UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                    FORM 10-K

            |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2005

                                       OR

            |_| 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 and Zip Code)

                                 (609) 584-3000
              (Registrant's Telephone Number, Including Area Code)

           Securities Registered Pursuant to Section 12(b) of the Act:

                                                     Name of Each Exchange on
         Title of Each Class                             Which Registered

Class A Common Stock, par value $0.01 per share    American Stock Exchange, Inc.

Securities Registered Pursuant to Section 12(g) of the Act:  None

<PAGE>

      Indicate by check mark if the Registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. YES |_| NO |X|

      Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YES |_| NO |X|

      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 |_|

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|

      Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.

Large accelerated filer |_|   Accelerated filer |_|    Non-accelerated filer |X|

      Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES |_| NO |X|

      As of June 30, 2005, the aggregate market value of all shares of Class A
Common Stock held by non-affiliates of the Registrant was approximately $13.6
million based on the closing price of $3.91 per share on the American Stock
Exchange. For purposes of determining this amount, affiliates are defined as
directors and executive officers of the Registrant, American Biltrite Inc. and
Hillside Capital Incorporated. All of the shares of Class B Common Stock of the
Registrant are held by affiliates of the Registrant. As of March 10, 2006, an
aggregate of 3,662,790 shares of Class A Common Stock and an aggregate of
4,608,945 shares of Class B Common Stock of the Registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of Congoleum Corporation's Proxy Statement for the 2006 Annual
Meeting of Stockholders to be held on May 9, 2006, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 2005, are
incorporated by reference into Part III of this Form 10-K.


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                             TABLE OF CONTENTS                              Page
                             -----------------                              ----
PART I

ITEM 1.  BUSINESS                                                              4

ITEM 1A. RISK FACTORS                                                         11

ITEM 1B. UNRESOLVED STAFF COMMENTS                                            16

ITEM 2.  PROPERTIES                                                           17

ITEM 3.  LEGAL PROCEEDINGS                                                    18

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                  22

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
         AND ISSUER PURCHASES OF EQUITY SECURITIES                            23

ITEM 6.  SELECTED FINANCIAL DATA                                              25

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS                                            26

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK           39

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                          40

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE                                                 85

ITEM 9A. CONTROLS AND PROCEDURES                                              85

ITEM 9B. OTHER INFORMATION                                                    85

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                   85

ITEM 11. EXECUTIVE COMPENSATION                                               85

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         AND RELATED STOCKHOLDER MATTERS                                      86

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                       86

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES                               86

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                           86


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                     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 statements made in this report speak 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.

                                     PART I

Item 1. BUSINESS

General

      Congoleum was incorporated in Delaware in 1986, but traces its history in
the flooring business back to Nairn Linoleum Co., which began in 1886.

      Congoleum produces both sheet and tile floor covering products with a wide
variety of product features, designs and colors. Sheet flooring, in its
predominant construction, is produced by applying a vinyl gel to a flexible
felt, printing a design on the gel, applying a wear layer, heating the gel layer
sufficiently to cause it to expand into a cushioned foam and, in some products,
adding a urethane coating. The Company also produces through-chip-inlaid sheet
products for both residential and commercial markets. These products are
produced by applying an adhesive coat and solid vinyl colored chips to a felt
backing and laminating the sheet under pressure with a heated drum. Tile
flooring is manufactured by creating a base stock (consisting primarily of
limestone and vinyl resin) which is less flexible than the backings for sheet
flooring, and transferring or laminating to it preprinted colors and designs
followed by a wear layer and, in some cases, a urethane coating. Commercial tile
is manufactured by including colored vinyl chips in the pigmented base stock.
For do-it-yourself tile, an adhesive is applied to the back of the tile. The


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differences between products within each of the two product lines consist
primarily of content and thickness of wear layers and coatings, the use of
chemical embossing to impart a texture, the complexity of designs and the number
of colors. Congoleum also purchases sundries and accessory products for resale.

      Congoleum's products serve both the residential and commercial
hard-surface flooring markets, and are used in remodeling, manufactured housing,
new construction and commercial applications. These products, together with a
limited quantity of related products purchased for resale, are sold primarily to
wholesale distributors and major retailers in the United States and Canada.
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.

      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 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 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 reflecting the
result of further negotiations with representatives of the Asbestos Claimants'
Committee, the Future Claimants' Representative 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 modified
plan. In April 2005, Congoleum announced that it had reached an agreement in
principle with representatives of the Asbestos Claimants' Committee and the
Future Claimants' Representative 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 February 2006, Congoleum filed a new amended plan of reorganization
(the "Seventh Plan"). On February 27, 2006, the Company announced its intention
to make additional changes to its plan of reorganization, and on March 17, 2006


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<PAGE>

it filed a new amended plan (the "Eighth Plan"). In addition, an insurance
company has filed a plan of reorganization (the "CNA Plan") and the Official
Committee of Bondholders has also filed a plan (the "Bondholder Plan"). The
Bankruptcy Court has scheduled a hearing to consider the adequacy of the
disclosure statements with respect to these plans for April 27, 2006. . See
Notes 1 and 17 of the Notes to Consolidated Financial Statements, which are
contained in Item 8 of this Annual Report on Form 10-K.

      The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and any amendments to these reports filed with or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available
free of charge through its Web site (www.congoleum.com), as soon as reasonably
practicable after being electronically filed with, or otherwise furnished to,
the Securities and Exchange Commission. The Company's code of ethics is also
posted on its Web site or may be obtained without charge by sending a written
request to Mr. Howard N. Feist III of the Company at its office at 3500
Quakerbridge Road, P.O. Box 3127, Mercerville, NJ 08619. Amendments to, or
waivers of, the code of ethics, if any, that relate to the Chief Executive
Officer, Chief Financial Officer, Chief Accounting Officer or other persons
performing such function, will also be posted on the Web site.

      As a result of filing its bankruptcy case, the Company is required to file
periodically with the Bankruptcy Court certain financial information on an
unconsolidated basis for itself and two subsidiaries. This information includes
Statements of Financial Affairs, schedules and certain monthly operating reports
(in forms prescribed by the Federal Rules of Bankruptcy Procedure). The debtors'
informational filings with the Bankruptcy Court, including the Statements of
Financial Affairs, schedules and monthly operating reports (collectively, the
"Bankruptcy Reports"), are available to the public at the office of the Clerk of
the Bankruptcy Court, Clarkson S. Fisher U.S. Courthouse, 402 East State Street,
Trenton, NJ 08608. Certain of the Bankruptcy Reports may be viewed at
www.njb.uscourts.gov (Case No. 03-51524).

      The Company is furnishing the information set forth above for convenience
of reference only. The Company cautions that the information contained in the
Bankruptcy Reports is or will be unaudited and subject to change and not
prepared in accordance with generally accepted accounting principles or for the
purpose of providing the basis for an investment decision relating to any of the
securities of the Company. In view of the inherent complexity of the matters
that may be involved in the bankruptcy case, the Company does not undertake any
obligation to make any further public announcement with respect to any
Bankruptcy Reports that may be filed with the Bankruptcy Court or the matters
referred to therein.

Raw Materials

      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 occasionally experienced
significant price increases for some of these materials. Raw material prices in
2004 and 2005 increased significantly. During that period, there was a tight
supply of specialty resins used in flooring, despite significant price
increases, due to several factors, including an explosion at a large resin plant


                                       6
<PAGE>

in 2004 that destroyed the plant, the decision by another major supplier to exit
the business, and the effect of hurricanes in 2005. 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. 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.

Patents and Trademarks

      The Company believes that the Congoleum brand name, as well as the other
trademarks it holds, is important to maintaining its competitive position.

      The Company also believes that patents and know-how play an important role
in furthering and maintaining competitive position. In particular, the Company
utilizes a proprietary transfer printing process for certain tile products that
it believes produces visual effects that only one competitor is presently able
to duplicate.

Distribution

      The Company currently sells its products through approximately 15
distributors providing approximately 86 distribution points in the United States
and Canada, as well as directly to a limited number of mass market retailers.
Net sales to customers in the United States for the years ended December 31,
2005, 2004 and 2003 totaled $228.8 million, $221.3 million and $211.8 million,
respectively, with net sales to customers outside the United States for the
years ended December 31, 2005, 2004, and 2003 totaling $8.8 million, $8.2
million, and $8.9 million, respectively.


                                       7
<PAGE>

      The Company's sales pattern is seasonal, with peaks in retail sales
typically occurring during March/April/May and September/October. See Note 21 of
the Notes to Consolidated Financial Statements for a comparison of quarterly
operating results for the years ended December 31, 2005 and 2004. Orders are
generally shipped as soon as a truckload quantity has been accumulated, and
backorders can be canceled without penalty. At December 31, 2005, the backlog of
unshipped orders was $6.5 million, compared to $6.4 million at December 31,
2004.

      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 sales, at least until a suitable
replacement is in place. For the year ended December 31, 2005, two customers
each accounted for over 10% of the Company's net sales. These customers were its
manufactured housing market distributor, LaSalle-Bristol Corporation, and its
retail market distributor, Mohawk Industries, Inc. Together, they accounted for
approximately 67% of the Company's net sales in 2005.

Working Capital

      The Company produces goods for inventory and sells on credit to customers.
Generally, the Company's distributors carry inventory as needed to meet local or
rapid delivery requirements. The Company's credit terms generally require
payment on invoices within 31 days, with a discount available for earlier
payment. These practices are typical within the industry.

      Congoleum expects to spend an additional $19.5 million at a minimum in
fees, expenses, and trust contributions in connection with obtaining
confirmation of its plan of reorganization during 2006, which amount is recorded
in its reserve for asbestos related liabilities (in addition to the $8.9 million
insurance settlement being held as restricted cash). It also expects to spend a
further $11.5 million at a minimum in connection with insurance coverage
litigation costs. While the Company expects to recover the $11.5 million in
future coverage litigation costs and $14.8 million in past costs from insurance
settlements upon confirmation of a plan of reorganization, there can be no
assurances that the Company will recover such costs. In February 2006, the
Bankruptcy Court ordered a law firm formerly representing Congoleum to disgorge
all fees and certain expenses it was paid by Congoleum. The law firm is expected
to appeal from this ruling once an order embodying the ruling has been entered
by the Bankruptcy Court. It is expected that the amount of the disgorgement will
range from approximately $8.2 million to $9.8 million. Pursuant to the terms of
the Eighth Plan, holders of the Company's 8-5/8% Senior Notes due 2008 (the
"Senior Notes") would forego $10 million in interest accrued during the
post-petition period and would receive the right to any funds (net of related
expenses) from the fee disgorgement and other causes of action against the law
firm and one of the service providers retained by that law firm, subject to a
maximum of $10 million plus interest at 8.625% from the effective date of the
plan until the time such payment is made (the "Maximum Additional Bondholder
Recovery"). Any net recoveries in excess of the Maximum Additional Bondholder
Recovery would be paid to the Plan Trust. Pending confirmation and effectiveness
of the Eighth Plan, the Company anticipates that its existing cash (including
restricted cash), cash generated from operations and credit arrangements should


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be sufficient to fund its operating needs and costs associated with the
insurance coverage litigation. The Company further anticipates that its existing
cash (including restricted cash), cash generated from operations, credit
arrangements and recoveries of costs for the coverage litigation from insurance
recoveries upon effectiveness of the Eighth Plan should be sufficient to fund
its obligations under the Eighth Plan to pay interest, cash to the Plan Trust,
and provide adequate working capital for operations.

Product Warranties

      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.

Competition

      The market for the Company's products is highly competitive. Resilient
sheet and tile compete for both residential and commercial customers primarily
with carpeting, hardwood, melamine laminate and ceramic tile. In residential
applications, both tile and sheet products are used primarily in kitchens,
bathrooms, laundry rooms and foyers and, to a lesser extent, in playrooms and
basements. Ceramic tile is used primarily in kitchens, bathrooms and foyers.
Carpeting is used primarily in bedrooms, family rooms and living rooms. Hardwood
flooring and melamine laminate are used primarily in family rooms, foyers and
kitchens. Commercial grade resilient flooring faces substantial competition from
carpeting, ceramic tile, rubber tile, hardwood flooring and stone in commercial
applications. The Company believes, based upon its market research, that
purchase decisions are influenced primarily by fashion elements such as design,
color and style, durability, ease of maintenance, price and ease of
installation. Both tile and sheet resilient flooring are easy to replace for
repair and redecoration and, in the Company's view, have advantages over other
floor covering products in terms of both price and ease of installation and
maintenance.

      The Company encounters competition from three other manufacturers in North
America and, to a lesser extent, foreign manufacturers. In the resilient
category, Armstrong World Industries, Inc. has the largest market share. Some of
the Company's competitors have substantially greater financial and other
resources and access to capital than the Company.

Research and Development

      The Company's research and development efforts concentrate on new product
development, improving product durability and expanding technical expertise in
the manufacturing process. Expenditures for research and development for the
year ended December 31, 2005 were $4.3 million, compared to $4.3 million and
$3.1 million for the years ended December 31, 2004 and 2003, respectively.


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Environmental Regulation

      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.
Pursuant to administrative consent orders signed in 1986 and in connection with
a prior restructuring, the Company is in the process of implementing cleanup
measures at its Trenton sheet facility under New Jersey's Environmental Clean-up
Responsibility Act, as amended by the New Jersey Industrial Site Recovery Act.
The Company does not anticipate that the additional costs of these measures will
be significant. The Company also agreed to be financially responsible for any
cleanup measures required at its Trenton tile facility when that facility was
acquired in 1993. In 2005, the Company incurred capital expenditures of
approximately $0.3 million for environmental compliance and control facilities.

      The Company has historically expended substantial amounts for compliance
with existing environmental laws and regulations, including those matters
described above. 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 those amounts may be substantial. Because environmental requirements have
grown increasingly strict, the outcome of these matters could result in
significant expenses or judgments that could have a material adverse effect on
the financial position of the Company. See Item 3 below for certain additional
information regarding environmental matters.

Employees

      At December 31, 2005, the Company employed a total of 833 employees,
compared to 875 employees at December 31, 2004.

      The Company has entered into collective bargaining agreements with hourly
employees at three of its plants and with the drivers of the trucks that provide
interplant transportation. These agreements cover approximately 500 of the
Company's employees. The Trenton tile plant has a five-year collective
bargaining agreement with United Steelworkers of America - Local 547, which
expires in May 2008. The Trenton sheet plant has a five-year collective
bargaining agreement with United Steelworkers of America - Local 107L, which
expires in January 2011. The Marcus Hook plant has a five-year collective
bargaining agreement with the United Steelworkers of America - Local 12698-01,
which expires in November 2008. The Marcus Hook plant also has a five-year
collective bargaining agreement with the Teamsters Union - Local 312, which
expires in January 2009. The Finksburg plant has no union affiliation. In the
past five years, there have been no strikes by employees of the Company and the
Company believes that its employee relations are satisfactory.


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Item 1A. RISK FACTORS

The Company has significant asbestos liability and funding exposure, and its
proposed amended plan of reorganization may not be confirmed.

      As more fully set forth in Notes 1 and 17 of the Notes to Consolidated
Financial Statements, which are included in this Annual Report on Form 10-K, 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. Under the terms of the Eighth Plan, asbestos
personal injury claimants voting to accept the plan would irrevocably consent or
would be deemed to have irrevocably consented to the forbearance of any claim
and lien rights under such settlement agreements.

      There can be no assurance that the Company will obtain approval to solicit
acceptances for the Eighth Plan, that the Company will receive the acceptances
necessary for confirmation of the Eighth Plan, that the Eighth Plan will not be
modified further, that the Eighth Plan will receive necessary court approvals
from the Bankruptcy Court or the Federal District Court, or that such approvals
will be received in a timely fashion, that the Eighth Plan will be confirmed, or
that the Eighth Plan, if confirmed, will become effective. 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, and plans have been
filed by an insurance company and the Official Committee of Bondholders. It is
unclear whether any other person will attempt to propose a plan or what any such
plan would provide or propose, and whether the Bankruptcy Court would approve a
plan other than Congoleum's proposed plan.

      The Eighth Plan and any alternative plan of reorganization pursued by the
Company or another plan proponent or confirmed by the Bankruptcy Court and the
Federal District Court could materially differ from the description of the
Eighth Plan contained in this Annual Report on Form 10-K. Furthermore, the
estimated costs and contributions to effect the Eighth Plan or an alternative
plan could be significantly greater than currently estimated. Any plan of
reorganization pursued by the Company will be subject to numerous conditions,
approvals and other requirements, including Bankruptcy Court and Federal
District Court approvals, and there can be no assurance that such conditions,
approvals and other requirements will be satisfied or obtained.

      Confirmation of a 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 the Eighth Plan or in connection with
the Company's New Jersey state court insurance coverage litigation discussed
elsewhere in this report are materially more than anticipated, or if sufficient
funds from insurance proceeds or other sources are not available at confirmation
to reimburse coverage litigation costs as expected, the Company may be unable to
obtain exit financing, when combined with net cash provided from operating
activities, that would provide it with sufficient funds, which would likely
result in the Company not being able to confirm an amended plan of
reorganization or have such plan become effective.


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<PAGE>

      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 reaching 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 American Biltrite Inc. ("ABI"), the majority stockholder of
the Company, 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 obtaining sufficient creditor and court approval (including the
results of any relevant appeals) of any reorganization plan pursued by it 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 insurance
coverage litigation pending in New Jersey state court involving Congoleum and
certain insurers, (x) the extent to which the Company is able to obtain
reimbursement for costs of the coverage litigation, (xi) compliance with the
Bankruptcy Code, including Section 524(g) and (xii) 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 its amended plan of reorganization, such failure would have a
material adverse effect upon its business, results of operations and financial
condition.

      In addition, there has been federal legislation proposed that, if adopted,
would establish a national trust to provide compensation to victims of
asbestos-related injuries and channel all current and future asbestos-related
personal injury claims to that trust. Due to the uncertainties involved with the
pending legislation, the Company does not know what effects any such
legislation, if adopted, may have upon its business, results of operations or
financial condition, or upon any plan of reorganization it may decide to pursue.
To date, the Company has expended significant amounts pursuant to resolving its
asbestos liability relating to its proposed amended plan of reorganization. To
the extent any federal legislation is enacted, which does not credit the Company
for amounts paid by the Company pursuant to its plan of reorganization or
requires the Company to pay significant amounts to any national trust or
otherwise, such legislation could have a material adverse effect on the
Company's business, results of operations and financial condition. As a result
of the Company's significant liability and funding exposure for asbestos claims,
there can be no assurance that if it were to incur any unforecasted or
unexpected liability or disruption to its business or operations it would be
able to withstand that liability or disruption and continue as an operating
company.

      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 this Annual Report on Form 10-K.


                                       12
<PAGE>

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 or 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; 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 or 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.

      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 occasionally experienced
significant price increases for some of these materials. Raw material prices in
2004 and 2005 increased significantly. During that period, there was a tight
supply of specialty resins used in flooring, despite significant price
increases, due to several factors, including an explosion at a large resin plant
in 2004 that destroyed the plant, the decision by another major supplier to exit
the business, and the effect of hurricanes in 2005. 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.


                                       13
<PAGE>

      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. However, there
is no certainty that the Company's maintenance of its raw material inventory or
its ongoing efforts to develop new sources of supply would be successful in
avoiding a material adverse effect on its business, results of operations and
financial condition if it were to realize an extended interruption in the supply
of its raw materials.

      In addition, the Company could incur significant increases in the costs of
its raw materials. 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. During those periods of time, there could be a
material adverse effect on the Company's business, results of operations and
financial condition.

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, like the Company, one of the Company's major competitors has sought
protection under Chapter 11 of the Bankruptcy Code. When such competitor emerges
from bankruptcy as a continuing operating company it may have shed much of its
pre-filing liabilities and have a competitive cost advantage over the Company as
a result of having shed those liabilities. 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.


                                       14
<PAGE>

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 could have 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 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.

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 of the Company 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 15
distributors providing approximately 86 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 materially 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


                                       15
<PAGE>

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 67% of the Company's net sales
for the year ended December 31, 2005 and 70% of the Company's net sales for the
year ended December 31, 2004.

Stockholder votes are controlled by ABI; our interests may not be the same as
ABI's interests.

