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<SEC-DOCUMENT>/in/edgar/work/0000950109-00-004591/0000950109-00-004591.txt : 20001116
<SEC-HEADER>0000950109-00-004591.hdr.sgml : 20001116
ACCESSION NUMBER:		0000950109-00-004591
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		13
CONFORMED PERIOD OF REPORT:	20000930
FILED AS OF DATE:		20001114

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			ARMSTRONG HOLDINGS INC /PA/
		CENTRAL INDEX KEY:			0001109304
		STANDARD INDUSTRIAL CLASSIFICATION:	 [3089
]		IRS NUMBER:				233033414
		STATE OF INCORPORATION:			PA
		FISCAL YEAR END:			1231
</COMPANY-DATA>

		FILING VALUES:
			FORM TYPE:		10-Q
			SEC ACT:		
			SEC FILE NUMBER:	333-32530
			FILM NUMBER:		768359
</FILING-VALUES>

			BUSINESS ADDRESS:	
				STREET 1:		2500 COLUMBIA AVE
				CITY:			LANCASTER
				STATE:			PA
				ZIP:			17603
				BUSINESS PHONE:		7173970611
</BUSINESS-ADDRESS>

				MAIL ADDRESS:	
					STREET 1:		2500 COLUMBIA AVE
					CITY:			LANCASTER
					STATE:			PA
					ZIP:			17603
</MAIL-ADDRESS>
</FILER>

					FILER:

						COMPANY DATA:	
							COMPANY CONFORMED NAME:			ARMSTRONG WORLD INDUSTRIES INC
							CENTRAL INDEX KEY:			0000007431
							STANDARD INDUSTRIAL CLASSIFICATION:	 [3089
]							IRS NUMBER:				230366390
							STATE OF INCORPORATION:			PA
							FISCAL YEAR END:			1231
</COMPANY-DATA>

							FILING VALUES:
								FORM TYPE:		10-Q
								SEC ACT:		
								SEC FILE NUMBER:	001-02116
								FILM NUMBER:		768360
</FILING-VALUES>

								BUSINESS ADDRESS:	
									STREET 1:		2500 COLUMBIA AVE
									CITY:			LANCASTER
									STATE:			PA
									ZIP:			17603
									BUSINESS PHONE:		7173970611
</BUSINESS-ADDRESS>

									MAIL ADDRESS:	
										STREET 1:		2500 COLUMBIA AVE
										CITY:			LANCASTER
										STATE:			PA
										ZIP:			17603
</MAIL-ADDRESS>

										FORMER COMPANY:	
											FORMER CONFORMED NAME:	ARMSTRONG CORK CO
											DATE OF NAME CHANGE:	19800611
</FORMER-COMPANY>
</FILER>
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>FORM 10-Q
<TEXT>

<PAGE>

                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

(Mark One)

[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
        OF 1934

                For the quarterly period ended September 30, 2000

                                       OR

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

                    For the transition period from          to
                                                     ------    -----

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

         Pennsylvania                  333-32530                23-3033414
- --------------------------------------------------------------------------------
(State or other jurisdiction of      Commission file         (I.R.S. Employer
incorporation or organization)           number              Identification No.)

P. O. Box 3001, Lancaster, Pennsylvania                          17604
- --------------------------------------------------------------------------------
(Address of principal executive offices)                       (Zip Code)

Registrant's telephone number, including area code             (717) 397-0611
                                                   -----------------------------


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

          Pennsylvania                  1-2116                  23-0366390
- --------------------------------------------------------------------------------
(State or other jurisdiction of      Commission file         (I.R.S. Employer
incorporation or organization)           number              Identification No.)

P. O. Box 3001, Lancaster, Pennsylvania                          17604
- --------------------------------------------------------------------------------
(Address of principal executive offices)                       (Zip Code)

Registrant's telephone number, including area code           (717) 397-0611
                                                   -----------------------------

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
                                                 Yes  X       No
                                                    ------      ------


Number of shares of Armstrong Holdings, Inc.'s common stock outstanding as of
October 31, 2000 - 40,863,840

                                       1
<PAGE>

                         Part I - Financial Information
                         ------------------------------

Item 1 - Financial Statements
- -----------------------------

                   Armstrong Holdings, Inc., and Subsidiaries
                  Condensed Consolidated Statements of Earnings
                 (amounts in millions except for per-share data)
                                    Unaudited

<TABLE>
<CAPTION>
                                                                                 Three Months Ended       Nine Months Ended
                                                                                    September 30            September 30
                                                                                    ------------            ------------
                                                                                   2000       1999          2000      1999
                                                                                 -------    -------       -------   -------
<S>                                                                               <C>        <C>        <C>         <C>
Net sales                                                                         $835.6     $844.3     $2,443.8    $2,444.4
Cost of goods sold                                                                 595.9      554.0      1,709.4     1,614.7
                                                                                 -------    -------     --------    --------
Gross profit                                                                       239.7      290.3        734.4       829.7

Selling, general and administrative expense                                        154.8      159.7        469.8       480.4
Charge for asbestos liability                                                        -          -          236.0         -
Reorganization charges, net                                                         15.7        -           15.7         -
Goodwill amortization                                                                5.9        6.5         18.2        18.6
Equity (earnings) from affiliates                                                   (4.9)      (5.2)       (14.1)      (13.1)
                                                                                 -------    -------     --------    --------
Operating income                                                                    68.2      129.3          8.8       343.8

Interest expense                                                                    26.0       25.8         79.8        78.9
Other (income) expense, net                                                        (61.6)       3.4        (67.0)       (4.5)
                                                                                 -------    -------     --------    --------
Earnings (loss) from continuing operations before income taxes                     103.8      100.1         (4.0)      269.4
Income taxes (benefit)                                                              31.8       38.2         (0.8)      101.3
                                                                                 -------    -------     --------    --------

Earnings (loss) from continuing operations                                         $72.0      $61.9        ($3.2)     $168.1
                                                                                 -------    -------     --------    --------

Earnings from discontinued operations, net of
  tax of $0, $4.3, $3.2, and $11.0, respectively                                     -         $9.8         $7.0       $24.7
Gain on sale of discontinued operations, net of
   tax of $0.9, $0, $42.8 and $0 respectively                                       $2.3        -          108.7         -
                                                                                 -------    -------     --------    --------
Earnings from discontinued operations                                                2.3        9.8        115.7        24.7

Net earnings                                                                       $74.3      $71.7       $112.5      $192.8
                                                                                 =======    =======     ========    ========


Earnings (loss) per share of common stock, continuing operations:
  Basic                                                                             $1.79      $1.55       ($0.08)      $4.22
  Diluted                                                                           $1.77      $1.54       ($0.08)      $4.18

Earnings per share of common stock, discontinued operations:
  Basic                                                                              -         $0.25        $0.17       $0.62
  Diluted                                                                            -         $0.24        $0.17       $0.61

Earnings per share of common stock, gain on sale of discontinued operations:
  Basic                                                                             $0.06       -           $2.70        -
  Diluted                                                                           $0.06       -           $2.70        -

Net earnings per share of common stock:
  Basic                                                                             $1.84      $1.80        $2.80       $4.84
  Diluted                                                                           $1.83      $1.78        $2.80       $4.80

Average number of common shares outstanding:
  Basic                                                                              40.3       39.9         40.2        39.8
  Diluted                                                                            40.7       40.2         40.4        40.2
</TABLE>


See accompanying footnotes to the unaudited condensed consolidated financial
statements beginning on page 6.

                                       2
<PAGE>

                   Armstrong Holdings, Inc., and Subsidiaries
                      Condensed Consolidated Balance Sheets
                              (amounts in millions)

<TABLE>
<CAPTION>
                                                                        Unaudited
             Assets                                                September 30, 2000    December 31, 1999
             ------                                                ------------------    -----------------
<S>                                                                       <C>                  <C>
Current assets:
       Cash and cash equivalents                                          $33.6                $26.6
       Accounts receivable less allowance
          for discounts and losses                                        479.6                403.4
       Inventories:
            Finished goods                                                263.4                257.9
            Work in process                                                54.4                 42.4
            Raw materials and supplies                                    162.5                154.6
                                                                       --------             --------
               Total gross inventories                                    480.3                454.9
             Less LIFO and other reserves                                  50.8                 48.0
                                                                       --------             --------
               Total inventories                                          429.5                406.9

       Deferred income taxes                                               55.7                 40.6
       Net assets of discontinued operations                                  -                 93.5
       Other current assets                                                84.1                 86.7
                                                                       --------             --------
               Total current assets                                     1,082.5              1,057.7

Property, plant, and equipment                                          2,365.6              2,481.1
       Less accumulated depreciation and amortization                   1,061.1              1,123.6
                                                                       --------             --------
               Net property, plant and equipment                        1,304.5              1,357.5

Insurance for asbestos-related liabilities, noncurrent                    236.1                270.0
Investment in affiliates                                                   35.6                 34.2
Goodwill, net                                                             890.5                935.1
Other intangibles, net                                                     55.8                 54.9
Other noncurrent assets                                                   427.2                374.4
                                                                       --------             --------
               Total assets                                            $4,032.2             $4,083.8
                                                                       ========             ========

       Liabilities and Shareholders' Equity
       ------------------------------------
Current liabilities:
       Short-term debt                                                    $24.0                $64.7
       Current installments of long-term debt                              14.8                 36.1
       Accounts payable and accrued expenses                              724.5                636.2
       Income taxes                                                        35.8                  2.1
                                                                       --------             --------
               Total current liabilities                                  799.1                739.1

Long-term debt, less current installments                               1,314.3              1,412.9
Employee Stock Ownership Plan (ESOP) loan guarantee                       142.2                155.3
Postretirement and postemployment benefit liabilities                     244.6                244.5
Pension benefit liabilities                                               147.1                166.2
Asbestos-related long-term liabilities                                    483.8                506.5
Other long-term liabilities                                                94.8                105.4
Deferred income taxes                                                      62.7                 62.9
Minority interest in subsidiaries                                           8.3                 11.8
                                                                       --------             --------
               Total noncurrent liabilities                             2,497.8              2,665.5

Shareholders' equity:
       Common stock                                                        51.9                 51.9
       Capital in excess of par value                                     166.9                176.4
       Reduction for ESOP loan guarantee                                 (180.5)              (190.3)
       Retained earnings                                                1,251.3              1,196.2
       Accumulated other comprehensive loss                               (35.7)               (16.5)
       Treasury stock                                                    (518.6)              (538.5)
                                                                       --------             --------
               Total shareholders' equity                                 735.3                679.2
                                                                       --------             --------

               Total liabilities and shareholders' equity              $4,032.2             $4,083.8
                                                                       ========             ========
</TABLE>


See accompanying footnotes to the unaudited condensed consolidated financial
statements beginning on page 6.

                                       3
<PAGE>

                  Armstrong Holdings, Inc., and Subsidiaries
           Condensed Consolidated Statements of Shareholders' Equity
                             (amounts in millions)
                                   Unaudited

<TABLE>
<CAPTION>
                                                                            2000                      1999
                                                                          --------                  --------
<S>                                                                       <C>                       <C>
Common stock, $1 par value:
- ---------------------------
Balance at beginning of year & September 30                                 $ 51.9                    $ 51.9
                                                                          --------                  --------

Capital in excess of par value:
- -------------------------------
Balance at beginning of year                                               $ 176.4                    $173.0
Stock issuances and other                                                     (4.2)                      5.9
Contribution of treasury stock to ESOP                                        (5.3)                       -
                                                                          --------                  --------
Balance at September 30                                                    $ 166.9                    $178.9
                                                                          --------                  --------

Reduction for ESOP loan guarantee:
- ----------------------------------
Balance at beginning of year                                               $(190.3)                 $ (199.1)
Principal paid                                                                13.2                      11.2
Loans to ESOP                                                                 (7.3)                     (0.8)
Contribution of treasury stock to ESOP                                        (4.1)                        -
Accrued compensation                                                           8.0                       4.8
                                                                          --------                  --------
Balance at September 30                                                    $(180.5)                 $ (183.9)
                                                                          --------                  --------

Retained earnings:
- ------------------
Balance at beginning of year                                              $1,196.2                  $1,257.0
Net earnings                                                                 112.5    $112.5           192.8    $192.8
Tax benefit on dividends paid on
  unallocated common shares                                                    0.7                       1.4
                                                                          --------                  --------
  Total                                                                   $1,309.4                  $1,451.2
Less common stock dividends                                                   58.1                      57.7
                                                                          --------                  --------
Balance at September 30                                                   $1,251.3                  $1,393.5
                                                                          --------                  --------

Accumulated other comprehensive income (loss):
- ----------------------------------------------
Balance at beginning of year                                               $ (16.5)                  $ (25.4)
  Foreign currency translation adjustments and
     hedging activities                                                      (13.5)                      1.1
  Unrealized loss on available for sale securities                            (2.5)                        -
  Minimum pension liability adjustments                                       (3.2)                      3.0
                                                                          --------                  --------
 Total other comprehensive income (loss)                                     (19.2)    (19.2)            4.1       4.1
                                                                          --------   --------       --------   -------
Balance at September 30                                                    $ (35.7)                  $ (21.3)
                                                                          --------                  --------

Comprehensive income                                                                   $93.3                    $196.9
- --------------------                                                                 =======                   =======

Less treasury stock at cost:
- ----------------------------
Balance at beginning of year                                               $ 538.5                    $547.7
Stock purchases                                                                1.4                       0.8
Stock issuance activity, net                                                 (11.9)                     (2.4)
Contribution of treasury stock to ESOP                                        (9.4)                       -
                                                                          --------                  --------
Balance at September 30                                                    $ 518.6                    $546.1
                                                                          --------                  --------

Total shareholders' equity                                                 $ 735.3                    $873.0
                                                                          ========                   =======
</TABLE>



See accompanying footnotes to the unaudited condensed consolidated financial
statements beginning on page 6.

                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                        Nine Months Ended
                                                                                                          September 30,
                                                                                                      2000             1999
                                                                                                      ----             ----
<S>                                                                                                   <C>              <C>
Cash flows from operating activities:
     Net earnings                                                                                     $112.5           $192.8
     Adjustments to reconcile net earnings to net cash
           provided by operating activities:
       Depreciation and amortization, continuing operations                                            125.7            117.2
       Depreciation and amortization, discontinued operations                                            3.9              7.7
       Gain on sale of businesses                                                                     (211.3)            (1.8)
       Deferred income taxes                                                                             1.6              3.3
       Equity earnings from affiliates                                                                 (14.1)           (13.1)
       Reorganization and restructuring payments                                                        (2.9)           (14.8)
       Payments for asbestos-related claims, net of recoveries                                        (131.0)           (52.4)
       Charge for asbestos liability                                                                   236.0                -
       Decrease in net assets of businesses held for sale                                               (0.3)            (3.7)
       Increase in net assets of discontinued operations                                                   -             (7.8)
Changes in operating assets and liabilities net of effects of reorganization,
     restructuring and dispositions:
       Increase in receivables                                                                         (67.5)           (86.9)
       (Increase)/decrease in inventories                                                              (30.2)             1.6
       (Increase)/decrease in other current assets                                                     (11.1)            44.8
       Increase in other noncurrent assets                                                             (44.0)           (55.7)
       Increase in accounts payable and accrued expenses                                                 4.9             73.1
       Increase in income taxes payable                                                                 29.1             85.5
       Increase/(decrease) in other long-term liabilities                                               (8.7)             9.0
       Other, net                                                                                       24.4             (5.0)
                                                                                                      ------           ------
Net cash provided by operating activities                                                               17.0            293.8
                                                                                                      ------           ------

Cash flows from investing activities:
     Purchases of property, plant and equipment, continuing operations                                (107.8)          (115.3)
     Purchases of property, plant and equipment, discontinued operations                                (2.8)            (5.6)
     Investment in computer software                                                                    (8.5)            (6.4)
     Acquisitions, net of cash acquired                                                                 (6.5)            (3.8)
     Distributions from equity affiliates                                                               11.1             10.7
     Proceeds from the sale of assets                                                                    3.3              3.5
     Proceeds from the sale of businesses                                                              329.3             87.6
     Other, net                                                                                            -             (0.2)
                                                                                                      ------           ------
Net cash provided by (used for) investing activities                                                   218.1            (29.5)
                                                                                                      ------           ------

Cash flows from financing activities:
     Decrease in short-term debt, net                                                                  (42.8)           (34.1)
     Issuance of long-term debt                                                                            -            200.0
     Payments of long-term debt                                                                       (127.2)          (347.6)
     Cash dividends paid                                                                               (58.1)           (57.7)
     Purchase of common stock for the treasury, net                                                     (1.4)            (0.8)
     Proceeds from exercised stock options                                                               0.1              1.2
     Other, net                                                                                          5.9             (0.3)
                                                                                                      ------           ------
Net cash used for financing activities                                                                (223.5)          (239.3)
                                                                                                      ------           ------

Effect of exchange rate changes on cash and cash equivalents                                            (4.6)            (0.1)
                                                                                                      -------          ------

Net increase in cash and cash equivalents                                                               $7.0            $24.9
Cash and cash equivalents at beginning of period                                                       $26.6            $38.2
                                                                                                     -------           ------

Cash and cash equivalents at end of period                                                             $33.6            $63.1
                                                                                                     =======          =======
</TABLE>

See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 6.

                                       5
<PAGE>

Note 1. BASIS OF PRESENTATION
- -----------------------------

The accompanying consolidated financial statements contain the financial results
of Armstrong Holdings, Inc. ("Armstrong"). Armstrong acquired the stock of
Armstrong World Industries, Inc. on May 1, 2000. An indirect holding in
Armstrong World Industries, Inc. makes up substantially all of the assets of
Armstrong. Financial statements of Armstrong World Industries, Inc., a wholly
owned subsidiary of Armstrong, are shown due to the existence of publicly-traded
debt. Since Armstrong was not a publicly traded company and had no substantial
operations prior to May 1, 2000, the 1999 results of operations and financial
condition of Armstrong World Industries, Inc. are used for comparative purposes.
See Note 12 for discussion of the financial statement differences between
Armstrong Holdings, Inc. and Armstrong World Industries, Inc.

Operating results of 2000, compared with the corresponding period of 1999
included in this report, are unaudited. However, these results have been
reviewed by Armstrong's independent public accountants in accordance with
established professional standards and procedures for a limited review of
interim financial information.

Armstrong completed the previously announced sale of its Insulation Products
segment on May 31, 2000 (see Note 2). Accordingly, the accompanying condensed
consolidated financial statements reflect this business as a discontinued
operation and prior periods have been restated.

The accounting policies used in preparing these statements are the same as those
used in preparing Armstrong's consolidated financial statements for the year
ended December 31, 1999. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in Armstrong's annual report and Form 10-K for the fiscal
year ended December 31, 1999. In the opinion of management, all adjustments of a
normal recurring nature have been included to provide a fair statement of the
results for the reporting periods presented. Quarterly results are not
necessarily indicative of annual earnings. The third quarters of the wood
products segment ended on September 30, 2000 and October 2, 1999. No events
occurred between September 30, 1999 and October 2, 1999 materially affecting
Armstrong's financial position or results of operations.


Note 2. DISCONTINUED OPERATIONS
- -------------------------------

On May 31, 2000, Armstrong completed its sale of all of the entities, assets and
certain liabilities comprising its Insulation Products segment to Orion
Einundvierzigste Beteiligungsgesellschaft Mbh, a subsidiary of the Dutch
investment firm Gilde Investment Management N.V. for $264 million. The
transaction resulted in an after tax gain of $106.4 million, or $2.64 per share
in Armstrong's second quarter. The after tax gain on sale of $2.3 million
recorded in the third quarter relates to certain accrual and post-closing
adjustments. Armstrong expects all post-closing adjustments to be finalized in
the fourth quarter of 2000.


Note 3. DIVESTITURES
- --------------------

On July 31, 2000, Armstrong completed the sale of its Installation Products
Group ("IPG") to subsidiaries of the German company Ardex GmbH, for $86 million
in cash. Ardex purchased substantially all of the assets and liabilities of IPG
including its shares of the W.W. Henry Company. The transaction resulted in a
gain of $59.9 million ($44.4 million after tax or $1.09 per share) and was
recorded in other income during the third quarter. The financial results of IPG
were reported as part of the floor coverings segment. The proceeds and gain are
subject to certain post-closing adjustments. Under the terms of the agreement
and a related supply agreement, Armstrong will purchase some of its installation
products needs from Ardex for an initial term of eight years, subject to certain
minimums for the first five years after the sale. The agreement also calls for
price adjustments based upon changing market prices for raw materials, labor and
energy costs.



Note 4. ACQUISITIONS
- --------------------

On May 18, 2000 Armstrong acquired privately-held Switzerland-based Gema
Holdings AG ("Gema"), a leading manufacturer and installer of metal ceilings,
for $6 million plus certain contingent consideration based on future results
over the next three years. Gema, with annual sales of nearly $50 million, has
two manufacturing sites located in Austria and Switzerland and employs nearly
300 people. The acquisition has

                                       6
<PAGE>

been recorded under the purchase method of accounting. The purchase price has
been allocated to the assets acquired and the liabilities assumed based on the
estimated fair market value at the date of acquisition. The purchase price
allocation is preliminary. Pro-forma results of Gema have been omitted, as they
are not material.

Note 5. INDUSTRY SEGMENTS
- -------------------------

During the third quarter, it was determined that the textiles and sports
flooring operating segment should be separately presented. Previously, this
segment was included as part of the floor coverings segment. Prior year amounts
have been restated for comparability.

<TABLE>
<CAPTION>
(amounts in millions)                                  Three months                         Nine months
                                                    ended September 30                  ended September 30
Net sales to external customers                    2000              1999              2000              1999
- -------------------------------                    ----              ----              ----              ----
<S>                                              <C>               <C>            <C>               <C>
Floor coverings                                  $ 339.5           $ 351.3        $    974.5        $    986.2
Building products                                  214.1             200.0             594.8             571.8
Wood products                                      215.7             210.0             676.8             615.9
Textiles and sports flooring                        66.3              76.5             197.7             220.1
All other                                              -               6.5                 -              50.4
                                                 -------           -------        ----------        ----------
Total sales to external customers                $ 835.6           $ 844.3        $  2,443.8        $  2,444.4
                                                 =======           =======        ==========        ==========
</TABLE>

<TABLE>
<CAPTION>
                                                       Three months                         Nine months
                                                    ended September 30                  ended September 30
Segment operating income (loss)                    2000              1999              2000              1999
- -------------------------------                    ----              ----              ----              ----
<S>                                              <C>               <C>            <C>               <C>
Floor coverings                                  $  35.2           $  70.1        $    108.2        $    169.8
Building products                                   35.4              34.4              92.3              95.1
Wood products                                       18.5              22.1              65.6              70.6
Textiles and sports flooring                        (2.6)              4.4               1.1              10.4
All other                                            0.4               0.8               0.5               5.9
                                                 -------           -------        ----------        ----------
Total segment operating income                      86.9             131.8             267.7             351.8
Charge for asbestos liability                          -                 -            (236.0)                -
Unallocated corporate (expense)                    (18.7)             (2.5)            (22.9)             (8.0)
                                                 -------           -------        ----------        ----------
Total consolidated operating income              $  68.2           $ 129.3        $      8.8        $    343.8
                                                 =======           =======        ==========        ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                                   September 30       December 31
Segment assets                                                                         2000              1999
- --------------                                                                         ----              ----
<S>                                                                                  <C>              <C>
Floor coverings                                                                    $   996.0          $1,071.4
Building products                                                                      544.6             535.1
Wood products                                                                        1,366.4           1,308.0
Textiles and sports flooring                                                           212.4             211.0
All other                                                                               16.1              16.0
                                                                                   ---------         ---------
Total segment assets                                                                 3,135.5           3,141.5
Assets not assigned to business units                                                  896.7             942.3
                                                                                   ---------         ---------
Total consolidated assets                                                          $ 4,032.2         $ 4,083.8
                                                                                   =========         =========
</TABLE>

Note 6. REORGANIZATION AND RESTRUCTURING ACTIVITIES
- ---------------------------------------------------

The following table summarizes activity in the reorganization and restructuring
accruals for the first nine months of 2000 and 1999:

<TABLE>
<CAPTION>
                                        Beginning         Cash      Net Charges/                      Ending
(amounts in millions)                    balance        payments     (Reversals)      Other           balance
                                         -------        --------     -----------      -----           -------
<S>                                       <C>            <C>           <C>           <C>              <C>
2000                                      $12.1          ($2.9)        $15.7         ($1.0)           $ 23.9
1999                                       30.6          (14.8)            -          (0.1)             15.7
</TABLE>

A $17.0 million pre-tax reorganization charge was recorded in the third quarter
of 2000, of which $8.6 million related to severance and enhanced retirement
benefits for more than 180 positions (approximately 66% related to salaried
positions) within the European Flooring business. Reorganization actions include
staff reductions due to the elimination of administrative positions, the
consolidation and closing of sales offices in Europe and the closure of the Team
Valley, England commercial tile plant. The remaining portion of the
reorganization charge primarily related to the remaining payments on a
noncancelable operating lease for

                                       7
<PAGE>

an office facility in the U.S. The employees who occupied this office facility
are being relocated to the corporate headquarters.

Armstrong also recorded a $12.2 million charge to cost of goods sold in the
third quarter of 2000 for write-downs of inventory and production-line assets
that were not categorized as reorganization costs related to the European
reorganization efforts. The inventory write-downs were related to changes in
product offerings while the write-downs of production-line assets primarily
related to changes in production facilities and product offerings.

In addition, $1.3 million of the remaining accrual for the 1998 reorganization
was reversed, comprising certain severance accruals that were no longer
necessary as certain individuals remained employed by Armstrong. The amount in
"other" is primarily related to foreign currency translation.

Excluding the $17.0 million accrual related to the third quarter 2000
reorganization charge, most of the remaining balance at September 30, 2000
relates to a noncancelable operating lease.


Note 7. OTHER COMPREHENSIVE INCOME (LOSS)
- -----------------------------------------

The related tax effects allocated to each component of other comprehensive
income (loss) for the nine months ended September 30, 2000 are as follows.

<TABLE>
<CAPTION>
                                                                          Before                     Net of
                                                                            Tax          Tax           Tax
(amounts in millions)                                                     Amount       Benefit       Amount
                                                                          ------       -------       ------
<S>                                                                      <C>            <C>         <C>
Foreign currency translation adjustments
    and hedging activities                                               $(13.5)           -        $(13.5)
Unrealized loss on available for sale securities                           (2.5)           -          (2.5)
Minimum pension liability adjustment                                       (5.0)        $1.8          (3.2)
                                                                         -------        ----        -------
Other comprehensive income (loss)                                        $(21.0)        $1.8        $(19.2)
                                                                         =======        ====        =======
</TABLE>

<TABLE>
<CAPTION>
Note 8. SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
(amounts in millions)                                                                    Nine Months Ended
                                                                                           September 30
                                                                                        2000         1999
                                                                                        ----         ----
<S>                                                                                   <C>           <C>
Interest paid                                                                         $ 76.3        $ 74.9
Income taxes paid, net                                                                $ 11.1        $ 21.1
</TABLE>

Note 9. EARNINGS (LOSS) PER SHARE
- ---------------------------------

The difference between the average number of basic and diluted common shares
outstanding is due to contingently issuable shares and the effect of dilutive
stock options. Earnings per share components may not add due to rounding. The
diluted earnings per share components for the first nine months of 2000 use the
basic number of shares due to the loss on continuing operations.

Note 10. OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS
- -------------------------------------------------------

Personal Injury Litigation

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. During the first nine months of 2000, the Center for Claims Resolution
("Center") received and verified approximately 45,300 claims naming Armstrong as
a defendant compared to approximately 40,500 during the first nine months of
1999.

Armstrong is a defendant in approximately 173,000 pending personal injury claims
as of September 30, 2000. Approximately 85,000 (or 49%) of these claims are
covered under the Center's Strategic Settlement Program ("SSP") compared to 36%
SSP coverage of the December 31, 1999 pending claims.

Asbestos-Related Liability

                                       8
<PAGE>

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.

In the second quarter of 2000, Armstrong recorded a charge to increase its
estimate of probable asbestos-related liability by $236.0 million. The increase
in the estimated liability reflected higher than anticipated claims and higher
average settlement costs for claims during the first half of 2000, primarily for
settlements outside of the Center's SSP.

In the third quarter of 2000, the number of filed claims was within the current
expectations but Armstrong's average cost to settle claims was higher than
anticipated. Armstrong will continue to study its experience to identify trends
and to assess their impact on the range of liability that is probable and
estimable. If additional study determines that current cost levels will
continue, an increase in the probable asbestos-related liability will be
necessary.

Armstrong's estimate of its asbestos-related liability that is probable and
estimable through 2006 ranges from $758.8 million to $1,363.3 million as of
September 30, 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, the cost to
settle claims outside the broad-based settlement program 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 $758.8 million as a liability in the condensed consolidated financial
statements in accordance with generally accepted accounting principles. Of this
amount, management expects to incur asbestos liability payments of approximately
$275.0 million over the next 12 months and has reflected such amount as a
current liability as of September 30, 2000. This compares to total liability
payments over the prior 12 months of $220.8 million.

The Center is involved in numerous legal proceedings with a former member of the
Center related to the former member's refusal to pay its share of certain
settlements concluded by the Center while that company was a member. In
addition, another Center member has terminated its membership due to exhaustion
of the assets of its claims trust. This member has also asserted that it is
entitled to reductions of certain payments. While the Center believes the member
is not entitled to any adjustment, the impact, if any, on the timing of cash
flows or amount of recorded liability is uncertain. In estimating its recorded
liability, Armstrong has not anticipated unfavorable outcomes resulting from the
legal proceedings or any increases in Armstrong's share of liability stemming
from the termination of these former Center members. Armstrong's share of
liability could increase should there be any negative developments related to
these matters.

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 2006. Accordingly, substantially all of the range discussed
above, and as recorded by Armstrong, comprises management's best estimate of
claims expected to be filed within the forthcoming 6 years. For claims that may
be filed beyond 2006, 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 occur, 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.

                                       9
<PAGE>

CODEFENDANT BANKRUPTCIES

Certain codefendant companies have filed for reorganization under Chapter 11 of
the U.S. Bankruptcy Code, including recent filings by Babcock & Wilcox,
Pittsburgh Corning and Owens Corning. As a consequence, litigation against them
(with some exceptions) has been stayed or restricted. However, Armstrong does
not expect to see a significant increase in the number of claims filed since it
has been named as a defendant in the majority of claims against these
co-defendants. Armstrong could see higher settlement demands from claimants as
the number of defendants in the litigation has decreased, but the Center plans
to negotiate to minimize any impact on settlement costs. Due to the
uncertainties involved, the long-term effect of these proceedings on the
litigation cannot be predicted and Armstrong believes it could be several months
before Armstrong receives the sufficient data to allow it to ascertain the
impact.

Insurance Asset

As with its estimated asbestos related liability, Armstrong continually
evaluates the probable insurance asset to be recorded. An insurance asset in the
amount of $268.3 million is recorded as of September 30, 2000. Approximately
$27.7 million was received in the second quarter of 2000 pursuant to existing
settlements. Of the total recorded asset, approximately $75.8 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,
activities such as settlement discussions with insurance carriers party to the
ADR and those not party to the ADR, the final determination of coverage
shared with ACandS and the financial condition of the insurers, Armstrong may
revise its estimate of probable insurance recoveries. Of the $268.3 million
asset, $32.2 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.

Conclusion

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. These uncertainties include the number of future claims
to be filed, the cost to settle claims in the future, which may be influenced by
factors including, but not limited to, the financial viability of other
defendants, the impact of any potential legislation and the ability of the
Center to achieve future SSP agreements, and the impact of the ADR proceedings
on the insurance asset. 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. Armstrong believes that potential future charges may be
material to the periods in which they are taken. See further discussion of
Liquidity and Capital Resources in Note 13.

Note 11. - ENVIRONMENTAL LIABILITIES
- ------------------------------------

Liabilities of $14.8 million and $14.7 million were recorded at September 30,
2000 and December 31, 1999, respectively, for potential environmental
liabilities that Armstrong considers probable and for which a reasonable
estimate of the probable liability could be made. Where existing data is
sufficient to estimate the 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 assessments and remediation activities progress at each individual site,
these liabilities are reviewed to reflect additional information as it becomes
available.

The estimated liabilities do not take into account any claims for recoveries
from insurance or third parties. Such recoveries, where probable, have been
recorded as an asset in the consolidated financial statements and are either
available through settlement or probable of recovery through negotiation or
litigation.

Actual costs to be incurred at identified sites in the future may vary from
estimates, given the inherent uncertainties in evaluating environmental
liabilities. Subject to the imprecision in estimating environmental remediation
costs, Armstrong believes that any sum it may have to pay in connection with
environmental matters in excess of the amounts noted above may be material to
earnings in such future period.


Note 12 - DIFFERENCES BETWEEN ARMSTRONG HOLDINGS INC. AND ARMSTRONG WORLD
- --------------------------------------------------------------------------
          INDUSTRIES, INC.
          ----------------

The difference between the financial statements is primarily due to transactions
related to the formation of Armstrong Holdings, Inc. and stock activity.

Note 13 - LIQUIDITY AND CAPITAL RESOURCES
- -----------------------------------------

                                       10
<PAGE>

As of September 30, 2000, Armstrong had no outstanding borrowings under
Armstrong World Industries, Inc.'s $450 million credit facility that expires in
October 2003 or under Armstrong World Industries, Inc.'s $450 million, 364 day
credit facility that expired on October 19, 2000. These lines have been in
support of commercial paper issuances. The outstanding amount of commercial
paper at September 30, 2000 was $352.6 million.

On October 5, 2000, Owens Corning voluntarily filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. This filing has had a significant effect
on Armstrong's liquidity. In early October, Armstrong was in discussions to
obtain a 364 day credit facility of up to $400 million, with the intention of
completing the new facility prior to the October 19, 2000 expiration of the
existing $450 million, 364 day credit facility. Whereas indications from
participant banks led Armstrong to believe the facility would be fully
subscribed, following the Owens Corning filing the potential participants in the
new credit facility decided to reevaluate their credit exposures to Armstrong,
primarily due to Armstrong's asbestos liability. Agreement was not reached on
terms for a new facility. Subsequently the $450 million, 364 day credit facility
expired on October 19, 2000.

On October 25, 2000, both Standard & Poor's and Moody's Investors Services
downgraded Armstrong's long term debt ratings to BBB- and Baa3 and short term
debt ratings to A-3 and P-3, respectively, citing the reduction in committed
credit facilities, prospects for weaker operating performance and continued
uncertainty surrounding the asbestos liability, owing to among other things, the
Owens Corning bankruptcy filing. Both agencies indicated the potential for
additional downgrades which could result from, among other things, the inability
to increase untapped committed borrowing capacity, significant increases in the
cash flow required to service the asbestos liability, or deteriorating operating
performance. Since October 25, 2000, Armstrong stopped issuing commercial paper
and began to draw on its $450 million credit facility that expires in October
2003. As of November 14, 2000, the $450 million credit facility was fully drawn,
approximately $83 million of commercial paper was outstanding and Armstrong had
approximately $127 million of cash on deposit. The remaining outstanding
commercial paper will mature by November 22, 2000.

Armstrong will face liquidity pressures in the near future. Such pressures will
be exacerbated should certain events occur. Specifically, should Armstrong's
long term debt ratings be further downgraded by both Standard & Poor's and
Moody's, holders of Employee Stock Ownership Plan bonds totaling $142.2 million
as of September 30, 2000 would have the right to require Armstrong to redeem
them under the terms of the Note Purchase Agreement dated June 19, 1989 for
8.43% Series A Guaranteed Serial ESOP Notes due 1989-2001 and 9.00% Series B
Guaranteed Serial ESOP Notes due 2000-2004. As of November 14, 2000, Armstrong
was not in violation of any debt covenants. The $450 million credit facility
that expires in 2003 contains customary events of default, including failure to
make payments, failure to meet other material obligations within specific time
periods and the acceleration of other material indebtedness. In addition, should
Armstrong World Indutstires, Inc.'s consolidated net worth decline by more than
$180.6 million from its September 30, 2000 balance, Armstrong would violate the
minimum consolidated net worth covenant of the $450 million credit facility. Any
event of default could result in the acceleration of the maturity of the
facility. Other factors could also influence Armstrong's liquidity. The outlook
for Armstrong World Industries, Inc.'s asbestos liability cash payments is
highly uncertain. See Part II, Item I "Legal Proceedings" for additional
information concerning asbestos litigation. Unforeseen deterioration in expected
earnings or working capital requirements would also negatively impact liquidity.

On October 30, 2000, Armstrong's Board of Directors elected to suspend the
quarterly cash dividend payment with the intent to increase financial
flexibility. Armstrong has acted to reduce working capital and capital
expenditures and is currently evaluating other alternatives to increase
liquidity, which include, among other things, selling non-core assets and
businesses, obtaining secured financing, and selling receivables. Armstrong
believes that sufficient incremental credit will be available to prevent a
liquidity crisis in the next few months but it is unclear whether obtaining such
incremental credit would be in the best interests of Armstrong. If Armstrong
does not obtain sufficient additional liquidity in the next few months,
Armstrong will have to consider seeking protection under the U.S. Bankruptcy
Code.

                                      11
<PAGE>

                       Independent Auditors' Review Report
                       -----------------------------------

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


We have reviewed the condensed consolidated balance sheet of Armstrong Holdings,
Inc., and subsidiaries as of September 30, 2000, and the related condensed
consolidated statements of earnings for the three and nine-month periods ended
September 30, 2000 and 1999, and the condensed consolidated statements of cash
flows and shareholders' equity for the nine-month periods ended September 30,
2000 and 1999. These condensed consolidated financial statements are the
responsibility of the Company's management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.

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

We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Armstrong World Industries, Inc.,
and subsidiaries as of December 31, 1999, and the related consolidated
statements of earnings, cash flows and shareholders' equity for the year then
ended (not presented herein); and in our report dated February 2, 2000, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1999, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.


KPMG LLP



Philadelphia, Pennsylvania
November 14, 2000


                                      12
<PAGE>

               Armstrong World Industries, Inc., and Subsidiaries
                  Condensed Consolidated Statements of Earnings
                             (amounts in millions)
                                    Unaudited


<TABLE>
<CAPTION>
                                                                                Three Months Ended          Nine Months Ended
                                                                                  September 30                September 30
                                                                                  ------------                ------------
                                                                                 2000        1999            2000        1999
                                                                                 ----        ----            ----        ----
<S>                                                                             <C>         <C>           <C>         <C>
Net sales                                                                       $835.6      $844.3        $2,443.8    $2,444.4
Cost of goods sold                                                               595.9       554.0         1,709.4     1,614.7
                                                                                ------      ------        --------    --------
Gross profit                                                                     239.7       290.3           734.4       829.7

Selling, general and administrative expense                                      154.8       159.7           469.3       480.4
Charge for asbestos liability                                                        -           -           236.0           -
Reorganization charges, net                                                       15.7           -            15.7           -
Goodwill amortization                                                              5.9         6.5            18.2        18.6
Equity (earnings) from affiliates                                                 (4.9)       (5.2)          (14.1)      (13.1)
                                                                                ------      ------        --------    --------
Operating income                                                                  68.2       129.3             9.3       343.8

Interest expense                                                                  26.0        25.8            79.8        78.9
Other (income) expense, net                                                      (61.6)        3.4           (67.0)       (4.5)
                                                                                ------      ------        --------    --------
Earnings (loss) from continuing operations before income taxes                   103.8       100.1            (3.5)      269.4
Income taxes (benefit)                                                            31.8        38.2            (0.6)      101.3
                                                                                ------      ------        --------    --------

Earnings (loss) from continuing operations                                       $72.0       $61.9           ($2.9)     $168.1
                                                                                ------      ------        --------    --------
Earnings from discontinued operations, net of
  tax of $0, $4.3, $3.2, and $11.0, respectively                                     -        $9.8            $7.0       $24.7
Gain on sale of discontinued operations, net of
   tax of $0.9, $0, $42.8 and $0 respectively                                     $2.3           -           108.7           -
                                                                                ------      ------        --------    --------
Earnings from discontinued operations                                              2.3         9.8           115.7        24.7

Net earnings                                                                     $74.3       $71.7          $112.8      $192.8
                                                                                ======      ======        ========    ========
</TABLE>


See accompanying footnotes to the unaudited condensed consolidated financial
statements beginning on page 17.

                                       13
<PAGE>

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

<TABLE>
<CAPTION>
                                                                         Unaudited
            Assets                                                   September 30, 2000     December 31, 1999
            ------                                                   ------------------     -----------------
<S>                                                                        <C>                    <C>
Current assets:
      Cash and cash equivalents                                            $33.6                  $26.6
      Accounts receivable less allowance
         for discounts and losses                                          479.6                  403.4
      Inventories:
           Finished goods                                                  263.4                  257.9
           Work in process                                                  54.4                   42.4
           Raw materials and supplies                                      162.5                  154.6
                                                                        --------               --------
              Total gross inventories                                      480.3                  454.9
            Less LIFO and other reserves                                    50.8                   48.0
                                                                        --------               --------
              Total inventories                                            429.5                  406.9

      Deferred income taxes                                                 55.7                   40.6
      Net assets of discontinued operations                                    -                   93.5
      Other current assets                                                  84.1                   86.7
                                                                        --------               --------
              Total current assets                                       1,082.5                1,057.7

Property, plant, and equipment                                           2,365.6                2,481.1
      Less accumulated depreciation and amortization                     1,061.1                1,123.6
                                                                        --------               --------
              Net property, plant and equipment                          1,304.5                1,357.5

Insurance for asbestos-related liabilities, noncurrent                     236.1                  270.0
Investment in affiliates                                                    35.6                   34.2
Goodwill, net                                                              890.5                  935.1
Other intangibles, net                                                      55.8                   54.9
Other noncurrent assets                                                    427.2                  374.4
                                                                        --------               --------
              Total assets                                              $4,032.2               $4,083.8
                                                                        ========               ========

      Liabilities and Shareholders' Equity
      ------------------------------------
Current liabilities:
      Short-term debt                                                      $24.0                  $64.7
      Current installments of long-term debt                                14.8                   36.1
      Accounts payable and accrued expenses                                724.5                  636.2
      Income taxes                                                          35.8                    2.1
                                                                        --------               --------
              Total current liabilities                                    799.1                  739.1

Long-term debt, less current installments                                1,314.3                1,412.9
Long-term amounts payable to parent company                                  4.7                      -
Employee Stock Ownership Plan (ESOP) loan guarantee                        142.2                  155.3
Postretirement and postemployment benefit liabilities                      244.6                  244.5
Pension benefit liabilities                                                147.1                  166.2
Asbestos-related long-term liabilities                                     483.8                  506.5
Other long-term liabilities                                                 94.8                  105.4
Deferred income taxes                                                       62.7                   62.9
Minority interest in subsidiaries                                            8.3                   11.8
                                                                        --------               --------
              Total noncurrent liabilities                               2,502.5                2,665.5

Shareholders' equity:
      Common stock                                                          51.9                   51.9
      Capital in excess of par value                                       175.8                  176.4
      Reduction for ESOP loan guarantee                                   (180.5)                (190.3)
      Retained earnings                                                  1,247.6                1,196.2
      Accumulated other comprehensive loss                                 (35.7)                 (16.5)
      Treasury stock                                                      (528.5)                (538.5)
                                                                        --------               --------
              Total shareholders' equity                                   730.6                  679.2
                                                                        --------               --------

              Total liabilities and shareholders' equity                $4,032.2               $4,083.8
                                                                        ========               ========
</TABLE>


See accompanying footnotes to the unaudited condensed consolidated financial
statements beginning on page 17.

                                       14
<PAGE>

               Armstrong World Industries, Inc., and Subsidiaries
            Condensed Consolidated Statements of Shareholders' Equity
                              (amounts in millions)
                                    Unaudited

<TABLE>
<CAPTION>
                                                                                2000                      1999
                                                                                ----                      ----
<S>                                                                           <C>                        <C>
Common stock, $1 par value:
- --------------------------
Balance at beginning of year & September 30                                  $   51.9                  $   51.9
                                                                             ---------                 ---------

Capital in excess of par value:
- ------------------------------
Balance at beginning of year                                                 $  176.4                  $  173.0
Stock issuances and other                                                         4.7                       5.9
Contribution of treasury stock to ESOP                                           (5.3)                       -
                                                                             ---------                 ---------
Balance at September 30                                                      $  175.8                  $  178.9
                                                                             ---------                 ---------

Reduction for ESOP loan guarantee:
- ---------------------------------
Balance at beginning of year                                                 $ (190.3)                 $ (199.1)
Principal paid                                                                   13.2                      11.2
Loans to ESOP                                                                    (7.3)                     (0.8)
Contribution of treasury stock to ESOP                                           (4.1)                        -
Accrued compensation                                                              8.0                       4.8
                                                                             ---------                 ---------
Balance at September 30                                                      $ (180.5)                 $ (183.9)
                                                                             ---------                 ---------

Retained earnings:
- -----------------
Balance at beginning of year                                                 $1,196.2                  $1,257.0
Net earnings                                                                    112.8     $112.8          192.8    $ 192.8
Tax benefit on dividends paid on
  unallocated common shares                                                       0.7                       1.4
                                                                             ---------                 ---------
  Total                                                                      $1,309.7                  $1,451.2
Less rights redemptions                                                           2.0                         -
Less common stock dividends                                                      60.1                      57.7
                                                                             ---------                 ---------
Balance at September 30                                                      $1,247.6                  $1,393.5
                                                                             ---------                 ---------

Accumulated other comprehensive income (loss):
- ---------------------------------------------
Balance at beginning of year                                                 $  (16.5)                 $  (25.4)
  Foreign currency translation adjustments and
     hedging activities                                                         (13.5)                      1.1
  Unrealized loss on available for sale securities                               (2.5)                        -
  Minimum pension liability adjustments                                          (3.2)                      3.0
                                                                             ---------                 ---------
 Total other comprehensive income (loss)                                        (19.2)      (19.2)          4.1        4.1
                                                                             ---------    -------      ---------   -------
Balance at September 30                                                      $  (35.7)                 $  (21.3)
                                                                             ---------                 ---------

Comprehensive income                                                                      $  93.6                  $ 196.9
- --------------------                                                                      =======                  =======

Less treasury stock at cost:
- ---------------------------
Balance at beginning of year                                                 $  538.5                  $  547.7
Stock purchases                                                                     -                       0.8
Stock issuance activity, net                                                     (0.6)                     (2.4)
Contribution of treasury stock to ESOP                                           (9.4)                        -
                                                                             ---------                 ---------
Balance at September 30                                                      $  528.5                  $  546.1
                                                                             ---------                 ---------

Total shareholders' equity                                                   $  730.6                  $  873.0
                                                                             ========                  ========
</TABLE>



See accompanying footnotes to the unaudited condensed consolidated financial
statements beginning on page 17.

                                       15
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                       Nine Months Ended
                                                                                                         September 30,
                                                                                                       2000         1999
                                                                                                       ----         ----
<S>                                                                                                   <C>          <C>
Cash flows from operating activities:
     Net earnings                                                                                     $112.8       $192.8
     Adjustments to reconcile net earnings to net cash
           provided by operating activities:
       Depreciation and amortization, continuing operations                                            125.7        117.2
       Depreciation and amortization, discontinued operations                                            3.9          7.7
       Gain on sale of businesses                                                                     (211.3)        (1.8)
       Deferred income taxes                                                                             1.6          3.3
       Equity earnings from affiliates                                                                 (14.1)       (13.1)
       Reorganization and restructuring payments                                                        (2.9)       (14.8)
       Payments for asbestos-related claims, net of recoveries                                        (131.0)       (52.4)
       Charge for asbestos liability                                                                   236.0            -
       Decrease in net assets of businesses held for sale                                               (0.3)        (3.7)
       Increase in net assets of discontinued operations                                                   -         (7.8)
Changes in operating assets and liabilities net of effects of reorganization,
     restructuring and dispositions:
       Increase in receivables                                                                         (67.5)       (86.9)
       (Increase)/decrease in inventories                                                              (30.2)         1.6
       (Increase)/decrease in other current assets                                                     (11.1)        44.8
       Increase in other noncurrent assets                                                             (44.0)       (55.7)
       Increase in accounts payable and accrued expenses                                                 4.9         73.1
       Increase in income taxes payable                                                                 29.1         85.5
       Increase/(decrease) in other long-term liabilities                                               (8.7)         9.0
       Other, net                                                                                       24.1         (5.0)
                                                                                                      ------       ------
Net cash provided by operating activities                                                               17.0        293.8
                                                                                                      ------       ------

Cash flows from investing activities:
     Purchases of property, plant and equipment, continuing operations                                (107.8)      (115.3)
     Purchases of property, plant and equipment, discontinued operations                                (2.8)        (5.6)
     Investment in computer software                                                                    (8.5)        (6.4)
     Acquisitions, net of cash acquired                                                                 (6.5)        (3.8)
     Distributions from equity affiliates                                                               11.1         10.7
     Proceeds from the sale of assets                                                                    3.3          3.5
     Proceeds from the sale of businesses                                                              329.3         87.6
     Other, net                                                                                            -         (0.2)
                                                                                                      ------       ------
Net cash provided by (used for) investing activities                                                   218.1        (29.5)
                                                                                                      ------       ------

Cash flows from financing activities:
     Decrease in short-term debt, net                                                                  (42.8)       (34.1)
     Issuance of long-term debt                                                                            -        200.0
     Payments of long-term debt                                                                       (127.2)      (347.6)
     Cash dividends paid                                                                               (58.1)       (57.7)
     Purchase of common stock for the treasury, net                                                     (1.4)        (0.8)
     Proceeds from exercised stock options                                                               0.1          1.2
     Other, net                                                                                          5.9         (0.3)
                                                                                                      ------       ------
Net cash used for financing activities                                                                (223.5)      (239.3)
                                                                                                      ------       ------

Effect of exchange rate changes on cash and cash equivalents                                            (4.6)        (0.1)
                                                                                                      ------       ------

Net increase in cash and cash equivalents                                                               $7.0        $24.9
Cash and cash equivalents at beginning of period                                                       $26.6        $38.2
                                                                                                      ------       ------

Cash and cash equivalents at end of period                                                             $33.6        $63.1
                                                                                                      ======       ======
</TABLE>

See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 17.

                                       16
<PAGE>

Note 1. BASIS OF PRESENTATION
- -----------------------------

The accompanying consolidated financial statements contain the financial results
of Armstrong World Industries, Inc. ("Armstrong"). Armstrong Holdings, Inc.
acquired the stock of Armstrong on May 1, 2000. An indirect holding in Armstrong
makes up substantially all of the assets of Armstrong Holdings, Inc. Financial
statements of Armstrong, a wholly owned subsidiary of Armstrong Holdings, Inc.,
are shown due to the existence of publicly-traded debt. See Note 11 for
discussion of the financial statement differences between Armstrong Holdings,
Inc. and Armstrong World Industries, Inc.

Operating results of 2000, compared with the corresponding period of 1999
included in this report, are unaudited.

Armstrong completed the previously announced sale of its Insulation Products
segment on May 31, 2000 (see Note 2). Accordingly, the accompanying condensed
consolidated financial statements reflect this business as a discontinued
operation and prior periods have been restated.

The accounting policies used in preparing these statements are the same as those
used in preparing Armstrong's consolidated financial statements for the year
ended December 31, 1999. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in Armstrong's annual report and Form 10-K for the fiscal
year ended December 31, 1999. In the opinion of management, all adjustments of a
normal recurring nature have been included to provide a fair statement of the
results for the reporting periods presented. Quarterly results are not
necessarily indicative of annual earnings. The third quarters of the wood
products segment ended on September 30, 2000 and October 2, 1999. No events
occurred between September 30, 1999 and October 2, 1999 materially affecting
Armstrong's financial position or results of operations.


Note 2. DISCONTINUED OPERATIONS
- -------------------------------

On May 31, 2000, Armstrong completed its sale of all of the entities, assets and
certain liabilities comprising its Insulation Products segment to Orion
Einundvierzigste Beteiligungsgesellschaft Mbh, a subsidiary of the Dutch
investment firm Gilde Investment Management N.V. for $264 million. The
transaction resulted in an after tax gain of $106.4 million, or $2.64 per share
in Armstrong's second quarter. The after tax gain on sale of $2.3 million
recorded in the third quarter relates to certain accrual and post-closing
adjustments. Armstrong expects all post-closing adjustments to be finalized in
the fourth quarter of 2000.


Note 3. DIVESTITURES
- --------------------

On July 31, 2000, Armstrong completed the sale of its Installation Products
Group ("IPG") to subsidiaries of the German company Ardex GmbH, for $86 million
in cash. Ardex purchased substantially all of the assets and liabilities of IPG
including its shares of the W.W. Henry Company. The transaction resulted in a
gain of $59.9 million ($44.4 million after tax or $1.09 per share) and was
recorded in other income during the third quarter. The financial results of IPG
were reported as part of the floor coverings segment. The proceeds and gain are
subject to certain post-closing adjustments. Under the terms of the agreement
and a related supply agreement, Armstrong will purchase some of its installation
products needs from Ardex for an initial term of eight years, subject to certain
minimums for the first five years after the sale. The agreement also calls for
price adjustments based upon changing market prices for raw materials, labor and
energy costs.



Note 4. ACQUISITIONS
- --------------------

On May 18, 2000 Armstrong acquired privately-held Switzerland-based Gema
Holdings AG ("Gema"), a leading manufacturer and installer of metal ceilings,
for $6 million plus certain contingent consideration based on future results
over the next three years. Gema, with annual sales of nearly $50 million, has
two manufacturing sites located in Austria and Switzerland and employs nearly
300 people. The acquisition has been recorded under the purchase method of
accounting. The purchase price has been allocated to the assets acquired and the
liabilities assumed based on the estimated fair market value at the date of
acquisition. The purchase price allocation is preliminary. Pro-forma results of
Gema have been omitted, as they are not material.

                                       17
<PAGE>

Note 5. INDUSTRY SEGMENTS
- -------------------------

During the third quarter, it was determined that the textiles and sports
flooring operating segment should be separately presented. Previously, this
segment was included as part of the floor coverings segment. Prior year amounts
have been restated for comparability.

