales in the Americas in 1998 were $1.92 billion, compared to $1.52 billion
recorded in 1997. The increase in sales to customers in the United States and
Canada was primarily due to the addition of Triangle Pacific sales. For the
Company's pre-acquisition business, sales growth continued to be strong in the
U.S. home center channel. Net sales in Europe in 1998 were $631.3 million,
compared to $488.4 million in 1997. Additional sales from DLW were somewhat
offset by lower sales to Eastern Europe, most notably Russia. Sales to
Scandinavian countries have continued to grow, reflecting increased sales from
the Swedish flooring and ceiling joint ventures. Sales to the Pacific area and
other foreign countries of $192.9 million were level with sales of $192.2
million in 1997.

Long-lived assets in the Americas in 1998 were $1.01 billion compared to
$0.77 billion in 1997. This increase reflects additional assets from the
acquisition of Triangle Pacific. Long-lived assets in Europe in 1998 were $451.7
million compared to $163.1 million in 1997. This increase reflects additional
assets from the acquisition of DLW. Long-lived assets in the Pacific area in
1998 were $41.2 million compared to $42.2 million in 1997.

MARKET RISK

The Company 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. Swap, forward and option
contracts are entered into for periods consistent with underlying exposure and
do not constitute positions independent of those exposures. The Company does not
enter into contracts for speculative purposes and is not a party to any
leveraged instruments.

20

INTEREST RATE SENSITIVITY

The table below provides information about the Company's long-term debt
obligations as of December 31, 1998, and December 31, 1997. The table presents
principal cash flows and related weighted average interest rates by expected
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
US dollar equivalents, which is the Company's reporting currency.

- ------------------------------------------------------------------------------------------------------------------------------------

Expected
maturity date After
($ millions) 1998 1999 2000 2001 2002 2003 2003 Total
- ------------------------------------------------------------------------------------------------------------------------------------

As of December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------

Liabilities
Long-term debt:
Fixed rate -- $ 28.9 $ 46.2 $ 29.7 $ 5.5 $ 206.5 $ 507.9 $ 824.7
Avg. interest
rate -- 5.19% 6.38% 5.46% 6.42% 6.36% 7.50% 6.99%

- ------------------------------------------------------------------------------------------------------------------------------------

Variable rate -- $ 4.0 $ 5.0 $ 302.0 $ 0.0 $ 450.0 $ 10.0 $ 771.0
Avg. interest
rate -- 7.0% 7.0% 5.71% 0.00% 5.90% 4.00% 5.81%

- ------------------------------------------------------------------------------------------------------------------------------------

Expected
maturity date After
($ millions) 1998 1999 2000 2001 2002 2002 Total
- ------------------------------------------------------------------------------------------------------------------------------------

As of December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------

Liabilities
Long-term debt:
Fixed rate $ 13.5 $ 21.0 $ 22.1 $ 7.5 $ 0.0 $ 153.0 $ 217.1
Avg. interest
rate 8.88% 4.79% 8.14% 9.00% 0.00% 9.13% 8.59%

- ------------------------------------------------------------------------------------------------------------------------------------

Variable rate $ 1.0 $ 4.0 $ 5.0 $ 2.0 $ 0.0 $ 8.5 $ 20.5
Avg. interest
rate 9.38% 8.28% 8.28% 8.28% 0.00% 3.90% 6.52%

- ------------------------------------------------------------------------------------------------------------------------------------

Debt cash flows increased as of December 31, 1998, in comparison to December 31,
1997, as a result of financing entered into in 1998 (see page 16). In 1997 and
1998 the Company entered into forward-starting interest rate swaps designated as
hedges of long-term bonds. In 1998 the Company terminated these interest rate
swaps concurrent with the issuance of its 7.45% quarterly interest bond due
2038. The loss of $16.3 million upon termination of the swaps will be recognized
as an adjustment to interest expense over the life of the bond.

The Company had no interest rate hedging agreements in place on December
31, 1998.

EXCHANGE RATE SENSITIVITY

The Company uses foreign currency forward contracts to reduce the risk that
future cash flows from transactions in foreign currencies will be affected
unfavorably by changes in exchange rates.

The table below provides anticipated net foreign cash flows for goods,
services and financing transactions for the following 12 months as of December
31, 1998, and December 31, 1997.

- --------------------------------------------------------------------------------
Foreign currency Commercial Financing Net Net
exposure ($ millions) exposure exposure hedge position
- --------------------------------------------------------------------------------
As of December 31, 1998
- --------------------------------------------------------------------------------
British pound $ 10.3 $(67.0) $ 53.2 $ (3.5)
Canadian dollar 51.6 -- -- 51.6
French franc 31.3 7.5 (7.5) 31.3
German mark (64.6) 277.5 (267.6) (54.7)
Italian lira 31.8 2.4 (2.4) 31.8
Spanish peseta 18.6 -- -- 18.6
Australian dollar 8.5 4.3 (4.3) 8.5
Belgian franc (22.6) (38.1) -- (60.7)
Dutch guilder (9.8) -- 12.0 2.2
Swedish krona (2.8) 2.2 (1.2) (1.8)
Swiss franc 1.6 (5.9) 3.7 (0.6)
United States dollar* 9.7 (9.5) -- 0.2
- --------------------------------------------------------------------------------
As of December 31, 1997
- --------------------------------------------------------------------------------
British pound $(24.0) $(17.1) $ 12.1 $(29.0)
Canadian dollar 37.0 -- -- 37.0
French franc (17.0) 3.3 (3.3) (17.0)
German mark (48.0) 12.4 (12.4) (48.0)
Italian lira 25.0 2.3 (2.3) 25.0
Spanish peseta 7.0 2.3 (2.3) 7.0
- --------------------------------------------------------------------------------

Note: A positive amount indicates the Company is a net receiver of this
currency, while a negative amount indicates the Company is a net payer.

*Related to U.S. dollar exposures by foreign subsidiaries with a foreign
functional currency.

21

Company policy allows hedges of cash flow exposures of up to one year. The
table below summarizes the Company's foreign currency forward contracts and
average contract rates at December 31, 1998, and December 31, 1997. Foreign
currency amounts are translated at exchange rates as of December 31, 1998, and
December 31, 1997.

- --------------------------------------------------------------------------------
Foreign currency Forward Contracts
contracts ($ millions) Sold Avg. rate Bought Avg. rate
- --------------------------------------------------------------------------------
As of December 31, 1998
- --------------------------------------------------------------------------------
British pound $ 13.8 1.68 $67.0 1.67
French franc 7.5 5.57 -- --
German mark 329.4 1.64 61.8 1.65
Italian lira 2.4 1653 -- --
Australian dollar 4.3 0.6207 -- --
Dutch guilder -- -- 12.0 1.88
Swedish krona 1.2 8.0 -- --
Swiss franc 2.2 1.34 5.9 1.31
- --------------------------------------------------------------------------------
As of December 31, 1997
- --------------------------------------------------------------------------------
British pound $ 5.0 1.68 $17.1 1.61
Dutch guilder 2.0 2.00 -- --
French franc 3.3 5.9 -- --
German mark 12.4 1.79 -- --
Italian lira 2.3 1726 -- --
Spanish peseta 2.3 151.5 -- --
- --------------------------------------------------------------------------------

Foreign currency hedges are contracts that have no embedded options or other
terms that involve a higher level of complexity or risk.

COMMODITY PRICE SENSITIVITY

The table below provides information about the Company's natural gas swap
contracts that are sensitive to changes in commodity prices. Notional amounts
are in millions of Btu's (MMBtu) and weighted average contract prices. All
contracts mature in or before December 2000.

- --------------------------------------------------------------------------------
On Balance Sheet Commodity
Related Derivatives 1998 1999 2000 Total
- --------------------------------------------------------------------------------
As of December 31, 1998
- --------------------------------------------------------------------------------
Swap contracts (long):
Contract amounts (MMBtu) -- 2,350,000 250,000 2,600,000
Weighted average price ($/MMBtu) -- $ 2.15 $ 2.41 $ 2.17
- --------------------------------------------------------------------------------
As of December 31, 1997
- --------------------------------------------------------------------------------
Swap contracts (long):
Contract amounts (MMBtu) 600,000 100,000 -- 700,000
Weighted average price ($/MMBtu) $ 2.26 $ 2.43 -- $ 2.29
- --------------------------------------------------------------------------------

YEAR 2000 ACTIVITIES

The Company increased its investment in computer software in 1997 and 1998 with
projects to develop and implement a new corporate logistics system and a new
financial and human resource system. These new systems are year-2000 compliant.
In addition, a Year 2000 Project, expected to be completed in 1999, is
converting the remainder of the Company's software and hardware information
technology and noninformation technology systems to minimize any exposure to
year-2000 compliance failures. Parallel workstreams or "tracks" have been
established by the Company to complete the work required to repair or replace
noncompliant systems and monitor the degree of year-2000 compliance by
Armstrong's business partners. The workstreams encompass (a) local projects to
repair all internally developed and supported applications; (b) infrastructure
projects to repair or replace all infrastructure components (e.g., mainframe and
client server computer systems, networks, phone switches and personal
computers); and (c) remote projects to repair or replace all remote systems:
plant supported systems and applications, PLC's and other factory systems.

The Year 2000 Project includes several phases: an inventory phase to
identify all software and hardware components potentially affected; an
assessment phase to determine if identified components are compliant; a planning
phase to establish plans to bring components into compliance; an execution phase
to carry out needed actions determined during the planning phase; a testing
phase to verify compliance; and a completion phase to bring the revised
component into production. For the local and infrastructure tracks, the project
is currently in the testing and completion phases. For the remote track, the
project is at various phases depending upon the location.

22

Total costs of the Year 2000 Project worldwide are estimated to be $19.1
million through 1999. Actual costs through December 1998 were $9.4 million.
Management believes internally generated funds and existing sources of liquidity
are sufficient to meet expected funding requirements for this project.

The Company is in the process of assessing, through letters of inquiry, the
year-2000 compliance of customers and suppliers. Responses to these letters are
being evaluated for compliance, the need for follow-up actions, or contingency
plans. Until completion of this process, the Company cannot assess the potential
impact, if any, that year-2000 noncompliance by customers and suppliers may have
on the Company. Management currently believes the most reasonably-likely worst
case scenario would be that a small number of suppliers, who are not critical to
the operation of the Company's business, will be unable to supply materials for
a short time after January 1, 2000. Moreover, management is creating contingency
plans to prepare for any reasonably-likely worst case scenarios, including
manual operations, selection of alternative suppliers, early purchase of
inventory and additional software repair.

NEW ACCOUNTING PRONOUNCEMENTS

In September 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement established
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for all fiscal quarters
of fiscal years beginning after September 15, 1999. The adoption of this
standard is not expected to materially impact the Company's consolidated
results, financial condition or long-term liquidity.

In April 1998, the American Institute of Certified Public Accountants
(AICPA), issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities. This statement is effective for fiscal years beginning after
December 15, 1998. The adoption of this statement is not expected to materially
impact the Company's consolidated results, financial condition or long-term
liquidity.

1997 COMPARED WITH 1996

FINANCIAL CONDITION

As shown on the Consolidated Statements of Cash Flows (see page 29), the Company
had cash and cash equivalents of $57.9 million at December 31, 1997. Cash
provided by operating activities, supplemented by increases in short-term debt;
proceeds from the sale of land, facilities and other assets; and cash proceeds
from exercised stock options covered normal working capital requirements;
purchases of property, plant and equipment; payment of cash dividends;
repurchase of shares; and acquisitions and investments in joint ventures and
computer software.

Cash provided by operating activities for the year ended December 31, 1997,
was $246.6 million compared with $220.9 million in 1996. The increase was
primarily due to higher earnings before noncash charges and lower restructuring
payments year-to-year, partially offset by a shortfall between currently
available insurance and amounts necessary to pay asbestos-related claims.
Working capital was $128.5 million as of December 31, 1997, $115.0 million lower
than the $243.5 million at year-end 1996. The ratio of current assets to current
liabilities was 1.27 to 1 as of December 31, 1997, compared with 1.76 to 1 as of
December 31, 1996. The ratio decreased from December 31, 1996, primarily due to
accrued expenses for projected short-term asbestos-related liability payments
and higher levels of short-term debt used to finance higher levels of
receivables and inventories, refinancing of long-term debt and other general
corporate purposes.

Net cash used for investing activities was $152.8 million for the year
ended December 31, 1997, down from $239.8 million in 1996. This reduction was
primarily due to lower purchases of property, plant and equipment and higher
proceeds from the sale of land, facilities and other assets which were partially
offset by additional acquisitions and investments in joint ventures, and higher
investment in computer software.

Net cash used for financing activities was $98.6 million for the year ended
December 31, 1997, as cash provided by higher levels of short-term debt was
offset by cash used for payment of dividends and reduction of long-term debt. In
1996, net cash used for financing activities was $171.8 million as cash was used
to reduce debt and redeem outstanding preferred stock in addition to the payment
of dividends and repurchases of stock.

Under the 1994 and 1996 board-approved 5,500,000 common share repurchase
plans, the Company repurchased approximately 3,661,000 shares through December
31, 1997, including 1,281,000 shares repurchased in 1997.

Long-term debt, excluding the Company's guarantee of the ESOP loan,
increased slightly in 1997. At December 31, 1997, long-term debt of $223.1
million, or 16.7% of total capital, compared with $219.4 million, or 17.4% of
total capital, at the end of 1996. The 1997 and 1996 year-end ratios of total
debt (including the Company's financing of the ESOP loan) as a percent of total
capital were 39.2% and 37.2%, respectively.

23

CONSOLIDATED RESULTS

Net sales in 1997 of $2.20 billion were 2.0% higher when compared with net
sales of $2.16 billion in 1996. Removing the currency translation impact of the
stronger U.S. dollar, sales would have increased 3.6%. Added sales from the
Swedish flooring and soft-fiber ceilings joint ventures, along with sales growth
in laminate flooring and the worldwide commercial and U.S. home center
businesses, offset sales declines in the U.S. residential sheet flooring
business.

Net earnings of $185.0 million, or $4.50 per diluted share compared with
$155.9 million, or $3.61 per diluted share, in 1996. The increase was primarily
related to the positive impact of manufacturing productivity improvements and
some lower raw material costs in 1997 and to the negative impact of the 1996
charges for restructuring, floor discoloration product issues and the Company's
share of the extraordinary loss of Dal-Tile International Inc., in which the
Company had a 33% equity interest. Adversely affecting 1997 earnings were
ceramic tile losses of $42.4 million, or $38.6 million after tax, including $8.4
million, or $6.1 million after tax, for the Company's 34.4% share of operating
losses incurred by Dal-Tile; an additional $29.7 million before- and after-tax
loss for the Company's share of the charge incurred by Dal-Tile, primarily for
uncollectible receivables and overstocked inventories; and $4.3 million, or $2.8
million after tax, for the amortization of Armstrong's initial investment in
Dal-Tile over the underlying equity in net assets of the business combination.
Net earnings in 1996 included after-tax charges of $29.6 million for
restructuring, or $0.70 per diluted share; $22.0 million for costs associated
with the discoloration of a limited portion of flooring products, or $0.53 per
diluted share; and $8.9 million, or $0.21 per diluted share, for the Company's
share of an extraordinary loss from Dal-Tile.

The EVA performance as measured by return on EVA capital of 13.3% in 1997
exceeded the Company's 11% cost of capital by 2.3 percentage points. In 1996,
the return on EVA capital was 14.8% and exceeded the Company's 12% cost of
capital by 2.8 percentage points. In 1997, the Company's cost of capital was
reduced to 11%, partially due to lower interest rates and stock price
volatility.

Cost of goods sold in 1997 was 66.5% of sales, lower than the 67.7% in 1996
which included charges associated with a floor discoloration issue. Cost of
goods sold was positively affected by continued productivity improvements and
some lower raw material costs which offset some promotional pricing actions and
a less favorable product mix.

SG&A expenses in 1997 were $383.5 million, or 17.4% of sales, which
includes the currency translation impact of the stronger U.S. dollar and some
lower advertising and administrative costs when compared with 1996. In 1996,
SG&A expenses were $410.5 million, or 19.0% of sales, and included a $14.0
million nonrecurring charge for floor discoloration.

During 1996, the Company learned that discoloration had occurred in a
limited portion of its residential sheet flooring product lines. After
correcting the manufacturing process to eliminate any further occurrence of this
problem, the Company recorded charges of $34.0 million before tax, or $22.0
million after tax ($0.53 per diluted share), for associated inventory and claims
costs.

In 1996, the Company incurred restructuring charges of $46.5 million, or
$29.6 million after tax ($0.70 per diluted share), related primarily to
reorganization of staff and plant positions, consolidation of the installation
products businesses, restructuring of production processes and write-down of
assets. Severance payments charged against restructuring reserves were $17.2
million in 1997 relating to the elimination of 394 positions of which 247
terminations occurred since the beginning of 1997. As of December 31, 1997, an
immaterial amount remained in the reserves for restructuring actions.

Interest expense in 1997 of $28.0 million was higher than 1996's interest
expense of $22.6 million. The primary reason for the increase was higher levels
of short-term debt used to finance a variety of general corporate purposes.