      ABI owns a majority (approximately 55% as of December 31, 2005) of the
outstanding shares of the Company's common stock, representing a 68.3% voting
interest. As a result, ABI can elect all of the Company's directors and can
control the vote on all matters, including determinations such as: approval of
mergers or other business combinations, sales of all or substantially all of the
Company's assets, any matters submitted to a vote of the Company's stockholders,
issuance of any additional common stock or other equity securities, incurrence
of debt other than in the ordinary course of business, the selection and tenure
of the Company's Chief Executive Officer, payment of dividends with respect to
common stock or other equity securities and other matters that might be
favorable to ABI. ABI's ability to prevent an unsolicited bid for us or any
other change in control could have an adverse effect on the market price for the
Company's common stock. In addition, certain officers of Congoleum are officers
of ABI and members of the family group that owns a controlling interest in ABI.

Possible future sales of shares by ABI could adversely affect the market for our
stock.

      ABI may sell shares of the Company's common stock in compliance with the
federal securities laws. By virtue of ABI's current control of Congoleum, ABI
could sell large amounts of shares of the Company's common stock by causing the
Company to file a registration statement that would allow them to sell shares
more easily. In addition, ABI could sell shares of the Company's common stock
without registration. Although the Company can make no prediction as to the
effect, if any, that such sales would have on the market price of the Company's
common stock, sales of substantial amounts of the Company's common stock, or the
perception that such sales could occur, could adversely affect the market price
of the Company's common stock. If ABI sells or transfers shares of the Company's
common stock as a block, another person or entity could become the Company's
controlling stockholder.

Item 1B. UNRESOLVED STAFF COMMENTS.

      Not applicable.


                                       16
<PAGE>

Item 2. PROPERTIES

      The Company owns four manufacturing facilities located in Maryland,
Pennsylvania and New Jersey and leases corporate and marketing offices in
Mercerville, New Jersey, which are described below:

      Location           Owned/Leased             Usage              Square Feet
      --------           ------------             -----              -----------

Finksburg, MD               Owned                  Felt                 107,000
Marcus Hook, PA             Owned             Sheet Flooring          1,000,000
Trenton, NJ                 Owned             Sheet Flooring          1,050,000
Trenton, NJ                 Owned             Tile Flooring             282,000
Mercerville, NJ            Leased            Corporate Offices           55,902

      The Finksburg facility consists primarily of a 16-foot wide flooring felt
production line.

      The Marcus Hook facility is capable of manufacturing rotogravure printed
sheet flooring in widths of up to 16 feet. Major production lines at this
facility include a 12-foot wide oven, two 16-foot wide ovens, a 12-foot wide
printing press and a 16-foot wide printing press.

      The Trenton sheet facility is capable of manufacturing rotogravure printed
and through-chip inlaid sheet products in widths up to 6 feet. Major production
lines, all six-foot wide, include an oven, a rotary laminating line and a press.
The examination, packing and warehousing of all sheet products (except products
for the manufactured housing market) occur at the Trenton plant distribution
center.

      The Trenton tile facility consists of three major production lines, which
are a four-foot wide commercial tile line, a two-foot wide residential tile line
and a one-foot wide residential tile line.

      Productive capacity and extent of utilization of the Company's facilities
are dependent on a number of factors, including the size, construction, and
quantity of product being manufactured, some of which also dictate which
production line(s) must be utilized to make a given product. The Company's major
production lines were operated an average of 77% of the hours available on a
five-day, three-shift basis in 2005 with the corresponding figure for individual
production lines ranging from 43% to 103%.

      Although many of the Company's manufacturing facilities have been
substantially depreciated for financial reporting purposes, the Company has
generally maintained and improved the productive capacity of these facilities
over time through a program of regular capital expenditures. The Company
considers its manufacturing facilities to be adequate for its present and
anticipated near-term production needs.


                                       17
<PAGE>

Item 3. LEGAL PROCEEDINGS

      Bankruptcy Proceedings and Asbestos-Related Liabilities: On December 31,
2003, Congoleum filed a voluntary petition with the Bankruptcy Court seeking
relief under Chapter 11 of the Bankruptcy Code as a means to resolve claims
asserted against it related to the use of asbestos in its products decades ago.
During 2003, Congoleum 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
(the "Fourth Plan") with the Bankruptcy Court reflecting the result of further
negotiations with representatives of the Asbestos Claimants' Committee, the
Future Claimants' Representative 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 Asbestos Claimants' Committee and the
Future Claimants' Representative 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. 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 February 2006,
Congoleum filed the Seventh Plan. On February 27, 2006, the Company announced
its intention to make additional changes to its plan of reorganization, and on
March 17, 2006 it filed the Eighth Plan. In addition, an insurance company has
filed the CNA Plan and the Official Committee of Bondholders has filed the
Bondholder Plan. The Bankruptcy Court has scheduled a hearing to consider the
adequacy of the disclosure statements with respect to these plans for April 27,
2006. See Notes 1 and 17 of the Notes to Consolidated Financial Statements,
which are contained in Item 8 of this Annual Report on Form 10-K.

      Congoleum is presently involved in litigation with certain insurance
carriers related to disputed insurance coverage for asbestos-related
liabilities. See Note 17 of the Notes to Consolidated Financial Statements,
which are contained in Item 8 of this Annual Report on Form 10-K. The Company
filed a motion for stay of such litigation on March 22, 2006. A decision on this
motion is expected during April 2006. The motion requests a cessation of such
litigation, as the Company believes such litigation constitutes and undue
interference with the Company's ongoing reorganization proceedings.


                                       18
<PAGE>

      On March 2, 2004, the Bankruptcy Court approved the retention of Gilbert,
Heintz & Randolph LLP ("the law firm") as special insurance counsel to the
Company. On October 13, 2005, the Court of Appeals for the Third Circuit issued
an opinion disqualifying the law firm from serving as counsel to Congoleum.

      On February 7, 2006, the Bankruptcy Court issued an oral decision ordering
a disgorgement of fees and certain expenses Congoleum has paid to the law firm.
It is expected that the amount of the disgorgement will range from approximately
$8.2 million to $9.8 million. Furthermore, on February 14, 2006, the Bankruptcy
Court ordered a service provider retained by the law firm to disgorge all fee
related services performed after the petition date. The service provider was
specifically ordered to disgorge the sum of $181,000, and Congoleum was directed
to investigate whether additional disgorgement or fee recovery is appropriate
under various legal theories.

      On December 3, 2005, the Company commenced an omnibus action (the "Omnibus
Avoidance Action") by filing in the Bankruptcy Court a Complaint to Avoid
Pre-Petition Liens, to Avoid and Recover Preferential Transfers of Property and
Fraudulent Transfers of Property Pursuant to 11 U.S.C. ss.ss. 544, 547, 548, 549
and 550, and to Disallow Claims Pursuant to 11 U.S.C. ss. 502(d) against (a)
Arthur J. Pergament, in his capacity as Collateral Trustee; (b) Joseph F. Rice
and the law firm of Motley Rice LLC; (c) Perry Weitz and the law firm of Weitz &
Luxenberg, P.C.; and (d) those holders of secured asbestos claims that did not
voluntarily execute an asbestos personal injury claim tolling agreement.

      On March 16, 2005, the Company filed a motion for summary judgment on
counts 1 and 2 of its complaint in the Omnibus Avoidance Action seeking to avoid
approximately 98% of the pre-petition settlements based on various bankruptcy
avoidance theories. The motion remains pending an oral argument has been
scheduled for April 10, 2006.

      On December 30, 2005, the Company commenced an action (the "Sealed
Avoidance Action" and, together with the Omnibus Avoidance Action, the
"Avoidance Actions") by filing under seal a Complaint to Avoid and Recover
Fraudulent Transfers of Property Pursuant to 11 U.S.C. ss.ss. 544, 548, 550, the
Uniform Fraudulent Transfer Act and Applicable State Law against (a) Arthur J.
Pergament, in his capacity as Collateral Trustee; and (b) all holders of secured
asbestos claims, including those who voluntarily executed an asbestos personal
injury claim tolling agreement. The Sealed Avoidance Action has been stayed and
all deadlines tolled until further order of the Bankruptcy Court.

      During 2005, Congoleum entered into a number of settlement agreements with
excess insurance carriers over coverage for asbestos-related claims. On May 13,
2005, Congoleum filed a Motion Pursuant to Bankruptcy Rule 9019 and Bankruptcy
Code Section 363 Approving Insurance Settlement Agreement with Certain AIG
Companies ("AIG") (the "AIG Settlement"). On June 28, 2005, the Bankruptcy Court
approved the AIG Settlement. AIG provided excess liability insurance coverage to
Congoleum for asbestos-related claims. Under the terms of the settlement, AIG
will pay $103 million over ten years to the Plan Trust. In exchange, Congoleum
agreed, among other things, to designate AIG as a Settling Asbestos Insurance
Company under the terms of the Company's plan of reorganization, thereby
entitling AIG to the benefit of certain injunctions under its plan of


                                       19
<PAGE>

reorganization pursuant to Sections 105(a) and 524(g) of the Bankruptcy Code.
The settlement resolves coverage obligations of policies with a total of $114
million in liability limits for asbestos bodily injury claims, and is subject to
final Bankruptcy Court approval and effectiveness of a plan that contains a
Bankruptcy Code ss. 524(g) injunction. An insurer has appealed the approval
order granted by the Bankruptcy Court to the District Court where it is pending.

      On June 27, 2005, Congoleum filed a Motion Pursuant to Bankruptcy Rule
9019 and Bankruptcy Code Section 363 Approving Insurance Settlement Agreement
with Certain Underwriters at Lloyd's, London ("Lloyd's Underwriters") (the
"Lloyd's Settlement"). Lloyd's Underwriters severally subscribed to certain
policies of insurance under which Congoleum is an insured (the "London
Policies"). Under the terms of the settlement, Lloyd's Underwriters will pay a
total of $19.95 million to the Plan Trust and Lloyd's Underwriters and Equitas
Limited, Equitas Reinsurance Limited, Equitas Holdings Limited, Equitas
Management Services Limited, and Equitas Policyholders Trust Limited
(collectively, "Equitas"), solely in their capacity as Lloyd's Underwriters'
reinsurer and run-off agent, will be designated as Settling Asbestos Insurance
Companies, thereby entitling Lloyd's Underwriters and Equitas to certain
injunctions under the Company's plan of reorganization pursuant to Sections
105(a) and 524(g) of the Bankruptcy Code. The settlement is subject to the
effectiveness of a plan that contains the Section 524(g) injunction specified in
the Lloyd's Settlement.

      On August 4, 2005, Congoleum filed a Motion for Order Pursuant to
Bankruptcy Rule 9019 Approving Insurance Settlement Agreement with Federal
Insurance Company ("Federal") (the "Federal Settlement"). On October 11, 2005,
the Bankruptcy Court approved the Federal Settlement. Federal provided certain
liability insurance coverage to Congoleum for asbestos-related claims. Under the
terms of the Federal Settlement, Federal will pay $4 million to the Plan Trust
once a plan of reorganization with the Section 524(g) protection specified in
the Federal Settlement agreement goes effective. In exchange, Congoleum agreed,
among other things, to designate Federal as a Settling Asbestos Insurance
Company, thereby entitling Federal to the benefit of certain injunctions under
the Company's plan of reorganization pursuant to Sections 105(a) and 524(g) of
the Bankruptcy Code. The Federal Settlement contains a downward adjustment
mechanism which will permit to pay a settlement amount less than $4 million if
certain market conditions occur. The purpose of the downward adjustment
mechanism is to equalize the settlement percentage of Federal's settlement
amount to the settlement percentages of other high level excess insurers that
are similarly situated to Federal in the Company's bankruptcy cases. The Future
Claimants' Representative has appealed the approval order granted by the
Bankruptcy Court to the District Court where it is pending.

      On October 6, 2005, Congoleum filed a Motion for Order Pursuant to
Bankruptcy Rule 9019 Authorizing and Approving Insurance Settlement Agreement
Among Debtors, Plan Trust, Mt. McKinley Insurance Company ("Mt. McKinley") and
Everest Reinsurance Company ("Everest") (the "Mt. McKinley and Everest
Settlement"). Under the terms of the Mt. McKinley and Everest Settlement, Mt.
McKinley and Everest have paid $21.5 million into an escrow account. The escrow
agent will transfer the funds to the Plan Trust once a plan containing a 524(g)
injunction becomes effective. In exchange, Congoleum agreed, among other things,
to designate Mt. McKinley and Everest as Settling Asbestos Insurance Companies,
thereby entitling Mt. McKinley and Everest to the benefit of certain injunctions
under the Company's plan of reorganization pursuant to Sections 105(a) and
524(g) of the Bankruptcy Code. The Bankruptcy Court approved the Mt. McKinley
and Everest Settlement on November 18, 2005. The Mt. McKinley and Everest
Settlement is subject to the effectiveness of a plan of reorganization that
contains a Bankruptcy Code Section 524(g) injunction. An insurer and the Future
Claimants' Representative have appealed the approval order granted by the
Bankruptcy Court to the District Court where it is pending.


                                       20
<PAGE>

      Environmental Liabilities: 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 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") recently selected a
remedy for the soil and shallow groundwater; however, the remedial
investigation/feasibility study related to the deep groundwater has not been
completed. The PRP group estimates that future costs of the remedy recently
selected by EPA based on engineering estimates would be approximately $11
million. Congoleum's proportionate share, based on waste disposed at the site,
is estimated to be approximately 5.7%, or $0.7 million. The majority of
Congoleum's share of costs is presently being paid by one of its insurance
carriers, whose remaining policy limits for this claim will cover approximately
half this amount. Congoleum expects the balance to be funded by other insurance
carriers and the Company.

      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 $1.6 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 $1.3 million is included in non-current liabilities subject to
compromise.


                                       21
<PAGE>

      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.

      Other: 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.

      The total balances of environmental, asbestos-related, and other
liabilities and the related insurance receivable and deemed probable of recovery
at December 31 are as follows:

<TABLE>
<CAPTION>
                                                          2005                            2004
                                                          ----                            ----
------------------------------------------------------------------------------------------------------------
(in millions)                                  Liability      Receivable       Liability       Receivable
------------------------------------------------------------------------------------------------------------
<S>                                              <C>              <C>              <C>             <C>
Environmental liabilities                        $ 4.3            $ 1.9            $ 4.6           $ 2.1
Asbestos product liability(1)                     28.4             14.8             23.8             8.8
Other                                              1.1              0.3              0.9             0.1
------------------------------------------------------------------------------------------------------------
Total                                            $33.8            $17.0            $29.3           $11.0
============================================================================================================
</TABLE>

(1)   Asbestos product liability at December 31, 2005 and 2004 reflects the
      estimated cost to settle asbestos liabilities through an amended plan of
      reorganization under Chapter 11. This liability at December 31, 2005
      includes $8.9 million received in connection with an insurance settlement
      (recorded as restricted cash), which the Company is required to contribute
      to a trust. Stated liability pursuant to settlement agreements is in
      excess of $491 million. The receivable related to asbestos product
      liability represents amounts paid by the Company for which it is entitled
      to reimbursement pursuant to the terms of the settlement agreements and
      related documents. See Note 17 of Notes to Consolidated Financial
      Statements.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None.


                                       22
<PAGE>

                                     PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
        ISSUER PURCHASES OF EQUITY SECURITIES

      The Company's Class A common stock is listed on the American Stock
Exchange under the symbol CGM. The following table reflects the high and low
sales prices (rounded to the nearest penny) based on American Stock Exchange
trading over the past two years.

               2005                          High                   Low
--------------------------------------------------------------------------------

First Quarter                                $6.49                $5.15
Second Quarter                                5.59                 3.03
Third Quarter                                 5.10                 3.71
Fourth Quarter                                5.45                 2.30

               2004                          High                   Low
--------------------------------------------------------------------------------

First Quarter                                $4.19                $0.75
Second Quarter                                2.75                 1.81
Third Quarter                                 5.40                 2.66
Fourth Quarter                                6.64                 3.70

      The Company's Class B common stock is not listed on any exchange. Holders
of Class A common stock are entitled to one vote per share on all matters
submitted to a vote of stockholders and holders of Class B common stock are
entitled to two votes per share on all matters other than certain extraordinary
matters. Each share of Class B common stock is convertible into one share of
Class A common stock under certain circumstances, including a sale or other
transfer by the holders of such shares to a person or entity other than an
affiliate of the transferor. Both classes vote together as a single class on all
matters with limited exceptions. Except with respect to voting rights and
conversion rights, the Class A common stock and the Class B common stock are
identical.

      The Company has not paid any cash dividends in 2005 or 2004 and does not
anticipate paying any cash dividends prior to confirmation of a plan of
reorganization or in the foreseeable future thereafter. The Company's current
debtor-in-possession credit facility prohibits payment of cash dividends. Any
change in the Company's dividend policy after confirmation of a plan of
reorganization will be within the discretion of the Board of Directors, subject
to restrictions contained in the Company's plan of reorganization and debt or
other agreements, and will depend, among other things, on the Company's
solvency, earnings, debt service and capital requirements, restrictions in
financing agreements, business conditions and other factors that the Board of
Directors deem relevant.

      The number of registered and beneficial holders of the Company's Class A
common stock on March 10, 2006 was approximately 1,000. The number of registered
and beneficial holders of the Company's Class B common stock on March 10, 2006
was two.


                                       23
<PAGE>

                      EQUITY COMPENSATION PLAN INFORMATION

      The following table sets forth information regarding the Company's equity
compensation plans as of December 31, 2005:

<TABLE>
<CAPTION>
                                                                                Number of Securities
                                         Number of                                   Remaining
                                       Securities to           Weighted            Available For
                                      be Issued Upon            Average           Future Issuance
                                        Exercise of         Exercise Price          Under Equity
                                        Outstanding         Of Outstanding       Compensation Plans
                                     Options, Warrants     Options, Warrants   (excluding securities
Plan Category                           And Rights            and Rights       reflected in column A)
-------------                           ----------            ----------       ----------------------

                                            (A)                   (B)                   (C)

<S>                                     <C>                     <C>                    <C>
Equity compensation plans
approved by security holders            672,000                 $2.03                  114,400

Equity compensation plans not
approved by security holders             21,500                 $2.40                   28,500
                                        -------                                        -------

Total                                   693,500                 $2.04                  142,900
                                        =======                                        =======
</TABLE>

      On September 21, 1995, the Company established its 1995 Stock Option Plan,
as amended (the "1995 Plan"), under which options to purchase up to 800,000
shares of the Company's Class A common stock may be issued to officers and key
employees. The 1995 Plan was approved by stockholders. Such options may be
either incentive stock options or nonqualified stock options, and the options'
exercise price must be at least equal to the fair value of the Company's Class A
common stock on the date of grant. All options granted under the 1995 Plan have
ten-year terms and vest over five years at the rate of 20% per year beginning on
the first anniversary of the date of grant.

      On July 1, 1999, the Company established its 1999 Stock Option Plan for
Non-Employee Directors, as amended (the "1999 Plan"), under which non-employee
directors may be granted non-qualified options (the "Options") to purchase up to
50,000 shares of the Company's Class A common stock. The 1999 Plan did not
require or receive stockholder approval. The Options granted under the 1999 Plan
have ten-year terms and vest six months from the grant date. The exercise price
for each Option is the fair market value on the date of the grant.

      As of December 31, 2005, an aggregate of 400,600 shares of common stock
were issuable upon the exercise of outstanding options under the 1995 Plan and
1999 Plan.