<TABLE>
<CAPTION>
(amounts in millions)                                  Three months                         Nine months
                                                    ended September 30                  ended September 30
Net sales to external customers                    2000              1999              2000              1999
- -------------------------------                    ----              ----              ----              ----
<S>                                              <C>               <C>             <C>               <C>
Floor coverings                                  $ 339.5           $ 351.3         $   974.5         $   986.2
Building products                                  214.1             200.0             594.8             571.8
Wood products                                      215.7             210.0             676.8             615.9
Textiles and sports flooring                        66.3              76.5             197.7             220.1
All other                                              -               6.5                 -              50.4
                                                 -------           -------         ---------         ---------
Total sales to external customers                $ 835.6           $ 844.3         $ 2,443.8         $ 2,444.4
                                                 =======           =======         =========         =========

<CAPTION>
                                                       Three months                         Nine months
                                                    ended September 30                  ended September 30
Segment operating income (loss)                    2000              1999              2000              1999
- -------------------------------                    ----              ----              ----              ----
<S>                                              <C>               <C>             <C>               <C>
Floor coverings                                  $  35.2           $  70.1         $   108.2         $   169.8
Building products                                   35.4              34.4              92.3              95.1
Wood products                                       18.5              22.1              65.6              70.6
Textiles and sports flooring                        (2.6)              4.4               1.1              10.4
All other                                            0.4               0.8               0.5               5.9
                                                 -------           -------         ---------         ---------
Total segment operating income                      86.9             131.8             267.7             351.8
Charge for asbestos liability                          -                 -            (236.0)                -
Unallocated corporate (expense)                    (18.7)             (2.5)            (22.4)             (8.0)
                                                 -------           -------         ---------         ---------
Total consolidated operating income              $  68.2           $ 129.3         $     9.3         $   343.8
                                                 =======           =======         =========         =========

<CAPTION>
                                                                                   September 30       December 31
Segment assets                                                                         2000              1999
- --------------                                                                         ----              ----
<S>                                                                                <C>               <C>
Floor coverings                                                                    $   996.0         $ 1,071.4
Building products                                                                      544.6             535.1
Wood products                                                                        1,366.4           1,308.0
Textiles and sports flooring                                                           212.4             211.0
All other                                                                               16.1              16.0
                                                                                   ---------         ---------
Total segment assets                                                                 3,135.5           3,141.5
Assets not assigned to business units                                                  896.7             942.3
                                                                                   ---------         ---------
Total consolidated assets                                                          $ 4,032.2         $ 4,083.8
                                                                                   =========         =========
</TABLE>


Note 6. REORGANIZATION AND RESTRUCTURING ACTIVITIES
- ---------------------------------------------------

The following table summarizes activity in the reorganization and restructuring
accruals for the first nine months of 2000 and 1999:

<TABLE>
<CAPTION>
                                        Beginning         Cash      Net Charges/                      Ending
(amounts in millions)                    balance        payments     (Reversals)      Other           balance
                                         -------        --------     -----------      -----           -------
<S>                                       <C>            <C>           <C>           <C>              <C>
2000                                      $12.1          ($2.9)        $15.7         ($1.0)           $ 23.9
1999                                       30.6          (14.8)          -            (0.1)             15.7
</TABLE>

A $17.0 million pre-tax reorganization charge was recorded in the third quarter
of 2000, of which $8.6 million related to severance and enhanced retirement
benefits for more than 180 positions (approximately 66% related to salaried
positions) within the European Flooring business. Reorganization actions include
staff reductions due to the elimination of administrative positions, the
consolidation and closing of sales offices in Europe and the closure of the Team
Valley, England commercial tile plant. The remaining portion of the
reorganization charge primarily related to remaining payments on a noncancelable
operating lease for an office facility in the U.S. The employees who occupied
this office facility are being relocated to the corporate headquarters.

Armstrong also recorded a $12.2 million charge to cost of goods sold in the
third quarter of 2000 for write-downs of inventory and production-line assets
that were not categorized as reorganization costs related to

                                       18
<PAGE>

the European reorganization efforts. The inventory write-downs were related to
changes in product offerings while the write-downs of production-line assets
primarily related to changes in production facilities and product offerings.

In addition, $1.3 million of the remaining accrual for the 1998 reorganization
charge was reversed, comprising certain severance accruals that were no longer
necessary as certain individuals remained employed by Armstrong. The amount in
"other" is primarily related to foreign currency translation.

Excluding the $17.0 million accrual related to the third quarter 2000
reorganization charge, most of the remaining balance at September 30, 2000
relates to a noncancelable operating lease.


Note 7. OTHER COMPREHENSIVE INCOME (LOSS)
- -----------------------------------------

The related tax effects allocated to each component of other comprehensive
income (loss) for the nine months ended September 30, 2000 are as follows.

<TABLE>
<CAPTION>
                                                                          Before                     Net of
                                                                            Tax          Tax           Tax
(amounts in millions)                                                     Amount       Benefit       Amount
                                                                          ------       -------       ------
<S>                                                                      <C>            <C>         <C>
Foreign currency translation adjustments
    and hedging activities                                               $(13.5)           -        $(13.5)
Unrealized loss on available for sale securities                           (2.5)           -          (2.5)
Minimum pension liability adjustment                                       (5.0)        $1.8          (3.2)
                                                                         -------        ----        -------
Other comprehensive income (loss)                                        $(21.0)        $1.8        $(19.2)
                                                                         =======        ====        =======
</TABLE>


<TABLE>
<CAPTION>
Note 8. SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
(amounts in millions)                                                                    Nine Months Ended
                                                                                           September 30
                                                                                        2000         1999
                                                                                        ----         ----
<S>                                                                                   <C>           <C>
Interest paid                                                                         $ 76.3        $ 74.9
Income taxes paid, net                                                                $ 11.1        $ 21.1
</TABLE>


Note 9. OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS
- ------------------------------------------------------

Personal Injury Litigation

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. During the first nine months of 2000, the Center for Claims Resolution
("Center") received and verified approximately 45,300 claims naming Armstrong as
a defendant compared to approximately 40,500 during the first nine months of
1999.

Armstrong is a defendant in approximately 173,000 pending personal injury claims
as of September 30, 2000. Approximately 85,000 (or 49%) of these claims are
covered under the Center's Strategic Settlement Program ("SSP") compared to 36%
SSP coverage of the December 31, 1999 pending claims.

Asbestos-Related Liability

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.

                                       19
<PAGE>

In the second quarter of 2000, Armstrong recorded a charge to increase its
estimate of probable asbestos-related liability by $236.0 million. The increase
in the estimated liability reflected higher than anticipated claims and higher
average settlement costs for claims during the first half of 2000, primarily for
settlements outside of the Center's SSP.

In the third quarter of 2000, the number of filed claims was within the current
expectations but Armstrong's average cost to settle claims was higher than
anticipated. Armstrong will continue to study its experience to identify trends
and to assess their impact on the range of liability that is probable and
estimable. If additional study determines that current cost levels will
continue, an increase in the probable asbestos-related liability will be
necessary.

Armstrong's estimate of its asbestos-related liability that is probable and
estimable through 2006 ranges from $758.8 million to $1,363.3 million as of
September 30, 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, the cost to
settle claims outside the broad-based settlement program 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 $758.8 million as a liability in the condensed consolidated financial
statements in accordance with generally accepted accounting principles. Of this
amount, management expects to incur asbestos liability payments of approximately
$275.0 million over the next 12 months and has reflected such amount as a
current liability as of September 30, 2000. This compares to total liability
payments over the prior 12 months of $220.8 million.

The Center is involved in numerous legal proceedings with a former member of the
Center related to the former member's refusal to pay its share of certain
settlements concluded by the Center while that company was a member. In
addition, another Center member has terminated its membership due to exhaustion
of the assets of its claims trust. This member has also asserted that it is
entitled to reductions of certain payments. While the Center believes the member
is not entitled to any adjustment, the impact, if any, on the timing of cash
flows or amount of recorded liability is uncertain. In estimating its recorded
liability, Armstrong has not anticipated unfavorable outcomes resulting from the
legal proceedings or any increases in Armstrong's share of liability stemming
from the termination of these former Center members. Armstrong's share of
liability could increase should there be any negative developments related to
these matters.

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 2006. Accordingly, substantially all of the range discussed
above, and as recorded by Armstrong, comprises management's best estimate of
claims expected to be filed within the forthcoming 6 years. For claims that may
be filed beyond 2006, 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 occur, 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.

CODEFENDANT BANKRUPTCIES

Certain codefendant companies have filed for reorganization under Chapter 11 of
the U.S. Bankruptcy Code, including recent filings by Babcock & Wilcox,
Pittsburgh Corning and Owens Corning. As a consequence, litigation against them
(with some exceptions) has been stayed or restricted. However, Armstrong does
not expect to see a significant increase in the number of claims filed since it
has been named as a defendant in the majority of claims against these
co-defendants. Armstrong could see higher settlement demands from claimants as
the number of defendants in the litigation has decreased, but the Center plans
to negotiate to minimize any impact on settlement costs. Due to the
uncertainties involved, the

                                       20
<PAGE>

long-term effect of these proceedings on the litigation cannot be predicted and
Armstrong believes it could be several months before Armstrong receives the
sufficient data to allow it to ascertain the impact.

Insurance Asset

As with its estimated asbestos related liability, Armstrong continually
evaluates the probable insurance asset to be recorded. An insurance asset in the
amount of $268.3 million is recorded as of September 30, 2000. Approximately
$27.7 million was received in the second quarter of 2000 pursuant to existing
settlements. Of the total recorded asset, approximately $75.8 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,
activities such as settlement discussions with insurance carriers party to the
ADR and those not party to the ADR, the final determination of coverage
shared with ACandS and the financial condition of the insurers, Armstrong may
revise its estimate of probable insurance recoveries. Of the $268.3 million
asset, $32.2 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.

Conclusion

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. These uncertainties include the number of future claims
to be filed, the cost to settle claims in the future, which may be influenced by
factors including, but not limited to, the financial viability of other
defendants, the impact of any potential legislation and the ability of the
Center to achieve future SSP agreements, and the impact of the ADR proceedings
on the insurance asset. 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. Armstrong believes that potential future charges may be
material to the periods in which they are taken. See further discussion of
Liquidity and Capital Resources in Note 12.

Note 10. - ENVIRONMENTAL LIABILITIES
- ------------------------------------

Liabilities of $14.8 million and $14.7 million were recorded at September 30,
2000 and December 31, 1999, respectively, for potential environmental
liabilities that Armstrong considers probable and for which a reasonable
estimate of the probable liability could be made. Where existing data is
sufficient to estimate the 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 assessments and remediation activities progress at each individual site,
these liabilities are reviewed to reflect additional information as it becomes
available.

The estimated liabilities do not take into account any claims for recoveries
from insurance or third parties. Such recoveries, where probable, have been
recorded as an asset in the consolidated financial statements and are either
available through settlement or probable of recovery through negotiation or
litigation.

Actual costs to be incurred at identified sites in the future may vary from
estimates, given the inherent uncertainties in evaluating environmental
liabilities. Subject to the imprecision in estimating environmental remediation
costs, Armstrong believes that any sum it may have to pay in connection with
environmental matters in excess of the amounts noted above may be material to
earnings in such future period.


Note 11 - DIFFERENCES BETWEEN ARMSTRONG HOLDINGS INC. AND ARMSTRONG WORLD
- --------------------------------------------------------------------------
          INDUSTRIES, INC.
          ----------------

The difference between the financial statements is primarily due to transactions
related to the formation of Armstrong Holdings, Inc. and stock activity.


Note 12 - LIQUIDITY AND CAPITAL RESOURCES
- -----------------------------------------

As of September 30, 2000, Armstrong had no outstanding borrowings under
Armstrong World Industries Inc.'s $450 million credit facility that expires in
October 2003 or under Armstrong World Industries Inc.'s $450 million, 364 day
credit facility that expired on October 19, 2000. These lines have been in
support of commercial paper issuances. The outstanding amount of commercial
paper at September 30, 2000 was $352.6 million.

On October 5, 2000, Owens Corning voluntarily filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. This filing has had a significant effect
on Armstrong's liquidity. In early October, Armstrong was in discussions to
obtain a 364 day credit facility of up to $400 million, with the intention of

                                       21
<PAGE>

completing the new facility prior to the October 19, 2000 expiration of the
existing $450 million, 364 day credit facility. Whereas indications from
participant banks led Armstrong to believe the facility would be fully
subscribed, following the Owens Corning filing the potential participants in the
new credit facility decided to reevaluate their credit exposures to Armstrong,
primarily due to Armstrong's asbestos liability. Agreement was not reached on
terms for a new facility. Subsequently the $450 million, 364 day credit facility
expired on October 19, 2000.

On October 25, 2000, both Standard & Poor's and Moody's Investors Services
downgraded Armstrong's long term debt ratings to BBB- and Baa3 and short term
debt ratings to A-3 and P-3, respectively, citing the reduction in committed
credit facilities, prospects for weaker operating performance and continued
uncertainty surrounding the asbestos liability, owing to among other things, the
Owens Corning bankruptcy filing. Both agencies indicated the potential for
additional downgrades which could result from, among other things, the inability
to increase untapped committed borrowing capacity, significant increases in the
cash flow required to service the asbestos liability, or deteriorating operating
performance. Since October 25, 2000, Armstrong stopped issuing commercial paper
and began to draw on its $450 million credit facility that expires in October
2003. As of November 14, 2000, the $450 million credit facility was fully drawn,
approximately $83 million of commercial paper was outstanding and Armstrong had
approximately $127 million of cash on deposit. The remaining outstanding
commercial paper will mature by November 22, 2000.

Armstrong will face liquidity pressures in the near future. Such pressures will
be exacerbated should certain events occur. Specifically, should Armstrong's
long term debt ratings be further downgraded by both Standard & Poor's and
Moody's, holders of Employee Stock Ownership Plan bonds totaling $142.2 million
as of September 30, 2000 would have the right to require Armstrong to redeem
them under the terms of the Note Purchase Agreement dated June 19, 1989 for
8.43% Series A Guaranteed Serial ESOP Notes due 1989-2001 and 9.00% Series B
Guaranteed Serial ESOP Notes due 2000-2004. As of November 14, 2000, Armstrong
was not in violation of any debt covenants. The $450 million credit facility
that expires in 2003 contains customary events of default, including failure to
make payments, failure to meet other material obligations within specific time
periods and the acceleration of other material indebtedness. In addition, should
Armstrong World Industries, Inc.'s consolidated net worth decline by more than
$180.6 million from its September 30, 2000 balance, Armstrong would violate the
minimum consolidated net worth covenant of the $450 million credit facility. Any
event of default could result in the acceleration of the maturity of the
facility. Other factors could also influence Armstrong's liquidity. The outlook
for Armstrong's asbestos liability cash payments is highly uncertain. See Part
II, Item I "Legal Proceedings" for additional information concerning asbestos
litigation. Unforeseen deterioration in expected earnings or working capital
requirements would also negatively impact liquidity.

On October 30, 2000, Armstrong's Board of Directors elected to suspend the
quarterly cash dividend payment with the intent to increase financial
flexibility. Armstrong has acted to reduce working capital and capital
expenditures and is currently evaluating other alternatives to increase
liquidity, which include, among other things, selling non-core assets and
businesses, obtaining secured financing, and selling receivables. Armstrong
believes that sufficient incremental credit will be available to prevent a
liquidity crisis in the next few months but it is unclear whether obtaining such
incremental credit would be in the best interests of Armstrong. If Armstrong
does not obtain sufficient additional liquidity in the next few months,
Armstrong will have to consider seeking protection under the U.S. Bankruptcy
Code.

                                       22
<PAGE>

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

The following discussion and analysis correspond to Armstrong Holdings, Inc. See
Notes 1, 2 and 12 to the unaudited condensed consolidated financial statements
for further discussion.

Financial Condition
- -------------------

As shown on the condensed Consolidated Balance Sheets (see page 3), Armstrong
had cash and cash equivalents of $33.6 million at September 30, 2000. Working
capital was $283.4 million as of September 30, 2000, $35.2 million lower than
the $318.6 million recorded at the end of 1999. The ratio of current assets to
current liabilities was 1.35 to 1 as of September 30, 2000, compared with 1.43
to 1 as of December 31, 1999.

Long-term debt, excluding Armstrong's guarantee of an ESOP loan, decreased in
the third quarter of 2000. At September 30, 2000, long-term debt of $1,314.3
million, or 58.9 percent of total capital, compared with $1,412.9 million, or
60.2 percent of total capital, at the end of 1999. At September 30, 2000, and
December 31, 1999, the ratios of total debt (including Armstrong's guarantee of
the ESOP loan) as a percent of total capital were 67.0 percent and 71.1 percent,
respectively. The decrease in long-term debt was primarily due to the receipt of
proceeds from the divestitures of the Insulation Products segment and the
Installation Products Group, (which was part of the floor coverings segment)
which was used to pay outstanding debt.

As shown on the condensed Consolidated Statements of Cash Flows (see page 5),
net cash provided by operating activities for the nine months ended September
30, 2000, was $17.0 million compared with $293.8 million for the comparable
period in 1999. The decrease was primarily due to several items including lower
net income, higher net payments for asbestos claims and changes in working
capital.

Net cash provided by investing activities was $218.1 million for the nine months
ended September 30, 2000, compared with net cash used for investing activities
of $29.5 million for the nine months ended September 30, 1999. The increase was
primarily due to proceeds from the sale of the Insulation Products segment and
the Installation Products Group.

Net cash used for financing activities was $223.5 million for the nine months
ended September 30, 2000 compared with $239.3 million for the nine months ended
September 30, 1999. The decrease was primarily due to the $170.0 million net
decrease in debt during 2000 compared to the $181.7 million net decrease in debt
during 1999.

Armstrong is regularly evaluating its various business units and may from time
to time dispose of, or restructure, those units. During 2000, Armstrong sold its
Insulation Products segment and its Installation Products while reorganizing its
European flooring business. Armstrong is also currently in divestiture
discussions and evaluations related to its textiles and sports flooring products
segment.

Asbestos-Related Litigation
- ---------------------------

Personal Injury Litigation

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. During the first nine months of 2000, the Center for Claims Resolution
("Center") received and verified approximately 45,300 claims naming Armstrong as
a defendant compared to approximately 40,500 during the first nine months of
1999.

Armstrong is a defendant in approximately 173,000 pending personal injury claims
as of September 30, 2000. Approximately 85,000 (or 49%) of these claims are
covered under the Center's Strategic Settlement Program ("SSP") compared to 36%
SSP coverage of the December 31, 1999 pending claims.

Armstrong continues to seek broad-based settlements of claims through the
Center. To date, the Center has reached SSP agreements with law firms that cover
approximately 130,000 claims that name Armstrong as a defendant, including
agreements with 16 law firms covering approximately 36,000 claims during the
first nine months of 2000. Some of these claims have already been paid, some are
currently pending and some 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

                                      23
<PAGE>

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. For some agreements, the
component of the agreement that covers future claims is subject to
re-negotiation if members leave the Center. As discussed later, several Center
members departed in 2000 and the Center is currently in discussions with
plaintiff law firms to address the treatment of future claims. Although it is
early in the negotiation process, it is possible that the re-negotiation of
these agreements could lead to an increase in the asbestos liability.
Negotiations with additional law firms engaged in asbestos-related litigation
that could resolve additional pending claims are ongoing. The ultimate success
and timing of those negotiations is uncertain.

Asbestos - Related Liability

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.

In the second quarter of 2000, Armstrong recorded a charge to increase its
estimate of probable asbestos-related liability by $236.0 million. The increase
in the estimated liability reflected higher than anticipated claims and higher
average settlement costs for claims during the first half of 2000, primarily for
settlements outside of the Center's SSP.

In the third quarter of 2000, the number of filed claims was within the current
expectations but Armstrong's average cost to settle claims was higher than
anticipated. Armstrong will continue to study its experience to identify trends
and to assess their impact on the range of liability that is probable and
estimable. If additional study determines that current cost levels will
continue, an increase in the probable asbestos-related liability will be
necessary.

Armstrong's estimate of its asbestos-related liability that is probable and
estimable through 2006 ranges from $758.8 million to $1,363.3 million as of
September 30, 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, the cost to
settle claims outside the broad-based settlement program 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 $758.8 million as a liability in the condensed consolidated financial
statements in accordance with generally accepted accounting principles. Of this
amount, management expects to incur asbestos liability payments of approximately
$275.0 million over the next 12 months and has reflected such amount as a
current liability as of September 30, 2000. This compares to total liability
payments over the prior 12 months of $220.8 million.

The Center is involved in numerous legal proceedings with a former member of the
Center related to the former member's refusal to pay its share of certain
settlements concluded by the Center while that company was a member. In
addition, another Center member has terminated its membership due to exhaustion
of the assets of its claims trust. This member has also asserted that it is
entitled to reductions of certain payments. While the Center believes the member
is not entitled to any adjustment, the impact, if any, on the timing of cash
flows or amount of recorded liability is uncertain. In estimating its recorded
liability, Armstrong has not anticipated unfavorable outcomes resulting from the
legal proceedings or any increases in Armstrong's share of liability stemming
from the termination of these former Center members. Armstrong's share of
liability could increase should there be any negative developments related to
these matters.

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 2006. Accordingly, substantially all of the range discussed
above, and as recorded by Armstrong, comprises management's best estimate of
claims expected to be filed within the forthcoming 6 years. For claims that may
be filed beyond 2006, 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

                                      24
<PAGE>

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 occur, 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.

Collateral Requirements

As of September 30, 2000, Armstrong had secured $56.2 million of future claim
payments with a surety bond to meet minimum collateral requirements established
by the Center. On October 27, 2000, the insurance company that underwrote the
surety bond informed Armstrong and the Center of its intention not to renew the
surety bond effective February 28, 2001. Armstrong is assessing its alternatives
relative to the terminated bond. Alternatives include replacing the bond with
another insurance company, purchasing a letter of credit from a financial
institution, posting cash as collateral or negotiating with the Center to waive
the collateral requirement.

Insurance Recovery Proceedings

A substantial portion of Armstrong's primary and excess remaining insurance
asset is nonproducts (general liability) insurance for personal injury claims,
including among others, those that involve alleged exposure during Armstrong's
installation of asbestos materials. Armstrong has entered into settlements with
a number of the carriers resolving its coverage issues. However, an alternative
dispute resolution ("ADR") procedure under the Wellington Agreement is under way
against certain carriers to determine the percentage of resolved and unresolved
claims that are nonproducts claims, to establish the entitlement to such
coverage and to determine whether and how much reinstatement of prematurely
exhausted products hazard insurance is warranted. The nonproducts coverage
potentially available is substantial and includes defense costs in addition to
limits. 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
Armstrong 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. One insurer has taken the position that it
is entitled to litigate in court certain issues in the ADR proceeding. During
1999, Armstrong received preliminary decisions in the initial phases of the
trial proceeding of the ADR which were generally favorable to Armstrong on a
number of issues related to insurance coverage. However, during the third
quarter of 2000, it was determined that a new trial judge should be selected for
the ADR. That process is underway but a new trial judge has not yet been
selected. Armstrong is uncertain at this time as to the impact, if any, this
change will have on the preliminary decisions of the initial phases of the ADR.
Because of the continuing ADR process and the possibilities for appeal on
certain matters, Armstrong has not yet completely determined the financial
implications of the decisions.

Other proceedings against non-Wellington carriers may become necessary.

Insurance Asset

As with its estimated asbestos related liability, Armstrong continually
evaluates the probable insurance asset to be recorded. An insurance asset in the
amount of $268.3 million is recorded as of September 30, 2000. Approximately
$27.7 million was received in the second quarter of 2000 pursuant to existing
settlements. Of the total recorded asset, approximately $75.8 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,
activities such as settlement discussions with insurance carriers party to the
ADR and those not party to the ADR, the final determination of coverage shared
with ACandS and the financial condition of the insurers, Armstrong may revise
its estimate of probable insurance recoveries. Of the $268.3 million asset,
$32.2 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 $158.7 million for asbestos related claims in the first nine
months of 2000 compared to $111.1 million in the first nine months of 1999.
Armstrong currently expects to pay between $243.0 million and $251.0 million for
asbestos related claims in 2000 compared to $173.0 million in 1999. Armstrong
received $27.7 million in asbestos-related insurance recoveries during the first
nine months of 2000 compared to $58.7 million during the first nine months of
1999. Armstrong does not anticipate any additional insurance proceeds during the
fourth quarter of 2000 and did not receive any insurance proceeds during the
fourth quarter of 1999. Therefore, Armstrong currently expects to pay
approximately $140.0 million to $145.0 million for asbestos related claims and
expenses in 2000, net of expected insurance recoveries and taxes, compared to
$74.3 million in 1999.

Conclusion

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. These uncertainties include the number of future claims
to be filed, the cost to settle claims in the future, which may be influenced by
factors including, but not limited to, the financial viability of other
defendants, the impact of any potential legislation and the ability of the
Center to achieve future SSP agreements, and the impact of the ADR proceedings
on the insurance asset. 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. Armstrong believes that potential future charges may be
material to the periods in which they are taken. See further discussion of
Liquidity and Capital Resources below.

                                      25
<PAGE>

Liquidity and Capital Resources
- -------------------------------

As of September 30, 2000, Armstrong had no outstanding borrowings under
Armstrong World Industries, Inc.'s $450 million credit facility that expires in
October 2003 or under Armstrong World Industries, Inc.'s $450 million, 364 day
credit facility that expired on October 19, 2000. These lines have been in
support of commercial paper issuances. The outstanding amount of commercial
paper at September 30, 2000 was $352.6 million.

On October 5, 2000, Owens Corning voluntarily filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. This filing has had a significant effect
on Armstrong's liquidity. In early October, Armstrong was in discussions to
obtain a 364 day credit facility of up to $400 million, with the intention of
completing the new facility prior to the October 19, 2000 expiration of the
existing $450 million, 364 day credit facility. Whereas indications from
participant banks led Armstrong to believe the facility would be fully
subscribed, following the Owens Corning filing the potential participants in the
new credit facility decided to reevaluate their credit exposures to Armstrong,
primarily due to Armstrong's asbestos liability. Agreement was not reached on
terms for a new facility. Subsequently the $450 million, 364 day credit facility
expired on October 19, 2000.

On October 25, 2000, both Standard & Poor's and Moody's Investors Services
downgraded Armstrong's long term debt ratings to BBB- and Baa3 and short term
debt ratings to A-3 and P-3, respectively, citing the reduction in committed
credit facilities, prospects for weaker operating performance and continued
uncertainty surrounding the asbestos liability, owing to among other things, the
Owens Corning bankruptcy filing. Both agencies indicated the potential for
additional downgrades which could result from, among other things, the inability
to increase untapped committed borrowing capacity, significant increases in the
cash flow required to service the asbestos liability, or deteriorating operating
performance. Since October 25, 2000, Armstrong stopped issuing commercial paper
and began to draw on its $450 million credit facility that expires in October
2003. As of November 14, 2000, the $450 million credit facility was fully drawn,
approximately $83 million of commercial paper was outstanding and Armstrong had
approximately $127 million of cash on deposit. The remaining outstanding
commercial paper will mature by November 22, 2000.

Armstrong will face liquidity pressures in the near future. Such
pressures will be exacerbated should certain events occur. Specifically, should
Armstrong's long term debt ratings be further downgraded by both Standard &
Poor's and Moody's, holders of Employee Stock Ownership Plan bonds totaling
$142.2 million as of September 30, 2000 would have the right to require
Armstrong to redeem them under the terms of the Note Purchase Agreement dated
June 19, 1989 for 8.43% Series A Guaranteed Serial ESOP Notes due 1989-2001 and
9.00% Series B Guaranteed Serial ESOP Notes due 2000-2004. As of November 14,
2000, Armstrong was not in violation of any debt covenants. The $450 million
credit facility that expires in 2003 contains customary events of default,
including failure to make payments, failure to meet other material obligations
within specific time periods and the acceleration of other material
indebtedness. In addition, should Armstrong's World Industries, Inc.'s
consolidated net worth decline by more than $180.6 million from its September
30, 2000 balance, Armstrong would violate the minimum consolidated net worth
covenant of the $450 million credit facility. Any envent of default could result
in the acceleration of the maturity of the facility. Other factors could also
influence Armstrong's liquidity. The outlook for Armstrong's asbestos liability
cash payments is highly uncertain. See Part II, Item I "Legal Proceedings" for
additional information concerning asbestos litigation. Unforeseen deterioration
in expected earnings or working capital requirements would also negatively
impact liquidity.

On October 30, 2000, Armstrong's Board of Directors elected to suspend the
quarterly cash dividend payment with the intent to increase financial
flexibility. Armstrong has acted to reduce working capital and capital
expenditures and is currently evaluating other alternatives to increase
liquidity, which include, among other things, selling non-core assets and
businesses, obtaining secured financing, and selling receivables. Armstrong
believes that sufficient incremental credit will be available to prevent a
liquidity crisis in the next few months but it is unclear whether obtaining such
incremental credit would be in the best interests of Armstrong. If Armstrong
does not obtain sufficient additional liquidity in the next few months,
Armstrong will have to consider seeking protection under the U.S. Bankruptcy
Code.


Consolidated Results
- --------------------

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

Third-quarter net sales of $835.6 million from continuing operations were 1.0%
lower than in the third quarter of 1999. Included in the third quarter of 1999
were sales from the textile products business which was sold on September 30,
1999. Excluding the impact of the 1999 divestiture and the impact of unfavorable
foreign currency translation, sales increased 3.2%. Building products sales
increased 7.1% driven primarily by the second quarter 2000 acquisition of our
European metal ceilings subsidiary, Gema. Wood products sales

                                      26
<PAGE>

increased 2.7%. Sales in the floor coverings and textile and sports flooring
products segments decreased 3.4% and 13.3%, respectively, due mainly to lower
unfavorable foreign currency translation in Europe.

Third-quarter 2000 earnings from continuing operations were $72.0 million or
$1.77 per diluted share. This included a pre-tax gain of $59.9 million from the
sale of the Installation Products Group ("IPG"), which was part of the floor
coverings segment.

The third quarter of 2000 included a pre-tax reorganization charge of $17.0
million, of which $8.6 million related to severance and enhanced retirement
benefits for more than 180 positions within the European Flooring business.
Reorganization actions included staff reductions due to the elimination of
administrative positions, the consolidation and closing of sales offices in
Europe and the closure of the Team Valley, England commercial tile plant. The
remaining portion of the reorganization charge primarily related to remaining
payments on a noncancelable operating lease for an office facility in the U.S.
The employees who occupied this office facility are being relocated to the
corporate headquarters. In addition, $1.3 million of the remaining accrual for
the 1998 reorganization charge was reversed, comprising certain severance
accruals that were no longer necessary as certain individuals remained employed
by Armstrong.

Armstrong also recorded a $12.2 million charge to cost of goods sold in the
third quarter of 2000 for write-downs of inventory and production-line assets
that were not categorized as reorganization costs related to the European
reorganization efforts. The inventory write-downs were related to changes in
product offerings while the write-downs of production-line assets primarily
related to changes in production facilities and product offerings.


In addition, Armstrong recorded $11.2 million within SG&A expense for CEO and
management transition costs during the third quarter of 2000. The components of
this amount included hiring a new CEO, expenses related to the departure of the
prior CEO, covenant agreements related to non-compete arrangements and other
management transition costs. There will also be approximately $7.6 million of
costs in the fourth quarter of 2000 related to settlements of certain benefit
plan obligations for former executive employees.

Armstrong also recorded $2.3 million within SG&A expense for fixed asset
impairments related to the decision to vacate office space in the U.S.

Excluding these items discussed above, earnings from continuing operations for
the third quarter of 2000 would have been $54.8 million, or $1.35 per diluted
share. Third quarter 1999 earnings from continuing operations were $61.9
million, or $1.54 per diluted share. This included a $5.7 million pre-tax loss
from the sale of the textile products business and a $2.6 million pre-tax gain
from proceeds from the demutualization of an insurance company with whom the
Company has company-owned life insurance policies. Excluding these items,
earnings from continuing operations for the third quarter of 1999 would have
been $62.9 million, or $1.56 per diluted share.

The cost of goods sold in the third quarter was 71.3 percent of net sales
compared to 65.6 percent of net sales in the third quarter of 1999. Excluding
$12.2 million of expenses associated with the third quarter 2000 reorganization
of the European flooring business and a $3.6 million insurance settlement
received in 1999 for past product claims, cost of goods sold increased from
66.0% of sales in 1999 to 69.9% of sales in 2000. Higher raw material costs
primarily in floor coverings and wood products and higher energy costs in
building products were the primary drivers of the increase.

Third-quarter 2000 SG&A expenses were 18.5 percent of net sales compared to 18.9
percent of net sales in last year's third quarter. The percentage decrease is
primarily due to lower incentive bonus accruals and lower selling expense
partially offset by CEO and management transition costs, expenses related to the
reorganization of European flooring business and asset write-downs related to
the decision to vacate office space in Lancaster, PA.

Interest expense of $26.0 million was $0.2 million higher than the amount
recorded in the third quarter of 1999 principally due to higher interest rates
partially offset by lower outstanding debt.

Net sales for the first nine months of 2000 were $2,443.8 million, essentially
similar to last year's net sales of $2,444.4 million. Excluding the impact of
the 1999 divestitures and the impact of foreign exchange rate translation, sales
increased 5.2%.

A loss from continuing operations of $3.2 million was recorded for the first
nine months of 2000. Excluding the third quarter 2000 items described above
(gain on the sale of IPG, costs associated with the reorganization of the
European flooring business and CEO and management transition costs), the second

                                      27
<PAGE>

quarter 2000 asbestos charge and a second quarter demutualization gain, earnings
from continuing operations for the first nine months of 2000 would have been
$129.6 million, or $3.21 per diluted share. Earnings from continuing operations
for the first nine months of 1999 were $168.1 million, or $4.18 per diluted
share. Excluding the loss from the sale of the textile products business, a
third quarter 1999 demutualization gain and the gain on the sale of a 65%
interest in Armstrong Industrial Specialities, Inc., earnings from continuing
operations for the first nine months of 1999 would have been $161.6 million, or
$4.02 per diluted share.

The effective tax rate from continuing operations for the third quarter was
30.6% versus 38.2% for the third quarter of 1999. Excluding the impact of the
gain on sale of Installation Products, the reorganization charge and other
related expenses in 2000 and the loss from the sale of textile products business
in 1999, the third quarter effective tax rate decreased from 38.1% to 36.1%
primarily due to increased foreign tax credit utilization.

Industry Segment Results
- ------------------------

Floor coverings net sales were $339.5 million and $351.3 million in the third
quarter of 2000 and 1999, respectively. Sales in the Americas decreased 0.4%
versus prior year. European sales of $64.9 million were 19.6% below 1999 levels
as a result of unfavorable foreign exchange rate translation, lower prices and a
less favorable mix driven by continued market weakness. Excluding the effects of
foreign exchange rate translation, sales in Europe were 8.2% below last year.
Pacific area sales increased 5.2% versus 1999. Operating income of $35.2 million
was 10.4% of sales compared to $70.1 million in the third quarter of 1999, or
20.0% of sales. Excluding expenses associated with reorganizing the European
business, other management changes, and $3.6 million received in 1999 for an
insurance settlement for past product claims, operating income was $56.7 million
or 14.7% below 1999. Operating margin excluding these expenses decreased from
18.9% to 16.7%. The operating margin reduction was driven primarily by higher
manufacturing costs, principally higher raw material and production costs for
the new ToughGuard product, lower volume in the Americas, and weaker volume and
prices in Europe.

Building products net sales of $214.1 million increased from $200.0 million in
the third quarter of 1999. Excluding the impact of foreign currency translation,
sales increased 10.8%. Americas sales increased 2.1% driven primarily by higher
sales in the U.S. commercial channel. In Europe, sales increased 18.3% primarily
due to incremental sales from Gema, our metal ceilings subsidiary acquired
during the second quarter of 2000, and increased sales to emerging markets.
Pacific area sales increased 3.5% versus 1999. Operating income increased $1.0
million to $35.4 million as improved volume and increased price in the Americas
was largely offset by higher manufacturing expense including raw materials and
energy. Overall operating margins decreased from 17.2% to 16.5%.

Wood products net sales of $215.7 million in the third quarter of 2000 compared
to net sales of $210.0 million in 1999. Cabinet sales decreased 5.7% due to
lower volume. Wood flooring sales increased 5.7% versus 1999 driven primarily by
volume growth and improved pricing. Operating margins declined from 10.5% to
8.6% primarily driven by higher lumber costs which are relatively unchanged
since the first quarter of 2000 but 10.6% above last year.

Textiles and sports flooring products net sales of $66.3 million in the third
quarter of 2000 were 13.3% lower than last year. Excluding the impact of
unfavorable foreign currency translation, sales increased 2.3% driven by volume
growth primarily in the sports flooring business. An operating loss of $2.6
million was incurred compared to operating income of $4.4 million in 1999.
Excluding the impact of expenses associated with European reorganization and
management changes, the operating loss was $0.6 million or $5.0 million lower
than 1999. The operating income reduction was driven mainly by less favorable
mix of products sold, increased manufacturing and SG&A expense and unfavorable
foreign currency translation which more than offset the impact of volume growth.

In the all other segment, sales and operating margin were down $6.5 million and
$0.4 million, respectively due to the absence of the textile products business
which was sold in the third quarter of 1999.

Unallocated corporate expense for the third quarter of 2000 of $18.7 million
increased $16.2 million versus 1999. Excluding $19.7 million in expenses related
to the CEO transition and other management changes and the decision to vacate an
office facility in the U.S., unallocated corporate expense decreased $3.5
million primarily due to lower incentive compensation expense.

                                      28
<PAGE>

Recent Accounting Pronouncements
- --------------------------------

The Securities and Exchange Commission ("SEC") has issued Staff Accounting
Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, as
amended on June 26, 2000. SAB No. 101 provides the SEC staff's views in applying
generally accepted accounting principles to selected revenue recognition issues,
and is effective beginning in the fourth quarter of 2000. Armstrong is
evaluating the effects of implementation, if any, on its financial statements.

In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement
No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities ("FAS 138"), an amendment of FASB Statement No. 133 ("FAS 133"). FAS
138 amends some accounting and reporting standards contained in FAS 133 and also
addresses a limited number of issues causing implementation difficulties in
applying FAS 133. Armstrong has formed a team to identify and implement the
appropriate systems and processes to adopt these statements effective January 1,
2001. The statements provide for the recognition of a cumulative adjustment for
an accounting change, as of the date of adoption. The effects of these
statements on Armstrong's financial position or results of operations have not
yet been determined.

In October 2000, the FASB issued Statement No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities ("FAS
140"), a replacement of FASB SFAS No. 125." This statement provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. This statement is effective March 2001. Armstrong
is evaluating the effects of implementation, if any, on its financial
statements.


Cautionary Statements About Future Results
- ------------------------------------------

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 events and 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 liquidity, 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 ability to secure sufficient additional financial flexibility and
          liquidity
     .    our asbestos-related and any other litigation
     .    downgrade in our credit rating
     .    greater than expected working capital requirements
     .    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 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.

                                      29
<PAGE>

                           Part II - Other Information
                           ---------------------------

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

ASBESTOS-RELATED LITIGATION
- ---------------------------

The following is a summary update of asbestos-related litigation; see Note 26 to
the financial statements of Armstrong's 1999 Form 10-K filing for additional
information.

Armstrong World Industries, Inc. is a defendant in personal injury claims and
property damage claims related to asbestos containing products. In the
discussion in this Item, "Armstrong" means Armstrong World Industries, Inc.

PERSONAL INJURY CLAIMS

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 Armstrong, which can involve allegations of negligence,
strict liability, breach of warranty and conspiracy, primarily relate to
Armstrong's involvement with asbestos-containing insulation products. Armstrong
discontinued the sale of all such insulation products in 1969. In addition,
other Armstrong products, such as gasket materials, have been named in some
litigation. Claims may arise many years after first exposure to asbestos in
light of the long latency period (up to 40 years) for asbestos-related injury.
Product identification and determining exposure periods are difficult and
uncertain. Armstrong believes that many current plaintiffs are unimpaired.
Armstrong is involved in all stages of claims resolution and litigation,
including individual trials, consolidated trials and appeals.

During the first nine months of 2000, the Center for Claims Resolution
("Center") received and verified approximately 45,300 claims naming Armstrong as
a defendant compared to approximately 40,500 during the first nine months of
1999.

Armstrong is a defendant in approximately 173,000 pending personal injury claims
as of September 30, 2000. Approximately 85,000 (or 49%) of these claims are
covered under the Center's Strategic Settlement Program ("SSP") compared to 36%
SSP coverage of the December 31, 1999 pending claims.

Armstrong continues to seek broad-based settlements of claims through the
Center. To date, the Center has reached SSP agreements with law firms that cover
approximately 130,000 claims that name Armstrong as a defendant, including
agreements with 16 law firms covering approximately 36,000 claims during the
first nine months of 2000. Some of these claims have already been paid, some are
currently pending and some 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. For some agreements, the
component of the agreement that covers future claims is subject to
re-negotiation if members leave the Center. As discussed later, several Center
members departed in 2000 and the Center is currently in discussions with
plaintiff law firms to address the treatment of future claims. Although it is
early in the negotiation process, it is possible that the re-negotiation of
these agreements could lead to an increase in the asbestos liability.
Negotiations with additional law firms engaged in asbestos-related litigation
that could resolve additional pending claims are ongoing. The ultimate success
and timing of those negotiations is uncertain.

Asbestos-Related Liability

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

                                      30
<PAGE>

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.

In the second quarter of 2000, Armstrong recorded a charge to increase its
estimate of probable asbestos-related liability by $236.0 million. The increase
in the estimated liability reflected higher than anticipated claims and higher
average settlement costs for claims during the first half of 2000, primarily for
settlements outside of the Center's SSP.

In the third quarter of 2000, the number of filed claims was within the current
expectations but Armstrong's average cost to settle claims was higher than
anticipated. Armstrong will continue to study its experience to identify trends
and to assess their impact on the range of liability that is probable and
estimable. If additional study determines that current cost levels will
continue, an increase in the probable asbestos-related liability will be
necessary.

Armstrong's estimate of its asbestos-related liability that is probable and
estimable through 2006 ranges from $758.8 million to $1,363.3 million as of
September 30, 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, the cost to
settle claims outside the broad-based settlement program 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 $758.8 million as a liability in the condensed consolidated financial
statements in accordance with generally accepted accounting principles. Of this
amount, management expects to incur asbestos liability payments of approximately
$275.0 million over the next 12 months and has reflected such amount as a
current liability as of September 30, 2000. This compares to total liability
payments over the prior 12 months of $220.8 million.

The Center is involved in numerous legal proceedings with a former member of the
Center related to the former member's refusal to pay its share of certain
settlements concluded by the Center while that company was a member. In
addition, another Center member has terminated its membership due to exhaustion
of the assets of its claims trust. This member has also asserted that it is
entitled to reductions of certain payments. While the Center believes the member
is not entitled to any adjustment, the impact, if any, on the timing of cash
flows or amount of recorded liability is uncertain. In estimating its recorded
liability, Armstrong has not anticipated unfavorable outcomes resulting from the
legal proceedings or any increases in Armstrong's share of liability stemming
from the termination of these former Center members. Armstrong's share of
liability could increase should there be any negative developments related to
these matters.

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 2006. Accordingly, substantially all of the range discussed
above, and as recorded by Armstrong, comprises management's best estimate of
claims expected to be filed within the forthcoming 6 years. For claims that may
be filed beyond 2006, 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 occur, 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.

CODEFENDANT BANKRUPTCIES

Certain codefendant companies have filed for reorganization under Chapter 11 of
the U.S. Bankruptcy Code, including recent filings by Babcock & Wilcox,
Pittsburgh Corning and Owens Corning. As a consequence, litigation against them
(with some exceptions) has been stayed or restricted. However, Armstrong does
not expect to see a significant increase in the number of claims filed since it
has been named as a defendant in the majority of claims against these
co-defendants. Armstrong could see higher

                                      31
<PAGE>

settlement demands from claimants as the number of defendants in the litigation
has decreased, but the Center plans to negotiate to minimize any impact on
settlement costs. Due to the uncertainties involved, the long-term effect of
these proceedings on the litigation cannot be predicted and Armstrong believes
it could be several months before Armstrong receives the sufficient data to
allow it to ascertain the impact.

COLLATERAL REQUIREMENTS

As of September 30, 2000, Armstrong had secured $56.2 million of future claim
payments with a surety bond to meet minimum collateral requirements established
by the Center. On October 27, 2000, the insurance company that underwrote the
surety bond informed Armstrong and the Center of its intention not to renew the
surety bond effective February 28, 2001. Armstrong is assessing its alternatives
relative to the terminated bond. Alternatives include replacing the bond with
another insurance company, purchasing a letter of credit from a financial
institution, posting cash as collateral or negotiating with the Center to waive
the collateral requirement.

Property Damage Litigation

Armstrong is also one of many defendants in seven pending property damage claims
as of September 30, 2000, that were filed by public and private building owners.
These cases present allegations of damage to the plaintiffs' buildings caused by
asbestos-containing products and generally seek compensatory and punitive
damages and equitable relief, including reimbursement of expenditures for
removal and replacement of such products. In the second quarter of 2000,
Armstrong was served with a lawsuit seeking class certification of Texas
residents who own asbestos-containing products. This case includes allegations
that Armstrong asbestos-containing products caused damage to buildings and
generally seeks compensatory damages and equitable relief, including testing,
reimbursement for removal and diminution of property value. Armstrong vigorously
denies the validity of the allegations against it in these claims and believes
that any costs will be covered by insurance. These claims are handled directly
by Armstrong and not by the Center.

Insurance Coverage

During relevant time periods, Armstrong purchased primary and excess insurance
policies providing coverage for personal injury claims and property damage
claims. Certain policies also provide coverage to ACandS, Inc., a former
subsidiary of Armstrong. Armstrong and ACandS agreed to share certain coverage
on a first-come first-served basis and to reserve for ACandS a certain amount of
excess coverage.

Wellington Agreement

In 1985, Armstrong and 52 other companies (asbestos defendants and insurers)
signed the Wellington Agreement. This Agreement settled disputes concerning
personal injury insurance coverage with signatory carriers. It provides broad
coverage for both defense and indemnity and applies to both products hazard and
nonproducts (general liability) coverages. Armstrong has resolved most
asbestos-related personal injury products hazard coverage matters with its
solvent carriers through the Wellington Agreement or other settlements.

Insurance Recovery Proceedings

A substantial portion of Armstrong's primary and excess remaining insurance
asset is nonproducts (general liability) insurance for personal injury claims,
including among others, those that involve alleged exposure during Armstrong's
installation of asbestos materials. Armstrong has entered into settlements with
a number of the carriers resolving its coverage issues. However, an alternative
dispute resolution ("ADR") procedure under the Wellington Agreement is under way
against certain carriers to determine the percentage of resolved and unresolved
claims that are nonproducts claims, to establish the entitlement to such
coverage and to determine whether and how much reinstatement of prematurely
exhausted products hazard insurance is warranted. The nonproducts coverage
potentially available is substantial and includes defense costs in addition to
limits. 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
Armstrong 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. One insurer has taken the position that it
is entitled to litigate in court certain issues in the ADR proceeding. During
1999, Armstrong received preliminary decisions in the initial phases of the
trial proceeding of the ADR which were generally favorable to Armstrong on a
number of issues related to insurance coverage. However, during the third
quarter of 2000, it was determined that a new trial judge should be selected for
the ADR. That process is underway but a new trial judge has not yet been
selected.

                                      32
<PAGE>

Armstrong is uncertain at this time as to the impact, if any, this change will
have on the preliminary decisions of the initial phases of the ADR. Because of
the continuing ADR process and the possibilities for appeal on certain matters,
Armstrong has not yet completely determined the financial implications of the
decisions.

Other proceedings against non-Wellington carriers may become necessary.

Insurance Asset

As with its estimated asbestos related liability, Armstrong continually
evaluates the probable insurance asset to be recorded. An insurance asset in the
amount of $268.3 million is recorded as of September 30, 2000. Approximately
$27.7 million was received in the second quarter of 2000 pursuant to existing
settlements. Of the total recorded asset, approximately $75.8 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,
activities such as settlement discussions with insurance carriers party to the
ADR and those not party to the ADR, the final determination of coverage shared
with ACandS and the financial condition of the insurers, Armstrong may revise
its estimate of probable insurance recoveries. Of the $268.3 million asset,
$32.2 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.

CASH FLOW IMPACT

Armstrong paid $158.7 million for asbestos related claims in the first nine
months of 2000 compared to $111.1 million in the first nine months of 1999.
Armstrong currently expects to pay between $243.0 million and $251.0 million for
asbestos related claims in 2000 compared to $173.0 million in 1999. Armstrong
received $27.7 million in asbestos-related insurance recoveries during the first
nine months of 2000 compared to $58.7 million during the first nine months of
1999. Armstrong does not anticipate any additional insurance proceeds during the
fourth quarter of 2000 and did not receive any insurance proceeds during the
fourth quarter of 1999. Therefore, Armstrong currently expects to pay
approximately $140.0 million to $145.0 million for asbestos related claims and
expenses in 2000, net of expected insurance recoveries and taxes, compared to
$74.3 million in 1999.

Conclusion
          -

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. These uncertainties include the number of future claims
to be filed, the cost to settle claims in the future, which may be influenced by
factors including, but not limited to, the financial viability of other
defendants, the impact of any potential legislation and the ability of the
Center to achieve future SSP agreements, and the impact of the ADR proceedings
on the insurance asset. 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. Armstrong believes that potential future charges may be
material to the periods in which they are taken. See further discussion in the
Liquidity and Capital Resources section of Management's Discussion and Analysis.


ENVIRONMENTAL MATTERS

Armstrong's operations are subject to federal, state, local and foreign
environmental laws and regulations. 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.

                                      33
<PAGE>

With regard to some sites, however, Armstrong disputes the liability, the
proposed remedy or the proposed cost allocation among the PRPs. Armstrong may
also have rights of contribution or reimbursement from other parties or coverage
under applicable insurance policies. Armstrong 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 Armstrong
experience in remediation of contaminated sites. Although current law may impose
joint and several liability on all parties at any Superfund site, Armstrong's
contribution to the remediation of these sites is expected to be limited by the
number of other companies also identified as potentially liable for site costs.
As a result, Armstrong's estimated liability reflects only Armstrong's expected
share. In determining the probability of contribution, Armstrong considers the
solvency of the parties, whether responsibility is being disputed, the terms of
any existing agreements and experience regarding similar matters.

Liabilities of $14.8 million were recorded at September 30, 2000 for potential
environmental liabilities that Armstrong considers probable and for which a
reasonable estimate of the probable liability could be made. Where existing data
is sufficient to estimate the 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 assessments and remediation activities progress at each individual
site, these liabilities are reviewed to reflect additional information as it
becomes available.

The estimated liabilities do not take into account any claims for recoveries
from insurance or third parties. Such recoveries, where probable, have been
recorded as an asset in the consolidated financial statements and are either
available through settlement or probable of recovery through negotiation or
litigation.

Actual costs to be incurred at identified sites in the future may vary from
estimates, given the inherent uncertainties in evaluating environmental
liabilities. Subject to the imprecision in estimating environmental remediation
costs, Armstrong believes that any sum it may have to pay in connection with
environmental matters in excess of the amounts noted above may be material to
earnings in such future period.

                                      34
<PAGE>

Item 6. -  Exhibits and Reports on Form 8-K
- ------     --------------------------------

     (a)  The following exhibits are filed as a part of the Quarterly Report on
          Form 10-Q:

     Exhibits
     --------
     No. 4(a)       Note Purchase Agreement dated June 19, 1989 for 8.43% Series
                    A Guaranteed Serial ESOP Notes due 1989-2001 and 9.00%
                    Series B Guaranteed Serial ESOP Notes due 2000-2004 for the
                    Armstrong World Industries, Inc. Employee Stock Ownership
                    Plan ("Share in Success Plan") Trust, with Armstrong World
                    Industries, Inc., as guarantor.
     No. 10(a)      Employment Agreement between Armstrong Holdings, Inc. and
                    Michael D. Lockhart, dated August 7, 2000
     No. 10(b)      Employment Agreement between Armstrong Holdings, Inc. and
                    Frank A. Riddick, dated August 7, 2000
     No. 10(c)      Amended and Restated Employment and Consulting Agreement
                    between Armstrong Holdings, Inc., Armstrong World
                    Industries, Inc. and George A. Lorch, dated August 7, 2000
                    and as amended October 30, 2000
     No. 10(d)      Stock Option Surrender Agreement between Armstrong Holdings,
                    Inc. and George A. Lorch, dated September 25, 2000
     No. 10(e)      Change in Control Agreement between Armstrong Holdings, Inc.
                    and Michael D. Lockhart, dated August 7, 2000
     No. 10(f)      Indemnification Agreement between Armstrong Holdings, Inc.
                    and Michael D. Lockhart, dated August 7, 2000
     No. 10(g)      Management Services Agreement between Armstrong Holdings,
                    Inc. and Armstrong World Industries, Inc., dated August 7,
                    2000
     No. 10(h)      Armstrong Holdings, Inc. Stock Award Plan is incorporate by
                    reference herein from Armstrong Holdings, Inc.'s
                    registration statement on Form S-8 filed August 16, 2000,
                    wherein in appeared as Exhibit 4.1.
     No. 10(i)      Terms of Restricted Stock for Stock Option Exchange Program
                    Offered to Employees and Schedule of Participating Executive
                    Officers.
     No. 15         Letter re Unaudited Interim Financial Information
     No. 27         Financial Data Schedules

     (b)  The following reports on Form 8-K were filed during the third quarter
          of 2000.

          On July 31, 2000, the registrants filed reports on form 8-K reporting
          Armstrong Holdings, Inc.'s sales and profits for the second quarter of
          2000.

          On July 21, 2000, the registrants filed reports on form 8-K discussing
          the sale of Armstrong World Industries, Inc.'s Installation Products
          Group to subsidiaries of the German company Ardex GmbH.

                                      35
<PAGE>

                                   Signatures
                                   ----------

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                 Armstrong Holdings, Inc.
                                 Armstrong World Industries, Inc.



                           By:    /s/ John N. Rigas
                                 -----------------------------------------------
                                 John N. Rigas, Senior Vice President,
                                 Secretary and General Counsel

                           By:    /s/ William C. Rodruan
                                 -----------------------------------------------
                                 William C. Rodruan, Vice President and
                                 Controller (Principal Accounting Officer)


Date:  November 14, 2000

<PAGE>

                                  Exhibit Index
                                  -------------
Exhibit No.
- ----------

No. 4(a)       Note Purchase Agreement dated June 19, 1989 for 8.43% Series A
               Guaranteed Serial ESOP Notes due 1989-2001 and 9.00% Series B
               Guaranteed Serial ESOP Notes due 2000-2004 for the Armstrong
               World Industries, Inc. Employee Stock Ownership Plan ("Share in
               Success Plan") Trust, with Armstrong World Industries, Inc., as
               guarantor

No. 10(a)      Employment Agreement between Armstrong Holdings, Inc. and Michael
               D. Lockhart, dated August 7, 2000

No. 10(b)      Employment Agreement between Armstrong Holdings, Inc. and Frank
               A. Riddick, dated August 7, 2000

No. 10(c)      Amended and Restated Employment and Consulting Agreement between
               Armstrong Holdings, Inc., Armstrong World Industries, Inc. and
               George A. Lorch, dated August 7, 2000 and as amended October 30,
               2000

No. 10(d)      Stock Option Surrender Agreement between Armstrong Holdings, Inc.
               and George A. Lorch, dated September 25, 2000

No. 10(e)      Change in Control Agreement between Armstrong Holdings, Inc. and
               Michael D. Lockhart, dated August 7, 2000

No. 10(f)      Indemnification Agreement between Armstrong Holdings, Inc. and
               Michael D. Lockhart, dated August 7, 2000

No. 10(g)      Management Services Agreement between Armstrong Holdings, Inc.
               and Armstrong World Industries, Inc., dated August 7, 2000

No. 10(h)      Armstrong Holdings, Inc. Stock Award Plan is incorporate by
               reference herein from Armstrong Holdings, Inc.'s registration
               statement on Form S-8 filed August 16, 2000, wherein in appeared
               as Exhibit 4.1.

