FORM
10-Q





UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION





Washington,
D.C.  20549





Quarterly
Report Pursuant to Section 13 or 15(d)


of
the Securities Exchange Act of 1934





For
      Quarter Ended September 30, 2008
            Commission
      File Number 1-4773





AMERICAN
BILTRITE INC.


(Exact
name of registrant as specified in its charter)





Delaware
            04-1701350(State
      or other jurisdiction of
            (I.R.S.
      Employer Identification No.)incorporation
      or organization)





57
River Street


Wellesley
Hills, Massachusetts  02481-2097


(Address
of Principal Executive Offices)




(781)
237-6655


(Registrant’s
telephone number, including area code)





Not
Applicable


(Former
name, former address and former fiscal year if changed since last
report)





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 (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes x   No o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.




Large accelerated filero
                Accelerated fileroNon-accelerated
      filero(Do not
      check if a smaller reporting company)
                Smaller reporting companyx





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes o   No x





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.





Class
            
            Outstanding
      at November 7, 2008Common
      Stock
            
            3,441,551
      shares





FORWARD
LOOKING STATEMENTS





Some
of the information presented in or incorporated by reference in this report
constitutes "forward-looking statements," within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve risks, uncertainties and
assumptions.  These statements can be identified by the use of words
such as "anticipate," "believe," "estimate," "expect," "intend," "plan,"
"project" and other words of similar meaning.  In particular, these
include statements relating to intentions, beliefs or current expectations
concerning, among other things, future performance, results of operations, the
outcome of contingencies, such as bankruptcy and other legal proceedings, and
financial conditions.  These statements do not relate strictly to
historical or current facts.  These forward-looking statements are
based on American Biltrite Inc.’s expectations and American Biltrite Inc.’s
understanding of its majority-owned subsidiary Congoleum Corporation’s
expectations, as of the date of this report, of future events, and American
Biltrite Inc. undertakes no obligation to update any of these forward-looking
statements, except as required by federal securities laws.  Although
American Biltrite Inc. believes that these expectations are based on reasonable
assumptions, within the bounds of its knowledge of its business and operations,
there can be no assurance that actual results will not differ materially from
its expectations.  Readers are cautioned not to place undue reliance
on any forward-looking statements.  Any or all of these statements may
turn out to be incorrect.  By their nature, forward-looking statements
involve risks and uncertainties because they relate to events and depend on
circumstances that may or may not occur in the future.  Any
forward-looking statements made in this report speak only as of the date of this
report unless the statement indicates that another date applies.  It
is not possible to predict or identify all factors that could potentially cause
actual results to differ materially from expected and historical
results.  Factors that could cause or contribute to American Biltrite
Inc.’s actual results differing from its expectations include those factors
discussed in Item 1A of Part II of this Quarterly Report on Form 10-Q and in
American Biltrite Inc.’s other filings with the Securities and Exchange
Commission.








AMERICAN
BILTRITE INC.





INDEX





PART
      I.
            FINANCIAL
      INFORMATIONItem
      1.
            Financial
      Statements:Consolidating
      Condensed Balance Sheets – Assets as of September 30, 2008 (Unaudited) and
      December 31, 2007
            1Consolidating
      Condensed Balance Sheets – Liabilities and Stockholders’ Equity as of
      September 30, 2008 (Unaudited) and December 31, 2007
            2Consolidating
      Condensed Statements of Operations (Unaudited) For the Three Months Ended
      September 30, 2008 and 2007
            3Consolidating
      Condensed Statements of Operations (Unaudited) For the Nine Months Ended
      September 30, 2008 and 2007
            4Consolidating
      Condensed Statements of Cash Flows – Operating Activities (Unaudited) For
      the Nine Months Ended September 30, 2008 and 2007
            5Consolidating
      Condensed Statements of Cash Flows – Investing & Financing Activities
      (Unaudited) For the Nine Months Ended September 30, 2008 and
      2007
            6Notes
      to Unaudited Consolidating Condensed Financial Statements
            7Item
      2.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            30Item
      4T.
            Controls
      and Procedures
            44PART
      II.
            OTHER
      INFORMATIONItem
      1.
            Legal
      Proceedings
            45Item
      1A.
            Risk
      Factors
            45Item
      3.
            Defaults
      Upon Senior Securities
            54Item
      6.
            Exhibits
            55Signature
            57










PART
I.   FINANCIAL INFORMATION





Item
1. Financial Statements








AMERICAN
BILTRITE INC. AND SUBSIDIARIES


CONSOLIDATING
CONDENSED BALANCE SHEETS – ASSETS


(In
thousands of dollars)





ABI
      Consolidated
            
            
            Eliminations
            
            
            Congoleum
            
            
            American
      BiltriteSeptember 30,
              2008
            
            
            December 31,
              2007
            
            
            September 30,
              2008
            
            
            December 31,
              2007
            
            
            September 30,
              2008
            
            
            December 31,
              2007
            
            
            September 30,
              2008
            
            
            December 31,
              2007(Unaudited)
            
            
            
            
            
            (Unaudited)
            
            
            
            
            
            (Unaudited)
            
            
            
            
            
            (Unaudited)AssetsCurrent
      Assets:Cash
      and cash equivalents
            
            $
            26,632
            
            
            $
            30,185
            
            
            
            
            
            
            
            
            $
            23,757
            
            
            $
            26,327
            
            
            $
            2,875
            
            
            $
            3,858Restricted
      cash
            
            
            29,538
            
            
            
            6,501
            
            
            
            
            
            
            
            
            
            29,538
            
            
            
            6,501Accounts
      receivable, net
            
            
            41,091
            
            
            
            41,345
            
            
            $
            (572
            )
            
            $
            (316
            )
            
            
            15,971
            
            
            
            14,162
            
            
            
            25,692
            
            
            
            27,499Inventories
            
            
            82,177
            
            
            
            78,401
            
            
            
            (107
            )
            
            
            (125
            )
            
            
            36,730
            
            
            
            35,182
            
            
            
            45,554
            
            
            
            43,344Deferred
      income taxes
            
            
            992
            
            
            
            961
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            992
            
            
            
            961Prepaid
      expense & other current assets
            
            
            7,835
            
            
            
            20,001
            
            
            
            
            
            
            
            
            
            
            
            4,490
            
            
            
            13,138
            
            
            
            3,345
            
            
            
            6,863Total
      current assets
            
            
            188,265
            
            
            
            177,394
            
            
            
            (679
            )
            
            
            (441
            )
            
            
            110,486
            
            
            
            95,310
            
            
            
            78,458
            
            
            
            82,525Property,
      plant & equipment, net
            
            
            91,218
            
            
            
            99,153
            
            
            
            
            
            
            
            
            
            
            
            57,132
            
            
            
            61,993
            
            
            
            34,086
            
            
            
            37,160Other
      assets:Insurance
      for asbestos-related liabilities
            
            
            11,140
            
            
            
            11,140
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            11,140
            
            
            
            11,140Goodwill,
      net
            
            
            11,605
            
            
            
            11,605
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            11,605
            
            
            
            11,605Other
      assets
            
            
            14,326
            
            
            
            19,014
            
            
            
            (117
            )
            
            
            (126
            )
            
            
            7,561
            
            
            
            11,909
            
            
            
            6,882
            
            
            
            7,23137,071
            
            
            
            41,759
            
            
            
            (117
            )
            
            
            (126
            )
            
            
            7,561
            
            
            
            11,909
            
            
            
            29,627
            
            
            
            29,976Total
      assets
            
            $
            316,554
            
            
            $
            318,306
            
            
            $
            (796
            )
            
            $
            (567
            )
            
            $
            175,179
            
            
            $
            169,212
            
            
            $
            142,171
            
            
            $
            149,661





See
accompanying notes to consolidating condensed financial
statements.


1


AMERICAN
BILTRITE INC. AND SUBSIDIARIES


CONSOLIDATING
CONDENSED BALANCE SHEETS – LIABILITIES AND STOCKHOLDERS’ EQUITY


(In
thousands of dollars)





ABI
      Consolidated
            
            
            Eliminations
            
            
            Congoleum
            
            
            American
      BiltriteSeptember 30,
              2008
            
            
            December 31,
              2007
            
            
            September 30,
              2008
            
            
            December 31,
              2007
            
            
            September 30,
              2008
            
            
            December 31,
              2007
            
            
            September 30,
              2008
            
            
            December 31,
              2007(Unaudited)
            
            
            
            
            
            (Unaudited)
            
            
            
            
            
            (Unaudited)
            
            
            
            
            
            (Unaudited)LiabilitiesCurrent
      liabilities:Accounts
      payable
            
            $
            20,269
            
            
            $
            22,570
            
            
            $
            (572
            )
            
            $
            (316
            )
            
            $
            9,294
            
            
            $
            10,715
            
            
            $
            11,547
            
            
            $
            12,171Accrued
      expenses
            
            
            33,890
            
            
            
            37,035
            
            
            
            
            
            
            
            
            
            
            
            17,135
            
            
            
            20,742
            
            
            
            16,755
            
            
            
            16,293Asbestos-related
      liabilities
            
            
            53,254
            
            
            
            31,207
            
            
            
            
            
            
            
            
            
            
            
            53,254
            
            
            
            31,207Deferred
      income taxes
            
            
            3,005
            
            
            
            7,725
            
            
            
            
            
            
            
            
            
            
            
            3,005
            
            
            
            7,725Notes
      payable
            
            
            27,885
            
            
            
            30,309
            
            
            
            
            
            
            
            
            
            
            
            12,637
            
            
            
            10,551
            
            
            
            15,248
            
            
            
            19,758Current
      portion of long-term debt
            
            
            2,134
            
            
            
            2,376
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,134
            
            
            
            2,376Liabilities
      subject to compromise
            
            
            4,997
            
            
            
            4,997
            
            
            
            
            
            
            
            
            
            
            
            4,997
            
            
            
            4,997Total
      current liabilities
            
            
            145,434
            
            
            
            136,219
            
            
            
            (572
            )
            
            
            (316
            )
            
            
            100,322
            
            
            
            85,937
            
            
            
            45,684
            
            
            
            50,598Long-term
      debt, less current portion
            
            
            5,649
            
            
            
            6,725
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,649
            
            
            
            6,725Asbestos-related
      liabilities
            
            
            12,880
            
            
            
            12,600
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            12,880
            
            
            
            12,600Other
      liabilities
            
            
            11,881
            
            
            
            12,195
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            11,881
            
            
            
            12,195Noncontrolling
      interests
            
            
            913
            
            
            
            1,093
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            913
            
            
            
            1,093Liabilities
      subject to compromise
            
            
            129,416
            
            
            
            129,605
            
            
            
            (117
            )
            
            
            (126
            )
            
            
            129,533
            
            
            
            129,731Total
      liabilities
            
            
            306,173
            
            
            
            298,437
            
            
            
            (689
            )
            
            
            (442
            )
            
            
            229,855
            
            
            
            215,668
            
            
            
            77,007
            
            
            
            83,211Stockholders’
      equityCommon
      stock
            
            
            46
            
            
            
            46
            
            
            
            (93
            )
            
            
            (93
            )
            
            
            93
            
            
            
            93
            
            
            
            46
            
            
            
            46Additional
      paid-in capital
            
            
            19,700
            
            
            
            19,607
            
            
            
            (49,382
            )
            
            
            (49,368
            )
            
            
            49,382
            
            
            
            49,368
            
            
            
            19,700
            
            
            
            19,607Retained
      earnings
            
            
            21,384
            
            
            
            30,835
            
            
            
            35,444
            
            
            
            35,413
            
            
            
            (73,651
            )
            
            
            (65,417
            )
            
            
            59,591
            
            
            
            60,839Accumulated
      other comprehensive loss
            
            
            (15,617
            )
            
            
            (15,487
            )
            
            
            6,111
            
            
            
            6,110
            
            
            
            (22,687
            )
            
            
            (22,687
            )
            
            
            959
            
            
            
            1,090Less
      treasury shares
            
            
            (15,132
            )
            
            
            (15,132
            )
            
            
            7,813
            
            
            
            7,813
            
            
            
            (7,813
            )
            
            
            (7,813
            )
            
            
            (15,132
            )
            
            
            (15,132
            )Total
      stockholders’ equity
            
            
            10,381
            
            
            
            19,869
            
            
            
            (107
            )
            
            
            (125
            )
            
            
            (54,676
            )
            
            
            (46,456
            )
            
            
            65,164
            
            
            
            66,450Total
      liabilities and stockholders’ equity
            
            $
            316,554
            
            
            $
            318,306
            
            
            $
            (796
            )
            
            $
            (567
            )
            
            $
            175,179
            
            
            $
            169,212
            
            
            $
            142,171
            
            
            $
            149,661





See
accompanying notes to consolidating condensed financial
statements.


2


AMERICAN
BILTRITE INC. AND SUBSIDIARIES


CONSOLIDATING
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)


For
the Three Months Ended September 30, 2008 and 2007


(In
thousands of dollars, except number of shares and per share
amounts)





ABI
      Consolidated
            
            
            Eliminations
            
            
            Congoleum
            
            
            American
      Biltrite2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      sales
            
            $
            97,351
            
            
            $
            107,403
            
            
            $
            -
            
            
            $
            -
            
            
            $
            46,085
            
            
            $
            53,588
            
            
            $
            51,266
            
            
            $
            53,815Cost
      of products sold
            
            
            75,330
            
            
            
            79,240
            
            
            
            (377
            )
            
            
            (125
            )
            
            
            37,765
            
            
            
            39,365
            
            
            
            37,942
            
            
            
            40,000Selling,
      general & administrative expenses
            
            
            21,269
            
            
            
            23,625
            
            
            
            
            
            
            
            
            
            
            
            7,768
            
            
            
            9,829
            
            
            
            13,501
            
            
            
            13,796Asbestos-related
      reorganization charges
            
            
            11,491
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            11,491
            
            
            
            -(Loss)
      income from operations
            
            
            (10,739
            )
            
            
            4,538
            
            
            
            377
            
            
            
            125
            
            
            
            (10,939
            )
            
            
            4,394
            
            
            
            (177
            )
            
            
            19Other
      income (expense)Interest
      income
            
            
            64
            
            
            
            212
            
            
            
            
            
            
            
            
            
            
            
            49
            
            
            
            185
            
            
            
            15
            
            
            
            27Interest
      expense
            
            
            (360
            )
            
            
            (3,675
            )
            
            
            
            
            
            
            
            
            
            
            (43
            )
            
            
            (3,146
            )
            
            
            (317
            )
            
            
            (529
            )Other
      (expense) income
            
            
            (945
            )
            
            
            (109
            )
            
            
            (360
            )
            
            
            (146
            )
            
            
            (377
            )
            
            
            (213
            )
            
            
            (208
            )
            
            
            250(1,241
            )
            
            
            (3,572
            )
            
            
            (360
            )
            
            
            (146
            )
            
            
            (371
            )
            
            
            (3,174
            )
            
            
            (510
            )
            
            
            (252
            )(Loss)
      income before taxes and other items
            
            
            (11,980
            )
            
            
            966
            
            
            
            17
            
            
            
            (21
            )
            
            
            (11,310
            )
            
            
            1,220
            
            
            
            (687
            )
            
            
            (233
            )(Benefit
      from) provision for income taxes
            
            
            (1,631
            )
            
            
            212
            
            
            
            
            
            
            
            
            
            
            
            (1,185
            )
            
            
            20
            
            
            
            (446
            )
            
            
            192Noncontrolling
      interests
            
            
            (17
            )
            
            
            (79
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (17
            )
            
            
            (79
            )(Loss)
      income from continuing operations
            
            
            (10,366
            )
            
            
            675
            
            
            
            17
            
            
            
            (21
            )
            
            
            (10,125
            )
            
            
            1,200
            
            
            
            (258
            )
            
            
            (504
            )Discontinued
      operation
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -
            
            
            
            -Net
      (loss) income
            
            $
            (10,366
            )
            
            $
            675
            
            
            $
            17
            
            
            $
            (21
            )
            
            $
            (10,125
            )
            
            $
            1,200
            
            
            $
            (258
            )
            
            $
            (504
            )





Basic
            
            
            Diluted2008
            
            
            2007
            
            
            2008
            
            
            2007(Loss)
      income per common share from continuing operations
            
            $
            (3.01
            )
            
            $
            0.20
            
            
            $
            (3.01
            )
            
            $
            0.20Discontinued
      operation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      (loss) income per common share
            
            $
            (3.01
            )
            
            $
            0.20
            
            
            $
            (3.01
            )
            
            $
            0.20Weighted
      average number of common and equivalent shares outstanding
            
            
            3,441,551
            
            
            
            3,441,551
            
            
            
            3,441,551
            
            
            
            3,441,796





See
accompanying notes to consolidating condensed financial
statements.


3


AMERICAN
BILTRITE INC. AND SUBSIDIARIES


CONSOLIDATING
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)


For
the Nine Months Ended September 30, 2008 and 2007


(In
thousands of dollars, except number of shares and per share
amounts)





ABI
      Consolidated
            
            
            Eliminations
            
            
            Congoleum
            
            
            American
      Biltrite2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      sales
            
            $
            294,347
            
            
            $
            322,992
            
            
            $
            -
            
            
            $
            -
            
            
            $
            140,948
            
            
            $
            160,444
            
            
            $
            153,399
            
            
            $
            162,548Cost
      of products sold
            
            
            225,600
            
            
            
            239,493
            
            
            
            (1,077
            )
            
            
            (679
            )
            
            
            111,866
            
            
            
            120,478
            
            
            
            114,811
            
            
            
            119,694Selling,
      general & administrative expenses
            
            
            67,234
            
            
            
            71,854
            
            
            
            
            
            
            
            
            
            
            
            26,138
            
            
            
            29,243
            
            
            
            41,096
            
            
            
            42,611Asbestos-related
      reorganization charges
            
            
            11,491
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            11,491
            
            
            
            -(Loss)
      income from operations
            
            
            (9,978
            )
            
            
            11,645
            
            
            
            1,077
            
            
            
            679
            
            
            
            (8,547
            )
            
            
            10,723
            
            
            
            (2,508
            )
            
            
            243Other
      income (expense)Interest
      income
            
            
            1,427
            
            
            
            548
            
            
            
            
            
            
            
            
            
            
            
            1,241
            
            
            
            439
            
            
            
            186
            
            
            
            109Interest
      expense
            
            
            (1,679
            )
            
            
            (10,910
            )
            
            
            
            
            
            
            
            
            
            
            (240
            )
            
            
            (9,204
            )
            
            
            (1,439
            )
            
            
            (1,706
            )Other
      (expense) income
            
            
            (858
            )
            
            
            39
            
            
            
            (1,059
            )
            
            
            (695
            )
            
            
            (791
            )
            
            
            (247
            )
            
            
            992
            
            
            
            981(1,110
            )
            
            
            (10,323
            )
            
            
            (1,059
            )
            
            
            (695
            )
            
            
            210
            
            
            
            (9,012
            )
            
            
            (261
            )
            
            
            (616
            )(Loss)
      income before taxes and other items
            
            
            (11,088
            )
            
            
            1,322
            
            
            
            18
            
            
            
            (16
            )
            
            
            (8,337
            )
            
            
            1,711
            
            
            
            (2,769
            )
            
            
            (373
            )(Benefit
      from) provision for income taxes
            
            
            (549
            )
            
            
            153
            
            
            
            
            
            
            
            
            
            
            
            (103
            )
            
            
            27
            
            
            
            (446
            )
            
            
            126Noncontrolling
      interests
            
            
            50
            
            
            
            (104
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            50
            
            
            
            (104
            )(Loss)
      income from continuing operations
            
            
            (10,489
            )
            
            
            1,065
            
            
            
            18
            
            
            
            (16
            )
            
            
            (8,234
            )
            
            
            1,684
            
            
            
            (2,273
            )
            
            
            (603
            )Discontinued
      operation
            
            
            1,025
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,025
            
            
            
            -Net
      (loss) income
            
            $
            (9,464
            )
            
            $
            1,065
            
            
            $
            18
            
            
            $
            (16
            )
            
            $
            (8,234
            )
            
            $
            1,684
            
            
            $
            (1,248
            )
            
            $
            (603
            )





Basic
            
            
            Diluted2008
            
            
            2007
            
            
            2008
            
            
            2007(Loss)
      income per common share from continuing operations
            
            $
            (3.05
            )
            
            $
            0.31
            
            
            $
            (3.05
            )
            
            $
            0.31Discontinued
      operation
            
            
            0.30
            
            
            
            -
            
            
            
            0.30
            
            
            
            -Net
      (loss) income per common share
            
            $
            (2.75
            )
            
            $
            0.31
            
            
            $
            (2.75
            )
            
            $
            0.31Weighted
      average number of common and equivalent shares outstanding
            
            
            3,441,551
            
            
            
            3,441,551
            
            
            
            3,441,551
            
            
            
            3,442,149





See
accompanying notes to consolidating condensed financial
statements.


