As shown on the condensed Consolidated Balance Sheets (see page 3), Armstrong had cash and cash equivalents of $19.2 million at March 31, 2000. Working capital was $257.7 million as of March 31, 2000, $60.9 million lower than the $318.6 million recorded at the end of 1999. The ratio of current assets to current liabilities was 1.31 to 1 as of March 31, 2000, compared with 1.43 to 1 as of December 31, 1999. The decreases from December 31, 1999 were due to higher short-term debt partially offset by lower accrued expenses, primarily due to annual incentive bonus payments made in the first quarter of 2000.

Long-term debt, excluding Armstrong's guarantee of an ESOP loan, decreased in the first quarter of 2000. At March 31, 2000, long-term debt of $1,359.7 million, or 55.0 percent of total capital, compared with $1,412.9 million, or 60.2 percent of total capital, at the end of 1999. At March 31, 2000, and December 31, 1999 ratios of total debt (including Armstrong's guarantee of the ESOP loan) as a percent of total capital were 71.9 percent and 71.1 percent, respectively.

As shown on the condensed Consolidated Statements of Cash Flows (see page 5), net cash used for operating activities for the three months ended March 31, 2000, was $74.6 million compared with net cash provided by operating activities of $15.6 million for the comparable period in 1999. The decrease was due to several items including lower net income, income taxes paid in the first quarter of 2000 compared to a net income tax refund in the first quarter of 1999 and a decrease in accrued expenses, primarily due to annual incentive bonus payments made in the first quarter of 2000.

Net cash used for investing activities was $25.3 million for the three months ended March 31, 2000, compared with $36.6 million for the three months ended March 31, 1999. The decrease was primarily due to lower capital spending and the proceeds from the sales of assets in 2000.

Net cash provided by financing activities was $94.3 million for the three months ended March 31, 2000 compared with $23.0 million for the three months ended March 31, 1999. The increase was primarily due to the $113.3 million net increase in debt during the first quarter of 2000 compared to the $43.4 million net increase in debt during the same period in 1999.

Armstrong is constantly evaluating its various business units and may from time to time dispose of, or restructure, those units. On April 27, 2000, Armstrong entered into an agreement to sell all of the entities, assets and certain liabilities comprising its Insulation Products segment to Orion Einundvierzigste Beteiligungsgesellschaft Mbh, a subsidiary of the Dutch investment firm Gilde Investment Management N.V. for $280 million, subject to closing adjustments. The consideration includes approximately $250 million cash and $30 million in notes receivable. The notes receivable will be discounted to their fair market value of approximately $15.6 million. The consideration is primarily denominated in Euros and is subject to currency translation adjustments until closing. The transaction is expected to close by late May and result in an after tax gain of approximately $100 million, or $2.48 per share in Armstrong's second quarter. Armstrong is also currently in divestiture discussions and evaluations related to its floor installation products division and its European carpet business.

Armstrong is involved in significant asbestos-related litigation which is described more fully under the heading "Legal Proceedings" in Item 1 of Part II of this report which should be read in conjunction with this discussion and analysis. Armstrong is a defendant in approximately 172,200 pending personal injury claims as of March 31, 2000. During the first quarter of 2000, the Center for Claims Resolution ("Center") received and verified approximately 13,000 claims naming Armstrong as a defendant.

Armstrong continues to seek broad-based settlements of claims through the Center. To date, the Center has reached agreements with several law firms that cover approximately 97,000 claims (or 49% of current claims) some of which are currently pending and some of which have yet to be filed. These agreements typically provide for multiyear payments for settlement of current claims and establish specific medical and other criteria for the settlement of future claims as well as annual limits on the number of claims that can be

filed by these firms. These agreements also establish fixed settlement values for different asbestos-related medical conditions which are subject to periodic re-negotiation over a period of 2 to 5 years. The plaintiff law firms are required to recommend settlements to their clients although future claimants are not legally obligated to accept the settlements. These agreements also provide for nominal payments to future claimants who are unimpaired but who are eligible for additional compensation if they develop a more serious asbestos-related illness. The Center can terminate an agreement with an individual law firm if a significant number of that firm's clients elect not to participate under the agreement. Negotiations with additional law firms engaged in asbestos-related litigation that would resolve a substantial portion of the remaining pending claims are ongoing. The ultimate success and timing of those negotiations is uncertain.