                                       24
<PAGE>

Item 6. SELECTED FINANCIAL DATA
        (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                       For the years ended December 31,
------------------------------------------------------------------------------------------------------------------------
                                                            2005         2004         2003       2002(1)       2001(1)
                                                            ----         ----         ----       -------       -------
<S>                                                      <C>          <C>          <C>          <C>          <C>
Consolidated Statements of Operations Data:
Net sales ............................................   $ 237,626    $ 229,493    $ 220,706    $ 237,206    $ 218,760
Cost of sales ........................................     183,734      167,844      166,864      179,699      165,683
Selling, general and administrative expenses .........      43,503       47,925       53,206       52,778       48,952
Asbestos-related reorganization charges ..............      25,326        5,000        3,705       17,341           --
------------------------------------------------------------------------------------------------------------------------

Income (loss) from operations ........................     (14,937)       8,724       (3,069)     (12,612)       4,125
Interest expense, net ................................      (9,973)      (9,332)      (8,843)      (8,112)      (7,591)
Other income, net ....................................         760        1,011        1,276        1,543        1,320
------------------------------------------------------------------------------------------------------------------------

Income (loss) before taxes and cumulative
  effect of accounting change ........................     (24,150)         403      (10,636)     (19,181)      (2,146)
Provision (benefit) for income taxes .................      (2,575)      (2,545)      (3,874)          92         (506)
------------------------------------------------------------------------------------------------------------------------

Income (loss) before cumulative effect of
  accounting change ..................................     (21,575)       2,948       (6,762)     (19,273)      (1,640)
Cumulative effect of accounting change ...............          --           --           --      (10,523)          --
------------------------------------------------------------------------------------------------------------------------
Net income (loss) ....................................   $ (21,575)   $   2,948    $  (6,762)   $ (29,796)   $  (1,640)
------------------------------------------------------------------------------------------------------------------------

Income (loss) per common share before
  cumulative effect of accounting change:
       Basic .........................................   $   (2.61)   $    0.36    $   (0.82)   $   (2.33)   $   (0.20)
       Diluted .......................................       (2.61)        0.35        (0.82)       (2.33)       (0.20)
Cumulative effect of accounting change ...............          --           --           --        (1.27)          --
Net income (loss) per common share:
       Basic .........................................   $   (2.61)   $    0.36    $   (0.82)   $   (3.60)   $   (0.20)
       Diluted .......................................       (2.61)        0.35        (0.82)       (3.60)       (0.20)
------------------------------------------------------------------------------------------------------------------------
Average shares outstanding:
       Basic .........................................       8,262        8,260        8,260        8,260        8,260
       Diluted .......................................       8,262        8,498        8,260        8,260        8,260
------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data (at end of period):
Total assets .........................................   $ 207,347    $ 212,882    $ 175,899    $ 203,991    $ 265,413
Total long-term debt .................................          --           --       99,773       99,724       99,674
Liabilities subject to compromise ....................     162,851      151,515           --           --           --
Stockholders' equity (deficit) .......................     (44,960)     (20,989)     (25,777)     (16,078)      25,054
</TABLE>

(1)   The impact of the adoption of Statement of Financial Accounting Standards
      No. 142 ("SFAS No. 142") on the Company's financial statements resulted in
      the elimination of $0.4 million of goodwill amortization expense, or $0.05
      per share, for the twelve months ended December 31, 2002. Had SFAS No. 142
      been adopted in 2001, the impact would have been the elimination of $0.4
      million of goodwill amortization expense, or $0.05 per share, for that
      year.


                                       25
<PAGE>

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

      The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto contained in Item 8 of this
Annual Report on Form 10-K.

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 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 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 Asbestos Claimants' Committee, the Future Claimants'
Representative 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 Asbestos Claimants' Committee and the Future Claimants' Representative 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. 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 February 2006, Congoleum filed the Seventh Plan. On
February 27, 2006, the Company announced its intention to make additional


                                       26
<PAGE>

changes to its plan of reorganization, and on March 17, 2006 it filed a new
amended plan (the "Eighth Plan"). In addition, an insurance company has filed
the CNA Plan and the Official Committee of Bondholders has filed the Bondholder
Plan. The Bankruptcy Court has scheduled a hearing to consider the adequacy of
the disclosure statements with respect to these plans for April 27, 2006. See
Notes 1 and 17 of the Notes to Consolidated Financial Statements, which are
contained in Item 8 of this Annual Report on Form 10-K.

      There can be no assurance that the Company will obtain approval to solicit
acceptances for the Eighth Plan, that the Company will receive the acceptances
necessary for confirmation of the Eighth Plan, that the Eighth Plan will not be
modified further, that the Eighth Plan will receive necessary court approvals
from the Bankruptcy Court or the Federal District Court, or that such approvals
will be received in a timely fashion, that the Eighth Plan will be confirmed, or
that the Eighth Plan, if confirmed, will become effective. It is unclear whether
the Bankruptcy Court will approve the CNA Plan or the Bondholder Plan or whether
either of such plans, if confirmed, would be feasible. Moreover, it is unclear
whether any other person will attempt to propose a plan or what any such plan
would provide or propose, and whether the Bankruptcy Court would approve a plan
other than Congoleum's proposed plan.

      Congoleum is presently involved in litigation with certain insurance
carriers related to disputed insurance coverage for asbestos related
liabilities, and certain insurance carriers filed various objections to
Congoleum's previously proposed plans of reorganization and related matters and
are expected to file objections to the Eighth Plan. Certain other parties have
also filed various objections to Congoleum's previously proposed plans of
reorganization and may file objections to the Eighth Plan.

      The Company expects that the terms of the Eighth Plan may be amended or
modified as a result of further negotiations with various parties. The terms of
the CNA Plan and the Bondholder Plan are materially different from the terms of
the Eighth Plan, and these plans may also be amended, modified or may be
withdrawn. There can be no assurance that the terms of the reorganization plan
that is ultimately confirmed, if any, will not materially differ from the terms
of the Eighth Plan. The Company expects that it will take until some time in the
fourth quarter of 2006 at the earliest to obtain confirmation of any plan of
reorganization.

      In anticipation of Congoleum's commencement of the Chapter 11 cases,
Congoleum entered into a settlement agreement with various asbestos personal
injury claimants (the "Claimant Agreement"), which provides for an aggregate
settlement value of at least $466 million as well as an additional number of
individually negotiated trial listed settlements with an aggregate value of
approximately $25 million, for total settlements in excess of $491 million. As
contemplated by the Claimant Agreement, Congoleum also entered into agreements
establishing a pre-petition trust (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 such settlements. Under
the terms of the Eighth Plan, asbestos personal injury claimants voting to
accept the plan would irrevocably consent or would be deemed to have irrevocably
consented to the forbearance of any claim and lien rights under the Claimant
Agreement and related agreements. Under the terms of the Eighth Plan, after the


                                       27
<PAGE>

establishment of the Plan Trust, the assets in the Collateral Trust would be
transferred to the Plan Trust and any claims subject to the Claimant Agreement
would be channeled to the Plan Trust and paid in accordance with the terms of
the Eighth Plan. Settlement values under the Eighth Plan may differ from values
under the Sixth Plan and the Claimant Agreement, which, together with the
outcome of the Avoidance Actions, may materially affect the liability associated
with the asbestos personal injury claims against Congoleum. As a result of
tabulating ballots on the Fourth Plan, the Company is also aware of claims by
claimants whose claims were not determined under the Claimant Agreement but who
have submitted claims with a value of approximately $512 million based on the
settlement values applicable in the Sixth Plan. Based on the Eighth Plan, the
Company has made provision in its financial statements for the minimum amount of
the range of estimates for its contribution to effect its plan to settle
asbestos liabilities through the Plan Trust. The Company recorded charges
aggregating approximately $26 million in prior years and a further approximately
$25.3 million in 2005, to provide for the estimated minimum costs of completing
its reorganization. Actual amounts that will be contributed to the Plan Trust
and costs for pursuing and implementing the Eighth Plan or any other plan of
reorganization could be materially higher than currently recorded. The Company
may record significant additional charges should the minimum estimated cost
increase. Delays in proposing, filing or obtaining approval of the Eighth Plan
or any new amended plan of reorganization, or the continued pursuit of the CNA
Plan or the Bondholder Plan by the proponents of such plans, or the proposal of
additional plans by other parties could result in a proceeding that takes longer
and is more costly than the Company has estimated.

      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 this Annual Report
on Form 10-K. In addition, please refer to "Risk Factors - The Company has
significant asbestos liability and funding exposure, and any plan of
reorganization may not be confirmed" contained in Item 1A of this Annual Report
on Form 10-K 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.

Year ended December 31, 2005 as compared to year ended December 31, 2004

                                               2005              2004
                                            ---------          ---------
                                              (In thousands of dollars)

Net sales                                   $ 237,626          $ 229,493
Cost of sales                                 183,734            167,844
                                            ---------          ---------
Gross profit                                   53,892   22.7%     61,649   26.9%
Selling, general & administrative expenses     43,503   18.3%     47,925   20.9%
Asbestos-related reorganization charges        25,326              5,000
                                            ---------          ---------
Operating income (loss)                       (14,937)             8,724
Interest expense, net                          (9,973)            (9,332)
Other income, net                                 760              1,011
                                            ---------          ---------
Income (loss) before taxes                    (24,150)               403
Provision for income taxes                     (2,575)            (2,545)
                                            ---------          ---------

Net income (loss)                           $ (21,575)         $   2,948
                                            =========          =========


                                       28
<PAGE>

      Net sales for the year ended December 31, 2005 totaled $237.6 million as
compared to $229.5 million for the year ended December 31, 2004, an increase of
$8.1 million or 3.5%. The increase in sales resulted primarily from the impact
of selling price increases instituted in late 2004 and during 2005 (7% of net
sales), and higher shipments to the manufactured housing industry reflecting
post-hurricane demand for both manufactured housing and RV homes. This was
partially offset by a sales decrease of do-it-yourself tile reflecting the loss
of a major mass merchandiser customer coupled with decreased demand for
residential sheet products.

      Gross profit for the year ended December 31, 2005 totaled $53.9 million,
or 22.7% of net sales, compared to $61.6 million or 26.9% of net sales for the
year ended December 31, 2004. The decrease in gross margins was driven by the
sharp increase in raw material pricing which increased costs by 8.4% of net
sales, a less favorable product mix which reduced gross margin by 2.5% of net
sales, and the negative impact of lower production volumes over which to spread
fixed manufacturing overhead costs (1.7% of net sales). This was partially
mitigated by price increases instituted during late 2004 and 2005 (7.0% of net
sales), lower warranty claims expense (0.5% of net sales) and the favorable
impact of manufacturing cost reduction programs initiated (1.0% of net sales).

      Selling, general and administrative expenses were $43.5 million for the
year ended December 31, 2005 as compared to $47.9 million for the year ended
December 31, 2004, a decrease of $4.4 million. As a percent of net sales,
selling, general and administrative expenses were 18.3% and 20.9% for the years
ended December 2005 and 2004, respectively. Selling, general and administrative
expenses were down $4.4 million (2.9% of net sales) reflecting cost savings
initiatives instituted in late 2005, including workforce reductions and related
benefits ($1.0 million), and the impact of lower unit sales volume on freight
and other incentive programs ($3.0 million).

      Asbestos-related charges in 2005 were $25.3 million, compared to $5.0
million in 2004. The Company recorded a charge of $9.9 million in the fourth
quarter of 2005 to increase its estimated recorded liability for resolving
asbestos-related claims. The recorded liability at December 31, 2005 represents
the minimum estimated cost that the Company would incur to resolve its
asbestos-related liability through the execution of the Company's proposed plan
of reorganization. If the Company is not successful in obtaining confirmation of
its proposed plan of reorganization in a timely manner, actual costs could be
significantly higher.

      The Eighth Plan also would require the Company to make contributions to
the Plan Trust comprised of approximately $7.7 million in cash, any net
recoveries in excess of the Maximum Additional Bondholder Recovery, 3.8 million
shares of newly issued Class A Common Stock and a convertible security. The
redemption value of the convertible security will be increased one year after
confirmation of the plan to the amount, if any, by which 36% of the value of the
Company's shares at that time exceeds approximately $2.7 million. No provision
has been made for the cost of this possible additional contribution of increased
redemption value, which could be material. The Company will adjust its recorded
liability should its estimates change. In addition, it is expected that the
terms of the convertible security will require the Company to make dividend or
interest payments prior to such security's redemption or maturity date.


                                       29
<PAGE>

      Loss from operations was $14.9 million for the year ended December 31,
2005 compared to income of $8.7 million for the same period in the prior year, a
decline of $23.6 million. This decline in operating income reflects the charges
for asbestos related claims taken in 2005, coupled with lower gross margins,
partially offset by reductions in operating expenses.

      Interest income was $0.4 million, which was $0.3 million higher than the
prior year reflecting higher cash balances and interest rates. Interest expense
increased from $9.4 million in 2004 to $10.4 million in 2005, primarily
reflecting the interest accrued on the unpaid interest on its Senior Notes. Due
to the Chapter 11 proceedings, the Company was precluded from making the
interest payments due February 1, 2004, August 1, 2004, February 1, 2005 and
August 1, 2005 on the Senior Notes.

      The Company recorded a tax benefit of $2.6 million on a loss before income
taxes of $24.2 million in 2005, and it also recorded a tax benefit of $2.5
million on income before taxes of $0.4 million in 2004. This relates primarily
to anticipated tax benefits associated with certain prior year expenditures for
resolving asbestos related liabilities, which the Company has determined may be
carried back but were not previously recognized.

Year ended December 31, 2004 as compared to year ended December 31, 2003

                                              2004               2003
                                            --------          ---------
                                              (In thousands of dollars)

Net sales                                   $229,493          $ 220,706
Cost of sales                                167,844            166,864
                                            --------          ---------
Gross profit                                  61,649   26.9%     53,842   24.4%
Selling, general & administrative expenses    47,925   20.9%     53,206   24.1%
Asbestos-related reorganization expenses       5,000              3,705
                                            --------          ---------
Operating income (loss)                        8,724             (3,069)
Interest expense, net                         (9,332)            (8,843)
Other income, net                              1,011              1,276
                                            --------          ---------
Income (loss) before taxes                       403            (10,636)
Provision for income taxes                    (2,545)            (3,874)
                                            --------          ---------

Net income (loss)                           $  2,948          $  (6,762)
                                            ========          =========

      Net sales for the year ended December 31, 2004 totaled $229.5 million as
compared to $220.7 million for the year ended December 31, 2003, an increase of
$8.8 million or 4%. The increase in sales resulted from the effect of selling
price increases initiated during 2004 (2.5%) and higher shipments to the
manufactured housing industry partially offset by declines in do-it-yourself
tile sales to mass merchandisers and less demand for residential sheet specials.


                                       30
<PAGE>

      Gross profit for the year ended December 31, 2004 totaled $61.6 million,
or 26.9% of net sales, compared to $53.8 million or 24.4% of net sales for the
year ended December 31, 2003. The increase in gross margins were driven by the
impact of the price increase (2.5% of net sales), improvement in product mix due
to a high-end residential sheet introduction (1.0% of net sales) coupled with
improved manufacturing efficiencies and the impact of cost reduction programs
initiated during the second half of 2003 (2.0% of net sales). These factors
helped offset sharply higher raw material costs experienced during the second
half of the year, which negatively impacted gross margins by 3.1% of net sales.
The significant raw material inflation experienced in 2004 is expected to
continue into 2005, and will reduce profit margins to the extent it cannot be
recovered through price increases.

      Selling, general and administrative expenses were $47.9 million for the
year ended December 31, 2004 as compared to $53.2 million for the year ended
December 31, 2003, a decrease of $5.3 million. As a percent of net sales,
selling, general and administrative expenses were 20.9% and 24.1% for the years
ended December 31, 2004 and 2003, respectively. The lower selling, general and
administrative expenses reflect the impact of several cost savings initiatives
instituted in the second half of 2003, including work force reductions ($2.1
million), and reduced merchandising and sampling expenses reflecting new product
launch expenses incurred in 2003 ($4.0 million). These initiatives, coupled with
further cost reduction steps taken in the fall of 2004, helped offset the
inflationary cost impact of pension / medical benefits and other incentive
programs ($2.5 million).

      The Company recorded a charge of $5.0 million during the fourth quarter of
2004 to increase its estimated recorded liability for resolving asbestos-related
claims. The recorded liability at December 31, 2004 represents the then minimum
estimated cost that the Company would incur to resolve its asbestos-related
liability through the execution of the Company's then proposed plan of
reorganization.

      Income from operations was $8.7 million for the year ended December 31,
2004 compared to a loss of $3.1 million for the same period in the prior year,
an improvement of $11.8 million. This improvement in operating income reflects
higher sales and margins coupled with reductions in operating expenses.

      Interest income was unchanged at $0.1 million for the years ended December
31, 2004 and 2003, respectively. Interest expense increased from $8.9 million in
2003 to $9.4 million in 2004, primarily reflecting the interest accrued on the
unpaid interest due on the Senior Notes. Due to the Chapter 11 proceedings, the
Company was precluded from making the interest payments due February 1, 2004 and
August 1, 2004 on the Senior Notes.

      The Company recorded a tax benefit of $2.5 million on income before taxes
of $0.4 million in 2004. This relates primarily to anticipated tax benefits
associated with certain prior year expenditures for resolving asbestos related
liabilities, which the Company has determined may be carried back but were not
previously recognized.


                                       31
<PAGE>

Liquidity and Capital Resources

      The 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
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 Consolidated Financial Statements contained
in Item 8 of this Annual Report on Form 10-K, 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 17 of the Notes to the Consolidated Financial Statements, which
are contained in Item 8 of this Annual Report on Form 10-K, for a discussion of
the Company's bankruptcy proceedings. These matters will have a material adverse
impact on liquidity and capital resources. During 2005, the Company paid $27.2
million in fees and expenses related to implementation of its planned
reorganization under Chapter 11 and litigation with certain insurance companies.
Pursuant to terms of the Eighth Plan and related documents, Congoleum is
entitled to reimbursement for certain expenses it incurs for claims processing
costs and expenses in connection with pursuit of insurance coverage. At December
31, 2005, Congoleum had $14.8 million recorded as a receivable for such
reimbursements. The amount and timing of reimbursements that will be received
will depend on when Congoleum or the Plan Trust receives funds from insurance
settlements or other sources. There can be no assurances that these
reimbursements will be received, or that the terms providing for such
reimbursements will not be modified. Congoleum expects to spend a further $19.5
million at a minimum in fees, expenses, and trust contributions in connection
with obtaining confirmation of its plan of reorganization, which amount is
recorded in its reserve for asbestos-related liabilities in addition to the $8.9
million insurance settlement being held as restricted cash. It also expects to
spend a further $11.5 million at a minimum in connection with insurance coverage
litigation costs, for which it expects to be reimbursed as discussed above.
Required expenditures could be materially higher than these estimates. The
Company currently holds $3.7 million in restricted cash that may be available to
offset future costs incurred pursuing insurance coverage, subject to approval by
the Bankruptcy Court.

      Due to the Chapter 11 proceedings, the Company has been precluded from
making interest payments on its outstanding Senior Notes since January 1, 2004.
The amount of accrued interest that is due but has not been paid on the Senior
Notes during this period is approximately $19.0 million, including interest on
the unpaid interest due. In February 2006, the Bankruptcy Court ordered a law
firm formerly representing Congoleum to disgorge all fees and certain expenses
it was paid by Congoleum. The law firm is expected to appeal from this ruling
once an order embodying the ruling has been entered by the Bankruptcy Court. It
is expected that the amount of the disgorgement will range from approximately
$8.2 million to $9.8 million. Pursuant to the terms of the Eighth Plan, holders
of the Senior Notes would forego $10 million in interest accrued during the
post-petition period and would receive the right to any funds (net of related
expenses) from the fee disgorgement and other causes of action against the law
firm and one of its service providers, subject to a maximum of $10 million plus
interest at 8.625% from the effective date of the plan until the time such
payment is made (the "Maximum Additional Bondholder Recovery"). There can be no
assurance that the Plan, which is ultimately confirmed, will provide for such
interest forgiveness. Any net recoveries in excess of the Maximum Additional
Bondholder Recovery would be paid to the Plan Trust.


                                       32
<PAGE>

      Pursuant to the terms of the Eighth Plan, Congoleum is to make a cash
contribution of approximately $7.7 million to the Plan Trust when the plan goes
effective. The Eighth Plan also provides that the maturity of the Senior Notes
will be extended by three years from August 2008 to August 2011. There can be no
assurance that the plan which is ultimately confirmed, will provide for such
maturity extension.