4


AMERICAN
BILTRITE INC. AND SUBSIDIARIES


CONSOLIDATING
CONDENSED STATEMENTS OF CASH FLOWS – OPERATING ACTIVITIES
(Unaudited)


For
the Nine Months Ended September 30, 2008 and 2007


(In
thousands of dollars)





ABI
      Consolidated
            
            
            Eliminations
            
            
            Congoleum
            
            
            American
      Biltrite2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Operating
      activitiesNet
      (loss) income
            
            $
            (9,464
            )
            
            $
            1,065
            
            
            $
            18
            
            
            $
            (16
            )
            
            $
            (8,234
            )
            
            $
            1,684
            
            
            $
            (1,248
            )
            
            $
            (603
            )Net
      income from discontinued operation
            
            
            (1,025
            )
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,025
            )
            
            
            -(Loss)
      income from continuing operations
            
            
            (10,489
            )
            
            
            1,065
            
            
            
            18
            
            
            
            (16
            )
            
            
            (8,234
            )
            
            
            1,684
            
            
            
            (2,273
            )
            
            
            (603
            )Adjustments
      to reconcile net (loss) income to net cash (used) provided by operating
      activities:Depreciation
      and amortization
            
            
            11,686
            
            
            
            12,146
            
            
            
            
            
            
            
            
            
            
            
            7,781
            
            
            
            8,003
            
            
            
            3,905
            
            
            
            4,143Asbestos-related
      reorganization charges
            
            
            11,491
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            11,491
            
            
            
            -Stock
      compensation expense
            
            
            107
            
            
            
            22
            
            
            
            
            
            
            
            
            
            
            
            14
            
            
            
            14
            
            
            
            93
            
            
            
            8Change
      in operating assets and liabilities:Accounts
      and notes receivable
            
            
            34
            
            
            
            (4,341
            )
            
            
            247
            
            
            
            242
            
            
            
            (1,809
            )
            
            
            (1,600
            )
            
            
            1,596
            
            
            
            (2,983
            )Inventories
            
            
            (4,447
            )
            
            
            (1,336
            )
            
            
            (18
            )
            
            
            16
            
            
            
            (1,548
            )
            
            
            (1,181
            )
            
            
            (2,881
            )
            
            
            (171
            )Prepaid
      expenses and other assets
            
            
            (1,499
            )
            
            
            2,450
            
            
            
            
            
            
            
            
            
            
            
            (946
            )
            
            
            2,114
            
            
            
            (553
            )
            
            
            336Proceeds
      from legal fees disgorgement
            
            
            9,168
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            9,168
            
            
            
            -Accounts
      payable and accrued expenses
            
            
            (4,318
            )
            
            
            8,081
            
            
            
            (247
            )
            
            
            (242
            )
            
            
            (5,209
            )
            
            
            8,574
            
            
            
            1,138
            
            
            
            (251
            )Asbestos-related
      expenses
            
            
            (12,519
            )
            
            
            (10,752
            )
            
            
            
            
            
            
            
            
            
            
            (12,519
            )
            
            
            (10,752
            )Noncontrolling
      interests
            
            
            (180
            )
            
            
            (21
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (180
            )
            
            
            (21
            )Other
            
            
            (228
            )
            
            
            (2,635
            )
            
            
            
            
            
            
            
            
            
            
            (137
            )
            
            
            (2,227
            )
            
            
            (91
            )
            
            
            (408
            )Net
      cash (used) provided by operating activities of continuing
      operations
            
            $
            (1,194
            )
            
            $
            4,679
            
            
            $
            -
            
            
            $
            -
            
            
            $
            (1,948
            )
            
            $
            4,629
            
            
            $
            754
            
            
            $
            50





See
accompanying notes to consolidating condensed financial
statements.


5


AMERICAN
BILTRITE INC. AND SUBSIDIARIES


CONSOLIDATING
CONDENSED STATEMENTS OF CASH FLOWS – INVESTING & FINANCING ACTIVITIES
(Unaudited)


For
the Nine Months Ended September 30, 2008 and 2007


(In
thousands of dollars)





ABI
      Consolidated
            
            
            Eliminations
            
            
            Congoleum
            
            
            American
      Biltrite2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Investing
      activitiesInvestments
      in property, plant and equipment
            
            $
            (3,749
            )
            
            $
            (3,569
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            (2,746
            )
            
            $
            (2,263
            )
            
            $
            (1,003
            )
            
            $
            (1,306
            )Net
      cash used by investing activities of continuing operations
            
            
            (3,749
            )
            
            
            (3,569
            )
            
            
            -
            
            
            
            -
            
            
            
            (2,746
            )
            
            
            (2,263
            )
            
            
            (1,003
            )
            
            
            (1,306
            )Financing
      activitiesNet
      short-term (repayments) borrowings
            
            
            (2,162
            )
            
            
            5,222
            
            
            
            
            
            
            
            
            
            
            
            2,086
            
            
            
            1,364
            
            
            
            (4,248
            )
            
            
            3,858Payments
      on long-term debt
            
            
            (1,320
            )
            
            
            (1,227
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,320
            )
            
            
            (1,227
            )Collection
      on Janus note receivable
            
            
            4,034
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,034
            
            
            
            -Net
      change in restricted cash
            
            
            38
            
            
            
            3,231
            
            
            
            
            
            
            
            
            
            
            
            38
            
            
            
            3,231Net
      cash provided (used) by financing activities of continuing
      operations
            
            
            590
            
            
            
            7,226
            
            
            
            -
            
            
            
            -
            
            
            
            2,124
            
            
            
            4,595
            
            
            
            (1,534
            )
            
            
            2,631Effect
      of foreign exchange rate changeson cash
            
            
            800
            
            
            
            (1,157
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            800
            
            
            
            (1,157
            )Net
      (decrease) increase in cash
            
            
            (3,553
            )
            
            
            7,179
            
            
            
            -
            
            
            
            -
            
            
            
            (2,570
            )
            
            
            6,961
            
            
            
            (983
            )
            
            
            218Cash
      and cash equivalents at beginningof period
            
            
            30,185
            
            
            
            21,180
            
            
            
            
            
            
            
            
            
            
            
            26,327
            
            
            
            18,591
            
            
            
            3,858
            
            
            
            2,589Cash
      and cash equivalents at end of period
            
            $
            26,632
            
            
            $
            28,359
            
            
            $
            -
            
            
            $
            -
            
            
            $
            23,757
            
            
            $
            25,552
            
            
            $
            2,875
            
            
            $
            2,807





See
accompanying notes to consolidating condensed financial
statements.





6


AMERICAN
BILTRITE INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATING CONDENSED


FINANCIAL
STATEMENTS


September
30, 2008


(Unaudited)





Note A - Basis of
Presentation





The
accompanying unaudited consolidating condensed financial statements which
include the accounts of American Biltrite Inc. and its wholly owned subsidiaries
(and including, unless the context otherwise indicates, its majority-owned
subsidiary K&M Associates L.P., are referred to herein as "ABI", "American
Biltrite" or the "Company") as well as entities over which it has voting control
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information, the instructions to Form
10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements.  In the opinion of management, all adjustments (consisting
of normal recurring adjustments, provisions for discontinued operations and
provisions to effect a plan of reorganization under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") of Congoleum Corporation
("Congoleum"), a majority-owned subsidiary of the Company, to settle asbestos
liabilities) considered necessary for a fair presentation have been
included.  Operating results for the three and nine months ended
September 30, 2008 are not necessarily indicative of the results that may be
expected for future periods, including the year ending December 31,
2008.  For further information, refer to the consolidating financial
statements and the notes to those financial statements included in American
Biltrite Inc.'s Annual Report on Form 10-K for the year ended December 31,
2007.





The
consolidating balance sheet at December 31, 2007 has been derived from the
audited financial statements as of that date but does not include all of the
information and notes required by accounting principles generally accepted in
the United States for complete financial statements.





During
2003, the Company decided to discontinue the operations of its Janus Flooring
Corporation subsidiary ("Janus"), a manufacturer of pre-finished hardwood
flooring, and sell the related assets.  Historical financial results
were restated to reflect the classification of Janus as a discontinued operation
in accordance with the Financial Accounting Standards Board's ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets.  Results of Janus, including
charges resulting from the shutdown, are being reported as a discontinued
operation.  In April 2006, the Company completed the sale of Janus’
remaining building and land (see Note C).  As a result of the sale of
property, the discontinued operation was effectively dissolved during
2006.  As of December 31, 2006, the Company merged Janus with and into
American Biltrite Inc.’s subsidiary, American Biltrite (Canada) Ltd. ("AB
Canada"), primarily for the purposes of utilizing Janus’ prior years’ net
operating losses against future taxable income.


7


Note A - Basis of
Presentation (continued)





As
discussed more fully below and elsewhere in these notes to consolidating
condensed financial statements, the Company's subsidiary Congoleum filed for
bankruptcy protection on December 31, 2003 in the United States Bankruptcy Court
for the District of New Jersey (the "Bankruptcy Court").  The
accompanying consolidated financial statements include the results for Congoleum
for all periods presented.  Congoleum’s results include losses
(including other comprehensive losses) of $54.7 million and $46.5 million in
excess of the value of ABI’s investment in Congoleum at September 30, 2008 and
December 31, 2007, respectively.  ABI owns a majority of the voting
stock of Congoleum, and expects to continue doing so until Congoleum’s
reorganization proceedings are concluded, at which time ABI expects its
ownership interests in Congoleum will be eliminated and no longer included in
the consolidated results of the Company.  The Company has elected to
continue to consolidate the financial statements of Congoleum in its
consolidated results because it believes that is the appropriate presentation
given its current voting control of Congoleum.  However, the
accompanying financial statements also present the details of consolidation to
separately show the financial condition, operating results and cash flows of ABI
(including its non-debtor subsidiaries) and Congoleum (and its debtor
subsidiaries), which may be more meaningful for certain analyses.





For
more information regarding Congoleum’s asbestos liability and plan for resolving
that liability, please refer to Note K.





The
financial statements of Congoleum have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business.  Accordingly, the financial
statements do not include any adjustments that might be necessary should
Congoleum be unable to continue as a going concern.  In light of
Congoleum’s substantial asbestos liabilities, which are further described in
Note K, there is substantial doubt about Congoleum’s ability to continue as a
going concern unless it timely obtains relief from those liabilities through a
successful reorganization under Chapter 11 of the Bankruptcy Code.





The
American Institute of Certified Public Accountants Statement of Position 90-7,
Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code ("SOP 90-7"),
provides financial reporting guidance for entities that are reorganizing under
the Bankruptcy Code.  Congoleum has implemented this guidance in its
consolidated financial statements for periods commencing after December 31,
2003.  Pursuant to SOP 90-7, companies in reorganization under the
Bankruptcy Code are required to segregate pre-petition liabilities that are
subject to compromise and report them separately on the balance sheet.
Liabilities that may be affected by a plan of reorganization are recorded at the
amount of the expected allowed claims, even if they may be settled for lesser
amounts.  Liabilities for asbestos claims are recorded based upon the
minimum amount Congoleum expects to spend for its contribution to, and costs to
settle asbestos liabilities through, the Plan Trust (as described in Note K).
Obligations arising post-petition and pre-petition obligations that are secured
or that the Bankruptcy Court has authorized Congoleum to pay, are not classified
as liabilities subject to compromise.  Other pre-petition claims (which
would be classified as liabilities subject to compromise) may arise due to the
rejection by





8


Note A - Basis of
Presentation (continued)





Congoleum
of executory contracts or unexpired leases pursuant to the Bankruptcy Code or as
a result of the allowance by the Bankruptcy Court of contingent or disputed
claims related to pre-petition matters.





Recently
Issued Accounting Principles





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS No. 157").  SFAS No. 157 provides a common fair value hierarchy
for companies to follow in determining fair value measurements in the
preparation of financial statements and expands disclosure requirements relating
to how such fair value measurements were developed.  SFAS No. 157
clarifies the principle that fair value should be based on the assumptions that
the marketplace would use when pricing an asset or liability, rather than
company-specific data.  SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007.  However, on February 12, 2008, the
FASB issued Staff Position 157-2 which delays the effective date of SFAS No. 157
for all non-financial assets and non-financial liabilities, except those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis.  For items within its scope, this Staff Position
defers the effective date of SFAS No. 157 to fiscal years beginning after
November 15, 2008.  The Company does not believe that the adoption of
SFAS No. 157 for its non-financial assets and liabilities, effective January 1,
2009, will have a material impact to the consolidated financial
statements.  The Company adopted SFAS No. 157 effective January 1,
2008 for its financial assets and liabilities.  The adoption has not
had a material impact to the consolidated financial statements (See Notes E and
F).





In
July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement No. 109("FIN
48").  FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in financial statements in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes
("FAS 109").  This interpretation prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return.  FIN 48 also provides guidance on derecognition of tax
benefits, classification on the balance sheet, interest and penalties,
accounting in interim periods, disclosure and transition.  The Company
adopted FIN 48 effective January 1, 2007.  As a result of the
adoption, the Company determined that no cumulative effect adjustment was
necessary to the opening balance of retained earnings as of January 1,
2007.  The Company’s unrecognized tax benefits as of January 1, 2007
were immaterial, and recognition of such tax benefits is not expected to have a
material impact on the Company’s income tax provision in future
periods.  Changes in the Company’s unrecognized tax benefits during
the nine months ended September 30, 2008 were
immaterial.  Furthermore, the Company does not expect such changes in
the next twelve months to be material to the Company’s financial position or
results of operation.





9


Note A - Basis of
Presentation (continued)





For
tax return purposes, ABI and Congoleum are not part of a consolidated group and,
consequently, file separate federal and state tax returns. ABI’s and Congoleum’s
federal income tax returns are open and subject to examination from the 2004 and
2003 tax return years and forward, respectively.  ABI’s and
Congoleum’s various state income tax returns are generally open from the 2002
and later tax return years based on individual state statute of
limitations.  Congoleum’s tax return net operating loss carryforwards
are significant.  The tax years in which losses arose may be subject
to audit when such carryforwards are utilized to offset taxable income in future
periods.  AB Canada’s federal and provincial tax returns are open and
subject to examination from 2002 and later.





For
the nine months ended September 30, 2008, the Company recorded a tax benefit it
expects to recover from carrying back current year losses against prior year
taxable income.  The Company also recorded a benefit of approximately
$200 thousand for a change in valuation allowance against foreign tax
credits.  Congoleum recorded a tax benefit of $1.2 million and $103
thousand for the three and nine months ended September 30, 2008,
respectively.  The benefit Congoleum recorded during the third quarter
of 2008 was due to a reversal of the provision recorded through the second
quarter of 2008.  Due to uncertainty in Congoleum’s future utilization
of net operating losses, Congoleum did not record a tax benefit on its loss in
the third quarter of 2008 beyond the reversal of the provision recorded during
the first six months of 2008.





The
Company records tax penalties and interest as a component of income tax
expense.





Note B -
Inventories




Inventories
at September 30, 2008 and December 31, 2007 consisted of the following (in thousands):





September 30,
              2008
            
            
            December 31,
              2007Finished
      goods
            
            $
            55,928
            
            
            $
            55,478Work-in-process
            
            
            14,087
            
            
            
            10,327Raw
      materials and supplies
            
            
            12,162
            
            
            
            12,596$
            82,177
            
            
            $
            78,401





10


Note C – Sale of
Property





In
April 2006, the Company completed the sale of a building and land owned by
Janus, a discontinued operation (see Note A).  The building and land
were sold for $5.0 million Canadian dollars ("C$").  The Company
received C$1.0 million in cash and a C$4.0 million note.  The note was
paid in full in May 2008 subsequent to the receipt of an environmental
certification on the land sold.  The Company recognized a gain of
approximately C$1.0 million on the sale of the building and land in May
2008.  The gain has been recorded as a gain from the discontinued
operation.





Note D – Accrued
Expenses





Accrued
expenses at September 30, 2008 and December 31, 2007 consisted of the following
(in
thousands):





September 30,
              2008
            
            
            December 31,
              2007Accrued
      advertising and sales promotions
            
            $
            15,827
            
            
            $
            20,906Employee
      compensation and related benefits
            
            
            9,178
            
            
            
            7,581Interest
            
            
            305
            
            
            
            7Environmental
      matters
            
            
            849
            
            
            
            849Royalties
            
            
            1,100
            
            
            
            828Income
      taxes
            
            
            (116
            )
            
            
            477Other
            
            
            6,747
            
            
            
            6,387$
            33,890
            
            
            $
            37,035





See
Note H for Liabilities Subject to Compromise.





11


Note E – Financing
Arrangements





American
Biltrite Inc.’s primary source of borrowings are the revolving credit facility
(the "Revolver") and the term loan ("Term Loan") it has with Bank of America,
National Association ("BofA") and BofA acting through its Canada branch (the
"Canadian Lender") pursuant to an amended and restated credit agreement (the
"Credit Agreement").  The Credit Agreement provides American Biltrite
Inc. and its subsidiary K&M Associates L.P. ("K&M") with (i) a $30.0
million commitment under the Revolver with a $12.0 million borrowing sublimit
(the "Canadian Revolver") for American Biltrite Inc.’s subsidiary AB Canada and
(ii) a $10.0 million Term Loan.  The Credit Agreement also provides
for domestic and Canadian letter of credit facilities with availability of up to
$5.0 million and $1.5 million, respectively, subject to availability under the
Revolver and the Canadian Revolver, respectively.





On
August 14, 2008, American Biltrite Inc. and its subsidiaries, K&M and AB
Canada, entered into an amendment, effective as of June 30, 2008, to the Credit
Agreement with BofA and BofA acting through its Canada branch, each in their
respective capacities as lenders and administrative agents under the Credit
Agreement.  The amendment permits the Company to include the principal
proceeds it received from the payoff of a note (see Note C) to its Consolidated
Adjusted EBITDA (as defined under the Credit Agreement, which includes the
Company’s earnings before interest, taxes, depreciation and amortization on a
consolidated basis, as adjusted under the Credit Agreement), as determined under
the Credit Agreement, for the periods ending June 30, 2008, September 30, 2008
and December 31, 2008.  The Credit Agreement includes a financial
covenant that requires the Company's Consolidated Adjusted EBITDA for the four
consecutive fiscal quarters then ending to exceed 100% of the Company's
Consolidated Fixed Charges for the 12-month period ending on such date, as
determined under the Credit Agreement (the "Fixed Charge
Covenant").  Further, under the amendment, the lenders waived defaults
that may have otherwise existed as of June 30, 2008 with respect to the
Consolidated Fixed Charges covenant.  ABI paid BofA a fee of $50
thousand in connection with this amendment.  On March 12, 2008, the
same parties entered into an amendment to the Credit Agreement to revise a
financial covenant to remove the financial covenant that required the Company
not to have any consecutive quarterly net losses from continuing operations
(reporting Congoleum on the equity method of accounting).  In
addition, for purposes of determining the Company's compliance with the
financial covenant requiring its Consolidated Adjusted EBITDA to exceed 100% of
the Company's Consolidated Fixed Charges (in each case, as determined under the
Credit Agreement), the amendment permits the Company to add certain amounts to
its Consolidated Adjusted EBITDA to the extent those amounts are deducted in
determining the Company's Consolidated Net Income (as determined under the
Credit Agreement).  Further, under the amendment, the lenders waived
defaults that may have otherwise existed as of December 31, 2007 with respect to
the financial covenants that were amended by the amendment.  ABI paid
BofA a fee of $50 thousand in connection with this amendment.  On May
14, 2007, the same parties entered into an amendment, effective as of March 31,
2007, to the Credit Agreement to revise a financial covenant to provide that for
each of the two





12


Note E – Financing
Arrangements (continued)





consecutive
fiscal quarters of the Company ending December 31, 2006 and March 31, 2007, the
Company may not have a quarterly net loss from continuing operations in excess
of $400 thousand.  As a result of the amendments, the Company was in
compliance with the Credit Agreement as of each quarter end for the year ended
December 31, 2007 and the nine months ended September 30, 2008.  The
Company may not be able to comply with financial covenants involving the
Company's Consolidated Adjusted EBITDA for future periods after December 31,
2008 and may need to obtain a waiver from BofA for any resulting failure to
satisfy those financial covenants or seek an amendment to the Credit Agreement
to address any such failure so that the Company would not be in breach of the
Credit Agreement.  Although the Company expects that it would be able
to obtain any such amendment or waiver, if necessary, there can be no assurances
that it would be successful in obtaining the amendment or
waiver.





