UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549





FORM
10-Q





x           QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934





For
the quarterly period ended September 30,
2008


or





o           TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934





For
the transition period from ________ to _________





Commission
File Number 1-13612




CONGOLEUM
CORPORATION


(Exact
name of registrant as specified in its charter)








DELAWARE
            02-0398678(State
      or Other Jurisdiction of
            (IRS
      Employer Identification No.)Incorporation
      or Organization)





3500
Quakerbridge Road


P.O.
Box 3127


Mercerville,
NJ  08619-0127


(Address
of principal executive offices, including zip code)





(609)
584-3000


(Registrant's
telephone number, including area code)





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 filer o Accelerated
filer o
Non-accelerated filer o Smaller reporting
company x


1





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  YES oNO
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 October 31, 2008Class
      A Common Stock
            
            3,663,390Class
      B Common Stock
            
            4,608,945


2


CONGOLEUM
CORPORATION





Index





PagePART
      I. FINANCIAL INFORMATIONItem
      1.
            Financial
      Statements:Consolidated
      Balance Sheet as of September 30, 2008(unaudited)
      and December 31, 2007
            5Condensed
      Consolidated Statement of Operations for the three and
ninemonths
      ended September 30, 2008 and 2007 (unaudited)
            6Condensed
      Consolidated Statement of Cash Flows for the nine monthsended
      September 30, 2008 and 2007 (unaudited)
            7Notes
      to Unaudited Condensed Consolidated Financial Statements
      (unaudited)
            8Item
      2.
            Management's
      Discussion and Analysis of Financial Conditionand
      Results of Operations
            25Item
      3.
            Quantitative
      and Qualitative Disclosures about Market Risk
            33Item
      4T.
            Controls
      and Procedures
            33PART
      II. OTHER INFORMATIONItem
      1.
            Legal
      Proceedings
            34Item
      1A.
            Risk
      Factors
            34Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            39Item
      3.
            Defaults
      Upon Senior Securities
            40Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            40Item
      5.
            Other
      Information
            40Item
      6.
            Exhibits
            41Signatures
            42





3


Factors That May Affect
Future Results





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 the 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 the
expectations of Congoleum Corporation (the “Company” or “Congoleum”), as of the
date of this report, of future events, and the Company undertakes no obligation
to update any of these forward-looking statements. Although the Company 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 statement made in this report speaks only
as of the date of such statement.  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 the Company's actual results differing from its expectations
include those factors discussed elsewhere in this report, including in the
section of this report entitled “Risk Factors,” and in the Company's other
filings with the Securities and Exchange Commission.


4


PART
I.       FINANCIAL INFORMATION





Item
1.         Financial
Statements





CONGOLEUM
CORPORATION


CONSOLIDATED
BALANCE SHEET


(In
thousands, except per share amounts)





September
      30,
              2008
            
            
            December
      31,
              2007(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            23,757
            
            
            $
            26,327Restricted
      cash
            
            
            29,538
            
            
            
            6,501Accounts
      receivable, less allowances of  $720 and $1,017 as of September
      30, 2008 and December 31, 2007, respectively
            
            
            15,971
            
            
            
            14,162Inventories
            
            
            36,730
            
            
            
            35,182Prepaid
      expenses and other current assets
            
            
            4,490
            
            
            
            13,138Total
      current assets
            
            
            110,486
            
            
            
            95,310Property,
      plant and equipment, net
            
            
            57,132
            
            
            
            61,993Deferred
      income taxes
            
            
            3,275
            
            
            
            7,400Other
      assets, net
            
            
            4,286
            
            
            
            4,509Total
      assets
            
            $
            175,179
            
            
            $
            169,212LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Accounts
      payable
            
            $
            8,832
            
            
            $
            10,399Accrued
      liabilities
            
            
            17,321
            
            
            
            20,933Asbestos-related
      liabilities
            
            
            53,254
            
            
            
            31,207Revolving
      credit loan
            
            
            12,637
            
            
            
            10,551Deferred
      income taxes
            
            
            3,005
            
            
            
            7,725Accrued
      taxes
            
            
            276
            
            
            
            125Liabilities
      subject to compromise – current
            
            
            4,997
            
            
            
            4,997Total
      current liabilities
            
            
            100,322
            
            
            
            85,937Liabilities
      subject to compromise - long term
            
            
            129,533
            
            
            
            129,731Total
      liabilities
            
            
            229,855
            
            
            
            215,668STOCKHOLDERS’
      EQUITY (DEFICIT)Class
      A common stock, par value $0.01; 20,000,000 shares authorized; 4,736,950
      shares issued and 3,663,390 shares outstanding as of September 30, 2008
      and December 31, 2007
            
            
            47
            
            
            
            47Class
      B common stock, par value $0.01; 4,608,945 shares authorized, issued and
      outstanding at September 30, 2008 and December 31, 2007
            
            
            46
            
            
            
            46Additional
      paid-in capital
            
            
            49,382
            
            
            
            49,368Retained
      deficit
            
            
            (73,651
            )
            
            
            (65,417
            )Accumulated
      other comprehensive loss
            
            
            (22,687
            )
            
            
            (22,687
            )(46,863
            )
            
            
            (38,643
            )Less
      Class A common stock held in treasury, at cost; 1,073,560 shares at
      September 2008 and December 31, 2007
            
            
            7,813
            
            
            
            7,813Total
      stockholders’ equity (deficit).
            
            
            (54,676
            )
            
            
            (46,456
            )Total
      liabilities and stockholders’ equity (deficit)
            
            $
            175,179
            
            
            $
            169,212





The
accompanying notes are an integral part of the condensed consolidated financial
statements.


5


CONGOLEUM
CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS


(In
thousands, except per share amounts)


(Unaudited)





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      sales
            
            $
            46,085
            
            
            $
            53,588
            
            
            $
            140,948
            
            
            $
            160,444Cost
      of sales
            
            
            37,765
            
            
            
            39,365
            
            
            
            111,866
            
            
            
            120,478Selling,
      general and administrative expenses
            
            
            7,768
            
            
            
            9,829
            
            
            
            26,138
            
            
            
            29,243Asbestos
      related reorganization charges
            
            
            11,491
            
            
            
            
            
            
            
            11,491(loss)
      income from operations
            
            
            (10,939
            )
            
            
            4,394
            
            
            
            (8,547
            )
            
            
            10,723Other
      income (expense):Interest
      income
            
            
            49
            
            
            
            185
            
            
            
            1,241
            
            
            
            439Interest
      expense
            
            
            (43
            )
            
            
            (3,146
            )
            
            
            (240
            )
            
            
            (9,204
            )Other
      expense
            
            
            (377
            )
            
            
            (213
            )
            
            
            (791
            )
            
            
            (247
            )(loss)
      income before income taxes
            
            
            (11,310
            )
            
            
            1,220
            
            
            
            (8,337
            )
            
            
            1,711(benefit)
      provision for income taxes
            
            
            (1,185
            )
            
            
            20
            
            
            
            (103
            )
            
            
            27Net
      (loss) income
            
            $
            (10,125
            )
            
            $
            1,200
            
            
            $
            (8,234
            )
            
            $
            1,684Net
      (loss) income per common shareBasic
            
            $
            (1.22
            )
            
            $
            0.15
            
            
            $
            (1.00
            )
            
            $
            0.20Diluted
            
            $
            (1.22
            )
            
            $
            0.14
            
            
            $
            (1.00
            )
            
            $
            0.20Weighted
      average number of common shares outstanding:Basic
            
            
            8,272
            
            
            
            8,272
            
            
            
            8,272
            
            
            
            8,272Diluted
            
            
            8,272
            
            
            
            8,283
            
            
            
            8,272
            
            
            
            8,287





The
accompanying notes are an integral part of the condensed consolidated financial
statements.