No. 10(i)      Terms of Restricted Stock for Stock Option Exchange Program
               Offered to Employees and Schedule of Participating Executive
               Officers

No. 15         Letter re: Unaudited Interim Financial Information

No. 27         Financial Data Schedules

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>EMPLOYEE STOCK OWNERSHIP PLAN
<TEXT>

<PAGE>

                                                                   Exhibit 4 (a)

                                                                  EXECUTION COPY
                                                                  ==============

                        ARMSTRONG WORLD INDUSTRIES, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN ("SHARE IN
                         SUCCESS PLAN") TRUST, As Issuer

                 ARMSTRONG WORLD INDUSTRIES, INC., As Guarantor



                             NOTE PURCHASE AGREEMENT



            8.43% Series A Guaranteed Serial ESOP Notes Due 1989-2001
            9.00% Series B Guaranteed Serial ESOP Notes Due 2001-2004


                                 ($270,000,000)


                            Dates as of June 19, 1989
<PAGE>

                                TABLE OF CONTENTS

                             (Not Part of Agreement)

                                -----------------
<TABLE>
<CAPTION>


                                                                                                              Page
                                                                                                              ----
<S>                                                                                                          <C>
1.       Authorization of Note............................................................................    1

2.       Purchase and Sale of Notes; Closing..............................................................    2

3.       Conditions for Closing...........................................................................    3
         3A.      Opinions of Counsel.....................................................................    3
         3B.      Representations and Warranties;
                       No Default.........................................................................    3
         3C.      Purchase Permitted by Applicable Laws...................................................    4
         3D.      ESOP Transaction........................................................................    4
         3E.      Compliance with Securities Laws.........................................................    5
         3F.      Approvals and Consents..................................................................    5
         3G.      Proceedings.............................................................................    5
         3H.      Sale of Notes to Other Purchasers.......................................................    5

4.       Payments ........................................................................................    5
         4A.      Required Installment Payments...........................................................    5
         4B.      Optional Prepayment without Premium.....................................................    6
         4C.      Optional Prepayment with Yield-Maintenance
                       Premium............................................................................    7
         4D.      Notice of Prepayments...................................................................    7
         4E.      Partial Payments Pro Rata...............................................................    7
         4F.      Acquisition or Retirement of Notes......................................................    7

5.       Affirmative Covenants............................................................................    8
         5A.      Financial Statements and Other Reports..................................................    8
         5B.      Inspection of Property..................................................................   11
         5C.      Payment of Taxes and Claims.............................................................   11
         5D.      Corporate Existence.....................................................................   12
         5E.      Maintenance of Properties...............................................................   12
         5F.      Compliance with Laws....................................................................   12
         5G.      Determination Letter....................................................................   13
         5H.      Plan Existence..........................................................................   13
         5I.      Application of Proceeds.................................................................   13

6.       Negative Covenants...............................................................................   14
         6A.      Limitations on Liens....................................................................   14
         6B.      Limitations on Sale and Lease-Back
                       Transactions.......................................................................   15
         6C.      Consolidation, Merger, Conveyance, Transfer or
                       Lease..............................................................................   16
</TABLE>
                                       (i)
<PAGE>

                           TABLE OF CONTENTS (cont'd)
<TABLE>
<CAPTION>

                                                                                                             Page
                                                                                                             ----
<S>                                                                                                         <C>
7.       Income Taxation..................................................................................   17
         7A.      Additional Payments.....................................................................   17
         7B.      Supplemental Payments...................................................................   18
         7C.      Payment Dates...........................................................................   20
         7D.      Interest Rate Adjustment................................................................   21
         7E.      Refunds.................................................................................   21
         7F.      Contest of Disallowance of
                       Section 133 Exclusion..............................................................   22
         7G.      Request for Qualifying Opinion
                       of Counsel.........................................................................   25

8.       Company Guarantee and Purchase Obligation........................................................   25
         8A.      Guarantee by the Company................................................................   25
         8B.      Purchases of Notes by the Company.......................................................   28

9.       Events of Default................................................................................   30
         9A.      Default; Acceleration...................................................................   30
         9B.      Other Remedies..........................................................................   35
         9C.      Rescission of Acceleration..............................................................   35

10.      Representations and Warranties...................................................................   36
         10A.     Organization; Corporate Authority.......................................................   36
         10B.     Financial Statements; SEC Reports.......................................................   36
         10C.     Actions Pending.........................................................................   37
         10D.     Taxes...................................................................................   38
         10E.     Title to Property.......................................................................   38
         10F.     Conflicting Agreements and Other Matters................................................   38
         10G.     Offering of Notes.......................................................................   39
         10H.     Broker's or Finder's Commissions........................................................   39
         10I.     Margin Regulations......................................................................   39
         10J.     Investment Company Act..................................................................   39
         10K.     Public Utility Holding Company Act......................................................   39
         10L.     Governmental Consents, Etc..............................................................   40
         10M.     ERISA...................................................................................   40
         10N.     The ESOP................................................................................   41
         10O.     Representations as to the Trustee.......................................................   42
         10P.     Pollution and Other Regulations.........................................................   43

11.      Representations of Purchaser.....................................................................   43

12.      Definitions......................................................................................   44
         12A.     Yield-Maintenance Terms.................................................................   44
         12B.     Other Terms.............................................................................   46
</TABLE>
                                      (ii)
<PAGE>

                           TABLE OF CONTENTS (cont'd)
<TABLE>
<CAPTION>

                                                                                                             Page
                                                                                                             ----
<S>                                                                                                         <C>
13.      Judicial Proceedings.............................................................................   56
         13A.     Consent to Jurisdiction.................................................................   56
         13B.     Enforcement of Judgements...............................................................   57
         13C.     Service of Process......................................................................   57
         13D.     No Limitation on Service or Suit........................................................   57

14.      Miscellaneous....................................................................................   57
         14A.     Note Payments...........................................................................   57
         14B.     Expenses................................................................................   58
         14C.     Consent to Amendments...................................................................   59
         14D.     Form, Registration, Transfer and
                       Exchange of Notes; Lost Notes......................................................   60
         14E.     Persons Deemed Owners;
                       Participations.....................................................................   61
         14F.     Survival of Representations and
                       Warranties; Entire Agreement.......................................................   61
         14G.     Successor and Assigns...................................................................   62
         14H.     Disclosure to Other Persons.............................................................   62
         14I.     Notices.................................................................................   62
         14J.     Descriptive Headings....................................................................   63
         14K.     Satisfaction Requirement................................................................   63
         14L.     Governing Law...........................................................................   63
         14M.     Counterparts............................................................................   63
         14N.     Reproduction of Documents...............................................................   63
         14O.     Recourse with Respect to ESOP...........................................................   64
</TABLE>

PURCHASER SCHEDULE

EXHIBIT A-1   - Form of Note
EXHIBIT A-2   - Amortization of Principal
EXHIBIT B-1   - Form of Opinion of Buchanan Ingersoll, P.C.
EXHIBIT B-2   - Form of Opinion of Lee, Toomey & Kent
EXHIBIT B-3   - Form of Opinion of Jones, Day, Reavis & Pogue,
                       Counsel to Trustee
EXHIBIT B-4   - Form of Opinion of Willkie, Farr & Gallagher

                                      (iii)
<PAGE>

                        ARMSTRONG WORLD INDUSTRIES, INC.
                          EMPLOYEE STOCK OWNERSHIP PLAN
                         ("SHARE IN SUCCESS PLAN") TRUST
                              c/o Mellon Bank, N.A.
                               Mellon Bank Center
                         Pittsburgh, Pennsylvania 15258


                        ARMSTRONG WORLD INDUSTRIES, INC.
                          Liberty and Charlotte Streets
                          Lancaster, Pennsylvania 17604

                                           June 19, 1989

To the Purchaser accepting this Agreement
on the signature page hereof

Ladies and Gentlemen:

     The undersigned, Armstrong World Industries, Inc., a Pennsylvania
corporation (the "Company"), and Armstrong World Industries, Inc. Employee Stock
Ownership Plan ("Share in Success Plan") and the trust established thereunder
(the "ESOP") hereby agree with you as follows:

     1. AUTHORIZATION OF NOTES. The ESOP will authorize the issuance, sale and
        ----------------------
delivery of $270,000,000 aggregate principal amount of its Guaranteed Serial
ESOP Notes (herein, together with any such notes that may be issued pursuant to
any provision of this Agreement or the Other Agreements hereinafter referred to
and any such notes that may be issued hereunder or thereunder in substitution or
exchange therefor, collectively called the "Notes" and individually called a
"Note"), to be issued in two series having interest rates and final maturities
as follows:

                                                                        Final
                  Principal                  Annual                   Maturity
Series             Amount                Interest Rate                  Date
- ------           ----------              -------------               ----------

  A             $149,957,000                 8.43%                 June 15, 2001
  B             $120,043,000                 9.00%                 June 15, 2004

Each note shall be dated the date of issue thereof and shall bear interest on
the unpaid principal balance thereof from the
<PAGE>

date thereof until the principal balance thereof shall become due and payable at
the applicable rate per annum specified above (subject to the provisions of
paragraph 7) and on overdue principal, premium and interest at the rates
specified therein; and the Notes, when issued, sold and delivered pursuant to
the Agreements, will be substantially in the form of Exhibit A-1. Interest on
the Notes shall accrue at the applicable rate per annum specified above (subject
to the provisions of paragraph 7), which interest will be payable semiannually
as provided in Exhibit A-1 and will be computed based on a 360-day year
comprised of 12 months of 30 days each.

     Certain capitalized terms used in this Agreement are defined in paragraph
12; references to a paragraph are, unless otherwise specified, to one of the
paragraphs of this Agreement and references to an "Exhibit" are, unless
otherwise specified, to one of the exhibits attached to this Agreement.

     2. PURCHASE AND SALE OF NOTES; CLOSING. Subject to the terms and conditions
        -----------------------------------
herein set forth, the ESOP hereby agrees to sell to you, and you agree to
purchase from the ESOP, Notes in the aggregate principal amount and of the
series set forth opposite your name in the Purchaser Schedule attached hereto,
in the form of one or more Notes registered in your name or that of your
nominee, as you shall request, and in such denominations (subject to paragraph
14D) as you shall request, for an aggregate purchase price of 100% of the
principal amount thereof.

     The issuance, sale and delivery of Notes to be purchased by you shall take
place at 10:00 A.M., New York City time, on June 20, 1989, at the offices of
Willkie Farr & Gallagher, 153 East 53rd Street, New York, New York, or on such
other date as the Company, the ESOP, you and the Other Purchasers may agree upon
(the "Closing"). At the Closing, the ESOP will deliver to you the Notes to be
purchased by you against payment of the purchase price therefor by wire transfer
of immediately available funds to Mellon Bank, N.A., Pittsburgh, Pennsylvania,
for credit to the account of the ESOP, account no. 184-588. If at the Closing
the ESOP shall fail to tender to you the Notes to be purchased by you as
provided above in this paragraph 2, or if any of the conditions specified in
paragraph 3 shall not have been satisfied or waived by you, you shall, at your
election, be relieved of all further obligations under this Agreement, without
thereby waiving any other rights you may have by reason of such failure or such
non-fulfillment.

     Concurrently with the exclusion and delivery of this Agreement, the ESOP
and the Company are entering into other Note Purchase Agreements (herein
referred to as the "Other

                                      -2-
<PAGE>

Agreements" and, with this Agreement, as the "Agreements"), identical with this
Agreement (except as to the identity of the purchaser and the series and
principal amount of Notes to be purchased thereunder) with the other purchasers
(herein called the "Other Purchasers") named in the Purchaser Schedule attached
hereto. The sale of the Notes to you and to the Other Purchasers are to be
separate and several sales.

     Notwithstanding the foregoing provisions, the ESOP shall not be required to
issue the Notes under the Agreements if you or any of the Other Purchasers
defaults in its obligation to purchase Notes under its Agreement.

     3. CONDITIONS FOR CLOSING. Your obligation to purchase and pay for the
        ----------------------
Notes to be purchased by you at the Closing is subject to the satisfaction or
waiver, prior to or simultaneously and concurrently with the Closing, of the
following conditions:

     3A. OPINIONS OF COUNSEL. You shall have received from (i) Buchanan
         -------------------
Ingersoll, P.C., counsel to the Company, (ii) Lee, Toomey & Kent, counsel to the
ESOP, (iii) Jones, Day, Reavis & Pogue, counsel to the Trustee, and (iv) Willkie
Farr & Gallagher, your special counsel in connection with the transactions
contemplated by this Agreement, favorable opinions substantially in the forms
set forth in Exhibits B-1, B-2, B-3 and B-4, respectively, each addressed to you
and dated the date of the Closing. To the extent that any opinion referred to
above in this paragraph 3A is rendered in reliance upon the opinion of any other
counsel, you shall have received a copy of the opinion of such other counsel,
dated the date of the Closing and addressed to you, or a letter from such other
counsel, dated the date of the Closing and addressed to you, authorizing you to
rely on such other counsel's opinion.

     3B. REPRESENATIONS AND WARRANTIES; NO DEFAULT. The representations and
         -----------------------------------------
warranties of the ESOP and the Company contained in paragraph 10 of this
Agreement shall be true when made and at the time of the Closing in all material
respects, and there shall exist at the time of the Closing and after giving
effect to the transactions contemplated hereby, no Event of Default or Default
or Purchase Event. Each of the ESOP and the Company shall have delivered to you
a certificate (which shall be an Officer's Certificate in the case of the
Company), dated the date of the Closing, to all such effects (but limited to the
representations and warranties of the ESOP in the case of the ESOP) and further
to the effect as to the satisfaction of the conditions (other than any condition
which relates to documents being in form and substance satisfactory to you) set
forth in paragraph 3D (but limited to the conditions applicable to the ESOP in
the case of the ESOP).

                                      -3-
<PAGE>

     3C. PURCHASE PERMITTED BY APPLICABLE LAWS. The purchase of and payment for
         -------------------------------------
the Notes to be purchased by you on the date of the Closing on the terms and
conditions herein provided (including the use of the proceeds of such Notes by
the ESOP) shall not violate any applicable law or governmental regulation
(including, without limitation, Section 5 of the Securities Act or Regulation G,
T, U or X of the Board of Governors of the Federal Reserve System) or result in
a violation of any order of any court or governmental body applicable to you (or
any of your employees, directors or affiliates) and shall not subject you to any
tax, penalty, liability or other onerous condition under or pursuant to any
applicable law or governmental regulation or order, and you shall have received
such certificates or other evidence as you may request to establish compliance
with this condition.

     3D. ESOP TRANSACTION. Prior to the Closing, you shall have received true
         ----------------
and correct copies of the Plan Documents and all other documents having the
legal effect of governing the terms or administration of the ESOP; all the terms
and provisions thereof shall be satisfactory to you in form and substance
(including schedules and exhibits thereto); all such agreements, documents and
instruments shall be in full force and effect and no term or condition thereof
shall have been amended, modified or waived except with your prior consent; the
Trustee shall have made appropriate determinations satisfactory to you
establishing that neither the sale of the Notes to you nor the purchase of the
Employer Capital Stock as contemplated by the Stock Purchase Agreement nor the
consummation of the transactions contemplated by this Agreement is or will
constitute a "prohibited transaction" as such term is defined in section 406 of
ERISA or section 4975 of the Code for which there is no exemption; and the
purchase of Employer Capital Stock in the ESOP Transaction shall be duly and
validly consummated concurrently with the Closing hereunder. Except as affected
by the transactions contemplated hereby, all conditions precedent to the
consummation of the transactions contemplated by the Plan Documents shall have
occurred, all governmental authorizations, consents, approvals, exemptions or
other actions required in connection with such transactions shall have been duly
received or taken (except for the determination letter from the Internal Revenue
Service described in paragraph 5G and the registrations and filings referred to
in paragraph 10L) and such transactions shall have been consummated
substantially in accordance with the terms of such documents. All material
matters relating to the ESOP, including, without limitation, the amount and the
deductibility of contributions by the Company to the ESOP, the use and
sufficiency of such contributions to pay the Notes and the

                                      -4-
<PAGE>

excludibility of 50% of the interest paid by the ESOP on the Notes from your
Federal Gross Income, shall be satisfactory to you.

     3E. COMPLIANCE WITH SECURITES LAWS. The issuance, sale and delivery of the
         ------------------------------
Notes under the Agreements and the sale of the Employer Capital tock in the ESOP
Transaction shall have complied in all material respects with all applicable
requirements of Federal and state securities laws, and you shall have received
evidence of such compliance in form and substance reasonably satisfactory to
you.

     3F. APPROVALS AND CONSENTS. The ESOP and the Company shall each have duly
         ----------------------
received all authorizations, consents, approvals, licenses, franchises, permits
and certificates by or of all Federal, state and local governmental authorities
necessary for the issuance, sale and delivery of the Notes pursuant to the
Agreements and the sale and delivery of the Employer Capital Stock in the ESOP
Transaction ("Approvals and Consents"), and all Approvals and Consents shall be
in full force and effect at the time of Closing and shall be effective to permit
each such issuance, sale and delivery, and you shall have received such
certificates or other evidence as you may reasonably request to establish
compliance with this condition.

     3G. PROCEEDINGS. All corporate and other proceedings taken or to be taken
         -----------
in connection with the transactions contemplated hereby, and all documents
incident thereto, shall be satisfactory in form and substance to you and your
special counsel, and you and your special counsel shall have received all such
counterpart originals or certified or other copies of such documents as you or
they may reasonably request.

     3H. SALE OF NOTES TO OTHER PURCHASERS. The ESOP shall, concurrently with
         ---------------------------------
your purchase of Notes hereunder, sell to the Other Purchasers the Notes to be
purchased by them at the Closing as provided in the Other Agreements and shall
receive payment in full therefor.

     4. PAYMENTS. The Notes shall be subject to payment with respect to the
        --------
Required Installment Payments specified in paragraph 4A and shall be subject to
prepayment under the circumstances set forth in paragraphs 4B and 4C.

     4A. REQUIRED INSTALLMENT PAYMENTS. The Notes of each series will be due and
         -----------------------------
payable in semi-annual installments of principal, on June 15 and December 15 (or
the next succeeding Business Day), as set forth on Exhibit A-2. Each such
installment payment is herein called a "Required Installment Payment" and each
such payment date is herein called an

                                      -5-
<PAGE>

"Installment Payment Date." Upon issuance of any Note, the ESOP will annex
thereto an amortization schedule with respect to such Note, setting forth the
amount of each Required Installment Payment to be allocated and applied on such
Note and the amount of the principal of such Note which will remain unpaid after
each such Required Installment Payment is made. Each Required Installment
Payment shall be allocated and applied on all outstanding Notes of a series in
proportion to the respective unpaid principal amounts thereof. Any payment made
by the ESOP pursuant to any other provision of this paragraph 4 shall not reduce
or otherwise affect its obligation to make any payment required by this
paragraph 4A, and upon any partial prepayment of Notes pursuant to paragraph 4B
or 4C, or any partial retirement, purchase or other acquisition of Notes by the
ESOP or the Company, its Subsidiaries or Affiliates (whether pursuant to
paragraph 4F or paragraph 8), the amount of the Required Installment Payments in
respect of the outstanding Notes of such series shall remain as specified on
Exhibit A-2, and such partial prepayments shall be applied to such amounts in
inverse order of their maturity. For the purpose of this paragraph 4A only, (x)
all Notes of a series prepaid (except pursuant to subparagraph (a) of paragraph
4B or paragraph 4C), or otherwise retired or purchased or otherwise acquired by
the ESOP or the Company or any of its Subsidiaries or Affiliates and (y) all
Notes prepaid pursuant to subparagraph (b) of paragraph 4B, shall be deemed
outstanding. The ESOP shall deliver to the holder of each Note outstanding after
any such prepayment, retirement, purchase or acquisition a revised amortization
schedule with respect to such Note, setting forth the amount of each Required
Installment Payment thereafter to be allocated and applied on such Note and the
amount of the principal of such Note which will remain unpaid after each such
Required Installment Payment is made.

     4B. OPTIONAL PREPAYMENT WITHOUT PREMIUM. (a) The Notes of each series shall
         -----------------------------------
be subject to prepayment in part, at the option of the ESOP, on any Installment
Payment Date in an aggregate principal amount not to exceed 20% of the Required
Installment Payment to be made on the Notes of such series on such date (and not
to be less than $250,000), at 100% of the principal amount so to be prepaid,
together with accrued interest thereon to the prepayment date, but without
premium. The right of the ESOP to prepay Notes pursuant to this paragraph 4B
shall be non-cumulative and shall not, to the extent not fully exercised with
respect to any Installment Payment Date, increase the amount of Notes which the
ESOP may prepay on any subsequent Installment Payment Date pursuant to this
paragraph 4B. The aggregate principal amount of Notes that may be prepaid by the
ESOP pursuant to this paragraph 4B shall not exceed &7,497,850, in the case of
the Series A Notes, and $6,002,150 in the case of the Series B Notes.

                                      -6-
<PAGE>

     (b) The ESOP may prepay, on or before June 30, 1989, Notes held by Wachovia
     Bank and Trust Company, N.A. in the principal amount not exceeding
     $700,000, at 100% of such principal amount, together with accrued interest
     thereon to the prepayment date, but without premium. Such prepayment shall
     be applied to the Required Installment Payments in respect of the Notes
     held by Wachovia Bank and Trust Company, N.A. in inverse order of their
     maturity.

     4C. OPTIONAL PREPAYMENT WITH YIELD-MAINTENANCE PREMIUM. The Notes of each
         --------------------------------------------------
series shall be subject to prepayment, at any time in whole, or from time to
time on any Installment Payment Date in part (in a minimum aggregate principal
amount of $50,000,000), at the option of the ESOP, at 100% of the principal
amount thereof to be prepaid, together with accrued interest thereon to the
prepayment date and the Yield-Maintenance Premium, if any, with respect to each
Note.

     4D. NOTICE OF PREPAYMENTS. The ESOP shall give each holder of Notes
         ---------------------
irrevocable written notice of any prepayment of the Notes pursuant to
subparagraph (a) of paragraph 4B or paragraph 4C not less than 30, nor more than
60, days prior to the prepayment date, specifying such prepayment date and the
principal amounts of the Notes of each series, and of the Notes held by such
holder, to be prepaid on such date and stating that such prepayment is being
made pursuant to subparagraph (a) of paragraph 4B or paragraph 4C, as the case
may be, whereupon the principal amount of the Notes to be prepaid, together with
interest accrued thereon to such prepayment date and the Yield-Maintenance
Premium, if any, with respect to each Note, shall become due and payable on such
prepayment date.

     4E. PARTIAL PAYMENTS PRO RATA. Upon any partial prepayment of the Notes of
         -------------------------
either series pursuant to subparagraph (a) of paragraph 4B or paragraph 4C, the
principal amount so prepaid shall e allocated to all Notes of such series at the
time outstanding (including, for the purpose of this paragraph 4E only, (x) all
Notes prepaid or otherwise retired or purchased or otherwise acquired by the
ESOP or the Company or any of its Subsidiaries or Affiliates other than by
prepayment pursuant to subparagraph (a) of paragraph 4B or paragraph 4C and (y)
all Notes prepaid pursuant to subparagraph (b) of paragraph 4B) in proportion to
the respective outstanding principal amounts thereof.

     4F. ACQUISITION OR RETIREMENT OF NOTES. The Company will not, and will not
         ----------------------------------
permit any of its Subsidiaries or Affiliates to, and the ESOP will not, retire
in whole or in part prior to their stated maturity, or purchase or otherwise
acquire, directly or indirectly, (other than by payment

                                      -7-
<PAGE>

pursuant to paragraph 4A, prepayment pursuant to paragraph 4B or 4C or purchase
pursuant to paragraph 7B(b) or paragraph 8B or after acceleration pursuant to
paragraph 9A), Notes of either series held by any holder unless the Company or
such Subsidiary or Affiliate or the ESOP shall have offered in writing to retire
or purchase or otherwise acquire, as the case may be, the same proportion of the
aggregate principal amount of Notes of such series held by each other holder of
Notes at the time outstanding upon economically equivalent terms and conditions.
To the extent that any holder of the Notes declines such offer (or shall fail to
accept such offer within the time period specified therein, which shall be not
less than 10 Business Days), the Company or such Subsidiary or Affiliate or the
ESOP may purchase or otherwise acquire Notes of such series (pro rata among all
such holders who have accepted such offer as aforesaid and otherwise on the same
terms as aforesaid) from other holders of Notes in an aggregate amount and for
an aggregate purchase price not to exceed the aggregate amount and price
originally so offered to all holders of such Notes. Any Notes retired, purchased
or otherwise acquired by ESOP shall not be deemed to be outstanding for any
purpose under this Agreement, except as provided in paragraphs 4A and 4E.

     5. AFFIRMATIVE COVENANTS. The provisions of this paragraph 5 shall remain
        ---------------------
in effect from the date hereof and thereafter so long as any Note shall remain
outstanding.

     5A. FINANCIAL STATEMENTS AND OTHER REPORTS. The Company covenants that it
         --------------------------------------
will deliver to each holder of a Note in quadruplicate:

          (i) as soon as is practicable and in any event within 60 days after
     the end of each quarterly period (other than the last quarterly period) in
     each fiscal year commencing with the first such quarter ending after the
     date of the Closing, a consolidated statement of income of the Company and
     its Subsidiaries for such quarterly period and for the period from the
     beginning of such fiscal year to the end of such quarterly period, setting
     forth in comparative form figures for the corresponding quarterly and
     year-do-date periods in the preceding fiscal year, a consolidated statement
     of cash flows of the Company and its Subsidiaries for the period from the
     beginning of such fiscal year to the end of such quarter, setting forth in
     comparative form figures for the corresponding period in the preceding
     fiscal year, and a consolidated balance sheet of the Company and its
     Subsidiaries as of the end of such

                                      -8-
<PAGE>

Quarter, setting forth in comparative form figures for the preceding fiscal year
end, all in reasonable detail and certified as complete and correct and prepared
in accordance with generally accepted accounting principles by an authorized
financial officer of the Company, subject to changes resulting from year-end
adjustments; provided, however, that delivery pursuant to clause (iii) below of
             --------  -------
a copy of the Quarterly Report on Form 10-Q of the Company for such quarterly
period shall be deemed to satisfy the requirements of this clause (i), provided
that such report contains at least the information required to be delivered
pursuant to this clause;

          (ii) as soon as practicable and in any event within 120 days after the
     end of each fiscal year, consolidated statements of income and of cash
     flows of the Company and its Subsidiaries for such year, and a consolidated
     balance sheet of the Company and its Subsidiaries as at the end of such
     year, setting forth in each case in comparative form corresponding figures
     from the preceding annual audit, all in reasonable detail and accompanied
     by an opinion, directed to the Company, of Peat Marwick Main & Co. or of
     other independent public accountants of recognized national standing
     selected by the Company and reasonably satisfactory to the Required
     Holder(s), whose opinion shall be in scope and substance reasonably
     satisfactory to the Required Holder(s) (it being agreed that the form of
     opinion included in the Historical Financial Statements is satisfactory);
     provided, however, that deliver pursuant to clause (iii) below of a copy of
     --------  -------
     the Annual Report on Form 10-K (including all incorporated documents) of
     the Company for such fiscal year shall be deemed to satisfy the
     requirements of this clause (ii), provided that such report contains at
     least the information required to be delivered pursuant to this clause;

          (iii) promptly upon transmission thereof, copies of all such financial
     statements, proxy statements, notices and reports as it shall send or shall
     be required to send to its public stockholders and copies of all
     registration statements (without exhibits), other than on Form S-8 or any
     similar successor form (except to the extent such registration statement on
     Form S-8 relates to the Plan), and all public reports which it files or is
     required to file with the Commission;

          (iv) promptly upon receipt thereof, a copy of each management letter
     or similar report submitted to the Company by independent accountants in
     connection with any annual, interim or special audit made by them of the
     books of the Company or any Subsidiary of the Company;

                                      -9-
<PAGE>

          (v) promptly upon its becoming available and any event within 30 days
     after such time as such reports are required to be filed with the IRS, a
     copy of the annual report of the ESOP on Form 5500;

          (vi) promptly upon their becoming available, copies of the Annual
     Report on Form 11-K of the ESOP as filed with the Commission;

          (vii) promptly following the Company's obtaining knowledge thereof, a
     notice of the occurrence of any event (other than matters of general public
     knowledge) that could, in the reasonable judgment of the Company, be
     expected to give rise to a change in the interest rate applicable to the
     Notes or the payment of any amount by the ESOP pursuant to paragraph 7;

          (viii) promptly upon the Company's receipt thereof, a copy of any
     notice given by a holder of a Note pursuant to the parenthetical clause
     contained in clause (b) of the last paragraph of paragraph 9A; and

          (ix) promptly upon your request therefor, such other information
     relating to the Company, its Subsidiaries or the ESOP as you may reasonably
     request.

Together with each delivery of financial statements required by clause (i) or
(ii) above, the Company will deliver to each holder of Notes an Officer's
Certificate stating that, to such officers' knowledge, there exists no Event of
Default or Default or Purchase Event, or, if any Event of Default or Default or
Purchase Event exists, specifying the nature and period of existence thereof and
what action the Company is taking or proposes to take with respect thereto.
Together with each delivery of financial statements required by clause (ii)
above, the Company deliver to each holder of Notes a certificate of such
accountants stating that, in making the audit necessary to the certification of
such financial statements, they have obtained no knowledge of any Event of
Default or Default or Purchase Event, or, if they have obtained knowledge of any
Event of Default or Default or Purchase Event, specifying the nature and period
of existence thereof. Such accountants, however, shall not be liable to anyone
by reason of their failure to obtain knowledge of any Event of Default or
Default or Purchase Event which would not be disclosed in the course of an audit
conducted in accordance with generally accepted auditing standards. The Company
also covenants that forthwith upon the chief executive officer, chief operating
officer, principal financial officer, principal accounting officer or treasurer
of the Company obtaining actual knowledge

                                      -10-
<PAGE>

of an Event of Default or Default or Purchase Event, it will deliver to each
holder of Notes an Officer's Certificate specifying the nature and period of
existence thereof and what action the Company is taking on proposes to take with
respect thereto.

     5B. INSPECTION OF PROPERTY. The Company covenants that it will permit any
         ----------------------
Person designated by you or any Transferee in writing, at your or such
Transferee's expense (or at the Company's expense if there exists an Event of
Default or Default or Purchase Event), (i) to visit and inspect any of the
properties of the Company and its Subsidiaries, (ii) if a Default or Event of
Default has occurred and is continuing, or if Moody's rating of Unsupported
Company Debt shall be reduced to "Baa3" or lower, to examine the corporate books
and financial records of the Company and its Subsidiaries and make copies
thereof or extracts therefrom and (iii) to discuss the affairs, finances and
accounts of any of such corporations with the principal officers of the Company
and its independent public accountants (who are hereby authorized to have such
discussions) all (except as otherwise provided in clause (ii)) at such
reasonable times and as often as you or such Transferee may reasonably request.

     5C. PAYMENT OF TAXES AND CLAIMS. The Company will pay or discharge, or
         ---------------------------
cause to be paid or discharged, before the same shall become delinquent (i) all
taxes, assessments and governmental charges (including claims of the IRS and the
PBGC and claims made at the instance of the PBGC) levied or imposed upon it or
its Subsidiaries or upon its or their income, profits or property, except where
non-payment would neither (x) result in an unstayed Lien on a Principal Property
nor (y) (either singly or in the aggregate) have a material adverse effect on
the Company and its Subsidiaries taken as a whole or the ability of the Company
to perform and satisfy its obligations under this Agreement, (ii) all lawful
claims for labor, materials and supplies, which, if unpaid, might by law become
a lien upon its or its Subsidiaries' properties, except where non-payment would
neither (x) result in an unstayed Lien on a Principal Property nor (y) (either
singly or in the aggregate) have a material adverse effect on the Company and
its Subsidiaries taken as a whole or the ability of the Company perform and
satisfy its obligations under this Agreement and (iii) all required installments
under section 412(m) of the Code and other required payments under section 412
of the Code with respect to any pension plan maintained by the Company or a Code
Affiliate; provided, however, that the Company shall not be required to pay or
           --------  -------
discharge or cause to be paid or

                                      -11-
<PAGE>

discharged any such tax, assessment, charge or claim referred to in clause (i),
(ii) or (iii) above whose amount, applicability or validity is being contested
in good faith by appropriate proceedings and in respect of which such accrual or
other appropriate provision, if any, as shall be required by generally accepted
accounting principles shall have been made.

     5D. CORPORATE EXISTENCE. Subject to paragraph C, the Company will be or
         -------------------
cause to be done all things necessary to preserve and keep in full force and
effect its corporate existence, rights (charger and statutory) and franchises;
provided, however, that the Company shall not be required to preserve any such
- --------  -------
right or franchise if the Board of Directors (with respect to the Company's
rights other than its corporate existence) or the Company (with respect to its
franchises) shall determine that the preservation thereof is no longer desirable
in the conduct of the business of the Company and that the loss thereof is not
disadvantageous in any material respect to the holders of the Notes.

     5E. MAINTENANCE OF PROPERTIES. The Company will cause all properties of
         -------------------------
material value used or useful in the conduct of its business or the business of
any Subsidiary to be maintained and kept in good condition, repair and working
order and supplied with all necessary equipment and will cause to be made all
necessary repairs, renewals, replacements, betterments and improvement thereof,
all as in the judgment of the Company may be necessary so that the business
carried on in connection therewith may be properly and advantageously conducted
at all times; provided, however, that nothing in this paragraph 5E shall prevent
              --------  -------
the Company from taking any acting which, in the judgment of the Company, is
desirable in the conduct of its business or the business of any Subsidiary and
not disadvantageous in any material respect to the holders of the Notes.

     5F. COMPLIANCE WITH LAWS. The Company will, and will cause each of its
         --------------------
Subsidiaries to, comply with the requirements of all applicable laws and
regulations of any governmental authority (including, without limitation, those
relating to pollution and environmental matters, equal employment opportunity
and employee safety), the failure to comply with which would have a material
adverse effect on the business, properties, financial condition or results of
operations of the Company and its Subsidiaries taken as a whole. For purposes of
this paragraph 5F, any such failures will be deemed to have such a material
adverse effect if the liabilities incurred or reasonably expected to be incurred
involved an aggregate amount in excess of 10% of Consolidated Net Tangible
Assets.

                                      -12-
<PAGE>

     5G. DETERMINATION LETTER. The Company will promptly (but in no event later
         --------------------
     than August 15, 1989) apply for, and use its best efforts to obtain and
     deliver to you as promptly as practicable, a determination letter from the
     IRS to the effect that the ESOP meets the requirements for qualification
     under section 401(a) of the Code, that the ESOP is a "employee stock
     ownership plan" under section 4975(e)(7) of the Code and that the trust
     forming part of the ESOP meets the requirements for tax exemption under
     section 501(a) of the Code and will comply with any reasonable request from
     any Indemnitee for assistance in establishing the status of the ESOP as a
     "employee stock ownership plan" under Section 4975(e) (7) of the Code or
     the status of the purchase of any Note as a "securities acquisition loan"
     under section 133 of the Code.

     5H. PLAN EXISTENCE. Each of the Company and the ESOP will (i) do all things
         --------------
necessary to that the loan evidenced by the Notes will qualify as an "exempt
loan" to the ESOP as defined in Treasury Regulation sections 54.4975-7 and
54.4975-11 and the requirements, if any, that may be promulgated from time to
time with respect to section 133 of the Code; (ii) do all things necessary to
maintain and keep in full force and effect the ESOP as an "employee stock
ownership plan", within the meaning of section 4975(e)(7) of the Code and
section 407(d)(6) of ERISA; (iii) cause the ESOP to be operated and administered
at all times and be amended as necessary so as to remain qualified under section
401(a) and 4975(e)(7) of the Code and the trust forming part of the ESOP to
remain tax-exempt under section 501(a) of the Code; (iv) cause all other actions
to be taken which are necessary for the ESOP to be in material compliance with
all applicable requirements of ERISA (including Titles I and II thereof) and the
Code and the regulations thereunder as from time to time in effect and
applicable to the ESOP; and (v) take no action to amend or otherwise modify any
Plan Document in a manner that would result in the extension of credit
represented by the Notes ceasing to qualify as a "securities acquisition loan"
within the meaning of section 133(b) of the Code. The Company covenants that it
will make contributions to the ESOP as required by the Plan Documents. Nothing
in this paragraph 5H is intended to give any Person, other than the holders from
time to time of the Notes, any rights.

     5I. APPLICATION OF PROCEEDS. The ESOP shall use the entire proceeds of the
         -----------------------
issuance and sale of the Notes promptly to acquire, at not more than adequate
consideration (within the meaning of Section 3(18) of ERISA), shares of Employer
Capital Stock in accordance with the Stock Purchase Agreement. The ESOP and the
Company will furnish to you, if required in connection with your purchase of the
Notes hereunder, a

                                      -13-
<PAGE>

statement in conformity with applicable margin requirements of the Federal
Reserve under Regulation G or U.

     6. NEGATIVE COVENANTS. The provisions of this paragraph 6 shall remain in
        ------------------
effect only so long as any Note shall remain outstanding.

     6A. LIMITATIONS ON LIENS. The Company will not, and will not permit any
         --------------------
Restricted Subsidiary to, issue, assume or guarantee any Debt secured by a Lien
upon any Principal Property of the Company or of any Restricted Subsidiary or
upon any shares of stock or Debt of any Restricted Subsidiary without in any
such case effectively providing concurrently with the issuance, assumption or
guaranty of any such Debt that the Company Obligations shall be secured equally
and ratably with (or, at the option of the Company, prior to) such Debt, so long
as such Debt shall be so secured, unless after giving effect thereto the
aggregate amount of all such Debt so secured, together with all Attributable
Debt in respect of sale and leaseback transactions involving Principal
Properties, would not exceed 10% of Consolidated Net Tangible Assets. The
foregoing restrictions shall not prevent, restrict or apply to Debt secured by:
(1) Liens on property, shares of stock or indebtedness of any corporation
existing at the time such corporation becomes a Restricted Subsidiary, provided
that any such Lien was in existence prior to the time such corporation became a
Restricted Subsidiary and was not effected in contemplation of such
corporation's becoming a Restricted Subsidiary; (2) Liens on any property
(including shares of stock or Debt) existing at the time of acquisition thereof
or securing the payment of all or any part of the purchase price or construction
cost thereof or securing any Debt incurred prior to, at the time or within 180
days after, the acquisition of such property, shares of stock or Debt or the
completion of any such construction, whichever is later, for the purpose of
financing all or any part of the purchase price or construction cost thereof;
(3) Liens on any property to secure all or any part of the cost of development,
operation, construction, alteration, repair or improvement of all or any part of
such property, or to secure Debt incurred prior to, at the time of or within 180
days after, the completion of such development, operation, construction,
alteration, repair or improvement, whichever is later, for the purpose of
financing all or any part of such cost; (4) Liens which secure Debt owing by a
Restricted Subsidiary to the Company or to another Restricted Subsidiary or any
the Company to a Restricted Subsidiary; (5) Liens securing indebtedness of a
corporation which becomes a successor of the Company in a transaction not
otherwise prohibited by this Agreement, provided that any such Lien was in
existence prior to the consummation of such

                                      -14-
<PAGE>

transaction, was not effected in contemplation of such transaction and does not,
upon or after such consummation, extend to any Principal Property held by the
Company or a Restricted Subsidiary prior to such consummation except in
compliance with the other provisions of this paragraph 6A; (6) Liens on property
of the Company or a Restricted Subsidiary in favor of governmental authorities
to secure partial, progress, advance or other payments or to secure any
indebtedness incurred for the purpose of financing all or any part of the
purchase price or the cost of construction of the property subject to such
Liens, or in favor of any trustee or mortgagee for the benefit of holders of
indebtedness of any such entity incurred for any such purpose; and (7) any
extension, renewal or replacement (or successive extensions, renewals or
replacements), in whole or in part, of any Lien referred to in the foregoing
clauses (1) to (6), inclusive, or of any Debt secured thereby, provided that
such extension, renewal or replacement Lien shall be limited to all or any part
of the same property that secured the Lien extended, renewed or replaced (plus
any improvements on such property) and shall secure no larger amount of Debt
than that existing at the time of such extension, renewal or replacement.

     6B. LIMITATIONS ON SALE AND LEASEBACK TRANSACTIONS. Neither the Company no
         ----------------------------------------------
any Restricted Subsidiary shall enter into any sale and leaseback transaction
involving any Principal Property, the completion of construction and
commencement of full operation of which has occurred more than 180 days prior
thereto, unless (a) the Company or such Restricted Subsidiary could incur a Lien
on such property under the restrictions set forth in paragraph 6A in an amount
equal to the Attributable Debt of the Company or its Restricted Subsidiaries
with respect to the sale and leaseback transaction without equally and ratably
securing the Company Obligations or (b) the Company, within 180 days, applies to
the retirement of Funded Debt of the Company or its Restricted Subsidiaries the
greater of (i) the next proceeds of the sale or transfer of the Principal
Property so sold and leased back or (ii) the fair value of the Principal
Property so sold (as of the date of such sale or transfer) and leased back. The
foregoing restriction will not apply to any sale and leaseback transaction (x)
between the Company and a Restricted Subsidiary or between Restricted
Subsidiaries or (y) involving the taking back of a lease for a period of less
than three years. For purposes of this paragraph 6B, the determination of the
net proceeds of the sale or transfer of a Principal Property or the fair value
of the Principal Property so sold or transferred shall be as determined in good
faith by the Board of Directors.

                                      -15-
<PAGE>

     6C. CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE. (a) The Company
         ----------------------------------------------------
shall not consolidate with or merge into any other corporation or convey,
transfer or lease its properties and assets substantially as an entirety to any
other Person, unless:

          (1) the corporation formed by such consolidation or into which the
     Company is merged or the Person which acquires by conveyance or transfer,
     or which leases, the properties and assets of the Company substantially as
     an entirety shall be a corporation organized and existing under the laws of
     the United States of America, any State thereof or the District of Columbia
     and shall expressly assume, by an agreement supplemental hereto, executed
     and delivered to the holders of the Notes, in form satisfactory to the
     Required Holders, the due and punctual performance of the Company
     Obligations and the payment and performance eof every other covenant
     (including, without limitation, those in respect of the Company
     Obligations) of this Agreement on the part of the Company to be performed
     or observed;

          (2) immediately after giving effect to such transaction and treating
     any indebtedness which becomes an obligation of the Company or a Subsidiary
     as a result of such transaction as having been incurred by the Company or
     such Subsidiary at the time of such transaction, no Event of Default or
     Default or Purchase Event, and no event which, after notice or lapse of
     time or both, would become a Purchase Event, shall have happened and be
     continuing; and

          (3) The Company has delivered to the holders of the Notes an Officer's
     Certificate and an Opinion of Counsel, each stating that such
     consolidation, merger conveyance, transfer or lease and, if a supplemental
     agreement is required in connection with such transaction, such
     supplemental agreement comply with this paragraph 6C and that all
     conditions precedent herein provided for relating to such transaction have
     been complied with.

     (b) Upon any consolidation by the Company with or merger by the Company
into any other corporation or any conveyance, transfer or lease of the
properties and assets of the Company substantially as an entirety in accordance
with paragraph 6C(a), the successor corporation formed by such consolidation or
with or into which the Company is merged or to which such conveyance, transfer
or lease is made shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under this Agreement (including, without
limitation, those provided for in paragraph 8) with the same

                                      -16-
<PAGE>

effect as if such successor corporation had been named as the Company herein,
and thereafter, except in the case of a lease, the predecessor corporation shall
be relieved of all obligations and covenants under this Agreement.

     (c) If, upon any consolidation or merger of the Company or any Restricted
Subsidiary with or into any other corporation or corporations (whether or not an
Affiliate of the Company), or successive consolidations or mergers in which the
Company or any Restricted Subsidiary or their successors shall be a party or
parties, or upon any sale, conveyance or lease of the property of the Company or
any Restricted Subsidiary as an entirety or substantially as an entirety to any
other Person (whether or not an Affiliate of the Company), any Principal
Property of the Company or of any Restricted Subsidiary owned immediately prior
thereto would thereupon become subject to any Lien, the Company or any such
Restricted Subsidiary, prior to such consolidation, merger, sale, conveyance or
lease, shall by agreement supplemental hereto secure the due and punctual
payment of the Company Obligations (equally and ratably with any other
indebtedness of the Company then entitled thereto) by a direct Lien on all such
Principal Properties of the Company or any such Restricted Subsidiary, prior to
all Liens other than any theretofore existing thereon, unless such Lien would be
permitted by paragraph 6A, treating, for the purposes of paragraph 6A, the
indebtedness of the other Person secured by such Lien as Debt.

     7.  INCOME TAXATION.
         ---------------

     7A. ADDITIONAL PAYMENTS. In the event that at any time (whether before or
         -------------------
after payment of the Notes) a Gross-Up Event shall occur with respect to any
Indemnitee, the ESOP will pay to such Indemnitee as additional interest in
immediately available funds at the time or times specified in paragraph 7C:

     (a) an amount equal to the excess of

          (i) the amount of interest which would have been payable on the unpaid
     principal amount of such Indemnitee's Note during the Additional Payment
     Period if such Note had borne interest at a rate per annum equal to the
     Gross-Up Rate (or if the percentage of Interest on such Indemnitee's Note
     included in its Federal Gross Income shall exceed the Inclusion Rate but
     shall be less than 100%, the interest rate determined in accordance with
     paragraph 7D (determined by applying the Adjustment Fraction as if the
     Inclusion Rate had increased to the percentage of interest on such
     Indemnitee" Note included in its Federal Gross Income), in lieu of the
     Gross-Up Rate), over

                                      -17-
<PAGE>

          (ii) the amount of interest actually paid or payable under the terms
          of such Indemnitee's Note during the Additional Payment Period
          (excluding any additional interest on overdue amounts paid or payable
          as provided in the Notes); and

     (b) the sum of

          (i) the amount of any interest and of any penalties, additions to tax
     and additional amounts payable under the Code (such penalties, additions to
     tax and additional amounts being referred to as "Additions to Tax") which
     are deductible for Federal income tax purposes and are payable (or have
     been paid) to the United States by the Indemnitee as a consequence of the
     failure to include more than the Inclusion Rate of the interest referred to
     in paragraph 7A(a)(ii) in the Federal Gross Income of such Indemnitee, and

          (ii) an amount which, after giving effect to all taxes attributable to
     the inclusion of such amount in the gross income of such Indemnitee under
     the laws of any Federal, state or local governmental taxing authority (such
     taxes to be calculated at the maximum statutory rate, applicable to such
     Indemnitee during the relevant taxable period, after taking into account
     deductions and credits attributable to the imposition of Federal, state and
     local taxes), shall be equal to the amount of any interest or Additions to
     Tax which are not deductible for Federal income tax purposes and which are
     payable (or have been previously paid) to the United States by the
     Indemnitee as a consequence of the failure to include more than the
     inclusion Rate of the interest referred to in paragraph 7A(a)(ii) in the
     Federal Gross Income of such Indemnitee;

provided, however, that as to any Gross-Up event, no payment shall be required
- --------  -------
pursuant to paragraph 7A(b) on account of any interest and Additions to Tax with
respect to periods after all amounts due under paragraph 7A have been paid with
respect to such Gross-Up Event.

     7B. SUPPLEMENTAL PAYMENTS.
         ---------------------

     (a) In the event that any time (whether before or after payment of the
Notes), in the reasonable opinion of an Indemnitee, which, at the request and
expense of the Company, is confirmed by an opinion of counsel to such
Indemnitee, a Change of Law shall occur with respect to such Indemnitee

                                      -18-
<PAGE>

which, in the reasonable opinion of such Indemnitee, results in any Tax
Disallowance, the ESOP shall pay to the Indemnitee within 30 days following the
receipt of written notice from the Indemnitee, in immediately available funds
amounts that shall be equal to the sum of (i) any tax, alternative minimum tax,
levy or other cost, including, but not limited to, penalties, additions to taxes
or interest related to any of the foregoing, related to the purchase, ownership,
or disposition of any Note that arises directly or indirectly, in whole or in
part, as a result of such Change of Law (all such taxes to be calculated
assuming rate in effect for the tax year or years in which the Tax Disallowance
occurs), plus (ii) an amount representing interest (at the Gross-up Rate) on any
such tax, levy or other cost listed in (i) above for the period (x) commencing
ten days after the Indemnitee shall have given notice to the Company of its
intention to pay, but in no event earlier than the date the Indemnitee shall
have paid, any such tax, levy or other cost listed in (i) above and (y) ending
on the date payment hereunder is received by the Indemnitee, plus (iii) an
amount which, after giving effect to all taxes attributable to the inclusion of
such amount in the taxable income of the Indemnitee for Federal and state tax
purposes, shall equal all taxes due on the payments set forth in (i), but only
to the extent such payments set forth in (i) are not items for which the
Indemnitee is allowed a tax deduction. Except as provided in 7(C)(b), the
determination of all amounts hereunder by the Indemnitee shall be conclusive and
binding on the Company absent manifest error.

     (b) Notwithstanding paragraph 7B(a), if the ESOP determines that any Change
of Law has occurred with respect to an Indemnitee which would result in a
liability of the ESOP to such Indemnitee pursuant to paragraph 7B(a), the ESOP
may, a its option, upon not more than 60 nor less than 30 days notice, cause the
terms of all Notes of all Series held by such Indemnitee to be adjusted in the
following manner on the date specified in such notice (the "Adjustment Date"):
(i) the interest rate on the Notes will be increased to the Gross-Up Rate
effective as of the Adjustment Date and (ii) the ESOP will have no liability for
payments that otherwise would be due under paragraphs 7A, 7B and 7D, except for
payments that may be due under paragraphs 7A, 7B and 7D with respect to periods
prior to the Adjustment Date. The ESOP will pay accrued interest on the Notes
through the date of adjustment on the Adjustment Date. At the request of such
Indemnitee, the ESOP will exchange the adjusted Notes for new Notes solely
reflecting the change to the interest rate.

                                      -19-
<PAGE>

     7C. PAYMENT DATES. (a) If the ESOP becomes obligated to make payments to
         -------------
any Indemnitee pursuant to paragraph 7A, the Indemnitee shall from time to time
notify the ESOP and the Company of the amount that is payable in respect of such
portion of the Additional Payment Period (i) as had elapsed prior to the
occurrence of a Gross-Up Event, which amount shall be due and payable (A) in the
case such notice is given prior to payment in full of the Notes, on the first
date thereafter on which any interest on the Notes is due and payable (or, if
later, 10 days after the date of such notice), or (B) in the case such notice is
given after payment in full of the Notes, within 10 days after the date of such
notice, and (ii) as had elapsed on and after the occurrence of a Gross-Up event,
which amount will be payable on each date thereafter on which any interest on
the Notes is due and payable (each notice under this clause (ii) shall be given
at least 10 days prior to such interest payment date); provided, however, that
if the Gross-Up Event occurs solely as a result of the occurrence of the event
described in clause (b)(i) of the definition of Gross-Up Event, and if neither a
Purchase Event nor Default has occurred and is continuing, the ESOP and the
Company may elect not to make any payments due under paragraph 7A during the
period of any contest under paragraph 7F, unless the Indemnitee makes a payment
(including reducing any available refund, offset or credit otherwise available)
of the increased Federal tax arising from the Gross-Up Event, in which event the
amount payable under paragraph 7A shall be paid by the ESOP to the Indemnitee
promptly upon its receipt of notice of such payment from the Indemnitee.

     (b) The computation of any amount payable under paragraph 7A, 7B, 7D or 7E
shall be made in good faith by the Indemnitee and shall be explained in writing
to the ESOP and the Company, but neither the ESOP nor the Company shall have any
right to examine the Indemnitee's Federal income tax returns or any other
returns, documents or records of the Indemnitee. At the Company's or the ESOP's
request and at the Company's expense, the Indemnitee will cause the Indemnitee's
independent auditors to review such computation and certify to the Company or
the ESOP, as the case may be, that such computation is accurate in all material
respects or shall certify as to the correct computation if such computation is
not accurate in all material respects.

     (c) If the ESOP shall fail to pay any amount payable under paragraphs 7A on
the due date pursuant to this paragraph 7C, the ESOP shall also pay, to the
extent lawful, interest on such unpaid amount at the rate payable on overdue
payments of principal on the Notes, as set forth therein.

                                      -20-
<PAGE>

     7D. INTEREST RATE ADJUSTMENT. In the event that, with respect to an
         ------------------------
Indemnitee at any time after the date hereof there is for any reason a change in
the Federal Tax Rate or the Inclusion Rate which is enacted after the date
hereof, then, in that event, the interest rate on the Notes of each series held
by such Indemnitee shall be automatically adjusted (but not higher than the
Gross-Up Rate nor lower than the Fully Tax Exempt Rate with respect to such
Notes), effective as of the effective date of change for each such change, to
the rate per annum determined by multiplying the original interest rate
applicable to the Notes of such series by the Adjustment Fraction. Such
Indemnitee shall determine the adjusted interest rate on its Notes in accordance
with the foregoing, subject to the procedures described in paragraph 7C(b). The
ESOP unconditionally promises to pay interest on such Notes from the effective
date of such change at the rate as so adjusted from time to time. If for any
reason (e.g., a retroactive effective date) the effective date of change for any
such change is prior to one or more payment dates for which payments were due
and payable on such Notes, and adjustments to payments are required under this
paragraph 7D, (i) the ESOP shall promptly upon demand by such Indemnitee pay the
amount by which interest computed at such rate or rates exceeds the amount of
interest actually theretofore paid by the ESOP on the Notes or (ii) the amount
by which the interest computed at such rate or rates is exceeded by the amount
of interested theretofore paid by the ESOP on the Notes shall be applied as an
offset against subsequent payments of interest and principal on the Notes.

     7E. REFUNDS. (a) If the ESOP or the Company shall make any payment to any
         -------
Indemnitee pursuant to paragraph 7A or 7B and such Indemnitee shall thereafter
receive a refund, offset or credit of federal tax for any taxable year to which
such payment related in respect of a claim that part of the interest on the
Notes to which such payment related was excludable from its Federal Gross Income
such Indemnitee shall pay to the ESOP or the Company, as the case may be, the
sum of:

          (i) an amount equal to the amount previously paid to such Indemnitee
     pursuant to paragraph 7A(a) or 7B with respect to all interest on such
     Notes for such taxable year to which such claim for refund, offset, or
     credit related (the "Disputed Interest") multiplied by a fraction (not to
     exceed one) the numerator of which is the amount of the refund or credit
     received of tax paid with respect to the Disputed Interest and the
     denominator of which is the amount of all tax paid by such Indemnitee with
     respect to such Disputed Interest; and

                                      -21-
<PAGE>

          (ii) the amount of any refunded, offset or credited interest or
     Additions to Tax that had been paid with respect to such Disputed Interest
     and with respect to which such Indemnitee had been paid with respect to
     such Disputed Interest and with respect to which such Indemnitee had been
     paid pursuant to paragraph 7A(b) or 7B (except to the extent already paid
     under clause (I))).