On
September 29, 2006, American Biltrite Inc. entered into swap agreements to
convert the interest rates on the Term Loan and $6.0 million of borrowings under
the Revolver from floating rates to fixed rates of interest.  The swap
agreement for the Term Loan (the "Term Loan Swap") has a five year term with the
same quarterly payment dates as the Term Loan and reduces proportionately in
line with the amortization of the Term Loan.  The swap agreement for
the $6.0 million outstanding under the Revolver (the "Revolver Swap") has a
three year term with quarterly settlement dates beginning December 31,
2006.  The Company expects its borrowings under the Revolver to remain
above $6.0 million through September 30, 2009, the termination date of the
Revolver Swap and the Revolver.  The Term Loan Swap and the Revolver
Swap are carried at fair value.  Changes in the fair value of the swap
agreements are recorded in Other Income (Expense).  For the three and
nine months ended September 30, 2008, the Company recorded a gain and a loss of
$61 thousand and $20 thousand, respectively, for the adjustment of the fair
values of the swap agreements.  For the three and nine months ended
September 30, 2007, the Company recorded a loss of $192 thousand and $102
thousand, respectively.





13


Note F – Fair Value
Measurements





Effective
January 1, 2008, the Company adopted SFAS No. 157, which defines fair value as
the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants at the
measurement date.  SFAS No. 157 establishes a three-level fair value
hierarchy that prioritizes the inputs used to measure fair
value.  This hierarchy requires entities to maximize the use of
observable inputs and minimize the use of unobservable inputs.  The
three levels of inputs used to measure fair value are as follows:





§
            Level
      1 – Quoted prices in active markets for identical assets or
      liabilities.





§
            Level
      2 – Quoted prices for similar assets and liabilities in active markets;
      quoted prices for identical or similar assets or liabilities in markets
      that are not active; inputs other than quoted prices that are observable
      for the asset or liability; inputs that are derived principally from or
      corroborated by observable market data by correlation or other
      means.





§
            Level
      3 – Unobservable inputs that are supported by little or no market activity
      and that are significant to the fair value of the assets or
      liabilities.





The
Company’s only financial assets or liabilities subject to SFAS No. 157 are its
interest rate swap agreements (see Note E).  Prior to the adoption of
SFAS No. 157, the Company recorded the swap agreements at fair
value.  The fair value of the swap agreements is based on quoted
prices for similar assets or liabilities in active markets (Level
2).  As of September 30, 2008, the Company had recorded an unrealized
loss of $347 thousand for its interest rate swap agreements.





Note G – Other
Liabilities





Other
Liabilities at September 30, 2008 and December 31, 2007 consisted of the
following (in
thousands):





September 30,
              2008
            
            
            December 31,
              2007Pension
      benefits
            
            $
            3,174
            
            
            $
            2,817Environmental
      remediation and product related liabilities
            
            
            4,799
            
            
            
            5,336Deferred
      income taxes
            
            
            1,339
            
            
            
            1,337Other
            
            
            2,569
            
            
            
            2,705$
            11,881
            
            
            $
            12,195





See
Note H for Liabilities Subject to Compromise.





14


Note H – Liabilities Subject
to Compromise





As
a result of Congoleum’s Chapter 11 filing (see Notes A and K), pursuant to SOP
90-7, Congoleum is required to segregate pre-petition liabilities that are
subject to compromise and report them separately on the consolidated balance
sheet.  Liabilities that may be affected by a plan of reorganization
are recorded at the amount of the expected allowed claims, even if they may be
settled for lesser amounts.  Substantially all of Congoleum’s
pre-petition debt is recorded at face value and is classified within liabilities
subject to compromise.  Prior to the fourth quarter of 2007,
Congoleum’s accrued interest expense on its 8.625% Senior Notes due August 2008
was also recorded in liabilities subject to compromise.  In the fourth
quarter of 2007, Congoleum recorded a $41.0 million interest expense credit to
reverse post-petition interest accrued on its Senior Notes.  Terms of
previously proposed reorganization plans had provided, among other things, for
the payment of post-petition interest on the Senior Notes, and therefore
Congoleum had continued to accrue such interest.  Under the terms of
the Joint Plan (described in Note K), as well as the New Plan (described in Note
K), the Senior Note holders would not receive any post-petition
interest.





Liabilities
subject to compromise at September 30, 2008 and December 31, 2007 and included
in ABI’s consolidated balance sheet at each such date were as follows (in thousands):





September 30,
              2008
            
            
            December 31,
              2007Current
      liabilityPre-petition
      other payables and accrued interest
            
            $
            4,997
            
            
            $
            4,997Non-currentDebt
      (at face value)
            
            
            100,000
            
            
            
            100,000Pension
      liability
            
            
            10,942
            
            
            
            10,772Other
      post-retirement benefit obligation
            
            
            9,687
            
            
            
            9,337Pre-petition
      other liabilities
            
            
            8,904
            
            
            
            9,622129,533
            
            
            
            129,731Elimination
      – Payable to American Biltrite
            
            
            (117
            )
            
            
            (126
            )Total
      non-current liability
            
            
            129,416
            
            
            
            129,605Total
      liabilities subject to compromise
            
            $
            134,413
            
            
            $
            134,602





Additional
pre-petition claims (which would be classified as liabilities subject to
compromise) may arise due to the rejection by Congoleum of executory contracts
or unexpired leases pursuant to the Bankruptcy Code, or as a result of the
allowance by the Bankruptcy Court of contingent or disputed claims.





15


Note I – Pension
Plans





The
Company and Congoleum sponsor several noncontributory defined benefit pension
plans covering most of their employees.  Benefits under the plans are
based on years of service and employee compensation.  Amounts funded
annually by the Company and Congoleum are actuarially determined using the
projected unit credit and unit credit methods and are equal to or exceed the
minimum required by government regulations.  Congoleum also maintains
health and life insurance programs for retirees (reflected in the table below
under the columns entitled "Other Benefits").





The
table below summarizes the components of the net periodic benefit cost for the
Company's and Congoleum's pension and other benefit plans during the three and
nine months ended September 30, 2008 and 2007 (in thousands):





Three
      Months Ended September 30,2008
            
            
            2007Pension
            
            
            Other
              Benefits
            
            
            Pension
            
            
            Other
              BenefitsService
      cost
            
            $
            642
            
            
            $
            56
            
            
            $
            618
            
            
            $
            53Interest
      cost
            
            
            1,652
            
            
            
            144
            
            
            
            1,615
            
            
            
            142Expected
      return on plan assets
            
            
            (1,719
            )
            
            
            -
            
            
            
            (1,627
            )
            
            
            -Recognized
      net actuarial loss
            
            
            384
            
            
            
            15
            
            
            
            337
            
            
            
            18Amortization
      of prior service cost
            
            
            31
            
            
            
            -
            
            
            
            29
            
            
            
            3Net
      periodic benefit cost
            
            $
            990
            
            
            $
            215
            
            
            $
            972
            
            
            $
            216





Nine
      Months Ended September 30,2008
            
            
            2007Pension
            
            
            Other
              Benefits
            
            
            Pension
            
            
            Other
              BenefitsService
      cost
            
            $
            1,926
            
            
            $
            168
            
            
            $
            1,832
            
            
            $
            159Interest
      cost
            
            
            4,956
            
            
            
            432
            
            
            
            4,816
            
            
            
            426Expected
      return on plan assets
            
            
            (5,157
            )
            
            
            -
            
            
            
            (4,838
            )
            
            
            -Recognized
      net actuarial loss
            
            
            1,152
            
            
            
            45
            
            
            
            1,012
            
            
            
            54Amortization
      of prior service cost
            
            
            93
            
            
            
            -
            
            
            
            83
            
            
            
            9Net
      periodic benefit cost
            
            $
            2,970
            
            
            $
            645
            
            
            $
            2,905
            
            
            $
            648





16


Note I – Pension Plans
(continued)





The
weighted average assumptions used to determine net periodic benefit cost for the
nine months ended September 30, 2008 and 2007 were as follows:





2008
            
            2007Pension
            
            Other
              Benefits
            
            Pension
            
            Other
              BenefitsDiscount
      rate
            5.50%
      - 6.00%
            
            6.00%
            
            5.20%
      - 6.00%
            
            6.00%Expected
      long-term return on plan assets
            7.00%
      - 7.50%
            
            —
            
            7.00%
      - 7.50%
            
            —Rate
      of compensation increase
            4.00%
      - 5.00%
            
            —
            
            4.00%
      - 5.00%
            
            —





Note J - Commitments and
Contingencies





The
Company and Congoleum are subject to federal, state and local environmental laws
and regulations, and certain legal and administrative claims are pending or have
been asserted against the Company and Congoleum.  Among these claims,
the Company and Congoleum are separately a named party in several actions
associated with waste disposal sites. These actions include possible obligations
to remove or mitigate the effects on the environment of wastes deposited at
various sites, including Superfund sites and certain of the Company’s and
Congoleum’s owned and previously owned facilities.  The contingencies
also include claims for personal injury and/or property damage.  The
exact amount of such future cost and timing of payments are indeterminable due
to such unknown factors as the magnitude of cleanup costs, the timing and extent
of the remedial actions that may be required, the determination of the Company’s
and Congoleum’s liability in proportion to other potentially responsible
parties, the financial viability of other potentially responsible parties, and
the extent to which costs may be recoverable from
insurance.  Provisions in the financial statements have been recorded
for the estimated probable loss associated with all known general and
environmental contingencies for the Company and Congoleum. While the Company and
Congoleum believe their estimate of the future amount of these liabilities is
reasonable, and that they will be paid over a period of five to ten years, the
timing and amount of such payments may differ significantly from the Company’s
and Congoleum’s assumptions.  Although the effect of future government
regulation could have a significant effect on the Company’s and Congoleum’s
costs, the Company and Congoleum are not aware of any pending legislation that
would have such an effect.  There can be no assurances that the costs
of any future government regulations could be passed along to their
customers.  Estimated insurance recoveries related to these
liabilities are reflected in other non-current assets.





The
Company and Congoleum record a liability for environmental remediation claims
when it becomes probable that the Company or Congoleum, as applicable, will
incur costs relating to a clean-up program or will have to make claim payments,
and the costs or payments can be reasonably estimated. As assessments are
revised and clean-up programs progress, these liabilities are adjusted as
appropriate to reflect such revisions and progress.





17


Note J - Commitments and
Contingencies (continued)





Liabilities
of Congoleum comprise the substantial majority of the environmental and other
liabilities reported on the Company’s consolidated balance sheet.  Due
to the relative magnitude and wide range of estimates of these liabilities and
the fact that recourse related to these liabilities is generally limited to
Congoleum, these matters are discussed separately following matters for which
ABI has actual or potential liability.  However, since ABI includes
Congoleum in ABI’s consolidating financial statements, to the extent that
Congoleum incurs a liability or expense, it will be reflected in ABI's
consolidating financial statements.





American Biltrite
Inc.





ABI is a co-defendant with many other
manufacturers and distributors of asbestos containing products in approximately
1,281 pending claims involvingapproximately 1,836individuals as ofSeptember 30, 2008.  The claimants allege
personal injury or death from exposure to asbestos or asbestos-containing
products.  Activity related to ABI's asbestos claims is as
follows:





Nine
      Months
              Ended
              September 30,
              2008
            
            
            Year
      Ended
              December
      31,
              2007Beginning
      claims
            
            
            1,360
            
            
            
            1,332New
      claims
            
            
            303
            
            
            
            523Settlements
            
            
            (8
            )
            
            
            (20
            )Dismissals
            
            
            (374
            )
            
            
            (475
            )Ending
      claims
            
            
            1,281
            
            
            
            1,360





The
total indemnity costs incurred to settle claims during the nine months ended
September 30, 2008 and the year ended December 31, 2007 were $0.6 million and
$2.2 million, respectively, all of which were paid by ABI's insurance carriers,
as were the related defense costs.  In June 2008, ABI’s primary layer
insurance carriers advised ABI that coverage limits under the February 1996
coverage-in-place agreement had exhausted.  In August 2008, ABI and
its applicable first-layer umbrella carriers reached an understanding on the
coverage under ABI’s applicable first-layer excess umbrella policies (the
“Umbrella Coverage”), including defense and indemnity obligations, allocation of
claims to specific policies, and other matters. There was no gap in coverage
following the exhaustion of the primary layer insurance coverage.





In
addition to coverage available under the Umbrella Coverage, ABI has additional
excess liability insurance policies that should provide further coverage if and
when limits of certain policies within the Umbrella Coverage
exhaust.  While ABI expects the Umbrella Coverage will result in the
substantial majority of defense and indemnity for asbestos claims against ABI
being paid by its insurance carriers for the foreseeable future, ABI may incur
uninsured costs related to





18


Note J - Commitments and
Contingencies (continued)





asbestos
claims, and those costs could be material.  If ABI were to incur
significant uninsured costs for asbestos claims, or its insurance carriers
failed to fund insured costs for asbestos claims, such costs could have a
material adverse impact on its liquidity, financial condition and results of
operations.





In
general, governmental authorities have determined that asbestos-containing sheet
and tile products are nonfriable (i.e., cannot be crumbled by hand pressure)
because the asbestos was encapsulated in the products during the manufacturing
process.  Thus, governmental authorities have concluded that these
products do not pose a health risk when they are properly maintained in place or
properly removed so that they remain nonfriable.  The Company has
issued warnings not to remove asbestos-­containing flooring by sanding or
other methods that may cause the product to become friable.





The
Company estimates its liability to defend and resolve current and reasonably
anticipated future asbestos-related claims (not including claims asserted
against Congoleum) based upon a strategy to actively defend against or
strategically seek settlement for those claims on a case by case basis in the
normal course of business.  Factors such as recent and historical
settlement and trial results, the incidence of past and recent claims, the
number of cases pending against it and asbestos litigation developments that may
impact the exposure of the Company were considered in performing these
estimates.  In 2007, the Company utilized an actuarial study to assist
it in developing estimates of the Company’s potential liability for resolving
present and possible future asbestos claims.  At December 31, 2007,
the estimated range of liability for settlement of current claims pending and
claims anticipated to be filed through 2013 was $12.6 million to $41.4
million.  The Company believed no amount within this range is more
likely than any other, and accordingly, recorded the minimum liability estimate
of $12.6 million in its consolidated financial statements at December 31,
2007.  At September 30, 2008, the Company has recorded $12.9 million
for the estimated minimum liability.  The Company has also recorded,
based on this minimum liability estimate, an estimate of the amount of insurance
probable of recovery is $11.1 million at September 30, 2008 and December 31,
2007, which has been included in other assets in the Company’s consolidated
balance sheet.  The same factors that affect developing forecasts of
potential indemnity costs for asbestos-related liabilities also affect estimates
of the total amount of insurance that is probable of recovery, as do a number of
additional factors.  These additional factors include the financial
viability of some of the insurance companies, the method in which losses will be
allocated to the various insurance policies and the years covered by those
policies, how legal and other loss handling costs will be covered by the
insurance policies, and interpretation of the effect on coverage of various
policy terms and limits and their interrelationships.  These amounts were based on currently
known facts and a number of assumptions made prior to the completion of the
umbrella/first-layer excess policies arrangement.  The Company intends
to engage an actuaryin the
fourth quarter of 2008to
estimate the amount of insurance probable of recovery taking that arrangement
into consideration.  However, projecting future events, such as the
number of new claims to be filed each year, the average cost of disposing of
each such claim, and the continuing solvency of various insurance companies, as
well as numerous uncertainties surrounding asbestos legislation in the United
States, could cause the actual liability and insurance recoveries for the
Company to be higher or lower than those projected or
recorded.


19


Note J - Commitments and
Contingencies (continued)





Due
to the numerous variables and uncertainties, including the effect of Congoleum's
Chapter 11 case and any plan of reorganization for Congoleum on the Company's
liabilities, the Company does not believe that reasonable estimates can be
developed of liabilities for asbestos-related claims against the Company (not
including claims asserted against Congoleum) beyond a six year
horizon.  The Company will continue to evaluate its range of future
exposure, and the related insurance coverage available, and when appropriate,
record future adjustments to those estimates, which could be
material.





ABI
and one of its subsidiaries, Ideal Tape Co., Inc., (“Ideal”), were named
Potential Responsible Parties (“PRP”) under the Federal Comprehensive
Environmental Response, Compensation, and Liability Act, as amended (“CERCLA”),
with respect to a site located in Southington, Connecticut (the
“Site”).  The PRP group in August 2008 offered to settle all claims
with all of the Site’s PRPs.  ABI settled as a de minimus party while
Ideal settled as a performing party.  Both companies accepted and paid
their share of the settlement offers.  ABI’s and Ideal’s aggregate
settlement was $842 thousand.  Under a preexisting agreement with the
former owner of Ideal’s assets, Ideal shared a percentage of this cost with the
former owner.  Under a preexisting agreement between ABI and The
Biltrite Corporation (“TBC”), TBC is liable for 37.5% of the remediation costs
incurred by ABI.  ABI’s and Ideal’s combined share of the settlement
for the Site, net of the amounts paid by Ideal’s former owner and TBC, was $655
thousand.  As of June 30, 2008, ABI had provided reserves for the
aggregate liability as well as a receivable for the amounts payable by the
former owner of Ideal’s assets and TBC.





There
have been no other material developments relating to the environmental sites or
the other environmental matters described in ABI's Annual Report on Form 10-K
during the nine month period ended September 30, 2008.





Congoleum





Congoleum
is a defendant in a large number of asbestos-related lawsuits and on December
31, 2003, filed a petition commencing a voluntary reorganization case under
Chapter 11 of the Bankruptcy Code for purposes of resolving its asbestos-related
liabilities.  See Note K.





Congoleum
is named, together with a large number (in most cases, hundreds) of other
companies, as a PRP in pending proceedings under CERCLA and similar state
laws.  In addition, in four other instances, although not named as a
PRP, Congoleum has received a request for information.  The pending
proceedings in which Congoleum is a named PRP currently relate to eight disposal
sites in New Jersey, Pennsylvania and Maryland in which recovery from generators
of hazardous substances is sought for the cost of cleaning up the contaminated
waste sites.  Congoleum’s ultimate liability and funding obligations
in connection with those other sites depends on many factors, including the
volume of material contributed to the site by Congoleum, the number of other
PRP’s and their financial viability, the remediation methods and technology to
be used and the extent to which costs may be recoverable by Congoleum from
relevant insurance policies.  However, under CERCLA and certain other
laws, Congoleum, as a PRP, can be held jointly and severally liable for all
environmental costs associated with a site.


20


Note J - Commitments and
Contingencies (continued)





The
most significant exposure for which Congoleum has been named a PRP relates to a
recycling facility site in Elkton, Maryland (the "Galaxy/Spectron Superfund
Site").  The PRP group at this site is made up of 81 companies,
substantially all of which are large, financially solvent
entities.  Two removal actions were substantially complete as of
December 31, 1998, and a groundwater treatment system was installed
thereafter.  The United States Environmental Protection Agency has
selected a remedy for the soil and shallow groundwater (Operable Unit 1 or
OU-1); however, the remedial investigation/feasibility study related to the deep
groundwater (Operational Unit 2 or OU-2) has not been completed.  The
PRP group, of which Congoleum is a part, has entered into a consent decree to
perform the remedy for OU-1 and resolve natural resource damage claims. The
consent decree also requires the PRP group to perform the OU-2 remedy, assuming
that the estimated cost of the remedy is not more than $10.0
million.  If the estimated cost of the OU-2 remedy is more than $10.0
million, the PRP group may decline to perform it or they may elect to perform it
anyway. Cost estimates for the OU-1 and OU-2 work combined (including natural
resource damages) range between $22 million and $34 million, with Congoleum’s
share ranging between approximately $1.0 million and $1.6
million.  This assumes that all parties participate and that none
cash-out and pay a premium; those two factors may account for some fluctuation
in Congoleum’s share of the costs. Fifty percent (50%) of Congoleum’s share of
the costs is presently being paid by one of its insurance carriers, Liberty
Mutual Insurance Company, whose remaining policy limits for this claim are
expected to cover approximately $300 thousand in additional
costs.  Congoleum expects to fund the balance to the extent further
insurance coverage is not available.