6


CONGOLEUM
CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS


(Unaudited)





Nine
      Months EndedSeptember
      30,2008
            
            
            2007Cash
      flows from operating activities:Net
      (loss) income
            
            $
            (8,234
            )
            
            $
            1,684Adjustments
      to reconcile net (loss) income to net cash provided
              by (used in) operating activities:Depreciation
            
            
            7,607
            
            
            
            7,714Amortization
            
            
            174
            
            
            
            289Asbestos
      related reorganization charges
            
            
            11,491
            
            
            
            --Stock
      based compensation expense
            
            
            14
            
            
            
            14Changes
      in certain assets and liabilities:Accounts
      and notes receivable
            
            
            (1,809
            )
            
            
            (1,600
            )Inventories
            
            
            (1,548
            )
            
            
            (1,181
            )Prepaid
      expenses and other assets
            
            
            (946
            )
            
            
            553Proceeds
      from legal fee disgorgement
            
            
            9,168
            
            
            
            --Insurance
      recovery (net) for oven replacement
            
            
            --
            
            
            
            1,561Accounts
      payable
            
            
            (1,567
            )
            
            
            (1,402
            )Accrued
      liabilities
            
            
            (3,641
            )
            
            
            9,976Asbestos-related
      liabilities
            
            
            (12,519
            )
            
            
            (10,752
            )Other
            
            
            (137
            )
            
            
            (2,227
            )Net
      cash (used in) provided by operating activities
            
            
            (1,947
            )
            
            
            4,629Cash
      flows from investing activities:Capital
      expenditures
            
            
            (2,746
            )
            
            
            (2,263
            )Net
      cash (used in) investing activities
            
            
            (2,746
            )
            
            
            (2,263
            )Cash
      flows from financing activities:Net
      short-term borrowings
            
            
            2,085
            
            
            
            1,364Net
      change in restricted cash
            
            
            38
            
            
            
            3,231Net
      cash provided by financing activities
            
            
            2,123
            
            
            
            4,595Net
      (decrease) increase in cash and cash equivalents
            
            
            (2,570
            )
            
            
            6,961Cash
      and cash equivalents:Beginning
      of period
            
            
            26,327
            
            
            
            18,591End
      of period
            
            $
            23,757
            
            
            $
            25,552





The
accompanying notes are an integral part of the condensed consolidated financial
statements


7


CONGOLEUM
CORPORATION


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2008


(Unaudited)








1.  Basis
of Presentation:





The accompanying unauditedcondensed consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with 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 and recurring
adjustments) considered necessary for a fair presentation of Congoleum
Corporation’s (the “Company” or “Congoleum”) condensed consolidated financial
position, results of operations and cash flows have been
included.  Operating results for the nine month period ended September
30, 2008 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2008.  For further information, refer to
the consolidated financial statements and related footnotes included in the
Company's Annual Report on Form 10-K for the year ended December 31,
2007.





Based upon the nature of the Company’s
operations, facilities and management structure, the Company considers its
business to constitute a single segment for financial reporting
purposes.





Certain amounts appearing in the prior
period’s condensed consolidated financial statements have been reclassified to
conform to the current period’s presentation.





The
Company's financial statements 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 the
Company be unable to continue as a going concern.  As described more
fully below, there is substantial doubt about the Company's ability to continue
as a going concern unless it obtains relief from its substantial asbestos
liabilities through a successful reorganization under Chapter 11 of the
Bankruptcy Code.





On December 31, 2003, Congoleum filed a
voluntary petition with the United States Bankruptcy Court for the District of
New Jersey (the “Bankruptcy Court”) (Case No. 03-51524) seeking relief under
Chapter 11 of the United States Bankruptcy Code (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,
the Company filed its proposed plan of reorganization and disclosure statement
with the Bankruptcy Court. In November 2004, Congoleum filed a modified plan of
reorganization and related documents with the Bankruptcy Court (the "Fourth
Plan") reflecting the result of further negotiations with representatives of the
Asbestos Claimants’ Committee (the “ACC”), the Future Claimants’ Representative
(the “FCR”) and other asbestos claimant representatives. The Bankruptcy Court
approved the disclosure statement and plan voting procedures in December 2004
and Congoleum obtained the requisite votes of asbestos personal injury claimants
necessary to seek


8


approval
of the Fourth Plan.  In April 2005, Congoleum announced that it had
reached an agreement in principle with representatives of the ACC and the FCR to
make certain modifications to its proposed plan of reorganization and related
documents governing the settlement and payment of asbestos-related claims
against Congoleum. Under the agreed-upon modifications, asbestos claimants with
claims settled under Congoleum's pre-petition settlement agreements would agree
to forbear from exercising the security interest they were granted and share on
a pari passu basis with
all other present and future asbestos claimants in insurance proceeds and other
assets of the trust to be formed upon confirmation of the plan under Section
524(g) of the Bankruptcy Code (the “Plan Trust”) to pay asbestos claims against
Congoleum.  In July 2005, Congoleum filed an amended plan of
reorganization (the “Sixth Plan”) and related documents with the Bankruptcy
Court which reflected the result of these negotiations, as well as other
technical modifications. The Bankruptcy Court approved the disclosure statement
and voting procedures and Congoleum commenced solicitation of acceptances of the
Sixth Plan in August 2005.  In September 2005, Congoleum learned that
certain asbestos claimants were unwilling to agree to forbear from exercising
their security interest as contemplated by the Sixth Plan and the Sixth Plan was
subsequently withdrawn.  In November 2005, the Bankruptcy Court denied
a request to extend Congoleum’s exclusive right to file a plan of reorganization
and solicit acceptances thereof.  In March 2006, Congoleum filed a new
amended plan of reorganization (the “Eighth Plan”).  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 the Company’s 8-5/8% Senior Notes due August
1, 2008 (the “Senior Notes”), also filed a plan of reorganization.  In
May 2006, the Bankruptcy Court ordered all parties in interest in Congoleum’s
reorganization proceedings to participate in global mediation
discussions.  Numerous mediation sessions took place from June through
September 2006.  During  the initial mediation negotiations,
Congoleum reached an agreement in principle, subject to mutually agreeable
definitive documentation, with  the ACC, the FCR and the Company’s
controlling shareholder, American Biltrite, Inc. (“ABI”), on certain terms of an
amended plan of reorganization (the “Ninth Plan”), which Congoleum filed and
proposed jointly with the  ACC in August 2006.  CNA and the
Bondholders’ Committee jointly filed a new, competing plan in August 2006 and
each withdrew its prior plan of reorganization.  Following further
mediated negotiations, Congoleum, the ACC, the FCR, ABI and the Bondholders’
Committee reached agreement on the terms of a new amended plan (the “Tenth
Plan”), which Congoleum filed jointly with the ACC in September
2006.  Following the Bondholders’ Committee’s withdrawal of support
for CNA’s plan, CNA filed an amended plan of reorganization (the “CNA
Plan”).  In October 2006, Congoleum and the ACC jointly filed a
revised version of the Tenth Plan (the “Eleventh Plan”) which reflected minor
technical changes agreed to by the various parties supporting Congoleum’s
plan.  In October 2006, the Bankruptcy Court held a hearing to
consider the adequacy of the disclosure statements with respect to the Tenth
Plan and the CNA Plan and to hear arguments on respective summary judgment
motions as to whether the Tenth Plan and the CNA Plan were confirmable as a
matter of law.  The Bankruptcy Court provisionally approved the
disclosure statements for both the Tenth Plan and the CNA Plan subject to the
Bankruptcy Court’s ruling on the respective summary judgment
motions.  In February 2007, the Bankruptcy Court issued two separate
opinions ruling that the Tenth Plan and the CNA Plan 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 a plan of


9


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 propose 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 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 new
plan of reorganization (the “New Plan”) and a settlement of avoidance litigation
with respect to pre-petition claim settlements (the “Litigation Settlement”) was
signed by the parties to the agreement and was filed with the Bankruptcy Court
on August 14, 2008 and reported by Congoleum on form 8K on August 15,
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 until a later date  a determination of whether 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 plan will receive necessary
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 have
sufficient funds to pay for continued proceedings with respect to any plan of
reorganization.  It also is unclear whether any other person might
successfully propose and confirm a plan 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 the Company 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.





For
more information regarding the Company’s asbestos liability and plan for
resolving that liability, please refer to Note 6.





American
Institute of Certified Public Accountant 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. The Company implemented this guidance in consolidated
financial statements for periods after December 31, 2003.





10


Pursuant
to SOP 90-7, companies 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. Substantially all of the Company’s liabilities at December 31, 2003
have been reclassified as liabilities subject to compromise. Obligations arising
post-petition, and pre-petition obligations that are secured, are not classified
as liabilities subject to compromise.





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





2.         Recent
Accounting Principles:





Fair Value Measurements





In September 2006, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 157, Fair Value Measurements. 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 on the consolidated financial
statements.  The Company adopted SFAS No. 157 effective January 1,
2008 for its financial assets and liabilities and this adoption did not have a
material impact on the consolidated financial statements.





3.         Inventories:





A summary of the major components of
inventories is as follows (in thousands):





September 30,
            
            
            December 31,2008
            
            
            2007Finished
      goods
            
            $
            28,482
            
            
            $
            28,445Work-in-process
            
            
            2,994
            
            
            
            1,108Raw
      materials and supplies
            
            
            5,254
            
            
            
            5,629Total
      inventories
            
            $
            36,730
            
            
            $
            35,182





11


4.         Income
Per Share





Basic
net income per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the
period.  Diluted net income per share is calculated by dividing net
income by the weighted average number of shares of common stock and common stock
equivalents outstanding during the period, unless their effect is
anti-dilutive.