     (b) Other Adjustments. (i) If the ESOP or the Company shall make any
         -----------------
payment to an Indemnitee pursuant to paragraph 7B and if, in the Federal income
tax return of such Indemnitee or after any adjustment of such return, the amount
of the Tax Allowance or other amount by reference to which the amount of the
supplemental payments is determined differs form the amount used to compute the
amount of such payment, the ESOP or the Company, as the case may be, shall pay
to such Indemnitee promptly on written demand any additional amount computed
pursuant to paragraph 7B, and the Indemnitee shall promptly refund to the ESOP
or the Company, as the case may be, any excess amount paid pursuant to paragraph
7B, attributable to such difference.

     (ii) In the case of a Gross-Up Event occurring solely as a result of the
                           --------
failure to provide a Qualifying Opinion of Counsel, the Indemnitee shall be
treated as receiving a refund if and when it files a federal income tax return
excluding interest on the Indemnitee's Note, in an amount equal to the product
of the amount paid pursuant to paragraph 7A with respect to such Gross-Up Event
multiplied by a fraction (not to exceed 1), the numerator of which is the amount
of interest on the Indemnitee's Note excluded on the return, and the denominator
of which is the amount of the interest on the Indemnitee's Note that would be
excludable assuming application of Section 133 of the Code.

     7F. CONTEST OF DISALLOWANCE OF SECTION 133 EXCLUSION.
         ------------------------------------------------

     (a) Notice. If an Indemnitee receives and IRS Notice asserting a claim
         ------
which, if successful, could result in a Gross-Up Event (an "Exclusion Claim"),
the Indemnitee agrees to notify the ESOP and the Company in writing, as promptly
as possible, of such Exclusion Claim and provide the ESOP and the Company with
any relevant information relating to such Exclusion Claim that may be available
to the Indemnitee. The Company will notify all other Indemnitees of such
Exclusion Claim.

     (b) Contest. The Indemnitee further agrees to contest any Exclusion Claim
         -------
with diligence and in good faith, including appealing any adverse administrative
or judicial determination and seeking a refund with respect to any Exclusion
Claim if (in provided, however, that:
             --------  -------

                                      -22-
<PAGE>

          (i) within 30 days after notice by the Indemnitee to the ESOP and the
     Company of such Exclusion Claim, the ESOP or the Company shall request that
     such Exclusion Claim be contested;

          (ii) the amount payable to the Indemnitee under paragraph 7A with
     respect to such Exclusion Claim would exceed $50,000;

          (iii) prior to the Indemnitee's taking any such requested action
     (including appealing any adverse decision), the ESOP or the Company (at the
     expense of either the ESOP or the Company and upon the written request of
     the Indemnitee) shall provide the Indemnitee with an opinion, reasonably
     satisfactory to the Indemnitee, of nationally recognized counsel,
     independent of the ESOP and the Company and reasonably satisfactory to the
     Indemnitee to the effect that there exists a substantial authority (within
     the meaning of Section 6661 of the Code) for contesting such Exclusion
     Claim;

          (iv) the ESOP or the Company shall from time to time pay to the
     Indemnitee within 30 days after receipt by the ESOP and the Company of an
     itemized written demand therefor and explanation thereof an amount
     sufficient to reimburse the Indemnitee for all out-of-pocket expenses that
     the Indemnitee has incurred in connection with contesting or defending such
     Exclusion Claim or any appeal thereof, including, without limitation,
     expert witness, attorneys' and accountants' fees and disbursements; and

          (v) the Indemnitee may, at any time, settle, compromise or otherwise
     terminate any contest with the consent of the ESOP and the Company, which
     consent shall not be unreasonably withheld.

     (c) Control over Contest. Sole control over the conduct of any contest
         --------------------
under subparagraph (b) of this paragraph 7F shall be vested in the Indemnitee,
but the Indemnitee shall consult with the ESOP, the Company and their counsel
regarding all aspects of the contest, and shall consider and act on (or refrain
from acting on) in good faith any recommendations of the ESOP, the Company, and
their counsel as to conduct of the contest. The right of the Indemnitee to
control the conduct of any contest shall not be construed to relieve the
Indemnitee of its obligation to contest any Exclusion Claim in accordance with
paragraph 7F(b).

                                      -23-
<PAGE>

     (d) Segregation and Settlement.
         --------------------------

     (i) The Indemnitee shall use its best efforts to segregate the Exclusion
Claim triggering a payment under paragraph 7A from other tax issues it may be
protesting or litigating with the IRS; provided, however, that the Indemnitee
                                       --------  -------
shall not be required to take any action that would in good faith and in its
sole discretion, impair the Indemnitee's ability to settle with the IRS with
respect to such other issues or materially affect the terms of any such
settlement.

     (ii) If the Indemnitee has made such best efforts as required by clause (i)
of this paragraph (d) but has not segregated such Exclusion Claim, then,
notwithstanding anything to the contrary contained in subparagraph (a), (b) or
(c) of this paragraph 7F, the Indemnitee may in its sole discretion settle or
compromise such Exclusion Claim, provided the Indemnitee gives the ESOP and the
Company notice of its intention to settle or compromise such Exclusion Claim.
If, after receiving the notice referred to in the preceding sentence and within
45 days of an agreement between the Company and the Indemnitee on the identity
of counsel, the Company provides the Indemnitee with an opinion, reasonably
satisfactory to the Indemnitee, of nationally recognized counsel, independent of
the ESOP and the Company and reasonably satisfactory to the Indemnitee, that it
is highly probable that the Indemnitee would prevail in litigation with respect
to such Exclusion Claim, then, if the Indemnitee settles or compromises such
Exclusion Claim, to the extent payment was made by the ESOP or the Company under
paragraph 7A as a result of a Gross-Up Event arising solely from such Exclusion
Claim, the Indemnitee shall be deemed to have received a refund in the amount of
such payment, and shall immediately return such amount to the ESOP or the
Company; to the extent payment was not made, such Gross-Up Event shall be deemed
not to have occurred. Alternatively, if the Company provides the Indemnitee with
an opinion, reasonably satisfactory to the Indemnitee, of nationally recognized
counsel, independent of the ESOP and the Company and reasonably satisfactory to
the Indemnitee, that it is more likely than not that the Indemnitee would
prevail in litigation with respect to such Exclusion Claim, then, if the
Indemnitee settles or compromises such Exclusion Claim, if the amount paid by
the ESOP or the Company exceeds 50% of the amount payable pursuant to paragraph
7A as result of a Gross-Up Event arising solely from such Exclusion Claim, the
Indemnitee shall pay such excess to the ESOP or the Company, as appropriate; and
if 50% of the amount payable pursuant to

                                      -24-
<PAGE>

paragraph 7A as a result of such Gross-Up Event exceeds the amount paid by the
ESOP or the Company, the ESOP or the Company, as the case may be, shall pay the
amount of such excess to the Indemnitee in complete accord and satisfaction of
its obligations as to such issue under paragraph 7A.

     7G. REQUEST FOR QUALIFYING OPINION OF COUNSEL. If any Indemnitee
         -----------------------------------------
determines, in good faith after consultation with independent nationally
recognized counsel, that there is a reasonable likelihood for any reason
whatsoever that any Qualified Holder will be required to include more than that
percentage of the interest on the Notes which is equal to the Inclusion Rate in
its Federal Gross Income, such Indemnitee shall be entitled to request, at the
Company's expense, a Qualifying Opinion of counsel with respect to interest on
the Notes for a period commencing with the date of issuance of the Notes and
continuing through the date of such request or for any lesser period specified
in such Indemnitee's request. If such a request is made, such Indemnitee shall
supply the counsel rendering such opinion with such information, reasonably
available to such Indemnitee, as may be reasonably requested by such counsel in
order for it to form a basis for rendering the opinion requested.

     8. COMPANY GUARANTEE AND PURCHAS OBLIGATION
        ----------------------------------------

     8A. GUARANTEE BY THE COMPANY. (a) Obligations Guaranteed. The Company, in
         ------------------------      ----------------------
consideration of the execution and delivery of this Agreement, hereby
unconditionally and irrevocably guarantees to you (together with your successors
and assigns, hereinafter referred to as the "Purchaser"), and to the holders
from time to time of the Notes, the due and punctual payment of the principal
of, premium, if any (including the Yield-Maintenance Premium), and interest on
the Notes (including post-petition interest in the event of a bankruptcy or
similar proceeding) when and as the same shall become due and payable, whether
at the maturity thereof, by acceleration, by notice of prepayment or otherwise,
according to the terms thereof and of this Agreement, and the due and punctual
payment of any other amounts owing to the Purchaser and to such holders under or
in respect of the Notes and all other payment obligations of the ESOP hereunder
(including, without limitation, amounts payable by the ESOP pursuant to
paragraph 7), whether absolute or contingent, liquidated of unliquidated. In the
absence of the due observance and performance by the ESOP of any of its other
obligations, undertakings and conditions contained in this Agreement, the
Company shall use its best efforts, to the extent practicable, to provide
reasonably equivalent performance intended to

                                      -25-
<PAGE>

achieve comparable results. If the ESOP shall not punctually pay any such
principal, premium (including, without limitation, Yield-Maintenance Premium),
interest or other amounts (regardless of whether the holders of the Notes have
recourse against the ESOP), the Company shall make such payment forthwith
thereafter. If the Purchaser or any of the holders of the Notes shall have the
right to declare any or all of the Notes due and payable (or any such right
shall be limited by operation of the last sentence of paragraph 9A or
otherwise), and acceleration of the payment of such Notes is stayed, enjoined or
otherwise prevented for any reason, including, without limitation, because of
any bankruptcy proceeding or the provisions of Treasury Regulation section
54.4975-7 or 54.4975-11, the Company, upon demand therefor, shall pay to the
Purchaser and each holder of Notes the sums which would have been due to the
Purchaser and such holders under this Agreement if such acceleration had
occurred, all as permitted by applicable law.

     (b) Obligations Unconditional. The Company agrees that its obligations
         -------------------------
hereunder are absolute and unconditional, irrespective of the validity,
regularity or enforceability of or any change in or amendment to any Note or
this Agreement, the institution or absence of any action to enforce the same,
the waiver or consent by the Purchaser or the holder of any Note with respect to
the provisions thereof, the obtaining of any judgement against the ESOP or any
action to enforce the same, the inability to recover from the ESOP because of
any statute of limitations, laches or otherwise or any other circumstance which
might otherwise constitute a legal or equitable discharge of or a defense to a
guarantor, and that the provisions of this paragraph 8 constitute a guarantee of
payment and not of collectibility.

     (c) Waivers and Agreements. The Company hereby unconditionally: (i) waives
         ----------------------
notice of acceptance hereof, of any action taken or omitted in reliance hereon
and of any defaults in respect of the Notes or in the payment of any other
amounts due in respect thereof, diligence, protest, presentment, filing of
claims with a court in the event of the bankruptcy of the ESOP (subject to such
filings as may be necessary to protect rights of subrogation, but only at the
written instance and expense of the Company), any right to require a proceeding
first against the ESOP or that the ESOP be joined in any proceeding against the
Company, any marshalling of assets of the Company or the ESOP, any notice of
default with respect to any of the Notes or this Agreement or any other act or
omission or thing or delay to do any other act or thing which might in any
manner or to any extent vary the risk of the Company or which might otherwise
operate as a discharge of the

                                      -26-
<PAGE>

Company; (ii) agrees that this guarantee shall remain in full force and effect
without regard to, and shall not be affected or impaired by, any invalidity,
irregularity or unenforceability in whole or in part or any of the Notes or this
Agreement or any of the limitations of liability or payment conditions
thereunder which may now or hereafter be caused or imposed in any manner
whatsoever; (iii) agrees that this guarantee shall not be subject to any
counterclaim (other than those which are compulsory in nature), set-off,
deduction or defense based upon any claim the Company may have against the ESOP
or any holder of the Notes hereunder or otherwise; and (iv) agrees that this
guarantee shall be discharged only by complete performance of the undertakings
in this paragraph 8. Nothing herein is intended to impair any rights of the
Company to enforce any rights it may have against any Person by way of a
separate proceeding or action.

     (d) Obligations Unimpaired. The Company authorizes the Purchaser and the
         ----------------------
holders of the Notes, without notice or demand to the Company and without
affecting its liability hereunder, from time to time (I) to exercise or refrain
from exercising any rights against the ESOP or others; and (ii) to apply any
sums, by whomsoever paid or however realized, to the payment of the principal
of, premium, if any (including the Yield-Maintenance Premium), and interest on
the Notes and any other obligation hereunder. The Company waives any right to
require the Purchaser and the holders of the Notes to proceed against the ESOP
or any other Person or to pursue any other remedy available to the Purchaser or
to such holders.

     (e) Subrogation. In the event the ESOP fails to observe or perform any of
         -----------
its obligations or undertakings under this Agreement (an "ESOP Default"), the
Company will be subrogated and succeed to the rights of the Purchaser and the
holders of the Notes which may be asserted against the ESOP by the Purchaser or
such holders as a result of any such ESOP Default upon payment or performance of
such obligations or undertakings; provided, however, that the Company will not
                                  --------  -------
exercise any rights which it may have acquired by way of subrogation under this
Agreement, by any payment made hereunder or otherwise, or accept any payment on
account of such subrogation rights, unless and until all of the obligations,
undertakings or conditions then and thereafter to be performed or observed by
the ESOP pursuant to the Notes and this Agreement shall have been performed,
observed or paid in full by the ESOP or the Company, and the Company's rights of
subrogation hereunder are expressly subordinate to the rights of the Purchaser
and holders of the Notes arising out of the Agreements. In the event that the
Company receives any payment on account of such subrogation rights, it shall
promptly apply

                                      -27-
<PAGE>

such payment to the extent of its obligations hereunder. In the event that the
Company pays or causes to be paid all amounts due under any of the Notes, the
Purchaser or holder will assign and transfer such Notes to the Company or its
designee. In no event shall such subrogation grant to the Company any right or
power with respect to the ESOP which it is forbidden to exercise pursuant to
ERISA or the Code or the regulations thereunder, including but not limited to
Treasury Regulations sections 54.4975-7 and 54.4975-11.

     (f) Rescission of Payment. This guarantee shall continue to be effective or
         ---------------------
be reinstated, as the case may be, if at any time payment, or a part thereof, of
the principal of, premium (including, without limitation, the Yield-Maintenance
Premium), if any, or interest on any of the Notes or of any other obligations
guaranteed hereby is rescinded or must otherwise be restored or returned by the
Purchaser or any holder of Notes upon the insolvency, bankruptcy or
reorganization of the ESOP, or otherwise, all as though such payment has not
been made.

     (g) Election to Perform Obligations. The Company may at any time elect to
         -------------------------------
pay or otherwise perform any obligation of the ESOP under this Agreement or in
respect of the Notes, which shall operate as a discharge and release of the ESOP
from such obligation to the Purchasers or any subsequent holders of the Notes
(but not to the Company as subrogee or as a successor Noteholder), provided that
no such election shall release the ESOP from any of its other obligations
                                                              -----------
hereunder and under the Notes.

     8B. PURCHASES OF NOTES BY THE COMPANY. (a) At any time after the occurrence
         ---------------------------------
of a Purchase Event and prior to the expiration of the later of (x) 90 days
after receipt of an Event Notice relating thereto and (y) 15 days after receipt
of an Other Holder Notice (as defined below), any holder of a Note may deliver a
notice to the Company (x) stating that it is electing to exercise its right to
require the purchase by the Company pursuant to this paragraph 8B of the Notes
then held by it (a "Purchase Notice") and (y) specifying the date on which such
purchase shall occur (which date shall not be less than 25 nor more than 35 days
after the date on which such holder shall have delivered such Purchase Notice to
the Company), and in any such event the Company, on such specified date, shall
purchase or cause to be purchased the Note or Notes then held by such holder,
without recourse, representation or warranty (other than as to the holder's full
right, title and interest, free of any adverse claim, in such Note or Notes),
and such holder shall sell such Note or Notes to or at the direction of the
Company at a price, payable in immediately available funds by

                                      -28-
<PAGE>

wire transfer to the account specified pursuant to paragraph 14A or to such
other account as may be specified in such notice, equal to the then outstanding
principal amount thereof, together with interest accrued on such principal
amount to the date of purchase, plus a premium equal to the Yield-Maintenance
Premium, if any, plus any amounts then due under Section 7 with respect to each
Note purchased. Promptly, and in any event within five days following its
receipt thereof, the Company will deliver to each holder of a Note a copy of any
Purchase Notice received by its pursuant to subparagraph (a) of paragraph 8B of
this Agreement or the Other Agreements (an "Other Holder Notice"). The Company
shall comply with all applicable laws (including, without limitation, securities
laws) in connection with its purchase of Notes hereunder and any related
transactions.

     (b) If either or both of Moody's or Standard & Poor's is not providing
public ratings of the Unsupported Company Debt, the Company may (subject to the
approval of the Required Holder(s)), and, at the request of the Required
Holder(s), shall substitute another rating agency or other rating agencies of
national reputation for Moody's and/or Standard & Poor's for the purpose of
determining, by reference to the public ratings of two such rating agencies
(which shall include Moody's or Standard & Poor's if one of them is providing
public ratings of the Unsupported Company Debt), whether the Company shall be
obligated pursuant to subparagraph (a) of this paragraph 8B to purchase such
holder's Note or Notes as a result of a Purchase Event. If no rating agency of
national reputation satisfactory to the Required Holder(s) or only one of such
rating agency is providing public ratings of the Unsupported Company Debt, any
holder of a Note may request that the Company obtain from either or both, as
appropriate, of Moody's and Standard & Poor's a private credit rating for the
Unsupported Company Debt for the purpose of determining, by reference to the
ratings of either or both as appropriate, of such rating agencies, whether the
Company shall be obligated pursuant to subparagraph (a) of this paragraph 8B to
purchase such holder's Note or Notes. Upon receipt of any such request, the
Company shall promptly, and in any event within 10 days after receiving such
request, either or both, as appropriate notify each other holder of a Note of
such request and use its best efforts to obtain as promptly as practicable from
either or both, as appropriate, of Moody's and Standard & Poor's (or, if either
of them declines to provide a private credit rating, the other of them and one
rating agency of national reputation, and if both of them so decline, two rating
agencies of national reputation, in each case approved by the Required
Holder(s)) a private credit rating for such purpose. If the Company does not
have any Unsupported Company Debt, the determination of whether the Company
shall be obligated pursuant to subparagraph (a) of this paragraph 8B to purchase
any holder's Note or Notes shall be

                                      -29-
<PAGE>

made as aforesaid, but by reference to a credit rating of the Notes instead of
Unsupported Company Debt. If the Company is required pursuant to this
subparagraph (b) of this paragraph 8B to seek a private credit rating and fails
to obtain such private credit rating within 60 days of any holder's request
therefor, such rating shall be deemed to be less than Baa3 or BBB- (or any
comparable rating then in existence). In the event another rating agency of
national reputation is substituted for Moody's or Standard & Poor's, such
determination shall be made by reference to the rating of such substituted
agency that it most nearly comparable to Baa3 of Moody's and BBB- of Standard &
Poor's (or, in either case, the comparable ratings then in existence).
Suspension of a rating by a rating agency shall be deemed to have the effect of
such agency's providing no rating.

     (c) The Company covenants that it will deliver to each holder of a Note
promptly, and in any event within 10 days following the occurrence thereof, (x)
a notice of any change in the credit rating (whether public or private), or any
cessation of the credit rating, of the Unsupported Company Debt by Moody's or
Standard & Poor's, together, in the case of any such change, with a statement of
the date of such occurrence and a reasonably detailed description of the facts
and circumstances underlying such occurrence know to it, and (y) a notice of the
occurrence of a Purchase Event, together with a statement of the date of
occurrence of such Purchase Event and a reasonably detailed description of the
facts and circumstances underlying such occurrence know to it, and which states
that the Company is obligated, upon receipt of a Purchase Notice described in
subparagraph (a) of this paragraph 8B, to purchase Notes pursuant to
subparagraph (a) of this paragraph 8B (an "Event Notice").

     9. EVENTS OF DEFAULT.
        -----------------

     9A. DEFAULT; ACCELERATION. If any of the following events shall occur and
         ---------------------
be continuing for any reason whatsoever (and whether such occurrence shall be
voluntary or involuntary or come about or be effected by operation of law or
otherwise):

          (i) default in the payment of any principal (including any Required
     Installment Payment) of or Yield-Maintenance Premium on any Note when the
     same shall become due, whether at maturity or at the times specified in
     paragraph 4A, 4B or 4C or otherwise, either by the terms thereof or
     otherwise as herein provided; default in the discharge by the Company of
     its obligations to purchase Notes pursuant to paragraph 8B when required by
     the provisions of said paragraph; or default in the payment of any interest
     on any Note when the same shall become due and such default shall continue
     for more than 10 days; or

                                      -30-
<PAGE>

          (ii) the Company states or otherwise claims in writing that any of its
     obligations under paragraph 8 is not enforceable in accordance with its
     terms; or

          (iii) default in the performance, or breach, of any covenant of the
     Company or the ESOP in this Agreement (other than a covenant a default in
     whose performance or whose breach is elsewhere in this paragraph 9A
     specifically dealt with), and continuance of such default or breach for a
     period of 30 days after the chief executive officer, chief operating
     officer, principal financial officer, principal accounting officer,
     treasurer or any other executive officer of the Company has obtained actual
     knowledge of such default or breach; or

          (iv) any representation or warranty made by the Company or the ESOP
     herein or in any writing furnished pursuant to the requirements of this
     Agreement shall be false in any material respect on the date as of which
     made; or

          (v) the Company or a Restricted Subsidiary makes an assignment for the
     benefit of creditors or is generally not paying its debts as such debts
     become due; or

          (vi) any decree or order for relief in respect of the Company or any
     Restricted Subsidiary is entered under any bankruptcy, reorganization,
     compromise, arrangement, insolvency, readjustment of debt, dissolution or
     liquidation or similar law, whether now or hereafter in effect (herein
     called the "Bankruptcy Law"), of any jurisdiction; or

          (vii) the Company or any Restricted Subsidiary petitions or applies to
     any tribunal for, or consents to, the appointment of, or taking possession
     by, a trustee, receiver, custodian, liquidator or similar official of the
     Company or any Restricted Subsidiary, or commences a voluntary case under
     the Bankruptcy Law of the United States or any proceedings (other than
     proceedings for the voluntary liquidation and dissolution of a Restricted
     Subsidiary) relating to the Company or any Restricted Subsidiary under the
     Bankruptcy Law of any other jurisdiction; or

          (viii) any petition or application referred to in clause (vii) above
     is filed, or any such proceedings are commenced, against the Company or any
     Restricted Subsidiary and the Company or such Restricted Subsidiary, by any
     corporate act, consents thereto or acquiesces therein, or

                                      -31-
<PAGE>

     an order, judgement or decree is entered appointing any such trustee,
     receiver, custodian, liquidator or similar official, or approving the
     petition in any such proceedings, and such order, judgment or decree
     remains unstayed and in effect for more than 90 days; or

          (ix) any order, judgment or decree is entered in any proceedings
     against the Company or any Restricted Subsidiary decreeing the dissolution
     of the Company or such Restricted Subsidiary and such order, judgment or
     decree remains unstayed and in effect for more than 60 days; or

          (x) any order, judgment or decree is entered in any proceeding against
     the Company or any Restricted Subsidiary decreeing a split-up of the
     Company or such Restricted Subsidiary which requires the divestiture of
     assets representing a substantial part, or the divestiture of the stock of
     a Restricted Subsidiary whose assets represent a substantial part, of the
     consolidated assets of the Company and its Subsidiaries (determined in
     accordance with generally accepted accounting principles) or which requires
     the divestiture of assets, or stock of a Restricted Subsidiary, which shall
     have contributed a substantial part of the consolidated net income of the
     Company and its Subsidiaries (determined in accordance with generally
     accepted accounting principles) for any of the three fiscal years then most
     recently ended, and such order, judgment or decree remains unstayed and in
     effect for more than 60 days (for the purpose of this clause (x),
     substantial shall mean 25% of Consolidated Net Tangible Assets); or

          (xi) any "reportable event" as such term is defined in section 4043 of
     ERISA occurs in connection with any ERISA Plan or trust created thereunder
     for which the thirty-day notice requirement has not been waived under
     applicable regulations, or an event occurs requiring the Company or any
     ERISA Affiliate to provide security to an ERISA Plan under section
     401(a)(29) of the Code; any "prohibited transaction" occurs, as such term
     is defined in section 4975 of the Code or in section 406 of ERISA, in
     connection with any ERISA Plan or any trust created thereunder, for which
     there is no exemption; any notice of intent to terminate an ERISA Plan is
     filed under Title IV of ERISA by the Company or any ERISA Affiliate, any
     ERISA Plan administrator or any combination of the foregoing; any
     proceedings are instituted by the PBGC to terminate or to cause a trustee
     to be appointed to administer any ERISA Plan; any partial or complete
     withdrawal is made by the Company or an ERISA Affiliate from any
     Multiemployer Plan; any proceedings are instituted by a fiduciary of any
     ERISA

                                      -32-
<PAGE>

     Plan against the Company or any Code Affiliate to enforce section 515 of
     ERISA and such proceeding shall not have been dismissed within 30 days
     thereafter; the Company or a Code Affiliate fails to make a required
     installment under section 412(m) of the Code or to pay any amount or
     amounts which it shall have become liable to pay to the PBGC or to an ERISA
     Plan under Title IV of ERISA on or before the due date; any application is
     filed by the Company or a Code Affiliate for a waiver of the minimum
     funding standard under section 412 of the Code or section 302 of ERISA; or
     any "reorganization" (as defined in section 418 of the Code or Title IV of
     ERISA) of any plan which is a Multiemployer Plan occurs; and each such
     instance individually, or any two or more such instances in the aggregate,
     would, in the reasonable judgment of the Required Holders, more likely than
     not result in liability of the Company or any Code Affiliate or ERISA
     Affiliate to the IRS, the PBGC, the United States Department of Labor or an
     ERISA Plan in an aggregate amount exceeding $20,000,000; or

          (xii) any order, judgment or decree is entered in any proceeding by a
     court of competent jurisdiction decreeing that the Plan, the ESOP or the
     ESOP Transaction has not been properly established or consummated, as the
     case may be (other than as specified in clause (ii) of the definition of
     Purchase Event), in any material respect, and such order, judgment or
     decree remains unstayed and in effect for more than 60 days and no appeal
     is filed by the Company or the ESOP therefrom within 60 days of the time
     such order, judgment or decree first becomes appealable; or

          (xiii) the Company or any Subsidiary defaults in any payment of
     principal of or interest on any other obligation for money borrowed (or any
     capitalized lease obligation, any obligation under a conditional sale or
     other title retention agreement, any obligation issued or assumed as full
     or partial payment for property whether or not secured by a purchase money
     mortgage or any obligation under notes payable or drafts accepted
     representing extension of credit), other than the Notes, beyond any period
     of grace provided with respect thereto, or the Company or any Subsidiary
     fails to perform or observe any other agreement, term or condition
     contained in any agreement (other than the Other Agreements) under which
     any such obligation is created (or if any other event thereunder or under
     any such agreement shall occur and be continuing) and the effect of such
     failure or other event is to cause (without any action by or on behalf of
     the holder or holders of such obligation), or as a result thereof the
     holder or holders of such obligation (or a trustee on behalf of such holder

                                      -33-
<PAGE>

     or holders) shall have caused, such obligation to become due prior to any
     stated maturity; provided that the aggregate amount of all obligations as
     to which such a payment default shall occur and be continuing or such a
     failure or other event causing or resulting in acceleration shall occur and
     be continuing exceeds $20,000,000;

then (a) if such event is an Event of Default specified in clause (vi), (vii) or
(viii) of this paragraph 9A with respect to the Company, all of the Notes at the
time outstanding shall automatically become immediately due and payable at the
principal amount thereof together with interest accrued thereon, without
presentment, demand, protest or notice of any kind, all of which are hereby
waived by the Company and the ESOP, and (b) if such event is an Event of Default
specified in clause (i) of this paragraph 9A the holder or holders of at least
25% of the aggregate principal amount of the Notes at the time outstanding, and
if such event is an Event of Default specified in clause (ii), (iii), (iv), (v),
(ix), (x), (xi), (xii) or (xiii) of this paragraph 9A the holder or holders of
at least 50% of the aggregate principal amount of the Notes at the time
outstanding, may at its or their option, by notice in writing to the Company and
the ESOP, declare all of the Notes to be, and all of the Notes shall thereupon
be and become (except that, if such event is an Event of Default specified in
clause (i) of this paragraph 9A with respect to any Note, the holder of such
Note may at its option by notice in writing to the Company and the ESOP declare
such Note to be, and such Note shall thereupon be and become) immediately due
and payable at the principal amount thereof together with interest accrued
thereon and the Yield-Maintenance Premium, if any, with respect thereto without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Company and the ESOP, provided that the Yield-Maintenance
                                           --------
Premium, if any, with respect to each Note shall be due and payable upon such
declaration only if (x) such event is an Event of Default specified in any of
clauses (i) to (v), inclusive, and clauses (xi), (xii) and (xiii) of this
paragraph 9A, (y) the holder or holders making such declaration shall have given
to the Company and the ESOP, at least 10 Business Days before such declaration,
written notice stating its or their intention so to declare the Notes to be
immediately due and payable and identifying one or more such Events of Default
whose occurrence on or before the date of such notice permits such declaration
and (z) one of more of the Events of Default so identified shall be continuing
at the time of such declaration. Nothing in this Agreement shall permit (i) a
transfer of assets of the ESOP to any Person in excess of the amount permitted
under Treasury Regulation ss. 54.4975-7(b) (5) or (6) or (ii) if a holder of any
Note is a disqualified person within the meaning

                                      -34-
<PAGE>

of section 4975 of the Code or the Regulations thereunder, the transfer of
assets of the ESOP to such holder except upon the failure of the ESOP to make
payment of regularly scheduled payments of principal of and interest on such
Notes, and then only to the extent of such failure.

     9B. OTHER REMEDIES. If any Event of Default or Default shall occur and be
         --------------
continuing, the holder of any Note may proceed to protect and enforce its rights
under this Agreement and such Note by exercising such remedies as are available
to such holder in respect thereof under applicable law, either by suit in equity
or by action at law, or both, whether for specific performance of any covenant
or other agreement contained in this Agreement or in aid of the exercise of any
power granted in this Agreement. No remedy conferred in this Agreement upon you
or any other holder of any Note is intended to be exclusive of any other remedy,
and each and every such remedy shall be cumulative and shall be in addition to
every other remedy conferred herein or now or hereafter existing at law or in
equity or by statue or otherwise.

     9C. RESCISSION OF ACCELERATION. At any time after any declaration of
         --------------------------
acceleration of any of the Notes shall have been made pursuant to paragraph 9A
by any holder or holders of the Notes and before a judgment or decree for the
payment of money due has been obtained by such holder or holders, the holder or
holders of at least 50% of the aggregate principal account of the Notes at the
time outstanding may, by written notice to the Company and the ESOP and to the
other holders of the Notes, rescind and annul such declaration and its
consequences, provided that (i) the principal of and interest on the Notes which
              --------
shall have become due otherwise than by such declaration of acceleration shall
have been duly paid and (ii) all Events of Default, other than the nonpayment of
principal of and interest on the Note which have become due solely by any such
declaration of acceleration, shall have been cured or expressly waived by such
holder or holders of not less than 50% of the aggregate principal amount of the
Notes at the time outstanding; provided further, however, that (x) no waiver
                               -------- -------  -------
referred to in clause (ii) above in respect of any matter referred to in the
proviso contained in the first sentence of paragraph 14C(a) shall be effective
without the consent of each holder of Notes affected by such waiver and (y) no
declaration pursuant to the parenthetical clause contained in clause (b) of the
last paragraph of paragraph 9A may be rescinded or annulled except by the holder
of Notes that made such declaration. No rescission or annulment referred to
above shall affect any subsequent Default or any right, power or remedy arising
out of such subsequent Default.

                                      -35-
<PAGE>

     10. REPRESENTATIONS AND WARRANTIES. The Company and, in the case of
         ------------------------------
paragraphs 10G, 10I, 10N, and 100, the ESOP, as to the ESOP, and, in the case of
paragraph 100, the Trustee, as to the Trustee, represent and warrant that:

     10A. ORGANIZATION; CORPORATE AUTHORITY. The Company and each of its
          ---------------------------------
Restricted Subsidiaries are corporations duly organized and validly existing in
good standing under the laws of their respective states of incorporation and
have all requisite power, and have all material governmental licenses,
authorizations, consents and approvals, necessary to own their assets and carry
on their business as now being conducted, except where the failure to have such
power, licenses, authorizations, consents and approvals would not, individually
or in the aggregate, have a material adverse effect on the business, properties,
financial condition or results of operations of the Company and its Subsidiaries
taken as a whole. The Company and each of its Restricted Subsidiaries are
qualified to do business in all jurisdictions in which the nature of the
business conducted by them makes such qualification necessary and where failure
to do so would have a material adverse effect on the business, property,
financial condition or results of operations of the Company and its Subsidiaries
taken as a whole. The execution, delivery and performance of this Agreement and
the Plan Documents, and compliance with the provisions hereof and the
consummation of any other transactions contemplated hereby and by the Plan
Documents, are within the corporate power of the Company, have been duly
authorized by all necessary corporate action and are valid obligations of the
Company, legally binding upon and enforceable against the Company in accordance
with their respective terms.

     10B. FINANCIAL STATEMENTS; SEC REPORTS. The Company has furnished you with
          ---------------------------------
the audited consolidated balance sheets of the Company and its Subsidiaries at
December 31, 1988 and December 31, 1987 and the related audited consolidated
statements of earnings, shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1988, all reported on by Peat
Marwick Main & Co. (the "Historical Financial Statements"). The Historical
Financial Statements (a) are complete and correct in all material respects, (b)
have been prepared in conformity with generally accepted accounting principles
applied on a consistent basis and (c) present fairly, in all material respects,
the consolidate financial position of the Company and its Subsidiaries at the
dates indicated and their results of operations and cash flows for the periods
indicated. The Company has also furnished you with (i) copies of the Company's
Annual Report on Form 10-K for its fiscal year ended

                                      -36-
<PAGE>

December 31, 1988 and its Quarterly Report on Form 10-Q for the quarter ended
March 31, 1989 (collectively, the "SEC Reports") and (ii) the Confidential
                                                      --
Private Placement Memorandum, dated May 1989, submitted to you by Goldman, Sachs
& Co. (the "Placement Memorandum"). The SEC Reports have been prepared in
conformity with the rules and regulations of the Commission applicable thereto
and, in accordance with such rules and regulations, accurately describe the
business conducted by the Company and its Subsidiaries and the properties owned
and operated in connection therewith. The Historical Financial Statements, the
SEC Reports, the Placement Memorandum and all other documents and reports
delivered by or on behalf of the Company to you in connection with the
transactions contemplated by this Agreement are herein collectively called the
"Disclosure Documents". The Disclosure Documents did not, as of their respective
dates, and taken as a whole, and this Agreement does not as of the date hereof,
contain an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. There is no fact peculiar to the
Company which materially adversely affects or in the future would reasonably be
expected to (so far as the Company can now foresee) materially adversely affect
the business, properties, financial condition or results of operations of the
Company and its Subsidiaries taken as a whole which has not been set forth in
this Agreement or in the Disclosure Documents. Since December 31, 1988, there
has not been any material adverse change, or any development which the Company
has reasonable cause to believe will involve a material adverse change, in or
affecting the business, properties, financial condition or results of operations
of the Company and its Subsidiaries taken as a whole, otherwise than as set
forth or contemplated in the Disclosure Documents.

     10C. ACTIONS PENDING. There are no actions or proceedings filed or
          ---------------
investigations pending or (to the best knowledge of the Company) threatened
against the Company or the ESOP which question the validity or legality of or
seek damages in connection with this Agreement or any action taken or to be
taken pursuant to this Agreement or any of the transactions contemplated hereby
(including the ESOP Transaction), and no order or judgment has been issued or
entered restraining or enjoining the Company or the ESOP from the consummation
of the transactions contemplated by this Agreement (including the ESOP
Transaction) or which affects the ESOP or the Company or any of the ESOP's or
the Company's properties or rights, or any of the ESOP's or the Company's
affiliates, associates, officers or directors in relation to such matters, nor
is there any action or proceeding which involves a significant possibility of an
adverse determination which would have any such effect. There

                                      -37-
<PAGE>

are no legal or governmental proceedings pending to which the Company or any of
its Subsidiaries is a party or of which any property of the Company or any of
its Subsidiaries is the subject other than (i) as set forth in the Disclosure
Documents and ( ii ) legal or governmental proceedings which would not, in the
reasonable judgment of the Company, in the aggregate have a material adverse
effect on the business, properties, financial condition or results of operations
of the Company and its Subsidiaries taken as a whole; and no such proceedings
are known by the Company to be threatened or contemplated by governmental
authorities or threatened by others.

     10D. TAXES. The Company has and each of its Subsidiaries has filed all
          -----
Federal, state and other income tax returns which are required to be filed, and
each has paid all taxes as shown on such returns and on all assessments received
by it to the extent that such taxes have become due, except such taxes as are
being contested in good faith by appropriate proceedings for which adequate
reserves have been recorded on the books of the Company and its Subsidiaries in
accordance with generally accepted accounting principles.

     10E. TITLE TO PROPERTY. The Company and its Restricted Subsidiaries have
          -----------------
good and marketable title to all real property and good title to all personal
property owned by them, free and clear of all liens, encumbrances and defects in
each case except such as are described in the Disclosure Documents or such as do
not materially affect the value of any material property and do materially
interfere with the use made and proposed to be made of such property by the
Company and its Restricted Subsidiaries; and any real property and buildings
held under lease by the Company and its Restricted Subsidiaries are held by them
under valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its Restricted Subsidiaries.

     10F. CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither the execution nor
          ----------------------------------------
delivery of this Agreement or the Plan Documents, nor the offering, issuance and
sale of the Notes or the consummation of the ESOP Transaction, nor fulfillment
of or compliance with the terms and provisions hereof and thereof will conflict
with, or result in a breach of the terms, conditions or provisions of, or
constitute a default under, or result in any violation of, or result in the
creation of any Lien upon any of the material properties or assets of the
Company or any of its Subsidiaries pursuant to, the charter or by-laws of the
Company or any of its Subsidiaries, any award of any arbitrator or any
agreement,

                                      -38-
<PAGE>

instrument, order, judgment or decree, to which the Company or any of its
Subsidiaries or any of their respective properties is subject. The Company is
not a party to any contract, agreement or arrangement with any of the Other
Purchasers relating to the transactions contemplated by the Agreements, other
than the Agreements.

     10G. OFFERING OF NOTES. Neither the Company, the ESOP nor Goldman, Sachs &
          -----------------
Co. (the only Person authorized or employed by the Company as agent, broker,
dealer or otherwise in connection with the offering or sale of the Notes or any
similar security) has, directly or indirectly offered any of the Notes, or any
similar security for sale to, or solicited any offers to buy any of the Notes,
or any similar security from, or otherwise approached or negotiated with respect
thereto with, any Person or Persons other than you, the Other Purchasers and no
more than 21 other institutional investors; and neither the Company, the ESOP
nor any agent acting on their behalf has taken or will take any action which
would subject the issuance or sale of any of the Notes to the provisions of
Section 5 of the Securities Act or violate the provisions of any securities or
blue sky law of any applicable jurisdiction.

     10H. BROKER'S OR FINDER'S COMMISSIONS. No broker's or finder's fee or
          --------------------------------
commission will be payable by the Company or the ESOP with respect to the
issuance and sale of the Notes or the transactions contemplated hereby, except
for fees paid or payable to Goldman, Sachs & Co., and the Company agrees that
such fees shall be paid by it and that it will hold you harmless from any claim,
demand or liability for broker's or finder's fees or commissions alleged to have
been incurred in connection with this transaction.

     10I. MARGIN REGULATIONS. Neither the Company nor the ESOP will, directly or
          ------------------
indirectly, use any of the proceeds of the issue and sale of the Notes or
otherwise take or permit to be taken any action which would result in the issue
and sale of the Notes, or the carrying out of any of the other transactions
contemplated hereby or by the ESOP Transaction, being violative of Regulation G,
T, U or X of the Board of Governors of the Federal Reserve System.

     10J. INVESTMENT COMPANY ACT. Neither the Company nor any of its
          ----------------------
Subsidiaries is an "investment company", or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended.

     10K. PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Company nor any of its
          ----------------------------------
Subsidiaries is a "holding company", or a "subsidiary company" of a "holding
company", or an

                                      -39-
<PAGE>

"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company", as such terms are defined in the Public Utility Holding Company Act of
1935, as amended.

     10L. GOVERNMENTAL CONSENTS, ETC. No consent, approval or authorization of,
          --------------------------
or the making of any declaration or filing with, any governmental authority is
required as a condition to the valid execution or delivery of this Agreement or
the Plan Documents or the consummation of the transactions contemplated hereby
and thereby except (i) the filing of the Plan Documents with the IRS as
contemplated by paragraph 5F, ( ii ) the filing of a Statement Effecting Class
or Series with the Pennsylvania Department of State with respect to the Employer
Capital Stock, ( iii ) with respect to the ESOP, the filing of a Registration
Statement on Form S-8 under the Securities Act and notice filings under certain
state securities laws, and ( iv ) with respect to the Company Common Stock
issuable upon conversion of the Employer Capital Stock, the filing of a listing
application with the New York Stock Exchange for the listing thereof.

     10M. ERISA. (a) Prohibited Transactions. Neither the Company or any ERISA
          -----      -----------------------
Affiliate has engaged in a transaction in connection with which the Company
would be subject to a material liability for either a civil penalty assessed
pursuant to section 502( i ) of ERISA or a tax imposed by section 4975 of the
Code.

     (b) ERISA Plan Termination; Material Liabilities. There has been no
         --------------------------------------------
termination of an ERISA Plan or trust created under any ERISA Plan that would
give rise to a material liability to the PBGC on the part of the Company or an
ERISA Affiliate. No material liability to the PBGC has been or is expected by
the Company to be incurred with respect to any ERISA Plan by the Company or an
ERISA Affiliate. The PBGC has not instituted proceedings to terminate any ERISA
Plan which is maintained or is to be maintained by the Company or an ERISA
Affiliate. There exists no condition or set of circumstances which presents a
material risk of termination or partial termination of any ERISA Plan by the
PBGC or restoration of any ERISA Plan heretofore terminated. The Company and
each Code Affiliate is current in the payment of all premiums to the PBGC.

     (c) Accumulated Funding Deficiency. Full payment has been made of all
         ------------------------------
amounts which are required under the terms of each ERISA Plan to have been paid
as contributions to such ERISA Plan as of the last day of the most recent fiscal
year of such ERISA Plan ended on or before the date of this Agreement, and no
accumulated funding deficiency (as defined in section 302 of ERISA and section
412 of the Code), whether or not

                                      -40-
<PAGE>

waived, exists with respect to any ERISA Plan or any employee pension benefit
plan maintained by the Company or a Code Affiliate. The Company and each Code
Affiliate is current with all required installments under section 412 (m) of the
Code.

     (d) Relationship of Benefits to Pension Plan Assets. The current value of
         -----------------------------------------------
the benefit liabilities (as defined in section 4001(a) (16) of ERISA) of each
ERISA Plan does not exceed the fair market value of the assets of such ERISA
Plan. Neither the Company nor any Code Affiliate is required to provide security
to an ERISA Plan or an employee pension benefit plan maintained by a Code
Affiliate under section 401(a)(29) of the Code. No lien under section 412(n) of
the Code or sections 312(f) or 4068 of ERISA has been or is reasonably expected
by the Company to be imposed on the assets of the Company or any ERISA
Affiliate.

     (e) Withdrawal Liability Neither the Company nor any ERISA Affiliate
         --------------------
participates or, since September 26, 1980, has participated in any Multiemployer
Plan.

     (f) Compliance with ERISA All employee pension benefit plans (as defined in
         ---------------------
section 3(2) of ERISA) maintained by the Company or an ERISA Affiliate which are
intended to be "qualified" are "qualified" under section 401(A) of the Code. All
employee benefit plans (as defined in section 3(3) of ERISA) maintained by the
Company or an ERISA Affiliate have been administered substantially in compliance
with ERISA and the applicable provisions of the Code. There are no pending
issues before the IRS or any court of competent jurisdiction related to the
qualification of the Plan except for the filing of the Plan with the IRS as
contemplated by paragraph 5F. Neither the Company nor any Code Affiliate has any
material liability under the Consolidate Omnibus Budget Reconciliation Act of
1985, as amended.

     (g) Execution of Agreement The execution and delivery of this Agreement and
         ----------------------
the consummation of the transactions contemplated by this Agreement will not
involve any transaction which is subject to the prohibitions of section 406 of
ERISA for which there is no exemption or in connection with which a tax could be
imposed pursuant to section 4975 of the Code. The representation by the Company
in the preceding sentence is made in reliance upon and subject to the accuracy
of your representation in paragraph 11 as to the source of funds used to pay the
purchase price of the Notes.

     10N. THE ESOP. (a) The ESOP is an "employee stock ownership plan" within
          --------
the meaning of section 4975(e)(7) of the Code and is qualified under section
401(a) of the Code. The

                                      -41-
<PAGE>

ESOP has been duly constituted in accordance with the Trust Agreement, is
validly existing and is tax-exempt under section 501(a) of the Code. The ESOP
has the requisite power and authority to own its properties and assets. The
execution, delivery and performance of this Agreement and the consummation of
the ESOP Transaction by the parties thereto will not involve any transaction
which is subject to the prohibitions of section 406 of ERISA for which there is
no exemption and will not otherwise constitute a violation of, or give rise to
any liability under, any other provision of Title I of ERISA or section 4975 of
the Code. The issuance and sale of the Notes hereunder to you by the ESOP
qualifies as a "securities acquisition loan" within the meaning of section 133
of the Code as in effect on the date hereof and, as a result thereof, 50% of the
interest on the Notes is currently excludible from the gross income of any
holder of the Notes for Federal income tax purposes, assuming that such holder
is a Qualified Holder.

     (b) The ESOP has not incurred any Debt and, as of the Closing, will not
have incurred any Debt other than Debt represented by the Notes. The ESOP has
been established by the Company for a valid corporate purpose. The Company and
the ESOP have delivered to you true and correct copies of the Plan Documents and
all other documents presently in effect and having the legal effect of governing
the terms or administration of the ESOP. The ESOP Transaction as of the date
hereof has been and after giving effect to the transactions contemplated hereby
will be duly and validly consummated and all Plan Documents are and will be
legal, valid, binding and enforceable obligations of the respective parties
thereto.

     10O. REPRESENTATIONS AS TO THE TRUSTEE (a) The Trustee has all requisite
          ---------------------------------
power and authority to execute and deliver and to perform all of the obligations
of the ESOP under this Agreement and the Notes and to carry out the ESOP
Transaction; (b) the execution, delivery and performance by the Trustee of this
Agreement and the Notes and the consummation by the ESOP of the ESOP Transaction
will not violate any provision of any law, rule, regulation (including, without
limitation, Regulation X of the Board of Governors of the Federal Reserve
System), order, writ, judgment, injunction, decree, determination or award
presently in effect having applicability to the Trustee; (c) this Agreement
constitutes, and the Notes when delivered hereunder will constitute, legal,
valid and binding obligations of the ESOP enforceable against the ESOP in
accordance with their terms; and (d) there are no actions, suits or proceedings
pending or, to the best knowledge of the Company or the ESOP, threatened against
or affecting the ESOP or its properties before any court or governmental
department,

                                      -42-
<PAGE>

commission, board, bureau, agency or instrumentality, domestic or foreign, which
( i ) draw into question the validity of the Trust Agreement, this Agreement,
the Notes or the ESOP Transaction or ( ii ) if determined adversely to the ESOP,
would materially adversely affect the ability of the Trustee to perform its
obligations under the Trust Agreement or of the ESOP to perform its obligations
under this Agreement or the Notes or of any of them to consummate the ESOP
Transaction.

     The following representations and warranties are made only by the Trustee
in its individual capacity and not for any purpose of this Agreement or any
certificate delivered pursuant to paragraph 3B, by the company or the ESOP: The
Trustee, in its individual capacity, represents and warranties the ( i ) the
Trustee is a national banking association with corporate trust powers duly
organized, validly existing and in good standing under the laws of the United
States and has all requisite power and authority, corporate and otherwise to
conduct its business and to execute and deliver, and to perform all its
obligations and to execute and deliver, and to perform all its obligations under
the Trust Agreement; ( ii ) the Trustee is not in default under any provision of
any law, rule, regulation (including, without limitation, Regulation X of the
Board of Governors of the Federal Reserve System), order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to the Trustee or any indenture or loan or credit agreement or any
other material agreement, lease or instrument to which the Trustee is a party or
by which it or its properties are bound or affected, which default would
materially affect the ability of the Trustee to perform its obligations under
the Trust Agreement; and ( iii ) the execution, delivery and performance by the
Trustee of the Plan Documents, this Agreement and the Notes and the consummation
by the ESOP of the ESOP Transaction do not and will not violate any provision of
the articles of association or by-laws of the Trustee.

     10P. POLLUTION AND OTHER REGULATIONS. The company and its Restricted
          -------------------------------
Subsidiaries are in compliance in all material respects with all laws and
regulations, including, without limitation, those relating to pollution and
environmental matters, equal employment opportunity and employee safety, in all
jurisdictions in which they are presently doing business except where the
failure to do so would not have a material adverse effect on the business,
properties, financial condition or results of operations of the Company and its
Subsidiaries taken as a whole.

     11. REPRESENTATIONS OF PURCHASER You represent, and in making this sale to
         ----------------------------
you it is specifically understood and agreed, that you are not acquiring the
Notes to be purchased by

                                      -43-
<PAGE>

you hereunder with a view to or for sale in connection with any distribution or
public offering thereof within the meaning of the Securities Act, provided that
                                                                  --------
the disposition of your property shall at all times be and remain within your
control.

     You also represent that the funds being used by you to pay the purchase
price of the Notes being purchased by you hereunder constitute either part of
your general asset account (or your general assets if you are not an insurance
company) or constitute assets allocated to ( I ) a separate account (as defined
in section 3 of ERISA) which is a "guaranteed contract separate account" (as
defined in Department of Labor ("DOL") Prohibited Transaction Exemption 81-82
issued September 18, 1981), in which case you further warrant that all
requirements for an exemption under DOL Prohibited Transaction Exemption 81-82
are met with respect to the use of such funds to pay the purchase price of the
Notes; ( ii ) a collective investment fund (as defined in section IV of DOL
Prohibited Transaction Exemption 80-51 issued July 21, 1980) maintained by you,
in which case you further warrant that all requirements for an exemption under
DOL Prohibited Transaction Exemption 80-51 are met with respect to use of such
funds to pay the purchase price of the Notes; or ( iii ) an investment fund (as
defined in Part V of DOL Prohibited Transaction Exemption 84-14, issued March
13, 1984), in which case you further warrant that all requirements for an
exemption under DOL Prohibited Transaction Exemption 84-14 are met with respect
to the use of such funds to pay the purchase price of the Notes.

     12. DEFINITIONS. As used herein, the following terms shall have the
         -----------
following meaning (terms defined in the singular to have the same meanings when
used in the plural and vice versa):
                       ---- -----

     12A. YIELD-MAINTENANCE TERMS.
          -----------------------

     "Called Principal" shall mean, with respect to any Note the principal of
      ----------------
such Note that is to be prepaid pursuant to paragraph 4C (any partial prepayment
being applied in satisfaction of required payments of principal in inverse order
of their scheduled due dates), purchased by the Company pursuant to paragraph 8B
or is declared to be immediately due and payable pursuant to paragraph 9A, as
the context requires.

     "Discounted Value" shall mean, with respect to the Called Principal of any
      ----------------
Note, the amount obtained by discounting all Remaining Scheduled Payments with
respect to such Called Principal from their respective scheduled due dates to
the Settlement Date with respect to such Called Principal, in accordance with
accepted financial practice and at a

                                      -44-
<PAGE>

discount factor (applied on a semiannual basis) equal to the Reinvestment Yield
with respect to such Called Principal.

     "Federal Reserve Board Statistical Release" shall mean the weekly
      -----------------------------------------
Statistical Release H.15(519) of the Federal Reserve Board of Governors or any
successor or substitute publication.

     "Reinvestment Yield" shall mean, with respect to the Called Principal of
      ------------------
any Note, the sum of (x) the yield to maturity implied by ( i ) the yields
reported, as of 10:00 A.M. (New York City time) on the Business Day next
preceding the Settlement Date with respect to such Called Principal, on the
display designated as "Page 678" on the Telerate Service (or such other display
as may replace Page 678 on the Telerate Service) for actively traded U.S.
Treasury securities having a maturity equal to the Remaining Average Life of
such Called Principal as of such Settlement Date, or if such yields shall not be
reported as of such time or the yields reported as of such time shall not be
ascertainable, ( ii ) the Treasury Constant Maturity Series yields reported for
the latest day for which such yields shall have been so reported as of the
Business Day next preceding the Settlement Date with respect to such Called
Principal, in the Federal Reserve Statistical Release for actively traded U.S.
Treasury securities having a constant maturity equal to the Remaining Average
Life of such Called Principal as of such Settlement Date (such implied yield
shall be determined, if necessary, by (a) converting U.S. Treasury bill
quotations to bond-equivalent yields in accordance with accepted financial
practice and (b) interpolating linearly between reported yields) and (y) 0.50%.

     "Remaining Average Life" shall mean, with respect to the Called Principal
      ----------------------
of any Note, the number of years (calculated to the nearest one-twelfth year)
obtained by dividing ( i ) such Called Principal into ( ii ) the sum of the
products obtained by multiplying (a) each Remaining Scheduled Payment of such
Called Principal (but not of interest thereon) by (b) the number of years
(calculated to the nearest one-twelfth year) which will elapse between the
Settlement Date with respect to such Called Principal and the scheduled due date
of such Remaining Scheduled Payment. Calculations pursuant to this definition
shall be made on the basis of the application of all partial prepayments in
satisfaction of required payments of principal in inverse order of their
scheduled due dates.

     "Remaining Scheduled Payments" shall mean, with respect to the Called
      ----------------------------
Principal of any Note, all payments of such Called Principal and interest
thereon (computed for this purpose as if the rate of interest on the Notes were
10.61% per

                                      -45-
<PAGE>

annum in the case of the Series A Notes and 11.32% per annum in the case of the
Series B Notes) that would be due on or after the Settlement Date with respect
to such Called Principal if no payment of such Called Principal were made prior
to its scheduled due date. Calculations pursuant to this definition shall be
made on the basis of the application of all partial prepayments in satisfaction
of required payments of principal in inverse order of their scheduled due dates.