Congoleum
filed a motion before the Bankruptcy Court seeking authorization and approval of
the consent decree and related settlement agreements for the Galaxy/Spectron
Superfund Site, as well as authorization for Liberty Mutual Insurance Company
and Congoleum to make certain payments that have been invoiced to Congoleum with
respect to the consent decree and related settlement agreements.  An
order authorizing and approving the consent decree and settlement agreements was
issued by the Bankruptcy Court in August 2006.





Congoleum
also accrues remediation costs for certain of Congoleum’s owned facilities on an
undiscounted basis.  Congoleum has entered into an administrative
consent order with the New Jersey Department of Environmental Protection and has
established a remediation trust fund of $100 thousand as financial assurance for
certain remediation funding obligations.  Estimated total clean-up
costs of $1.3 million for Congoleum’s expected portion of those remediation
funding obligations, including capital outlays and future maintenance costs for
soil and groundwater remediation, are primarily based on engineering
studies.  Of this amount, $300 thousand was included in current
liabilities subject to compromise and $1.0 million was included in non-current
liabilities subject to compromise in ABI’s consolidated balance sheet as of
September 30, 2008 and December 31, 2007.


21


Note J - Commitments and
Contingencies (continued)





At
September 30, 2008 and December 31, 2007, Congoleum recorded a total of $4.4
million for estimated environmental liabilities, which liabilities were not
reduced by the amount of expected insurance recoveries.  At September
30, 2008 and December 31, 2007, such estimated insurance recoveries are
approximately $2.2 million.  Receivables for expected insurance
recoveries are recorded if the related carriers are solvent and paying claims
under a reservation of rights or under an obligation pursuant to coverage in
place or a settlement agreement.  Substantially all of Congoleum’s
recorded insurance assets for environmental matters are collectible from a
single carrier.





Congoleum
anticipates that these matters will be resolved over a period of years, and that
after application of expected insurance recoveries, funding of the costs by
Congoleum will not have a material adverse impact on Congoleum’s liquidity or
financial position.  However, unfavorable developments in these
matters could result in significant expenses or judgments that could have a
material adverse effect on Congoleum’s and the Company’s business, results of
operations or financial condition.





Other





In
addition to the matters referenced above and in Note K, in the ordinary course
of their businesses, the Company and Congoleum become involved in lawsuits and
administrative proceedings in connection with product liability claims and other
matters.  In some of these proceedings, plaintiffs may seek to recover
large and sometimes unspecified amounts, and the matters may remain unresolved
for several years.





Note K – Congoleum Asbestos
Liabilities and Reorganization





On
December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court seeking relief under Chapter 11 of the Bankruptcy Code as a means to
resolve claims asserted against it related to the use of asbestos in its
products decades ago.  During 2003, Congoleum had obtained the
requisite votes of asbestos personal injury claimants necessary to seek approval
of a proposed, pre-packaged Chapter 11 plan of reorganization.  In
January 2004, Congoleum filed its proposed plan of reorganization and disclosure
statement with the Bankruptcy Court.  From that filing through 2007,
several subsequent plans were negotiated with representatives of the Asbestos
Claimants’ Committee (the "ACC"), the Future Claimants’ Representative (the
"FCR") and other asbestos claimant representatives.  In addition, an
insurance company, Continental Casualty Company, and its affiliate, Continental
Insurance Company (collectively, "CNA"), filed a plan of reorganization and the
Official Committee of Bondholders (the “Bondholders’ Committee”) (representing
holders of Congoleum’s 8.625% Senior Notes due August 1, 2008) also filed a plan
of reorganization.  In May 2006, the Bankruptcy Court ordered the
principal parties in interest in Congoleum’s reorganization proceedings to
participate in global mediation discussions.  Numerous mediation
sessions took place during 2006, culminating in two competing plans, one which
Congoleum filed jointly with the ACC in September 2006 (the "Tenth Plan") and
the other filed by CNA, both of which the Bankruptcy Court subsequently ruled
were not confirmable as a matter of law.


22


Note K – Congoleum Asbestos
Liabilities and Reorganization (continued)





In
March 2007, Congoleum resumed global plan mediation discussions with the various
parties seeking to resolve the issues raised in the Bankruptcy Court’s ruling
with respect to the Tenth Plan.  In July 2007, the FCR filed a plan of
reorganization and proposed disclosure statement.   After
extensive further mediation sessions, on February 5, 2008, the FCR, the ACC, the
Bondholders’ Committee and Congoleum jointly filed a plan of reorganization (the
"Joint Plan"). The Bankruptcy Court approved the disclosure statement for the
Joint Plan in February 2008, and the Joint Plan was solicited in accordance with
court-approved voting procedures.  Various objections to the Joint
Plan were filed, and on May 12, 2008 the Bankruptcy Court heard oral argument on
summary judgment motions relating to certain of those objections.  On
June 6, 2008, the Bankruptcy Court issued a ruling that the Joint Plan was not
legally confirmable, and issued an Order to Show Cause why the case should not
be converted or dismissed pursuant to 11 U.S.C. § 1112.  Following a
further hearing on June 26, 2008, the Bankruptcy Court issued an opinion that
vacated the Order to Show Cause and instructed the parties to submit a
confirmable plan by the end of calendar year 2008.  Following further
negotiations, the Bondholders’ Committee, the ACC, the FCR, representatives of
holders of pre-petition settlements and Congoleum reached an agreement in
principle which the Company understands that Congoleum believes addresses the
issues raised by the Bankruptcy Court in the ruling on the Joint Plan and in the
court's prior decisions.  A term sheet describing the proposed
material terms of a contemplated new plan of reorganization (the “New Plan”) and
a settlement of avoidance litigation with respect to pre-petition claim
settlements (the “Litigation Settlement”) was entered into by those parties and
was filed with the Bankruptcy Court on August 14, 2008.  Certain
insurers and a large bondholder have filed objections to the Litigation
Settlement and/or reserved their rights to object to confirmation of the New
Plan.  The Bankruptcy Court approved the Litigation Settlement
following a hearing on October 20, 2008, but the court reserved certain issues,
including whether any plan of reorganization embodying the settlement meets the
standards required for confirmation of a plan of reorganization.





Although
there can be no assurances as to the terms of any future plan, the proposed
terms for the New Plan provide that if the New Plan is approved by the
Bankruptcy Court and accepted by the requisite creditor constituencies, it would
permit Congoleum to exit Chapter 11 free of liability for existing and future
asbestos claims as provided in the New Plan.  Under the proposed terms
for the New Plan, it is contemplated that a Plan Trust would be created that
would assume the liability for Congoleum’s current and future asbestos
claims.  That Plan Trust would receive the proceeds of various
settlements Congoleum has reached with a number of insurance carriers and would
be assigned Congoleum’s rights under its remaining insurance policies covering
asbestos product liability.  The Plan Trust also would receive 70% of
the newly issued common stock in reorganized Congoleum when the New Plan takes
effect (the “Trust Shares”) and $5 million in new 9.75% senior secured notes
maturing five years from issuance.





Holders
of Congoleum’s $100 million in 8.625% Senior Notes due in August 2008 would
receive on a pro rata basis $70 million in new 9.75% senior secured notes
maturing five years from issuance.  The new senior secured notes would
be subordinated to the working capital facility providing Congoleum’s financing
upon exiting reorganization.  In addition, holders of





23


Note K – Congoleum Asbestos
Liabilities and Reorganization (continued)





Congoleum’s
$100 million in 8.625% Senior Notes due in August 2008 would receive 30% of the
common stock in reorganized Congoleum.  Congoleum’s obligations for
the $100 million in 8.625% Senior Notes due in August 2008, including accrued
pre-petition interest (which amounted to $3.6 million) would be satisfied in
full by the new senior secured notes and the common stock of reorganized
Congoleum to be issued if the New Plan takes effect.





Under
the proposed terms for the New Plan, existing Class A and Class B common shares
of Congoleum would be cancelled if the New Plan takes effect and holders of
those shares including ABI, would not receive anything on account of their
eliminated shares.  ABI expects its ownership interest in Congoleum
would be eliminated under any alternate plan or outcome in Congoleum’s Chapter
11 case.





The
proposed terms for the New Plan presently provide for the Plan Trust and holders
of Congoleum’s $100 million in 8.625% Senior Notes due in August 2008 who elect
to participate to enter into a put agreement (the “Put
Agreement”).  Pursuant to the term sheet for the New Plan, for the
first 60 days after the date the New Plan becomes effective (the “Effective
Date”), the Plan Trust would have the right, at its sole option, to elect to
cause participating holders of Congoleum’s $100 million in 8.625% Senior Notes
(the “Backstop Participants”) to purchase either (i) all of the Trust Shares
issued to the Plan Trust upon consummation of the New Plan representing 70% of
the newly issued common stock in reorganized Congoleum for an aggregate purchase
price equal to $8.75 million or (ii) a portion of the Trust Shares issued to the
Plan Trust upon consummation of the New Plan representing 45% of the newly
issued common stock in reorganized Congoleum for an aggregate purchase price
equal to $5.75 million.  It is not known at this time whether any
holders of Congoleum’s $100 million in 8.625% Senior Notes will elect to
participate in the Put Agreement and it is uncertain whether the Put Agreement
will become part of the New Plan.





The
New Plan is expected to include certain terms that would govern an intercompany
settlement among ABI and its non-debtor subsidiaries and Congoleum and ongoing
intercompany arrangements among American Biltrite and its subsidiaries and
reorganized Congoleum which would be effective when the New Plan takes effect
and would have a term of two years.  Those intercompany arrangements
include the provision of management services by American Biltrite to reorganized
Congoleum and other business relationships substantially consistent with their
traditional relationships.  The New Plan is expected to provide that
the final terms of the intercompany arrangements among American Biltrite and its
subsidiaries and reorganized Congoleum would be memorialized in a new agreement
to be entered into by reorganized Congoleum and American Biltrite in form and
substance mutually agreeable to the FCR, the official committee of bondholders,
the ACC and American Biltrite. Expiration or termination of these existing
arrangements, failure to reach definitive agreement on final terms of future
arrangements, or failure to consummate such arrangements in connection with the
effectiveness of a plan of reorganization for Congoleum could have a material
adverse impact on the business





24


Note K – Congoleum Asbestos
Liabilities and Reorganization (continued)





relationships
between ABI and Congoleum, and ABI’s business, operations and financial
condition.  The existing arrangements currently in effect among ABI
and its non-debtor subsidiaries and Congoleum expire on June 30, 2009 unless
renewed.





There
can be no assurance that the New Plan or any subsequent plan of reorganization,
if proposed, will receive the acceptances necessary for confirmation, that any
plan will not be modified further, that any other plan will receive necessary
court approvals from the Bankruptcy Court and the United States District Court
for the District of New Jersey (the "District Court"), or that such approvals
will be received in a timely fashion, that any plan will be confirmed, that any
plan, if confirmed, will become effective, or that Congoleum will continue to
earn sufficient funds to pay for continued litigation over any plan of
reorganization and the state court insurance coverage litigation.  It
also is unclear whether any other person might successfully propose a plan that
gets confirmed or what any such plan, if confirmed, would ultimately provide,
and whether the Bankruptcy Court would approve such a plan.  Any plan
of reorganization pursued by Congoleum will be subject to numerous conditions,
approvals and other requirements, including Bankruptcy Court and District Court
approvals, and there can be no assurance that such conditions, approvals and
other requirements will be satisfied or obtained.





In
anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into a Claimant Agreement, which provides for an aggregate settlement
value of at least $466 million.  The Claimant Agreement, along with a
number of individually negotiated trial listed settlements entered into prior to
the commencement of Congoleum’s Chapter 11 case with an aggregate value of
approximately $25 million, amount to settlements in excess of $491
million.  As contemplated by the Claimant Agreement, Congoleum also
entered into agreements establishing a Collateral Trust to distribute funds in
accordance with the terms of the Claimant Agreement and granting the Collateral
Trust a security interest in Congoleum’s rights under its applicable insurance
coverage and payments from Congoleum’s insurers for asbestos
claims.  In December 2005, Congoleum commenced the Avoidance Actions
seeking to void the security interest granted to the Collateral Trust and avoid
the Claimant Agreement and certain other pre-petition
settlements.  Following summary judgment hearings, the Bankruptcy
Court has rendered decisions that the grant of the security interest was not
valid but denying motions to avoid the settlements; certain of these decisions
are under appeal.  The terms of the Litigation Settlement provide for
a settlement of the Avoidance Actions, but it is not possible to determine if
the New Plan or any future plan will ultimately include such a settlement or how
any such settlement may affect the nominal liability.  In connection
with soliciting acceptance of the Joint Plan, the voting agent distributed
ballots to approximately 146 thousand personal injury claimants, which included
holders of claims under the Claimant Agreement and the individual trial listed
settlements discussed above, as well as holders of additional alleged
claims.  Approximately 71 thousand valid ballots were returned
indicating claims with a value of $1.46 billion based on the settlement values
applicable in the Joint Plan.  It is also possible that additional new
claims may be asserted in connection with any solicitation of acceptances of the
New Plan or any other future plan.  Congoleum does not believe it can
reasonably estimate the liability associated with asbestos-related claims that
may be pending.





25


Note K – Congoleum Asbestos
Liabilities and Reorganization (continued)





During
the first nine months of 2008, Congoleum paid $12.5 million in fees and expenses
related to implementation of a proposed plan of reorganization for Congoleum
under Chapter 11 of the Bankruptcy Code and the Coverage Action. Based on its
reorganization plans, Congoleum has made provision in its financial statements
for the minimum estimated cost to effect its plan to settle asbestos liabilities
through confirmation of a plan of reorganization that complies with section
524(g) of the Bankruptcy Code. Congoleum recorded charges aggregating
approximately $51.3 million in years prior to 2007.  Based on the
terms of the Joint Plan, in the fourth quarter of 2007 Congoleum recorded an
additional $41.3 million charge.  Of this charge, $14.9 million
related to the write-off of certain insurance litigation costs receivable that
would not have been collected under the terms of the Joint Plan and $26.4
million was an additional provision for estimated costs for the reorganization
proceedings and the Coverage Action.  In the fourth quarter of 2007
Congoleum also recorded a $41.0 million interest expense credit to reverse
post-petition interest accrued on its Senior Notes.  Terms of previous
reorganization plans had provided, among other things, for the payment of
post-petition interest on the Senior Notes and therefore Congoleum had continued
to accrue such interest.  Under the terms of the Joint Plan, the
Senior Note holders would not have received any post-petition
interest.  Following the ruling that the Joint Plan was unconfirmable
and based on the anticipated terms and timing of effectiveness of the New Plan,
Congoleum recorded an additional charge of $11.5 million in the third quarter of
2008 for costs to effect a proposed plan of reorganization for
Congoleum.





In
February 2006, the Bankruptcy Court ordered Congoleum’s former counsel, Gilbert,
Heintz & Randolph LLP (currently known as Gilbert Oshinsky LLP) ("GHR") to
disgorge all fees and certain expenses it was paid by Congoleum.  In
October 2006, Congoleum and GHR entered into a settlement pursuant to which GHR
was to pay Congoleum approximately $9.2 million plus accrued interest in full
satisfaction of the disgorgement order.  The obligation was secured by
assets of GHR and was to be made over time according to a formula based on GHR’s
earnings.  The Bankruptcy Court approved that settlement with GHR in
April 2007.  Congoleum received $9.2 million plus $1.0 million of
accrued interest in full satisfaction of that settlement in March
2008.





26


Note L - Comprehensive
Income (Loss)





The
following table presents total comprehensive income for the three and nine
months ended September 30, 2008 and 2007 (in thousands):





Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      (loss) income
            
            $
            (10,366
            )
            
            $
            675
            
            
            $
            (9,464
            )
            
            $
            1,065Foreign
      currency translation adjustments
            
            
            110
            
            
            
            1,400
            
            
            
            (130
            )
            
            
            3,108Total
      comprehensive (loss) income
            
            $
            (10,256
            )
            
            $
            2,075
            
            
            $
            (9,594
            )
            
            $
            4,173





Note M - Earnings (Loss) Per
Share





Basic
and diluted earnings per share are computed in accordance with FASB Statement
No. 128, Earnings per
Share ("SFAS 128").  SFAS 128 requires both basic earnings per
share, which is based on the weighted-average number of common shares
outstanding, and diluted earnings per share, which is based on the
weighted-average number of common shares outstanding and all dilutive potential
common share equivalents outstanding.  The dilutive effect of options
is determined under the treasury stock method using the average market price for
the period.  Common equivalent shares are included in the per share
calculations when the effect of their inclusion would be dilutive.





27


Note N - Industry
Segments





Description
of Products and Services





The
Company has four reportable segments:  flooring products, tape
division, jewelry and a Canadian division. The flooring products segment
consists of Congoleum, a manufacturer of resilient floor coverings, which are
sold primarily through floor covering distributors to retailers and contractors
for commercial and residential use. The tape division segment manufactures
paper, film, HVAC, electrical, shoe and other tape products for use in
industrial and automotive markets in two production facilities in the United
States, and in finishing and sales facilities in Belgium and
Singapore.  The jewelry segment consists of the Company's
majority-owned subsidiary K&M Associates L.P., a national costume jewelry
supplier to mass merchandisers and department stores.  The Company's
Canadian division produces flooring, rubber and other industrial
products.





Net
sales by segment for the three and nine months ended September 30, 2008 and 2007
were as follows (in
thousands):





Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      sales to external customers:Flooring
      products
            
            $
            46,085
            
            
            $
            53,588
            
            
            $
            140,948
            
            
            $
            160,444Tape
      products
            
            
            21,835
            
            
            
            23,901
            
            
            
            70,320
            
            
            
            73,823Jewelry
            
            
            14,587
            
            
            
            16,025
            
            
            
            39,043
            
            
            
            46,758Canadian
      division
            
            
            14,844
            
            
            
            13,889
            
            
            
            44,036
            
            
            
            41,967Total
      net sales to external customers
            
            
            97,351
            
            
            
            107,403
            
            
            
            294,347
            
            
            
            322,992Intersegment
      net sales:Flooring
      products
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Tape
      products
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Jewelry
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Canadian
      division
            
            
            954
            
            
            
            1,231
            
            
            
            3,170
            
            
            
            3,830Total
      intersegment net sales
            
            
            954
            
            
            
            1,231
            
            
            
            3,170
            
            
            
            3,830Reconciling
      items
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Intersegment
      net sales
            
            
            (954
            )
            
            
            (1,231
            )
            
            
            (3,170
            )
            
            
            (3,830
            )Total
      consolidated net sales
            
            $
            97,351
            
            
            $
            107,403
            
            
            $
            294,347
            
            
            $
            322,992





28


Note N - Industry Segments
(continued)





Segment
profit or loss is before income tax expense or benefit, noncontrolling
interests, and net income (loss) from discontinued operations.  Profit
(loss) by segment for the three and nine months ended September 30, 2008 and
2007 was as follows (in
thousands):





Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Segment
      profit (loss)Flooring
      products
            
            $
            (11,310
            )
            
            $
            1,220
            
            
            $
            (8,337
            )
            
            $
            1,711Tape
      products
            
            
            (1,875
            )
            
            
            (304
            )
            
            
            (2,106
            )
            
            
            (967
            )Jewelry
            
            
            320
            
            
            
            487
            
            
            
            (1,636
            )
            
            
            1,023Canadian
      division
            
            
            380
            
            
            
            (564
            )
            
            
            936
            
            
            
            (182
            )Total
      segment profit
            
            
            (12,485
            )
            
            
            839
            
            
            
            (11,143
            )
            
            
            1,585Reconciling
      itemsCorporate
      expenses
            
            
            489
            
            
            
            148
            
            
            
            37
            
            
            
            (247
            )Intercompany
      profit
            
            
            16
            
            
            
            (21
            )
            
            
            18
            
            
            
            (16
            )Total
      consolidated (loss) income before income taxes and other
    items
            
            $
            (11,980
            )
            
            $
            966
            
            
            $
            (11,088
            )
            
            $
            1,322





Assets
by segment as of the end of the quarter and the end of the prior year were as
follows (in
thousands):





September
      30,
              2008
            
            
            December
      31,
              2007Segment
      assetsFlooring
      products
            
            $
            175,179
            
            
            $
            169,212Tape
      products
            
            
            56,418
            
            
            
            52,287Jewelry
            
            
            35,606
            
            
            
            38,046Canadian
      division
            
            
            34,107
            
            
            
            37,907Total
      segment assets
            
            
            301,310
            
            
            
            297,452Reconciling
      itemsCorporate
      items
            
            
            34,482
            
            
            
            31,523Intersegment
      accounts receivable
            
            
            (19,013
            )
            
            
            (10,417
            )Intersegment
      profit in inventory
            
            
            (108
            )
            
            
            (126
            )Intersegment
      other asset
            
            
            (117
            )
            
            
            (126
            )Consolidated
      assets
            
            $
            316,554
            
            
            $
            318,306


29


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





Global
and financial markets have recently been experiencing substantial
disruption.  Economic conditions in the United States have been
challenging, including in the industries in which the Company and Congoleum
conduct business.  The downturn in the housing industry has resulted
in reduced demand for the Company's and Congoleum's products.  The
slowdown in manufacturing, including in the automotive and industrial sectors,
has resulted in reduced demand for the Tape division's products.  In
addition, the decline in consumer and retailer, especially mid-tier retailer,
spending has resulted in reduced demand for K&M's
products.  Forecasts generally call for a slowing economy or an
economic recession in the United States, including in the industries in which
the Company and Congoleum conduct business.  The Company expects the
current and forecasted economic conditions to continue to negatively impact the
Company's and Congoleum's businesses and operations and that the extent of that
impact will depend on the duration and depth of the economic slowdown or
recession.