5. Environmental
and Other Liabilities





The
Company records a liability for environmental remediation claims when a cleanup
program or claim payment becomes probable and the costs can be reasonably
estimated.  As assessments and cleanup programs progress, these
liabilities are adjusted based upon the progress in determining the timing and
extent of remedial actions and the related costs and damages. The recorded
liabilities, totaling $4.4 million at September 30, 2008 and December 31, 2007,
are not reduced by the amount of insurance recoveries.  Such estimated
insurance recoveries approximated $2.2 million at September 30, 2008 and
December 31, 2007, and are reflected in other non-current assets. 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 asset for environmental matters is collectible
from a single carrier.





The
Company is named, together with a large number (in most cases, hundreds) of
other companies, as a potentially responsible party ("PRP") in pending
proceedings under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA"), and similar state laws.  In
addition, in four other instances, although not named as a PRP, the Company has
received a request for information.  The pending proceedings 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.  The Company’s ultimate liability and
funding obligations in connection with those sites depends on many factors,
including the volume of material contributed to the site, the number of other
PRPs and their financial viability, the remediation methods and technology to be
used and the extent to which costs may be recoverable from
insurance.  However, under CERCLA and certain other laws, the Company,
as a PRP, can be held jointly and severally liable for all environmental costs
associated with a site.





The most significant exposure for which
the Company 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 Environmental Protection Agency (“EPA”) 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 (OU-2) has not been completed.  The PRP group, of which
the Company 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 PRPs to perform the OU-2 remedy, assuming that the estimated cost
of the remedy is not more than $10 million.  If the estimated cost of
the OU-2 remedy is more than $10 million, the PRPs may decline to perform it or
they may elect to


12


perform
anyway. Cost estimates for the OU-1 and OU-2 work combined (including natural
resource damages) range between $22 million and $34 million, with the Company’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 the Company’s share. 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 $0.3 million in additional costs.  Congoleum expects to
fund the balance to the extent further insurance coverage is not
available.





The
Company 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 the Company to make certain payments that have been
invoiced to the Company with respect to the Consent Decree and related
settlement agreements.  An order authorizing and approving the Consent
Decree and related settlement agreements was issued by the Bankruptcy Court in
August 2006.





The Company also accrues remediation
costs for certain of the Company’s owned facilities on an undiscounted basis.
The Company 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 cleanup costs of $1.3 million, including
capital outlays and future maintenance costs for soil and groundwater
remediation, are primarily based on engineering studies.  Of this amount,
$0.3 million is included in current liabilities subject to compromise and $1.0
million is included in non-current liabilities subject to
compromise.





The Company anticipates that these
matters will be resolved over a period of years and that after application of
expected insurance recoveries, funding the costs will not have a material
adverse impact on the Company’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 the financial position
of the Company.





6.         Asbestos
Liabilities





Claims
Settlement and Chapter 11 Reorganization





On December 31, 2003, Congoleum filed a
voluntary petition with the Bankruptcy Court (Case No. 03-51524) 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, the Company
filed its proposed plan of reorganization and disclosure statement with the
Bankruptcy Court. In November 2004, Congoleum filed the Fourth Plan with the
Bankruptcy Court reflecting the result of further negotiations with
representatives of the ACC, the FCR and other asbestos claimant representatives.
The Bankruptcy Court approved the disclosure statement and plan voting
procedures in December 2004 and Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of the Fourth
Plan.  In April 2005, Congoleum


13


announced
that it had reached an agreement in principle with representatives of the ACC
and the FCR to make certain modifications to its proposed plan of reorganization
and related documents governing the settlement and payment of asbestos-related
claims against Congoleum. Under the agreed-upon modifications, asbestos
claimants with claims settled under Congoleum's pre-petition settlement
agreements would agree to forbear from exercising the security interest they
were granted and share on a pari passu basis with all
other present and future asbestos claimants in insurance proceeds and other
assets of the Plan Trust to pay asbestos claims against Congoleum.  In
July 2005, Congoleum filed the Sixth Plan and related documents with the
Bankruptcy Court which reflected the result of these negotiations, as well as
other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005.  In September 2005,
Congoleum learned that certain asbestos claimants were unwilling to agree to
forbear from exercising their security interest as contemplated by the Sixth
Plan and the Sixth Plan was subsequently withdrawn.  In November 2005,
the Bankruptcy Court denied a request to extend Congoleum’s exclusive right to
file a plan of reorganization and solicit acceptances thereof.  In
March 2006, Congoleum filed the Eighth Plan.  In addition, CNA filed a
plan of reorganization and the Bondholders’ Committee also filed a plan of
reorganization.  In May 2006, the Bankruptcy Court ordered all parties
in interest in Congoleum’s reorganization proceedings to participate in global
mediation discussions.  Numerous mediation sessions took place from
June through September 2006.  During the initial mediation
negotiations, Congoleum reached an agreement in principle, subject to mutually
agreeable definitive documentation, with the ACC, the FCR and the Company’s
controlling shareholder, ABI, on certain terms of the Ninth Plan, which
Congoleum filed and proposed jointly with the ACC in August 2006.  CNA
and the Bondholders’ Committee jointly filed a new, competing plan in August
2006 and each withdrew its prior plan of reorganization.  Following
further mediated negotiations, Congoleum, the ACC, the FCR, ABI and the
Bondholders’ Committee reached agreement on the terms of the Tenth Plan, which
Congoleum filed jointly with the ACC in September 2006.  Following the
Bondholders’ Committee’s withdrawal of support for CNA’s plan, CNA filed the CNA
Plan.  In October 2006, Congoleum and the ACC jointly filed the
Eleventh Plan, a revised version of the Tenth Plan which reflected minor
technical changes agreed to by the various parties supporting Congoleum’s
plan.  In October 2006, the Bankruptcy Court held a hearing to
consider the adequacy of the disclosure statements with respect to the Tenth
Plan and the CNA Plan and to hear arguments on respective summary judgment
motions as to whether the Tenth Plan and the CNA Plan were confirmable as a
matter of law.  The Bankruptcy Court provisionally approved the
disclosure statements for both the Tenth Plan and the CNA Plan subject to the
Bankruptcy Court’s ruling on the respective summary judgment
motions.  In February 2007, the Bankruptcy Court issued two separate
opinions ruling that the Tenth Plan and the CNA Plan 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


14


Cause
and instructed the parties to propose 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 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 the New
Plan and the Litigation Settlement, a compromise of avoidance litigation with
respect to pre-petition claim settlements, was signed by the parties to the
agreement and was filed with the Bankruptcy Court on August 14, 2008 and
reported by Congoleum on form 8K on August 15, 2008.  Certain insurers
and a large bondholder 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 until a later date a determination of
whether 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 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 earn sufficient funds to pay for continued proceedings with respect
to any plan of reorganization.  It also is unclear whether any other
person might successfully propose and confirm a plan or what any such plan, when
confirmed, would ultimately provide, and whether the Bankruptcy Court would
approve such a plan.  Any plan of reorganization pursued by the
Company 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.





Although
there can be no assurances as to the terms of any future plan, the proposed
terms of 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
of 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 the $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 by the new senior
secured notes and the common stock issued if the New Plan takes
effect.




15




Under
the proposed terms of 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 would not receive anything on account of their cancelled
shares.




The
proposed terms of 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 intoa 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 (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 representing 45% of the newly issued common stock in reorganized
Congoleumfor 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 backstop a Put Agreement
and it is uncertain whether the Put Agreement will become part of the New
Plan.




In
March 2004, the Bankruptcy Court approved the retention of Gilbert, Heintz &
Randolph LLP ("GHR") as special insurance counsel to the Company.  An
insurance company appealed the retention order.  In October 2005, the
United States Court of Appeals for the Third Circuit issued an opinion
disqualifying GHR from serving as counsel to Congoleum. As a result of the
federal appeals court decision on GHR's retention, 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 agreement (the “GHR Settlement”) under which GHR agreed to pay
Congoleum approximately $9.2 million plus accruing 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 the GHR Settlement in April
2007. Congoleum received $9.2 million plus $1.0 million of accrued interest in
full satisfaction of the GHR Settlement in March 2008.





In
anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into the 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 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 the 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 an Omnibus Avoidance
Action and a Sealed Avoidance Action (collectively, the “Avoidance Actions”)
seeking to avoid the Claimant Agreement, individual settlements and other
pre-petition agreements, including the avoidance of the security interest
granted to the Collateral Trust.  Following summary judgment hearings,
the Bankruptcy Court has rendered decisions that the grant of the security
interest was not valid but has denied motions to avoid the settlements; certain
of these decisions are under appeal.  The terms of the Litigation
Settlement provide for a settlement of litigation related to the Avoidance
Actions, but it is possible that the Bankruptcy Court will determine that such
settlement, or aspects of such settlement does not satisfy confirmation
standards for a plan of reorganization.  It is also not possible to
predict if any future


16


plan
will include such a settlement or how any such settlement may affect the nominal
asbestos 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 asbestos 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 could be
asserted in connection with any solicitation of acceptances of any future
plan.  Congoleum does not believe it can reasonably estimate the
liability associated with claims that may be pending.