      As part of the Eighth Plan, Congoleum expects that it will issue a
convertible security (the "New Convertible Security") to the Plan Trust. Under
the terms of the Eighth Plan, the New Convertible Security means either shares
of preferred stock or convertible promissory notes to be issued by reorganized
Congoleum and contributed to the Plan Trust on the effective date of the Eight
Plan in satisfaction of section 524(g) of the Bankruptcy Code. If the New
Convertible Security is to be shares of preferred stock of reorganized
Congoleum, it shall have the following terms: (i) an initial liquidation
preference equal to $2,738,234.75 in the aggregate, such amount being subject to
increase in the amount, if any, by which 36% of reorganized Congoleum's market
capitalization based on average trading prices for reorganized Congoleum's Class
A common stock at the close of trading for the 90 consecutive trading days
beginning on the one year anniversary of the effective date of the plan of
reorganization, exceeds such initial liquidation preference; (ii) an initial
dividend rate equal to 9% of the liquidation preference per annum, payable
semi-annually in arrears, with such dividend rate to reset at the rate of 5% of
the liquidation preference per annum on the tenth anniversary of the effective
date of the plan of reorganization and payable at such reset dividend rate per
annum unless and until redeemed; (iii) redeemable for the liquidation preference
at the option of the Plan Trust or reorganized Congoleum following the tenth
anniversary of the effective date of the plan of reorganization; (iv) a
mandatory redemption on the fifteenth anniversary of the effective date of the
plan of reorganization if not redeemed earlier; (v) convertible into 5,700,000
shares of Class A Common Stock (or the equivalent thereof on a fully diluted
basis) upon a specified default of the obligation to pay dividends and a failure
to cure such default within any cure period, which, when combined with the 3.8
million newly issued shares of Class A Common Stock to be contributed to the
Plan Trust, will result in the Plan Trust owning 51% of the voting common shares
of reorganized Congoleum on a fully diluted basis; and (vi) no voting rights. If
the New Convertible Security is convertible promissory notes, such notes will be
on economic terms substantially equivalent to provisions (i) and (v) of the
preferred stock described herein, with other terms substantially the same as the
Promissory Note described in the Sixth Plan. Although the earliest redemption or
repayment date for the New Convertible Security does not occur until its tenth
anniversary of issuance, this obligation may affect Congoleum's ability to
obtain other sources of financing or refinance existing obligations. In
addition, it is expected that the terms of the New Convertible Security will
require the Company to make regularly scheduled dividend or interest payments
prior to such instrument's redemption or maturity date.


                                       33
<PAGE>

      Unrestricted cash and cash equivalents, including short-term investments
at December 31, 2005, were $24.5 million, a decrease of $5.2 million from
December 31, 2004. 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. Funds deposited in this account but not yet applied
to the loan balance, which amounted to $2.7 million and $1.2 million at December
31, 2005 and December 31, 2004, respectively, are recorded as restricted cash.
Additionally, $8.9 million remaining from a $14.5 million settlement received in
August 2004 from an insurance carrier, which is subject to the lien of the
Collateral Trust, is included as restricted cash at December 31, 2004. The
Company expects to contribute these funds, less any amounts withheld pursuant to
reimbursement arrangements, to the Plan Trust. Working capital was $28.0 million
at December 31, 2005, down from $35.3 million one year earlier. The ratio of
current assets to current liabilities at December 31, 2005 was 1.3 to 1.0,
compared to 1.4 to 1.0 at December 31, 2004. The ratio of debt to total capital
at December 31, 2005 was 0.48 to 1.0 compared to 0.47 to 1.0 at December 31,
2004. Net cash provided by operations during the year ended December 31, 2005
was $1.6 million, as compared to net cash provided by operations of $31.1
million in 2004. Net cash from operations decreased from 2004 to 2005 due to a
decline in operating results, lower accrued expenses and the non-recurrence of
the one time benefit realized in 2004 from the resumption of normal trade credit
which had contracted at the end of 2003.

      Capital expenditures in 2005 totaled $4.3 million. The Company is
currently planning capital expenditures of approximately $5 million in 2006 and
between $5 million and $7 million in 2007, 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
December 31, 2006 with borrowings up to $30 million. Interest is based on 0.75%
above the prime rate. This financing agreement contains certain covenants, which
include the maintenance of minimum earnings before interest, taxes, depreciation
and amortization ("EBITDA"). It 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
at December 31, 2005. Borrowings under this facility are collateralized by
inventory and receivables. At December 31, 2005, based on the level of
receivables and inventory, $16.8 million was available under the facility, of
which $4.4 million was utilized for outstanding letters of credit and $9.4
million was utilized by the revolving loan. The Company anticipates that its
debtor-in-possession financing facility will be replaced with a revolving credit
facility on substantially similar terms upon confirmation and effectiveness of
its plan of reorganization. While the Company expects the facilities discussed
above will provide it with sufficient liquidity, there can be no assurances that
it will continue to be in compliance with the required covenants, that the
Company will be able to obtain a similar or sufficient facility upon exit from
bankruptcy, or that the debtor-in-possession facility (as extended) will be
renewed prior to its expiration if the Company's plan of reorganization is not
confirmed before that time.


                                       34
<PAGE>

      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 16 to the Consolidated
Financial Statements contained in Item 8 of this Annual Report on Form 10-K).
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 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
generated $1.6 million in cash from operations in 2005 (as more fully discussed
above), which includes the benefit of $9.9 million of accrued but unpaid
interest on long-term debt. The Company believes these sources will be adequate
to fund working capital requirements, debt service payments, and planned capital
expenditures for the foreseeable future. To meet the funding obligations under
the Eighth Plan, the Company anticipates it will need to obtain the contemplated
forgiveness of $10 million of interest on the Senior Notes and obtain
reimbursement for any unreimbursed coverage litigation costs. Actual sources and
uses of funds to consummate the effectiveness of the Eighth Plan or any other
plan may differ from this description, but confirmation of any plan is dependent
on such plan demonstrating it leaves the Company with sufficient liquidity that
further reorganization will not be needed. The Company's inability to obtain
confirmation of the Eighth Plan in a timely manner would have a material adverse
effect on the Company's ability to fund its operating, investing and financing
requirements.


                                       35
<PAGE>

      The following table summarizes the Company's contractual obligations,
adjusted for terms of the Eighth Plan, for future principal and interest
payments on its debt, future minimum rental payments on its non-cancelable
operating leases, future minimum pension plans and OPEB funding and obligations
to the Plan Trust pursuant to the Eighth Plan at December 31, 2005. The Company
does not have payment obligations under capital leases or long-term purchase
contracts.

                             Payments due by Period
                            (In thousands of dollars)

<TABLE>
<CAPTION>
                                                                                                                   2011 and
                                  Total          2006          2007         2008         2009          2010       Thereafter
                              -----------------------------------------------------------------------------------------------

<S>                              <C>            <C>          <C>          <C>          <C>           <C>           <C>
Long-term debt(1)                $100,000           ---          ---          ---          ---           ---       $100,000

Interest on long-term debt(1)      59,157       $19,612      $ 8,628      $ 8,628      $ 8,628       $ 8,628          5,033

Operating leases                   11,758         2,637        2,625        2,428        2,229         1,839            ---

Pension plans funding(2)           53,591         4,848        4,923        4,993        5,132         5,285         28,410

OPEB funding(3)                     6,890           481          539          594          605           661          4,010

Contribution to Trust(4)            7,658         7,658          ---          ---          ---           ---            ---

Principal and dividends or
   interest on New
   Convertible Security to
   Plan Trust(4)                    5,198           ---          246          246          246           246          4,214
                              -----------------------------------------------------------------------------------------------
                                 $244,252       $35,236      $16,961      $16,889      $16,840       $16,659       $141,667
                              ===============================================================================================
</TABLE>

(1)   The principal and interest payments assume Congoleum's reorganization plan
      is effective as of December 31, 2006 and that $10 million of interest
      during the pendency of the reorganization is forgiven, and the maturity
      date of the Senior Note is extended by three years, as contemplated in the
      Eighth Plan.

(2)   The projected pension plans funding was actuarially determined using the
      following assumptions: i) current funding laws remain unchanged, ii) there
      are no gains or losses for 2006 and later, iii) the discount rates used
      for the projection are the same as the rates used for the pension
      valuations as of December 31, 2005 (see Note 11 of Notes to Consolidated
      Financial Statements, which are contained in Item 8 of this Annual Report
      on Form 10-K), and iv) for years after 2011, projected contributions are
      assumed to increase with inflation.

(3)   Congoleum's other post employment benefit plan is an unfunded plan.
      Funding requirements each year are assumed to approximate the expenses for
      each year (see Note 11 of Notes to Consolidated Financial Statements,
      which are contained in Item 8 of this Annual Report on Form 10-K.

(4)   Payments of cash, principal and dividends or interest to the Plan Trust
      assume Congoleum's Eighth Plan is effective December 31, 2006 and do not
      include any additional principal or dividends or interest thereon
      resulting from any adjustments to the New Convertible Security upon the
      one year anniversary of the plan effective date.


                                       36
<PAGE>

Critical Accounting Policies

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

      Critical accounting policies are defined as those that entail significant
judgments and estimates, and could potentially result in materially different
results under different assumptions and conditions. The Company believes its
most critical accounting policies upon which its financial condition depends,
and which involve the most complex or subjective decisions or assessments, are
those described below. For a discussion on the application of these and other
accounting policies, see Note 1 in the Notes to Consolidated Financial
Statements contained in Item 8 of this Annual Report on Form 10-K.

Asbestos Liabilities - As discussed in Notes 1 and 17 in the Notes to
Consolidated Financial Statements contained in Item 8 of this Annual Report on
Form 10-K, the Company is a party to a significant number of lawsuits stemming
from its manufacture of asbestos-containing products. During 2005, the Company
paid $27.2 million in fees and expenses related to implementation of its planned
reorganization under Chapter 11 of the Bankruptcy Code and litigation with
certain insurance companies. Pursuant to terms of the Eighth Plan and related
documents, Congoleum is entitled to reimbursement for certain expenses it incurs
for claims processing costs and expenses in connection with pursuit of insurance
coverage. At December 31, 2005, Congoleum had $14.8 million recorded as a
receivable for such reimbursements. The amount and timing of reimbursements that
will be received will depend on when Congoleum or the Plan Trust receives funds
from insurance settlements or other sources. There can be no assurances that
these reimbursements will be received or that the terms providing for such
reimbursements will not be modified. Congoleum expects to spend a further $19.5
million at a minimum in fees, expenses, and trust contributions in connection
with obtaining confirmation of its plan of reorganization, which amount is
recorded in its reserve for asbestos-related liabilities (in addition to the
$8.9 million insurance settlement being held as restricted cash). It also
expects to spend a further $11.5 million at a minimum in connection with
insurance coverage litigation costs, for which it expects to be reimbursed as
discussed above. The Company currently holds $3.7 million in restricted cash
that may be available to offset future costs incurred pursuing insurance
coverage, subject to approval by the Bankruptcy Court. Required expenditures
could be materially higher than these estimates.

      The Company expects that insurance will provide the substantial majority
of the recovery available to claimants, due to the amount of insurance coverage
it purchased and the comparatively limited resources and value of the Company
itself. The Company does not have the necessary financial resources to litigate
and/or settle asbestos claims in the ordinary course of business.


                                       37
<PAGE>

      In light of its bankruptcy filing and proposed plan of reorganization, the
Company believes the most meaningful measure of its probable loss due to
asbestos litigation is the amount it will have to contribute to the Plan Trust
plus the costs to effect the reorganization. The Company estimates the minimum
remaining amount of the contributions and costs to be $19.5 million, which it
has recorded as a current liability. These amounts do not include the liability
associated with a $14.5 million insurance settlement recorded as restricted
cash, which the Company expects to contribute, less any amounts withheld
pursuant to reimbursement arrangements, to the Plan Trust. At December 31, 2005
this liability (comprised of the original settlement plus interest to date, less
$6.1 million in reimbursements approved by the Bankruptcy Court) amounted to
$8.9 million and is included in current asbestos-related liabilities. The
Company is not yet able to determine the additional costs that may be required
to effect a new amended plan, and actual amounts that will be contributed to the
Plan Trust and costs for pursuing and implementing any plan of reorganization
could be materially higher.

      The Company will update its estimates, if appropriate, as additional
information becomes available during the reorganization process, which could
result in potentially material adjustments to the Company's earnings in future
periods.

      Inventories - Inventories are stated at the lower of LIFO cost or market.
The LIFO (last-in, first-out) method of determining cost is used for
substantially all inventories. The Company records as a charge to cost of goods
sold any amount required to reduce the carrying value of inventories to the net
realizable sales value.

      Valuation of Deferred Tax Assets - The Company provides for valuation
reserves against its deferred tax assets in accordance with the requirements of
Statement of Financial Accounting Standards No. 109. In evaluating the recovery
of deferred tax assets, the Company makes certain assumptions as to future
events such as the ability to generate future taxable income. At December 31,
2005, the Company has provided a 100% valuation allowance for its net deferred
tax assets.

      Environmental Contingencies - The Company has incurred liabilities related
to environmental remediation costs at both third-party sites and Company-owned
sites. Management has recorded both liabilities and insurance receivables in its
financial statements for its estimate of costs and insurance recoveries for
future remediation activities. These estimates are based on certain assumptions
such as the extent of cleanup activities to be performed, the methods employed
in the cleanup activities, the Company's relative share in costs at sites where
other parties are involved, and the ultimate insurance coverage available. These
projects tend to be long-term in nature, and these assumptions are subject to
refinement as facts change. As such, it is possible that the Company may need to
revise its recorded liabilities and receivables for environmental costs in
future periods resulting in potentially material adjustments to the Company's
earnings in future periods.


                                       38
<PAGE>

      Pension Plans and Post-Retirement Benefits - The Company accounts for its
defined benefit pension plans in accordance with SFAS No. 87, "Employers'
Accounting for Pensions," which requires that amounts recognized in financial
statements be determined on an actuarial basis. As permitted by SFAS No. 87, the
Company uses a calculated value of the expected return on plan assets (which is
further described below). Under SFAS No. 87, the effects of the actual
performance of the pension plan's assets and changes in pension liability
discount rates on the Company's computation of pension income or expense are
amortized over future periods.

      The most significant element in determining the Company's pension income
or expense in accordance with SFAS No. 87 is the expected return on plan assets.
For 2005, the Company has assumed that the expected long-term rate of return on
plan assets will be 7.0%. The assumed long-term rate of return on assets is
applied to the value of plan assets which produces the expected return on plan
assets that is included in determining pension expense. The difference between
this expected return and the actual return on plan assets is deferred. The net
deferral of past actuarial gains or losses ($23.4 million loss at December 31,
2005) will ultimately be recognized as an adjustment to future pension expense.

      At the end of each year, the Company determines the discount rate to be
used to calculate the present value of plan liabilities. The discount rate is an
estimate of the current interest rate at which the pension liabilities could be
effectively settled at the end of the year. In estimating this rate, the Company
looks to rates of return on high-quality, fixed-income investments that receive
one of the two highest ratings given by a recognized ratings agency. At December
31, 2005, the Company determined this rate to be 6.0%.

      The Company accounts for its post-retirement benefits other than pensions
in accordance with SFAS No. 106, "Employers' Accounting for Post-Retirement
Benefits Other than Pensions," which requires that amounts recognized in
financial statements be determined on a actuarial basis. These amounts are
projected based on the January 1, 2004 SFAS No. 106 valuation and the 2005
year-end disclosure assumptions, including a discount rate of 6.0% and health
care cost trend rates of 10% in 2005 reducing to an ultimate rate of 5% in 2011.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company is exposed to changes in prevailing market interest rates
affecting the return on its investments but does not consider this risk exposure
to be material to its financial condition or results of operations. The Company
invests primarily in highly liquid debt instruments with strong credit ratings
and short-term (less than one year) maturities. The carrying amount of these
investments approximates fair value due to the short-term maturities. Over 90%
of the Company's outstanding long-term debt as of December 31, 2005 consisted of
indebtedness with a fixed rate of interest which is not subject to change based
upon changes in prevailing market interest rates. Under its current policies,
the Company does not use derivative financial instruments, derivative commodity
instruments or other financial instruments to manage its exposure to changes in
interest rates, foreign currency exchange rates, commodity prices or equity
prices and does not hold any instruments for trading purposes.


                                       39
<PAGE>

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Balance Sheets
(dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                   December 31,  December 31,
                                                                                       2005          2004
-------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>          <C>
ASSETS
Current assets:
  Cash and cash equivalents .....................................................   $  24,511    $  29,710
  Restricted cash ...............................................................      11,644       15,682
  Accounts receivable, less allowances
    of $1,142 and $1,174 as of December 31, 2005 and 2004, respectively .........      17,092       17,621
  Inventories ...................................................................      34,607       39,623
  Prepaid expenses and other current assets .....................................      20,139        5,124
  Deferred income taxes .........................................................      16,735       10,678
-----------------------------------------------------------------------------------------------------------
      Total current assets ......................................................     124,728      118,438
Property, plant, and equipment, net .............................................      73,207       79,550
Other assets, net ...............................................................       9,412       14,894
-----------------------------------------------------------------------------------------------------------
      Total assets ..............................................................   $ 207,347    $ 212,882
-----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable ..............................................................   $  11,769    $  10,296
  Accrued liabilities ...........................................................      23,072       26,395
  Asbestos-related liabilities ..................................................      28,369       21,079
  Revolving credit loan .........................................................       9,404        9,500
  Accrued taxes .................................................................         107        1,670
Liabilities subject to compromise - current .....................................      23,990       14,225
-----------------------------------------------------------------------------------------------------------
     Total current liabilities ..................................................      96,711       83,165
Asbestos-related liabilities ....................................................          --        2,738
Deferred income taxes ...........................................................      16,735       10,678
Liabilities subject to compromise - long term ...................................     138,861      137,290
-----------------------------------------------------------------------------------------------------------
    Total liabilities ...........................................................     252,307      233,871
-----------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Class A common stock, par value $0.01; 20,000,000 shares authorized;
    4,736,950 shares issued and 3,662,790 shares outstanding as of
    December 31, 2005 and 4,736,950 shares issued and 3,651,590 shares
    outstanding at December 31, 2004 ............................................          47           47
Class B common stock, par value $0.01; 4,608,945 shares authorized,
    issued and outstanding at December 31, 2005 and 2004, respectively ..........          46           46
Additional paid-in capital ......................................................      49,126       49,106
Retained deficit ................................................................     (65,405)     (43,830)
Accumulated other comprehensive loss ............................................     (20,961)     (18,545)
                                                                                     --------     --------
                                                                                      (37,147)     (13,176)
Less Class A common stock held in treasury, at cost; 1,074,560 shares at
   December 31, 2005 and 1,085,760 shares at December 31, 2004 ..................       7,813        7,813
-----------------------------------------------------------------------------------------------------------
     Total stockholders' equity (deficit) .......................................     (44,960)     (20,989)
-----------------------------------------------------------------------------------------------------------
     Total liabilities and stockholders' equity (deficit) .......................   $ 207,347    $ 212,882
-----------------------------------------------------------------------------------------------------------
</TABLE>

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


                                       40
<PAGE>

Consolidated Statements of Operations
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                           For the years ended
                                                                               December 31,
                                                                      2005         2004         2003
                                                                      ----         ----         ----
-------------------------------------------------------------------------------------------------------

<S>                                                                <C>          <C>          <C>
Net sales ......................................................   $ 237,626    $ 229,493    $ 220,706
Cost of sales ..................................................     183,734      167,844      166,864
Selling, general and administrative expenses ...................      43,503       47,925       53,206
Asbestos-related reorganization charges ........................      25,326        5,000        3,705
-------------------------------------------------------------------------------------------------------

         Income (loss) from operations .........................     (14,937)       8,724       (3,069)
Other income (expense):
     Interest income ...........................................         438          114           63
     Interest expense ..........................................     (10,411)      (9,446)      (8,906)
     Other income ..............................................       1,064        1,285        1,343
     Other expense .............................................        (304)        (274)         (67)
-------------------------------------------------------------------------------------------------------

         Income (loss) before income taxes .....................     (24,150)         403      (10,636)
         Benefit for income taxes ..............................      (2,575)      (2,545)      (3,874)
-------------------------------------------------------------------------------------------------------

         Net income (loss) .....................................   $ (21,575)   $   2,948    $  (6,762)
-------------------------------------------------------------------------------------------------------