The Company's 1997 effective tax rate was 37.5%, negatively impacted by 3.4
percentage points from the recording of the Company's equity share of the 1997
loss from Dal-Tile. The 1996 rate of 31.4% was positively affected by 1.7
percentage points from recording the Company's equity share of the 1996 income
from Dal-Tile.

INDUSTRY SEGMENT RESULTS (see pages 32 and 33)

FLOOR COVERINGS

Worldwide floor coverings sales of $1.12 billion increased 2.2% from $1.09
billion in 1996 which included a $14.1 million reduction for product returns for
the potential discoloration of a limited portion of its product lines. The 1997
increase came primarily from the addition of sales from the laminate and Swedish
joint venture product lines and higher sales in the U.S. commercial and home
center channels. U.S. residential sheet flooring sales declined and were
adversely affected by a general weakness in high-end professionally installed
flooring, some shift toward alternative flooring products and consolidation of
the wholesaler distribution channel.

Operating income of $186.5 million in 1997 compared to 1996's $195.4
million, excluding 1996 charges of $34.0 million associated with the
discoloration issue and $14.5 million for restructuring primarily related to the
consolidation in the installation products business unit and other
reorganizations in the floor products operations staff. Sales increases and
productivity gains were more than offset by the negative impact of promotional
pricing, a shift in product mix to more mid-priced residential sheet flooring
and other lower margin products in the U.S. and start-up costs related to
acquisitions and new product lines. Capital expenditures for property, plant and
equipment in the floor coverings segment of $76.6 million in 1997 were directed
toward improving manufacturing processes. Capital expenditures in 1996 were
$117.7 million and were primarily related to the rollout of the Quest display
and merchandising system and toward improved manufacturing process
effectiveness.

24

BUILDING PRODUCTS

Net sales of $754.5 million in the building products segment increased 5% from
1996. Sales growth was experienced in all geographic areas. In the Americas,
strength came from the U.S. commercial market segment and Latin America. In
Europe, added sales from the new Swedish soft-fiber ceilings joint venture and
Eastern Europe contributed to the impact of sluggish Western European economies
and continued lower selling prices. Sales grew in the Pacific area (less than
10% of the segment's business); however, the economic slowdown in Southeast Asia
in the latter part of 1997 increased price competitiveness in this region.

Operating income of $122.3 million increased from $103.4 million in 1996,
which excluded $8.3 million in restructuring charges. The major factors in the
1997 improvement were higher sales volume and increased productivity, reduced
raw material prices and lower startup costs in China than in 1996. In addition,
solid increases in profits were realized from the WAVE grid joint venture.
Negative factors somewhat reducing the improvement were competitive pricing
actions in the U.S. home center channel and in Western Europe. In Eastern Europe
and Russia, increased sales were concentrated in lower margin products. Capital
expenditures for property, plant and equipment were $54.4 million compared with
$67.7 million in 1996.

INSULATION PRODUCTS

Sales of $228.4 million decreased from $246.8 million in 1996. Sales declines
from competitive market pressure in Europe were offset by increases in North
America and the Pacific area. Operating income of $45.4 million increased from
$42.4 million in 1996 excluding $2.8 million of restructuring charges, primarily
due to productivity gains in all geographic areas.

ALL OTHER

Sales reported in this segment comprise sales of gasket materials and textile
mill supplies. Sales of $99.8 million increased from $99.4 million reported in
1996.

Operating income reported in this segment comprises operating income from
gasket materials, textile products and ceramic tile. An operating loss of $2.6
million compared to an operating income of $11.6 million in 1996 excluding $1.2
million of restructuring charges. The 1997 loss included $8.4 million for the
Company's share of operating losses incurred by Dal-Tile International Inc., in
which the Company had a 34.4% equity interest and $4.3 million for the
amortization of the Company's initial investment in Dal-Tile over the underlying
equity in net assets of the business combination. The 1997 loss excluded a $29.7
million after-tax loss from the Company's share of a charge incurred by Dal-
Tile, primarily for uncollectible receivables and overstocked inventories. In
1996, ceramic tile reported income of $9.9 million. Profits increased in gasket
products due to the introduction of new products into European markets and an
improved cost profile. The textile products business recorded a profit in 1997
compared with a loss in 1996. Capital expenditures for property, plant and
equipment were $3.1 million compared with $2.1 million in 1996.

GEOGRAPHIC AREAS (see page 33)

Net sales in the Americas in 1997 were $1.52 billion, compared to $1.48 billion
recorded in 1998. Sales growth was strongest in the U.S. home center channel
serviced through the Corporate Retail Accounts distribution unit. Additional
growth in the Americas reflected the increase in sales to Mexico and South
America. Net sales in Europe in 1997 were $488.4 million, compared to $495.3
million in 1996. Growth from product alliances, such as Swedish flooring and
ceilings joint ventures, and sales to Central and Eastern Europe, especially
Russia were offset by lower sales to Western Europe, which reflected competitive
pricing and weakness in market economies in this area. Sales to the Pacific area
and other foreign countries of $192.2 million grew from sales of $177.5 million
in 1996. This increase primarily reflected growth in sales of insulation and
building products which benefited from manufacturing facilities in China.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk
- -------------------------------------------------------------------
(See pages 20 to 22 under Item 7 above.)

Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
ARMSTRONG WORLD INDUSTRIES, INC. AND SUBSIDIARIES

Index to Financial Statements and Schedule

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

Consolidated Financial Statements

Consolidated Statements of Earnings for the Years Ended December 31, 27
1998, 1997, and 1996

Consolidated Balance Sheets as of December 31, 1998 and 1997 28

Consolidated Statements of Cash Flows for the Years Ended December 31, 29
1998, 1997, and 1996

Consolidated Statements of Shareholders' Equity for the Years Ended 30
December 31, 1998, 1997, and 1996

Notes to Consolidated Financial Statements 31-50

Financial Statement Schedule

Schedule II - Valuation and Qualifying Reserves 60

The following additional financial data should be read in conjunction with the
financial statements. Schedules not included with this additional data have been
omitted because they are not applicable or the required information is presented
in the financial statements or the financial review.

Additional Financial Data
-------------------------

Computation for Basic Earnings
per Share Exhibit 11(a)
Computation for Diluted Earnings
per Share Exhibit 11(b)

25

QUARTERLY FINANCIAL INFORMATION

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

1998 Net sales $ 543.1 $ 555.6 $ 821.6 $ 825.9 $2,746.2
Gross profit 180.4 193.8 271.9 261.5 907.6
Net earnings (loss) 46.5 56.1 61.5 (173.4) (9.3)
Per share of common stock:
Basic: Net earnings (loss) 1.17 1.41 1.55 (4.36) (0.23)
Diluted: Net earnings (loss) 1.15 1.38 1.53 (4.36) (0.23)
Dividends per share of common stock 0.44 0.48 0.48 0.48 1.88
Price range of common stock --high 87 7/8 90 68 3/8 70 1/4 90
Price range of common stock -- low 69 7/8 67 3/8 46 15/16 50 1/2 46 15/16
- -------------------------------------------------------------------------------------------------------
1997 Net sales $ 518.3 $ 577.4 $ 575.6 $ 527.4 $2,198.7
Gross profit 171.3 199.2 195.6 170.9 737.0
Net earnings 45.5 58.9 33.8 46.8 185.0
Per share of common stock:
Basic: Net earnings 1.11 1.45 0.83 1.16 4.55
Diluted: Net earnings 1.10 1.43 0.82 1.15 4.50
Dividends per share of common stock 0.40 0.44 0.44 0.44 1.72
Price range of common stock --high 72 1/4 75 1/4 74 9/16 75 3/8 75 3/8
Price range of common stock -- low 64 3/4 61 1/2 64 3/8 64 1/8 61 1/2
- -------------------------------------------------------------------------------------------------------

Note: 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. The increase
in sales and net earnings from the second to the third quarter in 1998 reflects
the Triangle Pacific and DLW acquisitions.

FOURTH QUARTER 1998 COMPARED WITH FOURTH QUARTER 1997

Net sales of $825.9 million increased 56.6% from sales of $527.4 million in the
fourth quarter of 1997. Triangle Pacific contributed $178.7 million of sales and
DLW $129.1 million of sales to the Company's pre-acquisition business sales
figure of $518.1 million. A decline in sales in the Company's pre-acquisition
businesses came from floor coverings, as solid performance from North American
residential sheet and laminates was offset by slower sales to emerging markets
and competitive price pressures in Western Europe. Sales declined in building
products as weak economic conditions in emerging markets offset strong activity
in U.S. commercial markets. Sales of insulation products increased, led by
strong sales in China.

The operating loss of $254.0 million compared to an operating income of
$72.2 million in the fourth quarter of 1997. Triangle Pacific contributed $21.3
million of operating income while DLW lost $0.9 million. A $274.2 million
noncash pretax charge was recorded in the fourth quarter for an increase in the
estimated liability for asbestos-related claims. An additional pretax charge of
$74.6 million related primarily to reorganization of corporate and business unit
staff positions reflecting reorganization of engineering, research and
development and product styling and design; realignment of support activities in
connection with implementation of a new software system; changes to production
processes in the Company's Lancaster flooring plant; and elimination of
redundant positions in formation of a new combined business organization for
Floor Products, Corporate Retail Accounts and Installation Products. Also
negatively impacting fourth quarter results when compared with fourth quarter
1997 were higher goodwill amortization charges related to acquisitions of
Triangle Pacific and DLW. These expenses were partially offset from an
improvement of $8.7 million in equity earnings from affiliates as the Company's
remaining investment in Dal-Tile, which produced a loss from affiliates of $8.4
million in the fourth quarter of 1997, was sold in the fourth quarter of 1998.
The sale of 8.02 million shares of Dal-Tile created a pretax gain of $6.3
million.

For the fourth quarter, the cost of goods sold was 68.3% of sales compared
to 67.6% in 1997. Required purchase price accounting adjustments to inventories
at Triangle Pacific and DLW increased the cost of goods sold by $5.6 million,
without which gross margin percentage would have been 0.6 percentage points
better. The Company's base business cost of goods sold was 67.7%, or 0.1 points
lower than 1997, as price erosion and mix in floor coverings offset favorable
manufacturing efficiencies and lower raw material costs. The cost of goods sold
also benefited from several efficiency and policy savings related to the
implementation of the SAP Corporate Enterprise System, including a change in
vacation policy resulting in a $5.2 million benefit in the fourth quarter.

The Company's effective tax rate in the fourth quarter of 1998 was (36.6)%
compared to an effective tax rate of 31.3% in the fourth quarter of 1997. The
difference in the tax rates is primarily due to the recognition of a tax benefit
associated with the gain on the sale of the Dal-Tile shares somewhat offset by
the nondeductibility of goodwill in the Company's reported earnings.

The net loss was $173.4 million or $4.36 per diluted share compared to net
earnings of $46.8 million or $1.15 per diluted share in fourth quarter 1997.
Increased interest expense in addition to the asbestos liability and cost
reduction and reorganization charges were the primary reasons for the decline.

26

CONSOLIDATED STATEMENTS OF EARNINGS

Millions except for per-share data Years ended December 31 1998 1997 1996
=======================================================================================================

Net sales $ 2,746.2 $ 2,198.7 $ 2,156.4
Cost of goods sold 1,838.6 1,461.7 1,459.9
- -------------------------------------------------------------------------------------------------------
Gross profit 907.6 737.0 696.5
Selling, general and administrative expenses 522.0 383.5 410.5
Equity (earnings) loss from affiliates, net (13.8) 29.7 (19.1)
Reorganization and restructuring charges 74.6 -- 46.5
Charge for asbestos liability 274.2 -- --
Goodwill amortization 10.7 1.8 2.7
- -------------------------------------------------------------------------------------------------------
Operating income 39.9 322.0 255.9
Interest expense 62.2 28.0 22.6
Other income, net (1.7) (2.2) (6.9)
- -------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes and extraordinary loss (20.6) 296.2 240.2
Income tax (benefit) expense (11.3) 111.2 75.4
- -------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary loss (9.3) 185.0 164.8
Extraordinary loss (less income taxes of $0.7) -- -- (8.9)
- -------------------------------------------------------------------------------------------------------

Net earnings (loss) $ (9.3) $ 185.0 $ 155.9
- -------------------------------------------------------------------------------------------------------

Dividends paid on Series A convertible preferred stock -- -- 8.8
Tax benefit on dividends paid on unallocated preferred shares -- -- 2.0
- -------------------------------------------------------------------------------------------------------
Net earnings (loss) applicable to common stock $ (9.3) $ 185.0 $ 149.1
- -------------------------------------------------------------------------------------------------------

Per share of common stock (see note on page 46):
Basic:
Earnings (loss) before extraordinary loss $ (0.23) $ 4.55 $ 4.04
Extraordinary loss -- -- (0.23)
- -------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (0.23) $ 4.55 $ 3.81
- -------------------------------------------------------------------------------------------------------

Diluted:
Earnings (loss) before extraordinary loss $ (0.23) $ 4.50 $ 3.82
Extraordinary loss -- -- (0.21)
- -------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (0.23) $ 4.50 $ 3.61
- -------------------------------------------------------------------------------------------------------

The Notes to Consolidated Financial Statements, pages 31-50, are an integral
part of these statements.

27

CONSOLIDATED BALANCE SHEETS

Millions except for numbers of shares and per-share data As of December 31 1998 1997
- ---------------------------------------------------------------------------------------------------------

ASSETS
Current assets:
Cash and cash equivalents $ 38.2 $ 57.9
Accounts and notes receivable
(less allowance for discounts and losses:
1998--$49.8; 1997--$37.5) 440.4 252.6
Inventories 465.1 220.1
Income tax benefits 52.5 25.9
Net assets of businesses held for sale 55.9 --
Other current assets 69.0 43.5
- ---------------------------------------------------------------------------------------------------------
Total current assets 1,121.1 600.0
- ---------------------------------------------------------------------------------------------------------
Property, plant and equipment
(less accumulated depreciation and amortization:
1998--$1,121.9; 1997--$1,004.3) 1,502.0 972.2
Insurance for asbestos-related liabilities 248.8 291.6
Investment in affiliates 41.8 174.9
Goodwill, net 965.4 27.7
Other intangibles, net 63.2 32.6
Other noncurrent assets 330.9 276.5
- ---------------------------------------------------------------------------------------------------------
Total assets $4,273.2 $2,375.5
- ---------------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 149.9 $ 84.1
Current installments of long-term debt 32.9 14.5
Accounts payable and accrued expenses 544.8 339.9
Income taxes 25.7 33.0
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 753.3 471.5
- ---------------------------------------------------------------------------------------------------------
Long-term debt, less current installments 1,562.8 223.1
Employee Stock Ownership Plan (ESOP) loan guarantee 178.6 201.8
Deferred income taxes 107.6 53.7
Postretirement and postemployment benefit liabilities 249.0 248.0
Pension benefit liabilities 235.5 73.8
Asbestos-related long-term liabilities 344.8 179.7
Other long-term liabilities 115.8 98.3
Minority interest in subsidiaries 16.1 15.0
- ---------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 2,810.2 1,093.4
- ---------------------------------------------------------------------------------------------------------
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 173.0 169.5
Reduction for ESOP loan guarantee (199.1) (207.7)
Retained earnings 1,257.0 1,339.6
Accumulated other comprehensive income (loss) (25.4) (16.2)
- ---------------------------------------------------------------------------------------------------------
1,257.4 1,337.1
- ---------------------------------------------------------------------------------------------------------
Less common stock in treasury, at cost:
1998--11,856,721 shares; 1997--11,759,510 shares 547.7 526.5
- ---------------------------------------------------------------------------------------------------------
Total shareholders' equity 709.7 810.6
- ---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $4,273.2 $2,375.5
- ---------------------------------------------------------------------------------------------------------

The Notes to Consolidated Financial Statements, pages 31-50, are an integral
part of these statements.

28

CONSOLIDATED STATEMENTS OF CASH FLOWS

Millions Years ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------------------------------

Cash flows from operating activities:
Net earnings (loss) $ (9.3) $ 185.0 $ 155.9
Adjustments to reconcile net earnings (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 142.7 132.7 123.7
Deferred income taxes (27.9) 24.2 11.2
Equity change in affiliates (4.8) 37.2 (18.2)
Gain on sale of investment in affiliates (12.8) -- --
Reorganization and restructuring charges 74.6 -- 46.5
Severance and reorganization payments (11.2) (18.6) (37.4)
Payments for asbestos-related claims, net of recoveries (74.4) (41.4) --
Charge for asbestos liability 274.2 -- --
Extraordinary loss -- -- 8.9
Changes in operating assets and liabilities net of effects of
discontinued businesses, reorganizations and dispositions:
(Increase) decrease in receivables 3.5 (40.8) 3.6
(Increase) decrease in inventories 44.4 (12.8) (11.5)
(Increase) decrease in other current assets (28.2) 10.5 (22.8)
(Increase) in other noncurrent assets (112.0) (69.0) (57.4)
Increase (decrease) in accounts payable and accrued expenses (19.4) 16.6 (3.2)
Increase (decrease) in income taxes payable (2.7) 11.5 2.5
Increase in other long-term liabilities 26.0 23.2 15.2
Other, net (10.5) (11.7) 3.9
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 252.2 246.6 220.9
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (159.7) (141.7) (220.7)
Investment in computer software (24.6) (18.8) (7.3)
Proceeds from sale of land, facilities and discontinued businesses 2.7 24.3 3.6
Acquisitions, net of cash acquired (1,175.7) (4.2) --
Investment in affiliates 147.6 (12.4) (15.4)
- --------------------------------------------------------------------------------------------------------
Net cash used for investing activities (1,209.7) (152.8) (239.8)
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in short-term debt 24.2 69.3 (7.1)
Issuance of long-term debt 1,293.9 7.2 40.8
Reduction of long-term debt (278.6) (17.0) (40.0)
Cash dividends paid (75.3) (70.0) (70.1)
Purchase of common stock for the treasury, net (31.8) (89.2) (81.5)
Preferred stock redemption -- -- (21.4)
Proceeds from exercised stock options 7.9 7.9 6.2
Other, net (3.0) (6.8) 1.3
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 937.3 (98.6) (171.8)
- --------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 0.5 (2.7) (0.8)
- --------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents $ (19.7) $ (7.5) $ (191.5)
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year $ 57.9 $ 65.4 $ 256.9
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 38.2 $ 57.9 $ 65.4
- --------------------------------------------------------------------------------------------------------

The Notes to Consolidated Financial Statements, pages 31-50, are an integral
part of these statements.