During
the first nine months of 2008, the Company paid $12.5 million in fees and
expenses related to implementation of its planned reorganization under Chapter
11 of the Bankruptcy Code and the Coverage (as hereinafter
defined).  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 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 anticipated 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.





There
were no asbestos related property damage claims asserted against the Company at
the time of its bankruptcy filing.  The Bankruptcy Court approved an
order establishing a bar date of May 3, 2004 for the filing of asbestos property
damage claims. The claims agent appointed in the Company’s bankruptcy proceeding
advised the Company that, as of the bar date, it received 35 timely filed
asbestos property damage claims asserting liquidated damages in the amount of
approximately $0.8 million plus additional unspecified amounts. The Company
objected to certain claims on various grounds, and the Bankruptcy Court
ultimately allowed 19 claims valued at $133 thousand.  It is
anticipated that any plan of reorganization will provide for payment of those
claims in full from certain insurance proceeds.





17


Status
of Insurance Coverage





During the period that Congoleum
produced asbestos-containing products, the Company purchased primary and excess
insurance policies providing in excess of $1 billion of coverage for general and
product liability claims. These policies did not contain asbestos exclusions.
Through August 2002, substantially all asbestos-related claims and defense costs
were paid through primary insurance coverage. In August 2002, the Company
received notice that its primary insurance limits had been paid in full. The
payment of limits in full by one of the primary insurance companies was based on
its contention that limits in successive policies were not cumulative for
asbestos claims and that Congoleum was limited to only one policy limit for
multiple years of coverage. Certain excess insurance carriers claimed that the
non-cumulation provisions of the primary policies were not binding on them and
that there remained an additional $13.0 million in primary insurance limits plus
related defense costs before their policies were implicated. There is insurance
coverage litigation currently pending in the New Jersey State Court (the "State
Court") between Congoleum and its excess insurance carriers, and the guaranty
funds and associations for the State of New Jersey.  The litigation
was initiated in September 2001, by one of Congoleum’s excess insurers (the
“Coverage Action”).  In April 2003, the New Jersey Supreme Court ruled
in another case involving the same non-cumulation provisions as in the Congoleum
primary policies (the "Spaulding Case") that the non-cumulation provisions are
invalid under New Jersey law and that the primary policies provide coverage for
the full amount of their annual limits for all successive
policies.  Congoleum has reached a settlement agreement (the “Liberty
Settlement”) with the insurance carrier whose policies contained the
non-cumulation provisions, pursuant to which the insurance carrier will pay
Congoleum $15.4 million in full satisfaction of the applicable policy limits, of
which $14.5 million has been paid to date.  The Company is obligated
to pay remaining any insurance proceeds it receives under the Liberty
Settlement, net of any fees and expenses it may be entitled to deduct, to the
Plan Trust.  As of December 31, 2002, the Company had already entered
into settlement agreements with asbestos claimants exceeding the amount of this
previously disputed primary coverage. Based on these settlements, the Company
contended that, even allowing for annual limits of all primary policies, primary
coverage was exhausted and the excess policies triggered. The excess carriers
have objected to the reasonableness of several of these
settlements,  and Congoleum believes that they will continue to
dispute the reasonableness of the settlements and contend that their policies
still are not implicated and will dispute their coverage for that and other
various reasons in ongoing coverage litigation.





The excess insurance carriers have
objected to the global settlement of the asbestos claims currently pending
against Congoleum as contemplated by the Claimant Agreement on the grounds that,
among other things, the negotiations leading to the settlement and the Claimant
Agreement violate provisions in their insurance policies, including but not
limited to the carriers' right to associate in the defense of the asbestos
cases, the duty of Congoleum to cooperate with the carriers and the right of the
carriers to consent to any settlement.  The excess insurance carriers
also contend the settlement terms in the Claimant Agreement are not fair or
reasonable and/or that the Claimant Agreement was not negotiated at arm’s length
or in good faith.  Additionally, certain insurers have argued that
Congoleum’s entering into the Claimant Agreement voids the insurance for the
underlying claims in their entirety.  Certain insurers also have
claimed that the Claimant Agreement voids their entire policy
obligations.  Congoleum has disputed the allegations and contentions
of the excess insurance carriers.  In November 2003, the State Court
denied a motion for summary judgment by the excess insurance carriers that
the


18


Claimant
Agreement was not fair, reasonable or in good faith, ruling that material facts
concerning these issues were in dispute.  In April 2004, the State
Court denied motions for summary judgment by the excess carriers that the
Claimant Agreement was not binding on them because Congoleum had breached the
consent and cooperation clauses of their insurance policies by, among other
things, entering into the Claimant Agreement without their
consent.  Congoleum has argued, among other things, that it was
entitled to enter into the Claimant Agreement and/or the Claimant Agreement was
binding on the excess insurance carriers because they were in breach of their
policies and/or had denied coverage and/or had created a conflict with Congoleum
by reserving rights to deny coverage and/or the Claimant Agreement was fair,
reasonable and in good faith and/or there was and is no prejudice to the excess
insurance carriers from the Claimant Agreement and/or the excess insurance
carriers had breached their duties of good faith and fair dealing.





In
August 2004, the State Court entered a case management order that divided the
Coverage Action trial into three phases.  A new judge was assigned to
the case in February 2005 and the schedule was modified as a
result.





In
February 2005, the State Court ruled on a series of summary judgment motions
filed by various insurers.  The State Court denied a motion for
summary judgment filed by certain insurers, holding that there were disputed
issues of fact regarding whether the Claimant Agreement and other settlement
agreements between Congoleum and the claimants had released Congoleum and the
insurers from any liability for the asbestos bodily injury claims of the
claimants who signed the Claimant Agreement and the other settlement
agreements.





The
State Court also denied another motion for summary judgment filed by various
insurers who argued that they did not have to cover the liability arising from
the Claimant Agreement because they had not consented to it.





The
State Court granted summary judgment regarding Congoleum’s bad faith claims
against excess insurers (other than first-layer excess insurers), holding that
the refusal of these excess insurers to cover the Claimant Agreement was at
least fairly debatable and therefore not in bad faith.





In
March 2005, the Company filed a motion in the Bankruptcy Court asking the
Bankruptcy Court to vacate its prior order lifting the automatic stay in
bankruptcy to permit the Coverage Action to proceed.  The Company
requested that the Coverage Action proceedings be stayed until the Company had
completed its plan confirmation process in the Bankruptcy Court.  A
hearing on the Company’s motion was held in April 2005 and the motion was
denied.





The first phase of the Coverage Action
trial began in August 2005.  Phase 1 was limited to deciding whether
the insurers are obligated to provide coverage under the policies at issue in
this litigation for the asbestos claims settled under the terms of the global
Claimant Agreement.  Three months into the trial, in October 2005, a
federal appeals court ruled that GHR, which had been acting as the Company’s
insurance co-counsel in the Coverage Action, had other representations which
were in conflict with its representation of Congoleum.  As a result of
this ruling, with Bankruptcy Court approval, Congoleum retained the firm of
Covington & Burling to represent it as co-counsel with Dughi & Hewit in
the insurance coverage litigation and insurance settlement matters previously
handled by GHR.





19


In the middle of Congoleum presenting
its case, in or about mid-November 2005 and early December 2005, certain
insurers filed motions for summary judgment on the grounds, inter alia, that the federal
appeals court decision regarding GHR and/or Congoleum’s filing of the Avoidance
Actions in the Bankruptcy Court, entitled them to judgment as a matter of law on
the Phase 1 issues.  Congoleum opposed the motions.  The
motions were argued in January 2006, and in March 2006 the State Court denied
the motions for summary judgment.  (The Avoidance Actions sought,
among other things, to void the security interest granted to the Collateral
Trust and avoidance of the Claimant Agreement and certain individual
pre-petition settlements.)





Congoleum completed the presentation of
its case in April 2006.  Certain insurers moved for a directed verdict
in their favor during the first week of May 2006. Hearings of arguments on the
directed verdict motion took place in June 2006.  In July 2006 the
State Court denied the motion for a directed verdict.  The trial
resumed in September 2006.  Defendant insurers presented their case,
for the most part, through documents and deposition
designations.  Post-trial briefs were submitted by the parties in
November 2006.