     "Settlement Date" shall mean, with respect to the Called Principal of any
      ---------------
Note, the date on which such Called Principal is to be prepaid pursuant to
paragraph 4C or purchase pursuant to paragraph 8B or is declared to be
immediately due and payable pursuant to paragraph 9A, as the context requires.

     "Yield-Maintenance Premium" shall mean, with respect to any Note, a premium
      -------------------------
equal to the excess, if any, of the Discounted Value of the Called Principal of
such Note over the sum of ( i ) such Called Principal ( ii ) interest accrued
thereon as of (including interest due on ) the Settlement Date with respect to
such Called Principal. The Yield-Maintenance Premium shall in no event be less
than zero.

     12B. OTHER TERMS.
          -----------

     "Additional Payment Period" shall mean, as to any Indemnitee, the period
      -------------------------
from and at all times after the earliest date as of which more than the then
current Inclusion Rate of the interest on such Indemnitee's Note (or interest
therein) is included in such Indemnitee's Federal Gross Income as a result of
one or more Gross-Up Events ;until the earlier of (a) the latest date as of
which more than the then current Inclusion Rate of the interest on such
Indemnitee's Note (or interest therein) is included in such Indemnitee's Federal
Gross Income and (b) payment in full of such Indemnitee's Note, together with
accrued interest and Yield-Maintenance Premium, if any, thereon.

     "Additions to Tax" shall have the meaning specified in paragraph 7A.
      ----------------

     "Adjustment Fraction" shall mean the following fraction resulting from the
      -------------------
following formula:

                  (1 - (Xo x Fo) ) x )1 - Fn
                  ---------------------------
                  (1 - (Xn x Fn) ) x (1 - Fo)

where

                                      -46-
<PAGE>

Xo - 50% (the Inclusion Rate on the date hereof)

Fo - 34% (the Federal Tax Rate on the date hereof)

Xn - the Inclusion Rate in effect on the date of application of the Adjustment
Fraction, giving effect to any change therein.

Fn = the Federal Tax Rate in effect on the date of application of the Adjustment
Fraction, giving effect to any change therein.

The Adjustment Fraction will be rounded to three decimal places with rounding up
if the fourth decimal place is .0005 or higher, and rounded down otherwise.

     "Affiliate" shall mean, with respect to any Person, and Person directly or
      ---------
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. The term "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting securities, by
contract or otherwise, and the terms "controlling" and "controlled" have
correlative meanings to the foregoing.

     "Agreements" shall have the meaning specified in paragraph 2.
      ----------

     "Attributable Debt" in respect of any sale and leaseback transaction shall
      -----------------
mean, as of any time, the present value (discounted at the rate of interest
implicit in the terms of the lease involved in such sale and leaseback
transaction, as determined in good faith by the Company), of the obligation of
the lessee thereunder for net rental payments (excluding, however, any amounts
required to be paid by such lessee, whether or not designated as rent or
additional rent, on account of maintenance and repairs, services, insurance,
taxes, assessments, water rates and similar charges or any amounts required to
be paid by such lessee thereunder contingent upon monetary inflation or the
amount of sales, maintenance and repairs, insurance, taxes, assessments, water
rates or similar charges) during the remaining term of such lease (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).

     "Bankruptcy Law" shall have the meaning specified in paragraph 9A and shall
      --------------
include but not be limited to Title II of the United States Code.

                                      -47-
<PAGE>

     "Board of Directors" shall mean either the board of directors of the
      ------------------
     Company or any duly authorized committee of that board.

     "Business Day" shall mean any day which is not a Saturday or a Sunday or a
      ------------
bank holiday in New York, New York or Pittsburgh, Pennsylvania.

     "Change of Law" shall mean any amendment to the Code or amendment to other
      -------------
statute enacted by the Congress of the United State of America, or any
temporary, proposed or final regulation or rule promulgated by any agency or
department of the United State government, or any official or judicial
interpretation of any of the foregoing after the date of this Agreement, and for
purposes hereof shall include, but not be limited to, any law or temporary,
proposed or final regulation enacted after the date prior thereto, except that a
Change of Law shall not include any change in the Federal tax Rate or the
Inclusion Rate. The currently scheduled replacement of Section 56(f) of the Code
with 56(g) is not a Change of Law.

     "Closing" shall have the meaning specified in paragraph 2.
      -------

     "Code" shall mean the Internal Revenue Code of 1986, as amended from time
      ----
to time.

     "Code Affiliate" shall mean each trade or business (whether or not
      --------------
incorporated) which together with the Company is treated as a "single employer"
under subsection (b), (c), (m), (n), or (o) of section 414 of the Code.

     "Commission" shall mean the United States Securities and Exchange
      ----------
Commission and any successor Federal agency having similar powers.

     "Company" shall have the meaning specified in the introduction to this
      -------
Agreement and shall include any successor thereto.

     "Company Obligations" shall mean the obligations of the Company under
      -------------------
paragraph 8.

     "Consolidated Net Tangible Assets" shall mean the aggregate amount of
      --------------------------------
assets (less applicable reserves and another properly deductible items) after
deducting therefrom (a) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles and (b) all
current liabilities; all as reflected in the Company's audited

                                      -48-
<PAGE>

consolidated balance sheet most recently provided to holders of the Notes
pursuant to paragraph 5A.

     "Debt" shall mean indebtedness for borrowed money.
      ----

     "Disclosure Documents" shall have the meaning specified in paragraph 10B.
      --------------------

     "DOL" shall have meaning specified in paragraph 11.
      ---

     "Employer Capital Stock" shall mean the Company's Series A ESOP Convertible
      ----------------------
Preferred Stock.

     "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
      -----
amended from time to time. Section references to ERISA are to ERISA, as in
effect at the date of this Agreement and any subsequent provisions of ERISA
amendatory thereof, supplemental thereto or substituted therefor.

     "ERISA Affiliate" shall mean each trade or business (whether or not
      ---------------
incorporated) which together with the Company would be deemed to be a "single
employer" within the meaning of section 414(b) or (c) of the Code.

     "ERISA Plan" shall mean any employee pension benefit plan within the
      ----------
meaning of section 3(2) of ERISA maintained or contributed to by the Company or
an ERISA Affiliate.

     "ESOP" shall have the meaning specified in the introduction to this
      ----
Agreement and shall include any successor thereto.

     "ESOP Default" shall have the meaning specified in subparagraph (e) of
      ------------
paragraph 8A.

     "ESOP Transaction" shall mean the execution and delivery of the Notes by
      ----------------
the ESOP and the purchase by the ESOP of shares of Employer Capital Stock from
the Company pursuant to the Stock Purchase Agreement for an aggregate purchase
price of $270,000,000.

     "Event of Default" shall mean any of the events specified in paragraph 9A,
      ----------------
provided that there has been satisfied any requirement in connection with such
event for the giving of notice, or the lapse of time, or both, or the happening
of any further condition, event or act, and "Default" shall mean any of such
events, whether or not any such requirement has been satisfied.

                                      -49-
<PAGE>

     "Event Notice" shall have the meaning specified in paragraph 8B(c).
      ------------

     "Exchange Act" shall mean the Securities Exchange Act of 1934.
      ------------

     "Federal Gross Income" shall mean gross income within the meaning of the
      --------------------
Code.

     "Federal Tax Rate" shall mean, ( i ) in the case of a life insurance
      ----------------
company, the maximum incremental percentage rate from time to time applicable to
the taxable income of such company as determined under section 801 of the Code,
or any successor thereto, ( ii ) in the case of any other insurance company, the
maximum incremental percentage rate from time to time applicable to the taxable
income of such company as determined under section 831 of the Code, or any
successor provision, and ( iii ) in the case of any other Person the maximum
incremental percentage rate from time to time applicable to the taxable income
of any ordinary business corporation imposed under section 11 of the Code, or
any successor thereto.

     "Fully Tax-Exempt Rate" shall mean, with respect to each series of Notes,
      ---------------------
the annual rate of interest set forth below:

                   Series                            Fully Tax-Exempt Rate
                   ------                            ---------------------
                     A                                        7.00%
                     B                                        7.47%

     "Funded Debt" shall mean Debt maturing, or by its terms extendable or
      -----------
renewable to a date that is, at least twelve months after the date of
determination thereof.

     "Gross-Up Event" shall mean, with respect to any Indemnitee, (a) the
      --------------
failure by such Indemnitee to receive a Qualifying Opinion of Counsel, requested
pursuant to paragraph 7G, within 45 days after the receipt by the Company of
such request therefor and agreement by the Indemnitee and the Company as to the
identity of such counsel, or (b) an increase in such Indemnitee's Federal income
tax liability, a reduction of such Indemnitee's net operating loss, an offset
liability against any Federal tax refund or other amount otherwise due such
Indemnitee with respect to such Indemnitee's Federal tax liability, or a
utilization of an amount otherwise available to such Indemnitee as a credit
against Federal tax, caused by and computed solely with reference to an
inclusion in such Indemnitee's Federal Gross Income (other than by reason of a

                                      -50-
<PAGE>

Change of Law) of a percentage of the interest received or accrued by such
Indemnitee with respect to such Indemnitee's Note exceeding the then current
Inclusion Rate following or as a consequence of any one or more of the events
set forth below:

     ( i ) the issuance of an IRS Notice to such Indemnitee;

     ( ii ) the occurrence of a final decision, judgment, decree or other order
by the Tax Court or by any other court of competent jurisdiction with respect to
such Indemnitee or any other Indemnitee and the expiration of the period for
appealing such decision without an appeal being docketed;

     ( iii ) the execution of a closing agreement by such Indemnitee under
section 7121 of the Code; or

     ( iv ) the occurrence of one of the events described in clause ( ii ) of
the definition of Purchase Event.

     "Gross-Up Rate" shall mean with respect to each series of Notes, the annual
      -------------
rate of interest set forth below:

                 Series                     Gross-Up Rate
                 ------                     -------------
                   A                        10.61%
                   B                        11.32%

     "Historical Financial Statements" shall have the meaning specified in
      -------------------------------
paragraph 10B.

     "Inclusion Rate" shall mean at any time, the percentage of interest income
      --------------
received or accrued by, an Indemnitee on securities acquisition loans which may
not be excluded from such entity's Federal Gross Income. The Inclusion Rate
shall be deemed to have been changed to 100% with respect to an Indemnitee if
legislation repealing Section 133 of the Code is enacted and is effective with
respect to the Notes.

     "Indemnitee" shall mean you and your direct and indirect successors and
      ----------
assigns in any of the Notes (or any interest therein), including any assignee,
participant or other transferee of all or any portion of any Indemnitee's
interest in the Notes (whether or not the Indemnitee has an interest in any Note
at the time amounts are payable to such Indemnitee hereunder) and any affiliated
group (within the meaning of section 1504 of the Code) of which any Indemnitee
is a member; provided that, for purposes of paragraphs 7A, 7B, and 7D. the term
             --------
"Indemnitee" shall not include any assignee, participant

                                      -51-
<PAGE>

or other transferee that is not a Qualified Holder with respect to the Notes at
the time the assignee, participant or other transferee acquires an interest in
the Notes (unless the assignor or transferor was in Indemnitee but was not a
Qualified Holder at the time of the assignment or transfer), and shall not
include any Person that no longer qualifies as a Qualified Holder (other than by
reason of a Change of Law or a repeal of section 133 of the Code) but only with
respect to the period such Person owned or held an interest in the Note while so
disqualified.

     "Indemnitee's Notes" shall mean, with respect to any Indemnitee, the Note
      ------------------
(or participation or other interest in the Note) held by such Indemnitee at any
time.

     "IRS" shall mean the United States Internal Revenue Service and any
      ---
successor Federal agency having similar powers.

     "IRS Notice" shall mean, with respect to any Indemnitee, a revenue agent's
      ----------
report or notice of proposed adjustment or a notice of deficiency issued by the
IRS to such Indemnitee with respect to the inclusion in Federal Gross Income a
percentage of the interest on such Indemnitee's Note exceeding the Inclusion
Rate.

     "Lien" shall mean any mortgage, pledge, security interest, lien,
      ----
conditional sale or other title retention agreement or other encumbrance.

     "Moody's" shall mean Moody's Investors Service, Inc. and any successor
      -------
thereto which is a nationally recognized rating agency.

     "Multiemployer Plan" shall mean "multiemployer plan" (as such term is
      ------------------
defined in section 3(37) of ERISA and section 414(f) of the Code) to which
contributions are or have been made by the Company or any of its Subsidiaries.

     "Notes" shall have the meaning specified in paragraph 1.

     "Officer's Certificate" shall mean a certificate signed in the name of the
      ---------------------
Company by its Chief Executive Officer Chief Operating Officer, Chief Financial
and Administrative Officer, Vice President and Controller or Vice President and
Treasurer or any other officer of the Company performing functions similar to
the functions of such officers as of the date of this Agreement.

                                      -52-
<PAGE>

     "Opinion of Counsel" shall mean a written opinion of counsel, who may be
      ------------------
     counsel for the Company, and who shall be acceptable to the Required
     Holder(s).

     "Other Agreements" shall have the meaning specified in paragraph 2.
      ----------------

     "Other Holder Notice" shall have the meaning specified in paragraph 8B(a).
      -------------------

     "Other Purchasers" shall have meaning specified in paragraph 2.
      ----------------

     "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity
      ----
succeeding to any or all of its functions under ERISA.

     "Person" shall mean and include an individual, an association, a
      ------
partnership, a joint venture, a corporation, a joint-stock company, a trust, an
unincorporated organization and a government or any department or agency or
political subdivision thereof.

     "Placement Memorandum" shall have the meaning specified in paragraph 10B.
      --------------------

     "Plan Documents" shall mean the Plan, the Trust Agreement and the Stock
      --------------
Purchase Agreement.

     "Principal Property" shall mean any single manufacturing plant, research
      ------------------
laboratory or other similar facility (including property, plant and equipment)
located within the United States of America (other than it territories and
possessions) and owned by, or leased to, the Company or any Subsidiary, the book
value of the property, plant and equipment of which (as shown, net of
depreciation, on the books of the owner or owners) is not less than 2% of
Consolidated Net Tangible Assets at the end of the most recent fiscal year of
the Company for which audited consolidated financial statements have been
provided to the holders of the Notes pursuant to paragraph 5A, except (a) any
such plant or facility ( i ) owner or leased jointly or in common with one or
more Persons other than the Company and its Subsidiaries, in which the interest
of the Company and its Restricted Subsidiaries does not exceed 50%, or ( ii )
which the Board of Directors determines by board resolution in good faith is not
of material importance to the total business conducted, or assets owned, by the
Company and its subsidiaries as an entirety, or (b) any portion of any such
plant or facility which the Board of Directors determines by board resolution in
food faith not to be of material importance to the use or operation thereof.

                                      -53-
<PAGE>

     "Purchase Event" shall mean the occurrence for any reason whatsoever (and
      --------------
whether such occurrence shall be voluntary or come about or be effected by
operation of law or otherwise) of any of the following events:

     (i) Unsupported Company Debt shall be rated less than "Baa3" by Moody's and
     less than "BBB-" by Standard & Poor's (or in either case, the comparable
     ratings then in existence) (as modified pursuant to paragraph 8B (b)); or

     (ii) the ESOP shall have been terminated, the ESOP shall fail to hold
     "qualifying employer securities" or otherwise fail to satisfy any
     applicable condition necessary to provide that the indebtedness evidenced
     by the Notes constitutes a "securities acquisition loan" within the meaning
     of section 133 of the Code as in effect on the date hereof or the Company
     shall fail to obtain from the IRS by the Qualification Date a favorable
     written determination to the effect that the ESOP is an "employee stock
     ownership plan" within the meaning of section 4975 (e) (7) of the Code and
     is qualified under section 401 (a) of the Code and that the ESOP meets the
     requirements for tax exemption under section 501 (a) of the Code.

     "Purchaser" shall have the meaning specified in subparagraph (a) of
      ---------
paragraph 8A.

     "Qualification Date" shall mean the earliest of the following dates: (I)
      ------------------
the date on which the Company and the ESOP shall receive, after the exhaustion
of all legal remedies, a final determination that the ESOP fails to qualify
under Section 401(a) of the Code or is not an "employee stock ownership plan"
within the meaning of section 4975 (e) (7) of the Code or that the ESOP fails to
met the requirements for tax exemption under section 501 (a) of the Code; and
(ii) December 31, 1990, provided that such date shall be extended by the length
of any period of time during which the Internal Revenue Service has suspended
determinations under section 401 (a), 501 (a) or 4975 (e) (7) of the Code for a
category of plans which includes ESOP.

     "Qualified Holder" shall mean any entity described in section 133 (a) of
      ----------------
the Code which is not a member of the same controlled group of corporations, as
such term is defined in section 133 (b) (4) of the Code, as the Company.

     "Qualifying Opinion of Counsel" shall mean a written opinion of recognized
      -----------------------------
tax counsel, selected by the Company and

                                      -54-
<PAGE>

satisfactory to the Indemnitee requesting such opinion, to the effect that
interest on the Indemnitee's Note in an amount equal to the excess over the then
current Inclusion Rate is excludible from such Indemnitee's Federal Gross Income
during the applicable period under paragraph 7G.

     "Required Holder (s)" shall mean the holder or holders of at least 66 2/3%
      -------------------
of the aggregate principal amount of the Notes from time to time outstanding.

     "Required Installment Payment" shall have the meaning specified in
      ----------------------------
paragraph 4A.

     "Restricted Subsidiary" shall mean any Subsidiary substantially all the
      ---------------------
property of which is located, or substantially all of the business of which is
carried on, within the United States of America (excluding its territories and
possessions) which shall at the time, directly or indirectly through one or more
Subsidiaries or in a combination with on or more other Subsidiaries, own or be a
lessee of a Principal Property.

     "Securities Act" means the Securities Act of 1933, as amended.
      --------------

     "Standard & Poor's" shall mean Standard & Poor's Corporation and any
      -----------------
successor thereto that is a nationally recognized rating agency.

     "Stock Purchase Agreement" shall mean the Stock Purchase Agreement between
      ------------------------
the Company and the ESOP, in the form delivered as contemplated by paragraph 3D.

     "Subsidiary" shall mean a corporation more than 50% of the outstanding
      ----------
voting stock of which is owned, directly or indirectly, by the Company or by one
or more other Subsidiaries. For the purposes of this definition, "voting stock"
                                                                  ------------
means stock which ordinarily has voting power for the election of directors,
whether at all times or only so long as no senior class of stock has such voting
power by reason of any contingency.

     "Supplemental Payment Period" as to any Indemnitee shall mean, with respect
      ---------------------------
to any Change of Law, the period from the earliest date as of which such Change
of Law is effective with respect to such Indemnitee until the earlier of (I) the
payment in full of such Indemnitee's Note, together with all accrued interest
and premium, if any, thereon and (ii) the last date as of which such Change of
Law remains effective.

                                      -55-
<PAGE>

     "Tax Allowance" shall mean any deduction, credit, exclusion or other
      -------------
     allowance allowable in computing liability for any Federal Tax.

     "Tax Disallowance" shall mean (I) the reduction directly or indirectly of
      ----------------
any deduction (including, but not limited to, any net operating loss deduction
or the extension of the provisions of Sections 265 (a) (2) or (b) of the Code),
exclusion (including, but not limited to, the exclusion provided in Section 812
(g) of the Code), credit or other allowance that would but for the Change of
Law, have been allowable in computing the Purchaser's liability for any Federal
tax, whether currently in existence or not, including, but not limited to, the
tax imposed under Section 11 of the Code, or any successor thereto, (ii) the
imposition of any Federal tax or levy of any nature (including, but not limited
to, preference, excise or alternative minimum taxes), (iii) the increase in any
rate of Federal tax, rate of inclusion of any item of adjustment to the
alternative minimum taxable income of an Indemnitee, or levy upon an Indemnitee
(including, but not limited to, preference, excise or alternative minimum taxes)
on some or all of the payments on the Notes, or (iv) any reduction in the net
after-tax yield on any Note to an Indemnitee (using the then current Federal Tax
Rate and Inclusion Rate) below the after-tax yield on a fully taxable Note
bearing interest at the Gross-Up Rate.

     "Transferee" shall mean any direct or indirect transferee of all or any
      ----------
part of any Note purchased by you under the Agreement.

     "Trust Agreement" shall mean the Trust Agreement, effective as of June 13,
      ---------------
1989, by and between the Company and the Trustee, as from time to time in
effect, pursuant to which the ESOP was created.

     "Trustee" shall mean Mellon Bank, N.A., as trustee of the ESOP together
      -------
with its successors as such trustee.

     "Unsupported Company Debt" shall mean the long-term senior unsecured
      ------------------------
indebtedness of the Company, the creditworthiness of which is not supported
through defeasance, guarantees, credit enhancement or otherwise.

     13. JUDICIAL PROCEEDINGS.
         --------------------

     13A. CONSENT TO JURISDICTION. EACH OF THE COMPANY AND THE ESOP IRREVOCABLY
- -------------------------------------------------------------------------------
SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY NEW YORK STATE OR FEDERAL COURT
- --------------------------------------------------------------------------------
SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, OVER ANY SUIT,
- ---------------------------------------------------------------------

                                      -56-
<PAGE>

ACTION OR PROCEEDING BETWEEN OR AMONG ANY OF THE PARTIES TO THE AGREEMENTS OR
ANY PERSON WHO IS OR WAS A NOTEHOLDER AND ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE NOTES. TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER
APPLICABLE LAW, EACH OF THE COMPANY AND THE ESOP IRREVOCABLY WAIVES AND AGREES
NOT TO ASSERT, BY WAY OF MOTION AS A DEFENSE OR OTHERWISE, ANY CLAIM THAT IT IS
NOT SUBJECT TO THE SUBJECT-MATTER JURISDICTION OF ANY SUCH COURT IN ANY SUCH
CASE, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VUNUE
OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM
THAT ANY SUCH SUIT, ACTION OR PROCEESING BROUGHT IN ANY SUCH COURT HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM.

     13B. ENFORCEMENT OF JUDGMENTS. Each of the Company and the ESOP agrees, to
          ------------------------
the fullest extent it may effectively do so under applicable law, that a
judgment in any suit, action or proceeding of the nature referred to in
paragraph 13A brought in any such court shall be conclusive and binding upon the
Company or the ESOP, as the case may be, and may be enforced in the courts of
the United States of America or the Sate of New York (or any other courts to the
jurisdiction of which the Company or the ESOP, as the case may be, is or may be
subject) by a suit upon such judgment.

     13C. SERVICE OF PROCESS. Each of the Company and the ESOP consents to
          ------------------
process being served in any suit, action or proceeding of the nature referred to
in paragraph 13A by mailing a copy thereof by registered or certified mail,
postage prepaid, return receipt requested, to the address of the Company or the
ESOP, as the case may be, specified in or designated pursuant to paragraph 14I.
The Company and the ESOP agree that such service (I) shall be deemed in every
respect effective service of process upon the Company or the ESOP, as the case
may be, in any such suit, action or proceeding and (ii) shall, to the fullest
extent permitted by law, be taken and held to be valid personal service upon and
personal delivery to the Company or the ESOP, as the case may be.

     13D. NO LIMITATION ON SERVICE OR SUIT. Nothing in this paragraph 13 shall
affect the right of you or any holder of a Note to serve process in any manner
permitted by law, or limit any right that the holders of any Notes may have to
bring proceedings against the Company or the ESOP in the courts of any
jurisdiction or to enforce in any lawful manner a judgment obtained in one
jurisdiction in any other jurisdiction.

     14. MISCELLANEOUS.
         -------------

     14A. NOTE PAYMENTS. So long as you shall hold any Note, payments of
          -------------
principal of, premium and interest on the

                                      -57-
<PAGE>

Notes which comply with the terms of this Agreement shall be made, without
presentment or notation, by wire transfer of immediately available funds for
credit to your account or accounts, as specified in the Purchaser Schedule
attached hereto, or to such other account or accounts in the United States as
you may designate in writing, notwithstanding any contrary provision herein or
in any Note with respect to the place of payment. You agree that, before
transferring of any Note, you will make a notation thereon (or on a schedule
attached thereto) of all principal payments previously made thereon and of the
date to which interest thereon has been paid. Each of the Company and the ESOP
agrees to afford the benefits of this paragraph 14A to any Transferee which
shall have made the same agreements as you have made in this paragraph 14A.

     14B. EXPENSES. The Company agrees, whether or not the transactions hereby
          --------
contemplated shall be consummated, to pay, and save you and any Transferee
harmless against liability for the payment of, all out-of-pocket expenses
arising in connection with this Agreement, the Notes, the Plan Documents and the
transactions hereby and thereby contemplated, including, without limitation, (I)
all such expenses incurred with respect to the enforcement of any provision of
any such agreement or instrument or with respect to complying with any subpoena
or other legal process or informal investigative order upon you or any
Transferee or any of your or any Transferee's employees or agents in connection
with this Agreement or the transactions contemplated hereby or by reason of your
or any Transferee's having acquired any Note, or with respect to any proposed
modifications, consents, amendments or waivers (whether or not the same become
effective) under or in respect of any such agreement or instrument, and all
expenses incurred in connection with the preparation of such agreements and
instruments, (ii) all stamp, documentary or other similar issuance or
transaction taxes (together in each case with interest and penalties, if any,
and any income tax payable by you or any Transferee in respect of any
reimbursement therefor) which may be payable in respect of the execution and
delivery of such agreements or instruments, or the issuance, delivery or
purchase by you of any Note, including, without limitation, any excise taxes
imposed under the Code by reason of the failure of the ESOP Transaction to
satisfy the requirements of section 4975 of the Code for exemption from the
provisions thereof, and (iii) all document production and duplication charges
and the reasonable fees and expenses of your special counsel and all local
counsel retained in connection with such agreements and instruments, and the
transactions hereby and thereby contemplated, including the enforcement of any
provision hereof

                                      -58-
<PAGE>

or thereof, and any such proposed modifications, consents, amendments or waivers
(whether or not the same become affective), including without limitation costs
and expenses incurred in any bankruptcy case, and your costs incurred in
obtaining a PPN number from a rating agency in connection with your purchase of
Notes hereunder. The Company further agrees to indemnify and save harmless you
and any Transferee and each of your and any Transferee's officers, directors,
employees and agents (each herein called an "indemnified person") from and
against any and all actions, causes of action, suits, losses, liabilities and
damages, and expenses (including, without limitation, attorneys' fees and
disbursements provided, in any related series of actions involving different
Persons but with common interests and with no conflicting interest, only one
counsel's fees and disbursements shall be so reimbursed) in connection therewith
payable to any third party (herein called the "indemnified liabilities")
incurred by any indemnified person as a result of, or arising out of, or
relating to any of the transactions contemplated hereby, except for any
indemnified liabilities arising on account of the gross negligence or willful
misconduct of such indemnified person provided that, if and to the extent the
Company's agreement to indemnify may be unenforceable for any reason, the
Company shall make the maximum contribution to the payment and satisfaction of
each of the indemnified liabilities which shall be permissible under applicable
law.

     14C. CONSENT TO AMENDMENTS. (a) this Agreement may be amended with the
          ---------------------
consent of both the Company and the ESOP, and with such consent the Company or
the ESOP, as the case may be, may take any action herein prohibited, or omit to
perform any act herein required to be performed by it, but in any of the
foregoing cases only if there shall have been obtained the written consent to
                ----
such amendment, action or omission to act of the Required Holders, provided,
                                                                   --------
however, that, without the written consent of the holder or holders of all Notes
- -------
at the time outstanding, no amendment to this Agreement shall change the
maturity of any Note or the right of any holder of a Note to accelerate such
Note pursuant to paragraph 9A, or change the principal of, or the rate or time
of payment of interest or any premium payable with respect to any Note, or
change any of the provisions of paragraph 7 or 8, or affect the time, amount or
allocation of any Required Installment Payments, or change any of the provisions
of paragraph 4, or change any of the definitions contained in paragraph 12 that
are used in paragraph 4, 7, or 8, or reduce the proportion of the principal
amount of the Notes required with respect to any consent, waiver or rescission.
Each holder of a Note at the time or thereafter outstanding shall be bound by
any consent authorized by this paragraph 14C, whether or not such Note shall
have been

                                      -59-
<PAGE>

marked to indicate such consent, but any Notes issued thereafter may bear a
notation referring to any such consent. No course of dealing between the ESOP or
the Company and any holder of a Note nor any delay in exercising any rights
hereunder or under any Note shall operate as a waiver of any rights of such
holder of a Note. As used herein and in the Notes, the term "this Agreement" or
references thereto shall mean this Agreement as it may from time to time be
amended or supplemented.

     (b) Neither the ESOP nor the Company will solicit, request or negotiate for
or with respect to any proposed waiver or amendment of any of the provisions of
this Agreement or the Notes unless each holder of Notes (irrespective of the
amount of Notes then held by it) shall be informed thereof by the ESOP of the
Company, as the case may be, and shall be afforded an opportunity of considering
the same and shall be supplied by the ESOP or the Company, as the case may be,
with sufficient information to enable it to make an informed decision with
respect thereto. Executed or true and correct copies of any waiver or consent
effected pursuant to the provisions of this Agreement shall be delivered by the
ESOP or the Company, as the case may be, to each holder of Notes forthwith
following the date on which the same shall have been executed and delivered by
the holder or holders of the requisite percentage of outstanding Notes. Neither
the ESOP nor the Company will, directly or indirectly, pay or cause to be paid
any remuneration, whether by way of supplemental or additional interest, fee or
otherwise, to any holder of Notes as consideration for or as an inducement to
the entering into by such holder of Notes of any waiver or amendment of any of
the terms and provisions of this Agreement unless such remuneration is
concurrently paid, on the same terms, ratably to all such holders of Notes.

     14D. FORM, REGISTRATION, TRANSFER AND EXCHANGE OF NOTES; LOST NOTES. The
          --------------------------------------------------------------
Notes are issuable as registered Notes without coupons in denominations of at
least $500,000, except as may be necessary to reflect any principal amount not
evenly divisible by $500,000. The ESOP shall keep or cause to be kept at its
principal office or at the offices of its designated agent (the "ESOP Agent"),
which shall initially be the Trustee or such other ESOP Agent as the ESOP shall
from time to time designate and so notify the holders of the Notes, a register
in which it shall provide for the registration of Notes and of transfers of
Notes. Any registered holder of a Note shall be entitled, upon its written
request, to receive from the ESOP Agent a list of the registered holders of the
Notes and the respective principal amounts of Notes held by such holders. Upon
surrender for registration of transfer of any Note at the

                                      -60-
<PAGE>

principal office of the ESOP Agent it shall, at its expense, execute and deliver
one or more new Notes of like tenor and of a like aggregate principal amount,
which Notes shall be registered in the name of such transferee or transferees.
At the option of the holder of any Note, such Note may be exchanged for Notes of
like tenor and of any authorized denominations, of a like aggregate principal
amount, upon surrender of the Note to be exchanged at the principal office of
the ESOP Agent. Whenever any Notes are so surrendered for exchange, the ESOP
shall, at its expense, execute and deliver the Notes which the holder making the
exchange is entitled to receive. Every Note surrendered for registration of
transfer or exchange shall be duly endorsed, or be accompanied by a written
instrument of transfer duly executed, by the holder of such Note or such
holder's attorney duly authorized in writing. Any Note or Notes issued in
exchange for any Note or upon transfer thereof shall carry the rights to unpaid
interest and interest to accrue which were carried by the Note so exchanged or
transferred, so that neither gain nor loss of interest shall result from any
such transfer or exchange and shall be accompanied by the amortization schedule
required by paragraph 4A. Upon receipt of written notice from the holder of any
Note of the loss, theft, destruction or mutilation of such Note and, in the case
of any such loss, theft or destruction, upon receipt of such holder's unsecured
indemnity agreement, or in the case of any such mutilation upon surrender and
cancellation of such Note, the ESOP will make and deliver a new Note, of like
tenor, in lieu of the lost, stolen, destroyed or mutilated Note, which shall be
accompanied by the amortization schedule required by paragraph 4A.

     14E. PERSONS DEEMED OWNERS; PARTICIPATIONS. Prior to due presentment for
          -------------------------------------
registration of transfer, the ESOP may treat the Person in whose name any Note
is registered as the owner and holder of such Note for the purpose of receiving
payment of principal of and premium, if any, and interest on, such Note and for
all other purposes whatsoever, whether or not such Note shall be overdue, and
the ESOP shall not be affected by notice to the contrary. Subject to the
preceding sentence, the holder of any Note may from time to time grant
participations in all or any part of such Note to any Person on such terms and
conditions as may be determined by such holder in its sole and absolute
discretion, subject to compliance with all applicable securities laws and in
transactions which are consistent with the representations made in paragraph 11.

     14F. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All
          ------------------------------------------------------------
representations and warranties contained herein or made in writing by or on
behalf of the parties hereto in connection herewith shall survive the execution
and delivery

                                      -61-
<PAGE>

of this Agreement and the Notes, the transfer by you of any Note or portion
thereof or interest therein and the payment of any Note, and may be relied upon
by any Transferee, regardless of any investigation made at any time by or on
behalf of you or any Transferee. Subject to the preceding sentence, this
Agreement and the Notes embody the entire agreement and understanding between
you, the ESOP and the Company and supersede all prior agreements and
understandings relating to the subject matter hereof. The obligations of the
Company and/or the ESOP under paragraph 7, paragraph 8, and paragraph 14B shall
survive the transfer, purchase or payment of any Note (in whole or in part) and
the rights of each Person arising under said paragraphs may not be changed
without the consent of such Person.

     14G. SUCCESSORS AND ASSIGNS. All covenants and other agreements in this
          ----------------------
Agreement made by or on behalf of any of the parties hereto shall bind and inure
to the benefit of the respective successors and assigns of the parties hereto
(including, without limitation, any Transferee) whether so expressed or not.

     14H. DISCLOSURE TO OTHER PERSONS. Each of the Company and the ESOP
          ---------------------------
acknowledges that the holder of any Note may deliver copies of any financial
statements and other documents delivered to such holder, and disclose any other
information disclosed to such holder, by or on behalf of the ESOP, the Company
or any Subsidiary in connection with or pursuant to this Agreement to (I) such
holder's directors, officers, employees, agents and professional consultants in
connection with such holder's general investment activities, (ii) any other
holder of any Note, (iii) any Person to which such holder offers to sell such
Note or any part thereof, (iv) any Person to which such holder sells or offers
to sell a participation in all or any part of such Note, (v) any Federal or
state regulatory authority having jurisdiction over such holder, (vi) the
National Association of Insurance Commissioners or any similar organization or
(vii) any other Person to which such delivery or disclosure may be necessary or
appropriate (a) in compliance with any law, rule, regulation or order applicable
to such holder, (b) in response to any subpoena or other legal process or
informal investigative order, (c) in connection with any litigation to which
such holder is a party or (d) in order to protect such holder's investment in
such Note.

     14I. NOTICES. All communications provided for hereunder shall be sent by
          -------
first class mail or nationwide overnight delivery service (with charges prepaid)
and (I) if to you, addressed to you at the address specified for such

                                      -62-
<PAGE>

communications in the Purchaser Schedule hereto attached, or at such other
address as you may have designated to the other parties hereto in writing, (ii)
if to any other holder of any Notes, addressed to such holder at the registered
address of such holder as set forth in the register kept by the ESOP at its
principal office as provided in paragraph 14D, or at such other address as such
holder may have designated to the other parties hereto in writing, (iii) if to
the Company, addressed to it at 333 West Liberty Street, Lancaster, Pennsylvania
17603, Attention: Treasurer, and (iv) if to the ESOP addressed to it at c/o
Mellon Bank, N. A., Mellon Bank Center, Pittsburgh, Pennsylvania 15258,
Attention: John J. Dagenhard, Vice President, or to such other address or
addresses as the Company or the ESOP may have designated in writing to you and
each other holder of any of the Notes at the time outstanding; provided,
                                                               --------
however, that any such communication to the Company may also, at your option, be
- -------
either delivered to the Company at its address set forth above or to any
principal executive or financial officer of the Company.

     14J. DESCRIPTIVE HEADINGS. The descriptive headings of the several
          --------------------
paragraphs of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.

     14K. SATISFACTION REQUIREMENT. If any agreement, certificate or other
          ------------------------
writing, or any action taken or to be taken, is by the terms of this Agreement
required to be reasonably satisfactory to you or the Required Holder(s), the
determination of such reasonable satisfaction shall be made by you or the
Required Holder (s), as the case may be, in the sole and exclusive judgment
(exercised in good faith) of the Person or Persons making such determination.

     14L. GOVERNING LAW. THIS AGREEMENT AND THE NOTES SHALL BE CONSTRUED AND
          -------------
ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY,
THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF
CONFLICT OF LAW THEREOF.

     14M. COUNTERPARTS. This agreement may be executed simultaneously in two or
          ------------
more counterparts, each of which shall be deemed an original, and it shall not
be necessary in making proof of this Agreement to produce or account for more
than one such counterpart.

     14N. REPRODUCTION OF DOCUMENTS. This Agreement and all documents relating
          -------------------------
hereto, including, without limitation (a) consents, waivers and modifications
which may hereafter be executed, (b) documents received by any party at the
closing (except the Notes themselves), and (c) financial statements,

                                      -63-
<PAGE>

certificates and other information previously or hereafter furnished to any
party may be reproduced by such party by any photographic, photostatic,
microfilm, micro-card, miniature photographic or other similar process and such
party may destroy any original documents so reproduced. The parties hereto agree
and stipulate that, to the extent permitted by applicable law, any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding (whether or not the original is in
existence) and that any enlargement, facsimile or further reproduction of such
reproduction shall likewise be admissible in evidence.

     14O. RECOURSE WITH RESPECT TO ESOP.
          -----------------------------

     The holders of the Notes shall not have any recourse against the ESOP or
the Trustee, except to the extent of the assets of the ESOP that are permitted
under Treasury Regulation section 54.4975-7 (b) (f) and 54.4975-7 (b) (6) and
any successor thereto, to be used to repay the Notes.

     If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this letter and return the same to the
undersigned, whereupon this letter shall become a binding agreement between you
and the undersigned.

                                            Very truly yours,

                                            ARMSTRONG WORLD INDUSTRIES, INC.
                                            EMPLOYEE STOCK OWNERSHIP PLAN
                                            ("SHARE IN SUCCESS PLAN") TRUST

                                            By:  Mellon Bank, N.A., as Trustee

                                            By:
                                                 -------------------------------
                                                    Title:

                                      -64-
<PAGE>

                                        ARMSTRONG WORLD INDUSTRIES, INC.

                                                By:
                                                   -----------------------------
                                                   Title:


The foregoing Agreement is hereby accepted as of the date first above written.

THE FRANKLIN LIFE
INSURANCE COMPANY

By
  ---------------------------------
  Title:

                                      -65-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT
<TEXT>

<PAGE>

                                                                   EXHIBIT 10(a)

                              EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT is made as of August 7, 2000 (the "Agreement") by
and between ARMSTRONG HOLDINGS, INC., a Pennsylvania corporation (the
"Company"), and MICHAEL D. LOCKHART (the "Executive");

                                   WITNESSETH:

     WHEREAS, the Company desires to employ the Executive and the Executive
desires to become an employee of the Company on the terms and conditions set
forth in this Agreement;

     NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:

     1.   DEFINED TERMS.
          -------------

     The definitions of capitalized terms used in this Agreement, unless
otherwise defined herein, are provided in the last Section hereof.

     2.   EMPLOYMENT.
          ----------

     The Company hereby agrees to employ the Executive, and the Executive hereby
agrees to serve the Company and its subsidiaries and affiliates, on the terms
and conditions set forth herein, during the Term of this Agreement.

     3.   TERM OF AGREEMENT.
          -----------------

     The Term will commence on the date first above written (the "Effective
Date") and shall continue until the third anniversary of the Effective Date;
provided, that, the Term of this Agreement shall automatically be extended for
one (1) additional year on such third anniversary date and each succeeding
anniversary date unless the Company shall have given written notice to the
Executive at least 180 days prior to the third anniversary date or any
succeeding anniversary date thereafter to the effect that the Term of this
Agreement shall not be extended. Notwithstanding anything in this Agreement to
the contrary, the Company may terminate this Agreement in the event of
Executive's Disability; provided, that any such termination shall not, by
itself, terminate the Executive's employment with the Company.

     4.   POSITION AND DUTIES.
          -------------------

     During the Term of this Agreement, the Executive shall serve as Chairman of
the Board and Chief Executive Officer of the Company and as a member of the
Board and shall also serve in any other executive officer position of the
Company and its subsidiaries and affiliates as the Board may reasonably request.
The Executive shall be the chief executive officer of the Company and shall have
such duties and responsibilities as are customary for the Executive's


<PAGE>

position and such other duties not inconsistent therewith as the Board may
reasonably assign from time to time. During the Term of this Agreement,
excluding any periods of vacation and sick leave to which the Executive is
entitled under the Company's policies and practices (as the same may be
increased in the future), the Executive shall devote substantially all his
working time and efforts to the business and affairs of the Company and its
subsidiaries and affiliates and shall diligently and faithfully perform his
duties to the best of his ability; provided, however, that the Executive may
engage in activities relating to personal matters (including personal financial
matters) and in such corporate, industry, civic and charitable activities,
including membership on corporate and charitable boards of directors or trustees
of non-affiliated companies and organizations, so long as such service does not
substantially interfere with the performance of his duties hereunder or violate
his obligations under Section 10 hereof.

     5.   COMPENSATION AND RELATED MATTERS.
          --------------------------------

     5.1  HIRING COMPENSATION.
          -------------------

          (a) On the Effective Date, the Company shall pay to the Executive a
cash signing bonus of $5,000,000.

          (b) As of the Effective Date, the Company shall award the Executive
150,000 shares of restricted Common Stock under the Company's Stock Award Plan,
which shares of restricted Common Stock shall vest and shall become free of
restrictions in equal annual installments on the first, second and third
anniversary of the Effective Date and the Executive shall have the opportunity
to make a voluntary deferral election prior to the lapse of the restrictions on
such restricted Common Stock. Notwithstanding anything in the Company's Stock
Award Plan to the contrary, the Executive shall be entitled to receive any cash
dividends paid on the shares of restricted Common Stock. At the Executive's
election, the Executive will either pay the Company an amount of cash or
authorize the Company to withhold shares from any shares of Common Stock which
vest and become free of restrictions, in order to permit the Company to satisfy
its tax withholding obligations with respect to such shares.

          (c) The Company shall grant the Executive stock options for 300,000
shares of Common Stock under the Company's Long-Term Incentive Plan, which
options shall be granted as follows: (i) 100,000 options on the Effective Date,
(ii) 100,000 options on the four month anniversary of the Effective Date and
(iii) 100,000 options on the eight month anniversary of the Effective Date. Such
stock options shall have an exercise price equal to the fair market value of the
Common Stock on the date of grant. Each such stock option shall vest in equal
annual installments over a term of three years from the date of grant and will
have a ten year term. Notwithstanding anything in the Company's Long-Term
Incentive Plan to the contrary, in the event of the termination of the
Executive's employment, vested options shall be exercisable as follows: (A) in
the event of the Executive's death or disability (as defined for purposes of the
Company's Long-Term Incentive Plan), for a period equal to the remaining Term
under this Agreement, (B) in the event of the Executive's retirement which is
approved by the Board, for the remaining Term of this Agreement, (C) in the
event of the termination of the Executive's employment by the Executive for Good
Reason or by the Company without Cause, for the remaining Term of this
Agreement, (D) in the event of a termination of the Executive's

                                       2
<PAGE>

employment by the Executive other than for Good Reason, for the three (3) months
after the Date of Termination, and (E) in the event of the termination of the
Executive for Cause, the stock options shall not be exercisable and shall be
forfeited, and the agreement evidencing the grant shall so provide.

     (d) The Company will hold the Executive harmless against any and all losses
that he may directly or indirectly incur as a result of (i) any third party
claims brought against the Executive (other than by any taxing authority) with
respect to the Company's performance of, or (ii) the Company's failure to
perform any commitment made to the Executive in, this Section 5.

     5.2 BASE SALARY. The Company shall pay, or cause to be paid, to the
         -----------
Executive an annual base salary ("Base Salary") during the Term of this
Agreement which shall be at an initial rate of not less than $800,000 per year.
The Base Salary shall be paid in accordance with the Company's payroll practices
for its senior officers, but not less frequently than monthly, in arrears. For
purposes of this Agreement, "Base Salary" shall include any increases in Base
Salary during the Term of this Agreement. The Base Salary in effect from time to
time shall not be decreased during the Term of this Agreement except in
connection with across-the-board salary reductions similarly affecting all
senior officers of the Company and all senior officers of any person in control
of the Company which have been agreed to by the Executive. Compensation of the
Executive by Base Salary payments shall not be deemed exclusive and shall not
prevent the Executive from participating in any other compensation or benefit
plan of the Company. The Base Salary payments (including any increased Base
Salary payments) shall not in any way limit or reduce any other obligation of
the Company hereunder, and no other compensation, benefit or payment hereunder
shall in any way limit or reduce the obligation of the Company to pay the
Executive's Base Salary.

     5.3 BENEFIT PLANS. During the Term, the Executive and his eligible
         -------------
dependents shall be entitled to participate in and receive benefits under all
"employee benefit plans" (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended from time to time ("ERISA")), and
employee benefit arrangements in which senior officers of the Company generally
participate, including without limitation, (i) all savings, deferred
compensation, profit sharing and retirement plans, practices, policies and
programs and (ii) all welfare benefit plans, practices, policies and programs
(including all medical, prescription, dental, disability, employee life
insurance, group life insurance, group hospitalization, health, accidental death
and travel accident insurance plans and programs) as are made generally
available to senior officers of the Company, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans,
practices, policies and programs, including provisions which permit such plans,
practices, policies and programs to be modified or terminated, provided, that if
the Company reduces the benefits provided under or terminates any such employee
benefit plan, practice, policy or program in which the Executive participates,
the Company shall offer to the Executive participation in another plan or
program that provides the Executive with benefits at least comparable to those
that were reduced or eliminated, and provided, further, that all eligibility
requirements under any such plan, practice, policy or program shall be waived.
The Executive shall not be entitled to credit for service at any prior employer
for purposes of the level of benefits to which the Executive is entitled under
any such plan, practice, policy or program. The Executive's participation in
such employee benefit plans,

                                       3
<PAGE>

practices, policies and programs shall be at a level appropriate for the
Executive's position. Such employee benefit plans, practices, policies and
programs, shall include, without limitation, the plans, programs, policies and
practices in which the senior officers of the Company generally participate on
the date of this Agreement. Notwithstanding anything to the contrary in this
Agreement, in the Company's Retirement Income Plan or in the Company's
Retirement Benefit Equity Plan, the Executive shall be credited with that amount
of service equal to two times the service with which he would otherwise be
credited for purposes of determining his retirement benefits under the
Retirement Income Plan. To the extent that the Executive's retirement benefits
as so determined are not payable under the Retirement Income Plan, they shall be
paid by the Company under the Retirement Benefit Equity Plan or otherwise.

     5.4  INCENTIVE COMPENSATION.
          ----------------------

          (a) During the Term of this Agreement, the Executive shall be entitled
to participate in and receive benefits under all annual incentive (bonus) plans
and long-term incentive compensation plans in which other senior officers of the
Company generally participate, including all restricted share, performance
restricted share and stock option plans of the Company. The Executive's
participation in such incentive plans shall be at a level appropriate for the
Executive's position. Except as otherwise provided in this Agreement, such
incentive compensation shall be subject to and on a basis consistent with the
terms, conditions and overall administration of such plans, including provisions
which permit such plans to be modified or terminated, provided, that if the
Company reduces the incentive compensation opportunities provided under or
terminates any such plan in which the Executive participates, the Company shall
offer to the Executive participation in another plan that provides the Executive
with an incentive compensation opportunity at least comparable to that which was
reduced or eliminated. The target performance measures under the Company's
annual incentive program for each year shall be based on a reasonably achievable
level of net income, Economic Value Added or other performance measures
established by the Management Development and Compensation Committee of the
Board, adjusted for extraordinary events.

          (b) Without limiting the generality of the foregoing Section 5.4(a),
(i) during the Term of this Agreement, the Company shall provide the Executive
with an annual cash incentive opportunity which at target performance levels is
at least equal to 125% of the Executive's Base Salary, provided, however, that
the minimum cash incentive award payable to the Executive for the remainder of
calendar year 2000 shall not be less than a pro rata portion of $1,000,000,
based on the period from the Effective Date to December 31, 2000; and (ii)
beginning in March 2001, the Company shall provide the Executive with annual
long-term incentive awards under the Company's stock incentive plan or plans
then in effect and available for the issuance of long-term incentive awards to
senior officers of the Company generally, consisting of approximately 40% stock
options and 60% three-year performance restricted share grants (based on the
present value of the awards), with an aggregate present value on the date of
grant at least equal to 150% of Executive's target annual cash compensation for
the year, which is the sum of the Executive's Base Salary and annual incentive
opportunity at target performance levels. For purposes of the preceding
sentence, the present value of the awards shall be determined applying
reasonable Black Scholes assumptions in the case of stock options and using the
market value of the Common Stock on the date of grant in the case of restricted
stock.

                                       4
<PAGE>

     5.5 OTHER BENEFITS. The Executive shall participate on the same terms and
         --------------
conditions as all other senior officers of the Company in all other benefit
plans, programs, or arrangements as may be now or hereafter sponsored or
maintained for senior officers of the Company generally and shall participate on
the same terms and conditions as other senior officers generally participate.

     5.6 FRINGE BENEFITS. During the Term of this Agreement, the Executive shall
         ---------------
be entitled to receive all perquisites and fringe benefits which the Company
makes available to senior officers of the Company generally. Without limiting
the generality of the foregoing, the Executive shall be entitled to (i) the
reasonable use of the Company's aircraft for personal use, provided such
aircraft is available, and (ii) the reimbursement of all reasonable and
documented expenses of relocating his home to Lancaster, Pennsylvania, and in
each case, the Company shall pay to the Executive, promptly upon receipt of a
certification from the Executive's tax preparer, a "gross up" payment in an
amount such that after payment by the Executive of all taxes, including, without
limitation, any income taxes imposed upon such gross-up payment, the Executive
retains an amount of such gross-up payment equal to the income tax imposed with
respect to such benefits.

     5.7 EXPENSES. During the Term of this Agreement, the Executive is
         --------
authorized to incur, and shall be reimbursed by the Company for all reasonable
and customary business-related expenses, including travel, entertainment, gifts
and similar items, incurred by the Executive in connection with his employment
hereunder.

     5.8 WORKING FACILITIES. During the Term of this Agreement, the Company
         ------------------
shall furnish the Executive with offices and working facilities in the Company's
principal executive offices and shall provide secretarial and other assistance
suitable to Executive's position and adequate for the performance of his duties
hereunder.

     5.9 VACATION. During the Term of this Agreement, the Executive shall be
         --------
entitled to vacation in accordance with the Company's current policies and
practices, provided that the Executive shall be entitled to not less than five
(5) weeks of vacation during each year of this Agreement, or such greater period
as the Board shall approve, without reduction in salary or other benefits.

     5.10 ANNUAL REVIEW. During the Term of this Agreement, the Board (or the
          -------------
Management Development and Compensation Committee of the Board) shall in good
faith review the Executive's total compensation package (including but not
limited to the Base Salary provided for in Section 5.2, the benefit plans
provided for in Section 5.3 and the short and long-term incentive compensation
opportunity provided for in Section 5.4) at least annually for possible
increase, taking into account, among other things, (i) the performance of the
Executive, (ii) the performance of the Company, and (iii) the overall
compensation of executives in similar positions at comparable companies.

     6.   COMPENSATION IN THE EVENT OF EXECUTIVE'S DISABILITY.
          ---------------------------------------------------

     During the Term of this Agreement, during any period that the Executive
fails to perform the Executive's full-time duties hereunder as a result of
incapacity due to physical or mental

                                       5
<PAGE>

illness, the Company shall pay, or cause to be paid, to the Executive his Base
Salary at the rate in effect at the commencement of any such period, together
with all compensation and benefits payable to the Executive under the terms of
any compensation or benefit plan, program or arrangement maintained by the
Company for the benefit of the Executive during such period, until this
Agreement is terminated by the Company for Disability; provided, however, that
such payments shall be reduced by the sum of the amounts, if any, payable to the
Executive at or prior to the time of any such payment under disability benefit
plans of the Company, which amounts were not previously applied to reduce any
such payment.

     7.   TERMINATION COMPENSATION AND BENEFITS.
          -------------------------------------

     7.1 If the Executive's employment is terminated for any reason during the
Term of this Agreement, the Company shall pay to the Executive (or in accordance
with Section 11.2 in the event of the Executive's death), (i) the Executive's
Base Salary through the Date of Termination at the rate in effect immediately
prior to the time the Notice of Termination is given, (ii) all compensation and
benefits (other than severance compensation and benefits) payable to the
Executive through the Date of Termination or thereafter under the terms of any
compensation or benefit plan, program or arrangement maintained by the Company
during such period, including any short-term or long-term incentive compensation
to which the Executive is entitled, by virtue of previous awards, in accordance
with the terms of the plans in which Executive participates, and (iii) any
unreimbursed expenses payable pursuant to Section 5.7 of the Agreement that were
incurred before the Date of Termination.

     7.2 In the event the Executive's employment is terminated prior to the
third anniversary of the Effective Date by the Executive for Good Reason or by
the Company for any reason other than Cause, death of the Executive or
Disability, the Company shall (i) pay the Executive, in addition to amounts
payable under Section 7.1 and 7.5, a lump sum cash payment to be made within
thirty (30) days after the Date of Termination equal to the product of (A) the
sum of (w) the higher of the Base Salary in effect immediately prior to the
occurrence of the event or circumstance upon which the Notice of Termination is
based or the Base Salary in effect immediately prior to the date of the Notice
of Termination plus (x) the higher of the annual cash incentive award that may
be earned by the Executive if target performance levels are achieved in the year
in which the Date of Termination occurs or the highest annual incentive award
that was actually paid by the Company to the Executive for any year in the three
preceding years, times (B) the greater of (y) two or (z) the number of years and
fraction thereof remaining in the Term of this Agreement from the Date of
Termination; and (ii) continue the benefits provided for in Section 5.3 of this
Agreement for a period equal to the greater of (A) two years, or (B) the
remaining Term of this Agreement, provided that such benefits shall be
discontinued if comparable benefits are obtained from a subsequent employer
during the remaining Term of this Agreement.

     7.3 In the event the Executive's employment is terminated after the third
anniversary of the Effective Date by the Executive for Good Reason or by the
Company for any reason other than Cause, death of the Executive or Disability,
the Company shall (i) pay the Executive, in addition to amounts payable under
Section 7.1 and 7.5, a lump sum cash payment to be made within thirty (30) days
after the Date of Termination equal to the product of (A) the sum of (w)

                                       6
<PAGE>

the higher of the Base Salary in effect immediately prior to the occurrence of
the event or circumstance upon which the Notice of Termination is based or the
Base Salary in effect immediately prior to the date of the Notice of Termination
plus (x) the higher of the annual cash incentive award that may be earned by the
Executive if target performance levels are achieved in the year in which the
Date of Termination occurs or the highest annual incentive award that was
actually paid by the Company to the Executive for any year in the three
preceding years, times (B) the greater of (y) one or (z) a fraction the
numerator of which is the number of months (rounded up to the nearest whole
month) remaining in the Term of this Agreement from the Date of Termination and
the denominator of which is 12; and (ii) continue the benefits provided for in
Section 5.3 of this Agreement for the remaining Term of this Agreement, provided
that such benefits shall be discontinued if comparable benefits are obtained
from a subsequent employer during the remaining Term of this Agreement.