29

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Millions except for per-share data Years ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------

SERIES A CONVERTIBLE PREFERRED STOCK:
Balance at beginning of year $ -- $ -- $ 258.9
Conversion of preferred stock to common -- -- (241.5)
Shares retired -- -- (17.4)
- ------------------------------------------------------------------------------------------------------------------------------------

Balance at end of year $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------

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 $ 169.5 $ 169.5 $ 49.3
Gain in investment in affiliates -- -- 14.5
Conversion of preferred stock to common -- -- 102.4
Stock issuances and other 3.5 -- 3.3
- ------------------------------------------------------------------------------------------------------------------------------------

Balance at end of year $ 173.0 $ 169.5 $ 169.5
- ------------------------------------------------------------------------------------------------------------------------------------

REDUCTION FOR ESOP LOAN GUARANTEE:
Balance at beginning of year $ (207.7) $ (217.4) $ (225.1)
Principal paid 23.2 19.6 13.4
Loans to ESOP (10.1) (5.5) (4.2)
Accrued compensation (4.5) (4.4) (1.5)
- ------------------------------------------------------------------------------------------------------------------------------------

Balance at end of year $ (199.1) $ (207.7) $ (217.4)
- ------------------------------------------------------------------------------------------------------------------------------------

RETAINED EARNINGS:
Balance at beginning of year $1,339.6 $1,222.6 $1,133.8
Net earnings (loss) for year (9.3) $ (9.3) 185.0 $ 185.0 155.9 $ 155.9
Tax benefit on dividends paid on unallocated common shares 2.0 2.0 1.0
Tax benefit on dividends paid on unallocated preferred shares -- -- 2.0
- ------------------------------------------------------------------------------------------------------------------------------------

Total $1,332.3 $1,409.6 $1,292.7
- ------------------------------------------------------------------------------------------------------------------------------------

Less dividends:
Preferred stock $ -- $ -- $ 8.9
Common stock (per share):
$1.88 in 1998; $1.72 in 1997; $1.56 in 1996 75.3 70.0 61.2
- ------------------------------------------------------------------------------------------------------------------------------------

Total dividends $ 75.3 $ 70.0 $ 70.1
- ------------------------------------------------------------------------------------------------------------------------------------

Balance at end of year $1,257.0 $1,339.6 $1,222.6
- ------------------------------------------------------------------------------------------------------------------------------------

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of year $ (16.2) $ 9.9 $ 18.0
Foreign currency translation adjustments and hedging activities (7.0) (19.1) (0.7)
Minimum pension liability adjustments (2.2) (7.0) (7.4)
- ------------------------------------------------------------------------------------------------------------------------------------

Total other comprehensive income (loss) (9.2) $ (9.2) (26.1) $ (26.1) (8.1) $ (8.1)
- ------------------------------------------------------------------------------------------------------------------------------------

Balance at end of year $ (25.4) $ (16.2) $ 9.9
- ------------------------------------------------------------------------------------------------------------------------------------

COMPREHENSIVE INCOME (LOSS) $(18.5) $ 158.9 $ 147.8
- ------------------------------------------------------------------------------------------------------------------------------------

LESS TREASURY STOCK AT COST:
Balance at beginning of year $ 526.5 $ 446.5 $ 511.8
Stock purchases 31.8 89.2 81.5
Conversion of preferred stock to common -- -- (139.1)
Stock issuance activity, net (10.6) (9.2) (7.7)
- ------------------------------------------------------------------------------------------------------------------------------------

Balance at end of year $ 547.7 $ 526.5 $ 446.5
- ------------------------------------------------------------------------------------------------------------------------------------

Total shareholders' equity $ 709.7 $ 810.6 $ 790.0
- ------------------------------------------------------------------------------------------------------------------------------------

The Notes to Consolidated Financial Statements, pages 31-50, are an integral
part of these statements.

30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. Actual results may differ from these estimates.

Consolidation Policy. The consolidated financial statements and accompanying
- --------------------
data in this report include the accounts of the parent Armstrong World
Industries, Inc., and its domestic and foreign subsidiaries. All significant
intercompany transactions have been eliminated from the consolidated statements.

Earnings per Common Share. Basic earnings per share are computed by dividing the
- -------------------------
earnings available to common shareholders by the weighted average number of
shares of common stock outstanding during the year. Diluted earnings per common
share reflect the potential dilution of securities that could share in earnings.

Advertising Costs. The Company recognizes advertising expenses as they are
- -----------------
incurred.

Postretirement Benefits. The Company has plans that provide for medical and life
- -----------------------
insurance benefits to certain eligible employees when they retire from active
service. Generally, the Company'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 an ESOP is recognized in shareholders' equity.

Cash and Cash Equivalents. Short-term investments, substantially all of which
- -------------------------
have maturities of three months or less when purchased, are considered to be
cash equivalents and are carried at the lower of cost or an amount generally
approximating market value.

Inventories. Inventories are valued at the lower of cost or market.
- -----------
Approximately 38% of 1998's inventories are valued using the last in, first out
(LIFO) method. Other inventories are generally determined on a first in, first
out (FIFO) method.

Long-Lived Assets. Property, plant and equipment values are stated at
- -----------------
acquisition cost, with accumulated depreciation and amortization deducted to
arrive at net book value. Depreciation charges for financial reporting purposes
are determined generally on the straight-line basis at rates calculated to
provide for the retirement of assets at the end of their useful lives as
follows: buildings, 30 years; machinery and equipment, 3 to 15 years.
Accelerated depreciation is generally used for tax purposes. 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. When assets are disposed of or retired, their costs and related
depreciation are removed from the books, and any resulting gains or losses
normally are reflected in "Selling, general and administrative expenses."

Costs of the construction of certain long-term assets include capitalized
interest which is amortized over the estimated useful life of the related asset.
Capitalized interest was $5.8 million in 1998, $1.8 million in 1997 and $2.9
million in 1996.

Goodwill and Other Intangibles. Goodwill and other intangibles are amortized on
- ------------------------------
a straight-line basis. Goodwill is amortized over periods up to 40 years while
other intangibles are amortized over periods up to 7 years. On a periodic basis,
the Company 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.

Financial Instruments. The Company uses financial instruments to diversify or
- ---------------------
offset the effect of currency, interest rate and commodity price variability.

The Company may enter into foreign currency forward contracts to offset the
effect of exchange rate changes on cash flow exposures denominated in foreign
currencies. Such exposures include firm commitments with third parties and
intercompany financial transactions.

Realized gains and losses on contracts are recognized in the Consolidated
Statements of Earnings. Unrealized gains and losses on foreign currency options
that are designated as effective hedges as well as option premium expense are
deferred and included in the statements of earnings as part of the underlying
transactions. Unrealized gains and losses on foreign currency contracts used to
hedge intercompany transactions having the character of long-term investments
are included in other comprehensive income.

The Company may enter into interest rate swap agreements to alter the
interest rate risk profile of outstanding debt, thus altering the Company's
exposure to changes in interest rates. In these swaps, the Company agrees to
exchange, at specified intervals, the difference between fixed and variable
interest amounts calculated by reference to a notional principal amount. Any
differences paid or received on interest rate swap agreements, when terminated,
are recognized as adjustments to interest rate expense over the life of
associated debt.

The Company continuously 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 the Company considers the risk of counterparty default to
be negligible.

31

NATURE OF OPERATIONS
INDUSTRY SEGMENTS

- -------------------------------------------------------------------------------------------------------------------------------
For year ended 1998
- -------------------------------------------------------------------------------------------------------------------------------
Floor Building Wood Insulation All
(millions) coverings products products products other Totals
- -------------------------------------------------------------------------------------------------------------------------------

Net sales to external customers $1,317.6 $ 756.8 $ 346.0 $ 230.0 $ 95.8 $2,746.2
Intersegment sales -- -- -- -- 39.5 39.5
Equity (earnings) loss from affiliates 0.2 (14.2) -- -- 0.2 (13.8)
Segment operating income 176.5 116.6 38.6 46.3 9.1 387.1
Reorganization charges 53.5 10.1 -- 0.2 1.9 65.7
Segment assets 1,476.7 550.1 1,355.5 174.6 80.7 3,637.6
Depreciation and amortization 63.6 39.2 15.3 12.1 7.2 137.4
Equity investment 2.2 39.6 -- -- -- 41.8
Capital additions 93.6 42.5 12.4 11.3 5.9 165.7
- -------------------------------------------------------------------------------------------------------------------------------

For year ended 1997
- -------------------------------------------------------------------------------------------------------------------------------
Floor Building Wood Insulation All
(millions) coverings products products products other Totals
- -------------------------------------------------------------------------------------------------------------------------------

Net sales to external customers $1,116.0 $ 754.5 $ -- $ 228.4 $ 99.8 $2,198.7
Intersegment sales -- -- -- -- 35.8 35.8
Equity (earnings) loss from affiliates 0.2 (12.9) -- -- 42.4 29.7
Segment operating income (loss) 186.5 122.3 -- 45.4 (2.6) 351.6
Segment assets 713.8 554.9 -- 165.1 219.2 1,653.0
Depreciation and amortization 65.5 37.5 -- 12.0 9.6 124.6
Equity investment 2.5 36.7 -- -- 135.7 174.9
Capital additions 76.6 54.4 -- 13.4 3.1 147.5

- -------------------------------------------------------------------------------------------------------------------------------

For year ended 1996
- -------------------------------------------------------------------------------------------------------------------------------
Floor Building Wood Insulation All
(millions) coverings products products products other Totals
- -------------------------------------------------------------------------------------------------------------------------------

Net sales to external customers $1,091.8 $ 718.4 $ -- $ 246.8 $ 99.4 $2,156.4
Intersegment sales -- -- -- -- 40.9 40.9
Equity (earnings) loss from affiliates -- (9.1) -- -- (10.0) (19.1)
Segment operating income 195.4 103.4 -- 42.4 11.6 352.8
Reorganization and restructuring charges 14.5 8.3 -- 2.8 1.2 26.8
Segment assets 687.9 541.1 -- 184.0 257.5 1,670.5
Depreciation and amortization 53.9 37.0 -- 10.0 13.4 114.3
Equity investment -- 35.6 -- -- 168.7 204.3
Capital additions 117.7 67.7 -- 20.4 2.1 207.9
- -------------------------------------------------------------------------------------------------------------------------------

Segment information has been prepared in accordance with Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Segments were determined based on products and services provided
by each segment. 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 excluding
reorganization and restructuring charges, unusual gains and losses, and interest
expense. The Company accounts for intersegment sales and transfers as if the
sales or transfers were to third parties at current market prices.

The floor coverings segment includes resilient flooring, adhesives,
installation and maintenance materials and accessories sold to commercial and
residential segments through wholesalers, retailers and contractors. To reduce
interchannel conflict, distinctive resilient flooring products have been
introduced to allow exclusive product offerings by our customers. Raw materials,
especially plasticizers and resins, are a significant cost of resilient flooring
products. The Company has no influence on the worldwide market prices of these
materials and thus is subject to cost changes.

The building products segment includes commercial and residential ceiling
systems. Grid products, manufactured through the Company's WAVE joint venture
with Worthington Industries, have become an important part of this business
worldwide. Earnings from this joint venture are included in this segment's
operating income and in "Equity Earnings from Affiliates" (see "Equity
Investments" note on page 35). The major sales activity in this segment is
commercial ceiling systems sold to resale distributors and contractors
worldwide, with European sales having a significant impact. Ceiling systems for
the residential home segment are sold through wholesalers and retailers, mainly
in the United States. Through a joint venture with a Chinese partner, a plant in
Shanghai manufactures ceilings for the Pacific area.

The wood products segment is composed of Triangle Pacific Corp., a wholly
owned subsidiary, a leading manufacturer of consumer wood products including
hardwood flooring and cabinets. Products in this segment are used primarily in
residential new construction and remodeling and commercial applications such as
retail stores and restaurants. Approximately 40% of sales are from new
construction which is more cyclical than remodeling activity. Triangle Pacific
is the largest manufacturer in the world of hardwood flooring under the brand
names of Bruce, Hartco, Robbins, Premier and Traffic Zone. Cabinet manufacturing
is a highly fragmented industry with significant price competition. The cabinet
market is dependent on new home construction and remodeling activity.

The insulation products segment includes flexible pipe insulation used in
construction and in original equipment manufacturing. Sales are primarily in
Europe, with Germany having the largest concentration due to its regulatory
requirements. The major product costs for insulation are raw materials and
labor. Strong competition exists in insulation since there are minimal barriers
to entry into this market.

"All other" includes business units making a variety of specialty products
for the building, automotive, textile and other industries worldwide. Gasket
materials are sold for new and replacement use in automotive, construction and
farm equipment, appliance, small engine and compressor industries. Automotive
and diesel build rates are the most sensitive market drivers for these products.
From 1996 to 1998, the Company owned an equity interest in Dal-Tile
International Inc. ("Dal-Tile"), whose ceramic tile products are sold through
home centers, Dal-Tile sales service centers and independent distributors. In
1998 the Company sold its interest in Dal-Tile. Other products in the "all
other" category are textile mill supplies, including cots and aprons sold to
equipment manufacturers and textile mills.

32

The table below provides a reconciliation of segment information to total
consolidated information.
- --------------------------------------------------------------------------------
(millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Net sales:
Total segment sales $2,746.2 $2,198.7 $2,156.4
Intersegment sales 39.5 35.8 40.9
Elimination of intersegment sales (39.5) (35.8) (40.9)
- --------------------------------------------------------------------------------
Total consolidated sales $2,746.2 $2,198.7 $2,156.4
- --------------------------------------------------------------------------------
Operating income:
Total segment operating income $ 387.1 $ 351.6 $ 352.8
Segment reorganization and
restructuring charges (65.7) -- (26.8)
Corporate reorganization and
restructuring charges (8.9) -- (19.7)
Flooring discoloration charge -- -- (34.0)
Dal-Tile charge -- (29.7) --
Asbestos liability charge (274.2) -- --
Unallocated corporate (expense) income 1.6 0.1 (16.4)
- --------------------------------------------------------------------------------
Total consolidated operating income $ 39.9 $ 322.0 $ 255.9
- --------------------------------------------------------------------------------
Assets:
Total assets for reportable segments $3,637.6 $1,653.0 $1,670.5
Assets not assigned to business segments 635.6 722.5 465.1
- --------------------------------------------------------------------------------
Total consolidated assets $4,273.2 $2,375.5 $2,135.6
- --------------------------------------------------------------------------------
Other significant items:
Depreciation and amortization expense:
Segment totals $ 137.4 $ 124.6 $ 114.3
Unallocated corporate depreciation
and amortization expense 5.3 8.1 9.4
- --------------------------------------------------------------------------------
Total consolidated depreciation and
amortization expense $ 142.7 $ 132.7 $ 123.7
- --------------------------------------------------------------------------------
Capital additions:
Segment totals $ 165.7 $ 147.5 $ 207.9
Unallocated corporate capital additions 18.6 13.0 20.1
- --------------------------------------------------------------------------------
Total consolidated capital additions $ 184.3 $ 160.5 $ 228.0
- --------------------------------------------------------------------------------

GEOGRAPHIC AREAS
- --------------------------------------------------------------------------------
Net trade sales at December 31 (millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Americas:
United States $1,803.2 $1,412.2 $1,385.2
Canada 98.6 89.3 87.2
Other Americas 20.2 16.6 11.2
- --------------------------------------------------------------------------------
Total Americas $1,922.0 $1,518.1 $1,483.6
- --------------------------------------------------------------------------------
Europe:
Germany $ 182.5 $ 110.2 $ 142.4
England 142.5 130.3 129.5
France 65.9 53.1 63.2
Netherlands 57.0 33.1 37.2
Other Europe 183.4 161.7 123.0
- --------------------------------------------------------------------------------
Total Europe $ 631.3 $ 488.4 $ 495.3
- --------------------------------------------------------------------------------
Pacific area and other foreign $ 192.9 $ 192.2 $ 177.5
- --------------------------------------------------------------------------------
Total net trade sales $2,746.2 $2,198.7 $2,156.4
- --------------------------------------------------------------------------------

Sales are attributed to countries based on location of customer.