In May 2007, the State Court issued a
decision ruling that Congoleum’s insurers have no coverage obligations under New
Jersey law for the Claimant Agreement.  In that ruling, the State
Court judge also cited trial testimony in his opinion that the releases (given
by claimants who signed the Claimant Agreement) were non-recourse to Congoleum
whether or not any claimant recovered insurance proceeds.  Based in
part upon that finding, Congoleum filed an objection (the “Omnibus Objection”)
in the Bankruptcy Court in June  2007 requesting that all
asbestos-related personal injury claims settled and/or liquidated (the "Settled
Claims") pursuant to either a pre-petition settlement agreement or the Claimant
Agreement be disallowed and expunged.  The Omnibus Objection also
requested in the event the Bankruptcy Court found that the holders of Settled
Claims retained viable tort claims with recourse against Congoleum, that the
Bankruptcy Court rescind the pre-petition settlement agreements and the Claimant
Agreement and the claims settled thereunder be disallowed and expunged because,
since the filing of Congoleum’s bankruptcy case, supervening events have
resulted in a substantial frustration of the purpose of those agreements. The
Bankruptcy Court heard arguments on the Omnibus Objection in July 2007 and ruled
that the Omnibus Objection should be heard in the context of an adversary
proceeding (a formal lawsuit) in order to insure that the Bankruptcy Court has
jurisdiction over all the affected claimants and that their due process rights
were otherwise protected.  The Company amended the Omnibus Avoidance
Action to seek the same relief requested in the Omnibus Objection.





In September 2007, Congoleum filed the
Third Amended Complaint in the Omnibus Avoidance Action adding new counts that
encompass the subject matter and relief requested in the Omnibus Objection. The
Third Amended Complaint remains pending.  In October 2007, Congoleum
filed a motion for summary judgment in the Omnibus Avoidance Action seeking a
ruling that all of the pre-petition settlement agreements, including the
Claimant Agreement, were null and void or should be
rescinded.  Argument on the summary judgment motion was heard in
November 2007 and by opinion dated December 28, 2007, the Bankruptcy Court
denied the motion for summary judgment.  Congoleum and the
Bondholders' Committee have filed notice of appeal from this decision to the
District Court.  A motion was filed to amend further the complaint in
the Omnibus Avoidance Action, but such complaint was not filed as a result of
the Litigation Settlement discussed above.





20


The second phase of the Coverage Action
trial will address all coverage issues, including but not limited to whether
certain other trial listed settlements were fair, reasonable and negotiated in
good faith and covered by insurance as well as the triggering and allocation of
asbestos losses to insurance policies.  In February 2008, the State
Court expanded the scope of Phase 2 of the Coverage Action trial to include
obligations of insurers with respect to the Joint Plan.  The State
Court has entered a new case management order scheduling further discovery.
Congoleum sought to stay Phase 2 of the Coverage Action trial because of
the pendency of the solicitation and balloting and scheduled confirmation
hearing on the Joint Plan, but the Bankruptcy Court denied the stay motion,
which decision was appealed to the District Court.  Based on the
Litigation Settlement, which provides, in part, for the unwinding of the
Claimant Agreement and certain pre-petition settlements, Congoleum has again
sought to stay Phase 2 of the Coverage Action trial, and a hearing to
consider the request is scheduled for November 17, 2008.





The third and final phase of the
Coverage Action trial will address bad faith punitive damages, if
appropriate.





Amounts
Recorded in Financial Statements





The table below provides an analysis of
changes in the Company’s asbestos reserves and insurance receivables from
December 31, 2007 to September 30, 2008:





(In
      thousands)
              
              Balance
      at
                12/31/2007
              
              
              Additions
                (Deletions)
              
              
              Spending
                Against
                Reserve
              
              
              Recoveries
              
              
              Balance
      at
                9/30/2008ReservesCurrent
              
              $
              24,744
              
              
              
              11,491
              
              
              $
              (12,519
              )
              
              
              
              
              $
              23,716ReceivablesCurrent
              
              
              (10,490
              )
              
              
              
              
              
              
              
              
              
              $
              9,168
              
              
              
              (1,322
              )Net Asbestos
      Liability
              
              $
              14,254
              
              
              $
              11,491
              
              
              $
              (12,519
              )
              
              $
              9,168
              
              
              $
              22,394Restricted
      CashInsurance
      Proceeds
              
              $
              6,463
              
              
              $
              22,700
              
              
              $
              376
              
              
              
              
              
              
              $
              29,539











21


The
table below provides an analysis of changes in the Company’s asbestos reserves
and related receivables from December 31, 2006 to September 30,
2007:





(In
      thousands)
              
              Balance
      at
                12/31/2006
              
              
              Additions
                (Deletions)
              
              
              Spending
                Against
                Reserve
              
              
              Recoveries
                From
                Insurance
              
              
              Balance
      at
                9/30/2007ReservesCurrent
              
              $
              7,800
              
              
              $
              --
              
              
              $
              (7,733
              )
              
              $
              --
              
              
              $
              67ReceivablesCurrent
              
              
              (21,813
              )
              
              
              --
              
              
              
              (3,020
              )
              
              
              --
              
              
              
              (24,833
              )Net
      Asbestos Liability (Asset)
              
              $
              (14,013
              )
              
              $
              --
              
              
              $
              (10,752
              )
              
              $
              --
              
              
              $
              (24,766
              )Restricted
      CashInsurance
      Proceeds
              
              $
              6,149
              
              
              $
              --
              
              
              $
              --
              
              
              $
              238
              
              
              $
              6,387





7.         Product
Warranties





The Company provides product warranties
for specific product lines and accrues for estimated future warranty cost in the
period in which the revenue is recognized.  The following table sets
forth activity in the Company’s warranty reserves (in thousands):





Nine
      Months Ended
              September
      30,2008
            
            
            2007Beginning
      balance
            
            $
            1,806
            
            
            $
            1,957Accruals
            
            
            2,428
            
            
            
            2,390Charges
            
            
            (2,689
            )
            
            
            (2,560
            )Ending
      balance
            
            $
            1,545
            
            
            $
            1,787





22


8.         Liabilities
Subject to Compromise





As a result of the Company’s Chapter 11
filing (see Notes 1 and 6), pursuant to SOP 90-7, the Company 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 the Company’s pre-petition debt is
recorded at face value and is classified within liabilities subject to
compromise.  Prior to the fourth quarter of 2007, the Company’s
accrued interest expense on its Senior Notes was also recorded in liabilities
subject to compromise.  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, as well
as the New Plan, the Senior Note holders would not receive any post-petition
interest.





Liabilities
subject to compromise are as follows (in thousands):





September 30,
            
            
            December 31,2008
            
            
            2007CurrentPre-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
            
            
            
            9,622Total
      liabilities subject to compromise
            
            $
            134,530
            
            
            $
            134,728





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





9.         Accrued
Liabilities





A
summary of the significant components of accrued liabilities consists of the
following (in thousands):




September 30,
            
            
            December 31,2008
            
            
            2007Accrued
      warranty, marketing and sales promotion
            
            $
            11,792
            
            
            $
            16,637Employee
      compensation and related benefits
            
            
            4,044
            
            
            
            3,584Other
            
            
            1,485
            
            
            
            712Total
      accrued liabilities
            
            $
            17,321
            
            
            $
            20,933





23


As a result of the Company’s Chapter 11
bankruptcy filing and in accordance with SOP 90-7, certain liabilities are
included in liabilities subject to compromise on the balance sheet as of
September 30, 2008 and December 31, 2007 (see Note 8).





10.       Pensions
and Other Postretirement Plans





The
Company sponsors several non-contributory defined benefit pension plans covering
most of the Company’s employees.  Benefits under the plans are based
on years of service and employee compensation.  Amounts funded
annually by the Company are actuarially determined using the projected unit
credit and unit credit methods and are equal to or exceed the minimum required
by government regulations.  The Company also maintains health and life
insurance programs for retirees (reflected in the table below in “Other
Benefits”).





The
following summarizes the components of the net periodic benefit cost for the
Pension and Other Benefit Plans for the three months and nine months ended
September 30, 2008 and 2007 (in thousands):





Three Months
              Ended
            
            
            Three Months
              EndedSeptember
      30, 2008
            
            
            September30,
      2007Other
            
            
            
            
            
            OtherPension
            
            
            Benefits
            
            
            Pension
            
            
            BenefitsComponents of Net Periodic Benefit
      Cost:Service
      cost
            
            $
            381
            
            
            $
            56
            
            
            $
            366
            
            
            $
            53Interest
      cost
            
            
            1,207
            
            
            
            144
            
            
            
            1,206
            
            
            
            142Expected
      return on plan assets
            
            
            (1,198
            )
            
            
            --
            
            
            
            (1,146
            )
            
            
            --Recognized
      net actuarial loss
            
            
            410
            
            
            
            15
            
            
            
            349
            
            
            
            18Amortization
      of transition obligation
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Amortization
      of prior service cost
            
            
            6
            
            
            
            --
            
            
            
            11
            
            
            
            3Net periodic benefit
      cost
            
            $
            806
            
            
            $
            215
            
            
            $
            786
            
            
            $
            216








Nine Months
      Ended
            
            
            Nine MonthsEndedSeptember
      30, 2008
            
            
            September30,
      2007Other
            
            
            
            
            
            OtherPension
            
            
            Benefits
            
            
            Pension
            
            
            BenefitsComponents of Net Periodic Benefit
      Cost:Service
      cost
            
            
            1,143
            
            
            
            168
            
            
            $
            1,098
            
            
            $
            159Interest
      cost
            
            
            3,621
            
            
            
            432
            
            
            
            3,618
            
            
            
            426Expected
      return on plan assets
            
            
            (3,594
            )
            
            
            --
            
            
            
            (3,438
            )
            
            
            --Recognized
      net actuarial loss
            
            
            1,230
            
            
            
            45
            
            
            
            1,047
            
            
            
            54Amortization
      of transition obligation
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Amortization
      of prior service cost
            
            
            18
            
            
            
            --
            
            
            
            33
            
            
            
            9Net periodic benefit
      cost
            
            
            2,418
            
            
            
            645
            
            
            $
            2,358
            
            
            $
            648





24


The weighted average assumptions used to
determine net periodic benefit cost were as follows:





September
      30, 2008
            September
      30, 2007Other
            
            OtherPension
            Benefits
            Pension
            BenefitsDiscount
      rate
            6.00%
            6.00%
            6.00%
            6.00%Expected
      long-term return on plan  assets
            7.00%
            --
            7.00%
            --Rate of
      compensation increase
            5.00%
            --
            5.00%
            --








Item
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





The following discussion should be read
in conjunction with the Unaudited Condensed Consolidated Financial Statements
and notes thereto contained in Item 1 of Part I of this Quarterly Report on Form
10-Q.