In
addition, raw material and energy costs have increased sharply over the past
year, which has negatively impacted the Company's and Congoleum's businesses and
operating results.  Although raw material and energy costs have
recently declined, it is not known whether raw material and energy prices will
remain lower or will revert to increasing price levels.  In light of
the current and forecasted economic conditions in the United States and the
industries in which the Company and Congoleum conduct business, the Company and
Congoleum may be unable to pass increased raw material and energy costs on to
their respective customers.





Although
the Company and Congoleum intend to implement reductions in their expenses,
there can be no assurance that they will be able to reduce their respective
expenses, that any reductions they may implement will have any meaningful
positive impact on their businesses, results of operations or financial
condition, or that they will be able to sustain any expense reductions that they
may implement.





American
Biltrite’s consolidated financial statements include its majority-owned
subsidiary, Congoleum.  However, under the terms of the Joint Plan,
ABI’s ownership interest in
Congoleum would have been eliminated andwould be eliminated under the terms of
the New Plan.ABI expects
its ownership interest in Congoleum to be eliminated under any alternate plan or
outcome in Congoleum’s Chapter 11 case.On December 31, 2003,
Congoleum filed a voluntary petition with the Bankruptcy Court seeking relief
under Chapter 11 of the Bankruptcy Code as a means to resolve claims asserted
against it related to the use of asbestos in its products decades
ago.  During 2003, Congoleum had obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of a proposed,
pre-packaged Chapter 11 plan of reorganization.  In January 2004,
Congoleum filed its proposed joint plan of reorganization and disclosure
statement with the Bankruptcy Court.  From that filing through 2007,
several subsequent plans were negotiated with representatives of the ACC, the
FCR and other asbestos claimant representatives.  In addition, an
insurance company, CNA, filed a plan of reorganization and the Bondholders’
Committee also filed a plan of reorganization.  In May 2006, the
Bankruptcy Court ordered the principal parties in interest in Congoleum’s
reorganization proceedings to participate in global mediation
discussions.  Numerous mediation


30


sessions
took place during 2006, culminating in two competing plans, one which Congoleum
filed jointly with the ACC in September 2006 and the other filed by CNA, both of
which the Bankruptcy Court subsequently ruled were not confirmable as a matter
of law. In March 2007, Congoleum resumed global plan mediation discussions with
the various parties seeking to resolve the issues raised in the Bankruptcy
Court’s ruling with respect to the Tenth Plan.  In July 2007, the FCR
filed a plan of reorganization and proposed disclosure
statement.  After extensive further mediation sessions, on February 5,
2008, the FCR, the ACC, the Bondholders’ Committee and Congoleum jointly filed
the Joint Plan.  The Bankruptcy Court approved the disclosure
statement for the Joint Plan in February 2008, and the Joint Plan was solicited
in accordance with court-approved voting procedures.  Various
objections to the Joint Plan were filed, and on May 12, 2008 the Bankruptcy
Court heard oral argument on summary judgment motions relating to certain of
those objections. On June 6, 2008, the Bankruptcy Court issued a ruling that the
Joint Plan was not legally confirmable, and issued an Order to Show Cause why
the case should not be converted or dismissed pursuant to 11 U.S.C. §
1112.  Following a further hearing on June 26, 2008, the Bankruptcy
Court issued an opinion that vacated the Order to Show Cause and instructed the
parties to submit a confirmable plan by the end of calendar year 2008. Following
further negotiations, the Bondholders’ Committee, the ACC, the FCR,
representatives of holders of pre-petition settlements and Congoleum reached an
agreement in principle which the Company understands that Congoleum believes
addresses the issues raised by the Bankruptcy Court in the ruling on the Joint
Plan and in the court's prior decisions.  A term sheet describing the
proposed material terms of a contemplated new plan of reorganization (the “New
Plan”) and a settlement of avoidance litigation with respect to pre-petition
claim settlements (the “Litigation Settlement”) was entered into by those
parties and was filed with the Bankruptcy Court on August 14,
2008.  Certain insurers and a large bondholder have filed objections
to the Litigation Settlement and/or reserved their rights to object to
confirmation of the New Plan.  The Bankruptcy Court approved the
Litigation Settlement following a hearing on October 20, 2008, but the court
reserved certain issues, including whether any plan of reorganization embodying
the settlement meets the standards required for confirmation of a plan of
reorganization.





There
can be no assurance that the New Plan or any subsequent plan of reorganization,
if proposed, will receive the acceptances necessary for confirmation, that any
plan will not be modified further, that any other plan will receive necessary
court approvals from the Bankruptcy Court and the District Court, or that such
approvals will be received in a timely fashion, that any plan will be confirmed,
that any plan, if confirmed, will become effective, or that Congoleum will
continue to have sufficient funds to pay for continued proceedings with respect
to any plan of reorganization and the state court insurance coverage
litigation.  It also is unclear whether any other person might
successfully propose a plan that gets confirmed or what any such plan, if
confirmed, would ultimately provide, and whether the Bankruptcy Court would
approve such a plan.  Any plan of reorganization pursued by Congoleum
will be subject to numerous conditions, approvals and other requirements,
including Bankruptcy Court and District Court approvals, and there can be no
assurance that such conditions, approvals and other requirements will be
satisfied or obtained.





31


ABI
estimates that it will spend $325 thousand for legal fees in 2008, which it has
accrued, in connection with Congoleum’s reorganization plan.  Actual
costs for pursuing and implementing any plan of reorganization could be
materially higher, and Congoleum and the Company may record significant
additional charges should the applicable minimum estimated cost
increase.





Due
to Congoleum’s reorganization and separate capital structure, as well as the
anticipated elimination of ABI’s ownership interest in Congoleum, the Company
believes that presenting the results of operations of ABI and its non-debtor
subsidiaries separately from those of Congoleum is the most meaningful way to
discuss and analyze its financial condition and results of
operations.





Please
refer to "Risk Factors – The Company and its majority-owned subsidiary Congoleum
have significant asbestos liability and funding exposure, and the Company’s and
Congoleum’s strategies for resolving this exposure may not be
successful.  Any plan of reorganization for Congoleum is expected to
result in elimination of the interests of Congoleum's equity holders, including
the Company" and "Elimination of the Company’s equity interests in Congoleum
could have a material adverse impact on the business relationships between ABI
and Congoleum, and ABI’s business, operations and financial condition" included
in Part II, Item 1A of this Quarterly Report on Form 10-Q for a discussion of
certain factors that could cause actual results to differ from the Company’s and
Congoleum’s goals for resolving their asbestos liabilities.





Application
of Critical Accounting Policies and Estimates





The
discussion and analysis of the Company’s financial condition and results of
operations are based upon the Company’s consolidating financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States.  The preparation of these financial
statements requires the Company to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of contingent
assets and liabilities as of the date of the Company’s financial statements and
the reported amounts of revenues and expenses during the reporting period. The
Company’s actual results may differ from these estimates under different
assumptions or conditions.





Critical
accounting policies are defined as those that reflect significant judgments and
uncertainties, and could potentially result in materially different results
under different assumptions and conditions.  The Company believes that
its most critical accounting policies, upon which its financial condition
depends and which involve the most complex or subjective decisions or
assessments, are those described in the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2007, filed with the Securities and Exchange
Commission.





There
have been no material changes in what the Company considers to be its critical
accounting policies or the applicability of the disclosure the Company provided
regarding those policies in that Form 10-K.





32


Results
of Operations





ABI
and Non-Debtor Subsidiaries





Three
      Months Ended September 30
            
            
            Nine
      Months Ended September 302008
            
            
            2007
            
            
            2008
            
            
            2007(In
      thousands)Net
      sales
            
            $
            51,266
            
            
            
            
            
            $
            53,815
            
            
            
            
            
            $
            153,399
            
            
            
            
            
            $
            162,548Cost
      of sales
            
            
            37,942
            
            
            
            
            
            
            40,000
            
            
            
            
            
            
            114,811
            
            
            
            
            
            
            119,694Gross
      profit
            
            
            13,324
            
            
            26.0
            %
            
            
            13,815
            
            
            25.7
            %
            
            
            38,588
            
            
            25.2
            %
            
            
            42,854
            
            
            26.4
            %Selling,
      general & administrative expenses
            
            
            13,501
            
            
            26.3
            %
            
            
            13,796
            
            
            25.6
            %
            
            
            41,096
            
            
            26.8
            %
            
            
            42,611
            
            
            26.2
            %Operating
      (loss)  income
            
            
            (177
            )
            
            
            
            
            
            19
            
            
            
            
            
            
            (2,508
            )
            
            
            
            
            
            243Interest
      expense, net
            
            
            (302
            )
            
            
            
            
            
            (502
            )
            
            
            
            
            
            (1,253
            )
            
            
            
            
            
            (1,597
            )Other
      (expense) income, net
            
            
            (208
            )
            
            
            
            
            
            250
            
            
            
            
            
            
            992
            
            
            
            
            
            
            981Loss
      before taxes and other items
            
            
            (687
            )
            
            
            
            
            
            (233
            )
            
            
            
            
            
            (2,769
            )
            
            
            
            
            
            (373
            )Benefit
      from income taxes
            
            
            (446
            )
            
            
            
            
            
            192
            
            
            
            
            
            
            (446
            )
            
            
            
            
            
            126Noncontrolling
      interests
            
            
            (17
            )
            
            
            
            
            
            (79
            )
            
            
            
            
            
            50
            
            
            
            
            
            
            (104
            )Loss
      from continuing operations
            
            
            (258
            )
            
            
            
            
            
            (504
            )
            
            
            
            
            
            (2,273
            )
            
            
            
            
            
            (603
            )Discontinued
      operation
            
            
            -
            
            
            
            
            
            
            -
            
            
            
            
            
            
            1,025
            
            
            
            
            
            
            -Net
      (loss) income
            
            $
            (258
            )
            
            
            
            
            $
            (504
            )
            
            
            
            
            $
            (1,248
            )
            
            
            
            
            $
            (603
            )





Net
sales in the third quarter of 2008 were $51.3 million compared to $53.8 million
in the third quarter of 2007, a decrease of $2.5 million or
4.7%.  This sales decrease was due to lower sales at the Tape division
and K&M, partly offset by higher sales at the Canadian
division.  Tape division sales decreased $2.1 million or 8.6% from the
third quarter of 2007 primarily due to lower sales of pre-mask and application
tapes and HVAC tapes used in construction applications.  K&M’s
sales declined $1.4 million or 9% due to weak demand for costume jewelry,
particularly at mid-tier retailers.  Canadian division sales improved
from the third quarter of 2007 on improved sales of industrial
products.





Net
sales for the first nine months of 2008 decreased $9.1 million (5.6%) to $153.4
million from $162.5 million for the first nine months of 2007.  This
decrease was primarily due to lower jewelry sales as a result of weak retail
conditions and lower sales of paper, HVAC and film products at the Tape
division.





Gross
profit increased from 25.7% of net sales for the third quarter of 2007 to 26.0%
for the third quarter of 2008.  The increase in gross profit as a
percent of sales was primarily due to significant margin improvements at the
Canadian division as a result of pricing increases, cost reductions, and sales
mix improvements, which more than offset gross margin percentage decreases at
the Tape Division resulting from raw material cost increases and at K&M due
to higher allowances.


33


Gross
profit for the nine months ended September 30, 2008 was 25.2% compared to 26.4%
for the first nine months of 2007.  For the 2008 nine month period,
the Canadian division realized margin improvements, for the reasons cited
above.  These improvements were exceeded by the decline in margins at
Tape and K&M, which declines occurred for the same reasons Tape and K&M
realized margin declines in the third quarter.





The
Company includes the cost of purchasing and finished goods inspection in
selling, general and administrative ("SG&A") expenses.  Some
companies also record such costs in operating expenses while others record them
in cost of goods sold.  Consequently, the Company’s gross profit
margins may not be comparable to other companies.  Had the Company
recorded these expenses in cost of sales, the gross profit margins for the
quarter ended September 30, 2008 and 2007 would have been 25.3% and 25.2%,
respectively.  The gross profit margins for the nine months ended
September 30, 2008 and 2007 would have been 24.5% and 26.0%,
respectively.





SG&A
expenses in the third quarter of 2008 decreased by $293 thousand or 2.1%
compared to the third quarter of 2007.  This decrease was due to lower
costs at K&M as a result of expense reduction initiatives, partly offset by
higher expenses at the Canadian and Tape division due to inflation and the
effect of translation.  As a percentage of net sales, SG&A
increased from 25.6% for the third quarter of 2007 to 26.3% for the third
quarter of 2008.  SG&A expenses for the nine months ended
September 30, 2008 were $41.1 million (26.8% of net sales) versus $42.6 million
(26.2% of net sales) for the first nine months of 2007, a decrease of $1.5
million, due to expense reductions at K&M and the Tape division, partly
offset by the effect of currency translation on Canadian division
expenses.





Net
interest expense for the third quarter and first nine months of 2008 was lower
compared to the same periods in 2007 due to lower average
borrowings.





For
the nine months ended September 30, 2008, the Company recorded a tax benefit it
expects to recover from carrying back current year losses against a prior year’s
taxable income. The Company also recorded a benefit of approximately $200
thousand for a change in valuation allowance against foreign tax
credits.





The
loss from continuing operations in the third quarter of 2008 was $258 thousand
compared to a loss of $504 thousand in the corresponding prior year
period.  For the nine months ended September 30, 2008, the loss from
continuing operations was $2.3 million compared to a loss of $603 thousand for
the same period last year.





In
April 2006, the Company entered into an agreement to sell a building and land
owned by Janus, a discontinued operation.  The gain on the sale was
deferred and then recognized in May 2008 subsequent to the receipt of an
environmental certification on the land sold and receipt of payment of the $4
million principal amount of the note previously issued by the buyer as part of
the consideration for that sale.  The gain of approximately $1 million
was recorded as a gain from a discontinued operation during the second quarter
of 2008.





34


Congoleum





Three
      Months Ended September 30
            
            
            Nine
      Months Ended September 302008
            
            
            2007
            
            
            2008
            
            
            2007(In
      thousands)Net
      sales
            
            $
            46,085
            
            
            
            
            
            $
            53,588
            
            
            
            
            
            $
            140,948
            
            
            
            
            
            $
            160,444Cost
      of sales
            
            
            37,765
            
            
            
            
            
            
            39,365
            
            
            
            
            
            
            111,866
            
            
            
            
            
            
            120,478Gross
      profit
            
            
            8,320
            
            
            18.1
            %
            
            
            14,223
            
            
            26.5
            %
            
            
            29,082
            
            
            20.6
            %
            
            
            39,966
            
            
            24.9
            %Selling,
      general & administrative expenses
            
            
            7,768
            
            
            16.9
            %
            
            
            9,829
            
            
            18.3
            %
            
            
            26,138
            
            
            18.5
            %
            
            
            29,243
            
            
            18.2
            %Asbestos-related
      reorganization charges
            
            
            11,491
            
            
            
            
            
            
            -
            
            
            
            
            
            
            11,491
            
            
            
            
            
            
            -Operating
      (loss) income
            
            
            (10,939
            )
            
            
            
            
            
            4,394
            
            
            
            
            
            
            (8,547
            )
            
            
            
            
            
            10,723Interest
      income (expense), net
            
            
            6
            
            
            
            
            
            
            (2,961
            )
            
            
            
            
            
            1,001
            
            
            
            
            
            
            (8,765
            )Other
      expense, net
            
            
            (377
            )
            
            
            
            
            
            (213
            )
            
            
            
            
            
            (791
            )
            
            
            
            
            
            (247
            )(Loss)
      income before taxes
            
            
            (11,310
            )
            
            
            
            
            
            1,220
            
            
            
            
            
            
            (8,337
            )
            
            
            
            
            
            1,711(Benefit
      from) provision for income taxes
            
            
            (1,185
            )
            
            
            
            
            
            20
            
            
            
            
            
            
            (103
            )
            
            
            
            
            
            27Net
      (loss) income
            
            $
            (10,125
            )
            
            
            
            
            $
            1,200
            
            
            
            
            
            $
            (8,234
            )
            
            
            
            
            $
            1,684





Net
sales for the three months ended September 30, 2008 were $46.1 million as
compared to $53.6 million for the three months ended September 30, 2007, a
decrease of $7.5 million or 14% of net sales. The major factors driving the
decrease in sales were weak builder product sales reflecting ongoing weakness in
the new construction housing market, lower sales in the residential remodeling
product category and sharp declines in manufactured housing product volume
reflecting weak recreational vehicle and manufactured housing shipments,
partially offset by selling price increases instituted.





Net
sales for the nine months ended September 30, 2008 total $140.9 million as
compared to $160.4 million for the nine months ended September 30, 2007, a
decrease of $19.5 million or 12.2%. The decrease in sales is largely
attributable to the same factors impacting the third quarter
comparisons.





Gross
profit for the three months ended September 30, 2008 totaled $8.3 million, or
18% of net sales, compared to $14.2 million, or 26.5% of net sales, for the same
period last year. The decrease in gross margin dollars primarily reflects lower
sales, with the decrease in margin percent a result of sharply higher raw
material costs coupled with unabsorbed overhead expense related to lower
production volumes.





Gross
profit for the nine months ended September 30, 2008 totaled $29.1 million, or
20.6% of net sales, compared to $40.0 million, or 24.9% of net sales, for the
same period last year. Lower sales dollars accounted for most of the decline in
gross margin dollars, with higher raw material costs and unabsorbed overhead
expense related to lower production volumes driving the reduction in gross
margin percentage.





35


SG&A
expenses were $7.8 million for the three months ended September 30, 2008 as
compared to $9.8 million for the three months ended September 30, 2007, a
decrease of $2.0 million. Lower compensation and benefits expense reflecting
workforce reductions accounted for most of the decline. Congoleum booked an
$11.5 million charge in the quarter for projected expenses related to completing
its most recent reorganization plan.





SG&A
expenses were $26.1 million for the nine months ended September 30, 2008
compared to $29.2 million for the nine months ended September 30, 2007, a
decrease of $3.1 million.  Lower compensation and benefits expense
related to workforce reductions coupled with other cost reduction programs
accounted for most of the decrease.