         Net income (loss) per common share
               Basic ...........................................   $   (2.61)   $    0.36    $   (0.82)
               Diluted .........................................       (2.61)        0.35        (0.82)
-------------------------------------------------------------------------------------------------------
         Weighted average number of common shares outstanding
               Basic ...........................................       8,262        8,260        8,260
               Diluted .........................................       8,262        8,498        8,260
</TABLE>

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


                                       41
<PAGE>

Consolidated Statements of Changes in Stockholders' Equity (Deficit)
(dollars in thousands)

<TABLE>
<CAPTION>
                                                                        Accumulated                  Total
                               Common Stock    Additional                  Other                 Stockholders'
                               Class  Class     Paid-in    Retained   Comprehensive   Treasury       Equity       Comprehensive
                                 A      B       Capital     Deficit        Loss        Stock       (Deficit)      Income (Loss)
-------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>    <C>      <C>       <C>           <C>           <C>          <C>             <C>
Balance, December 31, 2002 ..   $47    $46      $49,105   $(40,016)     $(17,447)     $(7,813)     $(16,078)
Minimum pension liability
  adjustment ................    --     --           --         --        (2,937)          --        (2,937)       $ (2,937)
Net loss ....................    --     --           --     (6,762)           --           --        (6,762)         (6,762)
                                                                                                                    -------
Net comprehensive loss ......                                                                                      $ (9,699)
                                                                                                                   ========
-------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 ..    47     46       49,105    (46,778)      (20,384)      (7,813)      (25,777)
Exercise of option ..........    --     --            1         --            --           --             1
Minimum pension liability
  adjustment ................    --     --           --         --         1,839           --         1,839        $  1,839
Net income ..................    --     --           --      2,948            --           --         2,948           2,948
                                                                                                                   --------
Net comprehensive income ....                                                                                      $  4,787
                                                                                                                   ========
-------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 ..    47     46       49,106    (43,830)      (18,545)      (7,813)      (20,989)
Exercise of option ..........    --     --           20         --            --           --            20
Minimum pension liability
  adjustment ................    --     --           --         --        (2,416)          --        (2,416)       $ (2,416)
Net loss ....................    --     --           --    (21,575)           --           --       (21,575)        (21,575)
                                                                                                                   --------
Net comprehensive loss ......                                                                                      $(23,991)
                                                                                                                   ========
-------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 ..   $47    $46      $49,126   $(65,405)     $(20,961)     $(7,813)     $(44,960)
</TABLE>

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


                                       42
<PAGE>

Consolidated Statements of Cash Flows
(dollars in thousands)

<TABLE>
<CAPTION>
                                                                              For the years ended
                                                                                   December 31,
---------------------------------------------------------------------------------------------------------
                                                                          2005        2004        2003
---------------------------------------------------------------------------------------------------------
<S>                                                                     <C>         <C>         <C>
Cash flows from operating activities:
     Net income (loss) ..............................................   $(21,575)   $  2,948    $ (6,762)
     Adjustments to reconcile net income (loss) to net
        cash provided by (used in) operating  activities:
              Depreciation ..........................................     10,617      10,883      11,149
              Amortization ..........................................        385         545         612
              Asbestos-related charge ...............................     25,326       5,000       3,705
              Deferred income taxes .................................         --          --        (882)
              Changes in certain assets and liabilities:
                 Accounts and notes receivable ......................        529      (4,061)      3,473
                 Inventories ........................................      5,016       5,372       5,730
                 Prepaid expenses and other current assets ..........     (3,160)      2,340       1,920
                 Accounts payable ...................................      1,473       5,752     (10,103)
                 Accrued liabilities ................................      6,393      16,142      (8,366)
                 Asbestos-related liabilities .......................    (27,220)    (10,754)    (21,233)
                 Asbestos-related expense reimbursements from
                   insurance settlement .............................      6,091          --       2,466
                 Other liabilities ..................................     (2,315)     (3,102)     (1,664)
---------------------------------------------------------------------------------------------------------
              Net cash provided by (used in)
                 operating activities ...............................      1,560      31,065     (19,955)
---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
            Capital expenditures, net ...............................     (4,274)     (3,428)     (4,628)
            Proceeds from sale of retired assets ....................         --          30          --
---------------------------------------------------------------------------------------------------------
              Net cash used in investing activities .................     (4,274)     (3,398)     (4,628)
---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
            Net short-term borrowings ...............................        (97)       (732)     10,232
            Net change in restricted cash ...........................     (2,408)        605      (1,757)
            Proceeds from exercise of options .......................         20           1          --
---------------------------------------------------------------------------------------------------------
              Net cash (used in) provided by financing activities ...     (2,485)       (126)      8,475
---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ................     (5,199)     27,541     (16,108)
Cash and cash equivalents:
            Beginning of year .......................................     29,710       2,169      18,277
---------------------------------------------------------------------------------------------------------
            End of year .............................................   $ 24,511    $ 29,710    $  2,169
---------------------------------------------------------------------------------------------------------
</TABLE>

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


                                       43
<PAGE>

Notes to Consolidated Financial Statements

1. Basis of Presentation:

      The Consolidated Financial Statements of Congoleum Corporation (the
"Company" or "Congoleum") have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. Accordingly, the financial statements do not
include any adjustments that might be necessary should 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 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 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 (the "Fourth Plan") with the Bankruptcy
Court reflecting the result of further negotiations with representatives of the
Asbestos Claimants' Committee, the Future Claimants' Representative 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 Asbestos Claimants' Committee
and the Future Claimants' Representative 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 February 2006, Congoleum filed a new amended plan of reorganization
(the "Seventh Plan"). On February 27, 2006, the Company announced its intention
to make additional changes to its plan of reorganization, and on March 17, 2006
it filed the Eighth Plan. In addition, an insurance company has filed a plan of
reorganization (the "CNA Plan") and the Official Committee of Bondholders has
also filed a plan (the "Bondholder Plan"). The Bankruptcy Court has scheduled a
hearing to consider the adequacy of the disclosure statements of these plans for
April 27, 2006.


                                       44
<PAGE>

      There can be no assurance that the Company will obtain approval to solicit
acceptances for the Eighth Plan, that the Company will receive the acceptances
necessary for confirmation of the Eighth Plan, that the Eighth Plan will not be
modified further, that the Eighth Plan will receive necessary court approvals
from the Bankruptcy Court or the Federal District Court, or that such approvals
will be received in a timely fashion, that the Eighth Plan will be confirmed, or
that the Eighth Plan, if confirmed, will become effective. It is unclear whether
the Bankruptcy Court will approve the CNA Plan or the Bondholder Plan or whether
either of such plans, if confirmed, would be feasible. Moreover, it is unclear
whether any other person will attempt to propose a plan or what any such plan
would provide or propose, and whether the Bankruptcy Court would approve a plan
other than Congoleum's proposed plan.

      Congoleum is presently involved in litigation with certain insurance
carriers related to disputed insurance coverage for asbestos related
liabilities, and certain insurance carriers filed various objections to
Congoleum's previously proposed plans of reorganization and related matters and
are expected to file objections to the Eighth Plan. Certain other parties have
also filed various objections to Congoleum's previously proposed plans of
reorganization and may file objections to the Eighth Plan.

      The Eighth Plan would resolve all pending and future asbestos claims
against the Company. The Eighth Plan provides, among other things, for an
assignment of certain rights in, and proceeds of, Congoleum's applicable
insurance to the Plan Trust that would fund the settlement of all pending and
future asbestos claims and protect the Company from future asbestos-related
litigation by channeling all asbestos claims to the Plan Trust under Section
524(g) of the Bankruptcy Code. The Eighth Plan would require Congoleum to
contribute approximately $7.7 million in cash, 3.8 million newly issued shares
of Class A Common stock, and a New Convertible Security to the Plan Trust. In
February 2006, the Bankruptcy Court ordered a law firm formerly representing
Congoleum to disgorge all fees and certain expenses it was paid by Congoleum.
The law firm is expected to appeal from this ruling once an order embodying the
ruling has been entered by the Bankruptcy Court. It is expected that the amount
of the disgorgement will range from approximately $8.2 million to $9.8 million.
Pursuant to the terms of the Eighth Plan, holders of the Company's 8-5/8% Senior
Notes due 2008 (the "Senior Notes") would forego $10 million in interest accrued
during the post-petition period and would receive the right to any funds (net of
related expenses) from the fee disgorgement and other causes of action against
the law firm and one of its service providers, subject to a maximum of $10
million plus interest at 8.625% from the effective date of the plan until the
time such payment is made (the "Maximum Additional Bondholder Recovery"). Any
net recoveries in excess of the Maximum Additional Bondholder Recovery would be
paid to the Plan Trust. The terms of the Eighth Plan also would extend the
maturity of the Senior Notes for three years from August 2008 to August 2011.
The Bankruptcy Court has authorized the Company to pay its trade creditors in
the ordinary course of business. The Company expects that it will take until
some time in the fourth quarter of 2006 at the earliest to obtain confirmation
of the Eighth Plan.


                                       45
<PAGE>

      Based on the Eighth Plan, the Company has made provision in its financial
statements for the minimum amount of the range of estimates for its contribution
to effect its plan to settle asbestos liabilities through the Plan Trust. The
Company recorded charges aggregating approximately $26 million in prior years
and a further approximately $25.3 million in 2005, to provide for the estimated
minimum costs of completing its reorganization. Actual amounts that will be
contributed to the Plan Trust and costs for pursuing and implementing the Eighth
Plan or any plan of reorganization could be materially higher than currently
recorded. Delays in proposing, filing or obtaining approval of the Eighth Plan
or any new amended plan of reorganization, or the continued pursuit of the CNA
Plan or the Bondholder Plan by the proponents of such plans, or the proposal of
additional plans by other parties could result in a proceeding that takes longer
and is more costly than the Company has estimated. The Company may record
significant additional charges should the minimum estimated cost increase.

      For more information regarding the Company's asbestos liability and plan
for resolving that liability, please refer to Note 17 of the Notes to
Consolidated Financial Statements.

      AICPA 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.

      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. Summary of Significant Accounting Policies:

Nature of Business - Congoleum manufactures resilient sheet and tile flooring
products. These products, together with a limited quantity of related products
purchased for resale, are sold primarily to wholesale distributors and major
retailers in the United States and Canada. 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.

Basis of Consolidation - The accompanying consolidated financial statements
reflect the operations, financial position and cash flows of the Company and
include the accounts of the Company and its subsidiaries after elimination of
all significant intercompany transactions in consolidation.


                                       46
<PAGE>

Use of Estimates and Critical Accounting Policies - The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Critical accounting
policies are defined as those that entail significant judgments and estimates,
and could potentially result in materially different results under different
assumptions and conditions. The Company believes that the most critical
accounting policies upon which its financial condition depends, and which
involve the most complex or subjective decisions or assessments, concern
asbestos liabilities, environmental contingencies, valuation of deferred tax
assets, and pension plan and post-retirement benefits.

      Although the Company believes it employs reasonable and appropriate
estimates and assumptions in the preparation of its financial statements and in
the application of accounting policies, if business conditions are different
than the Company has assumed they will be, or if the Company used different
estimates and assumptions, it is possible that materially different amounts
could be reported in the Company's financial statements.

Revenue Recognition - Revenue is recognized when products are shipped and title
has passed to the customer. Net sales are comprised of the total sales billed
during the period less the sales value of estimated returns and sales
incentives, which consist primarily of trade discounts and customers'
allowances. The Company defers recognition of revenue for its estimate of
potential sales returns under right-of-return agreements with its customers
until the right-of-return period lapses.

Selling, General and Administrative Expenses - Selling, general and
administrative expenses are charged to income as incurred. Expenses promoting
and selling products are classified as selling expenses and include such items
as advertising, sales commissions and travel. Advertising expense amounted to
$1.6 million, $1.8 million and $3.3 million for 2005, 2004 and 2003,
respectively. General and administrative expenses include such items as
officers' salaries, office supplies, insurance and office rental. In addition,
general and administrative expenses include other operating items such as
provision for doubtful accounts, professional (accounting and legal) fees,
purchasing and environmental remediation costs.

Cash and Cash Equivalents - All highly liquid debt instruments with a maturity
of three months or less at the time of purchase are considered to be cash
equivalents.

Restricted Cash - 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. Restricted cash represents funds deposited in this
account but not immediately applied to the loan balance. At December 31, 2005
and 2004, cash of approximately $2.7 and $1.2 million was restricted under this
financing agreement. Additionally, $8.9 million remaining from a $14.5 million
settlement received in August 2004 from an insurance carrier, which is subject
to the lien of the Collateral Trust, is included as restricted cash at December
31, 2005.


                                       47
<PAGE>

Short-Term Investments - The Company invests in highly liquid debt instruments
with strong credit ratings. Commercial paper investments with a maturity greater
than three months, but less than one year at the time of purchase, are
considered to be short-term investments. The Company maintains cash and cash
equivalents and short-term investments with certain financial institutions. The
Company performs periodic evaluations of the relative credit standing of those
financial institutions that are considered in the Company's investment strategy.

Inventories - Inventories are stated at the lower of LIFO cost or market. The
LIFO (last-in, first-out) method of determining cost is used for substantially
all inventories. The Company records as a charge to cost of goods sold any
amount required to reduce the carrying value of inventories to the net
realizable sales value.

Property, Plant, and Equipment - Property, plant, and equipment are recorded at
cost and are depreciated over their estimated useful lives (30 years for
buildings, 15 years for building improvements, production equipment and
heavy-duty vehicles, 3 to 10 years for light-duty vehicles and office
furnishings and equipment) on the straight-line method for financial reporting
and accelerated methods for income tax purposes. Costs of major additions and
betterments are capitalized; maintenance and repairs which do not improve or
extend the life of the respective assets are charged to operations as incurred.
When an asset is sold, retired or otherwise disposed of, the cost of the asset
and the related accumulated depreciation are removed from the respective
accounts and any resulting gain or loss is reflected in operations.

Debt Issue Costs - Costs incurred in connection with the issuance of debt have
been capitalized and are being amortized over the life of the related debt. Such
costs at December 31, 2005 and 2004 amounted to $0.8 million and $1.2 million,
respectively, net of accumulated amortization of $2.5 million and $2.6 million,
respectively, and are included in other non-current assets.

Environmental Remediation - The Company is subject to federal, state and local
environmental laws and regulations. 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. The recorded liabilities are
not discounted for delays in future payments (see Note 16).

Asbestos Liabilities and Plan of Reorganization - The Company is a defendant in
a large number of asbestos-related lawsuits and has filed a proposed plan of
reorganization under Chapter 11 of the United States Bankruptcy Code to resolve
this liability (see Note 17). Accounting for asbestos-related and reorganization
costs includes significant assumptions and estimates, and actual results could
differ materially from those estimates.

Income Taxes - The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109,
deferred tax assets and liabilities are recognized based on temporary
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. SFAS No. 109 requires current recognition
of net deferred tax assets to the extent that it is more likely than not that
such net assets will be realized. To the extent that the Company believes that
its net deferred tax assets will not be realized, a valuation allowance must be
recorded against those assets.


                                       48
<PAGE>

Allowance for Doubtful Accounts and Cash Discounts - The Company provides an
allowance for doubtful accounts and cash discounts based on estimates of
historical collection experience and a review of the current status of trade
accounts receivable, revising its estimates when circumstances dictate.

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 millions):

                                                         December 31,
                                                 2005        2004        2003
                                                 ----        ----        ----

Beginning balance                                $2.7       $3.1         $2.7

Accruals                                          3.7        5.0          6.8

Charges                                          (4.3)      (5.4)        (6.4)
                                                 -----      -----        -----

Ending balance                                   $2.1       $2.7         $3.1
                                                 ====       ====         ====

Shipping and Handling Costs - Shipping costs for the years ended December 31,
2005, 2004 and 2003 were $0.9 million, $1.9 million, and $1.6 million,
respectively, and are included in selling, general and administrative expenses.

Earnings Per Share - SFAS No. 128, "Earnings Per Share", requires the
computation of basic and diluted earnings per share. The calculation of basic
earnings per share is based on the average number of common shares outstanding
during the period. Diluted earnings per share reflect the effect of all
potentially diluted securities which consist of outstanding common stock
options.

Long-lived Assets - The Company periodically considers whether there has been a
permanent impairment in the value of its long-lived assets, primarily property
and equipment, in accordance with Financial Accounting Standards Board ("FASB")
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." The Company evaluates various factors, including current and projected
future operating results and the undiscounted cash flows for the
under-performing long-lived assets. The Company then compares the carrying
amount of the asset to the estimated future undiscounted cash flows expected to
result from the use of the asset. To the extent that the estimated future
undiscounted cash flows are less than the carrying amount of the asset, the
asset is written down to its estimated fair market value and an impairment loss
is recognized. The value of impaired long-lived assets is adjusted periodically
based on changes in these factors. At December 31, 2005, the Company determined,
based on its evaluation, that the carrying value of its long-lived assets was
appropriate. No adjustments to the carrying costs were made.


                                       49
<PAGE>

      Accounting for Stock-based Compensation - The Company discloses
stock-based compensation information in accordance with FASB Statement No. 148
("SFAS 148"), "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123" and FASB issued Statement
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 148
provides additional transition guidance for companies that elect to voluntarily
adopt the provisions of SFAS 123. SFAS 148 does not change the provisions of
SFAS 123 that permit entities to continue to apply the intrinsic value method of
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." The Company has elected to continue to account for its
stock-based plans under APB 25, as well as to provide disclosure of stock-based
compensation as outlined in SFAS 123 as amended by SFAS 148.

      A reconciliation of consolidated net income (loss), as reported, to pro
forma consolidated net income (loss) including compensation expense for the
Company's stock-based plans as calculated based on the fair value at the grant
dates for awards made under these plans in accordance with the provisions of
SFAS 123, as amended by SFAS 148, as well as a comparison of as reported and pro
forma basic and diluted earnings per share, follows:

                                                   For Year Ended December 31,
                                                   ---------------------------
(in thousands, except per share data)              2005       2004        2003
                                                   ----       ----        ----

Net income (loss):
     As reported                                 $(21,575)   $ 2,948    $(6,762)
     Deduct: Total stock-based employee
     compensation expense determined under
     fair value based method for all awards,
     net of related tax effects, pro forma            232        203        208
                                                 --------    -------    -------
     As adjusted                                 $(21,807)   $ 2,745    $(6,970)
                                                 ========    =======    =======

Net income (loss) per share:
     As reported-basic                           $  (2.61)   $  0.36    $ (0.82)
     Pro forma compensation expense                 (0.03)     (0.02)     (0.03)
                                                 --------    -------    -------
     As adjusted-basic                           $  (2.64)   $  0.34    $ (0.85)
                                                 ========    =======    =======

Net income (loss) per share:
     As reported-diluted                         $  (2.61)   $  0.35    $ (0.82)
     Pro forma compensation expense                 (0.03)     (0.02)     (0.03)
                                                 --------    -------    -------
     As adjusted-diluted                         $  (2.64)   $  0.33    $ (0.85)
                                                 ========    =======    =======


                                       50
<PAGE>

      The fair value for these options granted was estimated at the date of
grant using a Black-Scholes option pricing model. A summary of the assumptions
used for stock option grants are as follows:

                                                  For Year Ended December 31,
                                           -------------------------------------
                                                2005         2004          2003
                                                ----         ----          ----
                                           -------------------------------------
1995 Stock Option Plan:
      Dividend yield                            0.0%          0.0%          0.0%
      Expected volatility                      92.0%         92.0%         92.0%
      Option forfeiture rate                   10.0%         10.0%         10.0%
      Risk free interest rate                  4.86%         5.02%         3.37%
      Expected lives                       7.0 years     7.0 years     7.0 years

                                                  For Year Ended December 31,
                                           -------------------------------------
                                                2005         2004          2003
                                                ----         ----          ----
                                           -------------------------------------
1999 Stock Option Plan:
      Dividend yield                            0.0%          0.0%          0.0%
      Expected volatility                      92.0%         92.0%         92.0%
      Option forfeiture rate                   10.0%         10.0%         10.0%
      Risk free interest rate                  5.88%         2.38%         2.28%
      Expected lives                       3.0 years     3.0 years     3.0 years

A summary of the weighted average fair value of option grants are as follows:

                                                     For Year Ended December 31,
                                                    ----------------------------
                                                     2005       2004       2003
                                                     ----       ----       ----
                                                    ----------------------------

Fair value of option grants under the 1995 Plan     $5.74      $1.94      $0.36
Fair value of option grants under the 1999 Plan     $4.14      $2.60      $0.75

New Accounting Standards

      In December 2004, the FASB issued Statement No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), a revision of FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123R supersedes
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and amends FASB Statement No. 95, "Statement of Cash
Flows". The approach to quantifying stock-based compensation expense in SFAS
123R is similar to SFAS 123. However, the revised statement requires all
shared-based payments to employees, including grants of employee stock options,
to be recognized as an expense in the Consolidated Statements of Operations
based on their fair values as they are earned by the employees under the vesting
terms. Pro forma disclosure of stock option expense, as is the Company's
practice under SFAS 123, will not be permitted after 2005. The Company plans to
follow the "modified prospective" method of adoptions of SFAS 123R whereby
earnings for prior periods will not be restated as though stock based
compensation had been expensed, rather than the "modified retrospective" method
which would entail restatement of previously published earnings. The Company
will adopt SFAS 123R as required on January 1, 2006.