Results
of Operations





The Company’s business is cyclical and
is affected by the same economic factors that affect the remodeling and housing
industries in general, including the availability of credit, consumer
confidence, changes in interest rates, market demand and general economic
conditions.





In addition to external economic
factors, the Company’s results are sensitive to sales and manufacturing volume,
competitors’ pricing, consumer preferences for flooring products, raw material
costs and the mix of products sold.  The manufacturing process is
capital intensive and requires substantial investment in facilities and
equipment.  The cost of operating these facilities generally does not
vary in direct proportion to production volume and, consequently, operating
results fluctuate disproportionately with changes in sales volume.





On December 31, 2003, Congoleum filed a
voluntary petition with the Bankruptcy Court (Case No. 03-51524) 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, the Company
filed its proposed plan of reorganization and disclosure statement with the
Bankruptcy Court. In November 2004, Congoleum filed the Fourth Plan with the
Bankruptcy Court reflecting the result of further negotiations with
representatives of the ACC, the FCR and other asbestos claimant representatives.
The Bankruptcy Court approved the disclosure statement and plan voting
procedures in December 2004 and Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of the Fourth
Plan.  In April 2005, Congoleum announced that it had reached an
agreement in principle with representatives of the ACC and the FCR to make
certain modifications to its proposed plan of reorganization and related
documents governing the settlement and payment of asbestos-related claims
against Congoleum. Under the agreed-upon modifications, asbestos claimants with
claims settled under Congoleum's pre-petition settlement agreements would agree
to forbear from exercising the security interest they were granted and share on
a pari passu basis with
all other present and future asbestos claimants in insurance proceeds and other
assets of the Plan Trust to pay asbestos claims against
Congoleum.  In


25


July
2005, Congoleum filed the Sixth Plan and related documents with the Bankruptcy
Court which reflected the result of these negotiations, as well as other
technical modifications. The Bankruptcy Court approved the disclosure statement
and voting procedures and Congoleum commenced solicitation of acceptances of the
Sixth Plan in August 2005.  In September 2005, Congoleum learned that
certain asbestos claimants were unwilling to agree to forbear from exercising
their security interest as contemplated by the Sixth Plan and the Sixth Plan was
subsequently withdrawn.  In November 2005, the Bankruptcy Court denied
a request to extend Congoleum’s exclusive right to file a plan of reorganization
and solicit acceptances thereof.  In March 2006, Congoleum filed the
Eighth Plan.  In addition, CNA filed a plan of reorganization and the
Bondholders’ Committee also filed a plan of reorganization.  In May
2006, the Bankruptcy Court ordered all parties in interest in Congoleum’s
reorganization proceedings to participate in global mediation
discussions.  Numerous mediation sessions took place from June through
September 2006.  During the initial mediation negotiations, Congoleum
reached an agreement in principle, subject to mutually agreeable definitive
documentation, with the ACC, the FCR and the Company’s controlling shareholder,
ABI, on certain terms of the Ninth Plan, which Congoleum filed and proposed
jointly with the ACC in August 2006.  CNA and the Bondholders’
Committee jointly filed a new, competing plan in August 2006 and each withdrew
its prior plan of reorganization.  Following further mediated
negotiations, Congoleum, the ACC, the FCR, ABI and the Bondholders’ Committee
reached agreement on the terms of the Tenth Plan, which Congoleum filed jointly
with the ACC in September 2006.  Following the Bondholders’
Committee’s withdrawal of support for CNA’s plan, CNA filed the CNA
Plan.  In October 2006, Congoleum and the ACC jointly filed the
Eleventh Plan, a revised version of the Tenth Plan which reflected minor
technical changes agreed to by the various parties supporting Congoleum’s
plan.  In October 2006, the Bankruptcy Court held a hearing to
consider the adequacy of the disclosure statements with respect to the Tenth
Plan and the CNA Plan and to hear arguments on respective summary judgment
motions as to whether the Tenth Plan and the CNA Plan were confirmable as a
matter of law.  The Bankruptcy Court provisionally approved the
disclosure statements for both the Tenth Plan and the CNA Plan subject to the
Bankruptcy Court’s ruling on the respective summary judgment
motions.  In February 2007, the Bankruptcy Court issued two separate
opinions ruling that the Tenth Plan and the CNA Plan 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 propose 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 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 the New Plan of reorganization and the
Litigation Settlement, a compromise of avoidance litigation with respect to
pre-petition claim settlements, was signed by the parties to the agreement and
was filed with the Bankruptcy Court on August 14, 2008 and reported by Congoleum
on form 8K on August 15, 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 until a later date a determination of
whether the settlement meets the standards required for confirmation of a plan
of reorganization.





26


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 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.  It also is unclear whether any
other person might successfully propose and confirm a plan 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 the
Company 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.





Congoleum is presently involved in
litigation with certain insurance carriers related to disputed insurance
coverage for asbestos related liabilities, and certain insurance carriers, as
noted above, filed various objections to the Joint Plan and are expected to file
objections to the New Plan or any other future plan.  Certain other
parties also filed various objections to the Joint Plan and may file objections
to the New Plan or any other future plan.





In
anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into the 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 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 the 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
any future plan will 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 claims that may be
pending.





27


During the first nine months of 2008,
Congoleum paid $12.5 million in fees and expenses related to implementation of
its planned reorganization 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 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.





Costs
for pursuing and implementing any plan of reorganization could be materially
higher than currently recorded or previously estimated. Delays in formulating,
proposing, filing or obtaining approval of a plan of reorganization, or the
proposal or solicitation of additional plans by other parties, could result in a
proceeding that takes longer and is more costly than the Company has previously
estimated.  The Company may experience and therefore record
significant additional charges in connection with its reorganization
proceedings.





For
more information regarding the Company’s asbestos liability and plan for
resolving that liability, please refer to Notes 1 and 17 of the Notes to
Consolidated Financial Statements contained in Item 8 of the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the
Securities and Exchange Commission.  In addition, please refer to
“Risk Factors – The Company has significant asbestos liability and funding
exposure," contained 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 goals for resolving its asbestos liability through a plan of
reorganization.





28




Three
      months ended
                September
      30,
              
              
              
              
              
              Nine
      months ended
                September
      30,2008
              
              
              
              
              
              2007
              
              
              
              
              
              2008
              
              
              
              
              
              2007(In thousands of
      dollars)
              
              
              
              
              
              (In thousands of
      dollars)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 and
      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 (expense) income,
      net
              
              
              6
              
              
              
              
              
              
              (2,961
              )
              
              
              
              
              
              1,001
              
              
              
              
              
              
              (8,765
              )Other (expense)income,
      net
              
              
              (377
              )
              
              
              
              
              
              213
              
              
              
              
              
              
              (791
              )
              
              
              
              
              
              (247
              )(loss) income before
      taxes
              
              
              (11,310
              )
              
              
              
              
              
              1,220
              
              
              
              
              
              
              (8,337
              )
              
              
              
              
              
              1,711(benefit) 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%. 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 increased selling prices.





Net
sales for the nine months ended September 30, 2008 were $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 was $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 was $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 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.





29


Selling,
general and administrative 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. The
Company booked an $11.5 million charge in the third quarter for projected
expenses related to completing its most recent asbestos related reorganization
plan.





Selling,
general and administrative 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 as compared to income from operations of $4.4 million for three months
ended September 30, 2007, reflecting lower gross margin dollars coupled with the
reorganization plan 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
charge.





The
Company 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%. The Company recorded a minimal provision for the
nine months ended September 30, 2007.