- --------------------------------------------------------------------------------
Long-lived assets at December 31 (millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Americas:
United States $ 991.9 $ 746.3 $ 728.9
Canada 17.1 20.5 20.7
Other Americas 0.1 0.1 0.1
- --------------------------------------------------------------------------------
Total Americas $1,009.1 $ 766.9 $ 749.7
- --------------------------------------------------------------------------------
Europe:
Germany $ 270.3 $ 47.7 $ 58.0
England 52.7 54.7 51.4
Netherlands 42.3 13.0 16.8
Belgium 34.5 -- --
France 15.9 15.1 17.6
Other Europe 36.0 32.6 25.5
- --------------------------------------------------------------------------------
Total Europe $ 451.7 $ 163.1 $ 169.3
- --------------------------------------------------------------------------------
Pacific area:
China $ 34.0 $ 34.0 $ 34.9
Other Pacific area 7.2 8.2 10.1
- --------------------------------------------------------------------------------
Total Pacific area $ 41.2 $ 42.2 $ 45.0
- --------------------------------------------------------------------------------
Total long-lived assets $1,502.0 $ 972.2 $ 964.0
- --------------------------------------------------------------------------------

33

ACQUISITIONS

On July 22, 1998, the Company completed its acquisition of Triangle Pacific
Corp. ("Triangle Pacific"), a Delaware corporation. Triangle Pacific is a
leading U.S. manufacturer of hardwood flooring and other flooring and related
products and a substantial manufacturer of kitchen and bathroom cabinets. The
acquisition, recorded under the purchase method of accounting, included the
purchase of outstanding shares of common stock of Triangle Pacific at $55.50 per
share which, plus acquisition costs, resulted in a total purchase price of
$911.5 million. A portion of the purchase price has been allocated to assets
acquired and liabilities assumed based on estimated fair market value at the
date of acquisition while the balance of $831.1 million was recorded as goodwill
and is being amortized over forty years on a straight-line basis.

Effective August 31, 1998, the Company acquired approximately 93% of the
total share capital of DLW Aktiengesellschaft ("DLW"), a corporation organized
under the laws of the Federal Republic of Germany. DLW is a leading flooring
manufacturer in Germany. The acquisition, recorded under the purchase method of
accounting, included the purchase of 93% of the total share capital of DLW
which, plus acquisition costs, resulted in a total purchase price of $289.9
million. A portion of the purchase price has been allocated to assets acquired
and liabilities assumed based on the estimated fair market value at the date of
acquisition while the balance of $117.2 million was recorded as goodwill and is
being amortized over forty years on a straight-line basis. In this purchase
price allocation, $49.6 million was allocated to the estimable net realizable
value of DLW's furniture business and a carpet manufacturing business in the
Netherlands, which the Company has identified as businesses held for sale.

The allocation of the purchase price to the businesses held for sale was
determined as follows:

- --------------------------------------------------------------------------------
(millions) 1998
- --------------------------------------------------------------------------------
Estimated sales price $54.3
Less: Estimated cash outflows through disposal date (2.2)
Allocated interest through disposal date (2.5)
- --------------------------------------------------------------------------------
Total $49.6
- --------------------------------------------------------------------------------

The final sales price and cash flows pertaining to these businesses may
differ from these amounts. Disposals of these businesses should occur in the
first half of 1999.

The table below reflects the adjustment to the carrying value of the
businesses held for sale relating to interest allocation, profits and cash flows
in 1998.

- --------------------------------------------------------------------------------
(millions) 1998
- --------------------------------------------------------------------------------
Carrying value at August 31, 1998 $49.6
Interest allocated September 1-December 31, 1998 1.1
Effect of exchange rate change 2.8
Profits excluded from consolidated earnings (0.4)
Cash flows funded by parent 2.8
- --------------------------------------------------------------------------------
Carrying value at December 31, 1998 $55.9
- --------------------------------------------------------------------------------

The purchase price allocation for these acquisitions is preliminary and
further refinements are likely to be made based on the completion of final
valuation studies. The operating results of these acquired businesses have been
included in the Consolidated Statements of Earnings from the dates of
acquisition. Triangle Pacific's fiscal year ends on the Saturday closest to
December 31, which was January 2, 1999. The difference in Triangle Pacific's
fiscal year from that of the parent company was due to the difficulty in
changing its financial reporting systems to accommodate a calendar year end. No
events occurred between December 31 and January 2 at Triangle Pacific materially
affecting the Company's financial position or results of operations.

The table below reflects unaudited pro forma combined results of the
Company, Triangle Pacific and DLW as if the acquisitions had taken place at the
beginning of fiscal 1998 and 1997:

- --------------------------------------------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Net sales $3,479.8 $3,350.0
Net earnings (14.2) 173.2
Net earnings per diluted share (0.36) 4.22
- --------------------------------------------------------------------------------

In management's opinion, these unaudited pro forma amounts are not
necessarily indicative of what the actual combined results of operations might
have been if the acquisitions had been effective at the beginning of fiscal 1997
and 1998.

34

REORGANIZATION AND OTHER ACTIONS

In 1998 the Company recognized charges of $65.6 million, or $42.6 million after
tax, related to severance and enhanced retirement benefits for more than 650
positions, approximately 75% of which were salaried positions. In addition, the
Company recorded an estimated loss of $9.0 million, or $5.9 million after tax,
related to redundant flooring products machinery and equipment held for
disposal. Reorganization actions include corporate and business unit staff
reductions reflecting reorganization of engineering, research and development
and product styling and design; realignment of support activities in connection
with implementation of a new corporate logistics and financial software system;
changes to production processes in the Company's Lancaster flooring plant; and
elimination of redundant positions in formation of a new combined business
organization for Floor Products, Corporate Retail Accounts and Installation
Products. Approximately $28.6 million is cash expenditures for severance which
will occur over the next 12 months. The remainder is a noncash charge for
enhanced retirement benefits.

A second-quarter 1996 restructuring charge related primarily to the
reorganization of corporate and business unit staff positions; realignment and
consolidation of the Armstrong and W.W. Henry installation products businesses;
restructuring of production processes in the Munster, Germany, ceilings
facility; early retirement opportunities for employees in the Fulton, New York,
gasket and specialty paper products facility; and write-downs of assets. These
actions affected approximately 500 employees, about two-thirds of whom were in
staff positions. The majority of the cash outflow occurred within the following
12 months. As of December 31, 1998, an immaterial amount remained in the 1996
reserve related to a non-cancelable operating lease.

Severance payments of $10.4 million were made in 1998 for the elimination
of 209 positions related to the 1996 and 1998 reorganization and restructuring
actions.

EQUITY INVESTMENTS

Investments in affiliates were $41.8 million at December 31, 1998, a decrease of
$133.1 million, reflecting the sale of the Company's ownership of Dal-Tile,
somewhat offset by an increase in the Company's 50% interest in its WAVE joint
venture with Worthington Industries.

Equity earnings from affiliates for 1998 primarily comprised income from a
50% interest in the WAVE joint venture and the Company's share of a net loss at
Dal-Tile and amortization of the excess of the Company's investment in Dal-Tile
over the underlying equity in net assets. Equity losses from affiliates in 1997
included $8.4 million for the Company's Share of operating losses incurred by
Dal-Tile; a $29.7 million loss for the Company's share of a charge incurred by
Dal-Tile, primarily for uncollectible receivables and overstocked inventories;
and $4.3 million for the amortization of Armstrong's initial investment in
Dal-Tile over the underlying equity in net assets. Equity earnings from
affiliates for 1996 primarily comprised the Company's after-tax share of the net
income of the Dal-Tile International Inc. business combination, amortization of
the excess of the Company's investment in Dal-Tile over the underlying equity in
net assets, and earnings from its 50% interest in the WAVE joint venture.

In 1995 the Company entered into a business combination with Dal-Tile
whereby the Company exchanged cash and the stock of its ceramic tile operations,
consisting primarily of American Olean Tile Company, a wholly-owned subsidiary,
for ownership of 37% of the shares of Dal-Tile. In August 1996, Dal-Tile issued
new shares in a public offering decreasing the Company's ownership share from
37% to 33%. During 1997, the Company purchased additional shares of Dal-Tile
stock, increasing the Company's ownership to 34%.

In 1996 Dal-Tile refinanced all of its existing debt and recorded an
extraordinary loss. The Company's share of the extraordinary loss was $8.9
million after tax or $0.21 per diluted share.

In 1998 the Company announced its intention to dispose of its investment in
Dal-Tile. In July the Company sold 10.35 million shares of Dal-Tile at $8.50 per
share before commission and fees. Since this sale reduced the Company's
ownership of Dal-Tile below 20%, remaining shares were classified as
available-for-sale under the terms of Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." An unrealized holding gain arising from valuing the securities at
market price was excluded from income and recognized as a separate component of
shareholders' equity.

In October and November, the Company sold its remaining 8.02 million shares
of Dal-Tile at $8.50 per share before commission and fees. The Company recorded
a total gain of $12.8 million after tax, classified as "Other income," in the
last half of 1998 on these sales.

RECEIVABLES
- --------------------------------------------------------------------------------
Accounts and notes receivable (millions) 1998 1997
- --------------------------------------------------------------------------------
Customers' receivables $462.9 $255.2
Customers' notes 15.5 15.1
Miscellaneous receivables 11.8 19.8
- --------------------------------------------------------------------------------
490.2 290.1
- --------------------------------------------------------------------------------
Less allowance for discounts and losses 49.8 37.5
- --------------------------------------------------------------------------------
Net $440.4 $252.6
- --------------------------------------------------------------------------------

35

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

Trade receivables are recorded in gross billed amounts as of date of
shipment. Provision is made for estimated applicable discounts and losses.

INVENTORIES

Approximately 38% of the Company's total inventory in 1998 and 57% in 1997 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 $50.5
million at the end of 1998 and $60.3 million at year-end 1997.

- --------------------------------------------------------------------------------
Inventories (millions) 1998 1997
- --------------------------------------------------------------------------------
Finished goods $251.2 $149.4
Goods in process 51.5 19.9
Raw materials and supplies 162.4 50.8
- --------------------------------------------------------------------------------
Total $465.1 $220.1
- --------------------------------------------------------------------------------

PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Land $ 111.5 $ 20.4
Buildings 549.8 395.4
Machinery and equipment 1,759.5 1,450.5
Construction in progress 203.1 110.2
- --------------------------------------------------------------------------------
2,623.9 1,976.5
- --------------------------------------------------------------------------------
Less accumulated depreciation
and amortization 1,121.9 1,004.3
- --------------------------------------------------------------------------------
Net $1,502.0 $ 972.2
- --------------------------------------------------------------------------------

GOODWILL AND OTHER INTANGIBLES
- --------------------------------------------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Goodwill $ 993.4 $ 44.0
Less accumulated amortization 28.0 16.3
- --------------------------------------------------------------------------------
Total goodwill $ 965.4 $ 27.7
- --------------------------------------------------------------------------------
Other intangibles $ 78.7 $ 55.2
Less accumulated amortization 15.5 22.6
- --------------------------------------------------------------------------------
Total other intangibles $ 63.2 $ 32.6
- --------------------------------------------------------------------------------

Goodwill and other intangibles increased by $968.3 million, reflecting
goodwill related to Triangle Pacific and DLW, higher spending levels in computer
software systems and acquired intangibles from acquisitions. Unamortized
computer software costs included in other intangibles were $56.0 million at
December 31, 1998, and $24.8 million at December 31, 1997.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- --------------------------------------------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Payables, trade and other $235.2 $174.0
Asbestos-related claims, current portion 80.0 72.0
Employment costs 82.5 47.7
Reorganization and severance payments 30.6 12.2
Other 116.5 34.0
- --------------------------------------------------------------------------------
Total $544.8 $339.9
- --------------------------------------------------------------------------------

DEBT
- --------------------------------------------------------------------------------
Average Average
year-end year-end
interest interest
(millions) 1998 rate 1997 rate
- --------------------------------------------------------------------------------
Short-term debt:
Commercial paper $ 104.1 6.20% $ 60.8 6.33%
Foreign banks 45.8 5.29% 23.3 6.23%
- --------------------------------------------------------------------------------
Total short-term debt $ 149.9 5.92% $ 84.1 6.30%
- --------------------------------------------------------------------------------
Long-term debt:
Bank loans due 1999-2006 $ 91.9 4.96% $ 25.0 4.74%
Medium-term notes
8.95-9% due 2000-2001 25.6 8.96% 39.1 8.94%
6.35% Senior notes due 2003 199.8 6.35% -- --
6.5% Senior notes due 2005 149.7 6.50% -- --
9 3/4% debentures due 2008 125.0 9.75% 125.0 9.75%
7.45% Senior quarterly
interest bonds due 2038 180.0 7.45% -- --
Industrial development bonds 31.2 4.67% 19.5 5.10%
Commercial paper, noncurrent 750.0 6.20% -- --
Capital lease obligations 13.3 7.25% -- --
Other 29.2 7.28% 29.0 7.76%
- --------------------------------------------------------------------------------
Total long-term debt $1,595.7 6.64% $ 237.6 8.46%
- --------------------------------------------------------------------------------
Less current installments 32.9 5.54% 14.5 8.91%
- --------------------------------------------------------------------------------
Net long-term debt $1,562.8 6.66% $ 223.1 8.43%
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Scheduled amortization of long-term debt (millions)
- --------------------------------------------------------------------------------
2000 $ 51.2 2003 $656.5
2001 331.7 2004 16.3
2002 5.5
- --------------------------------------------------------------------------------

36

On August 11, 1998, the Company completed an offering of $200 million of
6.35% Senior Notes due 2003 and a concurrent offering of $150 million of 6.5%
Senior Notes due 2005. On October 28, 1998, the Company completed an offering of
$180 million of 7.45% Senior Quarterly Interest Bonds due 2038. The Company used
the proceeds from the issuance of the securities to repay outstanding commercial
paper.

The 7.45% Senior Quarterly Interest Bonds are callable in five years and
have no sinking-fund requirements.

The Company's 9 3/4% debentures, senior notes and medium-term notes are not
redeemable until maturity and have no sinking-fund requirements.

The industrial development bonds mature in 2004, 2009 and 2024.

Other debt includes an $18.6 million zero-coupon note due in 2013 that had
a carrying value of $2.8 million at December 31, 1998, and an effective interest
rate of 13.4%.

The Company has three unused credit agreements: a $450 million credit agreement
expiring in 364 days; a $450 million line of credit expiring in 2003; and a
revolving line of credit of $300 million, expiring in 2001. In addition, the
Company's foreign subsidiaries have approximately $258.9 million of unused
short-term lines of credit available from banks. The credit lines are subject to
immaterial annual commitment fees. The Company intends to refinance a portion of
its outstanding commercial paper balance on a long-term basis. Such intent is
supported by the $450 million line of credit expiring in 2003 and the $300
million revolving line of credit expiring in 2001. Accordingly, long-term debt
includes $750 million of commercial paper reclassified from short-term debt.

In 1997 and 1998 the Company entered into forward-starting interest rate
swaps designated as hedges of long-term bonds. In 1998 the Company terminated
these interest rate swaps concurrent with the issuance of its 7.45% quarterly
interest bond due 2038. The loss of $16.3 million upon termination of the swaps
will be recognized as an adjustment to interest expense over the life of the
bond.

FINANCIAL INSTRUMENTS

The Company does not hold or issue financial instruments for trading purposes.
The estimated fair value of the Company's financial instruments are as follows:

- --------------------------------------------------------------------------------
1998 Estimated 1997 Estimated
(In millions at Carrying fair Carrying fair
December 31) amount value amount value
- --------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 38.2 $ 38.2 $ 57.9 $ 57.9
Receivables 440.4 440.4 252.6 252.6
Liabilities:
Accounts payable and
accrued expenses $ 544.8 $ 544.8 $ 339.9 $ 339.9
Short-term and
long-term debt 1,745.6 1,756.0 321.7 356.6
Other long-term liabilities 115.8 115.8 98.3 98.3
Off-balance sheet financial
instruments:
Foreign currency
contract obligations $ -- $ 6.4 $ -- $ 0.3
Letters of credit/financial
guarantees -- 244.6 -- 186.1
Lines of credit -- 1,458.9 -- 409.6
Natural gas contracts -- (0.5) -- (0.1)
- --------------------------------------------------------------------------------

Fair values were determined as follows:

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
the Company for debt of the same remaining maturities.

Other long-term liabilities consist primarily of deferred compensation
payments, for which cost approximates fair value.

Foreign currency contract obligations are estimated by obtaining quotes
from brokers.

Letters of credit, financial guarantees and lines of credit amounts are
based on the estimated cost to settle the obligations.

Natural gas contract amounts are based on estimated cost to settle the
contracts.

INCOME TAXES
- --------------------------------------------------------------------------------
Income taxes payable (millions) 1998 1997
- --------------------------------------------------------------------------------
Payable -- current $25.3 $32.2
Deferred -- current 0.4 0.8
- --------------------------------------------------------------------------------
Total $25.7 $33.0
- --------------------------------------------------------------------------------

37

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 net operating losses and capital loss carryforwards. Of
the $61.1 million in capital loss carryforwards at December 31, 1998, $15.0
million will expire in 1999, $37.7 million will expire in 2001 and $8.4 million
will expire in 2003. Of the $21.3 million in foreign net operating losses, $3.3
million will expire in 2003 and the remaining $18.0 million will be carried
forward indefinitely. Valuation allowances increased $0.2 million in 1998.