     7.4 In the event that the Executive's employment is terminated by the
Executive for any reason other than death, Disability or Good Reason or is
terminated by the Company for Cause, the Company shall pay the Executive any
amounts due pursuant to Section 7.1 and 7.5 hereof and the Executive shall pay
the Company: (i) a lump sum cash payment of $3,000,000 if such termination is
prior to the second anniversary date of the Effective Date; or (ii) a lump sum
cash payment of $1,500,000 if such termination is prior to the third anniversary
date of the Effective Date;

     7.5 If the Executive's employment is terminated for any reason during the
Term of this Agreement, the Company shall pay the Executive's normal
post-termination compensation and benefits (other than severance compensation
and benefits) to the Executive as such payments become due. Such normal
post-termination compensation and benefits (other than severance compensation
and benefits) shall be determined under, and paid in accordance with the
Company's retirement, insurance and other compensation or benefit plans,
programs and arrangements (other than this Agreement), as applicable.

     7.6 (a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment, benefit, or distribution by the
Company or its affiliates to or for the benefit of the Executive, whether paid
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed
by Section 4999 of the Code, or any interest or penalties with respect to such
excise tax (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then the Executive
shall be entitled to receive an additional payment ("Gross-Up Payment") in an
amount such that after payment by the Executive of all taxes (including any
interest or penalties imposed with respect to such taxes), including, without
limitation, any income taxes and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.

          (b) Subject to the provisions of Section 7.6(c) hereof, all
determinations required to be made under this Section 7.6, including whether a
Gross-Up Payment is required and the amount of such Gross-Up Payment and the
assumptions to be used in arriving at such determinations, shall be made by the
Company's principal outside accounting firm (the

                                       7
<PAGE>

"Accounting Firm") which shall provide detailed supporting calculations both to
the Board and the Executive within fifteen (15) business days after the Date of
Termination and/or such earlier date(s) as may be requested by the Company or
the Executive (each such date and the Date of Termination shall be referred to
as a "Determination Date" for purposes of this Section 7.6(b) and Section 7.7
hereof). All fees and expenses of the Accounting Firm shall be borne solely by
the Company. The initial Gross-Up Payment, if any, as determined pursuant to
this Section 7.6(b), shall be paid by the Company to the Executive within thirty
(30) days of the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by the Executive, it
shall furnish the Executive with a written opinion that failure to report the
Excise Tax on the Executive's applicable federal income tax return would not
result in the imposition of a negligence or similar penalty. Any determination
by the Accounting Firm under this Section 7.6(b) shall be binding upon the
Company and the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made ("Underpayment") consistent
with the calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 7.6(c) and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.

          (c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of an Underpayment. Such notification shall be given as soon as
practicable but no later than ten (10) business days after the Executive is
informed in writing of such claim and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the thirty (30)
day period following the date on which he gives such notice to the Company (or
such shorter period ending on the date that any payment of taxes with respect to
such claim is due). If the Company notifies the Executive in writing prior to
the expiration of such period that it desires to contest such claim, the
Executive shall:

               (i) give the Company any information reasonably requested by the
Company relating to such claim;

               (ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time, including,
without limitation accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company;

               (iii) cooperate with the Company in good faith in order to
effectively contest such claim; and

               (iv) permit the Company to participate in any proceeding relating
to such claim; provided, however, that the Company shall bear and pay directly
all costs and expenses (including additional interest and penalties) incurred in
connection with such contest

                                       8
<PAGE>

and shall indemnify and hold the Executive harmless, on an after-tax basis, for
any Excise Tax or income tax, including interest and penalties with respect
thereto, imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this Section 7.6(c),
the Company shall control all proceedings taken in connection with such contest
and, at its sole option, may pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect of
such claim and may, at its sole option, either direct the Executive to pay the
tax claimed and sue for a refund or contest the claim in any permissible manner,
and the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however, that if the
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax, including interest or
penalties with respect thereto, imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and provided,
further, that any extension of the statute of limitations relating to payment of
taxes for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.

          (d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 7.6(c) hereof, the Executive becomes entitled to
receive any refund with respect to such claim, the Executive shall (subject to
the Company's compliance with the requirements of Section 7.6(c) hereof)
promptly pay to the Company the amount of such refund (together with any
interest paid or credited thereon after taxes applicable thereto). If, after the
receipt by the Executive of an amount advanced by the Company pursuant to
Section 7.6(c) hereof, a determination is made that the Executive shall not be
entitled to any refund with respect to such claim and the Company does not
notify the Executive in writing of its intent to contest such denial of refund
prior to the expiration of thirty (30) days after such determination, then such
advance shall be forgiven and shall not be required to be repaid.

     7.7 The payments provided for in Section 7.6 hereof (other than Section
7.6(c) and (d)) shall be made not later than the thirtieth (30th) day following
each Determination Date; provided, however, that if the amounts of such payments
cannot be finally determined on or before such day, the Company shall pay to the
Executive on such day an estimate, as determined by the Executive, of the
minimum amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest at the rate
provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can
be determined but in no event later than the forty-fifth (45th) day after each
Determination Date. In the event that the amount of the estimated payments
exceeds the amount subsequently determined to have been due, such excess shall
constitute a loan by the Company to the Executive, payable on the fifth (5th)
business day after demand by the Company (together with interest at the rate
provided in Section 1274(b)(2)(B) of the Code).

                                       9
<PAGE>

     8.   TERMINATION PROCEDURES.
          ----------------------

     8.1  NOTICE OF TERMINATION. During the Term of this Agreement, any
          ---------------------
purported termination of the Executive's employment (other than by reason of
death) shall be communicated by written Notice of Termination from one party
hereto to the other party hereto in accordance with Section 12 hereof. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon
and, in the case of a termination by the Company for Cause or by the Executive
for Good Reason, shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated. Further, a Notice of Termination
for Cause is required to include a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters (3/4) of the entire membership
of the Board at a meeting of the Board which was called and held for the purpose
of considering such termination (after reasonable notice to the Executive and an
opportunity for the Executive, together with the Executive's counsel, to be
heard before the Board) finding that, in the good faith opinion of the Board,
the Executive was guilty of conduct set forth in the definition of Cause herein,
and specifying the particulars thereof in detail.

     8.2  DATE OF TERMINATION. "Date of Termination," with respect to any
          -------------------
purported termination of the Executive's employment during the Term of this
Agreement, shall mean (i) if the Executive's employment is terminated by his
death, the date of his death, (ii) if the Executive's employment is terminated
by the Executive other than for Good Reason, the date specified in the Notice of
Termination (which shall not be less than one hundred eighty (180) days after
such Notice of Termination is given), (iii) if the Executive's employment is
terminated by the Company for Cause, on the date that the Notice of Termination
is sent by the Board in accordance with Section 8.1, and (iv) if the Executive's
employment is terminated for any other reason, the date specified in the Notice
of Termination (which shall not be less than sixty (60) days) after such Notice
of Termination is given.

     9.   NO MITIGATION.
          -------------

     The Company agrees that, if the Executive's employment hereunder is
terminated during the Term of this Agreement, the Executive is not required to
seek other employment or to attempt in any way to reduce any amounts payable to
the Executive by the Company hereunder. Further, the amount of any payment or
benefit provided for hereunder (other than pursuant to Section 7.2, 7.3, 7.4 or
7.6(d) hereof) shall not be reduced by any compensation earned by the Executive
as the result of employment by another employer, by retirement benefits, by
offset against any amount claimed to be owed by the Executive to the Company, or
otherwise, provided, that the proviso to Section 7.2(ii), Section 7.3(ii),
Section 7.4 and Section 7.6(d) shall apply.

     10.  CONFIDENTIALITY AND NONCOMPETITION.
          ----------------------------------

     10.1 The Executive shall not, during or after the Term of this Agreement,
without the prior written consent of the Company disclose to any entity or
person any information which is treated as confidential by the Company or any of
their subsidiaries or affiliates (each, a

                                       10
<PAGE>

"Company Entity"), and is not generally known or available in to the public,
provided, that the Executive may make disclosures of such confidential
information (i) during the Term of this Agreement in the course of and to the
extent required by and consistent with the performance of his duties hereunder,
and (ii) to the extent required by law or legal process.

     10.2 Except as permitted by the Company with its prior written consent, the
Executive shall not, during the Executive's employment with the Company and for
the period ending twenty-four (24) months after the Executive's employment with
the Company terminates for any reason, directly or indirectly, own, enter into
the employ of or render, any services (whether as a consultant or otherwise) to
any person, firm or corporation within the United States or any foreign country
in which the Company is doing or is contemplating doing business on the Date of
Termination which is a competitor of any Company Entity with respect to products
which any Company Entity is then producing or services which any Company Entity
is then providing (a "Competitor"), or approach, canvass, solicit, or otherwise
endeavor to entice away from the Company, any customer in respect of any service
or product in any way competitive with the services or products supplied by any
Company Entity to such customer, or solicit the services of, or endeavor to
entice away from the Company, any director, executive officer or employee of the
Company; provided, that it shall not be a violation of this provision for the
Executive to be employed by, or render services to, a Competitor, if the
Executive renders those services only with respect to those lines of business of
the Competitor which are not directly competitive with a line of business of any
Company Entity or are located in any country in which the Company does not do
business and was not contemplating doing business on the Date of Termination.

     10.3 The Executive acknowledges and agrees that any breach of this Section
10 by the Executive will result in immediate and irreparable harm to the
Company, the amount of which will be extremely difficult to ascertain, and that
the Buyer could not be reasonably or adequately compensated by damages in an
action at law. For these reasons, the Company shall have the right to obtain
such preliminary, temporary or permanent mandatory or restraining injunctions,
orders or decrees as may be necessary to protect the Company against or on
account of any breach by the Executive of the provisions of this Section 10
without proof of any actual damage caused to the Company.

     11.  SUCCESSORS; BINDING AGREEMENT.
          -----------------------------

     11.1 In addition to any obligations imposed by law upon any successor to
the Company, the Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company, as the case may be, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
upon the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from the Company in
the same amount and on the same terms as the Executive would be entitled to
hereunder if the Executive were to terminate the Executive's employment for Good
Reason, except that, for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the Date of
Termination.

                                       11
<PAGE>

     11.2 This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive shall
die while any amount would still be payable to the Executive hereunder (other
than amounts which, by their terms, terminate upon the death of the Executive)
if the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate.

                                       12
<PAGE>

     12.  NOTICES.
          -------

     For the purpose of this Agreement, notices and all other communications
provided for in the Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by United States registered mail,
return receipt requested, postage prepaid, addressed to the respective
addressees set forth below, or to such other address as either party may have
furnished to the other in writing in accordance herewith, except that notice of
change of address shall be effective only upon actual receipt:

     To the Company:

     Armstrong Holdings, Inc.
     2500 Columbia Avenue
     Lancaster, PA 17603
     Attention:  Executive Vice President, Human Resources
     Telecopy:  717-396-6119

     To the Executive:

     At the Executive's residence address as maintained by the Company in the
regular course of its business for payroll purposes.

     13.  MISCELLANEOUS.
          -------------

     If the Executive, in his capacity as a director, votes for, or in his
capacity as an officer, approves in writing, any action that will adversely
affect the Executive's rights under this Agreement, such vote or approval shall
be deemed to constitute the Executive's consent to such action under this
Agreement; otherwise, no provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by the Executive and such officers as may be specifically designated
by the Board. No waiver by any party hereto at any time of any breach by any
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by any party
which are not expressly set forth in this Agreement, provided that nothing
contained herein shall be interpreted to amend or nullify those obligations of
the Company and the Executive pursuant to the Change in Control Agreement and
the Indemnification Agreement by and between the Company and the Executive, as
the same may be amended from time to time. This Agreement sets forth the entire
agreement of the parties hereto in respect of the subject matter contained
herein and supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto; and any prior agreement
of the parties hereto in respect of the subject matter contained herein is
hereby terminated and canceled, except as otherwise provided in this Agreement.
The validity, interpretation, construction and performance of this Agreement
shall be governed by the laws of the Commonwealth of Pennsylvania, without
giving effect to choice of law principles.

                                       13
<PAGE>

     All references to sections of the Code shall be deemed also to refer to any
successor provisions to such sections. There shall be withheld from any payments
provided for hereunder any amounts required to be withheld under federal, state
or local law and any additional withholding amounts to which the Executive has
agreed. The obligations under this Agreement of the Company or the Executive
which by their nature and terms require satisfaction after the end of the Term
shall survive such event and shall remain binding upon such party.

     14.  VALIDITY.
          --------

     The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.

     15.  COUNTERPARTS.
          ------------

     This Agreement may be executed in several counterparts, each of which shall
be deemed to be an original but all of which together will constitute one and
the same instrument.

     16.  SETTLEMENT OF DISPUTES; ARBITRATION.
          -----------------------------------

     All claims by the Executive for benefits under this Agreement shall be in
writing and shall be directed to and initially determined by the Board. Any
denial by the Board of a claim for benefits under this Agreement shall be
delivered to the Executive in writing and shall set forth the specific reasons
for the denial and the specific provisions of this Agreement relied upon. The
Board shall afford a reasonable opportunity to the Executive for a review of the
decision denying a claim and shall further allow the Executive to appeal to the
Board a decision of the Board within sixty (60) days after notification by the
Board that the Executive's claim has been denied. To the extent permitted by
applicable law and subject to the right of the Company to seek equitable relief
in a court pursuant to Section 10.3, any further dispute or controversy arising
under or in connection with this Agreement shall be settled exclusively by
arbitration in Allegheny County, Pennsylvania, in accordance with the rules for
the resolution of employment law disputes of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award in
any court having jurisdiction.

     17.  FEES AND EXPENSES.
          -----------------

     The Company shall pay to the Executive all reasonable legal fees and
expenses incurred by the Executive (i) in connection with his pre-signing review
of this Agreement and the related Change in Control Agreement and
Indemnification Agreement, and (ii) in disputing any termination or in seeking
in good faith to obtain or enforce any benefit or right provided by this
Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of Section 4999 of the Code to any payment or
benefit provided hereunder; provided, however, the Company shall not be required
to pay to the Executive legal fees and expenses to the extent such legal fees
and expenses were incurred in connection with a contest controlled by the
Company pursuant to Section 7.6(c) hereof in connection with which the Company
complied with its obligations under said Section 7.6(d). Such payments shall be
made within thirty (30)

                                       14
<PAGE>

business days after delivery of the Executive's written request for payment
accompanied with such evidence of fees and expenses incurred as the Company
reasonably may require.

     18.  OTHER AGREEMENTS.
          ----------------

     Simultaneously with the execution of this Agreement, the Company and the
Executive shall enter into a Change in Control Agreement ("Change in Control
Agreement") and a Indemnification Agreement ("Indemnification Agreement"), and
forms of which are attached hereto as Exhibits A and B, respectively.

     19.  COORDINATION OF BENEFITS.
          ------------------------

     Notwithstanding anything in this Agreement to the contrary, if the
Executive is paid "Severance Payments" under the Change in Control Agreement
dated the date hereof between the Company and the Executive, in connection with
a Change in Control (as defined therein), then this Agreement (including Section
10.2 hereof) shall forthwith terminate and the Executive shall not be entitled
to the payment of any amounts under this Agreement other than pursuant to
Section 7.1 hereof (and any amounts theretofore paid to the Executive pursuant
to Section 7.2 or 7.3 hereof shall be credited against any "Severance Payments"
to which the Executive is entitled under said Change in Control Agreement).

     20.  DEFINITIONS.
          -----------

     For purposes of this Agreement, the following terms shall have the meaning
indicated below:

     (a) "Base Salary" shall have the meaning stated in Section 5.1 hereof.

     (b) "Board" shall mean the Board of Directors of Armstrong Holdings, Inc.

     (c) "Cause" for termination by the Company of the Executive's employment,
for purposes of this Agreement, shall mean (i) the willful and continued failure
by the Executive to substantially perform the Executive's duties hereunder
(other than any such failure resulting from the Executive's incapacity due to
physical or mental illness or any such actual or anticipated failure after the
issuance of a Notice of Termination for Good Reason by the Executive pursuant to
Section 8.1) after a written demand for substantial performance is delivered to
the Executive by the Board, which demand specifically identifies the manner in
which the Board believes that the Executive has not substantially performed the
Executive's duties, or (ii) the willful engaging by the Executive in conduct
which is demonstrably and materially injurious to the Company, monetarily or
otherwise, including but not limited to fraud or embezzlement by the Executive,
or (iii) the Executive's conviction (or entering into a plea bargain admitting
guilt) of any felony, or (iv) a material breach by the Executive of this
Agreement, including a violation of Section 10. For purposes of clauses (i) and
(ii) of this definition, no act, or failure to act, on the Executive's part
shall be deemed "willful" unless done, or omitted to be done, by the Executive
not in good faith and without reasonable belief that the Executive's act, or
failure to act, was in the best interest of the Company. In the event of a
dispute concerning the application of this provision,

                                       15
<PAGE>

no claim by the Company that Cause exists shall be given effect unless the
Company establishes to the Board by clear and convincing evidence that Cause
exists.

     (d) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.

     (e) "Common Stock" shall mean the common stock, par value $1.00 per share
of the Company.

     (f) "Date of Termination" shall have the meaning stated in Section 8.2
hereof.

     (g) "Disability" shall be deemed the reason for the termination of this
Agreement by the Company, if, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from the
full-time performance of the Executive's duties hereunder for a period of six
(6) consecutive months, the Company shall have given the Executive Notice of
Termination for Disability, and, within thirty (30) days after such Notice of
Termination is given, the Executive shall not have returned to the full-time
performance of the Executive's duties.

     (h) "Excise Tax" shall have the meaning stated in Section 7.6(a) hereof.

     (i) "Executive" shall mean the individual named in the first paragraph of
this Agreement.

     (j) "Good Reason" for termination by the Executive of the Executive's
employment shall mean the occurrence (without the Executive's express written
consent), of any one of the following acts by the Company, or failures by the
Company to act, unless, in the case of any act or failure to act described in
paragraphs (i) or (ii) below, such act or failure to act is corrected prior to
the Date of Termination specified in the Notice of Termination given in respect
thereof:

          (i) the assignment to the Executive of any duties inconsistent with
the Executive's status as an executive officer of the Company or a substantial
alteration in the nature or status of the Executive's responsibilities
consistent with the title set forth in Section 4, unless the Executive has
indicated to the Company his intention to terminate his employment prior to the
end of the Term, and such assignment or alteration is made by the Board in good
faith in order to facilitate a transition to successor management;

          (ii) any material breach of any provision of this Agreement by the
Company;

          (iii) the relocation of the Executive's principal place of employment
to a location more than 250 miles from the Executive's principal place of
employment (unless such relocation is closer to the Executive's principal
residence) or the Company's requiring the Executive to be based anywhere other
than such principal place of employment (or permitted relocation thereof) except
for required travel on the Company's business to an extent substantially
consistent with the Executive's present business travel obligations;

          (iv) a reduction by the Company in the Executive's Base Salary as in
effect on the date hereof or as the same may be increased from time to time
except for across-the-board salary

                                       16
<PAGE>

reductions similarly affecting all senior officers of the Company and all senior
officers of any person in control of the Company; or

          (v) the failure by the Company to continue in effect any employee
benefit plan or incentive compensation plan in which the Executive currently
participates which is material to the Executive's total compensation, unless
such plan or arrangement has been replaced by a new plan on a basis not
materially less favorable, both in terms of the amount or timing of payment of
benefits provided and the level of the Executive's participation relative to
other participants.

          The Executive's right to terminate the Executive's employment for Good
Reason shall not be affected by the Executive's incapacity due to physical or
mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.

     (k) "Gross-Up Payment" shall have the meaning stated in Section 7.6(a)
hereof.

     (l) "Notice of Termination" shall have the meaning stated in Section 8.1
hereof.

     (m) "Severance Payments" shall mean those payments described in Section 7.2
and 7.3 hereof.

     (n) "Term" shall have the meaning stated in Section 3 hereof.

                                       17
<PAGE>

     IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first above written.

                       ARMSTRONG HOLDINGS, INC.

                       By:
                                ---------------------------
                                Name:  Douglas L. Boles
                                Title: Executive Vice President, Human Resources

                       The undersigned, Armstrong World Industries, Inc., agrees
                       to be jointly and severally bound by the terms of this
                       Agreement, including specifically with respect to the
                       obligations of the Company hereunder.

                       ARMSTRONG WORLD INDUSTRIES, INC.

                       By:
                                ---------------------------
                                Name:  Douglas L. Boles
                                Title: Executive Vice President, Human Resources

                       EXECUTIVE

                       ---------------------------------
                       Michael D. Lockhart

                                       18
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT
<TEXT>

<PAGE>

                                                                   EXHIBIT 10(b)

                              EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT is made as of August 7, 2000 (the "Agreement"),
by and among Armstrong Holdings, Inc., a Pennsylvania corporation (the
"Company"), and Frank A. Riddick III, an individual and resident of Lancaster
County, Pennsylvania (the "Executive");

                                   WITNESSETH:

     WHEREAS, the Executive is currently serving as the Chief Operating Officer
of the Company; and

     WHEREAS, the Company desires to provide for the continued employment of the
Executive and the Executive desires to serve the Company, in each case, on the
terms and conditions set forth herein;

     NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:

1.   DEFINED TERMS.
     -------------

     The definitions of capitalized terms used in this Agreement, unless
otherwise defined herein, are provided in the last Section hereof.

2.   EMPLOYMENT.
     ----------

     The Company hereby agrees to employ the Executive, and the Executive hereby
agrees to serve the Company and its subsidiaries and affiliates, on the terms
and conditions set forth herein, during the Term of this Agreement.

3.   TERM OF AGREEMENT.
     -----------------

     The Term will commence on the date first above written (the "Effective
Date") and shall continue until the third anniversary of the Effective Date
Time; provided, that commencing on the second anniversary of the Effective Date
and on each succeeding anniversary thereafter, the Term of this Agreement shall
automatically be extended for one (1) additional year unless the Company or the
Executive shall have given written notice to the other at least 180 days prior
to any such anniversary date to the effect that the Term of this Agreement shall
not be extended. Notwithstanding anything in this Agreement to the contrary, the
Company may terminate this Agreement in the event of Executive's Disability;
provided, that any such termination shall not, by itself, terminate the
Executive's employment with the Company.

                                       1
<PAGE>

4.   POSITION AND DUTIES.
     -------------------

     During the Term of this Agreement, the Executive shall serve as President
and Chief Operating Officer of the Company and shall also serve in any other
executive officer position of the Company or its subsidiaries and affiliates as
the Board may reasonably request. The Executive shall be the chief operating
officer of the Company and shall have such duties and responsibilities as are
customary for the Executive's position and such other duties not inconsistent
therewith as the Board of Directors may reasonably assign from time to time.
During the Term of this Agreement, excluding any periods of vacation and sick
leave to which the Executive is entitled under the Company's policies and
practices (as the same may be increased in the future), the Executive shall
devote substantially all his working time and efforts to the business and
affairs of the Company and its subsidiaries and affiliates and shall diligently
and faithfully perform his duties to the best of his ability; provided, however,
that the Executive may engage in activities relating to personal matters
(including personal financial matters) and in such corporate, industry, civic
and charitable activities, including membership on corporate and charitable
boards of directors or trustees of non-affiliated companies and organizations,
so long as such service does not substantially interfere with the performance of
his duties hereunder or violate his obligations under Section 10 hereof.

5.   COMPENSATION AND RELATED MATTERS.
     --------------------------------

     5.1 HIRING COMPENSATION. On the Effective Date, the Company shall grant the
         -------------------
Executive 50,000 shares of restricted Common Stock under the Company's Stock
Award Plan, which shares of restricted Common Stock shall vest and shall become
free of restrictions in equal annual installments on the first, second and third
anniversary of the Effective Date. The Executive shall have the opportunity to
make a voluntary deferral election prior to the lapse of the restrictions on
such Common Stock.

     5.2 BASE SALARY. The Company shall pay, or cause to be paid, to the
         -----------
Executive an annual base salary ("Base Salary") during the Term of this
Agreement, which shall be at an initial rate of not less than $600,000 per year.
The Base Salary shall be paid in accordance with the Company's payroll practices
for its senior officers, but not less frequently than monthly, in arrears. For
purposes of this Agreement, "Base Salary" shall include any increases in Base
Salary during the Term of this Agreement. The Base Salary in effect from time to
time shall not be decreased during the Term of this Agreement except in
connection with across-the-board salary reductions similarly affecting all
senior officers of the Company and all senior officers of any person in control
of the Company which have been agreed to by the Executive. Compensation of the
Executive by Base Salary payments shall not be deemed exclusive and shall not
prevent the Executive from participating in any other compensation or benefit
plan of the Company. The Base Salary payments (including any increased Base
Salary payments) shall not in any way limit or reduce any other obligation of
the Company hereunder, and no other compensation, benefit or payment hereunder
shall in any way limit or reduce the obligation of the Company to pay the
Executive's Base Salary.

                                       2
<PAGE>

     5.3 BENEFIT PLANS. During the Term, the Executive and his eligible
         -------------
dependents shall be entitled to participate in and receive benefits under all
"employee benefit plans" (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended from time to time ("ERISA")), and
employee benefit arrangements in which senior officers of the Company generally
participate, including without limitation, (i) all savings, deferred
compensation, profit sharing and retirement plans, practices, policies and
programs and (ii) all welfare benefit plans, practices, policies and programs
(including all medical, prescription, dental, disability, employee life
insurance, group life insurance, group hospitalization, health, accidental death
and travel accident insurance plans and programs) as are made generally
available to senior officers of the Company, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans,
practices, policies and programs, including provisions which permit such plans,
practices, policies and programs to be modified or terminated, provided, that if
the Company reduces the benefits provided under or terminates any such employee
benefit plan, practice, policy or program in which the Executive participates,
the Company shall offer to the Executive participation in another plan or
program that provides the Executive with benefits at least comparable to those
that were reduced or eliminated. The Executive's participation in such employee
benefit plans, practices, policies and programs shall be at a level appropriate
for the Executive's position. Such employee benefit plans, practices, policies
and programs, shall include, without limitation, the plans, programs, policies
and practices in which the Executive participates on the date of this Agreement.

     5.4 INCENTIVE COMPENSATION. During the Term of this Agreement, the
         ----------------------
Executive shall be entitled to participate in and receive benefits under all
annual incentive (bonus) plans and long-term incentive compensation plans in
which other senior officers of the Company generally participate, including all
restricted share, performance restricted share and stock option plans of the
Company. The Executive's participation in such incentive plans shall be at a
level appropriate for the Executive's position. Without limiting the generality
of the foregoing, the Company shall provide the Executive with an annual
incentive opportunity, as a percentage of the Executive's Base Salary at target
performance levels, that is not less than the opportunity provided to the
Executive on the date of this Agreement, which levels shall be reasonable and
shall be adjusted for extraordinary events. Such incentive compensation shall be
subject to and on a basis consistent with the terms, conditions and overall
administration of such plans, including provisions which permit such plans to be
modified or terminated, provided, that if the Company reduces the incentive
compensation opportunities provided under or terminates any such plan in which
the Executive participates, the Company shall offer to the Executive
participation in another plan that provides the Executive with an incentive
compensation opportunity at least comparable to that which was reduced or
eliminated. Such incentive compensation plans shall include, without limitation,
the plans in which the Executive participates on the date of this Agreement.

     5.5 OTHER BENEFITS. The Executive shall participate on the same terms and
         --------------
conditions as all other senior officers of the Company in all other benefit
plans, programs, or arrangements as may be now or hereafter sponsored or
maintained for senior officers of the Company generally and shall participate on
the same terms and conditions as other senior officers generally participate.

                                       3
<PAGE>

     5.6 FRINGE BENEFITS. During the Term of this Agreement, the Executive shall
         ---------------
be entitled to receive all perquisites and fringe benefits which the Company
makes available to senior officers of the Company generally, including, but not
limited to, all perquisites and fringe benefits provided to the Executive on the
date of this Agreement.

     5.7 EXPENSES. During the Term of this Agreement, the Executive is
         --------
authorized to incur, and shall be reimbursed by the Company for all reasonable
and customary business-related expenses, including travel, entertainment, gifts
and similar items, incurred by the Executive in connection with his employment
hereunder.

     5.8 WORKING FACILITIES. During the Term of this Agreement, the Company
         ------------------
shall furnish the Executive with offices and working facilities in the Company's
principal executive offices and shall provide secretarial and other assistance
suitable to Executive's position and adequate for the performance of his duties
hereunder.

     5.9 VACATION. During the Term of this Agreement, the Executive shall be
         --------
entitled to vacation in accordance with the Company's current policies and
practices, provided that the Executive shall be entitled to not less than five
(5) weeks of vacation during each year of this Agreement, or such greater period
as the Board shall approve, without reduction in salary or other benefits.

     5.10 ANNUAL REVIEW. During the Term of this Agreement, the Board (or the
          -------------
compensation committee of the Board) shall in good faith review the Executive's
total compensation package (including but not limited to the Base Salary
provided for in Section 5.2, the benefit plans provided for in Section 5.3 and
the short and long-term incentive compensation opportunity provided for in
Section 5.4) at least annually for possible increase, taking into account, among
other things, (i) the performance of the Executive, (ii) the performance of the
Company, and (iii) the overall compensation of executives in similar positions
at comparable companies.

6.   COMPENSATION IN THE EVENT OF EXECUTIVE'S DISABILITY.
     ---------------------------------------------------

     During the Term of this Agreement, during any period that the Executive
fails to perform the Executive's full-time duties hereunder as a result of
incapacity due to physical or mental illness, the Company shall pay, or cause to
be paid, to the Executive his Base Salary at the rate in effect at the
commencement of any such period, together with all compensation and benefits
payable to the Executive under the terms of any compensation or benefit plan,
program or arrangement maintained by the Company for the benefit of the
Executive during such period, until this Agreement is terminated by the Company
for Disability; provided, however, that such payments shall be reduced by the
sum of the amounts, if any, payable to the Executive at or prior to the time of
any such payment under disability benefit plans of the Company, which amounts
were not previously applied to reduce any such payment.

7.   TERMINATION COMPENSATION AND BENEFITS.
     -------------------------------------

                                       4
<PAGE>

     7.1 If the Executive's employment is terminated for any reason during the
Term of this Agreement, the Company shall pay to the Executive (or in accordance
with Section 11.2 in the event of the Executive's death), (i) the Executive's
Base Salary through the Date of Termination at the rate in effect immediately
prior to the time the Notice of Termination is given, (ii) all compensation and
benefits (other than severance compensation and benefits) payable to the
Executive through the Date of Termination or thereafter under the terms of any
compensation or benefit plan, program or arrangement maintained by the Company
during such period, including any short-term or long-term incentive compensation
to which the Executive is entitled, by virtue of previous awards, in accordance
with the terms of the long-term incentive plans in which Executive participates,
and (iii) any unreimbursed expenses payable pursuant to Section 5.7 of the
Agreement that were incurred before the Date of Termination.

     7.2 (a) In the event the Executive's employment is terminated during the
Term of this Agreement by the Executive for Good Reason or by the Company for
any reason other than Cause, death of the Executive or Disability, (i) the
Company shall pay the Executive, in addition to amounts payable under Sections
7.1 and 7.3, a lump sum cash payment to be made within thirty (30) days after
the Date of Termination equal to three times (the "Multiplier") the sum of (x)
the higher of the Base Salary in effect immediately prior to the occurrence of
the event or circumstance upon which the Notice of Termination is based or the
Base Salary in effect immediately prior to the date of the Notice of
Termination, and (y) the highest of the annual bonus that may be earned by the
Executive if target performance levels are achieved in the year in which the
Date of Termination occurs or the highest annual bonus earned by the Executive
in respect of the three (3) years immediately preceding the year in which the
Date of Termination occurs, in any case, pursuant to any annual incentive
(bonus) plan maintained by the Company, (ii) the restricted Common Stock awarded
to the Executive pursuant to Section 5.1 shall vest and shall become free of
restrictions upon the Date of Termination and (iii) the Company shall continue
the benefits provided for in Section 5.3 of this Agreement for thirty-six (36)
additional months after the Date of Termination. The payments provided for in
this Section 7.2(a) shall be in lieu of any severance compensation to which the
Executive would otherwise be entitled under any severance plan or policy
applicable to the Executive.

         (b) In the event that the Company gives notice to the Executive in
accordance with Section 3 of the Agreement that this Agreement shall not be
extended and will terminate at the end of the then current Term, then (i) the
Company shall, within thirty (30) days after the end of the Term, pay the
Executive a lump sum cash payment in an amount determined in accordance with
Section 7.2(a)(i) except that the Multiplier shall be one and one-half (1-1/2)
instead of three (3), (ii) the restricted Common Stock awarded to the Executive
pursuant to Section 5.1 shall vest and shall become free of restrictions at the
end of the Term, and (iii) the Company shall continue the benefits provided for
in Section 5.3 of this Agreement for eighteen (18) additional months after the
end of the Term. The payments provided for in this Section 7.2(b) shall be in
lieu of any severance compensation to which the Executive would otherwise be
entitled under any severance plan or policy applicable to the Executive.

     7.3 If the Executive's employment is terminated for any reason during the
Term of this Agreement, the Company shall pay the Executive's normal
post-termination compensation

                                       5
<PAGE>

and benefits (other than severance compensation and benefits) to the Executive
as such payments become due. Such normal post-termination compensation and
benefits (other than severance compensation and benefits) shall be determined
under, and paid in accordance with the Company's retirement, insurance and other
compensation or benefit plans, programs and arrangements (other than this
Agreement), as applicable.

     7.4 (a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment, benefit, or distribution by the
Company or its affiliates to or for the benefit of the Executive, whether paid
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed
by Section 4999 of the Code, or any interest or penalties with respect to such
excise tax (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then the Executive
shall be entitled to receive an additional payment ("Gross-Up Payment") in an
amount such that after payment by the Executive of all taxes (including any
interest or penalties imposed with respect to such taxes), including, without
limitation, any income taxes and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.

         (b) Subject to the provisions of Section 7.4(c) hereof, all
determinations required to be made under this Section 7.4, including whether a
Gross-Up Payment is required and the amount of such Gross-Up Payment and the
assumptions to be used in arriving at such determinations, shall be made by the
Company's principal outside accounting firm (the "Accounting Firm") which shall
provide detailed supporting calculations both to the Board and the Executive
within fifteen (15) business days after the Date of Termination and/or such
earlier date(s) as may be requested by the Company or the Executive (each such
date and the Date of Termination shall be referred to as a "Determination Date"
for purposes of this Section 7.4(b) and Section 7.5 hereof). All fees and
expenses of the Accounting Firm shall be borne solely by the Company. The
initial Gross-Up Payment, if any, as determined pursuant to this Section 7.4(b),
shall be paid by the Company to the Executive within thirty (30) days of the
receipt of the Accounting Firm's determination. If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it shall furnish the
Executive with a written opinion that failure to report the Excise Tax on the
Executive's applicable federal income tax return would not result in the
imposition of a negligence or similar penalty. Any determination by the
Accounting Firm under this Section 7.4(b) shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have been made
by the Company should have been made ("Underpayment") consistent with the
calculations required to be made hereunder. In the event that the Company
exhausts its remedies pursuant to Section 7.4(c) and the Executive thereafter is
required to make a payment of any Excise Tax, the Accounting Firm shall
determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.

         (c) The Executive shall notify the Company in writing of any claim by

                                       6
<PAGE>

the Internal Revenue Service that, if successful, would require the payment by
the Company of an Underpayment. Such notification shall be given as soon as
practicable but no later than ten (10) business days after the Executive is
informed in writing of such claim and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the thirty (30)
day period following the date on which he gives such notice to the Company (or
such shorter period ending on the date that any payment of taxes with respect to
such claim is due). If the Company notifies the Executive in writing prior to
the expiration of such period that it desires to contest such claim, the
Executive shall:

          (i) give the Company any information reasonably requested by the
Company relating to such claim;

          (ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company;

          (iii) cooperate with the Company in good faith in order to effectively
contest such claim; and

          (iv) permit the Company to participate in any proceeding relating to
such claim; provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax, including
interest and penalties with respect thereto, imposed as a result of such
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 7.4(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and the Executive agrees
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that if the Company directs the
Executive to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to the Executive on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax, including interest or penalties with respect thereto,
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and provided, further, that any extension of the
statute of limitations relating to payment of taxes for the taxable year of the
Executive with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.

                                       7
<PAGE>

          (d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 7.4(c) hereof, the Executive becomes entitled to
receive any refund with respect to such claim, the Executive shall (subject to
the Company's compliance with the requirements of Section 7.4(c) hereof)
promptly pay to the Company the amount of such refund (together with any
interest paid or credited thereon after taxes applicable thereto). If, after the
receipt by the Executive of an amount advanced by the Company pursuant to
Section 7.4(c) hereof, a determination is made that the Executive shall not be
entitled to any refund with respect to such claim and the Company does not
notify the Executive in writing of its intent to contest such denial of refund
prior to the expiration of thirty (30) days after such determination, then such
advance shall be forgiven and shall not be required to be repaid.

     7.5 The payments provided for in Section 7.4 hereof (other than Section
7.4(c) and (d)) shall be made not later than the thirtieth (30th) day following
each Determination Date; provided, however, that if the amounts of such payments
cannot be finally determined on or before such day, the Company shall pay to the
Executive on such day an estimate, as determined by the Executive, of the
minimum amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest at the rate
provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can
be determined but in no event later than the forty-fifth (45th) day after each
Determination Date. In the event that the amount of the estimated payments
exceeds the amount subsequently determined to have been due, such excess shall
constitute a loan by the Company to the Executive, payable on the fifth (5th)
business day after demand by the Company (together with interest at the rate
provided in Section 1274(b)(2)(B) of the Code).

8.   TERMINATION PROCEDURES.
     ----------------------

     8.1 NOTICE OF TERMINATION. During the Term of this Agreement, any purported
         ---------------------
termination of the Executive's employment (other than by reason of death) shall
be communicated by written Notice of Termination from one party hereto to the
other party hereto in accordance with Section 12 hereof. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and, in the
case of a termination by the Company for Cause or by the Executive for Good
Reason, shall set forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive's employment under the
provision so indicated. Further, a Notice of Termination for Cause is required
to include a copy of a resolution duly adopted by the affirmative vote of not
less than three-quarters (3/4) of the entire membership of the Board at a
meeting of the Board which was called and held for the purpose of considering
such termination (after reasonable notice to the Executive and an opportunity
for the Executive, together with the Executive's counsel, to be heard before the
Board) finding that, in the good faith opinion of the Board, the Executive was
guilty of conduct set forth in the definition of Cause herein, and specifying
the particulars thereof in detail.

     8.2 DATE OF TERMINATION. "Date of Termination," with respect to any
         -------------------
purported termination of the Executive's employment during the Term of this
Agreement, shall

                                       8
<PAGE>

mean (i) if the Executive's employment is terminated by his death, the date of
his death, (ii) if the Executive's employment is terminated by the Executive
other than for Good Reason, the date specified in the Notice of Termination
(which shall not be less than one hundred eighty (180) days) after such Notice
of Termination is given, (iii) if the Executive's employment is terminated by
the Company for Cause, on the date that the Notice of Termination is sent by the
Board in accordance with Section 8.1, and (iv) if the Executive's employment is
terminated for any other reason, the date specified in the Notice of Termination
(which shall not be less than sixty (60) days) after such Notice of Termination
is given.

9.   NO MITIGATION.
     -------------

     The Company agrees that, if the Executive's employment hereunder is
terminated during the Term of this Agreement, the Executive is not required to
seek other employment or to attempt in any way to reduce any amounts payable to
the Executive by the Company hereunder. Further, the amount of any payment or
benefit provided for hereunder (other than pursuant to Section 7.4(d) hereof)
shall not be reduced by any compensation earned by the Executive as the result
of employment by another employer, by retirement benefits, by offset against any
amount claimed to be owed by the Executive to the Company, or otherwise.

10.  CONFIDENTIALITY AND NONCOMPETITION.
     ----------------------------------

     10.1 The Executive shall not, during or after the Term of this Agreement,
without the prior written consent of the Company disclose to any entity or
person any information which is treated as confidential by the Company or any of
their subsidiaries or affiliates (each, a "Company Entity"), and is not
generally known or available in to the public, provided, that the Executive may
make disclosures of such confidential information (i) during the Term of this
Agreement in the course of and to the extent required by and consistent with the
performance of his duties hereunder, and (ii) to the extent required by law or
legal process.

     10.2 Except as permitted by the Company with its prior written consent, the
Executive shall not, during the Executive's employment with the Company and for
the period ending twenty-four (24) months after the Executive's employment with
the Company terminates for any reason, directly or indirectly, own, enter into
the employ of or render, any services (whether as a consultant or otherwise) to
any person, firm or corporation within the United States or any foreign country
in which the Company is doing or is contemplating doing business on the Date of
Termination which is a competitor of any Company Entity with respect to products
which any Company Entity is then producing or services which any Company Entity
is then providing (a "Competitor"), or approach, canvass, solicit, or otherwise
endeavor to entice away from the Company, any customer in respect of any service
or product in any way competitive with the services or products supplied by any
Company Entity to such customer, or solicit the services of, or endeavor to
entice away from the Company, any director, executive officer or employee of the
Company; provided, that it shall not be a violation of this provision for the
Executive to be employed by, or render services to, a Competitor, if the
Executive renders those services only with respect to those lines of business of
the Competitor which are not directly competitive with

                                       9
<PAGE>

a line of business of any Company Entity or are located in any country in which
the Company does not do business and was not contemplating doing business on the
Date of Termination.

     10.3 The Executive acknowledges and agrees that any breach of this Section
10 by the Executive will result in immediate and irreparable harm to the
Company, the amount of which will be extremely difficult to ascertain, and that
the Buyer could not be reasonably or adequately compensated by damages in an
action at law. For these reasons, the Company shall have the right to obtain
such preliminary, temporary or permanent mandatory or restraining injunctions,
orders or decrees as may be necessary to protect the Company against or on
account of any breach by the Executive of the provisions of this Section 10
without proof of any actual damage caused to the Company.

11.  SUCCESSORS; BINDING AGREEMENT.
     -----------------------------

     11.1 In addition to any obligations imposed by law upon any successor to
the Company, the Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company, as the case may be, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
upon the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from the Company in
the same amount and on the same terms as the Executive would be entitled to
hereunder if the Executive were to terminate the Executive's employment for Good
Reason, except that, for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the Date of
Termination.

     11.2 This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive shall
die while any amount would still be payable to the Executive hereunder (other
than amounts which, by their terms, terminate upon the death of the Executive)
if the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate.

12.  NOTICES.
     -------

     For the purpose of this Agreement, notices and all other communications
provided for in the Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by United States registered mail,
return receipt requested, postage prepaid, addressed to the respective
addressees set forth below, or to such other address as either party may have
furnished to the other in writing in accordance herewith, except that notice of
change of address shall be effective only upon actual receipt:

     To the Company:

                                       10
<PAGE>

     Armstrong World Industries, Inc.
     2500 Columbia Avenue
     Lancaster, PA 17603
     Attention:  Executive Vice President, Human Resources
     Telecopy:  717-396-6119

     To the Executive:

     At the Executive's residence address as maintained by the Company in the
regular course of its business for payroll purposes.

13.  MISCELLANEOUS.
     -------------

     If the Executive, in his capacity as an officer, approves in writing, or if
the Executive is elected as a director, if the Executive, in his capacity as a
director, votes for any action that will adversely affect the Executive's rights
under this Agreement, such vote or approval shall be deemed to constitute the
Executive's consent to such action under this Agreement; otherwise, no provision
of this Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed by the Executive
and such officers as may be specifically designated by the Board. No waiver by
any party hereto at any time of any breach by any other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by any party which are not expressly set
forth in this Agreement. This Agreement sets forth the entire agreement of the
parties hereto in respect of the subject matter contained herein and supersedes
all prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any officer, employee
or representative of any party hereto; and any prior agreement of the parties
hereto in respect of the subject matter contained herein is hereby terminated
and canceled, except as otherwise provided in this Agreement. Nothing in this
Section 13 shall affect the Executive's rights under the Change in Control
Agreement or the Indemnification Agreement between the Company and the
Executive. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the Commonwealth of Pennsylvania,
without giving effect to choice of law principles.

     All references to sections of the Code shall be deemed also to refer to any
successor provisions to such sections. There shall be withheld from any payments
provided for hereunder any amounts required to be withheld under federal, state
or local law and any additional withholding amounts to which the Executive has
agreed. The obligations under this Agreement of the Company or the Executive
which by their nature and terms require satisfaction after the end of the Term
shall survive such event and shall remain binding upon such party.

14.  VALIDITY.
     --------

                                       11
<PAGE>

     The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.

15.  COUNTERPARTS.
     ------------

     This Agreement may be executed in several counterparts, each of which shall
be deemed to be an original but all of which together will constitute one and
the same instrument.

16.  SETTLEMENT OF DISPUTES; ARBITRATION.
     -----------------------------------

     All claims by the Executive for benefits under this Agreement shall be in
writing and shall be directed to and initially determined by the Board. Any
denial by the Board of a claim for benefits under this Agreement shall be
delivered to the Executive in writing and shall set forth the specific reasons
for the denial and the specific provisions of this Agreement relied upon. The
Board shall afford a reasonable opportunity to the Executive for a review of the
decision denying a claim and shall further allow the Executive to appeal to the
Board a decision of the Board within sixty (60) days after notification by the
Board that the Executive's claim has been denied. To the extent permitted by
applicable law and subject to the right of the Company to seek equitable relief
in a court pursuant to Section 10.3, any further dispute or controversy arising
under or in connection with this Agreement shall be settled exclusively by
arbitration in Allegheny County, Pennsylvania, in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then in effect.
Judgment may be entered on the arbitrator's award in any court having
jurisdiction.

17.  FEES AND EXPENSES.
     -----------------

     The Company shall pay to the Executive all reasonable legal fees and
expenses incurred by the Executive in disputing any termination or in seeking in
good faith to obtain or enforce any benefit or right provided by this Agreement
or in connection with any tax audit or proceeding to the extent attributable to
the application of Section 4999 of the Code to any payment or benefit provided
hereunder; provided, however, the Company shall not be required to pay to the
Executive legal fees and expenses to the extent such legal fees and expenses
were incurred in connection with a contest controlled by the Company pursuant to
Section 7.4(c) hereof in connection with which the Company complied with its
obligations under said Section 7.4(d). Such payments shall be made within thirty
(30) business days after delivery of the Executive's written request for payment
accompanied with such evidence of fees and expenses incurred as the Company
reasonably may require.

18.  COORDINATION OF BENEFITS.
     ------------------------

     Notwithstanding anything in this Agreement to the contrary, if the
Executive is paid "Severance Payments" under that certain Agreement dated
between the Company and the Executive in connection with a Change in Control (as
defined therein), then this Agreement (including Section 10.2 hereof) shall
forthwith terminate and the Executive shall not be entitled

                                       12
<PAGE>

to the payment of any amounts under this Agreement other than pursuant to
Section 7.1 hereof (and any amounts theretofore paid to the Executive pursuant
to Section 7.2, hereof shall be credited against any "Severance Payments" to
which the Executive is entitled under said Change in Control Agreement).

19.  DEFINITIONS.
     -----------

     For purposes of this Agreement, the following terms shall have the meaning
indicated below:

     (a) "Base Salary" shall have the meaning stated in Section 5.2 hereof.

     (b) "Board" shall mean the Board of Directors of the Company.

     (c) "Cause" for termination by the Company of the Executive's employment,
for purposes of this Agreement, shall mean (i) the willful and continued failure
by the Executive to substantially perform the Executive's duties hereunder
(other than any such failure resulting from the Executive's incapacity due to
physical or mental illness or any such actual or anticipated failure after the
issuance of a Notice of Termination for Good Reason by the Executive pursuant to
Section 8.1) after a written demand for substantial performance is delivered to
the Executive by the Board, which demand specifically identifies the manner in
which the Board believes that the Executive has not substantially performed the
Executive's duties, or (ii) the willful engaging by the Executive in conduct
which is demonstrably and materially injurious to the Company, monetarily or
otherwise, including but not limited to fraud or embezzlement by the Executive,
or (iii) the Executive's conviction (or entering into a plea bargain admitting
guilt) of any felony, or (iv) a material breach by the Executive of this
Agreement, including a violation of Section 10. For purposes of clauses (i) and
(ii) of this definition, no act, or failure to act, on the Executive's part
shall be deemed "willful" unless done, or omitted to be done, by the Executive
not in good faith and without reasonable belief that the Executive's act, or
failure to act, was in the best interest of the Company.

     (d) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.

     (e) "Date of Termination" shall have the meaning stated in Section 8.2
hereof.

     (f) "Disability" shall be deemed the reason for the termination of this
Agreement by the Company, if, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from the
full-time performance of the Executive's duties hereunder for a period of six
(6) consecutive months.

     (g) "Excise Tax" shall have the meaning stated in Section 7.4(a) hereof.

     (h) "Executive" shall mean the individual named in the first paragraph of
this Agreement.

                                       13
<PAGE>

     (i) "Good Reason" for termination by the Executive of the Executive's
employment shall mean the occurrence (without the Executive's express written
consent), of any one of the following acts by the Company, or failures by the
Company to act, unless, in the case of any act or failure to act described in
paragraphs (i) or (ii) below, such act or failure to act is corrected prior to
the Date of Termination specified in the Notice of Termination given in respect
thereof:

          (i) the assignment to the Executive of any duties inconsistent with
the Executive's status as an executive officer of the Company or a substantial
alteration in the nature or status of the Executive's responsibilities
consistent with the title set forth in Section 4, unless the Executive has
indicated to the Company his intention to terminate his employment prior to the
end of the Term, and such assignment or alteration is made by the Board in good
faith in order to facilitate a transition to successor management;

          (ii) any material breach of any provision of this Agreement by the
Company;

          (iii) the relocation of the Executive's principal place of employment
to a location more than 250 miles from the Executive's principal place of
employment (unless such relocation is closer to the Executive's principal
residence) or the Company's requiring the Executive to be based anywhere other
than such principal place of employment (or permitted relocation thereof) except
for required travel on the Company's business to an extent substantially
consistent with the Executive's present business travel obligations;

          (iv) a reduction by the Company in the Executive's Base Salary as in
effect on the date hereof or as the same may be increased from time to time
except for across-the-board salary reductions similarly affecting all senior
officers of the Company and all senior officers of any person in control of the
Company; or

          (v) the failure by the Company to continue in effect any employee
benefit plan or incentive compensation plan in which the Executive currently
participates which is material to the Executive's total compensation, unless
such plan or arrangement has been replaced by a new plan on a basis not
materially less favorable, both in terms of the amount or timing of payment of
benefits provided and the level of the Executive's participation relative to
other participants.

          The Executive's right to terminate the Executive's employment for Good
Reason shall not be affected by the Executive's incapacity due to physical or
mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.

     (j) "Gross-Up Payment" shall have the meaning stated in Section 7.4(a)
hereof.

     (k) "Notice of Termination" shall have the meaning stated in Section 8.1
hereof.

     (l) "Severance Payments" shall mean those payments described in Section 7.2
hereof.

     (m) "Term" shall have the meaning stated in Section 3 hereof.

                                       14
<PAGE>

     IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first above written.

                       ARMSTRONG HOLDINGS, INC.

                       By:      ___________________________
                                Name:  Douglas L. Boles
                                Title: Executive Vice President, Human Resources

                       The undersigned, Armstrong World Industries, Inc., agrees
                       to be jointly and several bound by the terms of this
                       Agreement, including specifically with respect to the
                       obligations of the Company hereunder.

                       ARMSTRONG WORLD INDUSTRIES, INC.

                       By:      ___________________________
                                Name:  Douglas L. Boles
                                Title: Executive Vice President, Human Resources

                       EXECUTIVE

                       ---------------------------------
                       Frank A. Riddick III

                                       15
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>5
<FILENAME>0005.txt
<DESCRIPTION>AMENDED AND RESTATED EMPLOYMENT & CONSULTING AGR.
<TEXT>

<PAGE>

                                                                   EXHIBIT 10(c)

                              AMENDED AND RESTATED
                       EMPLOYMENT AND CONSULTING AGREEMENT

     THIS AMENDED AND RESTATED EMPLOYMENT AND CONSULTING AGREEMENT is made as of
August 7, 2000 (the "Agreement") among ARMSTRONG HOLDINGS, INC., a Pennsylvania
corporation (the "Company"), ARMSTRONG WORLD INDUSTRIES, INC., a Pennsylvania
corporation and an indirect wholly-owned subsidiary of the Company
("Armstrong"), and GEORGE A. LORCH, an individual and resident of Lancaster
County, Pennsylvania (the "Executive"); WITNESSETH:

     WHEREAS, the Executive, Armstrong and the Company are parties to an
Employment Agreement dated December 13, 1999, as amended (the "Original
Agreement"), pursuant to which the Executive serves as Chairman of the Board,
President and Chief Executive Officer of the Company; and

     WHEREAS, the Executive and the Company desire to implement the transition
to successor management of the Company that was begun in January 2000, and to
that end they desire to amend and restate the Original Agreement its entirety to
provide for (i) the continued employment of the Executive in a non-executive
capacity, and (ii) a period after the termination of Executive's employment
during which he will provide consulting services.

     NOW THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:

1.   DEFINED TERMS.
     -------------

     The definitions of capitalized terms used in this Agreement, unless
otherwise defined herein, are provided in the last Section hereof.

2.   EMPLOYMENT AND CONSULTING ENGAGEMENT.
     ------------------------------------

     The Company hereby agrees to employ the Executive and to thereafter engage
the Executive as a consultant, and the Executive hereby agrees to serve the
Company and its subsidiaries and affiliates, on the terms and conditions set
forth herein, during the Term of this Agreement.

3.   TERM OF AGREEMENT.
     -----------------

     The Term will commence on the date first above written (the "Effective
Date") and shall continue until January 31, 2003. Notwithstanding anything in
this Agreement to the contrary, the Company may terminate this Agreement in the
event of Executive's Disability; provided, that any such termination shall not,
by itself, terminate the Executive's employment or consulting engagement with
the Company.

4.   POSITION AND DUTIES.
     -------------------


<PAGE>

     (a) Effective at the close of business on the Effective Date, which shall
be the effective date of the appointment by the Board of Directors of a Chairman
of the Board and Chief Executive Officer of the Company to succeed the
Executive, the Executive agrees to resign as Chairman of the Board, President
and Chief Executive Officer of the Company and as a director and officer of its
subsidiaries and affiliates, and such resignations shall be effective without
any further action by the Executive.