Liquidity
and Capital Resources





The
Unaudited Condensed Consolidated Financial Statements of the Company 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 Unaudited Condensed Consolidated Financial
Statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern.  As described more
fully in the Notes to Unaudited Condensed Consolidated Financial Statements
contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, there is
substantial doubt about the Company's ability to continue as a going concern
unless it obtains relief from its substantial asbestos 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 1 and 6 of the Notes to Unaudited Condensed
Consolidated Financial Statements, contained in Part I, Item 1 of this Quarterly
Report on Form 10-Q, for a discussion of the Company’s bankruptcy proceedings.
These matters continue to have a material adverse impact on liquidity and
capital resources.  During the first nine months of 2008, the Company
paid $12.5 million in fees and expenses related to reorganization proceedings
under Chapter 11 and the Coverage Action.  Furthermore, at September
30, 2008, the Company had incurred but not paid approximately $10.0 million in
additional fees and expenses for services rendered through that
date.





30


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 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.





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 the GHR Settlement under which GHR was to pay Congoleum
approximately $9.2 million plus accruing 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 the GHR Settlement in April
2007.  Congoleum received $9.2 plus $1.0 million of accrued interest
in full satisfaction of the GHR 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 the Company’s accounts receivable
are deposited in an account assigned by the Company 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 the Company received an additional $22.7 million from
other insurance carriers which is also included in restricted
cash.  The Company 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, up
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.





31


Capital expenditures for the nine
months ended September 30, 2008 totaled
$2.7   million.  The Company 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 (“EBITDA”).  In connection with the most recent
amendment and extension of the agreement, the minimum level of EBITDA that the
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 conditions under
this financing agreement must be met in order for the Company to borrow from the
facility. The Company 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.  The Company
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 the Company 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, the Company will need to
obtain and demonstrate the sufficiency of exit financing.  The Company
cannot presently determine the terms of such financing, nor can there be any
assurances of its success obtaining it.





In addition to the provision for
asbestos litigation discussed previously, the Company 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. The Company is 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.  Among these claims, the
Company is a named party in several actions associated with waste disposal sites
(more fully discussed in Note 5 of the Notes to Unaudited Condensed Consolidated
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 the Company’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


32


the
magnitude of cleanup costs, the timing and extent of the remedial actions that
may be required, the determination of the Company’s liability in proportion to
other potentially responsible parties, and the extent to which costs may be
recoverable from insurance.  The Company has recorded provisions in
its financial statements for the estimated probable loss associated with all
known general and environmental contingencies. While the Company 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 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 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 the Company.





The Company's principal sources of
capital are net cash provided by operating activities and borrowings under its
financing agreement. The Company 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
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Not applicable.








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, or CEO, and
      Chief Financial Officer, or CFO, evaluated the effectiveness of the
      Company’s disclosure controls and procedures (as defined in Rules
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
      amended) as of September 30, 2008.  Based on this evaluation,
      the Company’s CEO and CFO concluded that, as of September 30, 2008 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 Securities
      Exchange Act of 1934, as amended, 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 CEO and CFO, as appropriate
      to allow timely decisions regarding required
  disclosure.





33


(b)
            Changes in Internal Control
      Over Financial Reporting.There have not been any changes in the
      Company’s internal control over financial reporting during the last
      quarter covered by this Quarterly Report on Form 10-Q that have materially
      affected, or are reasonably likely to materially affect, the Company’s
      internal control over financial
reporting.








PART
      II.
            OTHER
      INFORMATION








Item 1.
            LegalProceedings





The information contained in Note 5,
“Environmental and Other Liabilities”, and Note 6, “Asbestos Liabilities”, of
the Notes to Unaudited Condensed Consolidated Financial Statements is
incorporated herein by reference.








Item
      1A.
            Risk
      Factors





The Company has significant asbestos
liability and funding exposure.





As more fully set forth in Notes 1 and
17 of the Notes to Consolidated Financial Statements, which are included in the
Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed
with the Securities and Exchange Commission, the Company has significant
liability and funding exposure for asbestos claims.  The Company has
entered into settlement agreements with various asbestos claimants totaling in
excess of $491 million. 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.





The
Bankruptcy Court has ruled that the Joint Plan is not confirmable and has
directed the Company
to propose a confirmable plan by the end of calendar year 2008 to avoid having
the Chapter 11 case dismissed or converted to a Chapter 7 liquidation
proceeding. 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 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 there will be sufficient funds to pay for continued proceedings with
respect to any plan of reorganization.  It also is unclear whether any
other person might successfully propose and confirm a plan 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 the
Company 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.





34


Confirmation of any plan of
reorganization will depend on the Company obtaining exit financing to provide it
with sufficient liquidity to fund obligations upon the plan becoming
effective.  If the Company’s cash flow from operations is materially
less than anticipated, and/or if the costs in connection with seeking
confirmation of any plan of reorganization or in connection with the Coverage
Action discussed elsewhere in this Quarterly Report on Form 10-Q are materially
more than anticipated, the Company may be unable to obtain exit financing which,
when combined with net cash provided from operating activities, would provide it
with sufficient funds.  Such a circumstance would likely result in the
Company not being able to confirm a plan of reorganization or have such plan
become effective.





Some additional factors that could
cause actual results to differ from the Company's goals for resolving its
asbestos liability through an amended plan of reorganization include: (i) the
future cost and timing of estimated asbestos liabilities and payments, (ii) the
availability of insurance coverage and reimbursement from insurance companies
that underwrote the applicable insurance policies for the Company for
asbestos-related claims, (iii) the costs relating to the execution and
implementation of any plan of reorganization pursued by the Company, (iv)
timely  agreement with other creditors, or classes of creditors, that
exist or may emerge, (v) satisfaction of the conditions and obligations under
the Company's outstanding debt instruments, (vi) the response from time to time
of the lenders, customers, suppliers and other constituencies of the Company and
ABI to the ongoing process arising from the Company's strategy to settle its
asbestos liability, (vii) the Company's ability to maintain debtor-in-possession
financing sufficient to provide it with funding that may be needed during the
pendency of its Chapter 11 case and to obtain exit financing sufficient to
provide it with funding that may be needed for its operations after emerging
from the bankruptcy process, in each case, on reasonable terms, (viii) timely
creditor and court approval (including the results of any relevant appeals) of
any reorganization plan pursued by the Company and the court overruling any
objections to the Company's  reorganization plan that may be filed,
(ix) costs of, developments in and the outcome of the Coverage Action, (x)
compliance with the Bankruptcy Code, including section 524(g), and (xi) the
possible adoption of another party's plan of reorganization which may prove to
be unfeasible.  In any event, if the Company is not successful in
obtaining sufficient creditor and court approval of a plan of reorganization,
such failure could have a material adverse effect upon its business, results of
operations and financial condition.





For further information regarding the
Company’s asbestos liability, insurance coverage and strategy to resolve its
asbestos liability, please see Notes 1 and 17 of Notes to the Consolidated
Financial Statements, which are included in the Annual Report on Form 10-K for
the fiscal year ended December 31, 2007 filed with the Securities and Exchange
Commission.





35


Under
the New Plan, if it becomes effective, holders of existing equity securities
would receive nothing on account of their interests and will likely receive
nothing under any other future plan.





Under
the terms of the New Plan, if confirmed and effective, existing Class A and
Class B common shares of Congoleum would be cancelled when the plan takes effect
and holders of those shares would not receive anything on account of their
cancelled shares.





The
Company’s common stock is thinly traded, which will affect a stockholder’s
ability to sell the Company’s stock or the price for which it can be
sold.




There has been and may continue to be,
at least for the immediate future, a limited public market for the Company’s
common stock. The Company’s Class A common stock was delisted by the American
Stock Exchange ("Amex") on February 19, 2008 because it did not meet Amex
listing standards for share value, share price and aggregate market
capitalization. From February 19, 2008, the Company’s common stock has not been
listed on any securities exchange or on an automated dealer quotation system.
Accordingly, there is a limited trading market for its shares. Under the terms
of the New Plan, if confirmed and effective, the Company's common stock is
likely to be cancelled.




The
Company may incur substantial liability for environmental, product and general
liability claims in addition to asbestos-related claims, and its insurance
coverage and its likely recoverable insurance proceeds may be substantially less
than the liability incurred by the Company for these claims.





Environmental
Liabilities:  Due to the nature of the Company's business and certain
of the substances which are or have been used, produced or discharged by the
Company, the Company's operations are subject to extensive federal, state and
local laws and regulations relating to the generation, storage, disposal,
handling, emission, transportation and discharge into the environment of
hazardous substances. The Company has historically expended substantial amounts
for compliance with existing environmental laws and regulations, including
environmental remediation costs at both third-party sites and Company-owned
sites.  The Company will continue to be required to expend amounts in
the future for costs related to prior activities at its facilities and third
party sites, and for ongoing costs to comply with existing environmental laws
and such amounts may be substantial. There is no certainty that these amounts
will not have a material adverse effect on its business, results of operations
and financial condition because, as a result of environmental requirements
becoming increasingly strict, the Company is unable 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 and regulations
may require or cause the Company to modify or curtail its operations, which
could have a material adverse
effect on the Company's business, results of operations and financial
condition.