In continually evaluating its estimated asbestos-related liability, Armstrong reviews, among other things, its recent and historical settlement amounts, the incidence of past and recent claims, the mix of the injuries and occupations of the plaintiffs, the number of cases pending against it and the status and results of broad-based settlement discussions. Based on this review, Armstrong has estimated its share of liability to defend and resolve probable asbestos- related personal injury claims. This estimate is highly uncertain due to the limitations of the available data and the difficulty of forecasting with any certainty the numerous variables that can affect the range of the liability. Armstrong will continue to study the variables in light of additional information in order to identify trends that may become evident and to assess their impact on the range of liability that is probable and estimable.

Armstrong's estimation of its asbestos-related liability that is probable and estimable through 2005 ranges from $645.0 million to $1,301.4 million as of March 31, 2000. The range of probable and estimable liability reflects uncertainty in the number of future claims that will be filed and the cost to settle those claims, which may be influenced by a number of factors, including the outcome of the ongoing broad-based settlement negotiations and Armstrong's overall effective share of the Center's liabilities. Armstrong has concluded that no amount within that range is more likely than any other, and therefore has reflected $645.0 million as a liability in the consolidated financial statements in accordance with generally accepted accounting principles. Of this amount, management expects to incur asbestos liability payments of approximately $175.0 million over the next 12 months and has reflected such amount as a current liability.

Armstrong's estimated range of liability is primarily based on known claims and an estimate of future claims that are likely to occur and can be reasonably estimated through 2005. This estimated range of liability assumes that the number of new claims filed annually will be less than the number filed in 1999. For claims that may be filed beyond 2005, 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 estimated range of liability. 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. As additional experience is gained regarding claims and such settlement discussions or other new information becomes available regarding the potential liability, Armstrong will reassess its potential liability and revise the estimates as appropriate.

Although some settlements have already been reached, Armstrong is currently uncertain as to the ultimate success and timing of the remaining broad-based settlement discussions. However, if those discussions are unsuccessful or if unfavorable claims experiences continue, significant changes in the assumptions used in the estimate of Armstrong's liability may result. Those changes, if any, could lead to increases in the recorded liability.

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 Armstrong 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.

As with its estimated asbestos related liability, Armstrong continually evaluates the probable insurance asset to be recorded. An insurance asset in the amount of $296.0 million is recorded as of March 31, 2000. No amounts were received in the first quarter of 2000 pursuant to existing settlements. Of the total amount, approximately $87.9 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 6.50%. The total amount recorded

reflects Armstrong's belief in the availability of insurance in this amount, based upon Armstrong'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 that is in the trial phase of binding arbitration. Depending on further progress of the ADR, and activities such as settlement discussions with insurance carriers party to the ADR and those not party to the ADR, Armstrong may revise its estimate and additional insurance assets may be recorded in a future period. Of the $296.0 million asset, $26.0 million has been recorded as a current asset reflecting management's estimate of the minimum insurance payments to be received in the next 12 months. However, the actual amount of payments to be received in the next 12 months could increase dependent upon 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.

Armstrong paid $36.5 million for asbestos related claims in the first quarter of 2000 compared to $35.4 million in the first quarter of 1999. Armstrong did not receive any asbestos-related insurance recoveries during the first quarters of 2000 or 1999. Armstrong currently expects to pay approximately $80.0 million to $115.0 million for asbestos related claims and expenses in 2000, net of expected insurance recoveries and taxes.

While some successful broad-based settlements have been reached with plaintiff law firms, Armstrong is uncertain as to the timing and number of any additional settlements to be reached.

Since many uncertainties exist surrounding asbestos litigation, Armstrong will continue to evaluate its asbestos related estimated liability and corresponding estimated insurance recoveries asset as well as the underlying assumptions used to record these amounts. The recorded liability and asset reflect management's best estimate of probable amounts based on current information . However, it is reasonably possible that Armstrong's total exposure to personal injury claims may be greater than the recorded liability and accordingly future charges to income may be necessary. While Armstrong believes that potential future charges may be material to the periods in which they are taken, Armstrong does not believe the charges will have a material adverse effect on its financial position or liquidity.

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

First-quarter net sales of $773.3 million were essentially equal to net sales of $772.8 million in the first quarter of 1999. Floor coverings sales decreased 2.0%, wood products sales increased 15.7% and gaskets and textiles sales were absent in 2000 due to the divestiture of these businesses during the second and third quarters of 1999. Excluding the impact of the two 1999 divestitures, net sales increased 2.7%.

First-quarter earnings from continuing operations of $26.0 million decreased 36.9 percent from 1999's first-quarter earnings from continuing operations of $41.2 million. Earnings from continuing operations per diluted share were $0.65 compared with $1.02 per diluted share for the first quarter of 1999. Earnings from continuing operations per basic share were $0.65 compared with $1.03 per basic share for the first quarter of 1999.