     (b) From the Effective Date until January 31, 2001 (the "Initial Period"),
the Company agrees to employ the Executive with the title Advisor to the
Chairman of the Board and Chief Executive Officer. In that capacity, the
Executive shall assist the new Chairman of the Board and Chief Executive Officer
of the Company with the transition to his office and to that end the Executive
will (i) advise the new Chairman of the Board and Chief Executive Officer on
issues and other matters affecting the Company, (ii) introduce the new Chairman
of the Board and Chief Executive Officer to customers and suppliers of the
Company, and (iii) perform such other duties, which duties shall not be
inconsistent with the foregoing, and have such other responsibilities as the new
Chairman of the Board and Chief Executive Officer of the Company or the Board of
Directors shall prescribe. During the Initial Period, the Executive shall devote
his full professional time and attention to the duties and responsibilities of
his position; provided, that so long as such activities do not substantially
interfere with the duties the Executive may devote a reasonable amount of time
to (i) service as a director on one or more corporate boards of directors, (ii)
civic and charitable activities, and (iii) personal estate and financial
planning and investment activities. The Executive will retire as an employee of
the Company effective February 1, 2001.

     (c) The Executive will continue to serve as a director of the Company
through the December 2000 meeting of the Board of Directors of the Company,
which is presently scheduled for December 11, 2000. Upon the appointment of his
successor to the office of Chairman of the Board of the Company, the Executive
shall have the title Chairman Emeritus of the Board of Directors of the Company.

     (d) From February 1, 2001 until January 31, 2003, the Company agrees to
engage the Executive as a consultant and the Executive agrees to serve the
Company in a consulting capacity (the "Consulting Period"). In that capacity,
the Executive shall make himself available to the Company upon the Company's
reasonable request at such times as the Company and the Executive shall mutually
agree to: (i) consult with officers and advisors to the Company regarding issues
and matters affecting the Company, (ii) introduce the new Chairman and Chief
Executive Officer customers and suppliers of the Company and otherwise entertain
customers and suppliers for the Company, and (iii) perform such other functions
as the Company and the Executive shall mutually agree.

5.   COMPENSATION AND RELATED MATTERS.
     --------------------------------

     5.1 BASE SALARY. During the Initial Period, the Company shall pay to the
         -----------
Executive a base salary ("Base Salary") at a rate of $835,000 per year. The Base
Salary shall be paid in accordance with the Company's payroll practices for its
senior officers, but not less frequently than monthly, in arrears. Compensation
of the Executive by Base Salary payments

                                       2
<PAGE>

shall not be deemed exclusive and shall not prevent the Executive from
participating in the incentive compensation and other benefits provided by the
Company as specified herein. The Base Salary payments shall not in any way limit
or reduce any other obligation of the Company hereunder, and no other
compensation, benefit or payment hereunder shall in any way limit or reduce the
obligation of the Company to pay the Executive's Base Salary.

     5.2 INCENTIVE COMPENSATION. For the period through December 31, 2000, the
         ----------------------
Executive shall be entitled to participate in and receive benefits under the
Management Achievement Plan at the level specified for the Executive prior to
the date of this Agreement. Such incentive compensation shall be subject to and
on a basis consistent with the terms, conditions and overall administration of
such plans.

     5.3 OTHER COMPENSATION. Following the Executive's retirement as an employee
         ------------------
and during the Consulting Period, the Company shall pay the Executive cash
compensation as follows: (a) $1.8 million in cash on February 1, 2001, and (b)
$125,000 cash per quarter, payable on February 1, May 1, August 1, and November
1 of each year commencing February 1, 2001 and ending November 1, 2002;
provided, that if during the Consulting Period the Executive is asked by the
Company to perform services for the Company for more than 10 days per quarter,
then, in addition to the foregoing, the Company shall also pay the Executive a
per diem of $1,500 per day for such additional days. These payments shall be in
lieu of any further compensation that would otherwise be due the Executive under
the Original Agreement. The Executive shall not be entitled to any incentive or
other compensation during the Consulting Period.

     5.4 FRINGE BENEFITS. During the Initial Period of this Agreement, and not
         ---------------
thereafter, the Executive shall be entitled to receive all perquisites and
fringe benefits which the Company makes available to senior officers of the
Company generally, including, but not limited to, all perquisites and fringe
benefits provided to the Executive on the date of this Agreement.

     5.5 EXPENSES. During the Term of this Agreement, the Executive shall be
         --------
reimbursed by the Company for all reasonable and customary business-related
expenses, including travel, entertainment, gifts and similar items, incurred by
the Executive in connection with his services hereunder; provided, that the
Company may establish a reasonable policy for the documentation and approval of
such expenses.

     5.6 WORKING FACILITIES. During the Initial Period of this Agreement, and
         ------------------
not thereafter, the Company shall furnish the Executive with offices and working
facilities in the Company's principal executive offices and shall provide
secretarial and other assistance suitable to Executive's position and adequate
for the performance of his duties hereunder. During the Consulting Period, the
Executive shall be responsible for obtaining and maintaining such working
facilities and administrative assistance as are reasonably necessary for the
performance of his duties and responsibilities under this Agreement.

     5.7 VACATION. During the Initial Period of this Agreement, the Executive
         --------
shall be entitled to vacation in accordance with the Company's current policies
and practices, provided that the Executive shall be entitled to not less than
six (6) weeks of vacation during each year, or such greater period as the Board
shall approve, without reduction in salary or other benefits.

                                       3
<PAGE>

6.   COMPENSATION IN THE EVENT OF EXECUTIVE'S DEATH OR DISABILITY.
     ------------------------------------------------------------

     During the Term of this Agreement, during any period that the Executive is
unable to perform the Executive's duties hereunder as a result of incapacity due
to physical or mental illness, the Company shall pay, or cause to be paid, all
amounts payable to the Executive pursuant to this Agreement as they become due.
In the event that the Company terminates this Agreement prior to February 1,
2001 pursuant the last sentence of Section 3 as a result of the Executive's
Disability or the Executive dies prior to February 1, 2001, the Company shall
nevertheless pay to the Executive (or his estate) on February 1, 2001 the cash
amount payable to him on February 1, 2001 pursuant to Section 5.3(a).

7.   TERMINATION COMPENSATION AND BENEFITS.
     -------------------------------------

     7.1 (a) If the Executive's employment or consulting engagement is
terminated by the Company other than for Cause during the Term of this Agreement
or in the event the Executive's employment or consulting engagement is
terminated during the Term of this Agreement by the Executive for Good Reason,
the Company shall pay to the Executive (or in accordance with Section 11.2 in
the event of the Executive's death), (i) all remaining amounts payable to the
Executive under this Agreement through February 1, 2003, in a lump sum payable
within thirty (30) days after the Date of Termination, and (ii) any unreimbursed
expenses payable pursuant to Section 5.5 of the Agreement that were incurred
before the Date of Termination.

         (b) In the event the Executive's employment or consulting engagement
is terminated during the Term of this Agreement by the Company for Cause or by
the Executive other than for Good Reason, the Company shall pay the Executive
any amounts due pursuant to this Agreement as of the Date of Termination and all
other amounts payable to the Executive under this Agreement shall be forfeited.

     7.2 (a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment, benefit, or distribution by the
Company or its affiliates to or for the benefit of the Executive, whether paid
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed
by Section 4999 of the Code, or any interest or penalties with respect to such
excise tax (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then the Executive
shall be entitled to receive an additional payment ("Gross-Up Payment") in an
amount such that after payment by the Executive of all taxes (including any
interest or penalties imposed with respect to such taxes), including, without
limitation, any income taxes and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.

         (b) Subject to the provisions of Section 7.2(c) hereof, all
determinations required to be made under this Section 7.2, including whether a
Gross-Up Payment is required and the amount of such Gross-Up Payment and the
assumptions to be used in arriving at such determinations, shall be made by the
Company's principal outside accounting firm (the "Accounting Firm") which shall
provide detailed supporting calculations both to the Board and

                                       4
<PAGE>

the Executive within fifteen (15) business days after the Date of Termination
and/or such earlier date(s) as may be requested by the Company or the Executive
(each such date and the Date of Termination shall be referred to as a
"Determination Date" for purposes of this Section 7.2(b) and Section 7.3
hereof). All fees and expenses of the Accounting Firm shall be borne solely by
the Company. The initial Gross-Up Payment, if any, as determined pursuant to
this Section 7.2(b), shall be paid by the Company to the Executive within thirty
(30) days of the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by the Executive, it
shall furnish the Executive with a written opinion that failure to report the
Excise Tax on the Executive's applicable federal income tax return would not
result in the imposition of a negligence or similar penalty. Any determination
by the Accounting Firm under this Section 7.2(b) shall be binding upon the
Company and the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made ("Underpayment") consistent
with the calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 7.2(c) and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.

          (c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of an Underpayment. Such notification shall be given as soon as
practicable but no later than ten (10) business days after the Executive is
informed in writing of such claim and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the thirty (30)
day period following the date on which he gives such notice to the Company (or
such shorter period ending on the date that any payment of taxes with respect to
such claim is due). If the Company notifies the Executive in writing prior to
the expiration of such period that it desires to contest such claim, the
Executive shall:

               (i) give the Company any information reasonably requested by the
Company relating to such claim;

               (ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time, including,
without limitation accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company;

               (iii) cooperate with the Company in good faith in order to
effectively contest such claim; and

               (iv) permit the Company to participate in any proceeding relating
to such claim; provided, however, that the Company shall bear and pay directly
all costs and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax, including
interest and penalties with respect thereto, imposed as a result of such

                                       5
<PAGE>

representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 7.2(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and the Executive agrees
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that if the Company directs the
Executive to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to the Executive on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax, including interest or penalties with respect thereto,
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and provided, further, that any extension of the
statute of limitations relating to payment of taxes for the taxable year of the
Executive with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.

          (d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 7.2(c) hereof, the Executive becomes entitled to
receive any refund with respect to such claim, the Executive shall (subject to
the Company's compliance with the requirements of Section 7.2(c) hereof)
promptly pay to the Company the amount of such refund (together with any
interest paid or credited thereon after taxes applicable thereto). If, after the
receipt by the Executive of an amount advanced by the Company pursuant to
Section 7.2(c) hereof, a determination is made that the Executive shall not be
entitled to any refund with respect to such claim and the Company does not
notify the Executive in writing of its intent to contest such denial of refund
prior to the expiration of thirty (30) days after such determination, then such
advance shall be forgiven and shall not be required to be repaid.

     7.3 The payments provided for in Section 7.2 hereof (other than Section
7.2(c) and (d)) shall be made not later than the thirtieth (30th) day following
each Determination Date; provided, however, that if the amounts of such payments
cannot be finally determined on or before such day, the Company shall pay to the
Executive on such day an estimate, as determined by the Executive, of the
minimum amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest at the rate
provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can
be determined but in no event later than the forty-fifth (45th) day after each
Determination Date. In the event that the amount of the estimated payments
exceeds the amount subsequently determined to have been due, such excess shall
constitute a loan by the Company to the Executive, payable on the fifth (5th)
business day after demand by the Company (together with interest at the rate
provided in Section 1274(b)(2)(B) of the Code).

8.   TERMINATION PROCEDURES.
     ----------------------

                                       6
<PAGE>

     8.1 NOTICE OF TERMINATION. During the Term of this Agreement, any purported
         ---------------------
termination of the Executive's employment or consulting engagement by the
Company or the Executive (other than by reason of death) shall be communicated
by written Notice of Termination from one party hereto to the other party hereto
in accordance with Section 13 hereof. For purposes of this Agreement, a "Notice
of Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and, in the case of a
termination by the Company for Cause or by the Executive for Good Reason, shall
set forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment or consulting engagement
under the provision so indicated. Further, a Notice of Termination for Cause is
required to include a copy of a resolution duly adopted by the affirmative vote
of not less than three-quarters (3/4) of the entire membership of the Board at a
meeting of the Board which was called and held for the purpose of considering
such termination (after reasonable notice to the Executive and an opportunity
for the Executive, together with the Executive's counsel, to be heard before the
Board) finding that, in the good faith opinion of the Board, the Executive was
guilty of conduct set forth in the definition of Cause herein, and specifying
the particulars thereof in detail.

     8.2 DATE OF TERMINATION. "Date of Termination," with respect to any
         -------------------
purported termination of the Executive's employment or consulting engagement
during the Term of this Agreement, shall mean (i) if the Executive's employment
or consulting engagement is terminated by his death, the date of his death, (ii)
if the Executive's employment or consulting engagement is terminated by the
Executive other than for Good Reason, the date specified in the Notice of
Termination (which shall not be less than one hundred eighty (180) days) after
such Notice of Termination is given, (iii) if the Executive's employment or
consulting engagement is terminated by the Company for Cause, on the date that
the Notice of Termination is sent by the Board in accordance with Section 8.1,
and (iv) if the Executive's employment or consulting engagement is terminated by
the Company or the Executive for any other reason, the date specified in the
Notice of Termination (which shall not be less than sixty (60) days) after such
Notice of Termination is given.

9.   NO MITIGATION.
     -------------

     The Company agrees that, if the Executive's employment or consulting
engagement hereunder is terminated during the Term of this Agreement, the
Executive is not required to seek other employment or consulting engagements or
to attempt in any way to reduce any amounts payable to the Executive by the
Company hereunder. Further, the amount of any payment or benefit provided for
hereunder (other than pursuant to Section 7.2(d) hereof) shall not be reduced by
any compensation earned by the Executive as the result of employment by another
employer, by retirement benefits, by offset against any amount claimed to be
owed by the Executive to the Company, or otherwise.

10.  CONFIDENTIALITY AND NONCOMPETITION.
     ----------------------------------

     10.1 The Executive shall not, during or after the Term of this Agreement,
without the prior written consent of the Company disclose to any entity or
person any information which is treated as confidential by the Company or any of
their subsidiaries or affiliates (each, a "Company Entity"), and is not
generally known or available in to the public, provided, that the

                                       7
<PAGE>

Executive may make disclosures of such confidential information (i) during the
Initial Period of this Agreement in the course of and to the extent required by
and consistent with the performance of his duties hereunder, and (ii) to the
extent required by law or legal process.

     10.2 Except as permitted by the Company with its prior written consent, the
Executive shall not, during the period ending January 31, 2003, directly or
indirectly, own, enter into the employ of or render any services (whether as a
consultant or otherwise) to any person, firm or corporation within the United
States or any foreign country in which the Company is doing or is at the time
contemplating doing business which is a substantial and direct competitor of any
Company Entity with respect to products which any Company Entity is then
producing or services which any Company Entity is then providing (a
"Competitor"), or approach, canvass, solicit, or otherwise endeavor to entice
away from the Company, any customer in respect of any service or product in any
way competitive with the services or products supplied by any Company Entity to
such customer, or solicit the services of, or endeavor to entice away from the
Company, any director, executive officer or employee of the Company; provided,
that it shall not be a violation of this provision for the Executive to be
employed by, or render services to, a Competitor, if the Executive renders those
services only with respect to those lines of business of the Competitor which
are not directly competitive with a line of business of any Company Entity or
are located in any country in which the Company does not do business and is not
contemplating doing business.

     10.3 The Executive acknowledges and agrees that any breach of this Section
10 by the Executive will result in immediate and irreparable harm to the
Company, the amount of which will be extremely difficult to ascertain, and that
the Company could not be reasonably or adequately compensated by damages in an
action at law. For these reasons, the Company shall have the right to obtain
such preliminary, temporary or permanent mandatory or restraining injunctions,
orders or decrees as may be necessary to protect the Company against or on
account of any breach by the Executive of the provisions of this Section 10
without proof of any actual damage caused to the Company.

11.  SUCCESSORS; BINDING AGREEMENT.
     -----------------------------

     11.1 In addition to any obligations imposed by law upon any successor to
the Company, the Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company, as the case may be, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
upon the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from the Company in
the same amount and on the same terms as the Executive would be entitled to
hereunder if the Executive were to terminate the Executive's employment or
consulting engagement for Good Reason, except that, for purposes of implementing
the foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination.

     11.2 This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees,

                                       8
<PAGE>

devisees and legatees. If the Executive shall die while any amount would still
be payable to the Executive hereunder (other than amounts which, by their terms,
terminate upon the death of the Executive) if the Executive had continued to
live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the executors, personal
representatives or administrators of the Executive's estate.

12.  CHANGE OF CONTROL.
     -----------------

     Notwithstanding anything in this Agreement to the contrary, that certain
Agreement between the Company and the Executive in connection with a Change of
Control (as defined therein) (the "Change in Control Agreement") shall remain in
full force and effect through January 31, 2001 and if the Executive is paid any
benefits under the Change in Control Agreement, then this Agreement (including
Section 10.2 hereof) shall forthwith terminate and the Executive shall not be
entitled to the payment of any amounts under this Agreement (and any amounts
theretofore paid to the Executive pursuant to Section 7.1 hereof shall be
credited against any "Severance Payments" to which the Executive is entitled
under said Change in Control Agreement). After January 31, 2001, the Change of
Control Agreement shall terminate (except that those provisions respecting the
acceleration of benefits under any employee benefit plan of the Company,
including the acceleration of vesting of unvested stock options, which shall
survive for the Term of this Agreement) and, thereafter, upon the occurrence of
a Change of Control, the Company shall pay to the Executive, within thirty (30)
days after the Change of Control, all amounts payable to the Executive pursuant
to this Agreement through February 1, 2003 in a lump sum cash payment.

13.  NOTICES.
     -------

     For the purpose of this Agreement, notices and all other communications
provided for in the Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by United States registered mail,
return receipt requested, postage prepaid, addressed to the respective
addressees set forth below, or to such other address as either party may have
furnished to the other in writing in accordance herewith, except that notice of
change of address shall be effective only upon actual receipt:

     To the Company and Armstrong:

     Armstrong Holdings, Inc.
     2500 Columbia Avenue
     Lancaster, PA 17603
     Attention:  Executive Vice President, Human Resources
     Telecopy:  717-396-6119

     To the Executive:

     At the Executive's residence address as maintained by the Company in the
regular course of its business for payroll purposes.

14.  MISCELLANEOUS.
     -------------

                                       9
<PAGE>

     No agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by any party which are
not expressly set forth in this Agreement, provided that nothing contained
herein shall be interpreted to amend or nullify those obligations of the Company
and the Executive pursuant to the Indemnification Agreement between the Company
and the Executive. This Agreement sets forth the entire agreement of the parties
hereto in respect of the subject matter contained herein and supersedes all
prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any officer, employee
or representative of any party hereto; and any prior agreement of the parties
hereto in respect of the subject matter contained herein is hereby terminated
and canceled, except as otherwise provided in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the Commonwealth of Pennsylvania, without giving effect to choice
of law principles.

     All references to sections of the Code shall be deemed also to refer to any
successor provisions to such sections. There shall be withheld from any payments
provided for hereunder any amounts required to be withheld under federal, state
or local law and any additional withholding amounts to which the Executive has
agreed. The obligations under this Agreement of the Company or the Executive
which by their nature and terms require satisfaction after the end of the Term
shall survive such event and shall remain binding upon such party.

15.  VALIDITY.
     --------

     The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.

16.  COUNTERPARTS.
     ------------

     This Agreement may be executed in several counterparts, each of which shall
be deemed to be an original but all of which together will constitute one and
the same instrument.

17.  SETTLEMENT OF DISPUTES; ARBITRATION.
     -----------------------------------

     All claims by the Executive for payments under this Agreement shall be in
writing and shall be directed to and initially determined by the Board. Any
denial by the Board of a claim for benefits under this Agreement shall be
delivered to the Executive in writing and shall set forth the specific reasons
for the denial and the specific provisions of this Agreement relied upon. The
Board shall afford a reasonable opportunity to the Executive for a review of the
decision denying a claim and shall further allow the Executive to appeal to the
Board a decision of the Board within sixty (60) days after notification by the
Board that the Executive's claim has been denied. To the extent permitted by
applicable law and subject to the right of the Company to seek equitable relief
in a court pursuant to Section 10.3, any further dispute or controversy arising
under or in connection with this Agreement shall be settled exclusively by
arbitration in either Allegheny County or Philadelphia County, Pennsylvania, as
the parties shall mutually agree or, if the parties are unable to agree, in
either such county as the Board of Directors of the Company (or the compensation
committee thereof) shall specify, in accordance with the

                                       10
<PAGE>

Commercial Arbitration Rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.

18.  FEES AND EXPENSES.
     -----------------

     The Company shall pay to the Executive all reasonable legal fees and
expenses incurred by the Executive in disputing any termination or in seeking in
good faith to obtain or enforce any right or benefit provided by this Agreement
or in connection with any tax audit or proceeding to the extent attributable to
the application of Section 4999 of the Code to any payment or benefit provided
hereunder; provided, however, the Company shall not be required to pay to the
Executive legal fees and expenses to the extent such legal fees and expenses
were incurred in connection with a contest controlled by the Company pursuant to
Section 7.2(c) hereof in connection with which the Company complied with its
obligations under said Section 7.2(d). Such payments shall be made within thirty
(30) business days after delivery of the Executive's written request for payment
accompanied with such evidence of fees and expenses incurred as the Company
reasonably may require.

19.  DEFINITIONS.
     -----------

     For purposes of this Agreement, the following terms shall have the meaning
indicated below:

     (a) "Base Salary" shall have the meaning stated in Section 5.1 hereof.

     (b) "Board" shall mean the Board of Directors of the Company.

     (c) "Change of Control" shall be deemed to have occurred if the event set
forth in any one of the following paragraphs shall have occurred:

          A. any person is or becomes the beneficial owner (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company (not including in the securities acquired directly from the Company or
its affiliates) representing 20% or more of either the then outstanding shares
of common stock of the Company or the combined voting power of the Company's
then outstanding securities, excluding any person who becomes such a beneficial
owner in connection with a transactions described in clause (i) of paragraph (C)
below; or

          B. the following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals who, on the date
hereof, constitute the Board and any new director (other than a director whose
initial assumption of office is in connection with an actual or threatened
election contest, including but not limited to a consent solicitation, relating
to the election of directors of the Company) whose appointment or election by
the Board or nomination for election by the Company's shareholders was approved
by a vote of at least two-thirds (2/3) of the directors then still in office who
wither were directors on the date hereof or whose appointment, election or
nomination for election was previously so approved; or

          C. there is consummated a merger or consolidation of the Company
(including a triangular merger to which the Company is a party) with any other
corporation other

                                       11
<PAGE>

than (i) a merger or consolidation which would result in the voting securities
of the Company outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity or any parent thereof) at least
66 2/3% of the combined voting power of the voting securities of the Company or
such surviving entity of any parent thereof outstanding immediately after such
merger or consolidation, or (ii) a merger or consolidation effected to implement
a recapitalization of the Company (or similar transaction) in which no person is
or becomes the beneficial owner, directly of indirectly, of the securities of
the Company (not including in the securities beneficially owned by such person
any securities acquired directly from the Company or its subsidiaries)
representing 20% or more of either the then outstanding shares of common stock
of the Company or the combined voting power of the Company's then outstanding
securities; or

          D. the shareholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is consummated an agreement
for the sale or disposition by the Company of all or substantially all of the
Company's assets, other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity, at least 75% of the
combined voting power of the voting securities of which are owned by
shareholders of the Company in substantially the same proportions as their
ownership of the Company immediately prior to such sale. Notwithstanding the
foregoing, no "Change in Control" shall be deemed to have occurred if there is
consummated any transaction or series of integrated transactions immediately
following which the record holders of the common stock of the Company
immediately prior to such transaction or series of transactions continue to have
substantially the same proportionate ownership in an entity which owns all or
substantially all of the assets of the Company immediately following such
transaction or series of transactions.

     (d) "Cause" for termination by the Company of the Executive's employment or
consulting engagement, for purposes of this Agreement, shall mean (i) the
willful and continued failure by the Executive to substantially perform the
Executive's duties hereunder (other than any such failure resulting from the
Executive's incapacity due to physical or mental illness or any such actual or
anticipated failure after the issuance of a Notice of Termination for Good
Reason by the Executive pursuant to Section 8.1) after a written demand for
substantial performance is delivered to the Executive by the Board, which demand
specifically identifies the manner in which the Board believes that the
Executive has not substantially performed the Executive's duties, or (ii) the
willful engaging by the Executive in conduct which is demonstrably and
materially injurious to the Company, monetarily or otherwise, including but not
limited to fraud or embezzlement by the Executive, or (iii) the Executive's
conviction (or entering into a plea bargain admitting guilt) of any felony, or
(iv) a material breach by the Executive of this Agreement, including a violation
of Section 10. For purposes of clauses (i) and (ii) of this definition, no act,
or failure to act, on the Executive's part shall be deemed "willful" unless
done, or omitted to be done, by the Executive not in good faith and without
reasonable belief that the Executive's act, or failure to act, was in the best
interest of the Company. (e) "Code" shall mean the Internal Revenue Code of
1986, as amended from time to time.

     (e) "Date of Termination" shall have the meaning stated in Section 8.2
hereof.

     (f) "Disability" shall be deemed the reason for the termination of this
Agreement by the Company, if, as a result of the Executive's incapacity due to
physical or mental illness, the

                                       12
<PAGE>

Executive shall have been absent from the full-time performance of the
Executive's duties hereunder for a period of six (6) consecutive months.

     (g) "Excise Tax" shall have the meaning stated in Section 7.2(a) hereof.

     (h) "Executive" shall mean the individual named in the first paragraph of
this Agreement.

     (i) "Good Reason" for termination by the Executive of the Executive's
employment or consulting engagement shall mean the occurrence (without the
Executive's express written consent), of any one of the following acts by the
Company, or failures by the Company to act, unless, in the case of any act or
failure to act described in paragraphs (i) or (ii) below, such act or failure to
act is corrected prior to the Date of Termination specified in the Notice of
Termination given in respect thereof:

     (i) the assignment to the Executive of any duties which are materially
inconsistent with the duties specified in Sections 4(b)(i) and (ii) or 4(d)(i)
and (ii), unless the Executive has indicated to the Company his intention to
terminate his employment prior to the end of the Initial Period, and such
assignment is made by the Board in good faith in order to facilitate the
transition of the Executive;

     (ii) any material breach of any provision of this Agreement by the Company;

     (iii) the relocation of the Executive's principal place of employment or
consulting engagement to a location more than 250 miles from the Executive's
principal place of employment or consulting (unless such relocation is closer to
the Executive's principal residence) or the Company's requiring the Executive to
be based anywhere other than such principal place of employment or consulting
(or permitted relocation thereof) except for required travel on the Company's
business to an extent substantially consistent with the Executive's present
business travel obligations;

     (iv) a reduction by the Company during the Initial Term in the Executive's
Base Salary as in effect on the date hereof or as the same may be increased from
time to time except for across-the-board salary reductions similarly affecting
all senior officers of the Company and all senior officers of any person in
control of the Company; or

     (v) the failure by the Company during the Initial Period to continue in
effect any employee benefit plan or incentive compensation plan in which the
Executive currently participates which is material to the Executive's total
compensation, unless such plan or arrangement has been replaced by a new plan on
a basis not materially less favorable, both in terms of the amount or timing of
payment of benefits provided and the level of the Executive's participation
relative to other participants.

     The Executive's right to terminate the Executive's employment or consulting
engagement for Good Reason shall not be affected by the Executive's incapacity
due to physical or mental illness. The Executive's continued employment or
consulting shall not constitute

                                       13
<PAGE>

consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.

     (k) "Gross-Up Payment" shall have the meaning stated in Section 7.2(a)
hereof.

     (l) "Notice of Termination" shall have the meaning stated in Section 8.1
hereof.

     (m) "Term" shall have the meaning stated in Section 3 hereof.

                                       14
<PAGE>

         IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.

                               ARMSTRONG HOLDINGS, INC.

                               By:      ___________________________
                               Name:  Douglas L. Boles
                               Title:  Executive Vice President, Human Resources

                               ARMSTRONG WORLD INDUSTRIES, INC.

                               By:      ___________________________
                               Name:  Douglas L. Boles
                               Title:  Executive Vice President, Human Resources

                               EXECUTIVE

                               ---------------------------------
                               George A. Lorch

                                       15
<PAGE>

                       [Letterhead of Michael D. Lockhart]

                                October 30, 2000

Dear George:

     This will confirm our discussions relative to your continued relationship
with Armstrong under your Amended and Restated Employment Agreement dated as of
August 7, 2000.

 .    Your role as Advisor to the Chairman of the Board and Chief Executive
     Officer is now complete. To that end, you are electing to accelerate your
     retirement as a director and as an employee of Armstrong to December 1,
     2000. In doing so, you will not receive any compensation to which you would
     have been entitled as a director and as an employee under your Amended and
     Restated Employment Agreement. Your execution of this letter will
     constitute your resignation as a director effective December 1, 2000.

 .    Armstrong remains obligated to pay you the $2.8 million due to you on
     February 1, 2001 under your Amended and Restated Employment Agreement and
     under your Stock Option Surrender Agreement dated September 25, 2000 (less
     any required withholdings).

 .    From the date of your retirement as an employee of Armstrong, you stand
     ready to serve Armstrong as a consultant in accordance with the terms of
     your Amended and Restated Employment Agreement and you remain bound by the
     non-compete and the other provisions of that Agreement.

     Please acknowledge your agreement with the foregoing by signing this letter
where indicated below and returning it to me. This letter effectively amends the
Amended and Restated Employment Agreement.

     On behalf of the Board of Directors, thank you for your service to
Armstrong.

                              Very truly yours,

                              ARMSTRONG HOLDINGS, INC.

                              By:  ____________________________
                                       Michael D. Lockhart
                                       President and Chief Executive Officer, on
                              behalf of Armstrong Holdings, Inc. and
                       Armstrong World Industries, Inc.

Acknowledged and agreed,
intending to be legally bound:

- ----------------------------
George A. Lorch

                                       16
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.4
<SEQUENCE>6
<FILENAME>0006.txt
<DESCRIPTION>STOCK OPTION SURRENDER AGREEMENT
<TEXT>

<PAGE>

                                                                   EXHIBIT 10(d)

                        STOCK OPTION SURRENDER AGREEMENT

     THIS STOCK OPTION SURRENDER AGREEMENT (this "Agreement") is made as of
September 25, 2000, by and between George A. Lorch ("Executive") and Armstrong
Holdings, Inc., a Pennsylvania corporation ("Company").

                                   WITNESSETH:

     WHEREAS, Executive holds options to purchase 559,380 shares of Common Stock
of the Company with an exercise price of greater than $50.00 per share which the
Executive desires and is willing to surrender in exchange for $1,000,000 cash
from the Company;

     NOW, THEREFORE, in consideration of the premises and the mutual promises
set forth herein, the parties hereto, intending to be legally bound hereby,
agree as follows:

     1. Surrender. For good and valuable consideration, the receipt and
        ---------
sufficiency of which are acknowledged, the Executive hereby surrenders, releases
and forfeits as of the date of this Agreement all of his right, title and
interest in and to options which he holds to purchase 559,380 shares of Common
Stock of the Company, which have an exercise price greater than $50.00 per share
and which were previously granted to the Executive by the Company in
consideration for his services as an employee of the Company and its affiliates
(the "Options"). Such Options are more particularly identified on Exhibit A
hereto.

     2. Payment. In consideration of the Executive's surrender, release and
        -------
forfeiture of such Options, the Company agrees to pay the Executive $1,000,000
in cash, less any tax withholdings required under applicable law, on February 1,
2001.

     3. Stock Option Agreements. Effective as of the date of this Agreement, the
        -----------------------
stock option agreements evidencing the Options are void and of no further force
or effect.

     4. Amendment. This Agreement cannot be amended, modified or terminated
        ---------
except in writing and no waiver, extension or consent will be effective unless
evidenced by an instrument in writing duly executed by the party which is sought
to be charged with having granted the same.

     5. Headings. The section headings of this Agreement are for convenience of
        --------
reference only and do not form a part of this Agreement and do not in any way
modify, interpret, or otherwise affect the intentions of the parties.

     6. Governing Law. This Agreement shall be governed by, and construed in
        -------------
accordance with, the laws of the Commonwealth of Pennsylvania without regard to
its conflicts of laws principles.
<PAGE>

     IN WITNESS HEREOF, the parties hereto have executed this Agreement on the
day and year first above written.

                                       -----------------------------------------
                                       George A. Lorch

                                       ARMSTRONG HOLDINGS, INC.

                                       By:
                                          --------------------------------------
                                       Name:
                                            ------------------------------------
                                       Title:
                                             -----------------------------------

                                      -2-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.5
<SEQUENCE>7
<FILENAME>0007.txt
<DESCRIPTION>AGREEMENT
<TEXT>

<PAGE>

                                                                   EXHIBIT 10(e)
                                                                   -------------

                                   AGREEMENT
                                   ---------

     THIS AGREEMENT, dated as of August 7, 2000, is made by and between,
Armstrong Holdings, Inc., a Pennsylvania corporation (the "Company"), and
                                                           -------
Michael D. Lockhart (the "Executive").
                          ---------

     WHEREAS, the Board considers it essential to the best interests of the
Company to foster the continued employment of key management personnel; and

     WHEREAS, the Board recognizes that, as is the case with many publicly held
corporations, the possibility of a Change in Control exists and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company; and

     WHEREAS, the Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of the
Company's management, including the Executive, to their assigned duties without
undue concern for their personal financial and employment security arising from
the possibility of a Change in Control;

     NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and intending to be legally bound hereby, the Company and the
Executive hereby agree as follows:

     1. Defined Terms. The definitions of capitalized terms used in this
        -------------
Agreement are provided in the last Section hereof.

     2. Term of Agreement. This Agreement shall commence on the date hereof and
        -----------------
shall continue in effect through the third anniversary of such date; provided,
                                                                     --------
however, that commencing on the third anniversary and each anniversary
- -------
thereafter, the term of this Agreement shall be extended for one additional year
unless, if not later than 180 days prior to such anniversary, the Company or the
Executive shall have given notice not to extend this Agreement or a Change in
Control shall have occurred prior to such anniversary; and further provided,
                                                           ------- --------
however, that if a Change in Control shall have occurred during the term of this
Agreement, this Agreement shall continue in effect for a period of not less than
thirty-six (36) months beyond the month in which such Change in Control
occurred.

     3. Company's Covenants Summarized. In order to induce the Executive to
        ------------------------------
remain in the employ of the Company and in consideration of the Executive's
covenants set forth in Section 4 hereof, the Company agrees, under the
conditions described herein, to pay the Executive the Severance Payments and the
other payments and benefits described herein. Except as provided in Section 10.1
hereof, no amount or benefit shall be payable under this Agreement unless there
shall have been (or, under the terms of the second sentence of Section 6.1
hereof, there shall be deemed to have been) a termination of the Executive's
employment with the Company following a Change in Control and during the term of
this Agreement. This Agreement shall not be construed as creating an express or
implied contract of employment and,
<PAGE>

except as otherwise agreed in writing between the Executive and the Company, the
Executive shall not have any right to be retained in the employ of the Company.

     4.   The Executive's Covenants. The Executive agrees that, subject to the
          -------------------------
terms and conditions of this Agreement, in the event of a Potential Change in
Control during the term of this Agreement, the Executive will remain in the
employ of the Company until the earliest of (i) a date which is six (6) months
after the date of such Potential Change in Control, (ii) the date of a Change in
Control, (iii) the date of termination by the Executive of the Executive's
employment for Good Reason or by reason of death or Disability, or (iv) the
termination by the Company of the Executive's employment for any reason.

     5.   Compensation Other Than Severance Payments.
          ------------------------------------------

     5.1. Following a Change in Control and during the term of this Agreement,
during any period that the Executive fails to perform the Executive's full-time
duties with the Company as a result of incapacity due to physical or mental
illness, the Company shall pay the Executive's full salary to the Executive at
the rate in effect at the commencement of any such period, together with all
compensation and benefits payable to the Executive under the terms of any
compensation or benefit plan, program or arrangement maintained by the Company
during such period, until the Executive's employment is terminated by the
Company for Disability.

     5.2. If the Executive's employment shall be terminated for any reason
following a Change in Control and during the term of this Agreement, the Company
shall pay the Executive's full salary to the Executive through the Date of
Termination at the rate in effect immediately prior to the Change in Control or
at the time the Notice of Termination is given, whichever is greater, together
with all compensation and benefits to which the Executive is entitled in respect
of all periods preceding the Date of Termination under the terms of the
Company's compensation and benefit plans, programs or arrangements.

     5.3. If the Executive's employment shall be terminated for any reason
following a Change in Control and during the term of this Agreement, the Company
shall pay to the Executive the Executive's normal post-termination compensation
and benefits as such payments become due. Such post-termination compensation and
benefits shall be determined under, and paid in accordance with, the Company's
retirement, insurance and other compensation or benefit plans, programs and
arrangements as in effect immediately prior to the Change in Control or, if more
favorable to the Executive, as in effect immediately prior to the Date of
Termination.

     6.   Severance Payments.
          ------------------

     6.1. The Company shall pay the Executive the payments described in this
Section 6.1 (the "Severance Payments") upon the termination of the Executive's
                  ------------------
employment following a Change in Control and during the term of this Agreement,
in addition to any payments and benefits to which the Executive is entitled
under Section 5 and 8 hereof, unless such termination is (i) by the Company for
Cause, (ii) by reason of death or Disability, or (iii) by the Executive without
Good Reason. For purposes of this Agreement, the Executive's employment shall be
deemed to have been terminated by the Company without Cause or by the

                                      -2-
<PAGE>

Executive with Good Reason following a Change in Control if (i) the Executive's
employment is terminated without Cause prior to a Change in Control which
actually occurs during the term of this Agreement and such termination was at
the request or direction of a Person who has entered into an agreement with the
Company the consummation of which would constitute a Change in Control, (ii) the
Executive terminates his employment with Good Reason prior to a Change in
Control which actually occurs during the term of this Agreement and the
circumstance or event which constitutes Good Reason occurs at the request or
direction of such Person, (iii) the Executive's employment is terminated without
Cause prior to a Change in Control and the Executive reasonably demonstrates
that such termination is otherwise in connection with or in anticipation of a
Change in Control which actually occurs during the term of this Agreement, or
(iv) the Executive's employment is terminated without Cause after a Potential
Change in Control of the type described in paragraphs (I) or (IV) of the
definition of "Potential Change in Control."

          (A) In lieu of any further salary payments to the Executive for
     periods subsequent to the Date of Termination and in lieu of any severance
     benefit otherwise payable to the Executive, the Company shall pay to the
     Executive a lump sum severance payment, in cash, equal to three (3) times
     the sum of (i) the higher of the Executive's annual base salary in effect
     immediately prior to the occurrence of the event or circumstance upon which
     the Notice of Termination is based or the Executive's annual base salary in
     effect immediately prior to the Change in Control (the "Change in Control
                                                             -----------------
     Salary"), and (ii) the higher of (x) the highest annual bonus earned by the
     ------
     Executive pursuant to any annual bonus or incentive plan maintained by the
     Company in respect of the three (3) years immediately preceding that year
     in which the Date of Termination occurs or (y) the annual target bonus in
     respect of the year in which the Change in Control occurs (the "Change in
                                                                     ---------
     Control Bonus").
     -------------

          (B) Notwithstanding any provision of any annual incentive plan to the
     contrary, the Company shall pay to the Executive a lump sum amount, in
     cash, equal to a pro rata portion to the Date of Termination of the value
     of the target incentive award under such plan for the then uncompleted
     period under such plan, calculated by multiplying the Executive's target
     award by the fraction obtained by dividing the number of full months and
     any fractional portion of a month during such performance award period
     through the Date of Termination by the total number of months contained in
     such performance award period.

          (C) Notwithstanding any provision to the contrary within paragraphs
     (A) and (B) of this Section 6.1, the Company shall honor any election that
     the Executive makes with respect to the timing of any benefit payments due
     under this section (provided the Executive makes the election more than 90
     days before a Change in Control and the period over which payments are
     elected to be made ends not more than 15 years after the Change in
     Control). In any event, not later than ten business days after a Change in
     Control, the Company shall (i) establish an irrevocable grantor trust (the
     "Trust") designed in accordance with Revenue Procedure 92-64 and having a
     trustee independent of the Company, (ii) assign to the Trust the Company's
     interest in any policy or policies insuring the Executive under any
     insurance policy insuring the life of the Executive under any
     "split-dollar" or corporate-owned insurance arrangement in effect between
     the Executive and the Company, (iii) deposit in said Trust an amount
     sufficient to pay all

                                      -3-
<PAGE>

     remaining premiums owed by the Company on such insurance policies (with the
     Trust being required to pay such premiums), and all amounts that could
     become payable after the Change in Control pursuant to either paragraphs
     (A) or (B) of this Section 6.1 or pursuant to any other plan or program
     under which the Executive may be entitled to collect deferred compensation,
     supplemental retirement benefits, or welfare benefits after the date of the
     Change in Control, and (iv) provide the trustee of the Trust with a written
     direction to hold said amount and any investment return thereon in a
     segregated account for the benefit of the Executive, and to follow the
     procedures set forth herein as to the payment of such amounts from the
     Trust. During the 39-consecutive month period after a Change in Control,
     the Employee may provide the trustee of the Trust with a written notice
     directing that the trustee pay to the Executive an amount designated in the
     notice as being payable pursuant to this Agreement. Within three business
     days after receiving said notice, the trustee of the Trust shall pay such
     amount to the Executive, and coincidentally shall provide the Company or
     its successor with notice of such payment. Upon the earlier of the Trust's
     final payment of all amounts due under paragraphs (A) and (B) of this
     Section 6.1 or the date 36 months after the Change in Control, the trustee
     of the Trust shall pay to the Company the entire balance remaining in the
     segregated account maintained for the benefit of the Employee. The Employee
     shall thereafter have no further interest in the Trust.

          (D) In addition to the retirement benefits to which the Executive is
     entitled under each Pension Plan or any successor plan thereto, the Company
     shall pay the Executive a lump sum amount, in cash, equal to the excess of
     (i) the actuarial equivalent of the aggregate retirement pension (taking
     into account any early retirement subsidies associated therewith and
     determined as a straight life annuity commencing at the date (but in no
     event earlier than the third anniversary of the Date of Termination) as of
     which the actuarial equivalent of such annuity is greatest) which the
     Executive would have accrued under the terms of all Pension Plans (without
     regard to any amendment to any Pension Plan made subsequent to the earlier
     of a Potential Change in Control or a Change in Control and on or prior to
     the Date of Termination, which amendment adversely affects in any manner
     the computation of retirement benefits thereunder), determined as if the
     Executive were fully vested thereunder and had accumulated (after the Date
     of Termination) thirty-six (36) additional months of service credit
     thereunder and had been credited under each Pension Plan during such period
     with compensation at the higher of (1) the Executive's compensation (as
     defined in such Pension Plan) during the twelve (12) months immediately
     preceding the Date of Termination or (2) the Executive's compensation (as
     defined in such Pension Plan) during the twelve (12) months immediately
     preceding the Change in Control, over (ii) the actuarial equivalent of the
     aggregate retirement pension (taking into account any early retirement
     subsidies associated therewith and determined as a straight life annuity
     commencing at the date (but in no event earlier than the Date of
     Termination) as of which the actuarial equivalent


                                      -4-
<PAGE>

     of such annuity is greatest) which the Executive had accrued pursuant to
     the provisions of the Pension Plans as of the Date of Termination. For
     purposes of this Section 6.1(D), "actuarial equivalent" shall be determined
     using the same assumptions utilized under the aggregate retirement pension
     (taking into account any early retirement subsidies associated therewith
     and determined as a straight life annuity commencing at the date (but in no
     event earlier than the Date of Termination) as of which the actuarial
     equivalent of such annuity is greatest) which the Executive had accrued
     pursuant to the provisions of the Pension Plans as of the Date of
     Termination; provided that the actuarial equivalent of such payment shall
     reduce the amount of the benefit enhancement to which the Executive may be
     entitled under the Company's Retirement Benefit Equity Plan due to enhance
     change in Control benefits under Article I, Section(35) Article VI, Section
     (2), Article VI Section (7), and Article VII, Section (6) of the Company's
     Retirement Income Plan. For purposes of this Section 6.1(D), "actuarial
     equivalent" shall be determined using the same assumptions utilized under
     the Company's Retirement Income Plan immediately prior to the Change in
     Control, to determine lump sum present values under Article VII, Section
     (7) of the Company's Retirement Income Plan.

          (E) For the thirty-six (36) month period immediately following the
     Date of Termination, the Company shall arrange to provide the Executive
     (which includes the Executive's eligible dependents for purposes of this
     paragraph (E)) with life, disability, accident and health insurance
     benefits substantially similar to those which the Executive was receiving
     immediately prior to the Notice of Termination (without giving effect to
     any amendment to such benefits made subsequent to the earlier of a
     Potential Change in Control or a Change in Control which amendment
     adversely affects in any manner the Executive's entitlement to or the
     amount of such benefits); provided, however, that, unless the Executive
                               --------  -------
     consents to a different method, such health insurance benefits shall be
     provided through a third-party insurer. Benefits otherwise receivable by
     the Executive pursuant to this Section 6.1(E) shall be reduced to the
     extent comparable benefits are actually received by or made available to
     the Executive by a subsequent employer without cost during the thirty-six
     (36) month period following the Executive's termination of employment (and
     any such benefits actually received by or made available to the Executive
     shall be reported to the Company by the Executive).

          (F) If the Executive would have become entitled to benefits under the
     Company's post-retirement health care or life insurance plans (as in effect
     immediately prior to a Potential Change in Control, the Change in Control
     or the Date of Termination, whichever is most favorable to the Executive)
     had the Executive's employment terminated at any time during the period of
     thirty-six (36) months after the Date of Termination, the Company shall
     provide such post-retirement health care or life insurance benefits to the
     Executive (subject to any employee contributions required under the terms
     of such plans at the level in effect immediately prior to the Change in
     Control or the Date of Termination, whichever is more favorable to the
     Executive) commencing on the later of (i) the date that such coverage would
     have first become available or (ii) the date that benefits described in
     subsection (E) of this Section 6.1 terminate. From the end of the period
     described in the preceding sentence until the Executive and his spouse (if
     any, as of the Change in Control) become entitled to Medicare coverage, the
     Company will permit them to purchase, at COBRA rates or less, any health
     care coverage that they were receiving on the date of the Change in
     Control; provided that the Company may instead hold them harmless from any
     cost and associated income taxes that they incur in order to purchase
     substitute health insurance at premiums above the COBRA premiums that they
     would have paid to the Company.

                                      -5-
<PAGE>

          (G) The Company will pay the Executive, at a daily salary rate
     calculated from the higher of the Executive's annual base salary in effect
     immediately prior to the occurrence of the event or circumstance upon which
     the Notice of Termination is based or the Executive's annual base salary in
     effect immediately prior to the Change in Control, an amount equal to all
     unused vacation days which would have been earned had the Executive
     continued employment through December 31 of the year in which the Date of
     Termination occurs.

          (H) The Company shall pay the reasonable fees and expenses of a full
     service nationally recognized executive outplacement firm until the earlier
     of the date the Executive secures new employment or the date which is
     thirty-six (36) months following the Executive's Date of Termination;
     provided, that in no event shall the aggregate amount of such payment be
     greater than 20% of the Executive's Change in Control Salary.

      6.2.

          (A) Anything in this Agreement to the contrary notwithstanding, in the
     event it shall be determined that any payment or distribution by the
     Company to or for the benefit of the Executive (whether paid or payable or
     distributed or distributable pursuant to the terms of this Agreement or
     otherwise) (a "Payment") would be subject to the excise tax imposed by
                    -------
     section 4999 of the Code or any interest or penalties are incurred by the
     Executive with respect to the excise tax (such excise tax, together with
     any such interest and penalties, are hereinafter collectively referred to
     as the "Excise Tax"), then the Executive shall be entitled to receive an
             ----------
     additional payment (a "Gross-Up Payment") in an amount such that after
                            ----------------
     payment by the Executive of all taxes (including any interest or penalties
     imposed with respect to such taxes), including, without limitation, any
     income taxes (and any interest and penalties imposed with respect thereto)
     and Excise Tax imposed on the Gross-Up Payment, the Executive retains an
     amount of the Gross-Up Payment equal to the Excise Tax imposed upon the
     Payments.

          (B) Subject to the provisions of Section 6.2(C), all determinations
     required to be made under this Section 6.2, including whether and when a
     Gross-Up Payment is required and the amount of such Gross-Up Payment, shall
     be made by a nationally recognized accounting firm designated by the
     Company (the "Accounting Firm") which shall provide detailed supporting
                   ---------------
     calculations both to the Company and the Executive within fifteen (15)
     business days after there has been a Payment, or such earlier time as
     requested by the Company. In the event that the Accounting Firm is serving
     as accountant or auditor for the individual, entity or group effecting the
     Change in Control, the Company shall appoint another nationally recognized
     accounting firm to make the determinations required hereunder (which
     accounting firm shall then be referred to as the Accounting Firm
     hereunder). All fees and expenses of the Accounting Firm shall be borne
     solely by the Company. Any Gross-Up Payment, as determined pursuant to this
     Section 6, shall be paid by the Company to the Executive within five days
     of the receipt of the Accounting Firm's determination. Any determination by
     the Accounting Firm shall be binding upon the Company and the Executive. As
     a result of the uncertainty in the application of section 4999 of the Code
     at the time of the initial determination by the


                                      -6-
<PAGE>

     Accounting Firm hereunder, it is possible that Gross-Up Payments which will
     not have been made by the Company should have been made ("Underpayment"),
                                                               ------------
     consistent with the calculations required to be made hereunder. In the
     event that the Company exhausts its remedies pursuant to Section 6.2(C) and
     the Executive thereafter is required to make a payment of any Excise Tax,
     the Accounting Firm shall determine the amount of the Underpayment that has
     occurred and any such Underpayment shall be promptly paid by the Company to
     or for the benefit of the Executive.

          (C) The Executive shall notify the Company in writing of any claim by
     the Internal Revenue Service that, if successful, would require the payment
     by the Company of the Gross-Up Payment. Such notification shall be given as
     soon as practicable but no later than ten (10) business days after the
     Executive is informed in writing of such claim and shall apprise the
     Company of the nature of such claim and the date on which such claim is
     requested to be paid. The Executive shall not pay such claim prior to the
     expiration of the 30-day period following the date on which it gives such
     notice to the Company (or such shorter period ending on the date any
     payment of taxes with respect to such claim is due). If the Company
     notifies the Executive in writing prior to the expiration of such period
     that it desires to contest such claim, the Executive shall:

               (i)   give the Company any information reasonably requested by
          the Company relating to such claim;

               (ii)  take such action in connection with contesting such claim
          as the Company shall reasonably request in writing from time to time,
          including, without limitation, accepting legal representation with
          respect to such claim by an attorney reasonably selected by the
          Company;

               (iii) cooperate with the Company in good faith in order
          effectively to contest such claim; and

               (iv)  permit the Company to participate in any proceedings
          relating to such claim;

     provided, however, that the Company shall bear and pay directly all costs
     and expenses (including additional interest and penalties) incurred in
     connection with such contest and shall indemnify and hold the Executive
     harmless, on an after-tax basis, for any Excise Tax or income tax
     (including interest and penalties with respect thereto) imposed as a result
     of such representation and payment of costs and expenses. Without
     limitation on the foregoing provisions of this Section 6.2(C), the Company
     shall control all proceedings taken in connection with such contest and, at
     its sole option, may pursue or forego any and all administrative appeals,
     proceedings, hearings and conferences with the taxing authority in respect
     of such claim and may, at its sole option, either direct the Executive to
     pay the tax claimed and sue for a refund or contest the claim in any
     permissible manner, and the Executive agrees to prosecute such contest to a
     determination before any administrative tribunal, in a court of initial
     jurisdiction and in one or more appellate courts, as the Company shall
     determine; provided, however, that if the Company directs the Executive to
                --------  -------
     pay such claim and sue for a refund, the Company


                                      -7-
<PAGE>

          shall advance the amount of such payment to the Executive, on an
          interest-free basis, and shall indemnify and hold the Executive
          harmless, on an after-tax basis, from any Excise Tax or income tax
          (including interest or penalties with respect thereto) imposed with
          respect to such advance or with respect to any imputed income with
          respect to such advance; and further provided that any extension of
          the statute of limitations relating to payment of taxes for the
          taxable year of the Executive with respect to which such contested
          amount is claimed to be due is limited solely to such contested
          amount. Furthermore, the Company's control of the contest shall be
          limited to issues with respect to which a Gross-Up Payment would be
          payable hereunder and the Executive shall be entitled to settle or
          contest, as the case may be, any other issue raised by the Internal
          Revenue Service or any other taxing authority.

                    (D) If, after the receipt by the Executive of an amount
          advanced by the Company pursuant to Section 6.2(C), the Executive
          becomes entitled to receive any refund with respect to such claim, the
          Executive shall (subject to the Company's complying with the
          requirements of Section 6.2(C)) promptly pay to the Company the amount
          of such refund (together with any interest paid or credited thereon
          after taxes applicable thereto). If, after the receipt by the
          Executive of an amount advanced by the Company pursuant to Section
          6.2(C), a determination is made that the Executive shall not be
          entitled to any refund with respect to such claim and the Company does
          not notify the Executive in writing of its intent to contest such
          denial of refund prior to the expiration of 30 days after such
          determination, then such advance shall be forgiven and shall not be
          required to be repaid and the amount of such advance shall offset, to
          the extent thereof, the amount of Gross-Up Payment required to be
          paid.

               6.3. The payments provided for in subsections (A), (B), (C), (D)
and (G) of Section 6.1 hereof shall be made not later than the thirtieth (30th)
day following the Date of Termination; provided, however, that if the amounts of
                                       --------  -------
such payments cannot be finally determined on or before such day, the Company
shall pay to the Executive on such day an estimate, as determined in good faith
by the Executive of the minimum amount of such payments to which the Executive
is clearly entitled and shall pay the remainder of such payments (together with
interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as
soon as the amount thereof can be determined but in no event later than the
thirtieth (30th) day after the Date of Termination. In the event that the amount
of the estimated payments exceeds the amount subsequently determined to have
been due, such excess shall constitute a loan by the Company to the Executive,
payable on the fifth (5th) business day after demand by the Company (together
with interest at 120% of the rate provided in section 1274(b)(2)(B) of the
Code). In the event the Company should fail to pay when due the amounts
described in subsections (A), (B), (C), (D) and (G) of Section 6.1 hereof, the
Executive shall also be entitled to receive from the Company an amount
representing interest on any unpaid or untimely paid amounts from the due date,
as determined under this Section 6.3 (without regard to any extension of the
Date of Termination pursuant to Section 7.3 hereof), to the date of payment at a
rate equal to 120% of the rate provided in section 1274(b)(2)(B) of the Code.

               6.4. The Company also shall pay to the Executive all legal fees
and expenses incurred by the Executive in disputing in good faith any issue
hereunder relating to the termination of the Executive's employment, in seeking
in good faith to obtain or enforce any


                                      -8-
<PAGE>

benefit or right provided by this Agreement or in connection with any tax audit
or proceeding to the extent attributable to the application of section 4999 of
the Code to any payment or benefit provided hereunder. Such payments shall be
made within five (5) business days after delivery of the Executive's written
requests for payment accompanied with such evidence of fees and expenses
incurred as the Company reasonably may require.