36


Product and General
Liabilities:  In the ordinary course of its business, the Company
becomes involved in lawsuits, administrative proceedings, product liability
claims (in addition to asbestos-related 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 and financial condition if the Company
is unable to successfully defend against or settle these matters, its insurance
coverage is insufficient to satisfy unfavorable judgments or settlements
relating to these matters, or the Company is unable to collect insurance
proceeds relating to these matters.





The
Company is 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’s business is dependent upon
a continuous supply of raw materials from third party
suppliers.The principal raw materials used by the Company in
its manufacture of sheet and tile flooring are vinyl resins, plasticizers,
latex, limestone, stabilizers, cellulose paper fibers, urethane and transfer
print film.  The Company purchases most of these raw materials from
multiple sources.  Although the Company has generally not had
difficulty in obtaining its requirements for these materials, it has
periodically experienced significant price increases for some of these
materials.  Although the Company has been able to obtain sufficient
supplies of specialty resin and other 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.





The Company believes that suitable
alternative suppliers are generally available for substantially all of its raw
material requirements, although quantities of certain materials available from
alternative suppliers may be in limited supply and production trials may be
required to qualify new materials for use.  The Company does not have
readily available alternative sources of supply for specific designs of transfer
print film, which are produced utilizing print cylinders engraved to the
Company's specifications. Although no loss of this source of supply is
anticipated, replacement could take a considerable period of time and interrupt
production of some of the Company's products.  In an attempt to
protect against this risk of loss of supply, the Company maintains a raw
material inventory and continually seeks to develop new sources which will
provide continuity of supply for its raw material requirements.





In addition, the Company could incur
significant increases in the costs of its raw materials due to market
conditions, energy costs, and other factors.  Although the Company
generally attempts to pass on increases in the costs of its raw materials to its
customers, the Company’s ability to do so is, to a large extent, dependent upon
the rate and magnitude of any increase, competitive pressures and market
conditions for its products.  There have been in the past, and may be
in the future, periods of time during which increases in these costs cannot be
recovered.





37


The Company
operates in a highly competitive flooring industry
and some of its competitors have greater
resources and broader distribution channels than the
Company.





The market for the Company's products
is highly competitive. The Company encounters competition from three other
manufacturers in North America and, to a lesser extent, foreign
manufacturers.  Some of
the Company's competitors have greater financial and other resources and access
to capital than the Company.Furthermore, one of the Company's
major competitors has successfully confirmed a plan of reorganization under
Chapter 11 of the Bankruptcy Code. Having shed much of its pre-filing asbestos
and other liabilities, that competitor may have a competitive cost advantage
over the Company.  In addition, in order to maintain its competitive
position, the Company may need to make substantial investments in its business,
including its product development, manufacturing facilities, distribution
network and sales and marketing activities. Competitive pressures may also
result in decreased demand for the Company's products and in the loss of the
Company's market share for its products.  Moreover, due to the
competitive nature of the Company's industry, the Company may be commercially
restricted from raising or even maintaining the sales prices of its products,
which could result in the Company incurring significant operating losses if its
expenses were to increase or otherwise represent an increased percentage of the
Company's sales.





The
Company’s business is subject to general economic conditions and conditions
specific to the remodeling and housing industries.





The
Company is subject to the effects of general economic conditions.  A
sustained general economic slowdown or recession could have very serious
negative consequences for the Company's business, results of operations and
financial condition.  Moreover, the Company's business is cyclical and
is affected by the economic factors that affect the remodeling and housing
industries in general and the manufactured housing industry specifically,
including the availability of credit, consumer confidence, changes in interest
rates, market demand and general economic conditions.  The Company has
experienced a significant decline in sales as a result of weakness in the
housing market and general economy.  The Company may experience
further sales declines resulting from continued deterioration in the housing
market and general economy.





The
Company could realize shipment delays, depletion of inventory and increased
production costs resulting from unexpected disruptions of operations at any of
the Company's facilities.





The Company's business depends upon its
ability to timely manufacture and deliver products that meet the needs of its
customers and the end users of the Company's products. If the Company 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 and financial
condition.





38


The
Company offers limited warranties on its products which could result in the
Company incurring significant costs as a result of warranty claims.





The Company offers a limited warranty
on all of its 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, the Company 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
were to incur a significant number of warranty claims, the resulting warranty
costs could be substantial.





The
Company is heavily dependent upon its distributors to sell the Company's
products and the loss of a major distributor could have a material adverse
effect on the Company's business, results of operations and financial
condition.





The Company currently sells its
products through approximately 13 distributors providing approximately 51
distribution points in the United States and Canada, as well as directly to a
limited number of mass market retailers.  The Company considers its
distribution network very important to maintaining its competitive position.
Although the Company 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 and financial condition. The Company
derives a significant percentage of its sales from two of its distributors,
LaSalle-Bristol Corporation and Mohawk Industries, Inc. LaSalle-Bristol
Corporation serves as the Company's manufactured housing market distributor, and
Mohawk Industries, Inc. serves as its retail market
distributor.  These two distributors accounted for approximately 67%
and 65% of the Company's net sales for the nine months ended September 30, 2008
and 2007, respectively.





Stockholder votes are
controlledby ABI; Congoleum’s interests may not
be the same as ABI’s interests.





ABI owns a majority (approximately 55%
as of September 30, 2008) of the outstanding shares of the Company’s common
stock, representing a 69.4% voting interest.  As a result, ABI can
elect all of the Company’s directors and can control the vote on all matters
that require shareholder or Board of Director approval.  In addition,
certain officers of Congoleum are officers of ABI and members of the family
group that owns a controlling interest in ABI.








Item
      2.
            Unregistered
      Sales of Equity Securities and Use of
Proceeds





None.





39


Item
      3.
            Defaults
      Upon Senior Securities





On
August 3, 1998, the Company issued $100 million of the Senior Notes priced at
99.505% to yield 8.70%. The Senior Notes are redeemable at the option of the
Company, 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 the Chapter 11
proceedings constituted an event of default under the indenture governing the
Senior Notes.  During 2003, the Company and the trustee under the
indenture governing the Senior Notes amended the indenture, and sufficient note
holders consented, to explicitly permit the Company 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” (see Note 8 of the Notes to Consolidated Financial Statements
contained in Part I, Item 1, of this Quarterly Report on Form 10-Q) as of
September 30, 2008.  During 2007, the Company reversed all accrued
post-petition interest on the Senior Notes to reflect the terms of the Joint
Plan.








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





None.








Item
      5.
            Other
      Information





None.








40


Item
      6.
            Exhibits





Exhibit
              Number
            Exhibits10.1
            Amendment
      to Business Relations Agreement, dated as of September 23, 2008, by and
      between American Biltrite, Inc. and Congoleum Corporation (incorporated
      herein by reference to Exhibit 10.1 filed with the Company’s Current
      Report on Form 8-K, filed on September 24, 2008)10.2
            Sixth
      Amendment to Personal Services Agreement, dated as of September 23, 2008,
      by and between American Biltrite, Inc. and Congoleum Corporation
      (incorporated herein by reference to Exhibit 10.2 filed with the Company’s
      Current Report on Form 8-K, filed on September 24, 2008)10.3
            Amendment
      No. 10 to ratification and amendment agreement and Amendment No. 12
      to  Loan and Security agreement31.1
            Rule
      13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer31.2
            Rule
      13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer32.1
            Section
      1350 Certification of the Chief Executive Officer32.2
            Section
      1350 Certification of the Chief Financial Officer





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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.





CONGOLEUM
      CORPORATION(Registrant)Date:
      November 7, 2008
            By:
      /s/Howard N.
      Feist IIIHoward
      N. Feist IIIChief
      Financial Officer(Duly
      Authorized Officer andPrincipal
      Financial & Accounting Officer)





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Exhibit
Index








Exhibit
              Number
            Exhibits10.1
            Amendment
      to Business Relations Agreement, dated as of September 23, 2008, by and
      between American Biltrite, Inc. and Congoleum Corporation (incorporated
      herein by reference to Exhibit 10.1 filed with the Company’s Current
      Report on Form 8-K, filed on September 24, 2008)10.2
            Sixth
      Amendment to Personal Services Agreement, dated as of September 23, 2008,
      by and between American Biltrite, Inc. and Congoleum Corporation
      (incorporated herein by reference to Exhibit 10.2 filed with the Company’s
      Current Report on Form 8-K, filed on September 24, 2008)10.3
            Amendment
      No. 10 to ratification and amendment agreement and Amendment No.
      12  to  Loan and Security agreement31.1
            Rule
      13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer31.2
            Rule
      13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer32.1
            Section
      1350 Certification of the Chief Executive Officer32.2
            Section
      1350 Certification of the Chief Financial Officer










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