- --------------------------------------------------------------------------------
Deferred income taxes (millions) 1998 1997
- --------------------------------------------------------------------------------
Postretirement and postemployment benefits $ (87.7) $ (87.0)
Reorganization payments (24.2) (7.4)
Asbestos-related liabilities (150.3) (82.1)
Net operating losses (8.2) (9.0)
Capital loss carryforward (21.3) (20.4)
Other (97.9) (66.0)
- --------------------------------------------------------------------------------
Total deferred tax assets $(389.6) $(271.9)
- --------------------------------------------------------------------------------
Valuation allowance 29.5 29.3
- --------------------------------------------------------------------------------
Net deferred tax assets $(360.1) $(242.6)
- --------------------------------------------------------------------------------
Accumulated depreciation $ 224.8 $ 102.4
Pension costs 51.3 48.3
Insurance for asbestos-related liabilities 92.7 94.4
Other 55.7 30.5
- --------------------------------------------------------------------------------
Total deferred income tax liabilities $ 424.5 $ 275.6
- --------------------------------------------------------------------------------
Net deferred income tax liabilities $ 64.4 $ 33.0
- --------------------------------------------------------------------------------
Deferred tax asset -- current (43.2) (20.7)
- --------------------------------------------------------------------------------
Deferred income tax liability -- long term $ 107.6 $ 53.7
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Details of taxes (millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Earnings (loss) before income taxes:
Domestic $ (57.1) $ 236.4 $ 176.5
Foreign 63.5 92.9 87.6
Eliminations (27.0) (33.1) (23.9)
- --------------------------------------------------------------------------------
Total $ (20.6) $ 296.2 $ 240.2
- --------------------------------------------------------------------------------
Income tax provision (benefit):
Current:
Federal $ 11.2 $ 46.8 $ 36.2
Foreign 21.7 35.7 33.4
State 1.3 1.5 1.4
- --------------------------------------------------------------------------------
Total current 34.2 84.0 71.0
- --------------------------------------------------------------------------------
Deferred:
Federal (48.2) 30.9 4.9
Foreign 2.3 (3.7) (0.5)
State 0.4 -- --
- --------------------------------------------------------------------------------
Total deferred (45.5) 27.2 4.4
- --------------------------------------------------------------------------------
Total income taxes $ (11.3) $ 111.2 $ 75.4
- --------------------------------------------------------------------------------

38

At December 31, 1998, unremitted earnings of subsidiaries outside the
United States were $155.6 million (at December 31, 1998, balance sheet exchange
rates) for which no U.S. taxes have been provided. If such earnings were to be
remitted without offsetting tax credits in the United States, withholding taxes
would be $5.4 million. The Company's intention, however, is to reinvest
unremitted earnings permanently or to repatriate them only when it is tax
effective to do so.

- --------------------------------------------------------------------------------
Reconciliation to
U.S. statutory tax rate (millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Tax expense (benefit) at statutory rate $ (7.2) $ 103.7 $ 84.1
State income taxes, net of federal benefit 1.7 1.0 0.9
(Benefit) on ESOP dividend (1.2) (0.9) (1.5)
Tax (benefit) on foreign and
foreign-source income 0.6 1.1 6.2
Utilization of excess foreign tax credit -- (2.9) (6.5)
Equity in (earnings) loss of affiliates (6.2) 9.9 (4.2)
Insurance programs (1.0) (0.8) (1.2)
Goodwill 3.3 -- --
Other items (1.3) 0.1 (2.4)
- --------------------------------------------------------------------------------
Tax (benefit) expense at effective rate $ (11.3) $ 111.2 $ 75.4
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Other taxes (millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Payroll taxes $ 65.0 $ 50.7 $ 51.5
Property, franchise and capital
stock taxes $ 20.0 $ 16.6 $ 14.7
- --------------------------------------------------------------------------------

Other long-term liabilities
- --------------------------------------------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Deferred compensation $ 38.1 $ 32.8
Other 77.7 65.5
- --------------------------------------------------------------------------------
Total other long-term liabilities $ 115.8 $ 98.3
- --------------------------------------------------------------------------------

EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

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 the Company. The ESOP used the proceeds to purchase
5,654,450 shares of a new series of convertible preferred stock issued by the
Company. In 1996 the ESOP was merged with the Retirement Savings Plan to form
the new 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 is
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, 1998, the ESOP had allocated to participants a total of 1,966,000
shares and retired 953,000 shares.

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

The Company's guarantee of the ESOP loan has been recorded as a long-term
obligation and as a reduction of shareholders' equity on its Consolidated
Balance Sheets.

- --------------------------------------------------------------------------------
Details of ESOP debt service
payments (millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Preferred dividends paid $ -- $ -- $ 8.9
Common stock dividends paid 9.0 8.5 4.0
Employee contributions 9.8 9.7 5.3
Company contributions 11.4 14.7 11.0
Company loans to ESOP 10.1 5.5 4.2
- --------------------------------------------------------------------------------
Debt service payments made
by ESOP trustee $ 40.3 $ 38.4 $ 33.4
- --------------------------------------------------------------------------------

The Company recorded costs for the ESOP, utilizing the 80% of the shares
allocated method, of $6.9 million in 1998, $10.4 million in 1997 and $9.4
million in 1996. These costs were partially offset by savings realized from
previous changes to Company-sponsored health care benefits and elimination of
the contribution-matching feature in the Company-sponsored voluntary retirement
savings plan.

The trustee borrowed $10.1 million from the Company in 1998, $5.5 million
in 1997, and $4.2 million in 1996. These loans were made to ensure that the
financial arrangements provided to employees remain consistent with the original
intent of the ESOP.

39

STOCK-BASED COMPENSATION PLANS

Awards under the 1993 Long-Term Stock Incentive Plan may be in the form of stock
options, stock appreciation rights in conjunction with stock options,
performance restricted shares and restricted stock awards. No more than
4,300,000 shares of common stock may be issued under the Plan, and no more than
430,000 shares of common stock may be awarded in the form of restricted stock
awards. The Plan extends to April 25, 2003. Pre-1993 grants made under
predecessor plans will be governed under the provisions of those plans.

Options are granted to purchase shares at prices not less than the closing
market price of the shares on the dates the options were granted. The options
generally 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) 1998 1997 1996
- --------------------------------------------------------------------------------
Option shares at beginning of year 2,161.3 2,161.4 1,841.6
Options granted 914.8 286.8 728.7
Option shares exercised (253.3) (265.5) (376.7)
Stock appreciation rights exercised (3.1) (4.7) (10.8)
Options cancelled (36.0) (16.7) (21.4)
Option shares at end of year 2,783.7 2,161.3 2,161.4
Option shares exercisable at end
of year 1,372.0 1,262.1 1,185.8
Shares available for grant 789.7 1,585.5 1,914.6
- --------------------------------------------------------------------------------
Weighted average price per share:
Options outstanding $ 60.41 $ 54.01 $ 50.06
Options exercisable 52.38 46.88 41.11
Options granted 70.43 69.63 60.30
Option shares exercised 41.68 39.10 36.27
- --------------------------------------------------------------------------------

The table below summarizes information about stock options outstanding at
December 31, 1998.

- --------------------------------------------------------------------------------
Stock options outstanding as of 12/31/98
- --------------------------------------------------------------------------------
Options outstanding Options exercisable
------------------------------------------ ------------------------
Range Number Weighted- Weighted- Number Weighted-
of outstanding average average exercisable average
exercise at remaining exercise at exercise
prices 12/31/98 contractual life price 12/31/98 price
- --------------------------------------------------------------------------------
$29-55 713,468 4.9 $43.31 698,168 $43.09
55-60 625,042 7.3 59.52 461,662 59.76
60-68 565,540 8.1 63.90 125,112 63.45
68-72 238,437 8.2 69.90 69,073 69.91
72-86 641,230 9.1 73.71 17,973 79.23
- --------------------------------------------------------------------------------
2,783,717 1,371,988
- --------------------------------------------------------------------------------

Performance restricted shares issuable under the 1993 Long-Term Stock
Incentive Plan entitle certain key executive employees to earn shares of
Armstrong'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). Total Company performance measures include
Armstrong's total shareholder return relative to a peer group of 12 companies.
At the end of performance periods, common stock awarded will carry additional
restriction periods (generally three or four years), during which time the
shares will be held in custody by the Company until the expiration or
termination of restrictions. Compensation expense will be charged to earnings
over the performance period. Within performance periods at the end of 1998 were
6,600 performance restricted shares outstanding, with 777 accumulated dividend
equivalent shares. No restricted common stock awards were earned based on the
performance period ending December 31, 1998. Within restriction periods at the
end of 1998 were 182,425 shares of restricted common stock outstanding based on
performance periods ending prior to 1998.

Restricted stock awards can be used for the purposes of recruitment,
special recognition and retention of key employees. Awards for 36,750 shares of
restricted stock were granted (excluding performance based awards discussed
above) during 1998. At the end of 1998, there were 157,334 restricted shares of
common stock outstanding.

40

On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which 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 cost for these plans been
determined consistent with SFAS No. 123, the Company's net earnings and earnings
per share would have been reduced to the following pro forma amounts.

- --------------------------------------------------------------------------------
(millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Net earnings (loss):
As reported $ (9.3) $ 185.0 $ 155.9
Pro forma (16.1) 180.7 150.7
Basic earnings (loss) per share:
As reported (0.23) 4.55 3.81
Pro forma (0.40) 4.45 3.68
Diluted earnings (loss) per share:
As reported (0.23) 4.50 3.61
Pro forma (0.40) 4.39 3.49
- --------------------------------------------------------------------------------

The fair value of grants was estimated on the date of grant using the
Black-Scholes option pricing model with the assumptions for 1998, 1997 and 1996
presented in the table below. The weighted-average fair value of stock options
granted in 1998 was $17.34.

- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Risk-free interest rates 5.14% 6.21% 6.17%
Dividend yield 3.03% 2.46% 2.32%
Expected lives 5 years 5 years 5 years
Volatility 28% 19% 21%
- --------------------------------------------------------------------------------

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.

EMPLOYEE COMPENSATION

Employee compensation and the average number of employees are presented in the
table below. Charges for severance costs and early retirement incentives to
terminated employees have been excluded.

- --------------------------------------------------------------------------------
Employee compensation cost summary (millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Wages and salaries $ 590.4 $ 494.7 $ 509.7
Payroll taxes 65.0 50.7 51.5
Pension credits (38.1) (22.2) (16.1)
Insurance and other benefit costs 60.0 51.9 50.7
Stock-based compensation 5.0 9.6 5.8
- --------------------------------------------------------------------------------
Total $ 682.3 $ 584.7 $ 601.6
- --------------------------------------------------------------------------------
Average number of employees 13,881 10,643 10,572
- --------------------------------------------------------------------------------

PENSION AND OTHER BENEFIT PROGRAMS

The Company and a number of its subsidiaries have pension plans and
postretirement medical and insurance benefit plans covering eligible employees
worldwide.

The Company also has defined-contribution pension plans for eligible
employees. Costs for these plans were $6.9 million in 1998, $10.4 million in
1997, and $9.9 million in 1996. The Company also has an Employee Stock Ownership
Plan, as described on page 39. Benefits from the pension plan, which cover
substantially all employees and include the employees of Triangle Pacific,
acquired on July 22, 1998, are based on an employee's compensation and years of
service. Pension plans are funded by the Company. Postretirement benefits are
funded by the Company 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. The Company announced in 1989 and 1990 a 15-year phaseout of its
health care benefits for certain future retirees. These future retirees include
parent company nonunion employees and some union employees. Shares of ESOP
common stock are scheduled to be allocated to these employees, based on employee
age and years to expected retirement, to help offset future postretirement
medical costs.

The FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," in February 1998. In accordance with this
standard, pension costs for the U.S. include those related to the pension plan
and the retirement benefit equity plan, a nonqualified pension plan. The new
standard does not change the measurement or recognition of costs for pension or
other postretirement plans. It standardizes disclosures and eliminates those
that are no longer useful. The following tables, in accordance with the new
standard, 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 listed
as stocks and bonds. Included in these assets were 1,426,751 shares of Armstrong
common stock at year-end 1997 and 1998.

41

- -----------------------------------------------------------------------------------
Retiree Health and Life
U.S. defined-benefit Pension Benefits Insurance Benefits
plans (millions) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------

Change in benefit obligation:
Benefit obligation as of
January 1 $1,078.1 $1,001.3 $ 262.7 $ 247.1
Service cost 17.5 16.4 3.3 3.3
Interest cost 72.6 72.6 17.2 17.6
Plan participants' contributions -- -- 2.3 2.1
Acquisition 15.1 -- -- --
Effect of special termination benefits 38.1 7.8 -- --
Actuarial loss (gain) 15.5 51.8 (1.0) 14.1
Benefits paid (73.4) (71.8) (22.0) (21.5)
- -----------------------------------------------------------------------------------
Benefit obligation as
of December 31 $1,163.5 $1,078.1 $ 262.5 $ 262.7
- -----------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets as
of January 1 $1,754.4 $1,501.9 $ -- $ --
Actual return on plan assets 180.3 322.6 -- --
Acquisition 11.4 -- -- --
Employer contribution 2.2 1.7 19.7 19.4
Plan participants' contributions -- -- 2.3 2.1
Benefits paid (73.4) (71.8) (22.0) (21.5)
- -----------------------------------------------------------------------------------
Fair value of plan assets as
of December 31 $1,874.9 $1,754.4 $ 0.0 $ 0.0
- -----------------------------------------------------------------------------------
Funded status $ 711.4 $ 676.3 $ (262.5) $ (262.7)
Unrecognized net actuarial
loss (gain) (597.4) (586.2) 48.8 50.9
Unrecognized transition asset (20.7) (26.9) -- --
Unrecognized prior service
cost (benefit) 82.2 92.2 (6.0) (6.8)
- -----------------------------------------------------------------------------------
Net amount recognized $ 175.5 $ 155.4 $ (219.7) $ (218.6)
- -----------------------------------------------------------------------------------

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 1998 1997 1998 1997
- -----------------------------------------------------------------------------------

Weighted-average assumption
as of December 31:
Discount rate 6.75% 7.00% 6.75% 7.00%
Expected return on plan assets 8.75% 8.75% n/a n/a
Rate of compensation increase 3.75% 4.00% 3.75% 4.00%
- -----------------------------------------------------------------------------------

Amounts recognized in the Consolidated Balance Sheets consist of:

- -------------------------------------------------------------------------------------
Retiree Health and Life
Pension Benefits Insurance Benefits
(millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------

Prepaid benefit costs $ 187.8 $ 164.2 $ -- $ --
Accrued benefit liability (40.2) (23.2) (219.7) (218.6)
Intangible asset 2.3 2.6 -- --
Other comprehensive income 25.6 11.8 -- --
- -------------------------------------------------------------------------------------
Net amount recognized $ 175.5 $ 155.4 $(219.7) $(218.6)
- -------------------------------------------------------------------------------------

- -------------------------------------------------------------------------------------
U.S. Pension plans with benefit obligations Pension Benefits
in excess of assets (millions) 1998 1997
- -------------------------------------------------------------------------------------
Retirement benefit equity plan
Projected benefit obligation, December 31 $48.4 $30.1
Accrued benefit obligation, December 31 40.2 23.2
Fair value of plan assets, December 31 -- --
- -------------------------------------------------------------------------------------

The components of pension credit are as follows:

- -------------------------------------------------------------------------------------
U.S. defined-benefit Pension Benefits
plans (millions) 1998 1997 1996
- -------------------------------------------------------------------------------------
Service cost of benefits earned
during the year $ 17.5 $ 16.4 $ 17.6
Interest cost on projected
benefit obligation 72.6 72.6 67.4
Expected return on plan assets (136.2) (122.8) (113.8)
Amortization of transition asset (6.2) (6.2) (6.2)
Amortization of prior service cost 10.0 10.0 10.0
Recognized net actuarial gain (18.4) (13.6) (12.0)
- -------------------------------------------------------------------------------------
Net periodic pension credit $ (60.7) $ (43.6) $ (37.0)
- -------------------------------------------------------------------------------------

Costs for other funded and unfunded pension plans were $4.0 million in
1998, $2.8 million in 1997 and $2.5 million in 1996.

42

The components of postretirement benefit costs are as follows:

- -------------------------------------------------------------------------------------
U.S. defined-benefit Retiree Health and Life Insurance Benefits
plans (millions) 1998 1997 1996
- -------------------------------------------------------------------------------------

Service cost of benefits earned
during the year $ 3.3 $ 3.3 $ 3.7
Interest cost on accumulated
postretirement benefit obligation 17.2 17.6 17.0
Amortization of prior service benefit (0.9) (0.9) (0.9)
Recognized net actuarial loss 1.3 1.2 1.4
- -------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 20.9 $ 21.2 $ 21.2
- -------------------------------------------------------------------------------------

For measurement purposes, an 8% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1998. The rate was assumed
to decrease 1% per year to an ultimate rate of 6% by the year 2000.