                                       51
<PAGE>

      As permitted by SFAS 123, the Company currently accounts for share-based
compensation to employees under the APB 25 intrinsic value method and generally
recognizes no compensation cost for employee stock options. Accordingly, the
adoption of the SFAS 123R fair value method will impact the Company's results of
operations, although it will have no impact on overall financial position. The
impact of adoption of SFAS 123R will depend on levels of share-based
compensation, particularly stock options, granted in the future and the fair
value assigned thereto. The future impact of SFAS 123R is likely to approximate
the pro forma compensation expense reported under SFAS 123 as described in the
disclosure in the pro forma net earnings and earnings per share above.

      In November 2004, the FASB issued SAS No. 151 "Inventory Costs, an
amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and spoilage. In addition, SFAS 151 requires that allocation of fixed
production overhead to the costs of conversion be based on the normal capacity
of the production facilities. The provisions of SFAS 151 are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
adoption of SFAS 151 will not have a material impact on the Company's results of
operations and financial position.

Reclassifications - Certain amounts appearing in the prior years' financial
statements have been reclassified to conform to the current year's presentation.

3. Inventories:

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

                                               December 31,       December 31,
                                                   2005               2004
--------------------------------------------------------------------------------

Finished goods                                    $25,548            $32,811
Work-in-process                                     1,497              1,415
Raw materials and supplies                          7,562              5,397
--------------------------------------------------------------------------------
Total inventories                                 $34,607            $39,623
--------------------------------------------------------------------------------

      If the FIFO (first in, first out) inventory method, which approximates
replacement cost, had been used to value these inventories, they would have been
$1,672 higher at December 31, 2005 and $591 lower at December 31, 2004. During
2005 and 2004 certain inventory quantities were reduced, which resulted in
liquidations of LIFO inventory layers. The effect of the liquidations was to
increase cost of sales by $445 in 2005 and decrease cost of sales by $108 in
2004.


                                       52
<PAGE>

4. Property, Plant, and Equipment:

      A summary of the major components of property, plant, and equipment is as
follows (in thousands):

                                                  December 31,      December 31,
                                                      2005              2004
--------------------------------------------------------------------------------

Land                                                $   2,931        $   2,930
Buildings and improvements                             46,522           46,257
Machinery and equipment                               183,595          182,162
Construction-in-progress                                4,072            1,430
--------------------------------------------------------------------------------
                                                      237,120          232,779

Less accumulated depreciation                         163,913          153,229
--------------------------------------------------------------------------------
Total property, plant,
     and equipment, net                             $  73,207        $  79,550
--------------------------------------------------------------------------------

      Interest is capitalized in connection with the construction of major
facilities and equipment. The capitalized interest is recorded as part of the
asset to which it relates and is amortized over the asset's estimated useful
life. Capitalized interest costs were $0.1 million in 2005, $0.2 million in 2004
and $0.3 million in 2003.

      The amount of approved but unexpended capital appropriations at December
31, 2005 was $1.1 million, substantially all of which is planned to be expended
during 2006.

5. Liabilities Subject to Compromise:

      As a result of the Company's Chapter 11 filing (see Notes 1 and 17),
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. In addition, the Company's accrued interest expense on
its Senior Notes is also recorded in liabilities subject to compromise.


                                       53
<PAGE>

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

                                                     December 31,   December 31,
                                                         2005           2004
--------------------------------------------------------------------------------
Current
-------
Pre-petition other payables and accrued interest        $ 23,990    $ 14,225

Non-current
-----------
Debt (at face value)                                     100,000     100,000
Pension liability                                         16,871      16,936
Other post-retirement benefit obligation                   8,407       8,303
Pre-petition other liabilities                            13,583      12,051
--------------------------------------------------------------------------------
Total liabilities subject to compromise                 $162,851    $151,515
--------------------------------------------------------------------------------

      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.

6. Accrued Liabilities:

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

                                              December 31,          December 31,
                                                  2005                  2004
--------------------------------------------------------------------------------

Accrued warranty, marketing and
      sales promotion                           $19,129               $18,487
Employee compensation and
      related benefits                            3,674                 4,735
Other                                               269                 3,173
--------------------------------------------------------------------------------
Total accrued liabilities                       $23,072               $26,395
--------------------------------------------------------------------------------

      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 December 31, 2005 (see Note 5).


                                       54
<PAGE>

7. Debt:

      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 (as amended and approved by the Bankruptcy Court
to date) provides a revolving credit facility expiring on December 31, 2006 with
borrowings up to $30 million. Interest is based on .75% above the prime rate.
This financing agreement contains certain covenants, which include the
maintenance of a minimum EBITDA. It 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
at December 31, 2005. Borrowings under this facility are collateralized by
inventory and receivables. At December 31, 2005, based on the level of
receivables and inventory, $16.8 million was available under the facility, of
which $4.4 million was utilized for outstanding letters of credit and $9.4
million was utilized by the revolving loan. The Company anticipates that its
debtor-in-possession financing facility will be replaced with a revolving credit
facility on substantially similar terms upon confirmation of its plan of
reorganization. While the Company expects the facilities discussed above will
provide it with sufficient liquidity, there can be no assurances that it will
continue to be in compliance with the required covenants, that the Company will
be able to obtain a similar or sufficient facility upon exit from bankruptcy or
that the debtor-in-possession facility (as extended) will be renewed prior to
its expiration if the Company's plan of reorganization is not confirmed before
that time.

      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. In addition, due to the Chapter 11 proceedings, the Company was precluded
from making the interest payments due February 1, 2004, August 1, 2004, February
1, 2005, August 1, 2005 and February 1, 2006, on the Senior Notes. The amount of
accrued interest that was not paid on the Senior Notes as of December 31, 2005
is approximately $17.3 million. As of December 31, 2005, the principal amount of
the Senior Notes, net of unamortized original issue discount, was $99.9 million.
These amounts, plus $1.7 million of accrued interest on the interest due but not
paid from February 1, 2004, August 1, 2004, February 1, 2005 and August 1, 2005,
are included in "Liabilities Subject to Compromise."


                                       55
<PAGE>

8. Other Liabilities:

      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 December 31, 2005 (see Note 5).

9. Research and Development Costs:

      Total research and development costs charged to operations amounted to
$4.3 million, $4.3 million and $3.1 million for the years ended December 31,
2005, 2004, and 2003, respectively.

10. Operating Lease Commitments and Rent Expense:

      The Company leases certain office facilities and equipment under leases
with varying terms. Certain leases contain rent escalation clauses. These rent
expenses are recognized on a straight-line basis over the respective term of the
lease.

      Future minimum lease payments of non-cancelable operating leases having
initial or remaining lease terms in excess of one year as of December 31, 2005
are as follows (in thousands):

Years Ending:
--------------------------------------------------------------------------------

2006                                                                $  2,637
2007                                                                   2,625
2008                                                                   2,428
2009                                                                   2,229
2010                                                                   1,839
Thereafter                                                                --
--------------------------------------------------------------------------------
Total minimum lease payments                                         $11,758
--------------------------------------------------------------------------------

      Rent expense was $3.8 million, $4.0 million and $3.7 million for the years
ended December 31, 2005, 2004 and 2003, respectively.

11. 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").


                                       56
<PAGE>

       The following summarizes the change in the benefit obligation, the change
in plan assets, the funded status, and reconciliation to the amounts recognized
in the balance sheets for the pension benefits and other benefit plans. The
measurement date for all items set forth below is the last day of the fiscal
year presented.

<TABLE>
<CAPTION>
Obligations and Funded Status:                                     At December 31,

                                                      Pension Benefits        Other Benefits
                                                      ----------------        --------------
(in thousands)                                        2005        2004       2005       2004
---------------------------------------------------------------------------------------------

<S>                                                <C>         <C>         <C>        <C>
Change in Benefit Obligation:

  Benefit obligation at beginning of year          $ 71,598    $ 73,243    $ 8,542    $ 9,177
  Service cost                                        1,280       1,293        183        170
  Interest cost                                       4,373       4,263        520        484
  Actuarial (gain) loss                               2,609      (2,736)       212       (760)
  Medicare Rx Subsidy                                    --          --         --        (74)
  Benefits paid                                      (4,615)     (4,465)      (469)      (455)
                                                   ------------------------------------------
Benefit obligation at end of year                  $ 75,245    $ 71,598    $ 8,988    $ 8,542
                                                   ------------------------------------------

Change in Plan Assets:

  Fair value of plan assets at beginning of year   $ 52,708    $ 47,404         --         --
  Actual return on plan assets                        2,791       4,015         --         --
  Employer contribution                               5,086       5,754         --         --
  Benefits paid                                      (4,615)     (4,465)        --         --
                                                   ------------------------------------------
Fair value of plan assets at end of year           $ 55,970    $ 52,708         --         --
                                                   ------------------------------------------

Funded (unfunded) status                           $(19,275)   $(18,891)   $(8,988)   $(8,542)
Unrecognized transition amount                           --         (54)        --         --
Unrecognized net actuarial loss                      23,413      21,209        118        (35)
Unrecognized prior service cost                        (140)       (427)        47       (141)
                                                   ------------------------------------------
Net amount recognized                              $  3,998    $  1,837    $(8,823)   $(8,718)
                                                   ==========================================
</TABLE>

Amounts recognized in the balance sheets consist of:

<TABLE>
<CAPTION>
                                                      Pension Benefits        Other Benefits
                                                      ----------------        --------------
(in thousands)                                        2005        2004       2005       2004
---------------------------------------------------------------------------------------------
<S>                                                <C>         <C>         <C>        <C>
Accrued benefit cost                               $(17,097)   $(16,936)   $(8,823)   $(8,718)
Intangible asset                                        134         228         --         --
Deferred tax asset                                       --          --         --         --
Accumulated other comprehensive income               20,961      18,545         --         --
                                                   ------------------------------------------
Net amount recognized                              $  3,998    $  1,837    $(8,823)  $(8,718)
                                                   ==========================================
</TABLE>

The accumulated benefit obligation for all defined benefit pension plans was
$72,841 and $69,416 at December 31, 2005 and 2004, respectively.


                                       57
<PAGE>

Information for pension plans with an accumulated benefit obligation in excess
of plan assets:

                                                              December 31,
(in thousands)                                            2005           2004
--------------------------------------------------------------------------------
Projected benefit obligation                             $75,245       $71,598
Accumulated benefit obligation                           $72,841       $69,416
Fair value of plan assets                                $55,970       $52,708

Components of Net Periodic Benefit Cost:

<TABLE>
<CAPTION>
                                                Pension Benefits              Other Benefits
                                        -----------------------------    -----------------------
(in thousands)                            2005       2004       2003      2005     2004     2003
------------------------------------------------------------------------------------------------
<S>                                     <C>        <C>        <C>        <C>      <C>      <C>
Service cost                            $ 1,280    $ 1,293    $ 1,174    $ 183    $ 170    $ 189
Interest cost                             4,373      4,263      4,223      520      484      546
Expected return on plan assets           (3,713)    (3,380)    (2,769)      --       --       --
Recognized net actuarial loss (gain)      1,328      1,447      1,595       59       49       34
Amortization of transition obligation       (54)       (72)       (72)      --       --       --
Amortization of prior service cost         (288)      (285)      (283)    (188)    (462)    (462)
                                        --------------------------------------------------------
Net periodic benefit cost               $ 2,926    $ 3,266    $ 3,868    $ 574    $ 241    $ 307
                                        ========================================================
</TABLE>

Additional Information:

<TABLE>
<CAPTION>
                                                         Pension Benefits    Other Benefits
                                                         ----------------    --------------
(in thousands)                                            2005      2004      2005     2004
------------------------------------------------------------------------------------------
<S>                                                      <C>      <C>          <C>     <C>
Increase in minimum liability included in other
comprehensive income, net of tax benefit                 $2,416   $(1,839)     N/A     N/A
</TABLE>

The weighted-average assumptions used to determine benefit obligation as of
year-end were as follows:
                                            Pension Benefits      Other Benefits
                                            ----------------      --------------
                                             2005      2004       2005     2004
--------------------------------------------------------------------------------
Discount rate                                6.00%     6.25%      6.00%    6.25%
Rate of compensation increase                5.00%     5.50%       --       --

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

<TABLE>
<CAPTION>
                                                       Pension Benefits                   Other Benefits
                                                ----------------------------        ----------------------------
                                                2005        2004        2003        2005        2004        2003
-----------------------------------------------------------------------------------------------------------------
<S>                                             <C>         <C>         <C>         <C>         <C>         <C>
Discount rate                                   6.25%       6.25%       6.25%       6.25%       6.25%       6.75%
Expected long-term return on plan Assets        7.00%       7.00%       7.00%         --          --          --
Rate of compensation increase                   5.00%       5.50%       5.00%         --          --          --
</TABLE>


                                       58
<PAGE>

      In developing the overall expected long-term return on plan assets
assumption, a building block approach was used in which rates of return in
excess of inflation were considered separately for equity securities, debt
securities, and other assets. The excess returns were weighted by the
representative target allocation and added along with an appropriate rate of
inflation to develop the overall expected long-term return on plan assets
assumption. The Company believes this determination is consistent with SFAS 87.

Assumed healthcare cost trend rates as of year-end were as follows:

                                                             December 31,
                                                        -------------------
                                                            2005     2004
                                                        -------------------

Healthcare cost trend rate assumed for next year            10.0%     9.0%
Ultimate healthcare cost trend rate                          5.0%     5.0%
Year that the assumed rate reaches ultimate rate            2011     2010

      Assumed healthcare cost trend rates have a significant effect on the
amounts reported for healthcare benefits. A one-percentage point change in
assumed healthcare cost trend rates would have the following effects:

<TABLE>
<CAPTION>
                                                          1 Percentage     1 Percentage
 (in thousands)                                          Point Increase   Point Decrease
 --------------                                          --------------   --------------

<S>                                                           <C>              <C>
Effect on total of service and interest cost components       $ 61             $ 55
Effect on post-retirement benefit obligation                  $647             $591
</TABLE>

Plan Assets:

      For the pension plans, the weighted-average asset allocation at December
31, 2005 and 2004, by asset category, are as follows:

                                                         Plan Assets at
                                                          December 31,
                                                     ----------------------
Asset Category:                                       2005            2004
                                                     ----------------------
     Equity securities                                 60%             60%
     Debt securities                                   39%             39%
     Other                                              1%              1%
                                                     ----------------------
Total                                                 100%            100%
                                                     ======================

      The Company has developed an investment strategy for the pension plans.
The investment strategy is to emphasize total return; that is, the aggregate
return from capital appreciation and dividend and interest income. The primary
objective of the investment management for the plans' assets is the emphasis on
consistent growth; specifically, growth in a manner that protects the plans'
assets from excessive volatility in market value from year to year. The
investment policy takes into consideration the benefit obligations, including
timing of distributions.

      The primary objective for the plans is to provide long-term capital
appreciation through investment in equity and debt securities. The Company's
target asset allocation is consistent with the weighted - average allocation at
December 31, 2005.


                                       59
<PAGE>

      The Company selects professional money managers whose investment policies
are consistent with the Company's investment strategy and monitors their
performance against appropriate benchmarks.

Contributions:

      The Company expects to contribute $ 4.9 million to its pension plan and $
0.5 million to its other postretirement plan in 2006.

Estimated Future Benefit Payments:

      The following benefit payments, which reflect future service as
appropriate, are expected to be paid. The benefit payments are based on the same
assumptions used to measure the Company's benefit obligation at the end of 2005.

                                                           Other Benefits
                                                             Projected
                                         Pension            Net Benefit
                   (in thousands)        Benefits            Payments
                   --------------        --------            --------

                        2006             $ 4,848             $  481
                        2007               4,923                539
                        2008               4,993                594
                        2009               5,132                605
                        2010               5,285                661
                      2011-2015           28,410              4,010

Defined Contribution Plan:

      The Company also has two 401(k) defined contribution retirement plans that
cover substantially all employees. Eligible employees may contribute up to 20%
of compensation, with partially matching Company contributions. The charge to
income relating to the Company match was $0.3 million, $0.7 million and $0.4
million for the years ended December 31, 2005, 2004 and 2003, respectively.


                                       60
<PAGE>

12. Income Taxes:

      Income taxes are comprised of the following (in thousands):

                                              For the years ended December 31,
                                            ------------------------------------
                                                2005       2004         2003
--------------------------------------------------------------------------------
Current:
     Federal                                   $(2,680)   $    39    $(3,201)
     State                                         105        183         72
Deferred:
     Federal                                       417     (3,843)      (745)
     State                                        (526)    (1,180)      (437)
     Valuation allowance                           109      2,256        437
--------------------------------------------------------------------------------
Benefit for
     income taxes                              $(2,575)   $(2,545)   $(3,874)
--------------------------------------------------------------------------------

      The following is a reconciliation of the statutory federal income tax rate
to the Company's effective tax rate expressed as a percentage of income before
income taxes:

                                                For the years ended December 31,
                                              ----------------------------------
                                                  2005       2004         2003
------------------------------------------------------------------------------

Statutory federal income tax rate                 34.0%      34.0%       34.0%
State income taxes,
     net of federal benefit                       (0.2)      30.0        (0.4)
Change in valuation allowance                       --      267.5          --
Reorganization costs                             (14.3)        --          --
Benefit of net operating loss                     (9.7)    (991.2)        3.6
Non-deductible, meal and
     entertainment expense                          --       26.1        (1.2)
Other                                              0.9        1.4         0.4
------------------------------------------------------------------------------
Effective tax rate                                10.7%    (632.2)%      36.4%
------------------------------------------------------------------------------


                                       61
<PAGE>

      Deferred taxes are recorded using enacted tax rates based upon differences
between financial statement and tax bases of assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The components of the deferred tax asset and
liability relate to the following temporary differences (in thousands):

                                                   December 31,     December 31,
                                                       2005             2004
                                                  ------------------------------
Deferred tax assets:
     Accounts receivable                              $    121         $    140
Environmental remediation and
     product-related reserves                           12,716           13,943
Postretirement benefit obligations                       3,592            3,693
Tax credit and other carryovers                          9,129            7,221
Other accruals                                           1,251              721

--------------------------------------------------------------------------------
Deferred tax asset                                      26,809           25,718
Valuation allowance                                     (4,688)          (4,577)
--------------------------------------------------------------------------------
Net deferred tax asset                                  22,121           21,141
--------------------------------------------------------------------------------
Deferred tax liability:
     Depreciation and amortization                      (9,971)         (11,876)
     Inventory                                          (1,626)          (2,521)
     Other                                             (10,524)          (6,744)
--------------------------------------------------------------------------------
Total deferred tax liability                           (22,121)        $(21,141)
--------------------------------------------------------------------------------
Net deferred tax asset                                $     --         $     --
--------------------------------------------------------------------------------

      At December 31, 2005 and 2004, the Company had available federal net
operating loss carry forwards of approximately $12.7 million and $6.6 million,
respectively, to offset future taxable income. The federal loss carry forwards
will begin to expire in 2025.

13. Supplemental Cash Flow Information:

      Cash payments for interest were $0.6 million, $0.6 million and $9.2
million for the years ended December 31, 2005, 2004 and 2003, respectively. Net
cash refunds for income taxes were $0.0 million, $1.6 million and $3.0 million
for the years ended December 31, 2005, 2004 and 2003, respectively.