Loss
from operations totaled $10.9 million for the three months ended September 30,
2008 compared to income of $4.4 million for three months ended September 30,
2007, reflecting lower gross margin dollars coupled with the asbestos-related
reorganization charge. Loss from operations was $8.5 million for the nine months
ended September 30, 2008 compared to income of $10.7 million for the nine months
ended September 30, 2007, reflecting lower gross margin dollars as a result of
lower sales and the asbestos-related reorganization charges.





Congoleum
reported a tax benefit from income taxes of $103 thousand for the nine months
ending September 30, 2008.  The full year effective tax rate is
expected to approximate 1.24%. Congoleum recorded a minimal provision for the
nine months ended September 30, 2007.








Liquidity
and Capital Resources





ABI
& Non-Debtor Subsidiaries





Cash
and cash equivalents decreased $983 thousand in the nine months ended September
30, 2008 to $2.9 million. Working capital at September 30, 2008 was $32.8
million compared to $31.9 million at December 31, 2007.  The ratio of
current assets to current liabilities at September 30, 2008 was 1.72 compared to
1.63 at December 31, 2007.  Cash from operating activities for the
nine months ended September 30, 2008 exceeded requirements for working capital
and capital expenditures, and the excess, together with the $4.0 million in
proceeds from the Janus note receivable, were used to reduce short term
borrowings.  Net cash provided by operating activities was $754
thousand for the nine months ended September 30, 2008, compared to cash provided
by operating activities of $50 thousand for the nine months ended September 30,
2007, which increase was primarily due to lower investment in accounts
receivable.





Capital
expenditures in the first nine months of 2008 were $1.0 million compared to $1.3
million for the first nine months of 2007.  It is anticipated that
capital spending for the full year 2008 will be approximately $2.5
million.





The
Company has recorded provisions which it believes are adequate for environmental
remediation, including provisions for testing and potential remediation of
conditions at its own facilities, and non-asbestos product-related
liabilities.  While the Company believes its estimate of the future
amount of these environmental liabilities is reasonable, that most of such
amounts will be paid over a period of five to ten years and that the Company
expects to have sufficient resources to fund such amounts, the actual timing and
amount of such payments may differ significantly from the Company's
assumptions.  Although the effect of future government regulation
could have a significant effect on the Company's costs, the Company is not aware
of any pending legislation or regulation relating to these matters that would
have a material adverse effect on its consolidated results of operations or
financial position.  There can be no assurances that any such costs
could be passed along to its customers.





36


American
Biltrite Inc.’s primary source of borrowings are the revolving credit facility
(the "Revolver") and the term loan ("Term Loan") it has with Bank of America,
National Association ("BofA"), and BofA acting through its Canada branch (the
"Canadian Lender") pursuant to an amended and restated credit agreement (the
"Credit Agreement").  The Credit Agreement provides American Biltrite
Inc. and its subsidiary K&M with (i) a $30.0 million commitment under the
Revolver with a $12.0 million borrowing sublimit (the "Canadian Revolver") for
American Biltrite Inc.’s subsidiary AB Canada and (ii) the $10.0 million Term
Loan.  The Credit Agreement also provides for domestic and Canadian
letter of credit facilities with availability of up to $5.0 million and $1.5
million, respectively, subject to availability under the Revolver and the
Canadian Revolver, respectively.





On
September 25, 2006, American Biltrite Inc., K&M and AB Canada entered into
an amendment and restatement to the Credit Agreement with BofA and the Canadian
Lender.  Pursuant to the amendment and restatement, the Term Loan was
added to the Credit Agreement and the amount of the Revolver was increased by
$10.0 million to its current $30.0 million amount.  In addition, the
availability for domestic letters of credit issued under the Credit Agreement
was increased from $4.0 million to $5.0 million.  In connection with
that amendment and restatement, American Biltrite Inc. used approximately $17.0
million of new borrowings from the proceeds of the Term Loan, which was fully
drawn, and under the Revolver to fully prepay $16.0 million of aggregate
outstanding principal amount of the Company’s senior notes, all of which were
held by The Prudential Insurance Company of America, together with approximately
$1.0 million in interest and yield maintenance fees in connection with those
notes and prepayment.  A charge of approximately $860 thousand for
early extinguishment of debt was recorded in connection with this prepayment,
which was included in other expense.





The
amount of borrowings available from time to time for American Biltrite Inc. and
K&M under the Revolver may not exceed the lesser of (a) $30.0 million less
the then outstanding amount of borrowings by AB Canada under the Canadian
Revolver less any outstanding borrowings under the domestic letter of credit
facility and (b) the applicable borrowing base.  The formula used for
determining the domestic borrowing base is based upon inventory, receivables and
fixed assets of the Company and certain of its subsidiaries (not including,
among others, AB Canada and Congoleum), reduced by amounts outstanding under the
Term Loan.





The
amount of borrowings available from time to time for AB Canada under the
Canadian Revolver is limited to the lesser of (a) $12 million less any
outstanding borrowings under the Canadian letter of credit facility, (b) AB
Canada's borrowing base amount, which is based upon AB Canada's accounts
receivable, inventory and fixed assets, and (c) $30.0 million less the amount of
domestic borrowings outstanding under the Revolver on behalf of the Company and
K&M.  AB Canada may borrow amounts under the Canadian Revolver in
United States or Canadian dollar denominations; however, solely for purposes of
determining amounts outstanding and borrowing availability under the Revolver,
all Canadian dollar denominated amounts will be converted into United States
dollars in the manner provided in the Credit Agreement.





37


Interest
is payable quarterly on the Term Loan and Revolver borrowings by American
Biltrite Inc. and K&M under the Credit Agreement at rates which vary
depending on the applicable interest rate in effect and are generally determined
based upon: (a) if a LIBOR based rate is in effect, at a rate between a LIBOR
based rate plus 1.0% to a LIBOR based rate plus 2.75%, depending on the
Company's leverage ratio, as determined under the Credit Agreement, (b) if a
fixed rate is in effect, at a rate between the fixed rate plus 1.0% to a fixed
rate plus 2.75%, depending on the Company's leverage ratio, as determined under
the Credit Agreement, and (c) for loans not based on a LIBOR or fixed rate, the
higher of (i) BofA's applicable prime rate and (ii) 0.50% plus the federal funds
rate, as determined under the Credit Agreement.  Under the Credit
Agreement, American Biltrite Inc. and K&M may generally determine whether
interest on domestic revolving loans will be calculated based on a LIBOR based
rate, and if BofA elects to make a fixed rate option available, whether interest
on revolving loans will be calculated based on a fixed rate.





Interest
is payable quarterly on revolving loans under the Canadian Revolver at rates
which vary depending on the applicable interest rate in effect and are generally
determined based upon: (a) if a LIBOR based rate is in effect, at a rate between
a LIBOR based rate plus 1.0% to a LIBOR based rate plus 2.75%, depending on the
Company's leverage ratio, as determined under the Credit Agreement, and (b) if a
LIBOR based rate is not in effect, for outstanding revolving loans denominated
in Canadian dollars, the higher of (i) 0.50% plus the applicable 30-day average
bankers' acceptance rate as quoted on Reuters CDOR page and (ii) the Canadian
Lender's applicable prime rate for loans made in Canadian dollars to Canadian
customers, and for outstanding revolving loans denominated in United States
dollars, the higher of (i) 0.50% plus the federal funds rate as calculated under
the Credit Agreement and (ii) the applicable rate announced by the Canadian
Lender as its reference rate for commercial loans denominated in United States
dollars made to a person in Canada.  Under the Credit Agreement, AB
Canada may generally determine whether interest on Canadian revolving loans will
be calculated based on a LIBOR based rate.





American
Biltrite Inc. has entered into interest rate swap agreements that effectively
fix the LIBOR rate component of the Term Loan and $6.0 million of the Revolver
at 5.18% and 5.15%, respectively.





The
Term Loan principal is payable in 20 quarterly installments of $500 thousand
beginning December 31, 2006 and ending on September 30, 2011.  All
indebtedness under the Credit Agreement, other than the Term Loan, matures on
September 30, 2009.





38


The
Credit Agreement contains certain covenants that the Company must
satisfy.  The covenants included in the Credit Agreement include
certain financial tests, restrictions on the ability of the Company to incur
additional indebtedness or to grant liens on its assets and restrictions on the
ability of the Company to pay dividends on its capital stock.  The
financial tests are required to be calculated based on the Company accounting
for its majority-owned subsidiary Congoleum Corporation on the equity method and
include a maximum ratio of total liabilities to tangible net worth, a minimum
ratio of earnings before interest, taxes, depreciation and amortization
(“EBITDA”) less certain cash payments for taxes, debt service, and dividends to
interest expense, a minimum level of tangible net worth, and a maximum level of
capital spending.  Pursuant to the amendment and restatement to the
Credit Agreement entered into on September 25, 2006, certain of the financial
covenants under the Credit Agreement were amended to, among other things, (i)
increase the permitted ratio of the Company's consolidated total liabilities to
consolidated tangible net worth to 200%, (ii) to provide for a higher threshold
for satisfying the consolidated tangible net worth test and (iii) to provide a
higher permitted aggregate amount for capital expenditures in any fiscal year.
The Credit Agreement also requires, for each fiscal quarter ending on and after
March 31, 2007, the Company's Consolidated Adjusted EBITDA for the four
consecutive fiscal quarters then ending to exceed 100% of the Company's
Consolidated Fixed Charges for the 12-month period ending on such date, as
determined under the Credit Agreement (the “Fixed Charge
Covenant”).





Pursuant
to the Credit Agreement, the Company and certain of its subsidiaries previously
granted BofA and the Canadian Lender a security interest in most of the
Company's and its subsidiaries' assets.  The security interest granted
does not include the shares of capital stock of Congoleum or the assets of
Congoleum.  In addition, pursuant to the Credit Agreement, certain of
the Company’s subsidiaries have agreed to guarantee the Company's obligations
(excluding AB Canada's obligations) under the Credit Agreement.





In
the past, the Company has had to amend its debt agreements in order to avoid
being in default of those agreements as a result of failing to satisfy certain
financial covenants contained in those agreements.  At March 31, 2007,
the Company was not in compliance with the financial covenant under the Credit
Agreement that there be no consecutive quarterly net losses from continuing
operations.  On May 14, 2007, American Biltrite Inc. and its
subsidiaries, K&M and AB Canada, entered into an amendment, effective as of
March 31, 2007, to the Credit Agreement with BofA and BofA acting through its
Canada branch, each in their respective capacities as lenders and administrative
agents under the Credit Agreement.  The amendment revised that
financial covenant to provide that for each of the two consecutive fiscal
quarters of the Company ending December 31, 2006 and March 31, 2007, the Company
may not have a quarterly net loss from continuing operations in excess of $400
thousand.  The Company was in compliance with the financial covenants
of its debt agreements at June 30 and September 30, 2007.  At December
31, 2007, the Company was not in compliance with the financial covenant under
the Credit Agreement that requires a ratio of Adjusted EBITDA to Consolidated
Interest Expense (as such terms are defined in the Credit Agreement) to exceed
1.0 and that there be no consecutive quarterly net losses from continuing
operations.  On March 12, 2008, the same parties entered into an
amendment to the Credit Agreement to remove the financial covenant that required
the Company not to have any consecutive quarterly net losses from continuing
operations (reporting Congoleum on the equity method of
accounting).  In addition, for purposes of determining the Company's
compliance with the financial covenant requiring its Consolidated Adjusted
EBITDA to exceed 100% of the Company's Consolidated Fixed Charges (in each case,
as determined under the Credit Agreement), the amendment permits the Company to
add certain amounts to its Consolidated Adjusted EBITDA to the extent those
amounts are deducted in determining the Company's Consolidated Net Income (as
determined under the Credit Agreement).  Further, under the amendment,
the lenders waived defaults that may have otherwise existed as of December 31,
2007 with respect to the financial covenants that were amended by the
amendment.





39


On
August 14, 2008, American Biltrite Inc. and its subsidiaries, K&M and AB
Canada, entered into an amendment, effective as of June 30, 2008, to the Credit
Agreement with BofA and BofA acting through its Canada branch, each in their
respective capacities as lenders and administrative agents under the Credit
Agreement.  The amendment permits the Company to add the principal
proceeds it received from the payoff of a note (see Note Cof the Notes to
Unaudited Consolidating Condensed Financial Statements, which is included in
Part I, Item 1 of this Quarterly Report on Form 10-Q) to its Consolidated
Adjusted EBITDA, as determined under the Credit Agreement, for the periods
ending June 30, 2008, September 30, 2008 and December 31,
2008.  Further, under the amendment, the lenders waived defaults that
may have otherwise existed as of June 30, 2008 with respect to the Fixed Charge
Covenant.  ABI paid BofA a fee of $50 thousand in connection with this
amendment.





The
Company may need to further amend the Credit Agreement or obtain waivers from
the lenders under that agreement in order to avoid being in default at some
future date.  For instance, as noted above, pursuant to the amendment
to the Credit Agreement entered into on August 14, 2008, the principal proceeds
the Company received from the payoff of the Janus note receivable may be added
to the Company's Consolidated Adjusted EBITDA, as determined under the Credit
Agreement, for the periods ending June 30, 2008, September 30, 2008 and December
31, 2008.  Those proceeds are not allowed to be added to the Company's
Consolidated Adjusted EBITDA for periods after December 31, 2008.  As
a result, the Company may not be able to comply with financial covenants
involving the Company's Consolidated Adjusted EBITDA for future periods after
December 31, 2008 and may need to obtain a waiver from BofA for any resulting
failure to satisfy those financial covenants or seek an amendment to the Credit
Agreement to address any such failure so that the Company would not be in breach
of the Credit Agreement.  Although the Company expects that it would
be able to obtain any such amendment or waiver, if necessary, there can be no
assurances that it would be successful in obtaining the amendment or
waiver.





Under
the terms of the Joint Plan, ABI’s ownership interest in Congoleum would have
been eliminated and would be eliminated under the terms of the New
Plan.  ABI expects that its ownership interest in Congoleum will
likely be eliminated under any alternate plan or outcome in Congoleum’s Chapter
11 case. While the Company does not believe the loss of the value of its equity
interest in Congoleum would have a direct material adverse effect on ABI’s
liquidity, the loss of a controlling interest could have a material adverse
impact on the business relationships between ABI and Congoleum, which in turn
could have a material adverse impact on ABI’s business, operations and financial
condition. In connection with Congoleum’s plan of reorganization, ABI expects to
spend $325 thousand for legal fees in 2008, which is not expected to have a
material adverse effect on ABI’s working capital or cash flow.





40


The
Company has not declared a dividend subsequent to the third quarter of
2003.  Future dividends, if any, will be determined by the Company's
Board of Directors based upon the financial performance and capital requirements
of the Company, among other considerations.  Under the Credit
Agreement, aggregate dividend payments (since June 30, 2003) are generally
limited to 50% of cumulative consolidated net income (computed treating
Congoleum under the equity method of accounting), as determined under the Credit
Agreement, earned from June 30, 2003.





Congoleum





The
consolidated financial statements of Congoleum have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business.  Accordingly,
Congoleum’s consolidated financial statements do not include any adjustments
that might be necessary should Congoleum be unable to continue as a going
concern.  In light of Congoleum’s substantial asbestos liabilities,
which are further described in the Notes to Unaudited Consolidating Condensed
Financial Statements contained in Part I, Item 1 of this Quarterly Report on
Form 10-Q, there is substantial doubt about Congoleum's ability to continue as a
going concern unless it obtains relief from those liabilities through a
successful reorganization under Chapter 11 of the Bankruptcy Code.





On
December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court (Case No. 03-51524) seeking relief under the Bankruptcy
Code.  See Notes A and K of the Notes to Unaudited Consolidating
Condensed Financial Statements, contained in Part I, Item 1 of this Quarterly
Report on Form 10-Q, for a discussion of Congoleum’s bankruptcy proceedings.
These matters continue to have a material adverse impact on liquidity and
capital resources.  During the first nine months of 2008, Congoleum
paid $12.5 million in fees and expenses related to reorganization proceedings
under Chapter 11 and the Coverage Action.  Furthermore, at September
30, 2008 Congoleum had incurred but not paid approximately $10.0 million in
additional fees and expenses for services rendered through that
date.





Based
on the Joint Plan, Congoleum has made provision in its financial statements for
the minimum estimated cost to effect its plan to settle asbestos liabilities
through confirmation of a plan that complies with section 524(g) of the
Bankruptcy Code. Congoleum recorded charges aggregating approximately $51.3
million in years prior to 2007.  Based on the terms of the Joint Plan,
in the fourth quarter of 2007 Congoleum recorded an additional $41.3 million
charge.  Of this charge, $14.9 million related to the write-off of
certain insurance litigation costs receivable that would not have been collected
under the terms of the Joint Plan and $26.4 million was an additional provision
for estimated costs for the reorganization proceedings and the Coverage
Action.  In the fourth quarter of 2007 Congoleum also recorded a $41.0
million interest expense credit to reverse post-petition interest accrued on its
Senior Notes.  Terms of previous reorganization plans had provided,
among other things, for the payment of post-petition interest on the Senior
Notes and therefore Congoleum had continued to accrue such
interest.  Under the terms of the Joint Plan, the Senior Note holders
would not have received any post-petition interest.  Following the
ruling that the Joint Plan was unconfirmable and based on the anticipated terms
and timing of effectiveness of the New Plan, Congoleum recorded an additional
charge of $11.5 million in the third quarter of 2008 for costs to effect its
reorganization.


41


In
February 2006, the Bankruptcy Court ordered GHR to disgorge all fees and certain
expenses it was paid by Congoleum.  In October 2006, Congoleum and GHR
entered into a settlement pursuant to which GHR was to pay Congoleum
approximately $9.2 million plus accrued interest in full satisfaction of the
disgorgement order.  The obligation was secured by assets of GHR and
was to be made over time according to a formula based on GHR’s
earnings.  The Bankruptcy Court approved that settlement with GHR in
April 2007.  Congoleum received $9.2 million plus $1.0 million of
accrued interest in full satisfaction of that settlement in March
2008.





Unrestricted
cash and cash equivalents, including short-term investments at September 30,
2008, were $23.8 million, a decrease of $ 2.6 million from December 31,
2007.  Under the terms of its revolving credit agreement, payments on
Congoleum’s accounts receivable are deposited in an account assigned by
Congoleum to its lender and the funds in that account are used by the lender to
pay down any loan balance. Deposits made on the last day of the month are
considered restricted cash. There were no funds deposited in this account at
September 30, 2008 and December 31, 2007.  Additionally, $6.6 million
remaining from a $14.5 million settlement received in August 2004 from an
insurance carrier, which is subject to a court order, is included as restricted
cash at September 30, 2008. In the second quarter of 2008 Congoleum received an
additional $22.7 million from other insurance carriers which is also included in
restricted cash.  Congoleum expects to contribute these funds, less
any amounts withheld pursuant to reimbursement arrangements, to the Plan Trust
should the Bankruptcy Court confirm a plan pursuant to Section 524(g) of the
Bankruptcy Code.  Working capital was $10.2 million at September 30,
2008, down from $9.4 million at December 31, 2007.  The ratio of
current assets to current liabilities was 1.1 to 1.0 at September 30, 2008 and
December 31, 2007.  Net cash used in operations during the nine months
ended September 30, 2008 was $1.9 million, as compared to net cash provided by
operations of $4.6 million during the nine months ended September 30,
2007.





Capital
expenditures for the nine months ended September 30, 2008 totaled $2.7
million.  Congoleum is currently planning capital expenditures of
approximately $5.5 million in 2008 and between $5.0 million and $7.0 million in
2009, primarily for maintenance and improvement of plants and equipment, which
it expects to fund with cash from operations and credit facilities.