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:

- --------------------------------------------------------------------------------
U.S. retiree health and life One percentage point
insurance benefit plans (millions) Increase Decrease
- --------------------------------------------------------------------------------
Effect on total of service and interest cost
components $ 2.2 $ (1.8)
Effect on postretirement benefit obligation $22.8 $(19.3)
- --------------------------------------------------------------------------------

The Company 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. These plans include those of DLW, acquired on
August 31, 1998. The following tables summarize the balance sheet impact as well
as the benefit obligations, assets, funded status and rate assumptions
associated with pension benefits.

- --------------------------------------------------------------------------------
Non-U.S. defined-benefit Pension Benefits
plans (millions) 1998 1997
- --------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation as of January 1 $ 127.4 $ 125.5
Service cost 6.3 5.7
Interest cost 12.3 8.8
Plan participants' contributions 1.4 1.1
Plan amendments -- 0.5
Acquisition 164.6 --
Effect of settlements (0.5) (1.3)
Effect of special termination benefits 0.5 --
Foreign currency translation adjustment 12.8 (9.2)
Actuarial loss 10.2 2.2
Benefits paid (9.8) (5.9)
- --------------------------------------------------------------------------------
Benefit obligation as of December 31 $ 325.2 $ 127.4
- --------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets as of January 1 $ 95.5 $ 84.5
Actual return on plan assets 16.7 15.4
Acquisition 35.1 --
Employer contribution 6.3 2.5
Plan participants' contribution 1.4 1.1
Foreign currency translation adjustment 1.9 (2.1)
Benefits paid (9.8) (5.9)
- --------------------------------------------------------------------------------
Fair value of plan assets as of December 31 $ 147.1 $ 95.5
- --------------------------------------------------------------------------------
Funded status $(178.1) $ (31.9)
Unrecognized net actuarial gain (21.1) (21.8)
Unrecognized transition obligation 1.6 1.4
Unrecognized prior service cost 4.9 5.3
- --------------------------------------------------------------------------------
Net amount recognized $(192.7) $ (47.0)
- --------------------------------------------------------------------------------

Amounts recognized in the Consolidated Balance Sheets consist of:

- --------------------------------------------------------------------------------
Pension Benefits
(millions) 1998 1997
- --------------------------------------------------------------------------------
Prepaid benefit cost $ 2.2 $ 3.2
Accrued benefit liability (195.3) (50.6)
Intangible asset 0.2 0.2
Other comprehensive income 0.2 0.2
- --------------------------------------------------------------------------------
Net amount recognized $(192.7) $ (47.0)
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Non-U.S. pension plans with benefit obligations Pension Benefits
in excess of assets (millions) 1998 1997
- --------------------------------------------------------------------------------
Projected benefit obligation, December 31 $192.5 $46.8
Accrued benefit obligation, December 31 186.3 45.1
Fair value of plan assets, December 31 0.6 --
- --------------------------------------------------------------------------------

43

The components of pension cost are as follows:

- --------------------------------------------------------------------------------
Non-U.S. defined-benefit Pension Benefits
plans (millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Service cost of benefits earned
during the year $ 6.3 $ 5.7 $ 5.3
Interest cost on projected
benefit obligation 12.3 8.8 8.6
Expected return on plan assets (7.4) (6.8) (5.9)
Amortization of transition obligation 0.3 0.3 0.7
Amortization of prior service cost (benefit) 0.4 0.4 (0.1)
Recognized net actuarial gain (0.2) (0.2) (0.1)
- --------------------------------------------------------------------------------
Net periodic pension cost $ 11.7 $ 8.2 $ 8.5
- --------------------------------------------------------------------------------

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

- --------------------------------------------------------------------------------
Pension Benefits
Non-U.S. defined-benefit plans 1998 1997
- --------------------------------------------------------------------------------
Weighted-average assumption as of December 31:
Discount rate 6.25% 7.00%
Expected return on plan assets 6.25% 8.00%
Rate of compensation increase 3.50% 4.75%
- --------------------------------------------------------------------------------

SHAREHOLDERS' EQUITY
Treasury share changes for 1998, 1997 and 1996 are as follows:

- --------------------------------------------------------------------------------
Years ended
December 31 (thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Common shares
Balance at beginning of year 11,759.5 10,714.6 15,014.1
Stock purchases(1) 389.5 1,299.2 1,357.6
Stock issuance activity, net(2) (292.3) (254.3) (5,657.1)
- --------------------------------------------------------------------------------
Balance at end of year 11,856.7 11,759.5 10,714.6
- --------------------------------------------------------------------------------

Note 1: Includes small unsolicited buybacks of shares, shares received under
share tax withholding transactions and open market purchases of stock through
brokers.

Note 2: 1996 includes 5,057,400 shares issued as a result of conversion of
preferred to common stock.

In July 1996, the Board of Directors authorized the Company to repurchase
3.0 million shares of its common stock through the open market or through
privately negotiated transactions, bringing the total authorized common share
repurchases to 5.5 million shares. Under the total plan, Armstrong has
repurchased approximately 4,017,000 shares through December 31, 1998, with a
total cash outlay of $248.1 million, including 355,000 repurchased in 1998.

In June 1998, the Company halted purchases of its common shares under the
common share repurchase program in connection with its announcement to purchase
Triangle Pacific and DLW.

The balance of each component of other comprehensive income as of December
31, 1998, and December 31, 1997, is presented in the table below.

- --------------------------------------------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Foreign currency translation adjustments
and hedging activities $ 8.7 $ 1.7
Minimum pension liability adjustments 16.7 14.5
- --------------------------------------------------------------------------------
Total $25.4 $16.2
- --------------------------------------------------------------------------------

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

- --------------------------------------------------------------------------------
Before-Tax Tax After-Tax
(millions) Amount Benefit Amount
- --------------------------------------------------------------------------------
Foreign currency translation
adjustments and hedging activities $ 7.0 $ 0.0 $ 7.0
Minimum pension liability adjustments 13.8 11.6 2.2
- --------------------------------------------------------------------------------
Total $20.8 $11.6 $ 9.2
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Other comprehensive income
reclassification adjustments (millions) 1998 1997
- --------------------------------------------------------------------------------
Unrealized holding gains arising during period $ 12.8 $ --
Less:
Reclassification adjustment for gains
included in net income (12.8) --
- --------------------------------------------------------------------------------
Net unrealized gains on securities $ 0.0 $ --
- --------------------------------------------------------------------------------

44

PREFERRED STOCK PURCHASE RIGHTS PLAN

In 1996 the Board of Directors renewed the Company's 1986 shareholder rights
plan and in connection therewith declared a distribution of one right for each
share of the Company's common stock outstanding on and after January 19, 1996.
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 the Company, either acquires beneficial
ownership of shares representing 20% or more of the voting power of the Company
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
the Company. If thereafter any person or group becomes the beneficial owner of
28% or more of the voting power of the Company or if the Company is the
surviving company in a merger with a person or group that owns 20% or more of
the voting power of the Company, 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 the Company 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 the Company's common stock. The
rights have no voting power nor do they entitle a holder to receive dividends.
At the Company's option, the rights are redeemable prior to becoming exercisable
at five cents per right. The rights expire on March 21, 2006.

SUPPLEMENTAL FINANCIAL INFORMATION

- --------------------------------------------------------------------------------
Selected operating expenses (millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Maintenance and repair costs $ 112.3 $ 107.3 $ 105.3
Research and development costs 42.2 47.8 55.2
Advertising costs 41.2 19.3 25.5
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Other expense (income), net (millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Interest and dividend income $ (3.3) $ (4.9) $ (6.5)
Foreign exchange, net loss 0.5 0.5 1.2
Dal-Tile gain (12.8) -- --
Domco litigation expense 12.3 -- --
Deferred compensation 1.0 0.5 --
Discontinued businesses 0.3 0.8 (2.8)
Minority interest (0.9) 0.6 0.3
Other 1.2 0.3 0.9
- --------------------------------------------------------------------------------
Total $ (1.7) $ (2.2) $ (6.9)
- --------------------------------------------------------------------------------

SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------------------------------------------
(millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Interest paid $ 48.6 $ 23.5 $ 20.7
Income taxes paid $ 35.3 $ 54.5 $ 65.5
- --------------------------------------------------------------------------------
Acquisitions:
Fair value of assets acquired $1,031.9 $ 32.6 $ --
Cost in excess of net assets acquired 948.3 -- --
Less:
Liabilities assumed 804.5 28.4 --
- --------------------------------------------------------------------------------
Cash paid, net of cash acquired $1,175.7 $ 4.2 $ --
- --------------------------------------------------------------------------------

LEASES

The Company 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. Rental expense
was $26.1 million in 1998, $15.5 million in 1997, and $13.1 million in 1996.

Triangle Pacific leases a plant and related equipment in Beverly, West Virginia.
The lease agreement contains a purchase option of $1 until 2018. As a result,
the present value of the remaining future minimum lease payments is recorded as
a capitalized lease asset and related capitalized lease obligation. Assets under
this capital lease as included in the Consolidated Balance Sheets are as
follows:

- --------------------------------------------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Land $ 3.8 $ --
Building 4.5 --
Machinery and equipment 21.5 --
- --------------------------------------------------------------------------------
Total assets $29.8 $ --
- --------------------------------------------------------------------------------
Less accumulated amortization 4.8 --
- --------------------------------------------------------------------------------
Net assets $25.0 $ --
- --------------------------------------------------------------------------------

45

Future minimum payments at December 31, 1998, by year and in the aggregate,
under the Triangle Pacific lease and other operating leases having noncancelable
lease terms in excess of one year were as follows:

- --------------------------------------------------------------------------------
Scheduled minimum lease payments Capital Operating
(millions) leases leases
- --------------------------------------------------------------------------------
1999 $ 2.0 $ 9.7
2000 4.2 8.0
2001 0.8 4.6
2002 0.8 3.1
2003 2.2 2.2
Thereafter 3.3 13.8
- --------------------------------------------------------------------------------
Total $13.3 $41.4
- --------------------------------------------------------------------------------

EARNINGS PER SHARE

The table below provides a reconciliation of the numerators and denominators of
the basic and diluted per share calculations for earnings (loss) from continuing
businesses.
- --------------------------------------------------------------------------------
Earnings Per-Share
Millions except for per-share data (Loss) Shares Amount
- --------------------------------------------------------------------------------
For the year ended 1998
- --------------------------------------------------------------------------------
Basic Earnings (Loss) per Share
Earnings (loss) from continuing businesses $ (9.3) 39.8 $(0.23)
- --------------------------------------------------------------------------------
Diluted Earnings (Loss) per Share
Dilutive options 0.6
Earnings (loss) available for
common shareholders $ (9.3) 40.4 $(0.23)/1/
- --------------------------------------------------------------------------------
For the year ended 1997
- --------------------------------------------------------------------------------
Basic Earnings per Share
Earnings from continuing businesses $185.0 40.6 $ 4.55
- --------------------------------------------------------------------------------
Diluted Earnings per Share
Dilutive options 0.4
Earnings available for common shareholders $185.0 41.0 $ 4.50
- --------------------------------------------------------------------------------
For the year ended 1996
- --------------------------------------------------------------------------------
Earnings from continuing businesses $164.8
Less: preferred stock dividends 8.8
Plus: tax benefit on dividends paid on
unallocated preferred shares 2.0
- --------------------------------------------------------------------------------
Basic Earnings per Share
Earnings available for common shareholders $158.0 39.1 $ 4.04
- --------------------------------------------------------------------------------
Earnings from continuing businesses $164.8
Less: increased contribution to the ESOP
assuming conversion of preferred
shares to common 3.2
Less: net reduction in tax benefits assuming
conversion of the ESOP preferred
shares to common shareholders 0.6
- --------------------------------------------------------------------------------
Diluted Earnings per Share
Dilutive options 0.4
Common shares issuable under the ESOP 2.6
Earnings available for common shareholders $161.0 42.1 $ 3.82
- --------------------------------------------------------------------------------
Note 1: Diluted earnings (loss) per share from continuing businesses for 1998
was antidilutive.

In 1996 the employee stock ownership plan (ESOP) and retirement savings
plan were merged resulting in the conversion of convertible preferred shares
into common stock. Basic earnings per share for "Earnings from continuing
businesses" in 1996 is determined by dividing the earnings, after deducting
preferred dividends (net of tax benefits on unallocated shares), by the average
number of common shares outstanding, including the converted ESOP shares from
the conversion date forward. Diluted earnings per share for 1996 include the
shares of common stock outstanding, the dilutive effect of stock options and the
adjustments to common shares and earnings required to portray the convertible
preferred ESOP shares on an "if-converted" basis prior to conversion.

46

ENVIRONMENTAL MATTERS

The Company incurred capital expenditures of approximately $6.7 million in 1998,
$1.2 million in 1997 and $3.0 million in 1996 for environmental compliance and
control facilities and anticipates comparable annual expenditures for those
purposes for the years 1999 and 2000. The Company does not anticipate that it
will incur significant capital expenditures in order to meet the requirements of
the Clean Air Act of 1990 ("CAA") and the final implementing regulations
promulgated by various state agencies. Until all new CAA regulatory requirements
are known, uncertainty will remain regarding future estimates of capital
expenditures.

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 voluntarily agreed to jointly fund the required investigation and
remediation of each site. 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. The Company is also
remediating environmental contamination resulting from past industrial activity
at certain of its current and former plant sites.

Estimates of future liability are based on an evaluation of currently
available facts regarding each individual site and consider factors including
existing technology, presently enacted laws and regulations and prior Company
experience in remediation of 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, the Company's estimated liability reflects only the Company's
expected share. In determining the probability of contribution, the Company
considers the solvency of the parties, whether responsibility is being disputed,
the terms of any existing agreements and experience regarding similar matters.
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.

Reserves of $18.3 million at December 31, 1998, and $9.3 million at
December 31, 1997, were for potential environmental liabilities that the Company
considers probable and for which a reasonable estimate of the probable liability
could be made. Where existing data is sufficient to estimate the amount of 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 a result, the Company has accrued,
before agreed-to insurance coverage, $18.3 million to reflect its estimated
undiscounted liability for environmental remediation. As assessments and
remediation activities progress at each individual site, these liabilities are
reviewed to reflect additional information as it becomes available.

Actual costs to be incurred at identified sites in the future may vary from
the estimates, given the inherent uncertainties in evaluating environmental
liabilities. Subject to the imprecision in estimating environmental remediation
costs, the Company 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.

LITIGATION AND RELATED MATTERS

ASBESTOS-RELATED LITIGATION

PERSONAL INJURY LITIGATION

The Company is one of many defendants in approximately 154,000 pending claims as
of December 31, 1998, alleging personal injury from exposure to asbestos.

Nearly all claims seek general and punitive damages arising from alleged
exposures, at various times, from World War II onward, to asbestos-containing
products. Claims against the Company generally involve allegations of
negligence, strict liability, breach of warranty and conspiracy with respect to
its involvement with asbestos-containing insulation products. The Company
discontinued the sale of all such products in 1969. The claims also allege that
injury may be determined many years (up to 40 years) after first exposure to
asbestos. Nearly all suits name many defendants, and over 100 different
companies are reportedly involved. The Company believes that many current
plaintiffs are unimpaired. A large number of claims have been settled,
dismissed, put on inactive lists or otherwise resolved, and the Company
generally is involved in all stages of claims resolution and litigation,
including individual trials, consolidated trials and appeals. Neither the rate
of future filings and resolutions nor the total number of future claims can be
predicted at this time with a high degree of certainty.

Attention has been given by various parties to securing a comprehensive
resolution of the litigation. In 1991, the Judicial Panel for Multidistrict
Litigation ordered the transfer of federal cases to the Eastern District of
Pennsylvania in Philadelphia for pretrial purposes. The Company supported this
transfer. Some cases are periodically released for trial, although the issue of
punitive damages is retained by the transferee court. That court has been
instrumental in having the parties resolve large numbers of cases in various
jurisdictions and has been receptive to different approaches to the resolution
of claims. Claims in state courts have not been directly affected by the
transfer, although most recent cases have been filed in state courts.

47

Amchem Settlement Class Action

Georgine v. Amchem ("Amchem") was a settlement class action filed in the Eastern
- ------------------
District of Pennsylvania on January 15, 1993, that included essentially all
future personal injury claims against members of the Center for Claims
Resolution ("Center"), including the Company. It was designed to establish a
nonlitigation system for the resolution of such claims, and offered a method for
prompt compensation to claimants who were occupationally exposed to asbestos if
they met certain exposure and medical criteria. Compensation amounts were
derived from historical settlement data and no punitive damages were to be paid.
The settlement was designed to, among other things, minimize transactional
costs, including attorneys' fees, expedite compensation to claimants with
qualifying claims, and relieve the courts of the burden of handling future
claims.

The District Court, after exhaustive discovery and testimony, approved the
settlement class action and issued a preliminary injunction that barred class
members from pursuing claims against Center members in the tort system. The U.S.
Court of Appeals for the Third Circuit reversed that decision, and the reversal
was sustained by the U.S. Supreme Court on June 25, 1997, holding that the
settlement class did not meet the requirements for class certification under
Federal Rule of Civil Procedure 23. The preliminary injunction was vacated on
July 21, 1997, resulting in the immediate reinstatement of enjoined cases and a
loss of the bar against the filing of claims in the tort system. The Company
believes that an alternative claims resolution mechanism similar to Amchem is
likely to emerge.