                                       62
<PAGE>

14. Related Party Transactions:

      The Company and its controlling shareholder, American Biltrite Inc.
("ABI"), provide certain goods and services to each other pursuant to negotiated
agreements. The Company had the following transactions with ABI (in thousands):

                                                For the years ended December 31,
                                               ---------------------------------
                                                   2005       2004       2003
--------------------------------------------------------------------------------

Sales made to ABI                                 $   13     $   54     $   57
Sales commissions earned by ABI                      246        215         68
Raw material
     transfers to ABI                                866      1,521      1,996
Computer service
     income earned from ABI                           52         54         75
Material purchases
     from ABI                                      5,628      6,718      7,342
Indemnification
      payments made to ABI                            --         --      2,163
Management fees paid
     to ABI                                          651      1,527        608
--------------------------------------------------------------------------------

      There was nothing due from ABI on December 31, 2005, as compared to $114
thousand on December 31, 2004. Amounts as of December 31, 2005 and 2004 due to
ABI totaled $0.6 million and $1.2 million, respectively, and are included in
accounts payable and accrued expenses.

15. Major Customers:

      Substantially all the Company's sales are to select flooring distributors
and retailers located in the United States and Canada. Economic and market
conditions, as well as the individual financial condition of each customer, are
considered when establishing allowances for losses from doubtful accounts.

      Two customers, LaSalle-Bristol Corporation and Mohawk Industries, Inc.,
accounted for 28% and 39%, respectively, of the Company's net sales for the year
ended December 31, 2005, 26% and 44%, respectively, for the year ended December
31, 2004, and 24% and 41%, respectively, for the year ended December 31, 2003.
Mohawk Industries accounted for 31% and 44% of accounts receivable at December
31, 2005 and 2004, respectively, while LaSalle - Bristol Corporation accounted
for 24% and 11%, respectively, of accounts receivable at December 31, 2005 and
2004.


                                       63
<PAGE>

16. 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 $4.3 million at December 31, 2005 and $4.6 million at
December 31, 2004, are not reduced by the amount of insurance recoveries. Such
estimated insurance recoveries approximated $1.9 million at December 31, 2005
and $2.1 million at December 31, 2004, 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 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") recently selected a
remedy for the soil and shallow groundwater; however, the remedial
investigation/feasibility study related to the deep groundwater has not been
completed. The PRP group estimates that future costs of the remedy recently
selected by EPA based on engineering estimates would be approximately $11
million. Congoleum's proportionate share, based on waste disposed at the site,
is estimated to be approximately 5.7%, or $0.7 million. The majority of
Congoleum's share of costs is presently being paid by one of its insurance
carriers, whose remaining policy limits for this claim will cover approximately
half this amount. Congoleum expects the balance to be funded by other insurance
carriers and the Company.


                                       64
<PAGE>

      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 $1.6 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 $1.3 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.

17. Asbestos Liabilities:

      Claims Settlement and Chapter 11 Reorganization

      In early 2003, the Company announced a strategy for resolving current and
future asbestos claims liability through confirmation of a pre-packaged plan of
reorganization under Chapter 11 of the Bankruptcy Code. Later in 2003, the
Company entered into a settlement agreement with various asbestos personal
injury claimants (the "Claimant Agreement"). As contemplated by the Claimant
Agreement, the Company also entered into agreements establishing a pre-petition
trust (the "Collateral Trust") to distribute funds in accordance with the terms
of the Claimant Agreement and granting the Collateral Trust a security interest
in the Company's rights under its applicable insurance coverage and payments
from the Company's insurers for asbestos claims.

      The Claimant Agreement established a compensable disease valuation matrix
(the "Matrix") and allowed claimants who qualified to participate in the
Claimant Agreement (the "Qualifying Claimants") to settle their claims for the
Matrix value, secured in part (75%) by a security interest in the collateral
granted to the Collateral Trust. The Collateral Trust provides for distribution
of trust assets according to various requirements that give priority (subject to
aggregate distribution limits) to participating claimants who had pre-existing
unfunded settlement agreements ("Pre-Existing Settlement Agreements") with the
Company and participating claimants who qualified for payment under unfunded
settlement agreements entered into by the Company with plaintiffs that had
asbestos claims pending against the Company and which claims were scheduled for
trial after the effective date of the Claimant Agreement but prior to the
commencement of the Company's anticipated Chapter 11 reorganization case
("Trial-Listed Settlement Agreements").


                                       65
<PAGE>

      The Claimant Agreement incorporated Pre-Existing Settlement Agreements and
the settlement of certain Trial-Listed Settlement Agreement claims for a fully
secured claim against the Collateral Trust, and it settled all other claims for
a secured claim against the Collateral Trust equal to 75% of the claim value and
an unsecured claim for the remaining 25%. In December 2005, the Company
commenced the Avoidance Actions seeking to void the security interest granted to
the Collateral Trust and such settlements.

      Under the terms of the Eighth Plan, asbestos personal injury claimants
voting to accept the plan would irrevocably consent or would be deemed to have
irrevocably consented to the forbearance of any claim and lien rights under to
the Claimant Agreement and related agreements.

      Under the terms of the Eighth Plan, after the establishment of the Plan
Trust, the assets in the Collateral Trust would be transferred to the Plan Trust
and any claims subject to the Claimant Agreement would be channeled to the Plan
Trust and paid in accordance with the terms of the Eighth Plan.

      In October 2003, the Company began soliciting acceptances for its proposed
pre-packaged plan of reorganization and the Company received the votes necessary
for acceptance of the plan in late December 2003. On December 31, 2003,
Congoleum filed a voluntary petition with the United States Bankruptcy Court for
the District of New Jersey (Case No. 03-51524) seeking relief under Chapter 11
of the Bankruptcy Code. 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 (the "Fourth Plan") with the Bankruptcy Court reflecting the
result of further negotiations with representatives of the Asbestos Claimants'
Committee, the Future Claimants' Representative 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 Asbestos Claimants' Committee and the
Future Claimants' Representative 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.


                                       66
<PAGE>

      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
subsequently withdrew the Sixth Plan.

      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 February 2006, Congoleum filed the Seventh Plan. On
February 27, 2006, the Company announced its intention to make additional
changes to its plan of reorganization, and on March 17, 2006 it filed the Eighth
Plan. In addition, an insurance company has filed the CNA Plan and the Official
Committee of Bondholders has filed the Bondholder Plan. The Bankruptcy Court has
scheduled a hearing to consider the adequacy of the disclosure statements of
these plans for April 27, 2006.

      There can be no assurance that the Company will obtain approval to solicit
acceptances for the Eighth Plan, that the Company will receive the acceptances
necessary for confirmation of the Eighth Plan, that the Eighth Plan will not be
modified further, that the Eighth Plan will receive necessary court approvals
from the Bankruptcy Court or the Federal District Court, or that such approvals
will be received in a timely fashion, that the Eighth Plan will be confirmed, or
that the Eighth Plan, if confirmed, will become effective. It is unclear whether
the Bankruptcy Court will approve the CNA Plan or the Bondholder Plan or whether
either of such plans, if confirmed, would be feasible. Moreover, it is unclear
whether any other person will attempt to propose a plan or what any such plan
would provide or propose, and whether the Bankruptcy Court would approve a plan
other than Congoleum's proposed plan.

      Congoleum is presently involved in litigation with certain insurance
carriers related to disputed insurance coverage for asbestos related
liabilities, and certain insurance carriers filed various objections to
Congoleum's previously proposed plans of reorganization and related matters and
are expected to file objections to the Eighth Plan. Certain other parties have
also filed various objections to Congoleum's previously proposed plans of
reorganization and may file objections to the Eighth Plan.


                                       67
<PAGE>

      During 2005, the Company entered into a number of settlement agreements
with excess insurance carriers over coverage for asbestos-related claims. In May
2005, certain AIG companies agreed to pay approximately $103 million over ten
years to the Plan Trust. This settlement resolves coverage obligations of
policies with a total of $114 million in liability limits for asbestos bodily
injury claims. Payment is subject to various conditions, including without
limitation, the effectiveness of a plan of reorganization that provides AIG with
certain specified relief including a channeling injunction pursuant to Section
524(g) of the Bankruptcy Code. An insurer has appealed the approval order
granted by the Bankruptcy Court to the U.S. District Court, where it is pending.
In June 2005, the Company entered into a settlement agreement with certain
underwriters at Lloyd's, London, pursuant to which the certain underwriters paid
approximately $20 million into an escrow account in exchange for a release of
insurance coverage obligations. The escrow agent will transfer the funds to the
Plan Trust once a plan of reorganization with the Section 524(g) protection
specified in the settlement agreement goes effective and the Bankruptcy Court
approves the transfer of the funds. In August 2005, the Company entered into a
settlement agreement with Federal Insurance Company pursuant to which Federal
will pay $4 million to the Plan Trust once a plan of reorganization with the
Section 524(g) protection specified in the settlement agreement goes effective
and the Bankruptcy Court approves the transfer of the funds. The Future
Claimants' Representative has appealed the approval order granted by the
Bankruptcy Court to the U.S. District Court, where it is pending. In October
2005, Congoleum entered into a settlement agreement with Mt. McKinley Insurance
Company and Everest Reinsurance Company pursuant to which Mt. McKinley and
Everest have paid $21.5 million into an escrow account. The escrow agent will
transfer the funds to the Plan Trust once a plan goes effective and the
Bankruptcy Court approves the transfer of the funds. An insurer and the Future
Claimants' Representative have appealed the approval order granted by the
Bankruptcy Court to the U.S. District Court, where it is pending. It also is
possible that a settling insurer may argue that the Eighth Plan is not
substantially similar to the Sixth Plan and therefore is relieved of its
settlement obligation. In March 2006, Congoleum entered into a settlement
agreement with Harper Insurance Limited. Under the terms of this settlement,
Harper will pay $1.4 million to Congoleum or the Plan Trust once certain
conditions are satisfied, including the effectiveness of a plan of
reorganization containing the Section 524(g) protection specified in the
settlement agreement. A motion for Bankruptcy Court approval of this settlement
is pending.

      The Company expects that it will take until some time in the fourth
quarter of 2006 at the earliest to obtain confirmation of the Eighth Plan.

      Under the Eighth Plan, Congoleum's assignment of insurance recoveries to
the Plan Trust is net of costs incurred by Congoleum in connection with
insurance coverage litigation. Congoleum is entitled to withhold from
recoveries, or seek reimbursement from the Plan Trust, for coverage litigation
costs incurred after January 1, 2003. Congoleum also paid $1.3 million in claims
processing fees in connection with claims settled under the Claimant Agreement.
Under the Eighth Plan, Congoleum is entitled to withhold from recoveries, or
seek reimbursement from the Plan Trust, for the $1.3 million claims processing
fee. There can be no assurance that any future plan will provide for Congoleum
to recover any coverage litigation costs or claims processing fees.


                                       68
<PAGE>

      The Eighth Plan provides for the channeling of asbestos property damage
claims in addition to asbestos personal injury claims to the Plan Trust. 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. The Eighth Plan will pay
those claims in full from certain insurance proceeds.

      The Eighth Plan provides that on the effective date of the Eighth Plan,
Congoleum will issue a new security (the "New Convertible Security") in the form
of either shares of preferred stock or convertible promissory notes and
contribute it to the Plan Trust on the effective date of its plan of
reorganization in satisfaction of section 524(g) of the Bankruptcy Code. If the
New Convertible Security is to be shares of preferred stock of reorganized
Congoleum, it will have the following terms: (i) an initial liquidation
preference equal to $2,738,234.75 in the aggregate, such amount being subject to
increase in the amount (the "Market Reset Obligation"), if any, by which 36% of
reorganized Congoleum's market capitalization based on average trading prices
for reorganized Congoleum's Class A common stock at the close of trading for the
90 consecutive trading days beginning on the one year anniversary of the
effective date of its plan of reorganization, exceeds such initial liquidation
preference; (ii) an initial dividend rate equal to 9% of the liquidation
preference per annum, payable semi-annually in arrears, with such dividend rate
to reset at the rate of 5% of the liquidation preference per annum on the tenth
anniversary of such effective date and payable at such reset dividend rate per
annum unless and until redeemed; (iii) redeemable for the liquidation preference
at the option of the Plan Trust or reorganized Congoleum following the tenth
anniversary of such effective date; (iv) a mandatory redemption on the fifteenth
anniversary of such effective date if not redeemed earlier; (v) convertible into
5,700,000 shares of Class A Common Stock (or the equivalent thereof on a fully
diluted basis) upon a specified default of the obligation to pay dividends and a
failure to cure such default within any cure period, which, when combined with
the 3.8 million newly issued shares of Class A Common Stock to be contributed to
the Plan Trust, will result in the Plan Trust owning 51% of the voting common
shares of reorganized Congoleum on a fully diluted basis; and (vi) no voting
rights. If the New Convertible Security is convertible promissory notes, such
notes will be on economic terms substantially equivalent to provisions (i) and
(v) of the preferred stock described herein, with other terms substantially the
same as the Promissory Note described in the Sixth Plan.

      Under the Eighth Plan and related documents, ABI has agreed to make a cash
contribution in the amount of $250 thousand to the Plan Trust upon the formation
of the Plan Trust. Under the Eighth Plan, ABI would receive certain relief as
may be afforded under Section 524(g)(4) of the Bankruptcy Code from asbestos
claims that derive from claims made against the Company, which claims are
expected to be channeled to the Plan Trust. However, the Eighth Plan does not
provide that any other asbestos claims that may be asserted against ABI would be
channeled to the Plan Trust.


                                       69
<PAGE>

      There are sufficient risks and uncertainties related to Congoleum's
efforts to confirm a plan of reorganization such that no assurances of the
outcome can be given. In addition, the remaining costs to effect the
reorganization process, consisting principally of legal and advisory fees and
contributions to the Plan Trust, are expected to be approximately $19.5 million
at a minimum, not including any Market Reset Obligation arising from revaluation
of the New Convertible Security, and could be materially higher.

      Based on the Eighth Plan, the Company has made provision in its financial
statements for the minimum amount of the range of estimates for its contribution
to effect its plan to settle asbestos liabilities through the Plan Trust. The
Company recorded charges aggregating approximately $26 million in prior years
and a further approximately $25.3 million in 2005, to provide for the estimated
minimum costs of completing its reorganization as based on the Eighth Plan. The
Company is not yet able to determine the additional costs that may be required
to effect the Eighth Plan or any other plan, and actual amounts that will be
contributed to the Plan Trust and costs for pursuing and implementing any plan
of reorganization could be materially higher than currently recorded. Delays in
proposing, filing or obtaining approval of the Eighth Plan or any new amended
plan of reorganization, or the continued pursuit of the CNA Plan or the
Bondholder Plan by the proponents of such plans, or the proposal of additional
plans by other parties could result in a proceeding that takes longer and is
more costly than the Company has estimated. The Company may record significant
additional charges should the minimum estimated cost increase.

      Pending Asbestos Claims

      In 2003, the Company was one of many defendants in approximately 22
thousand pending lawsuits (including workers' compensation cases) involving
approximately 106 thousand individuals, alleging personal injury or death from
exposure to asbestos or asbestos-containing products. Claims involving
approximately 80 thousand individuals have been settled pursuant to the Claimant
Agreement and litigation related to unsettled or new claims is presently stayed
by the Bankruptcy Code. The Company expects unsettled and future claims to be
handled in accordance with the terms of a plan of reorganization and the Plan
Trust. In December 2005, the Company commenced the Avoidance Actions seeking to
void the security interest granted to the Collateral Trust and such settlements.

      Nearly all asbestos-related claims that have been brought against the
Company to date allege that various diseases were caused by exposure to
asbestos-containing products, including resilient sheet vinyl and tile
manufactured by the Company (or, in the workers' compensation cases, exposure to
asbestos in the course of employment with the Company). The Company discontinued
the manufacture of asbestos-containing sheet products in 1983 and
asbestos-containing tile products in 1974. In general, governmental authorities
have determined that asbestos-containing sheet and tile products are non-friable
(i.e., cannot be crumbled by hand pressure) because the asbestos was
encapsulated in the products during the manufacturing process. Thus,
governmental authorities have concluded that these products do not pose a health
risk when they are properly maintained in place or properly removed so that they
remain non-friable. The Company has issued warnings not to remove
asbestos-containing flooring by sanding or other methods that may cause the
product to become friable.


                                       70
<PAGE>

      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. 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 million in primary insurance limits plus
related defense costs before their policies were implicated. There is insurance
coverage litigation currently pending 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 ("Insurance 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. Pursuant to the terms of the Security Agreement,
the Company is obligated to pay any insurance proceeds it receives under the
Insurance Settlement, net of any fees and expenses it may be entitled to deduct,
to the Collateral Trust. Payment of such fees and expenses are subject to
Bankruptcy Court order or approval. The Company does not expect the Insurance
Settlement to have a material effect on its financial condition or results of
operations. As of December 31, 2002, the Company had entered into additional
settlement agreements with asbestos claimants exceeding the amount of previously
disputed coverage. 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 also raised various objections to the Company's previously proposed plans
of reorganization and may raise objections to any new amended plan that is
proposed.

      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 Claimant Agreement is
not fair, reasonable 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 Court denied a motion for summary judgment by the excess


                                       71
<PAGE>

insurance carriers that the Claimant Agreement was not fair, reasonable or in
good faith, ruling that material facts concerning these issues were in dispute.
In April 2004, the 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 Court entered a case management order that divided the
trial into three phases. A new judge was assigned to the case effective February
23, 2005 and the schedule was modified as a result.

      In February 2005, the Court ruled on a series of summary judgment motions
filed by various insurers. The 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 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 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.

      The first phase of the trial began on August 2, 2005 and will address all
issues and claims relating to whether the insurers are obligated to provide
coverage under the policies at issue in this litigation for the global Claimant
Agreement entered into by Congoleum, including but not limited to all issues and
claims relating to both Congoleum's decision and conduct in entering into the
Claimant Agreement and filing a pre-packaged bankruptcy and the insurance
company defendants' decisions and conduct in opposing the Claimant Agreement and
Congoleum's pre-packaged bankruptcy, the reasonableness and good faith of the
Claimant Agreement, whether the Claimant Agreement breached any insurance
policies and, if so, whether the insurance companies suffered any prejudice, and
whether the insurance companies' opposition to the Claimant Agreement and


                                       72
<PAGE>

bankruptcy and various other conduct by the insurers has breached their duties
of good faith and fair dealing such that they are precluded from asserting that
Congoleum's decision to enter into the Claimant Agreement constitutes any
breach(es) on the part of Congoleum. The Company believes, however, that even if
the insurers were to succeed in the first phase of the Coverage Action, such
result would not deprive individual claimants of the right to seek payment from
the insurers who issued the affected insurance policies. Additionally, Congoleum
could negotiate settlements with some or all of the signatories to the Claimant
Agreement and seek payment from its insurers for such settlements. Such result
would not preclude the Company from attempting to amend the Claimant Agreement
and thereafter seek recovery under the Claimant Agreement as amended; moreover,
the Company does not believe that it would be deprived of coverage-in-place
insurance for future obligations of or demands upon the insurers under the
applicable insurance policies. However, there can be no assurances of the
outcome of these matters or their potential effect on the Company's ability to
obtain approval of its plan of reorganization.

      The second phase of the trial will address all coverage issues, including
but not limited to trigger and allocation. The final phase of the trial will
address bad faith punitive damages, if appropriate.

      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 has 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.

      In October 2005, a federal appeals court ruled that the law firm of
Gilbert Heintz & Randolph, 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,
Gilbert Heintz & Randolph has filed a motion to withdraw as coverage counsel
and, 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
Gilbert Heintz & Randolph.

      In or about mid-November 2005, and in early December 2005, certain
insurers filed motions for summary judgment on the ground, inter alia, that the
decision of the United States Court of Appeals for the Third Circuit reversing
the Bankruptcy Court's order approving the retention of the Gilbert Heinz &
Randolph firm in In re Congoleum, 426 F.3d 675 (3d Cir. 2005), 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 I issues. Congoleum opposed the
motions. The motions were argued on January 10, 2006, and on March 16, 2006 the
Court denied the motion for summary judgment.