In
January 2004, the Bankruptcy Court authorized entry of a final order approving
Congoleum’s debtor-in-possession financing, which replaced its pre-petition
credit facility on substantially similar terms. The debtor-in-possession
financing agreement (as amended and approved by the Bankruptcy Court to date)
provides a revolving credit facility expiring on the earlier of (i) June 30,
2009 and (ii) the date the plan of reorganization in Congoleum's bankruptcy
cases as confirmed by the Bankruptcy Court becomes effective.  Total
borrowing under the facility may not exceed $30.0 million. Interest is based on
0.25% above the prime rate.  This financing agreement contains certain
covenants, which include the maintenance of minimum earnings before interest,
taxes, depreciation and amortization (“Congoleum EBITDA”).  In
connection with the most recent amendment and extension of the agreement, the
minimum level of Congoleum EBITDA that Congoleum must maintain was reduced for
quarters ending after June 30, 2008.  Congoleum paid a fee of $25
thousand for such amendment, plus an amendment fee in the amount of $15 thousand
per month.  The financing agreement also includes restrictions on the
incurrence of additional debt and limitations on capital expenditures. The
covenants and


42


conditions
under this financing agreement must be met in order for Congoleum to borrow from
the facility. Congoleum was in compliance with these covenants (as amended) at
September 30, 2008. Borrowings under this facility are collateralized by
inventory and receivables.  At September 30, 2008, based on the level
of receivables and inventory, $20.3 million was available under the facility, of
which $2.2 million was utilized for outstanding letters of credit and $12.6
million was utilized by the revolving loan.  Congoleum anticipates
that its debtor-in-possession financing facility (including anticipated
extensions thereof) together with cash from operations will provide it with
sufficient liquidity to operate during 2008 and 2009 while under Chapter 11
protection.  There can be no assurances that Congoleum will continue to be
in compliance with the required covenants under this facility or that the
debtor-in-possession facility (as extended) will be renewed prior to its
expiration if a plan of reorganization is not confirmed before that time.
 For a plan of reorganization to be confirmed, Congoleum will need to
obtain and demonstrate the sufficiency of exit financing.  Congoleum cannot
presently determine the terms of such financing, nor can there be any assurances
of its success obtaining it, particularly in light of the recent substantial
disruption in the global credit markets which has resulted in credit becoming
more expensive and difficult to obtain.





In
addition to the provision for asbestos litigation discussed previously,
Congoleum has also recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities (other than
asbestos-related claims), including provisions for testing for potential
remediation of conditions at its own facilities. Congoleum is subject to
federal, state and local environmental laws and regulations and certain legal
and administrative claims are pending or have been asserted against
Congoleum.  Among these claims, Congoleum is a named party in several
actions associated with waste disposal sites (further described in Note J of the
Notes to Unaudited Consolidating Condensed Financial Statements contained in
Part I, Item 1 of this Quarterly Report on Form 10-Q).  These actions
include possible obligations to remove or mitigate the effects on the
environment of wastes deposited at various sites, including Superfund sites and
certain of Congoleum’s owned and previously owned facilities.  The
contingencies also include claims for personal injury and/or property
damage.  The exact amount of such future cost and timing of payments
are indeterminable due to such unknown factors as the magnitude of cleanup
costs, the timing and extent of the remedial actions that may be required, the
determination of Congoleum’s liability in proportion to other potentially
responsible parties, and the extent to which costs may be recoverable from
insurance.  Congoleum has recorded provisions in its financial
statements for the estimated probable loss associated with all known general and
environmental contingencies. While Congoleum believes its estimate of the future
amount of these liabilities is reasonable, and that they will be paid over a
period of five to ten years, the timing and amount of such payments may differ
significantly from Congoleum’s assumptions.  Although the effect of
future government regulation could have a significant effect on Congoleum’s
costs, Congoleum is not aware of any pending legislation which would reasonably
have such an effect.  There can be no assurances that the costs of any
future government regulations could be passed along to its
customers.  Estimated insurance recoveries related to these
liabilities are reflected in other non-current assets.





The
outcome of these environmental matters could result in significant expenses
incurred by or judgments assessed against Congoleum.





43


Congoleum's
principal sources of capital are net cash provided by operating activities and
borrowings under its financing agreement. Congoleum believes that its existing
cash (excluding restricted cash), cash generated from operations, and
debtor-in-possession credit arrangements should be sufficient to provide
adequate working capital for operations during 2008.  Congoleum’s
ability to emerge from Chapter 11 will depend on obtaining sufficient exit
financing to settle administrative expenses of the reorganization and any other
related obligations, and to provide adequate future liquidity.





Item
4T:  Controls and Procedures





a)
            Evaluation
      of Disclosure Controls and Procedures.  The Company's
      management, with the participation of the Company's Chief Executive
      Officer and Chief Financial Officer, has evaluated the effectiveness of
      the Company's disclosure controls and procedures (as such term is defined
      in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
      1934, as amended (the "Exchange Act")), as of the end of the period
      covered by this report.  Based on such evaluation, the Company's
      Chief Executive Officer and Chief Financial Officer have concluded that,
      as of the end of such period, the Company’s disclosure controls and
      procedures were effective, in that they provide reasonable assurance that
      information required to be disclosed by the Company in the reports that it
      files or submits under the Exchange Act is recorded, processed,
      summarized, and reported within the time periods specified in the
      Securities and Exchange Commission's rules and forms, and is accumulated
      and communicated to the Company’s management, including the Company’s
      Chief Executive Officer and Chief Financial Officer, as appropriate to
      allow timely decisions regarding required
  disclosure.





(b)
            Changes
      in Internal Control Over Financial Reporting.  There have not
      been any changes in the Company's internal control over financial
      reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under
      the Exchange Act) during the fiscal quarter to which this report relates
      that have materially affected, or are reasonably likely to materially
      affect, the Company’s internal control over financial
      reporting.





44


PART
II.   OTHER INFORMATION





Item
1.  Legal Proceedings





The
information contained in Note J "Commitments and Contingencies" and Note K
"Congoleum Asbestos Liabilities and Reorganization" of the Notes to Unaudited
Consolidating Condensed Financial Statements included in Part I, Item 1 of this
Quarterly Report on Form 10-Q, in "Management’s Discussion and Analysis of
Financial Condition and Results of Operations" included in Part I, Item 2 of
this Quarterly Report on Form 10-Q, and in "Risk Factors – The Company and its
majority-owned subsidiary Congoleum have significant asbestos liability and
funding exposure, and the Company's and Congoleum's strategies for resolving
this exposure may not be successful.  Any plan of reorganization for
Congoleum is expected to result in elimination of the interests of Congoleum’s
equity holders, including the Company" and "Elimination of the Company’s equity
interests in Congoleum could have a material adverse impact on the business
relationships between ABI and Congoleum, and ABI’s business, operations and
financial condition" included in Part II, Item 1A of this Quarterly Report on
Form 10-Q, are incorporated herein by reference.








Item
1A.  Risk Factors





The Company and its majority-owned
subsidiary Congoleum have significant asbestos liability and funding exposure,
and the Company's and Congoleum's strategies for resolving this exposure may not
be successful.  Any plan of reorganization for Congoleum is expected
to result in elimination of the interests of Congoleum's equity holders,
including the Company.





As
more fully set forth in Notes J and K of the Notes to Unaudited Consolidating
Condensed Financial Statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q, the Company and Congoleum have significant liability and
funding exposure for asbestos personal injury claims.  On December 31,
2003, Congoleum filed a voluntary petition with the Bankruptcy Court seeking
relief under Chapter 11 of the Bankruptcy Code as a means to resolve claims
asserted against it related to the use of asbestos in its products decades
ago.  A joint plan of reorganization for Congoleum proposed by the
FCR, the ACC, the Bondholders’ Committee and Congoleum was filed in the
Bankruptcy Court, which plan is referred to elsewhere in this Quarterly Report
on Form 10-Q as the "Joint Plan."  While that plan was found to be
legally unconfirmable, it had sufficient creditor support to have been confirmed
and those parties have agreed to a term sheet for the New Plan that is expected
to provide similar treatment to ABI’s interests as provided under the Joint
Plan.  Under the terms of the Joint Plan, ABI's ownership interest in
Congoleum would have been eliminated and would be eliminated under the terms of
the New Plan.  ABI expects that its ownership interest in Congoleum
would be eliminated under any alternate plan or outcome in Congoleum’s Chapter
11 case.





45


Any
plan of reorganization for Congoleum, if proposed, will be subject to numerous
conditions, approvals and other requirements, including the receipt of necessary
creditor, claimant and court approvals.  Certain insurers have
contested the reorganization plans previously filed by Congoleum in the
Bankruptcy Court and Congoleum is involved in ongoing litigation against its
insurers in a state court coverage action.  If the insurers are
successful in contesting any future reorganization plan or in denying coverage
under the insurance policies, such reorganization plan may not receive necessary
court approval or may not become effective.  Further, even if the
insurers are not successful in contesting any future plan that may be proposed
or in denying coverage under the insurance policies, Congoleum may be required
to incur significant time and expense litigating against the insurers, which
could further delay any confirmation or effectiveness of any reorganization
plan.  In order to obtain confirmation of any reorganization plan,
Congoleum will need sufficient funds to pay for the continued litigation with
these insurers as well the bankruptcy proceedings generally.  In
addition, for a plan of reorganization to be confirmed, Congoleum will need to
obtain and demonstrate the sufficiency of exit financing.  Congoleum
cannot presently determine the terms of such financing, nor can there be any
assurances of its success obtaining it, particularly in light of the recent
substantial disruption in the global credit markets which has resulted in credit
becoming more expensive and difficult to obtain.  Moreover, the
failure of any lender under any credit facility Congoleum may have or obtain to
fund requests for borrowings by Congoleum could negatively impact Congoleum's
business, results of operations or financial condition and its chances of
obtaining confirmation of any plan of reorganization.





Under
the terms of the Joint Plan, ABI’s rights and claims to indemnification from
Congoleum under the existing joint venture agreement between ABI and Congoleum
that relate to ABI's contribution to Congoleum in 1993 of ABI's tile division,
and the joint venture agreement itself, would have been deemed rejected and
disallowed upon the effective date of the Joint Plan, and therefore
eliminated.  The Joint Plan's rejection and disallowance of the joint
venture agreement and ABI’s claims thereunder included any unfunded
indemnification claims ABI may have had prepetition and during the pendency of
Congoleum's Chapter 11 case as well as any such claims ABI might otherwise have
been entitled to assert after the Joint Plan became effective.





In
addition, in view of ABI’s relationships with Congoleum, ABI will be affected by
Congoleum's negotiations regarding, and its pursuit of, any plan of
reorganization, and there can be no assurance as to what that impact, positive
or negative, might be.  In any event, the failure of Congoleum to
obtain confirmation and consummation of a Chapter 11 plan of reorganization
would have a material adverse effect on Congoleum's business, results of
operations or financial condition and could have a material adverse effect on
ABI’s business, results of operations or financial condition.





The
Company has its own direct asbestos liability as well.  The Company's
strategy remains to vigorously defend against and strategically settle its
asbestos claims on a case-by-case basis.  To date, the Company's
insurers have funded substantially all of the Company's liabilities and expenses
related to its asbestos liability under the Company's applicable insurance
policies.  The Company expects its insurance carriers will continue to
defend and indemnify it for a substantial amount of its asbestos liabilities for
the foreseeable future pursuant to an umbrella/first-layer excess policies
arrangement between the Company and the applicable insurance
carriers.  It is possible that asbestos claims may be asserted against
the Company alleging exposure allocable solely to years in which the Company’s
insurance policies excluded coverage for asbestos, that the policies providing
coverage under the umbrella/first-layer excess policies arrangement will
exhaust, or that the carriers responsible for such policies may at some future
date be unwilling or unable to meet their obligations under the policies or that
arrangement.  If ABI were to incur significant additional asbestos
liabilities for which it did not have insurance coverage or was not able to
receive recoveries under its insurance policies due to the carriers which
underwrote those policies being insolvent or otherwise, ABI may have to fund
such liabilities, which could have a material adverse effect on ABI's business,
results of operations or financial condition.





46


As
a result of Congoleum's significant liability and funding exposure for asbestos
claims, there can be no assurance that if Congoleum were to incur any
unforecasted or unexpected liability or disruption to its business or operations
it would be able to withstand that liability or disruption and continue as an
operating company.  Any significant increase of the Company's asbestos
liability and funding exposure would likely have a material adverse effect on
the Company's business, operations and financial condition and possibly its
ability to continue as a going concern.





In
the past, federal legislation has been proposed which would establish a national
trust to provide compensation to victims of asbestos-related injuries and
channel all current and future asbestos-related personal injury claims to that
trust.  In light of the numerous uncertainties surrounding this and
other possible asbestos legislation in the United States, ABI does not know what
effects any such legislation, if adopted, may have upon its or Congoleum's
businesses, results of operations or financial conditions, or upon any plan of
reorganization for Congoleum.





For
further information regarding the Company's and Congoleum's asbestos liability,
insurance coverage and strategies to resolve that asbestos liability, please see
Notes A, J and K of the Notes to Unaudited Consolidating Condensed Financial
Statements and "Management’s Discussion and Analysis of Financial Condition and
Results of Operations," which are included in Part I, Item 1 and Part I, Item 2,
respectively, of this Quarterly Report on Form 10-Q.





Elimination
of the Company’s equity interests in Congoleum could have a material adverse
impact on the business relationships between ABI and Congoleum and ABI’s
business, operations and financial condition.





ABI
expects that its ownership interest in Congoleum will be eliminated under any
plan or outcome in Congoleum’s Chapter 11 case.  There can be no
assurances as to the ownership structure under the terms of any new
reorganization plan for Congoleum that may be proposed or how such structure and
any other change in ownership and control may affect reorganized Congoleum’s
business, operations and financial condition, or its future relationships with
ABI.





ABI
provides management services to Congoleum, sells and purchases products to and
from Congoleum, and receives royalties from Congoleum.  Agreements for
these current intercompany arrangements expire on June 30, 2009, or upon the
effectiveness of a plan of reorganization for Congoleum, whichever comes
first.  It is not known whether ABI, Congoleum and the other parties
in interest will agree to extend the term of these arrangements, and if so, for
how long any extension would last or what the terms of any such extension and
related intercompany arrangements would be.  The terms of the Joint
Plan provided for certain intercompany arrangements continuing for a two year
period ending on the second anniversary of the effective date of the Joint Plan
pursuant to a new agreement to be entered into by ABI and reorganized Congoleum
on the effective date of the Joint Plan.  The Joint Plan provided that
the new agreement would be in form and substance mutually agreeable to the FCR,
the Bondholders' Committee, the ACC and ABI.  Pursuant to that new
agreement, ABI's current chief executive officer would serve as a director and
the chief executive officer of reorganized Congoleum and ABI would have to make
available to reorganized Congoleum substantially all of his time during normal
working hours on an annual basis, ABI would have to make available to
reorganized Congoleum approximately 25% of the time of ABI's current president
and chief operating officer during normal working hours and on an annual basis,
and ABI's current chief financial officer would serve as the chief financial
officer of reorganized Congoleum and ABI would have to make available to
reorganized Congoleum approximately 50% of his time during normal working hours
and on an annual basis.  Expiration or termination of such
intercompany arrangements, failure to reach definitive agreement on final terms
of future arrangements between ABI and reorganized Congoleum, or failure to
consummate such arrangements in connection with the effectiveness of a plan of
reorganization for Congoleum could have a material adverse impact on the
business relationships between ABI and Congoleum, and ABI’s business, operations
and financial condition.





47


The
Company has had to amend its debt agreements in the past in order to avoid being
in default of those agreements and may have to do so again in the future, and
the Company's ability to obtain additional financing may be
limited.





In
the past, the Company has had to amend its debt agreements in order to avoid
being in default of those agreements as a result of failing to satisfy certain
financial covenants contained in those agreements.  Most
recently,on August
14, 2008, American Biltrite Inc. and its subsidiaries, K&M and AB Canada,
entered into an amendment, effective as of June 30, 2008, to the Credit
Agreement with BofA and BofA acting through its Canada branch, each in their
respective capacities as lenders and administrative agents under the Credit
Agreement.  That credit agreement, as amended and restated, governs
ABI's primary source of borrowings.  The August 14, 2008 amendment
permits the Company to add the principal proceeds it received from the payoff of
a note to its Consolidated Adjusted EBITDA, as determined under the Credit
Agreement, for the periods ending June 30, 2008, September 30, 2008 and December
31, 2008.  The Credit Agreement includes a financial covenant that
requires the Company's Consolidated Adjusted EBITDA for the four consecutive
fiscal quarters then ending to exceed 100% of the Company's Consolidated Fixed
Charges for the 12-month period ending on such date, as determined under the
Credit Agreement (the "Fixed Charge Covenant").  Further, under the
amendment, the lenders waived defaults that may have otherwise existed as of
June 30, 2008 with respect to the Fixed Charge Covenant.  ABI paid
BofA a fee of $50 thousand in connection with this amendment.  On
March 12, 2008, American Biltrite Inc. and its subsidiaries, K&M and AB
Canada, entered into an amendment, effective as of December 31, 2007, to the
credit agreement with BofA and BofA acting through its Canada branch, each in
their respective capacities as lenders and administrative agents under that
credit agreement.  The March 12, 2008 amendment removed the financial
covenant that required the Company not to have any consecutive quarterly net
losses from continuing operations (reporting Congoleum on the equity method of
accounting).  In addition, for purposes of determining the Company's
compliance with the financial covenant requiring its Consolidated Adjusted
EBITDA to exceed 100% of the Company's Consolidated Fixed Charges (in each case,
as determined under the credit agreement), the amendment permits the Company to
add certain amounts to its Consolidated Adjusted EBITDA to the extent those
amounts are deducted in determining the Company's Consolidated Net Income (as
determined under the credit agreement).  On May 14, 2007, the same
parties entered into an amendment, effective as of March 31, 2007, to the Credit
Agreement to revise a financial covenant to provide that for each of the two
consecutive fiscal quarters of the Company ending December 31, 2006 and March
31, 2007, the Company may not have a quarterly net loss from continuing
operations in excess of $400 thousand.  On September 25, 2006, the
Company entered into an amendment and restatement to the credit agreement it has
with BofA and BofA acting through its Canada branch.  In connection
with that amendment and restatement, certain financial covenants were amended
under the credit agreement to enable the Company to comply with those
covenants.  The Company may need to further amend the credit agreement
or obtain waivers from the lenders under that agreement in order to avoid being
in default at some future date.  For instance, as noted above,
pursuant to the amendment to the Credit Agreement entered into on August 14,
2008, the principal proceeds the Company received from the payoff of the Janus
note receivable may be added to the Company's Consolidated


48


Adjusted
EBITDA, as determined under the Credit Agreement, for the periods ending June
30, 2008, September 30, 2008 and December 31, 2008.  Those proceeds
are not allowed to be added to the Company's Consolidated Adjusted EBITDA for
periods after December 31, 2008.  As a result, the Company may not be
able to comply with financial covenants involving the Company's Consolidated
Adjusted EBITDA for future periods after December 31, 2008 and may need to
obtain a waiver from BofA for any resulting failure to satisfy those financial
covenants or seek an amendment to the Credit Agreement to address any such
failure so that the Company would not be in breach of the Credit
Agreement.  Although the Company expects that it would be able to
obtain any such amendment or waiver, if necessary, there can be no assurances
that it would be successful in obtaining the amendment or waiver. If the
Company were to violate one of those or other covenants or provisions under the
credit agreement and not amend the credit agreement to address or obtain a
waiver of the violation, it could breach the credit agreement, resulting in a
default of the credit agreement.  If such a default were to occur, the
lenders could require the Company to repay all amounts outstanding under the
credit agreement.  If the Company were unable to repay those amounts
due, the lenders could have its rights over the collateral (most of the
Company’s and its domestic subsidiaries’ (excluding Congoleum) assets)
exercised, which would likely have a material adverse effect on the Company’s
business, results of operations or financial condition.





In
addition, under the terms of the credit agreement, the Company's ability to
obtain additional debt financing is limited.  Moreover, since the Company
and most of its domestic subsidiaries have already granted security interests in
most of their assets, the Company's ability to obtain any additional debt
financing may be limited.  Further, the global credit markets have
recently been experiencing substantial disruption, and as a result, credit has
become more expensive and difficult to obtain, which would further limit the
availability of any additional financing for the Company.





The
Company relies on its revolving credit facility to fund its business, operations
and working capital needs, that revolving credit facility expires on September
30, 2009 and the Company may not be able to renew or replace that facility on
satisfactory terms.