Recent Events

During 1998, pending claims increased by 71,000 claims. This increase was higher
than previously anticipated. The Company and its outside counsel believe the
increase in claims filed during 1998 was partially due to acceleration of
pending claims as a result of the Supreme Court's decision on Amchem and
additional claims that had been filed in the tort system against other
defendants (and not against Center members) while Amchem was pending.

Asbestos-Related Liability

The Company continually evaluates the nature and amount of recent claim
settlements and their impact on the Company's projected asbestos resolution and
defense costs. In doing so, the Company reviews, among other things, its recent
and 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, the previous estimates based on the Amchem projection and its recent
experience. Subject to the uncertainties, limitations and other factors referred
to above and based upon its experience, the Company has estimated its share of
liability to defend and resolve probable asbestos-related personal injury
claims. The Company's estimation of such liability that is probable and
estimable through 2004 ranges from $424.7 million to $813 million. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has reflected $424.7 million as a liability in the accompanying
consolidated financial statements. This estimate includes an assumption that the
number of new claims filed annually will be less than the number filed in 1998
as discussed above under "Recent Events." Of this amount, management expects to
incur approximately $80.0 million in 1999 and has reflected this amount as a
current liability. The Company believes it can reasonably estimate the number
and nature of future claims that may be filed during the next six years. However
for claims that may be filed beyond that period, management believes that the
level of uncertainty is too great to provide for reasonable estimation of the
number of future claims, the nature of such claims, or the cost to resolve them.
Accordingly, it is reasonably possible that the total exposure to personal
injury claims may be greater than the recorded liability. The increase in
recorded liability of $274.2 million in 1998 is primarily reflective of the
increases in claims filed in 1998, recent settlement experience and current
expectations about future claims.

Because of the uncertainties related to the number of claims, the ultimate
settlement amounts, and similar matters, it is extremely difficult to obtain
reasonable estimates of the amount of the ultimate liability. The Company's
evaluation of the range of probable liability is primarily based on known
pending claims and an estimate of potential claims that are likely to occur and
can be reasonably estimated. The estimate of likely claims to be filed in the
future is subject to a greater degree of uncertainty each year into the future.
As additional experience is gained regarding claims and settlements or other new
information becomes available regarding the potential liability, the Company
will reassess its potential liability and revise the estimates as appropriate.

Because, among other things, payment of the liability will extend over many
years, management believes that the potential additional costs for claims net of
any potential insurance recoveries, will not have a material after-tax effect on
the financial condition of the Company or its liquidity, although the net
after-tax effect of any future liabilities recorded in excess of insurance
assets could be material to earnings in a future period.

CODEFENDANT BANKRUPTCIES

Certain codefendant companies have filed for reorganization under Chapter 11 of
the Federal Bankruptcy Code. As a consequence, litigation against them (with
some exceptions) has been stayed or restricted. Due to the uncertainties
involved, the long-term effect of these proceedings on the litigation cannot be
predicted.

48

PROPERTY DAMAGE LITIGATION

The Company is also one of many defendants in eight pending claims as of
December 31, 1998, brought by public and private building owners. These claims
include allegations of damage to 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. Among the lawsuits that have been resolved are four class
actions, which involve public and private schools, Michigan state public and
private schools, colleges and universities, and private property owners who
leased facilities to the federal government. The Company vigorously denies the
validity of the allegations against it in these claims. These suits and claims
are not handled by the Center. Insurance coverage has been resolved and is
expected to cover almost all costs of these claims.

INSURANCE COVERAGE

The Company's primary and excess insurance policies provide product hazard and
nonproducts (general liability) coverages for personal injury claims, and
product hazard coverage for property damage claims. Certain policies also
provide coverage to ACandS, Inc., a former subsidiary of the Company. The
Company and ACandS, Inc., share certain limits that both have accessed and have
entered into an agreement that reserved for ACandS, Inc., a certain amount of
excess insurance.

The insurance carriers that provide personal injury products hazard,
nonproducts or property damage coverages include the following: Reliance
Insurance Company; Aetna (now Travelers) Casualty and Surety Company; Liberty
Mutual Insurance Company; Travelers Insurance Company; Fireman's Fund Insurance
Company; Insurance Company of North America; Lloyds of London; various London
market companies; Fidelity and Casualty Insurance Company; First State Insurance
Company; U.S. Fire Insurance Company; Home Insurance Company; Great American
Insurance Company; American Home Assurance Company and National Union Fire
Insurance Company (now part of AIG); Central National Insurance Company;
Interstate Insurance Company; Puritan Insurance Company; and Commercial Union
Insurance Company. Midland Insurance Company, an excess carrier that provided
$25 million of personal injury coverage, certain London companies, and certain
excess carriers providing only property damage coverage are insolvent. The
Company is pursuing claims against insolvents in a number of forums.

Wellington Agreement

In 1985, the Company and 52 other companies (asbestos defendants and insurers)
signed the Wellington Agreement. This Agreement settled nearly all disputes
concerning personal injury insurance coverage with most of the Company's
carriers, provided broad coverage for both defense and indemnity and addressed
both products hazard and nonproducts (general liability) coverages.

California Insurance Coverage Lawsuit

Trial court decisions in the insurance lawsuit filed by the Company in
California held that the trigger of coverage for personal injury claims was
continuous from exposure through death or filing of a claim, that a triggered
insurance policy should respond with full indemnification up to policy limits,
and that any defense obligation ceases upon exhaustion of policy limits.
Although not as comprehensive, another decision established favorable defense
and indemnity coverage for property damage claims, providing coverage during the
period of installation and any subsequent period in which a release of fibers
occurred. The California appellate courts substantially upheld the trial court,
and that insurance coverage litigation is now concluded. The Company has
resolved most personal injury products hazard coverage matters with its solvent
carriers through the Wellington Agreement, referred to above, or other
settlements. In 1989, a settlement with a carrier having both primary and excess
coverages provided for certain minimum and maximum percentages of costs for
personal injury claims to be allocated to nonproducts (general liability)
coverage, the percentage to be determined by negotiation or in alternative
dispute resolution ("ADR").

Asbestos Claims Facility ("Facility") and Center for Claims Resolution

The Wellington Agreement established the Facility to evaluate, settle, pay and
defend all personal injury claims against member companies. Resolution and
defense costs were allocated by formula. The Facility subsequently dissolved,
and the Center was created in October 1988 by 21 former Facility members,
including the Company. Insurance carriers, while not members, are represented ex
officio on the Center's governing board and have agreed annually to provide a
portion of the Center's operational costs. The Center adopted many of the
conceptual features of the Facility and has addressed the claims in a manner
consistent with the prompt, fair resolution of meritorious claims. Resolution
and defense costs are allocated by formula; adjustments over time have resulted
in some increased share for the Company.

Insurance Recovery Proceedings

A substantial portion of the Company's primary and excess insurance asset is
nonproducts (general liability) insurance for personal injury claims, including
among others, those that involve exposure during installation of asbestos
materials. The Wellington Agreement and the 1989 settlement agreement referred
to above have provisions for such coverage. An ADR process under the Wellington
Agreement is underway 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, for some policies, includes
defense costs in addition to limits. The carriers have raised various defenses,
including waiver, laches, statutes of limitations and contractual defenses. One
primary carrier alleges that it is no longer bound by the Wellington Agreement,
and another alleges that the Company agreed to limit its claims for nonproducts
coverage against that carrier when the Wellington Agreement was signed. The ADR
process is in the trial phase of binding arbitration. The Company has entered
into a settlement with a number of the carriers resolving its access to
coverage.

49

Other proceedings against non-Wellington carriers may become necessary.

An insurance asset in the amount of $264.8 million is recorded on the
Consolidated Balance Sheet. Of this amount, approximately $26 million represents
partial settlement for previous claims which will be paid in a fixed and
determinable flow and is reported at its net present value discounted at 6.35%.
The total amount recorded reflects the Company's belief in the availability of
insurance in this amount, based upon the Company'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 which is in the
trial phase of binding arbitration. Of the $264.8 million asset, $16.0 million
has been recorded as a current asset reflecting management's estimate of the
minimum insurance payments to be received in 1999.

CONCLUSIONS

The Company does not know how many claims will be filed against it in the
future, or the details thereof or of pending suits not fully reviewed, or the
defense and resolution costs that may ultimately result therefrom, or whether an
alternative to the Amchem settlement vehicle may emerge, or the scope of its
insurance coverage ultimately deemed available.

The Company continually evaluates the nature and amount of recent claim
settlements and their impact on the Company's projected asbestos resolution and
defense costs. In doing so, the Company reviews, among other things, its recent
and 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, the previous estimates based on the Amchem projection and its recent
experience. Subject to the uncertainties, limitations and other factors referred
to above and based upon its experience, the Company has estimated its share of
liability to defend and resolve probable asbestos-related personal injury
claims. The Company's estimation of such liability that is probable and
estimable through 2004 ranges from $424.7 million to $813 million. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has reflected $424.7 million as a liability in the accompanying
consolidated financial statements. Of this amount, management expects to incur
approximately $80.0 million in 1999 and has reflected this amount as a current
liability. The Company believes it can reasonably estimate the number and nature
of future claims that may be filed during the next six years. However for claims
that may be filed beyond that period, management believes that the level of
uncertainty is too great to provide for reasonable estimation of the number of
future claims, the nature of such claims, or the cost to resolve them.
Accordingly, it is reasonably possible that the total exposure to personal
injury claims may be greater than the recorded liability. The increase in
recorded liability of $274.2 million in 1998 is primarily reflective of the
increases in claims filed in 1998, recent settlement experience and current
expectations about future claims.

Because of the uncertainties related to asbestos litigation, it is not
possible to precisely estimate the number of personal injury claims that may
ultimately be filed or their cost. It is reasonably possible there will be
additional claims beyond management's estimates. Management believes that the
potential additional costs for such additional claims, net of any potential
insurance recoveries, will not have a material after-tax effect on the financial
condition of the Company or its liquidity, although the net after-tax effect of
any future liabilities recorded in excess of insurance assets could be material
to earnings in a future period.

An insurance asset in the amount of $264.8 million is recorded on the
Consolidated Balance Sheet and reflects the Company's belief in the availability
of insurance in this amount, based upon the Company's success in insurance
recoveries, settlement agreements that provide such coverage, the nonproducts
recoveries by other companies, and the opinion of outside counsel. Such
insurance is either available through settlement or probable of recovery through
the ADR process, negotiation or litigation.

The Company believes that a claims resolution mechanism alternative to the
Amchem settlement will eventually emerge, but the liability is likely to be
higher than the projection in Amchem.

Subject to the uncertainties, limitations and other factors referred to
elsewhere in this note and based upon its experience, the Company believes it is
probable that substantially all of the defense and resolution costs of property
damage claims will be covered by insurance.

Even though uncertainties remain as to the potential number of unasserted
claims and the liability resulting therefrom, and after consideration of the
factors involved, including the ultimate scope of its insurance coverage, the
Wellington Agreement and other settlements with insurance carriers, the results
of the California insurance coverage litigation, the establishment of the
Center, the likelihood that an alternative to the Amchem settlement will
eventually emerge, and its experience, the Company believes the asbestos-related
claims against the Company would not be material either to the financial
condition of the Company or to its liquidity, although the net after-tax effect
of any future liabilities recorded in excess of insurance assets could be
material to earnings in such future period.

50

Independent auditors' report

The Board of Directors and Shareholders,
Armstrong World Industries, Inc.:

We have audited the consolidated financial statements of Armstrong World
Industries, Inc., and subsidiaries as listed in the accompanying index on page
25. 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 25. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

KPMG LLP

Philadelphia, PA
February 2, 1999

51

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

Not applicable.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------

Directors of the Registrant
- ---------------------------

The information appearing in the tabulation in the section captioned "Election
of Directors" on pages 2-5 of the Company's 1999 Proxy Statement is incorporated
by reference herein.

Executive Officers of the Registrant
- ------------------------------------

George A. Lorch* -- Age 57; Chairman of the Board since April 25, 1994; and
President (Chief Executive Officer) since September 7, 1993; Executive Vice
President, 1988-1993.

Marc R. Olivie -- Age 45; President, Worldwide Building Products Operations
since October 15, 1996; and the following positions with Sara Lee Corporation
(branded consumer products): President, Sara Lee Champion Europe, Inc. (Italy),
March 1994-October 1996; Vice President, Corporate Development, Sara Lee/DE
(Netherlands), September 1993-March 1994; Executive Director, Corporate
Development, Sara Lee Corporation (Chicago, Illinois/France), April
1990-September 1993.

Robert J. Shannon, Jr. -- Age 50, President, Worldwide Floor Products Operations
since February 1, 1997; President Floor Products Operations International
February 1, 1996;-February 1, 1997; President American Olean Tile Company, Inc.
March 1, 1992-December 29, 1995.

Ulrich J. Weimer -- Age 54; President, Armstrong Insulation Products since
February 1, 1996; Geschaftsfuhrer, Armstrong World Industries G.m.b.H. since
December 11, 1995; General Manager, Worldwide Insulation Products Operations,
February 1, 1993-June 1, 1995.

Douglas L. Boles -- Age 41; Senior Vice President, Human Resources since
March 1, 1996; and the following positions with PepsiCo (consumer products):
Vice President of Human Resources, Pepsi Foods International Europe Group
(U.K.), June 1995-February 1996; Vice President of Human Resources, Walkers
Snack Foods (U.K.), March 1994-June 1995; Vice President of Human Resources,
Snack Ventures Europe (Netherlands), September 1992-March 1994.

Deborah K. Owen -- Age 47; Senior Vice President, Secretary and General Counsel
since January 1, 1998; Attorney, Law Offices of Deborah K. Owen, Columbia, MD,
September 1996-September 1997; Partner, Arent Fox Kintner Plotkin & Kahn, PLLC,
Washington, DC, August 1994-August 1996; Commissioner, Federal Trade Commission,
Washington, DC, October 1989-August 1994.

Frank A. Riddick, III -- Age 42; Senior Vice President, Finance and Chief
Financial Officer since April 1995; and the following positions with FMC
Corporation, Chicago, IL (chemicals, machinery): Controller, May 1993-March
1995; Treasurer, December 1990-May 1993.

Edward R. Case -- Age 52; Vice President and Controller since April 27, 1998;
Vice President and Treasurer, May 8, 1996-April 26, 1998; and the following
positions with Campbell Soup Company (branded food products): Director,
Corporate Development, October 1994-May 1996; Director, Financial Planning, U.S.
Soup, May 1993-September 1994; Deputy Treasurer, September 1991-April 1993.

52

E. Follin Smith -- Age 39; Vice President and Treasurer since August 1998; and
the following positions with General Motors Corporation (automobile
manufacturer): Chief Financial Officer, Delphi Chassis Systems, April 1997-July
1998; Assistant Treasurer, October 1994-April 1997; Vice President, Finance,
General Motors Acceptance Corporation, May 1994-September 1994; Treasurer,
General Motors of Canada Limited, June 1992-April 1994.

Dr. Bernd F. Pelz -- Age 55; President DLW Aktiengesellschaft since September
1998; Member of the Executive Board, DLW Aktiengesellschaft since April 1990,
and its Chairman since October 1991.

Floyd F. Sherman -- Age 59; President, Wood Flooring and Cabinet Operations
since July 24, 1998; and the following positions with Triangle Pacific Corp.:
Chairman of the Board and Chief Executive Officer since July 1992; President
1981-November 1994.

All information presented above is current as of March 1, 1999. The term of
office for each Executive Officer in his or her present capacity is one year,
and each such Executive Officer will serve until reelected or until a successor
is elected at the annual meeting of directors which follows the annual
shareholders' meeting. Each Executive Officer has been employed by the Company
in excess of five continuous years with the exception of Messrs. Boles, Case,
Olivie, Riddick, Sherman, Pelz and Mses. Owen and Smith.

(*)Member of the Executive Committee of the Board of Directors as of March 1,
1998.

Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------

The information appearing in the section captioned "Section 16(a) Beneficial
Ownership Reporting Compliance" on page 9 of the Company's 1999 Proxy Statement
is incorporated by reference herein.

Item 11. Executive Compensation
- --------------------------------

The information appearing in the sections captioned "Directors' Compensation" on
pages 6-7 and "Executive Officers' Compensation," (other than the information
contained under the subcaption "Performance Graph") and "Retirement Income Plan
Benefits," on pages 12-17 of the Company's 1999 Proxy Statement is incorporated
by reference herein.

Mr. Sherman, President, Wood Flooring and Cabinet Operations, one of the named
executives in the Summary Compensation Table on page 12 of the Company's 1999
Proxy Statement, has entered into a change of control agreement with the
Company. The change of control agreement is similar to the change of control
agreements which are described under the caption Change in Control Agreements on
page 13 of the Company's 1999 Proxy Statement, except that Mr. Sherman does not
participate in the Company's defined benefit retirement plan or its split-dollar
life insurance plan and his benefits under his agreement have been modified
accordingly. This agreement was entered into after the Company's 1999 Proxy
Statement went to print.

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

The information appearing in the sections captioned "Stock Ownership of Certain
Beneficial Owners" on pages 17-18 and "Directors' and Executive Officers' Stock
Ownership" on pages 8-9 of the Company's 1999 Proxy Statement is incorporated by
reference herein.