The cost of goods sold in the first quarter was 69.4 percent of net sales compared to 67.2 percent of net sales in the first quarter of 1999. This increase was driven primarily by raw material increases in floor coverings and wood products. Our current expectations include some additional price increases for some floor products raw materials with peak pricing occurring in the third quarter.

First-quarter SG&A expenses were 21.4 percent of net sales compared to 20.4 percent of net sales in last year's first quarter. The percentage increase is primarily due to higher selling and advertising costs in some business segments, higher environmental remediation costs plus expenses related to the collection of some accounts receivable.

Armstrong's effective tax rate for continuing businesses was 39.1 percent for the first quarter of 2000 and 1999.

Expected sales synergies from the 1998 acquisitions of Triangle Pacific and DLW have proceeded at a slower pace than originally anticipated. In addition, weak results from European operations have negatively impacted first quarter 2000 results and Armstrong anticipates this condition continuing through the remainder of the year.

Floor coverings net sales were $368.5 million and $376.2 million in the first quarter of 2000 and 1999, respectively. Sales in the Americas increased 5.7% as demand for both residential and commercial products increased. European sales of $131.4 million were 12.3% below 1999 levels as a result of continued market weakness, lower prices and unfavorable foreign exchange. Pacific area sales were 23.3% ahead of last year.Operating income of $29.7 million was 8.1% of sales compared to $46.7 million in the first quarter of 1999, or 12.4% of sales. The operating margin reduction was driven primarily by higher manufacturing costs, particularly raw materials, and lower prices driven by competitive pressure in the Americas and Europe.

Building products net sales of $188.5 million decreased slightly from $189.7 million in the first quarter of 1999. Sales in the Americas increased 6.9% driven primarily by higher demand in all channels except Latin America. In Europe, sales decreased 14.1% primarily due to unfavorable foreign exchange and less favorable product mix. Pacific area sales were virtually flat versus 1999. Operating income declined $4.0 million to $25.7 million as improved volume and mix in the Americas was offset by price declines in both the Americas and Europe, higher manufacturing expense primarily from raw materials and higher advertising expense in support of the U.S. retail business. Overall operating margins decreased from 15.7% to 13.6%.

Wood products net sales of $216.3 million in the first quarter of 2000 compared to net sales of $187.0 million in 1999. Cabinet net sales grew 24.3 percent due to higher volume. Wood flooring net sales increased 13.0 percent versus 1999 driven primarily by volume growth and improved pricing. Operating margins declined from 9.9% to 8.3% primarily driven by increased lumber costs.

In the all other segment, net sales and operating income were down $19.9 million and $1.7 million, respectively due to the absence of the gaskets and textiles businesses that were sold in the second and third quarters of 1999.

The results of the Insulation Products segment have been shown as a discontinued business. Earnings from the Insulation business were $4.7 million in 2000 compared to $7.1 million in 1999 primarily due to lower sales.

This discussion is provided under the Private Securities Litigation Reform Act of 1995. Our disclosures in reports here and in other public comments contain forward-looking statements. These statements provide our expectations or forecasts of future eventsand can be identified by the use of words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "outlook," and others of similar meaning in discussions of future operating or financial performance. In particular, these include statements relating to future earnings per share, dividends, financial results, operating results, prospective products, future performance of current products, future sales or expenses, and the outcome of contingencies such as legal proceedings.

Any of these forward-looking statements may turn out to be wrong. Actual future results may vary materially. Consequently, no forward-looking statement can be guaranteed.

Many factors could cause our actual results to differ materially from those expected. These factors include:

. our asbestos-related and any other litigation discussed in our filings with the SEC
. variations in raw material and energy costs, and our success in achieving manufacturing efficiencies and price increases,
. our success in introducing new products,
. product and price competition caused by factors such as worldwide excess industry capacity,
. interest, foreign exchange and effective tax rates

. integration of our 1998 acquisitions,
. business combinations among competitors and suppliers,
. the strength of domestic and foreign end-use markets and improved efficiencies in the European flooring market, and
. impacts to international operations caused by changes in intellectual property protections and trade regulations, and the political climate in emerging markets.

This should not be considered to be a complete list of all risks and uncertainties that might affect our future results. We undertake no obligation to update any forward-looking statement. Related disclosures in our most recent report on Form 10-K, in our reports on Form 10-Q and any further disclosures in subsequent 10-Q, 8-K and 10-K reports should also be consulted.