The
Company relies on borrowings under its $30 million revolving credit facility
which is governed by its Credit Agreement with BofA to fund its business and
operations.  If the Company is not able to generate sufficient cash
flows from its operations as a result of the current and forecasted economic
slowdown or recession in the United States or otherwise, it may have greater
reliance on the availability of borrowings under its credit
facility.  The Company's credit facility is scheduled to expire on
September 30, 2009.  The Company expects that it will need to renew
this facility or seek replacement financing by that expiration
date.  The global credit markets have recently been experiencing
substantial disruption, and as a result, credit has become more expensive and
difficult to obtain.  In addition, creditors have generally been
imposing more stringent restrictions on the terms of credit.  If these
conditions continue to exist, the Company may be unable to obtain adequate
credit to renew or replace its existing credit facility and the terms of any
replacement credit facility it may be able to obtain may be significantly more
expensive and restrictive than the terms under its current credit
facility.  If the Company were unable to renew or replace its credit
facility by the time its existing credit facility expires, or the terms of any
renewed or replacement facility it may obtain were significantly more expensive
or restrictive, the Company's business, results of operations or financial
condition would be materially adversely affected.  In addition, if a
lender under the Company's credit facility fails to fund a request by the
Company to borrow money under its credit facility, the Company's business,
results of operations or financial condition may be materially adversely
affected.





49


The
Company and Congoleum sell their products on credit and their customers may fail
to pay, or they may extend the payment period, for products sold to them on
credit.





The
Company and Congoleum sell their products on credit.  Customers
purchasing goods on credit from the Company or Congoleum may default on their
obligations to pay, or they may extend the payment period, for products sold to
them on credit, which may result in an increased investment in accounts
receivable by the Company or Congoleum.  In light of the current and
forecasted economic slowdown or recession in the United States, the risk that
the Company and Congoleum may realize an increased investment in accounts
receivable may be greater.  To the extent the Company and Congoleum
are unable to collect receivables owed to them in a timely fashion, increased
demands may be placed on their respective working capital, which could have a
material adverse effect on their respective businesses, results of operations or
financial condition.





The
Company and its majority-owned subsidiary Congoleum may incur substantial
liability for environmental claims and compliance matters.





Due
to the nature of the Company's and its majority-owned subsidiary Congoleum's
businesses and certain of the substances which are or have been used, produced
or discharged by them, the Company's and Congoleum's operations and facilities
are subject to a broad range of federal, state, local and foreign legal and
regulatory provisions relating to the environment, including those regulating
the discharge of materials into the environment, the handling and disposal of
solid and hazardous substances and wastes and the remediation of contamination
associated with releases of hazardous substances at Company and Congoleum
facilities and off-site disposal locations.  The Company and Congoleum
have historically expended substantial amounts for compliance with existing
environmental laws or regulations, including environmental remediation costs at
both third-party sites and Company and Congoleum-owned sites.  The
Company and Congoleum will continue to be required to expend amounts in the
future because of the nature of their prior activities at their facilities, in
order to comply with existing environmental laws, and those amounts may be
substantial.  Although the Company and Congoleum believe that those
amounts should not have a material adverse effect on their respective financial
positions, there is no certainty that these amounts will not have a material
adverse effect on their respective financial positions because, as a result of
environmental requirements becoming increasingly strict, neither the Company nor
Congoleum is able to determine the ultimate cost of compliance with
environmental laws and enforcement policies.





Moreover,
in addition to potentially having to pay substantial amounts for compliance,
future environmental laws or regulations may require or cause the Company or
Congoleum to modify or curtail their operations, which could have a material adverse effect on the
Company's business, results of operations or financial
condition.





50


The
Company and its majority-owned subsidiary Congoleum, may incur substantial
liability for other product and general liability claims.





In
the ordinary course of their businesses, the Company and its majority-owned
subsidiary Congoleum become involved in lawsuits, administrative proceedings,
product liability claims and other matters.  In some of these
proceedings, plaintiffs may seek to recover large and sometimes unspecified
amounts and the matters may remain unresolved for several
years.  These matters could have a material adverse effect on the
Company's business, results of operations or financial condition if the Company
or Congoleum, as applicable, is unable to successfully defend against or settle
these matters, and its insurance coverage is insufficient to satisfy any
judgments against it or settlements relating to these matters, or the Company or
Congoleum, as applicable, is unable to collect insurance proceeds relating to
these matters.





The
Company and its majority-owned subsidiary Congoleum are dependent upon a
continuous supply of raw materials from third party suppliers and would be
harmed if there were a significant, prolonged disruption in supply or increase
in its raw material costs.





The
Company and its majority-owned subsidiary Congoleum generally design and
engineer their own products.  Most of the raw materials required by
the Company for its manufacturing operations are available from multiple
sources; however, the Company does purchase some of its raw materials from a
single source or supplier.  Any significant delay in or disruption of
the supply of raw materials could substantially increase the Company's cost of
materials, require product reformulation or require qualification of new
suppliers, any one or more of which could materially adversely affect the
Company's business, results of operations or financial condition.  The
Company's majority-owned subsidiary Congoleum does not have readily available
alternative sources of supply for specific designs of transfer print paper,
which are produced utilizing print cylinders engraved to Congoleum's
specifications.  Although Congoleum does not anticipate any loss of
this source of supply, replacement could take a considerable period of time and
interrupt production of certain products, which could have a material adverse
affect on the Company's business, results of operations or financial
condition.  The Company and Congoleum have occasionally experienced
significant price increases for some of its raw materials.  Although
the Company has been able to obtain sufficient supplies of raw materials, there
can be no assurances that it may not experience difficulty in the future,
particularly if global supply conditions deteriorate, which could have a
material adverse effect on profit margins.  In addition, raw material
and energy costs have increased sharply over the past year, which has negatively
impacted the Company's and Congoleum's businesses and operating
results.  Although raw material and energy costs have recently
declined, it is not known whether raw material and energy prices will remain
lower or will revert to increasing price levels.  In light of the
current and forecasted economic conditions in the United States and the
industries in which the Company and Congoleum conduct business, the Company and
Congoleum may be unable to pass increased raw material and energy costs on to
their respective customers.





51


The
Company and its majority-owned subsidiary Congoleum operate in highly
competitive markets and some of their competitors have greater resources, and in
order to be successful, the Company and Congoleum must keep pace with and
anticipate changing customer preferences.





The
market for the Company's and its majority-owned subsidiary Congoleum's products
and services is highly competitive.  Some of their respective competitors
have greater financial and other resources and access to capital.Furthermore, to the extent any of the Company's or Congoleum's
competitors make a filing under Chapter 11 of the Bankruptcy Code and emerge
from bankruptcy as continuing operating companies that have shed much of their
pre-filing liabilities, those competitors could have a cost competitive
advantage over Congoleum.  In addition, in order to maintain their competitive
positions, the Company and Congoleum may need to make substantial investments in
their businesses, including, as applicable, product development, manufacturing
facilities, distribution network and sales and marketing activities. Competitive
pressures may also result in decreased demand for their products and in the loss
of market share for their products. Moreover, due to the competitive nature of
their industries, they may be commercially restricted from raising or even
maintaining the sales prices of their products, which could result in the
incurrence of significant operating losses if their expenses were to increase or
otherwise represent an increased percentage of sales.





The
markets in which the Company and Congoleum compete are characterized by frequent
new product introductions and changing customer preferences. There can be no
assurance that the Company's and Congoleum's existing products and services will
be properly positioned in the market or that the Company and Congoleum will be
able to introduce new or enhanced products or services into their respective
markets on a timely basis, or at all, or that those new or enhanced products or
services will receive customer acceptance. The Company's and Congoleum's failure
to introduce new or enhanced products or services on a timely basis, keep pace
with industry or market changes or effectively manage the transitions to new
products, technologies or services could have a material adverse effect on the
Company's business, results of operations or financial condition.





The
Company and its majority-owned subsidiary Congoleum are subject to general
economic conditions and conditions specific to their respective
industries.





Global
and financial markets have recently been experiencing substantial
disruption.  Economic conditions in the United States have been
challenging, including in the industries in which the Company and Congoleum
conduct business.  The downturn in the housing industry has resulted
in reduced demand for the Company's and Congoleum's products.  The
slowdown in manufacturing, including in the automotive and industrial sectors,
has resulted in reduced demand for the Tape division's products.  In
addition, the decline in consumer and retailer, especially mid-tier retailer,
spending has resulted in reduced demand for K&M's
products.  Forecasts generally call for a slowing economy or an
economic recession in the United States, including in the industries in which
the Company and Congoleum conduct business.  The Company expects the
current and forecasted economic conditions to continue to negatively impact the
Company's and Congoleum's businesses and operations and that the extent of that
impact will depend on the duration and depth of the economic slowdown or
recession.





In
addition, raw material and energy costs have increased sharply over the past
year, which has negatively impacted the Company's and Congoleum's businesses and
operating results.  Although raw material and energy costs have
recently declined, it is not known whether raw material and energy prices will
remain lower or will revert to increasing price levels.  In light of
the current and forecasted economic conditions in the United States and the
industries in which the Company and Congoleum conduct business, the Company and
Congoleum may be unable to pass increased raw material and energy costs on to
their respective customers.





52


Although
the Company and Congoleum intend to implement reductions in their expenses,
there can be no assurance that they will be able to reduce their respective
expenses, that any reductions they may implement will have any meaningful
positive impact on their businesses, results of operations or financial
condition, or that they will be able to sustain any expense reductions that they
may implement.





The
Company and its majority-owned subsidiary Congoleum could realize shipment
delays, depletion of inventory and increased production costs resulting from
unexpected disruptions of operations at any of the Company's or Congoleum's
facilities.





The
Company's and its majority-owned subsidiary Congoleum's businesses depend upon
their ability to timely manufacture and deliver products that meet the needs of
their customers and the end users of their products.  If the Company
or Congoleum were to realize an unexpected, significant and prolonged disruption
of its operations at any of its facilities, including disruptions in its
manufacturing operations, it could result in shipment delays of its products,
depletion of its inventory as a result of reduced production and increased
production costs as a result of taking actions in an attempt to cure the
disruption or carry on its business while the disruption remains.  Any
resulting delay, depletion or increased production cost could result in
increased costs, lower revenues and damaged customer and product end user
relations, which could have a material adverse effect on the Company's business,
results of operations or financial condition.





The
Company and its majority-owned subsidiary Congoleum offer limited warranties on
their products which could result in the Company or Congoleum incurring
significant costs as a result of warranty claims.





The
Company and its majority-owned subsidiary Congoleum offer a limited warranty on
many of their products against manufacturing defects.  In addition, as
a part of its efforts to differentiate mid- and high-end products through color,
design and other attributes, Congoleum offers enhanced warranties with respect
to wear, moisture discoloration and other performance characteristics which
generally increase with the price of such products.  If the Company or
Congoleum were to incur a significant number of warranty claims, the resulting
warranty costs could be substantial.





The
Company and its majority-owned subsidiary Congoleum rely on a small number of
customers and distributors for a significant portion of their sales or to sell
their products.





The
Company's Tape Division principally sells its products through
distributors.  Sales to five unaffiliated customers accounted for
approximately 20% of the Company's Tape Division's net sales for the year ended
December 31, 2007.  The loss of the largest unaffiliated customer
and/or two or more of the other four unaffiliated customers could have a
material adverse effect on the Company's business, results of operations or
financial condition.





The
Company's majority-owned subsidiary Congoleum principally sells its products
through distributors.  Although Congoleum has more than one
distributor in some of its distribution territories and actively manages its
credit exposure to its distributors, the loss of a major distributor could have
a material adverse impact on the Company's business, results of operations, or
financial condition.  Congoleum derives a significant percentage of
its sales from two of its distributors. These
two distributors accounted for approximately 66% of Congoleum's net sales for
the year ended December 31, 2007.


53





The
Company's subsidiary K&M sells its products through its own direct sales
force and, indirectly, through a wholly owned subsidiary and through third-party
sales representatives.  Four of K&M's customers accounted for
approximately 58% of its net sales for the year ended December 31, 2007. The
loss of the largest of these customers would have a material adverse effect on
K&M’s business, results of operations and financial condition and would
likely have a material adverse effect on the Company’s business, results of
operations or financial condition.





The
Company and its majority-owned subsidiary Congoleum depend on key executives to
run their businesses, and the loss of any of these executives would likely harm
the Company's business.





The
Company and its majority-owned subsidiary Congoleum depend on key executives to
run their businesses.  In particular, three of the persons that serve
as key executives at the Company also serve as key executives at
Congoleum.  The Company's future success will depend largely upon the
continued service of these key executives, all of whom have no employment
contract with the Company or Congoleum, as applicable, and may terminate their
employment at any time without notice.  Although certain key
executives of the Company and Congoleum are, directly or indirectly, large
shareholders of the Company or Congoleum, and thus are less likely to terminate
their employment, the loss of any key executive, or the failure by the key
executive to perform in his current position, could have a material adverse
effect on the Company's business, results of operations or financial
condition.








Item
3.  Defaults Upon Senior Securities





On
August 3, 1998, Congoleum issued $100 million of its 8.625% Senior Notes due in
August 2008 priced at 99.505% to yield 8.70%.  The Senior Notes are
redeemable at the option of Congoleum, in whole or in part, at any time on or
after August 1, 2003 at predetermined redemption prices (ranging from 104% to
100%), plus accrued and unpaid interest to the date of
redemption.  The indenture governing the Senior Notes includes certain
restrictions on additional indebtedness and uses of cash, including dividend
payments.  The commencement of Congoleum’s Chapter 11 proceedings
constituted an event of default under the indenture governing the Senior
Notes.  During 2003, Congoleum and the trustee under the indenture
governing the Senior Notes amended the indenture, and sufficient note holders
consented, to explicitly permit Congoleum to take steps in connection with
preparing and filing its prepackaged plan of reorganization under Chapter 11 of
the Bankruptcy Code.  The amount of accrued interest on the Senior
Notes that was not paid as of the bankruptcy filing on December 31, 2003 was
approximately $3.6 million.  The accrued pre-petition interest and the
principal amount of the Senior Notes are included in “Liabilities Subject to
Compromise” as of September 30, 2008 (see Note H of the Notes to the Unaudited
Consolidating Condensed Financial Statements contained in Part I, Item 1 of this
Quarterly Report on Form 10-Q).   During 2007, Congoleum reversed
all accrued post-petition interest on the Senior Notes to reflect the terms of
the Joint Plan.


54


Item
6.  Exhibits





Exhibit
      No.
            Description3.1 
      I
            Restated
      Certificate of Incorporation3.2 
      II
            By-Laws,
      amended and restated as of November 7, 20074.1 
      III
            Amendment
      No. 5 to Amended and Restated Credit Agreement, dated as of June 30, 2008,
      among American Biltrite Inc., K&M Associates L.P., and American
      Biltrite (Canada) Ltd., Bank of America, National Association, both in its
      capacity as a domestic lender and as a domestic administrative agent, Bank
      of America, National Association, acting through its Canada branch, both
      in its capacity as a Canadian lender and as Canadian administrative agent,
      and the other lenders from time to time party thereto10.1
       III
            Amendment
      No. 5 to Amended and Restated Credit Agreement, dated as of June 30, 2008,
      among American Biltrite Inc., K&M Associates L.P., and American
      Biltrite (Canada) Ltd., Bank of America, National Association, both in its
      capacity as a domestic lender and as a domestic administrative agent, Bank
      of America, National Association, acting through its Canada branch, both
      in its capacity as a Canadian lender and as Canadian administrative agent,
      and the other lenders from time to time party thereto10.2 
      IV
            Amendment
      to Business Relations Agreement, dated as of September 23, 2008, by and
      between American Biltrite Inc. and Congoleum
Corporation10.3 
      IV
            Sixth
      Amendment to Personal Service Agreement, dated as of September 23, 2008,
      by and between American Biltrite Inc. and Congoleum
      Corporation31.1
            Certification
      of the Principal Executive Officer of the Registrant Pursuant to Rule
      13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as
      amended31.2
            Certification
      of the Principal Financial Officer of the Registrant Pursuant to Rule
      13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as
      amended32
            Certification
      of the Chief Executive Officer and Chief Financial Officer of the
      Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002





55





Exhibit
      No.
            Description99.1  V
            Term
      Sheet between Congoleum Corporation and its debtor subsidiaries, the
      Official Committee of Bondholders, the Asbestos Claimants’ Committee, the
      Futures Representative, the Claimants’ Counsel and Arthur J. Pergament, as
      Collateral Trustee99.2
            Press
      release dated November 5, 2008





___________________________





I
            Incorporated
      by reference to the exhibits filed with the Company’s Annual Report on
      Form 10-K for the year ended December 31, 1996 and filed with the
      Securities and Exchange Commission on March 27,
      1997  (1-4773)II
            Incorporated
      by reference to the exhibits filed with the Company's Quarterly Report on
      Form 10-Q for the quarter ended September 30, 2007 and filed with the
      Securities and Exchange Commission on November 14, 2007III
            Incorporated
      by reference to the exhibits filed with the Company's Quarterly Report on
      Form 10-Q for the quarter ended June 30, 2008 and filed with the
      Securities and Exchange Commission on August 14, 2008IV
            Incorporated
      by reference to the exhibits filed with the Company’s Current Report on
      Form 8-K filed on September 24, 2008V
            Incorporated
      by reference to the exhibits filed with the Company’s Current Report on
      Form 8-K filed on August 18, 2008


56











SIGNATURE







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.











AMERICANBILTRITE
      INC.(Registrant)Date:   November
      7, 2008
            BY:
            /s/  Howard
      N. Feist IIIHoward
      N. Feist IIIVice
      President-Finance(Duly
      Authorized Officer andPrincipal
      Financial and ChiefAccounting
      Officer)





57


INDEX
OF EXHIBITS





Exhibit
      No.
            Description3.1 
      I
            Restated
      Certificate of Incorporation3.2 
      II
            By-Laws,
      amended and restated as of November 7, 20074.1 
      III
            Amendment
      No. 5 to Amended and Restated Credit Agreement, dated as of June 30, 2008,
      among American Biltrite Inc., K&M Associates L.P., and American
      Biltrite (Canada) Ltd., Bank of America, National Association, both in its
      capacity as a domestic lender and as a domestic administrative agent, Bank
      of America, National Association, acting through its Canada branch, both
      in its capacity as a Canadian lender and as Canadian administrative agent,
      and the other lenders from time to time party thereto10.1 
      III
            Amendment
      No. 5 to Amended and Restated Credit Agreement, dated as of June 30, 2008,
      among American Biltrite Inc., K&M Associates L.P., and American
      Biltrite (Canada) Ltd., Bank of America, National Association, both in its
      capacity as a domestic lender and as a domestic administrative agent, Bank
      of America, National Association, acting through its Canada branch, both
      in its capacity as a Canadian lender and as Canadian administrative agent,
      and the other lenders from time to time party thereto10.2 
      IV
            Amendment
      to Business Relations Agreement, dated as of September 23, 2008, by and
      between American Biltrite Inc. and Congoleum
Corporation10.3 
      IV
            Sixth
      Amendment to Personal Service Agreement, dated as of September 23, 2008,
      by and between American Biltrite Inc. and Congoleum
      Corporation31.1
            Certification
      of the Principal Executive Officer of the Registrant Pursuant to Rule
      13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as
      amended31.2
            Certification
      of the Principal Financial Officer of the Registrant Pursuant to Rule
      13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as
      amended32
            Certification
      of the Chief Executive Officer and Chief Financial Officer of the
      Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002











Exhibit
      No.
            Description99.1  V
            Term
      Sheet between Congoleum Corporation and its debtor
      subsidiaries,  the Official Committee of Bondholders, the
      Asbestos Claimants’ Committee, the Futures Representative, the Claimants’
      Counsel and Arthur J. Pergament, as Collateral Trustee99.2
            Press
      release dated November 5, 2008





___________________________





I
            Incorporated
      by reference to the exhibits filed with the Company’s Annual Report on
      Form 10-K for the year ended December 31, 1996 and filed with the
      Securities and Exchange Commission on March 27,
      1997  (1-4773)II
            Incorporated
      by reference to the exhibits filed with the Company's Quarterly Report on
      Form 10-Q for the quarter ended September 30, 2007 and filed with the
      Securities and Exchange Commission on November 14, 2007III
            Incorporated
      by reference to the exhibits filed with the Company's Quarterly Report on
      Form 10-Q for the quarter ended June 30, 2008 and filed with the
      Securities and Exchange Commission on August 14, 2008IV
            Incorporated
      by reference to the exhibits filed with the Company’s Current Report on
      Form 8-K filed on September 24, 2008V
            Incorporated
      by reference to the exhibits filed with the Company’s Current Report on
      Form 8-K filed on August 18, 2008