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

The information appearing under the biography of H. Jesse Arnelle appearing on
page 3 of the Company's 1999 Proxy Statement is incorporated by reference
herein.

PART IV
-------

53

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

The financial statements and schedule filed as a part of this Annual Report on
Form 10-K are listed in the "Index to Financial Statements and Schedules" on
page 25.

54

a. The following exhibits are filed as a part of this Annual Report on Form
10-K:
Exhibits
- --------
No. 3(a) Registrant's By-laws, as amended effective March 9, 1998, are
incorporated by reference herein from registrant's 1997 Annual
Report on Form 10-K wherein they appear as Exhibit 3(a).

No. 3(b) Registrant's restated Articles of Incorporation, as amended,
are incorporated by reference herein from registrant's 1994 Annual
Report on Form 10-K wherein they appear as Exhibit 3(b).

No. 4(a) Registrant's Rights Agreement effective as of March 21, 1996,
between the registrant and Chemical Mellon Shareholder Services,
L.L.C., as Rights Agent, relating to the registrant's Preferred
Stock Purchase Rights is incorporated by reference herein from
registrant's registration statement on Form 8-A/A dated March 15,
1996, wherein it appeared as Exhibit 4.

No. 4(b) Registrant's Retirement Savings and Stock Ownership Plan as
amended and restated effective October 1, 1996, is incorporated by
reference herein from registrant's 1996 Annual Report on Form 10-K
where it appeared as Exhibit 4(b). *

No. 4(c) Registrant's Indenture, dated as of March 15, 1988, between the
registrant and Morgan Guaranty Trust Company of New York, as
Trustee, as to which The First National Bank of Chicago is
successor trustee, is incorporated herein by reference from
registrant's 1995 Annual Report on Form 10-K wherein it appeared
as Exhibit 4(c).

No. 4(d) Registrant's Supplemental Indenture dated as of October 19, 1990,
between the registrant and The First National Bank of Chicago, as
Trustee, is incorporated by reference herein from registrant's
1994 Annual Report on Form 10-K wherein it appeared as Exhibit
4(d).

No. 4(e) Copy of registrant's Credit Agreement (364-day) dated as of
October 29, 1998, among the registrant, The Chase Manhattan Bank
as administrative agent, and listed banks.

No. 4(f) Copy of registrant's Credit Agreement (5-year) dated as of October
29, 1998, among the registrant, The Chase Manhattan Bank as
administrative agent, and listed banks.

No. 4(g) Registrant's Indenture, dated as of August 6, 1996, between the
Registrant 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 registrant's registration
statement on Form S-3/A dated August 14, 1996.

No. 4(h) Copy of portions of the registrant's Board of Directors' Pricing
Committee's resolution establishing the terms and conditions of
the issuance of $200,000,000 of 6.35% Senior Notes Due 2003 and
$150,000,000 of 6 1/2% Senior Notes Due 2005.

55

No. 4(i) Copy of portions of the registrant's Board of Directors' Pricing
Committee's resolution establishing the terms and conditions of
the issuance of $180,000,000 7.45% Senior Quarterly Interest
Bonds Due 2038.

No. 10(i)(a) Registrant's Agreement Concerning Asbestos-Related Claims dated
June 19, 1985, (the "Wellington Agreement") among the registrant
and other companies is incorporated by reference herein from
registrant'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 dated
September 23, 1988, among the registrant and other companies as
amended is incorporated by reference herein from registrant's
1996 Annual Report on Form 10-K wherein it appeared as Exhibit
10(i)(b).

No. 10(i)(c) Credit Agreement between the registrant, certain banks listed
therein, and Morgan Guaranty Trust Company of New York, as
Agent, dated as of February 7, 1995, providing for a
$200,000,000 credit facility, is incorporated by reference
herein from registrant's 1994 Annual Report on Form 10-K wherein
it appeared as Exhibit 10(i)(c).

No. 10(i)(d) Copy of registrant's Amendment No. 1 to Credit Agreement
included herein as Exhibit 10(i)(c).

No. 10(i)(e) Agreement and Plan of Merger dated as of June 12, 1998, among
the registrant, Triangle Pacific Corp., and Sapling Acquisition,
Inc., is incorporated by reference herein from registrant's Form
8-K filed on June 15, 1998, wherein it appeared as Exhibit 10.1.

No. 10(iii)(a) Registrant's Long-Term Stock Option Plan for Key Employees, as
amended, is incorporated by reference herein from registrant's
1995 Annual Report on Form 10-K wherein it appeared as Exhibit
10(iii)(a). *

No. 10(iii)(b) Copy of agreement between DLW and Dr. Bernd F. Pelz, as
amended.*

No. 10(iii)(c) Registrant's Directors' Retirement Income Plan, as amended, is
incorporated by reference herein from registrant's 1996 Annual
Report on Form 10-K wherein it appeared as Exhibit 10(iii)(c). *

No. 10(iii)(d) Copy of registrant's Management Achievement Plan for Key
Executives, as amended December 14, 1998. *

No. 10(iii)(e) Copy of registrant's Retirement Benefit Equity Plan (formerly
known as the Excess Benefit Plan), as amended April 27, 1998. *

No.10(iii)(f) Copy of registrant's Deferred Compensation Plan, as amended
September 21, 1998. *

No.10(iii)(g) Registrant's Employment Protection Plan for Salaried Employees
of Armstrong World Industries, Inc., as amended, is incorporated
by reference herein from registrant's 1994 Annual Report on Form
10-K wherein it appeared as Exhibit 10(iii)(g). *

56

No. 10(iii)(h) Registrant's Restricted Stock Plan For Nonemployee Directors, as
amended, is incorporated by reference herein from registrant's
1996 Annual Report on Form 10-K wherein it appeared as Exhibit
10(iii)(h). *

No. 10(iii)(i) Copy of registrant's Severance Pay Plan for Salaried Employees,
as amended April 27, 1998. *

No. 10(iii)(j) Copy of registrant's 1993 Long-Term Stock Incentive Plan as
amended. *

No. 10(iii)(k) Form of Agreement between the Company and certain of its
Executive Officers, together with a schedule identifying those
executives is incorporated by reference herein from registrant's
quarterly report on Form 10-Q for the quarter ended September
30, 1997, wherein it appeared as Exhibit 10, provided that a
revised schedule, identifying the officers that are a party to
that agreement, is filed herewith. *

No. 10(iii)(l) Form of Indemnification Agreement between the registrant and
each of the registrant's Nonemployee Directors, is incorporated
by reference herein from registrant's 1996 Annual Report on Form
10-K wherein it appeared as Exhibit 10(iii)(l). *

No. 10(iii)(m) Copy of registrant's Bonus Replacement Retirement Plan, dated as
of January 1, 1998. *

No. 11(a) Computation for basic earnings per share.

No. 11(b) Computation for diluted earnings per share.

No. 21 List of the registrant's domestic and foreign subsidiaries.

No. 23 Consent of Independent Auditors.

No. 24 Powers of Attorney and authorizing resolutions.

No. 27 Financial Data Statement

* Compensatory Plan

57

b. The following reports on Form 8-K were filed during the last quarter of
1998:

1. On October 21, 1998, the registrant filed a current report on Form 8-K
announcing its third quarter 1998 results.

2. On November 2, 1998, the registrant filed a current report on Form 8-K
announcing that it had completed an underwritten public offering under its
existing shelf registration statement (File No. 333-6333) of $180 million
aggregate principal amount of 7.45% Senior Quarterly Interest Bonds due
2038.

3. On November 19, 1998, the registrant filed a current report on Form 8-K
announcing its expectation to take a charge in the fourth quarter of 1998
of approximately $78 million primarily to reflect a work force reduction.

This 10-K contains certain "forward looking statements" (within the meaning of
the Private Securities Litigation Reform Act of 1995). Among other things, they
pertain to the Company's earnings, liquidity and financial condition; the
ultimate outcome of the Company's asbestos-related litigation (including the
likelihood that an alternative to the Amchem settlement will be negotiated);
anticipated efficiencies relating to acquisitions; and certain operational
matters. Words or phrases denoting the anticipated results of future events -
such as "anticipate," "believe," "estimate," "expect," "will likely," "are
expected to," "will continue," "project," and similar expressions that denote
uncertainty - are intended to identify such forward-looking statements. Actual
results may differ materially from anticipated future results: (1) as a result
of risk and uncertainties identified in connection with those forward-looking
statements, including those factors identified under the sections captioned
"Outlook" in Management's Discussion and Analysis of Financial Condition and
Results of Operations and those factors identified under the caption "Litigation
and Related Matters" in the Notes to Consolidated Financial Statements in
connection with the Company's asbestos-related litigation; (2) as a result of
factors over which the Company has no control, including the strength of
domestic and foreign economies, sales growth, competition and certain costs
increases; or (3) if the factors on which the Company's conclusions are based do
not conform to the Company's expectations.

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/ George A. Lorch
---------------------------
Chairman

Date March 15, 1999
-------------------------

58

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 and
in the capacities and on the dates indicated.

Directors and Principal Officers of the registrant:

George A. Lorch Chairman and President
(Principal Executive Officer)
Frank A. Riddick, III Senior Vice President, Finance
(Principal Financial Officer)
Edward R. Case 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
David M. LeVan Director
James E. Marley Director
David W. Raisbeck Director
Jerre L. Stead Director
By /s/ George A. Lorch
---------------------------
(George A. Lorch, as
attorney-in-fact and on his own
behalf)
As of March 15, 1999

59

SCHEDULE II
-----------

Valuation and Qualifying Reserves of Accounts Receivable
--------------------------------------------------------

For Years Ended December 31
---------------------------
(amounts in millions)

Provision for Losses 1998 1997 1996
- -------------------- ---- ---- ----

Balance at Beginning of Year $ 12.8 $ 10.9 $ 8.7
Additions Charged to Earnings 7.2 7.3 5.4
Deductions 11.4 5.4 3.2
Balances acquired via acquisitions 12.0 -- --
Balance at End of Year $ 20.6 $ 12.8 $ 10.9

- --------------------------------------------------------------------------------
Provision for Discounts
- -----------------------

Balance at Beginning of Year $ 24.7 $ 24.0 $ 20.3
Additions Charged to Earnings 93.3 76.7 74.5
Deductions 88.8 76.0 70.8
Balance at End of Year $ 29.2 $ 24.7 $ 24.0

- --------------------------------------------------------------------------------
Total Provision for Discounts and Losses
- ----------------------------------------

Balance at Beginning of Year $ 37.5 $ 34.9 $ 29.0
Additions Charged to Earnings 100.5 84.0 79.9
Deductions 100.2 81.4 74.0
Balances acquired via acquisitions 12.0 -- --
Balance at End of Year $ 49.8 $ 37.5 $ 34.9

60

a. The following exhibits are filed as a part of this Annual Report on Form
10-K:
Exhibits
- --------
No. 3(a) Registrant's By-laws, as amended effective March 9, 1998, are
incorporated by reference herein from registrant's 1997 Annual
Report on Form 10-K wherein they appear as Exhibit 3(a).

No. 3(b) Registrant's restated Articles of Incorporation, as amended,
are incorporated by reference herein from registrant's 1994 Annual
Report on Form 10-K wherein they appear as Exhibit 3(b).

No. 4(a) Registrant's Rights Agreement effective as of March 21, 1996,
between the registrant and Chemical Mellon Shareholder Services,
L.L.C., as Rights Agent, relating to the registrant's Preferred
Stock Purchase Rights is incorporated by reference herein from
registrant's registration statement on Form 8-A/A dated March 15,
1996, wherein it appeared as Exhibit 4.

No. 4(b) Registrant's Retirement Savings and Stock Ownership Plan as
amended and restated effective October 1, 1996, is incorporated by
reference herein from registrant's 1996 Annual Report on Form 10-K
where it appeared as Exhibit 4(b). *

No. 4(c) Registrant's Indenture, dated as of March 15, 1988, between the
registrant and Morgan Guaranty Trust Company of New York, as
Trustee, as to which The First National Bank of Chicago is
successor trustee, is incorporated herein by reference from
registrant's 1995 Annual Report on Form 10-K wherein it appeared
as Exhibit 4(c).

No. 4(d) Registrant's Supplemental Indenture dated as of October 19, 1990,
between the registrant and The First National Bank of Chicago, as
Trustee, is incorporated by reference herein from registrant's
1994 Annual Report on Form 10-K wherein it appeared as Exhibit
4(d).

No. 4(e) Copy of registrant's Credit Agreement (364-day) dated as of
October 29, 1998, among the registrant, The Chase Manhattan Bank
as administrative agent, and listed banks.

No. 4(f) Copy of registrant's Credit Agreement (5-year) dated as of October
29, 1998, among the registrant, The Chase Manhattan Bank as
administrative agent, and listed banks.

No. 4(g) Registrant's Indenture, dated as of August 6, 1996, between the
Registrant 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 registrant's registration
statement on Form S-3/A dated August 14, 1996.

No. 4(h) Copy of portions of the registrant's Board of Directors' Pricing
Committee's resolution establishing the terms and conditions of
the issuance of $200,000,000 of 6.35% Senior Notes Due 2003 and
$150,000,000 of 6 1/2% Senior Notes Due 2005.

No. 4(i) Copy of portions of the registrant's Board of Directors' Pricing
Committee's resolution establishing the terms and conditions of
the issuance of $180,000,000 7.45% Senior Quarterly Interest
Bonds Due 2038.

No. 10(i)(a) Registrant's Agreement Concerning Asbestos-Related Claims dated
June 19, 1985, (the "Wellington Agreement") among the registrant
and other companies is incorporated by reference herein from
registrant'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 dated
September 23, 1988, among the registrant and other companies as
amended is incorporated by reference herein from registrant's
1996 Annual Report on Form 10-K wherein it appeared as Exhibit
10(i)(b).

No. 10(i)(c) Credit Agreement between the registrant, certain banks listed
therein, and Morgan Guaranty Trust Company of New York, as
Agent, dated as of February 7, 1995, providing for a
$200,000,000 credit facility, is incorporated by reference
herein from registrant's 1994 Annual Report on Form 10-K wherein
it appeared as Exhibit 10(i)(c).

No. 10(i)(d) Copy of registrant's Amendment No. 1 to Credit Agreement
included herein as Exhibit 10(i)(c).

No. 10(i)(e) Agreement and Plan of Merger dated as of June 12, 1998, among
the registrant, Triangle Pacific Corp., and Sapling Acquisition,
Inc., is incorporated by reference herein from registrant's Form
8-K filed on June 15, 1998, wherein it appeared as Exhibit 10.1.

No. 10(iii)(a) Registrant's Long-Term Stock Option Plan for Key Employees, as
amended, is incorporated by reference herein from registrant's
1995 Annual Report on Form 10-K wherein it appeared as Exhibit
10(iii)(a). *

No. 10(iii)(b) Copy of agreement between DLW and Dr. Bernd F. Pelz, as
amended.*

No. 10(iii)(c) Registrant's Directors' Retirement Income Plan, as amended, is
incorporated by reference herein from registrant's 1996 Annual
Report on Form 10-K wherein it appeared as Exhibit 10(iii)(c). *

No. 10(iii)(d) Copy of registrant's Management Achievement Plan for Key
Executives, as amended December 14, 1998. *

No. 10(iii)(e) Copy of registrant's Retirement Benefit Equity Plan (formerly
known as the Excess Benefit Plan), as amended April 27, 1998. *

No.10(iii)(f) Copy of registrant's Deferred Compensation Plan, as amended
September 21, 1998. *

No.10(iii)(g) Registrant's Employment Protection Plan for Salaried Employees
of Armstrong World Industries, Inc., as amended, is incorporated
by reference herein from registrant's 1994 Annual Report on Form
10-K wherein it appeared as Exhibit 10(iii)(g). *

No. 10(iii)(h) Registrant's Restricted Stock Plan For Nonemployee Directors, as
amended, is incorporated by reference herein from registrant's
1996 Annual Report on Form 10-K wherein it appeared as Exhibit
10(iii)(h). *

No. 10(iii)(i) Copy of registrant's Severance Pay Plan for Salaried Employees,
as amended April 27, 1998. *

No. 10(iii)(j) Copy of registrant's 1993 Long-Term Stock Incentive Plan as
amended. *

No. 10(iii)(k) Form of Agreement between the Company and certain of its
Executive Officers, together with a schedule identifying those
executives is incorporated by reference herein from registrant's
quarterly report on Form 10-Q for the quarter ended September
30, 1997, wherein it appeared as Exhibit 10, provided that a
revised schedule, identifying the officers that are a party to
that agreement, is filed herewith. *

No. 10(iii)(l) Form of Indemnification Agreement between the registrant and
each of the registrant's Nonemployee Directors, is incorporated
by reference herein from registrant's 1996 Annual Report on Form
10-K wherein it appeared as Exhibit 10(iii)(l). *

No. 10(iii)(m) Copy of registrant's Bonus Replacement Retirement Plan, dated as
of January 1, 1998. *

No. 11(a) Computation for basic earnings per share.

No. 11(b) Computation for diluted earnings per share.

No. 21 List of the registrant's domestic and foreign subsidiaries.

No. 23 Consent of Independent Auditors.

No. 24 Powers of Attorney and authorizing resolutions.

No. 27 Financial Data Statement

* Compensatory Plan