     7.   Termination Procedures and Compensation During Dispute.
          ------------------------------------------------------

     7.1. Notice of Termination. After a Potential Change in Control or, if
          ---------------------
there is no Potential Change in Control, after a Change in Control and during
the term of this Agreement, any purported termination of the Executive's
employment (other than by reason of death) shall be communicated by written
Notice of Termination from one party hereto to the other party hereto in
accordance with Section 11 hereof. For purposes of this Agreement, a "Notice of
                                                                      ---------
Termination" shall mean a notice which shall indicate the specific termination
- -----------
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated. Further, a Notice of
Termination for Cause is required to include a copy of a resolution duly adopted
by the affirmative vote of not less than three-quarters (3/4) of the entire
membership of the Board at a meeting of the Board which was called and held for
the purpose of considering such termination (after reasonable notice to the
Executive and an opportunity for the Executive, together with the Executive's
counsel, to be heard before the Board) finding that, in the good-faith opinion
of the Board, the Executive was guilty of conduct set forth in clause (i) or
(ii) of the definition of Cause herein, and specifying the particulars thereof
in detail.

     7.2. Date of Termination. "Date of Termination," with respect to any
          -------------------   -------------------
purported termination of the Executive's employment after a Change in Control
and during the term of this Agreement, shall mean (i) if the Executive's
employment is terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that the Executive shall not have returned to the
full-time performance of the Executive's duties during such thirty (30) day
period), and (ii) if the Executive's employment is terminated for any other
reason, the date specified in the Notice of Termination (which, in the case of a
termination by the Company, shall not be less than thirty (30) days (except in
the case of a termination for Cause) and, in the case of a termination by the
Executive, shall not be less than fifteen (15) days nor more than sixty (60)
days, respectively, from the date such Notice of Termination is given).

     7.3. Dispute Concerning Termination. If within fifteen (15) days after any
          ------------------------------
Notice of Termination is given, or, if later, prior to the Date of Termination
(as determined without regard to this Section 7.3), the party receiving such
Notice of Termination notifies the other party that a dispute exists concerning
the termination, the Date of Termination shall be extended until the date on
which the dispute is finally resolved, either by mutual written agreement of the
parties or by a final judgment, order or decree of an arbitrator or a court of
competent jurisdiction (which is not appealable or with respect to which the
time for appeal therefrom has expired and no appeal has been perfected);
provided, however, that the Date of Termination shall be extended by a notice of
- --------  -------
dispute given by the Executive only if such notice is given in good faith and
the Executive pursues the resolution of such dispute with reasonable diligence.


                                      -9-
<PAGE>

     7.4. Compensation During Dispute. If a purported termination occurs
          ---------------------------
following a Change in Control and during the term of this Agreement and the Date
of Termination is extended in accordance with Section 7.3 hereof, the Company
shall continue to pay the Executive the full compensation in effect when the
notice giving rise to the dispute was given (including, but not limited to,
salary) and continue the Executive as a participant in all compensation, benefit
and insurance plans in which the Executive was participating when the notice
giving rise to the dispute was given, until the Date of Termination, as
determined in accordance with Section 7.3 hereof. Amounts paid under this
Section 7.4 are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement.

     8.   Acceleration of Certain Stock-Based Benefits.
          --------------------------------------------

     (A)  Upon the occurrence of a Change in Control, all unvested options with
respect to the Company's stock held by the Executive shall vest and become
immediately exercisable and will be exercisable for a period ending on the later
of (i) the fifth anniversary of such Change in Control or (ii) the last date
that such option would otherwise be exercisable under the terms of the option
agreement or the plan pursuant to which such option was granted; provided, that
in no event shall any option be exercisable after the expiration of the original
term of the option.

     (B)  Upon the occurrence of a Change in Control, all unearned performance
restricted shares held by the Executive under the Company's Stock Plan shall be
deemed to have been earned to the maximum extent permitted under the Stock Plan
for any performance period not then completed and all earned but unvested
performance restricted shares, including those deemed to be earned pursuant to
this sentence, and all unvested restricted stock awards shall immediately vest
and the restrictions on all shares subject to restriction shall lapse.

     (C)  For purposes of the Stock Plan and any stock option plan pursuant to
which any stock options, performance restricted shares or restricted stock
awards have been issued, this Agreement, which has been approved by the
Compensation Committee of the Board, shall constitute an amendment of the
agreement or other instruments pursuant to which such stock options, performance
restricted shares and restricted stock awards were issued in accordance with the
terms of such plans. Notwithstanding the foregoing, in the event that this
Section 8(C) is determined for any reason to be inconsistent with the terms of
any plan pursuant to which such stock options, performance restricted shares and
restricted stock awards were issued, the terms of this Agreement shall supersede
the terms of such plan

     (D)  The Company will hold the Executive harmless against any and all
losses that he may directly or indirectly incur as a result of (i) any third
party claims brought against the Executive (other than by any taxing authority)
with respect to the Company's performance of, or (ii) the Company's failure to
perform any commitment made to the Executive in, this Section 8.

     9.   No Mitigation. The Company agrees that, if the Executive's employment
          -------------
with the Company terminates during the term of this Agreement, the Executive is
not required to seek other employment or to attempt in any way to reduce any
amounts payable to the Executive by the Company pursuant to Section 6 hereof or
Section 7.4 hereof. Further, the amount of any

                                     -10-
<PAGE>

payment or benefit provided for in this Agreement (other than Section 6.1(E)
hereof) shall not be reduced by any compensation earned by the Executive as the
result of employment by another employer, by retirement benefits, by offset
against any amount claimed to be owed by the Executive to the Company, or
otherwise.

     10.   Successors; Binding Agreement.
           -----------------------------

     10.1. In addition to any obligations imposed by law upon any successor to
the Company, the Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle the Executive to compensation from the Company in the same amount
and on the same terms as the Executive would be entitled to hereunder if the
Executive were to terminate the Executive's employment for Good Reason after a
Change in Control, except that, for purposes of implementing the foregoing, the
date on which any such succession becomes effective shall be deemed the Date of
Termination.

     10.2. This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive shall
die while any amount would still be payable to the Executive hereunder (other
than amounts which, by their terms, terminate upon the death of the Executive)
if the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate.

     11.   Notices. For the purpose of this Agreement, notices and all other
           -------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed, if to the
Executive, to the address shown for the Executive in the personnel records of
the Company and, if to the Company, to the address set forth below, or to such
other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon actual receipt:

           To the Company:

           Armstrong Holdings, Inc.
           2500 Columbia Avenue
           Lancaster, Pennsylvania 17603
           Attention:  General Counsel

     12.   Miscellaneous. No provision of this Agreement may be modified, waived
           -------------
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or of any lack of


                                     -11-
<PAGE>

compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. This Agreement
supersedes any other agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof which have been made by
either party. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the Commonwealth of Pennsylvania,
without regard to its conflicts of law provisions. All references to sections of
the Exchange Act or the Code shall be deemed also to refer to any successor
provisions to such sections. Any payments provided for hereunder shall be paid
net of any applicable withholding required under federal, state or local law and
any additional withholding to which the Executive has agreed. The obligations of
the Company and the Executive under Sections 6 and 7 hereof shall survive the
expiration of the term of this Agreement. If the Executive elects not to enter
into this Agreement, he will continue to be eligible for change in control
benefits provided under the Company's Employment Protection Plan (if
applicable), Retirement Income Plan and long-term incentive plans. The Executive
agrees that this Agreement replaces the benefits to which he may otherwise be
entitled to under the Company's Employment Protection Plan for salaried
employees. The Company agrees that it will not argue in any form for any purpose
that this Agreement constitutes an "employee benefit plan" within meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended.

     13. Validity. The invalidity or unenforceability of any provision of this
         --------
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.

     14. Counterparts. This Agreement may be executed in several counterparts,
         ------------
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.

     15. Settlement of Disputes; Arbitration. All claims by the Executive for
         -----------------------------------
benefits under this Agreement shall be directed in writing to and determined by
the Committee, which shall give full consideration to the evidentiary standards
set forth in this Agreement. Any denial by the Committee of a claim for benefits
under this Agreement shall be delivered to the Executive in writing and shall
set forth the specific reasons for the denial and the specific provisions of
this Agreement relied upon. The Committee shall afford a reasonable opportunity
to the Executive for a review of the decision denying a claim and shall further
allow the Executive to appeal to the Committee a decision of the Committee
within sixty (60) days after notification by the Committee that the Executive's
claim has been denied. Any further dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
Allegheny County, Pennsylvania in accordance with the rules for the resolution
of employment law disputes of the American Arbitration Association then in
effect; provided, however, that the evidentiary standards set forth in this
        --------  -------
Agreement shall apply. Judgment may be entered on the arbitrator's award in any
court having jurisdiction. Notwithstanding any provision of this Agreement to
the contrary, the Executive shall be entitled to seek specific performance of
the Executive's right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with this
Agreement. The Company shall reimburse the Executive for all costs and expenses
relating to litigation arising hereunder, including reasonable attorney's fees
and expenses, promptly upon receipt of a written


                                     -12-
<PAGE>

demand therefor and regardless of whether such litigation results in any
settlement or judgment or order in favor of any party.

     16. Definitions. For purposes of this Agreement, the following terms shall
         -----------
have the meanings indicated below:

         (A) "Accounting Firm" shall have the meaning stated in Section 6.2(B)
              ---------------
     hereof.

         (B) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3
              ----------------
     under the Exchange Act.

         (C) "Board" shall mean the Board of Directors of the Company.
              -----

         (D) "Cause" for termination by the Company of the Executive's
              -----
     employment shall mean (i) conviction of the Executive for (or a plea of
     nolo contendre by the Executive with respect to) a felony or of a
     misdemeanor involving moral turpitude; or (ii) the deliberate engaging by
     the Executive in gross misconduct which is demonstrably and materially
     injurious to the Company, monetarily or otherwise, including but not
     limited to fraud or embezzlement by the Executive; or (iii) the deliberate
     and continued failure to substantially perform the duties and
     responsibilities of such Executive's office. For the purposes of this
     Agreement, no act, or failure to act, on the part of the Executive shall be
     considered "deliberate" unless done, or omitted to be done, by the
     Executive not in good faith and without reasonable belief that such action
     or omission was in the best interests of the Company. In the event of a
     dispute concerning the application of this provision, no claim by the
     Company that Cause exists shall be given effect unless the Company
     establishes to the Committee by clear and convincing evidence that Cause
     exists.

         (E) A "Change in Control" shall be deemed to have occurred if the
                -----------------
     event set forth in any one of the following paragraphs shall have occurred:

               (I)  any Person is or becomes the Beneficial Owner, directly or
          indirectly, of securities of the Company (not including in the
          securities beneficially owned by such Person any securities acquired
          directly from the Company or its affiliates) representing 20% or more
          of either the then outstanding shares of common stock of the Company
          or the combined voting power of the Company's then outstanding
          securities, excluding any Person who becomes such a Beneficial Owner
          in connection with a transaction described in clause (i) of paragraph
          (III) below; or

               (II) the following individuals cease for any reason to constitute
          a majority of the number of directors then serving: individuals who,
          on the date hereof, constitute the Board and any new director (other
          than a director whose initial assumption of office is in connection
          with an actual or threatened election contest, including but not
          limited to a consent solicitation, relating to the election of
          directors of the Company) whose appointment or election by the Board
          or nomination for election by the


                                     -13-
<PAGE>

          Company's shareholders was approved by a vote of at least two-thirds
          (2/3) of the directors then still in office who either were directors
          on the date hereof or whose appointment, election or nomination for
          election was previously so approved; or

               (III) there is consummated a merger or consolidation of the
          Company with any other corporation other than (i) a merger or
          consolidation which would result in the voting securities of the
          Company outstanding immediately prior to such merger or consolidation
          continuing to represent (either by remaining outstanding or by being
          converted into voting securities of the surviving entity or any parent
          thereof) at least 66 2/3% of the combined voting power of the voting
          securities of the Company or such surviving entity or any parent
          thereof outstanding immediately after such merger or consolidation, or
          (ii) a merger or consolidation effected to implement a
          recapitalization of the Company (or similar transaction) in which no
          Person is or becomes the Beneficial Owner, directly or indirectly, of
          securities of the Company (not including in the securities
          Beneficially Owned by such Person any securities acquired directly
          from the Company or its subsidiaries) representing 20% or more of
          either the then outstanding shares of common stock of the Company or
          the combined voting power of the Company's then outstanding
          securities; or

               (IV)  the shareholders of the Company approve a plan of complete
          liquidation or dissolution of the Company or there is consummated an
          agreement for the sale or disposition by the Company of all or
          substantially all of the Company's assets, other than a sale or
          disposition by the Company of all or substantially all of the
          Company's assets to an entity, at least 75% of the combined voting
          power of the voting securities of which are owned by shareholders of
          the Company in substantially the same proportions as their ownership
          of the Company immediately prior to such sale. Notwithstanding the
          foregoing, no "Change in Control" shall be deemed to have occurred if
          there is consummated any transaction or series of integrated
          transactions immediately following which the record holders of the
          common stock of the Company immediately prior to such transaction or
          series of transactions continue to have substantially the same
          proportionate ownership in an entity which owns all or substantially
          all of the assets of the Company immediately following such
          transaction or series of transactions.

          (F) "Change in Control Salary" shall have the meaning stated in
               ------------------------
     Section 6.1 hereof.

          (G) "Change in Control Bonus" shall have the meaning stated in Section
               -----------------------

     6.1 hereof.


                                     -14-
<PAGE>

          (H) "Code" shall mean the Internal Revenue Code of 1986, as amended
               ----
     from time to time.

          (I) "Committee" shall mean (i) the individuals (not fewer than three
               ---------
     in number) who, on the date six (6) months before a Change in Control,
     constitute the Management Development and Compensation Committee of the
     Board, plus (ii) in the event that fewer than three individuals are
     available from the group specified in clause (i) above for any reason, such
     individuals as may be appointed by the individual or individuals so
     available (including for this purpose any individual or individuals
     previously so appointed under this clause (ii)).

          (J) "Company" shall mean Armstrong Holdings, Inc. and, except in
               -------
     determining under Section 16(E) hereof whether or not any Change in Control
     of the Company has occurred, shall include its subsidiaries and any
     successor to its business and/or assets which assumes and agrees to perform
     this Agreement by operation of law, or otherwise.

          (K) "Date of Termination" shall have the meaning stated in Section 7.2
               -------------------
     hereof.

          (L) "Disability" shall be deemed the reason for the termination by the
               ----------

     Company of the Executive's employment, if, as a result of the Executive's
     incapacity due to physical or mental illness, the Executive shall have been
     absent from the full-time performance of the Executive's duties with the
     Company for a period of six (6) consecutive months, the Company shall have
     given the Executive a Notice of Termination for Disability, and, within
     thirty (30) days after such Notice of Termination is given, the Executive
     shall not have returned to the full-time performance of the Executive's
     duties.

          (M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
               ------------
     amended from time to time.

          (N) "Excise Tax" shall have the meaning stated in Section 6.2(A)
               ----------
     hereof.

          (O) "Executive" shall mean the individual named in the first paragraph
               ---------
     of this Agreement.

          (P) "Good Reason" for termination by the Executive of the Executive's
               -----------
     employment shall mean the occurrence (without the Executive's express
     written consent) after any Change in Control, or prior to a Change in
     Control under the circumstances described in clause (ii) of the second
     sentence of Section 6.1 hereof (treating all references in paragraphs (I)
     through (VIII) below to a "Change in Control" as references to a "Potential
     Change in Control"), of any one of the following acts by the Company, or
     failures by the Company to act, unless, in the case of any act or failure
     to act described in paragraph (I), (V) , (VI) or (VII) below, such act or
     failure to act is corrected prior to the Date of Termination specified in
     the Notice of Termination given in respect thereof:


                                     -15-
<PAGE>

               (I)   the assignment to the Executive of any duties inconsistent
          with the Executive's status as an executive officer of the Company or
          a substantial adverse alteration in the nature or status of the
          Executive's responsibilities, which in the Executive's reasonable
          judgment, represents a substantial reduction of the status, title,
          position or responsibilities from those in effect immediately prior to
          the Change in Control;

               (II)  a reduction by the Company in the Executive's annual base
          salary as in effect on the date hereof as the same may be increased
          from time to time;

               (III) the relocation of the Executive's principal place of
          employment to a location more than 30 miles from the Executive's
          principal place of employment immediately prior to the Change in
          Control (unless such relocation is closer to the Executive's principal
          residence) or the Company's requiring the Executive to be based
          anywhere other than such principal place of employment (or permitted
          relocation thereof) except for required travel on the Company's
          business to an extent substantially consistent with the Executive's
          present business travel obligations;

               (IV)  the failure by the Company to pay to the Executive any
          portion of the Executive's current compensation or to pay to the
          Executive any portion of an installment of deferred compensation under
          any deferred compensation program of the Company, within seven (7)
          days of the date such compensation is due;

               (V)   the failure by the Company to continue in effect any
          compensation plan in which the Executive participates immediately
          prior to the Change in Control which is material to the Executive's
          total compensation, including but not limited to the Company's Base
          Salary Plan, Management Achievement Plan, 1984 Long-Term Stock Option
          Plan for Key Employees, 1993 Long-Term Stock Incentive Plan, 1999
          Long-Term Incentive Plan, Armstrong Deferred Compensation Plan,
          Retirement Income Plan and Retirement Benefit Equity Plan, unless an
          equitable arrangement (embodied in an ongoing substitute or
          alternative plan) has been made with respect to such plan, or the
          failure by the Company to continue the Executive's participation
          therein (or in such substitute or alternative plan) on a basis not
          materially less favorable, both in terms of the amount or timing of
          payment of benefits provided and the level of the Executive's
          participation relative to other participants, as existed immediately
          prior to the Change in Control;

               (VI)  any material breach of any provision of this Agreement or
          any employment that the Executive may have with the Company;


                                     -16-
<PAGE>

               (VII)  the failure by the Company to continue to provide the
          Executive with benefits substantially similar to those enjoyed by the
          Executive under any of the Company's pension, savings, life insurance,
          medical, health and accident, or disability plans in which the
          Executive was participating immediately prior to the Change in
          Control, the taking of any action by the Company which would directly
          or indirectly materially reduce any of such benefits or deprive the
          Executive of any material fringe benefit enjoyed by the Executive at
          the time of the Change in Control, or the failure by the Company to
          provide the Executive with the number of paid vacation days to which
          the Executive is entitled on the basis of years of service with the
          Company in accordance with the Company's normal vacation policy in
          effect at the time of the Change in Control; or

               (VIII) any purported termination of the Executive's employment
          which is not effected pursuant to a Notice of Termination satisfying
          the requirements of Section 7.1 hereof; for purposes of this
          Agreement, no such purported termination shall be effective.

          Notwithstanding anything herein to the contrary, termination of
     employment by the Executive for any reason during the 30-day period
     commencing one (1) year anniversary of a Change in Control shall constitute
     Good Reason; provided however, that soley for purposes of this paragraph,
     the term Change in Control shall include a merger described by Section
     16(E)(III) in which the Company is the surviving corporation or parent
     corporation and the holders of the voting securities of the Company
     outstanding immediately prior to such merger represent less than 66 2/3% of
     the combined voting power of the securities of the Company outstanding
     immediately after such merger, only if an event described in Section
     16(E)(II) also occurs.

          The Executive's right to terminate the Executive's employment for Good
     Reason shall not be affected by the Executive's incapacity due to physical
     or mental illness. The Executive's continued employment shall not
     constitute consent to, or a waiver of rights with respect to, any act or
     failure to act constituting Good Reason hereunder. For purposes of any
     determination regarding the existence of Good Reason, any claim by the
     Executive that Good Reason exists shall be presumed to be correct unless
     the Company establishes to the Committee by clear and convincing evidence
     that Good Reason does not exist.

          (Q) "Gross-Up Payment" shall have the meaning stated in Section 6.2(A)
               ----------------
     hereof.

          (R) "Notice of Termination" shall have the meaning stated in Section
               ---------------------
     7.1 hereof.

          (S) "Payment" shall have the meaning stated in Section 6.2(A) hereof.
               -------

          (T) "Pension Plan" shall mean any tax-qualified, supplemental or
               ------------
     excess benefit pension plan maintained by the Company and any other
     agreement entered


                                     -17-
<PAGE>

     into between the Executive and the Company which is designed to provide the
     Executive with supplemental retirement benefits.

          (U) "Person" shall have the meaning given in Section 3(a)(9) of the
               ------
     Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof,
     except that such term shall not include (i) the Company or any of its
     subsidiaries, (ii) a trustee or other fiduciary holding securities under an
     employee benefit plan of the Company or any of its subsidiaries, (iii) an
     underwriter temporarily holding securities pursuant to an offering of such
     securities, (iv) a corporation owned, directly or indirectly, by the
     shareholders of the Company in substantially the same proportions as their
     ownership of stock of the Company, or (v) an entity or entities which are
     eligible to file and have filed a Schedule 13G under Rule 13d-l-(b) of the
     Exchange Act, which Schedule indicates beneficial ownership of 15% or more
     of the outstanding shares of common stock of the Company or the combined
     voting power of the Company's then outstanding securities.

          (V) "Potential Change in Control" shall be deemed to have occurred if
               ---------------------------
     the event set forth in any one of the following paragraphs shall have
     occurred:

                    (I)   the Company enters into an agreement, the
          consummation of which would result in the occurrence of a Change in
          Control;

                    (II)  the Company or any Person publicly announces an
          intention to take or to consider taking actions which, if consummated,
          would constitute a Change in Control;

                    (III) any Person becomes the Beneficial Owner, directly or
          indirectly, of securities of the Company representing 15% or more of
          either the then outstanding shares of common stock of the Company or
          the combined voting power of the Company's then outstanding securities
          (not including in the securities beneficially owned by such Person any
          securities acquired directly from the Company or its affiliates); or

                    (IV)  the Board adopts a resolution to the effect that, for
          purposes of this Agreement, a Potential Change in Control has
          occurred.

          (W) "Severance Payments" shall mean those payments described in
               ------------------
     Section 6.1 hereof.

          (X) "Stock Plan" shall mean the Company's Long-Term Stock Incentive
               ----------
     Plan and the Company's Stock Award Plan, as the same may be amended from
     time to time, and any successor plan or plans to such plans.

          (Y) "Underpayment" shall have the meaning stated in Section 6.2(B)
               ------------
     hereof.


                                     -18-
<PAGE>

          (Z) IN WITNESS WHEREOF, the parties have executed and delivered this
     Agreement as of the date first above written.

                       ARMSTRONG HOLDINGS, INC.


                       By:      ___________________________
                                Name:  Douglas L. Boles
                                Title: Executive Vice President, Human Resources


                       The undersigned, Armstrong World
                       Industries, Inc., agrees to be jointly
                       and severally bound by the terms
                       of this Agreement, including
                       specifically with respect to the
                       obligations of the Company hereunder.

                       ARMSTRONG WORLD INDUSTRIES, INC.


                       By:      ___________________________
                                Name:  Douglas L. Boles
                                Title: Executive Vice President, Human Resources


                       EXECUTIVE

                       ---------------------------------
                       Michael D. Lockhart





                                     -19-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.6
<SEQUENCE>8
<FILENAME>0008.txt
<DESCRIPTION>INDEMNIFICATION AGREEMENT
<TEXT>

<PAGE>

                                                                   EXHIBIT 10(f)
                                                                   -------------
                            INDEMNIFICATION AGREEMENT
                            -------------------------

          This Agreement is made effective as of the 7th day of August, 2000, by
and between Armstrong Holdings, Inc., a Pennsylvania corporation (the
"Corporation") and MICHAEL D. LOCKHART (the "Indemnitee"), a director of the
Corporation.

     WHEREAS, it is essential that the Corporation retain and attract as
directors and officers the most capable persons available; and

     WHEREAS, Indemnitee is a member of the Board of Directors of the
Corporation and in that capacity is performing a valuable service for the
Corporation; and

     WHEREAS, the Corporation has purchased and maintained policies of Directors
and Officers Liability Insurance ("D & O Insurance") covering certain
liabilities which may be incurred by its directors and officers in their
performance of services for the Corporation; and

     WHEREAS, developments with respect to the terms, renewal, and availability
of D & O Insurance have raised questions concerning the continued adequacy and
reliability of the protection available to corporate directors and officers; and

     WHEREAS, the shareholders of the Corporation have adopted a bylaw (the
"Bylaw") which provides for indemnification of and advancement of expenses to
the officers and directors of the Corporation unless the act or failure to act
giving rise to the claim for indemnification is determined by a court to have
constituted willful misconduct or recklessness, and the Bylaw and the applicable
indemnification statutes of the Commonwealth of Pennsylvania provide that they
are not exclusive; and

     WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitee's continued service to
the Corporation in an effective manner, the increasing difficulty in obtaining
satisfactory D & O Insurance coverage, and Indemnitee's reliance on the Bylaws,
and in part to provide Indemnitee with specific contractual assurance that the
protection promised by the Bylaws will be available to Indemnitee (regardless
of, among other things, any amendment to or revocation of the Bylaws or any
change in the composition of the Corporation's Board of Directors or acquisition
transaction relating to the Corporation), the Corporation wishes to provide in
this Agreement for the indemnification of and the advancing of expenses to
Indemnitee to the fullest extent (whether partial or complete) permitted by law
and as set forth in this Agreement, and, to the extent insurance is maintained,
for the continued coverage of indemnitee under the Corporation's D & 0 Insurance
policies.

     NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Corporation directly or, at its request, another
enterprise, and intending to be legally bound hereby, the parties hereto agree
as follows:
<PAGE>

     1.   Indemnity of Indemnitee.

          (a) The Corporation shall hold harmless and indemnify the Indemnitee
against any and all reasonable expenses, including attorneys' fees, and any and
all liability and loss, including judgments, fines, excise taxes (including any
unpaid excise taxes under ERISA) or penalties and amounts paid or to be paid in
settlement, incurred or paid by Indemnitee in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter "a proceeding") and whether or not
by or in the right of the Corporation or otherwise, to which the Indemnitee is,
was or at any time becomes a party, or is threatened to be made a party or is
involved (as a witness or otherwise) by reason of the fact that Indemnitee is or
was a director or officer of the Corporation or is or was serving at the request
of the Corporation as director, officer, trustee or representative of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis of
such proceeding is alleged action in an official capacity, or in any other
capacity while serving, as a director, officer, trustee or representative,
unless the act or failure to act giving rise to the claim for indemnification is
determined by a court to have constituted willful misconduct or recklessness;
provided, however, that the Corporation shall indemnify the Indemnitee in
connection with a proceeding (or part thereof) initiated by the Indemnitee
(other than a proceeding to enforce the Indemnitee's rights to indemnification
under this Agreement or otherwise) prior to a Change of Control, as defined in
Section 2(d), only if such proceeding (or part thereof) was authorized by the
Board of Directors of the Corporation.

          (b) Subject to the foregoing limitation concerning certain proceedings
initiated by the Indemnitee prior to a Change of Control, the Corporation shall
pay the expenses (including attorneys' fees) incurred by Indemnitee in
connection with any proceeding in advance of the final disposition thereof
promptly after receipt by the Corporation of a request therefor stating in
reasonable detail the expenses incurred or to be incurred.

          (c) If a claim under paragraph (a) or (b) of this section is not paid
in full by the Corporation within forty-five (45) days after a written claim has
been received by the Corporation, the Indemnitee may, at any time thereafter,
bring suit against the Corporation to recover the unpaid amount of the claim.
The burden of proving that indemnification or advances are not appropriate shall
be on the Corporation. The Indemnitee shall also be entitled to be paid the
expenses of prosecuting such claim to the extent he or she is successful in
whole or in part on the merits or otherwise in establishing his or her right to
indemnification or to the advancement of expenses. The Corporation shall pay
such fees and expenses in advance of the final disposition of such action on the
terms and conditions set forth in Section 1(b).

     2.   Maintenance of Insurance and Funding.

          (a) The Corporation represents that as of August 7, 2000, it had in
force and effect the following policies of D & O Insurance (the "Insurance
Policies"):

                                       2
<PAGE>

     Insurer                                                        Amount*

Primary:  National Union Fire Insurance Company (AIG)               $25,000,000
Excess:  ACE                                                        $35,000,000

*Deductible zero where Company not permitted/required to indemnify; otherwise $2
million.

     Subject only to the provisions of Section 2(b) hereof, the Corporation
agrees that, so long as Indemnitee shall continue to serve as an officer or
director of the Corporation (or shall continue at the request of the Corporation
to serve as a director, officer, trustee or representative of another
corporation, partnership, joint venture, trust or other enterprise, including
service with respect to an employee benefit plan) and thereafter so long as
Indemnitee shall be subject to any possible claim or threatened, pending or
completed action, suit or proceeding, whether civil, criminal or investigative,
by reason of the fact that Indemnitee was a director or officer of the
Corporation (or served in any of said other capacities), the Corporation shall
purchase and maintain in effect for the benefit of Indemnitee one or more valid,
binding and enforceable policy or policies of D & 0 Insurance providing coverage
at least comparable to that provided pursuant to the Insurance Policies.

          (b) The Corporation shall not be required to maintain said policy or
policies of D & 0 Insurance in effect if, in the reasonable business judgment of
the then directors of the Corporation (i) the premium cost for such insurance is
substantially disproportionate to the amount of coverage, (ii) the coverage
provided by such insurance is so limited by exclusions that there is
insufficient benefit from such insurance or (iii) said insurance is not
otherwise reasonably available; provided however, that in the event the then
directors make such a judgment, the Corporation shall purchase and maintain in
force a policy or policies of D & O Insurance in the amount and with such
coverage as the then directors determine to be reasonably available.
Notwithstanding the general provisions of this Section 2(b), following a Change
of Control, any decision not to maintain any policy or policies of D & O
Insurance or to reduce the amount or coverage under any such policy or policies
shall be effective only if there are "disinterested directors" (as defined in
Section 2(d) hereof) and shall require the concurrence of a majority of the
"disinterested directors."

          (c) If and to the extent the Corporation, acting under Section 2(b),
does not purchase and maintain in effect the policy or policies of D & O
Insurance described in Section 2(a), the Corporation shall indemnify and hold
harmless the Indemnitee to the full extent of the coverage which would otherwise
have been provided by such policies. The rights of the Indemnitee hereunder
shall be in addition to all other rights of Indemnitee under the remaining
provisions of this Agreement.

          (d) In the event of a Potential Change of Control or if and to the
extent the Corporation is not required to maintain in effect the policy or
policies of D & O Insurance described in Section 2(a) pursuant to the provisions
of Section 2(b), the Corporation shall, upon written request by indemnitee,
create a "Trust" for the benefit of Indemnitee and from time to

                                       3
<PAGE>

time, upon written request by Indemnitee, shall fund such Trust in an amount
sufficient to pay any and all expenses, including attorneys' fees, and any and
all liability and loss, including judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement actually and reasonably
incurred by him or on his behalf for which the Indemnitee is entitled to
indemnification or with respect to which indemnification is claimed, reasonably
anticipated or proposed to be paid in accordance with the terms of this
Agreement or otherwise; provided that in no event shall more than $100,000 be
required to be deposited in any Trust created hereunder in excess of the amounts
deposited in respect of reasonably anticipated expenses, including attorneys'
fees. The amounts to be deposited in the Trust pursuant to the foregoing funding
obligation shall be determined by the Reviewing Person whose determination shall
be final and conclusive. The Reviewing Person shall have no liability to the
Indemnitee for his decisions hereunder.

     The terms of the Trust shall provide that upon a Change of Control (i) the
Trust shall not be revoked or the principal thereof invaded, without the written
consent of the Indemnitee, (ii) the Trust shall advance, within two business
days of a request by the Indemnitee, any and all expenses, including attorneys'
fees, to the Indemnitee (and the Indemnitee hereby agrees to reimburse the Trust
under the circumstances under which the Indemnitee would be required to
reimburse the Trustee under Section 5 of this Agreement), (iii) the Trust shall
continue to be funded by the Corporation in accordance with the funding
obligation set forth above, (iv) the Trustee shall promptly pay to the
Indemnitee all amounts for which the Indemnitee shall be entitled to
indemnification pursuant to this Agreement or otherwise, and (v) all unexpended
funds in such Trust shall revert to the Corporation upon a final determination
by the Reviewing Party or a court of competent jurisdiction, as the case may be,
that the Indemnitee has been fully indemnified under the terms of this
Agreement. The Trustee shall be a bank or trust company or other individual or
entity chosen by the Indemnitee and acceptable and approved of by the
Corporation.

          (e) For the purposes of this Agreement:

               (i)  a "Change of Control" shall occur if and when (A) any person
                    acquires "beneficial ownership" of more than 28% of the then
                    outstanding "voting stock" of the Company and within five
                    years thereafter, "disinterested directors" no longer
                    constitute at least a majority of the entire Board of
                    Directors or (B) there shall occur a "business combination"
                    with an "interested shareholder" not approved by a majority
                    of the "disinterested directors".

               (ii) a "Potential Change of Control" shall occur if (A) the
                    Corporation enters into an agreement or arrangement, the
                    consummation of which would result in the occurrence of a
                    Change in Control; (B) any person publicly announces a
                    tender offer or comparable action which if consummated would
                    constitute a Change of Control; (C) any person (other than a
                    trustee or other fiduciary holding securities under an
                    employee benefit plan of the Corporation acting in such
                    capacity or a corporation owned, directly or indirectly, by

                                       4
<PAGE>

                    the shareholders of the Corporation in substantially the
                    same proportions as their ownership of stock of the
                    Corporation), who is or becomes the beneficial owner,
                    directly or indirectly, of securities of the Corporation
                    representing 10% or more of the combined voting stock
                    increases his beneficial ownership of such securities by 5%
                    or more over the percentage so owned by such person on the
                    date hereof; or (D) the Board adopts a resolution to the
                    effect that, for the purposes of this Agreement, a Potential
                    Change of Control has occurred.

             (iii)  a "Reviewing Person" means any appropriate person or body
                    consisting of a member or members of the Corporation's Board
                    of Directors or any other person or body appointed by the
                    Board which, following a Change of Control, shall require
                    the concurrence of a majority of the "disinterested
                    directors" or shall be independent legal counsel approved
                    and accepted by the Indemnitee who is not a party to the
                    particular claim for which Indemnitee is seeking
                    indemnification.

     For purposes of this subsection, the terms "person," "beneficial
ownership," "voting stock," "disinterested director," "business combination,"
and "interested shareholder" shall have the meaning given to them in Article 7
of the Company's Articles of Incorporation as in effect on May l, 2000.

     3. Continuation of Indemnity.

     All agreements and obligations of the Corporation contained in this
Agreement shall continue during the period the Indemnitee is a director or
officer of the Corporation (or is or was serving at the request of the
Corporation as a director, officer, trustee or representative of another
corporation, partnership, joint venture, trust or other enterprise, including
any employee benefit plan) and shall continue thereafter so long as the
Indemnitee shall be subject to any possible claim or threatened, pending or
completed action, suit or proceeding, whether civil, criminal or investigative,
by reason of the fact that the Indemnitee was a director or officer of the
Corporation or serving in any other capacity referred to herein.

     4. Notification and Defense of Claim.

     As soon as practicable after receipt by the Indemnitee of actual knowledge
of any action, suit or proceeding the Indemnitee will notify the Corporation
thereof, if a claim in respect thereof may be or is being made by the Indemnitee
against the Corporation under this Agreement. With respect to any action, suit
or proceeding as to which the Indemnitee has so notified the Corporation:

        (a)  The Corporation will be entitled to participate therein at its own
expense; and

                                       5
<PAGE>

          (b) Except as otherwise provided below, the Corporation may assume the
defense thereof, with counsel reasonably satisfactory to the Indemnitee. After
the Corporation notifies the Indemnitee of its election to so assume the
defense, the Corporation will not be liable to the Indemnitee under this
Agreement for any legal or other expenses subsequently incurred by the
Indemnitee in connection with the defense, other than reasonable costs of
investigation, including an investigation in connection with determining whether
there exists a conflict of interest of the type described in (ii) of this
paragraph, or as otherwise provided in this paragraph. The Indemnitee shall have
the right to employ his or her counsel in such action, suit or proceeding but
the fees and expenses of such counsel incurred after the Corporation notifies
the Indemnitee of its assumption of the defense shall be at the expense of the
Indemnitee unless (i) the Corporation authorizes the Indemnitee's employment of
counsel which, following a "Change of Control", shall be effective if authorized
by a majority of the "disinterested directors" (which terms are defined in
Section 2(d)), although less than a quorum or majority of a quorum of the
directors then in office; (ii) the Indemnitee shall have reasonably concluded
that there may be a conflict of interest between the Corporation and the
Indemnitee in the conduct of the defense or (iii) the Corporation shall not have
employed counsel to assume the defense of such action, in each of which cases
the fees and expenses of counsel shall be at the expense of the Corporation. The
Corporation shall not be entitled to assume the defense of any action, suit or
proceeding brought by or on behalf of the Corporation or as to which the
Indemnitee shall have made the conclusion described in (ii) of this paragraph.

          (c) The Corporation shall not be obligated to indemnify the Indemnitee
under this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. The Corporation shall not settle any
action or claim in any manner which would impose any penalty limitation on the
Indemnitee without the Indemnitee's written consent. Neither the Corporation nor
the Indemnitee shall unreasonably withhold their consent to any proposed
settlement.

     5.   Undertaking to Repay Expenses.

     In the event it shall ultimately be determined that the Indemnitee is not
entitled to be indemnified for the expenses paid by the Corporation pursuant to
Section 1(b) hereof or otherwise or was not entitled to be fully indemnified,
the Indemnitee shall repay to the Corporation such amount of the expenses or the
appropriate portion thereof, so paid or advanced.

     6.   Notice.

     Any notice to the Corporation shall be directed to Armstrong Holdings,
Inc., 2500 Columbia Avenue, Lancaster, Pennsylvania 17604-3001 Attention:
Secretary (or such other address as the Corporation shall designate in writing
to the Indemnitee).

     7.   Enforcement.

     In the event the Indemnitee is required to bring any action to enforce
rights or to collect monies due under this Agreement, the Corporation shall pay
to the Indemnitee the fees and expenses incurred by the Indemnitee in bringing
and pursuing such action to the extent the

                                       6
<PAGE>

Indemnitee is successful, in whole or in part, on the merits or otherwise, in
such action. The Corporation shall pay such fees and expenses in advance of the
final disposition of such action on the terms and conditions set forth in
Section 1(b).

     8.  Severability.

     If any provision or provisions of this Agreement shall be held to be
invalid, illegal or unenforceable for any reason whatsoever:

         (a) the validity, legality and enforceability of the remaining
provisions o this Agreement (including without limitation, each portion of any
Section of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that is not itself invalid, illegal or unenforceable)
shall not in any way be affected or impaired thereby; and

         (b) to the fullest extent possible, the provisions of this Agreement
(including, without limitation, each portion of any Section of this Agreement
containing any such provision held to be invalid, illegal or unenforceable, that
is not itself invalid, illegal or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, illegal or
unenforceable.

     9.  Indemnification Under this Agreement Not Exclusive.

     The indemnification provided by this Agreement shall not be deemed
exclusive of any other rights to which the Indemnitee may be entitled under the
Articles of Incorporation of the Corporation or its bylaws, any other agreement,
any vote of stockholders or directors, or otherwise, both as to action in the
Indemnitee's official capacity and as to action in another capacity while
holding such office.

     10. Miscellaneous:

         (a) This Agreement shall be interpreted and enforced in accordance
with the laws of the Commonwealth of Pennsylvania.

         (b) This Agreement shall be binding upon the Indemnitee and upon the
Corporation, its successors and assigns, and shall inure to the benefit of the
Indemnitee, his heirs, executors, personal representatives and assigns and to
the benefit of the Corporation, its successors and assigns. If the Corporation
shall merge or consolidate with another corporation or shall sell, lease,
transfer or otherwise dispose of all or substantially all of its assets to one
or more persons or groups (in one transaction or series of transactions), (i)
the Corporation shall cause the successor in the merger or consolidation or the
transferee of the assets that is receiving the greatest portion of the assets or
earning power transferred pursuant to the transfer of the assets, by agreement
in form and substance satisfactory to the Indemnitee, to expressly assume all of
the Corporation's obligations under and agree to perform this Agreement, and
(ii) the term "Corporation" whenever used in this Agreement shall mean and
include any such successor or transferee.

                                       7
<PAGE>

          (c) No amendment, modification, termination or cancellation of this
Agreement shall be effective unless in writing signed by both of the parties
hereto.

                                       8
<PAGE>

     IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first above written.

                               ARMSTRONG HOLDINGS, INC.


                               By:      ___________________________
                                        Name:  Douglas L. Boles
                                        Title: Executive Vice President,
                                               Human Resources


                               The undersigned, Armstrong World
                               Industries, Inc., agrees to be
                               jointly and severally bound by the
                               terms of this Agreement, including
                               specifically with respect to the
                               obligations of the Company hereunder.

                               ARMSTRONG WORLD INDUSTRIES, INC.


                               By:      ___________________________
                                        Name:  Douglas L. Boles
                                        Title: Executive Vice President,
                                               Human Resources

                               INDEMNITEE


                               _________________________________
                               Michael D. Lockhart
                               Title:  Chairman of the Board and
                                       Chief Executive Officer





                                       9
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.7
<SEQUENCE>9
<FILENAME>0009.txt
<DESCRIPTION>MANAGEMENT SSERVICES AGREEMENT
<TEXT>

<PAGE>

                                                                   EXHIBIT 10(g)
                          MANAGEMENT SERVICES AGREEMENT


This Management Services Agreement is made and entered into as of August 7, 2000
by and between Armstrong Holdings, Inc., a Pennsylvania corporation ("Holdings")
and Armstrong World Industries, Inc., also a Pennsylvania corporation ("World"),
in connection with contracts made this day by Holdings with three executives.

Holdings and World are also parties to an "Affiliate Agreement" dated as of May
1, 2000 concerning, among other things, an allocation of expenses between them
and non-solicitation of each other's employees. In consideration of the promises
and mutual covenants, and subject to the terms and conditions hereof, Holdings
and World now agree as follows:

1.   Individuals holding the posts of Chief Executive Officer, President, Chief
     Operating Officer and Advisor to the Chairman of the Board and Chief
     Operating Officer shall be under contract to Holdings and such action shall
     not violate the "Nonsolicitation of Employees" provisions of the aforesaid
     Affiliate Agreement.

2.   The executives of Holdings in said positions shall provide management
     services to World and its subsidiaries. World agrees to treat them as
     employees and pay or reimburse all expenses and obligations of Holdings in
     connection with the contracts, compensation, benefits and any severance of
     said individuals, including salary, bonus, other direct and indirect
     compensation, and any other sums due, and such individuals shall
     participate at World's expense in the same perquisites and benefit plans of
     World as heretofore available to executives in similar positions.

3.   From time to time, certain employees of World may be elected to serve as
     officers of Holdings in Finance, Human Resources, Legal and other
     functions. Except to the extent such services to Holdings create additional
     costs or fall within the specific categories of services enumerated in the
     second sentence of Section 1 of said Affiliate Agreement, World shall bear
     all expenses related to such employees.

4.   World recognizes that, because Holdings is the ultimate shareholder of
     World and its subsidiaries, issues relating to the business and operations
     of World and its subsidiaries are reviewed and analyzed by the board of
     directors of Holdings. Although the directors of World are not bound by the
     determinations of the board of directors of Holdings, World recognizes that
     it benefits from the analysis and deliberations of the board of directors
     of Holdings. Accordingly, effective July 1, 2000, World will pay or
     reimburse Holdings for all costs and expenses relating to Holdings' Board
     of Directors, including fees, travel expenses and support costs, provided
     that any increase in fees to Holdings' Directors must be approved by World
     in advance.

5.   This Agreement shall be deemed an amendment of said Affiliate Agreement,
     and shall be subject to the same dispute resolution, limitation of
     liability and other provisions as provided therein.

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
as of the date first written above.

ARMSTRONG HOLDINGS INC.                     ARMSTRONG WORLD INDUSTRIES, INC.


By: _______________________________         By: _______________________________

Title: ____________________________         Title: ____________________________
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.8
<SEQUENCE>10
<FILENAME>0010.txt
<DESCRIPTION>STOCK OPTION EXCHANGE PROGRAM TO EMPLOYEES
<TEXT>

<PAGE>

                                                                   EXHIBIT 10(i)

               TERMS OF RESTRICTED STOCK FOR STOCK OPTION EXCHANGE
                          PROGRAM OFFERED TO EMPLOYEES.

On behalf of the Management Development and Compensation Committee of the Board
of Directors, we are extending a one-time opportunity for you to exchange your
stock options with exercise prices above $50 per share for shares of Armstrong
stock and restricted stock. This will be done at either a 6 to 1 or an 11 to 1
conversion ratio depending on the exercise price of the option.

You will have to decide which of these stock options, if any, you want to
exchange. The shares of Armstrong stock will be granted to you with the
following conditions:

     .        1/3 of the shares will be issued as a stock award on 9/18/00. For
          individuals subject to United States income tax, the value of these
          shares will be considered taxable income to you on the date of grant.

     .        1/3 of the shares will be issued as a restricted stock award which
          will become free of restrictions on 9/18/01.

     .        1/3 of the shares will be issued as a restricted stock award which
          will become free of restrictions on 9/18/02.

                              ILLUSTRATIVE EXAMPLE
                              --------------------
<TABLE>
<CAPTION>
    ------------------- ------------------ ----------------- ----------------- ----------------- ------------------
                                                                                # of Shares of       Value at
    Grant Date           Exercise Price      # of Options    Conversion Ratio       Stock            $16/Share
    ------------------- ------------------ ----------------- ----------------- ----------------- ------------------
<S>                           <C>                <C>               <C>                <C>              <C>
         2/22/99              $50.9375           1,200              6:1               200              $3,200
    ------------------- ------------------ ----------------- ----------------- ----------------- ------------------
         2/28/98                73.125           1,100             11:1               100               1,600
    ------------------- ------------------ ----------------- ----------------- ----------------- ------------------
         2/23/97                69.875           1,100             11:1               100               1,600
    ------------------- ------------------ ----------------- ----------------- ----------------- ------------------
         2/25/96                59.875           1,210             11:1               110               1,760
    ------------------- ------------------ ----------------- ----------------- ----------------- ------------------
         2/24/94                54.625             550             11:1                50                 800
    ------------------- ------------------ ----------------- ----------------- ----------------- ------------------
                 TOTAL                           5,160                                560              $8,960
    ------------------- ------------------ ----------------- ----------------- ----------------- ------------------
</TABLE>

You are able to elect to exchange these options on a grant-by-grant basis.
Incentive Stock Options and Nonstatutory Stock Options have been shown as
separate grants. The exchange of each identified grant would need to be done on
                                 ----
an all or nothing basis. You can, however, elect to exchange some grants but not
others. The election is strictly voluntary on your part.

WHAT IS A RESTRICTED STOCK AWARD?
- ---------------------------------

A restricted stock award is a grant of Armstrong common stock where your rights
to the shares are restricted for a defined period of time and the shares are
subject to forfeiture under certain circumstances.
<PAGE>

The shares of stock are registered in your name at the time of the award but you
do not have access to them until the conclusion of the restriction period.
During the restriction period, you are able to vote the shares, and declared
dividends are used to purchase additional shares of stock which are subject to
the same restriction period.

At the conclusion of the restriction period, you will receive a certificate for
the shares awarded and the shares purchased with the reinvested dividend
payments. For individuals subject to United States tax law, there will be
ordinary income tax assessed on the value of the shares on the date the
restrictions lapse.

CONVERSION OF YOUR STOCK OPTION GRANTS
- --------------------------------------

Enclosed is a listing of your stock option grants with exercise prices above $50
per share. You will see that we have indicated the conversion ratio as well as
the number of shares of common stock that would result from the exchange of each
stock option grant. The last column of this summary provides a space for you to
indicate whether you wish to convert each of the corresponding stock option
grants. If you wish to exchange a stock option grant for stock and restricted
stock, write "Yes" in the space provided. If you do not want to exchange the
                                                 -- ---
stock option grant, write "No" or leave the space blank in order to continue to
hold the stock option grant. WE HAVE ESTABLISHED A DEADLINE OF THURSDAY,
SEPTEMBER 7, 2000, TO RECEIVE YOUR COMPLETED AND SIGNED CONVERSION RESPONSE. It
is important that you sign and date the form in the lower right-hand corner.
Your form should be returned to Scott Webster in Compensation and Benefits.
INDIVIDUALS WHO WORK OUTSIDE OF LANCASTER SHOULD FAX THEIR FORMS TO (717)
396-6119.

TERMS AND CONDITIONS OF AWARDS
- ------------------------------

If you decide to exchange any of your stock options, shares of stock and
restricted stock will be issued under the Armstrong Holdings, Inc. Stock Award
Plan. We have provided a copy of the plan document and the plan prospectus which
contains additional information about the plan. Following the approval of the
stock and restricted stock awards on September 18, 2000, you will receive
transmittal letters and award agreements that specify the terms and conditions
of the awards.

You should understand the following points with respect to these awards:

     General - No fractional shares will be issued. The number of shares issued
     -------
     will be rounded to the nearest whole share.

     Taxation - Employees subject to United States income tax law will have
     --------
     immediate ordinary income on the market value of the shares issued as a
     stock award on September 18, 2000, (i.e., approximately one-third of the
     total shares issued under the conversion). Restricted stock awards are
     subject to ordinary income tax based on the value of the shares on the date
     the restrictions lapse.
<PAGE>

     You are responsible for satisfying any tax withholding obligations that
     arise with respect to stock and restricted stock awards. Individuals
     subject to United States income tax law may satisfy tax withholding
     obligations by requesting that the company withhold shares of common stock
     that would otherwise be delivered to you. This tax withholding decision
     will be made at a later date.

     Termination of Employment During a Restriction Period - If you terminate
     -----------------------------------------------------
     employment during a restriction period for any reason other than death,
     disability or retirement, you will forfeit all shares of restricted stock
     subject to a restriction period.

     If your termination is due to retirement, restrictions will lapse on a
     proportion of shares subject to restriction at the time of retirement. The
     number of shares you would be entitled to receive will be prorated for the
     number of months of your employment during the restriction period. Any
     applicable restriction period would continue in effect for the prorated
     number of shares.

     If you terminate employment due to death or disability, restrictions will
     lapse on all shares of restricted stock.

     Certain Forfeitures - If you are discharged for willful, deliberate or
     -------------------
     gross misconduct, or engage in activities found to be injurious to the
     company's financial interest, you may be required to forfeit and/or return
     stock received under these awards. These provisions are described under
     Section 8.7 of the plan text.
<PAGE>

                  SCHEDULE OF PARTICIPATING EXECUTIVE OFFICERS


             Name                   Number of    Number of    Total # of
                                    Options       Options     Stock Award
                                    Above $50    Converted       Shares

Frank A. Riddick, III                189,720       189,720        20,278
Marc R. Olivie                       101,300       101,300        11,103
Floyd F. Sherman                      87,000        87,000        10,712
E. Follin Smith                       52,240        52,240         8,707
Stephen E. Stockwell                  56,750        56,750         6,068
Stephen J. Senkowski                  16,630        16,630         2,004
Matthew J. Angello                    13,300        13,300         1,626
William C. Rodruan                     9,280         9,280           977
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-15
<SEQUENCE>11
<FILENAME>0011.txt
<DESCRIPTION>EXHIBIT 15
<TEXT>

<PAGE>

                                                                  Exhibit No. 15



Armstrong Holdings, Inc.
Lancaster, Pennsylvania

Ladies and Gentlemen:

     RE:  Registration Statement Nos. 33-74501; 33-91890; 33-18996; 33-29768;
          33-18997; 33-65768; 333-74633; 333-79093.

With respect to the subject Registration Statements, we acknowledge our
awareness of the incorporation by reference therein of our report dated November
14, 2000, related to our review of interim financial information of Armstrong
Holdings, Inc.

Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a Registration Statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.

KPMG LLP

Philadelphia, Pennsylvania
November 14, 2000
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>12
<FILENAME>0012.txt
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>

<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Armstrong Holdings and Subsidiaries Unaudited Condensed Financial Statements as
of and for September 30, 2000, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0001109304
<NAME> ARMSTRONG HOLDINGS

<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-2000
<PERIOD-END>                               SEP-30-2000
<CASH>                                              34
<SECURITIES>                                         0
<RECEIVABLES>                                      527
<ALLOWANCES>                                        47
<INVENTORY>                                        430
<CURRENT-ASSETS>                                 1,083
<PP&E>                                           2,366
<DEPRECIATION>                                   1,061
<TOTAL-ASSETS>                                   4,032
<CURRENT-LIABILITIES>                              799
<BONDS>                                          1,314
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                           219
<OTHER-SE>                                         517
<TOTAL-LIABILITY-AND-EQUITY>                     4,032
<SALES>                                          2,444
<TOTAL-REVENUES>                                 2,444
<CGS>                                            1,709
<TOTAL-COSTS>                                    1,709
<OTHER-EXPENSES>                                   648
<LOSS-PROVISION>                                    11
<INTEREST-EXPENSE>                                  80
<INCOME-PRETAX>                                    (4)
<INCOME-TAX>                                       (1)
<INCOME-CONTINUING>                                (3)
<DISCONTINUED>                                     116
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                       113
<EPS-BASIC>                                       2.80
<EPS-DILUTED>                                     2.80


</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.1
<SEQUENCE>13
<FILENAME>0013.txt
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>

<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Armstrong World Industries, Inc. and Subsidiaries Unaudited Condensed Financial
Statements as of and for September 30, 2000, and is qualified in its entirety by
reference to such financial
statements.
</LEGEND>
<CIK> 0000007431
<NAME> ARMSTRONG WORLD INDUSTRIES, INC.

<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-2000
<PERIOD-END>                               SEP-30-2000
<CASH>                                              34
<SECURITIES>                                         0
<RECEIVABLES>                                      527
<ALLOWANCES>                                        47
<INVENTORY>                                        430
<CURRENT-ASSETS>                                 1,083
<PP&E>                                           2,366
<DEPRECIATION>                                   1,061
<TOTAL-ASSETS>                                   4,032
<CURRENT-LIABILITIES>                              799
<BONDS>                                          1,314
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                           228
<OTHER-SE>                                         503
<TOTAL-LIABILITY-AND-EQUITY>                     4,032
<SALES>                                          2,444
<TOTAL-REVENUES>                                 2,444
<CGS>                                            1,709
<TOTAL-COSTS>                                    1,709
<OTHER-EXPENSES>                                   647
<LOSS-PROVISION>                                    11
<INTEREST-EXPENSE>                                  80
<INCOME-PRETAX>                                    (4)
<INCOME-TAX>                                       (1)
<INCOME-CONTINUING>                                (3)
<DISCONTINUED>                                     116
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                       113
<EPS-BASIC>                                          0
<EPS-DILUTED>                                        0


</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