      In the meantime, the trial has proceeded with additional witnesses
appearing on behalf of Congoleum. It is anticipated that Congoleum will complete
the presentation of its case in March 2006. At that point, some or all of the
insurers have indicated that they will move for a directed verdict in their
favor.


                                       73
<PAGE>

      Some insurers contend that, if there is a ruling adverse to Congoleum in
the Coverage Litigation, then the insurers will not owe coverage for claims
resolved under the Claimant Agreement and/or under other pre-petition
settlements. Insurers further contend that such result would also deprive
individual claimants who were parties to the Claimant Agreement and other
pre-petition settlements of the right to seek payment from the insurers under
their insurance policies or from negotiating settlements with some or all of the
insurers. Insurers also contend that such result would preclude Congoleum and
claimants from agreeing to forbear under or amending the Claimant Agreement and
other pre-petition settlements and would preclude claimants from seeking
recovery under other claims payment standards, including bankruptcy Trust
Distribution Plans (TDPs), or under any amended agreements. Congoleum intends to
contest any attempt by the insurers to enlarge or expand upon a Phase 1 ruling
that is adverse to Congoleum. However, there can be no assurances of the outcome
of these matters.

      The Phase 2 trial will address all remaining coverage issues, including
but not limited to trigger and allocation. Discovery is permitted on all issues,
except for punitive damages. Pre-trial motions and trial dates for the Phase 2
and Phase 3 trials and discovery for the Phase 3 trial will be addressed by the
court after the Phase 1 trial decision.

      Given the actions of its excess insurance carriers, the Company believes
it likely that it would currently have to fund any asbestos-related expenses for
defense expense and indemnity itself. However, litigation by asbestos claimants
against the Company is stayed pursuant to the Company's bankruptcy proceedings,
and the Company does not anticipate its future expenditures for defense and
indemnity of asbestos-related claims, other than expenditures pursuant to a plan
of reorganization, will be significant.

      The Company believes that the Eighth Plan renders moot the issue of
whether the Claimant Agreement is insured, and therefore Congoleum has sought a
stay of the Coverage Action in order to facilitate a vote on the Eighth Plan and
to permit plaintiff groups with pre-petition settlements an opportunity to
forbear.

      Payments Related to Asbestos Claims

      The following table sets forth amounts paid to defend and settle claims:

                                                Year Ended        Year Ended
(in millions)                                  December 31,      December 31,
                                                   2005              2004
                                                   ----              ----

Indemnity costs paid by the Company's
      insurance carriers                        $    --           $     --

Indemnity costs paid by the Company             $    --           $     --

Defense costs paid by the Company               $    --           $    0.4

      The amounts shown in the above table do not include non-cash settlements
using assignments of insurance proceeds, which amounted to $477 million in 2003.
There were no non-cash settlements with assignment of insurance proceeds in the
years ended December 31, 2005 and 2004.


                                       74
<PAGE>

      At December 31, 2005, there were no additional settlements outstanding
that the Company had agreed to fund other than settlements pursuant to the
Claimant Agreement.

      The Company is seeking recovery from its insurance carriers of the amounts
it has paid for defense and indemnity, and intends to seek recovery for any
future payments of defense and indemnity. In light of the assignment of the
rights to its applicable insurance proceeds to the Collateral Trust and the
planned reorganization, the Company does not anticipate recovering these costs.

      Accounting for Asbestos-Related Claims

      Under the terms of the Claimant Agreement, the Company's claims processing
agent processed 79,630 claims meeting the requirements of the Claimant Agreement
with a settlement value in excess of $466 million. In addition, Pre-Existing
Settlement Agreements and Trial-Listed Settlement Agreements with claims secured
by the Collateral Trust total approximately $25 million. As a result of
tabulating ballots on its Fourth Plan, the Company is also aware of claims by
claimants whose claims were not determined under the Claimant Agreement but who
have submitted claims with a value of approximately $512 million based on the
settlement values applicable in the Sixth Plan.

      The Company's gross liability in excess of approximately $491 million for
these settlements and contingent liability for the additional approximately $512
million in unsettled claims is substantially in excess of the total assets of
the Company. The Company believes that it does not have the necessary financial
resources to litigate and/or fund judgments and/or settlements of the asbestos
claims in the ordinary course of business. Therefore, the Company believes the
most meaningful measure of its probable loss due to asbestos litigation is the
amount it will have to contribute to the Plan Trust plus the costs to effect its
reorganization under Chapter 11. At December 31, 2005, the Company estimates it
will spend a further $19.5 million at a minimum in fees, expenses, and trust
contributions in connection with obtaining confirmation of its plan of
reorganization, which amount is recorded in its reserve for asbestos-related
liabilities (in addition to the $8.9 million insurance settlement being held as
restricted cash). It also expects to spend a further $11.5 million at a minimum
in connection with insurance coverage litigation costs, for which it expects to
be reimbursed as discussed above. Required expenditures could be materially
higher than these estimates. The Company currently holds $3.7 million in
restricted cash that may be available to offset future costs incurred pursuing
insurance coverage, subject to approval by the Bankruptcy Court. Pursuant to the
terms of the Eighth Plan, holders of the Company's 8 5/8% Senior Notes would
forego $10 million in interest accrued during the post-petition period and would
receive the right to any funds (net of related expenses) from the fee
disgorgement and other causes of action against the law firm and one of its
service providers, subject to a maximum of $10 million plus interest at 8.625%
from the effective date of the plan until the time such payment is made (the
"Maximum Additional Bondholder Recovery"). In February 2006, the Bankruptcy
Court ordered a law firm formerly representing Congoleum to disgorge all fees
and certain expenses it was paid by Congoleum. The law firm is expected to
appeal from this ruling once an order embodying the rule has been entered by the
Bankruptcy Court. It is expected that the amount of the disgorgement will range
from approximately $8.2 million to $9.8 million.


                                       75
<PAGE>

      The Company recorded charges aggregating approximately $26 million in
prior years and a further approximately $25.3 million in 2005, to provide for
the estimated minimum costs of completing its reorganization. Additional charges
may be required in the future should the minimum estimated cost increase. The
maximum amount of the range of possible asbestos-related losses is limited to
the going concern or liquidation value of the Company, an amount which the
Company believes is substantially less than the minimum gross liability for the
known claims against it.

      The Company has not attempted to make an estimate of its probable
insurance recoveries for financial statement purposes given the accounting for
its estimate of future asbestos-related costs. Substantially all future
insurance recoveries have been assigned to the Collateral Trust or Plan Trust.

      Amounts Recorded in Financial Statements

      The table below provides an analysis of changes in the Company's asbestos
reserves and related receivables from December 31, 2004 to December 31, 2005:
<TABLE>
<CAPTION>

                                                                                      Spending        Recoveries
                                      Balance at                       Additions       Against           From       Balance at
(in thousands)                         12/31/04   Reclassifications   (Deletions)      Reserve        Insurance      12/31/05
                                  --------------------------------------------------------------------------------------------

<S>                                    <C>              <C>             <C>            <C>              <C>           <C>
Reserves
   Current                             $  6,550         $ 2,738         $22,964        $(12,783)            --        $ 19,469
   Long-Term                              2,738          (2,738)             --              --             --              --

Receivables
   Current                               (1,509)         (7,300)          2,362         (14,437)        $6,091         (14,793)
   Long-Term                             (7,300)          7,300              --              --             --              --

                                  --------------------------------------------------------------------------------------------
Net Asbestos
Liability                              $    479         $    --         $25,326        $(27,220)        $6,091        $  4,676
                                       ========         =======         =======        ========         ======        ========

Restricted Cash
   Insurance Proceeds                  $ 14,530         $    --         $   462        $ (6,091)        $   --        $  8,901
                                       ========         =======         =======        ========         ======        ========
</TABLE>


                                       76
<PAGE>

      The table below provides an analysis of changes in the Company's asbestos
reserves and insurance receivables from December 31, 2003 to December 31, 2004:

<TABLE>
<CAPTION>
                                                                                       Spending     Recoveries
                                   Balance at                        Additions          Against        From         Balance at
(in thousands)                      12/31/03    Reclassifications   (Deletions)         Reserve     Insurance        12/31/04
                                  --------------------------------------------------------------------------------------------

<S>                                  <C>             <C>             <C>              <C>              <C>         <C>
Reserves
    Current                          $ 9,820         $(2,738)        $ 10,222         $(10,754)        $ --        $  6,550
    Long-Term                             --           2,738               --               --           --           2,738

Receivables
    Current                           (3,587)          7,300           (5,222)              --           --          (1,509)
    Long-Term                             --          (7,300)              --               --           --          (7,300)

                                  --------------------------------------------------------------------------------------------
Net Asbestos
Liability                            $ 6,233         $    --         $  5,000         $(10,754)        $ --        $    479

Restricted Cash
   Insurance Proceeds                $    --         $    --         $ 14,530         $     --         $ --        $ 14,530
                                     =======         =======         ========         ========         ====        ========
</TABLE>

18. Stock Option Plans:

      Under the Company's 1995 Stock Option Plan, as amended (the "1995 Plan"),
options to purchase up to 800,000 shares of the Company's Class A common stock
may be issued to officers and key employees. Such options may be either
incentive stock options or nonqualified stock options, and the options' exercise
price must be at least equal to the fair value of the Company's Class A common
stock on the date of grant. All options granted under the 1995 Plan have
ten-year terms and vest over five years at the rate of 20% per year beginning on
the first anniversary of the date of grant.

      On July 1, 1999, the Company established its 1999 Stock Option Plan for
Non-Employee Directors, as amended (the "1999 Plan"), under which non-employee
directors may be granted options to purchase up to 50,000 shares of the
Company's Class A common stock. Options granted under the 1999 Plan have
ten-year terms and vest six months from the grant date.

      In December 2001, the Company offered its eligible option holders an
exchange of all options then outstanding and granted to them under the 1995 Plan
or the 1999 Plan for new stock options to be granted under those plans not
earlier than six months and one day after the date the Company canceled any
options tendered to and accepted by it pursuant to the offer to exchange. On
January 4, 2002, the Company accepted and canceled 667,500 options that had been
previously granted under the 1995 Plan and 9,500 options that had been
previously granted under the 1999 Plan that were tendered to and accepted by the
Company pursuant to the offer to exchange.

      On July 11, 2002, the Company issued 665,500 options under the 1995 Plan
and 9,500 options under the 1999 Plan at an exercise price of $2.05 per share
pursuant to the exchange. The new options granted under the 1995 Plan will
generally vest annually in equal installments over a five-year period beginning
on the first anniversary of the date of grant, and the new options granted under
the 1999 Plan will generally vest fully six months from the date of grant.


                                       77
<PAGE>

      On May 10, 2004, the Company issued 38,500 options under the 1995 Plan at
an exercise price of $1.94 per share. The new options granted under the 1995
Plan will generally vest annually in equal installments over a five-year period
beginning on the first anniversary of the date of the grant.

      On March 10, 2005, the Company issued 5,000 options under the 1995 Plan at
an exercise price of $5.74 per share. The new options granted under the 1995
Plan will generally vest annually in equal installments over a five-year period
beginning on the first anniversary of the date of the grant.

      On July 1, 2004, the Company issued 2,500 options under the 1999 Plan at
an exercise price of $2.60 per share. The new options granted under the 1999
Plan will generally vest fully six months from the date of grant.

      On July 1, 2005, the Company issued 2,500 options under the 1999 Plan at
an exercise price of $3.91 per share. The new options granted under the 1999
Plan will generally vest fully six months from the date of grant.

      On December 16, 2005, the Company issued 2,000 options under the 1999 Plan
at an exercise price of $4.42 per share. The new options granted under the 1999
Plan will generally vest fully six months from the date of grant.

A summary of the Company's 1995 Plan activity, and related information, is as
follows:

December 31, 2005:
--------------------------------------------------------------------------------
                                                               Weighted average
                                                      Shares    exercise price
--------------------------------------------------------------------------------
Options outstanding
     beginning of year                                 686,500      $1.99
Options granted                                          5,000       5.74
Options exercised                                      (11,200)      1.81
Options forfeited                                       (8,300)      1.14
                                                      --------      -----
Options outstanding end of year                        672,000      $2.03
--------------------------------------------------------------------------------
Exercisable at end of year                             383,600      $2.03
Weighted average remaining
     contractual life                                6.65 years
Stock options available
     for future issuance                               114,400
================================================================================


                                       78
<PAGE>

================================================================================
December 31, 2004:
--------------------------------------------------------------------------------
                                                                Weighted average
                                                     Shares      exercise price
--------------------------------------------------------------------------------
Options outstanding
     beginning of year                                652,500     $   1.99
Options granted                                        38,500         1.94
Options exercised                                        (400)        2.05
Options forfeited                                      (4,100)        2.05
                                                     --------     --------
Options outstanding
     end of year                                      686,500     $   1.99
--------------------------------------------------------------------------------
Exercisable at end of year                            255,600     $   2.04
Weighted average remaining
     contractual life                               7.63 years
Stock options available
     for future issuance                              111,100
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
December 31, 2003:
--------------------------------------------------------------------------------
                                                                Weighted average
                                                        Shares   exercise price
--------------------------------------------------------------------------------

Options outstanding
     beginning of year                                  678,500     $   2.09
Options granted                                          28,000         0.36
Options canceled                                             --           --
Options forfeited                                       (54,000)        2.05
                                                       --------     --------
Options outstanding end of year                         652,500     $   1.99
--------------------------------------------------------------------------------
Exercisable at end of year                              127,300     $   2.09
Weighted average remaining
     contractual life                                 8.53 years
Stock options available
  For future issuance                                   145,500
--------------------------------------------------------------------------------

      The weighted average grant date fair value of options granted under the
1995 Plan in 2005, 2004, and 2003 was $5.74, $1.94 and $0.36, respectively.


                                       79
<PAGE>

      The exercise price of options granted under the 1999 Plan and outstanding
at December 31, 2005 range from $0.75 to $4.42 per share.

      A summary of the 1999 Plan activity, and related information, is as
follows:

--------------------------------------------------------------------------------
December 31, 2005:
--------------------------------------------------------------------------------
                                                                Weighted average
                                                     Shares       Exercise price
--------------------------------------------------------------------------------
Options outstanding
     beginning of year                                17,000           $1.94
Options granted                                        4,500            4.14
Options exercised                                         --              --
Options forfeited                                         --              --
                                                     -------           -----
Options outstanding
     end of year                                      21,500           $2.40
--------------------------------------------------------------------------------
Exercisable at end of year                            17,000           $1.94
Weighted average remaining
     contractual life                               6.68 years
Stock options available for
     future issuance                                  28,500
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
December 31, 2004:                                             Weighted average
                                                       Shares   Exercise price
--------------------------------------------------------------------------------
Options outstanding
     beginning of year                                 15,500        $2.17
Options granted                                         2,500         2.60
Options exercised                                          --           --
Options forfeited                                      (1,000)        7.19
                                                      -------        -----
Options outstanding
     end of year                                       17,000        $1.94
--------------------------------------------------------------------------------
Exercisable at end of year                             14,500        $1.83
Weighted average remaining
    contractual life                                 7.96 years
Stock options available
    for future issuance                                33,000
--------------------------------------------------------------------------------



                                       80
<PAGE>

================================================================================
December 31, 2003:                                              Weighted average
                                                      Shares     Exercise price
--------------------------------------------------------------------------------
Options outstanding
     beginning of year                                13,000         $2.44
Options granted                                        2,500          0.75
Options canceled                                          --            --
Options forfeited                                         --            --
                                                      ------         -----

Options outstanding end of year                       15,500         $2.17
--------------------------------------------------------------------------------
Exercisable at end of year                            13,000         $2.44$2.54
Weighted average remaining
     contractual life                               8.49 years
Stock options available
     for future issuance                              34,500

      The weighted average grant date fair value of options granted under the
1999 Plan in 2005, 2004, and 2003 was $4.14, $2.60 and $0.75, respectively.

19. Stockholders' Equity:

      Holders of shares of the Company's Class B common stock are entitled to
two votes per share on all matters submitted to a vote of stockholders other
than certain extraordinary matters. The holders of shares of the Company's Class
A common stock are entitled to one vote per share on all matters submitted to a
vote of stockholders.

      In November 1998, the Board of Directors authorized the Company to
repurchase an additional $5.0 million of the Company's common stock (Class A and
Class B shares) through the open market or through privately negotiated
transactions, bringing the total authorized common share repurchases to $15.0
million. Under the total plan, Congoleum has repurchased shares of its common
stock at an aggregate cost of $14.0 million through December 31, 2005. No shares
were repurchased during 2005 or 2004. Shares of Class B stock repurchased
(totaling 741,055 shares) have been retired. As of December 31, 2005, American
Biltrite Inc. owned 151,100 Class A shares and 4,395,605 Class B shares that
represented an aggregate 69.4% of the voting interest of the Company.


                                       81
<PAGE>

20. Fair Value of Financial Instruments:

      The Company's cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and long-term debt are financial instruments. With
the exception of the Company's long-term debt, the carrying value of these
financial instruments approximates their fair value at December 31, 2005 and
2004. The Company's long-term debt had a book value of $99.9 million and, based
on bid prices published by the high yield research group of a major investment
bank, a fair market value of $63.5 million at December 31, 2005. The Company's
long-term debt had a book value of $99.8 million and a fair market value of
$64.0 million at December 31, 2004.

      The fair value of the Company's long-term debt is determined based on bid
prices published by the high yield research group of a major investment bank.
The fair value of the Company's other financial instruments is determined based
on discounted cash flows. Due to the short period over which the cash flows are
expected to be realized, the carrying value of the financial instruments
approximates the net present value of cash flows and changes in interest rate
assumptions would not have a material effect on the calculation.

21. Quarterly Financial Data (Unaudited):

      The following table summarizes unaudited quarterly financial information
(in thousands):

<TABLE>
<CAPTION>
                                                                 Year ended December 31, 2005
                                                    ----------------------------------------------------
                                                       First       Second         Third      Fourth
                                                      Quarter     Quarter(1)     Quarter    Quarter(2)
--------------------------------------------------------------------------------------------------------

<S>                                                    <C>         <C>            <C>       <C>
Net sales                                              $ 57,630    $ 58,108       $60,507   $ 61,381

Gross profit                                             13,661      13,770        13,237     13,224

Net income (loss)                                          (352)    (14,598)(1)       325     (6,950)(2)

Net income (loss) per common share:

       Basic                                           $  (0.04)   $  (1.77)      $  0.04   $  (0.84)

       Diluted                                            (0.04)      (1.77)         0.04      (0.84)
========================================================================================================
</TABLE>


                                       82
<PAGE>

<TABLE>
<CAPTION>
                                                               Year ended December 31, 2004
                                                    ----------------------------------------------------
                                                        First       Second    Third     Fourth
                                                       Quarter     Quarter   Quarter   Quarter(3)
--------------------------------------------------------------------------------------------------------

<S>                                                    <C>         <C>       <C>       <C>
Net sales                                              $ 52,000    $62,951   $58,871   $55,671

Gross profit                                             13,551     16,886    17,059    14,153

     Net income (loss)                                     (435)     1,360     1,153       870(3)

Net income (loss) per common share:

         Basic                                         $  (0.05)   $  0.16   $  0.14   $  0.11

         Diluted                                          (0.05)      0.16      0.13      0.10
========================================================================================================
</TABLE>

(1)   The second quarter of 2005 includes $15.5 million or $1.87 per share for
      the effect of the asbestos-related charges described in Notes 1 and 17.
(2)   The fourth quarter of 2005 includes $9.9 million or $1.19 per share for
      the effect of the asbestos-related charges described in Notes 1 and 17.
(3)   The fourth quarter of 2004 includes $5.0 million or $0.61 per share for
      the effect of the asbestos-related charges described in Notes 1 and 17.


                                       83
<PAGE>

             Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Congoleum Corporation

We have audited the accompanying consolidated balance sheets of Congoleum
Corporation (the Company) as of December 31, 2005 and 2004, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 2005. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Congoleum
Corporation at December 31, 2005 and 2004, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2005, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

The accompanying financial statements have been prepared assuming that Congoleum
Corporation will continue as a going concern. As more fully described in Note 1,
"Basis of Presentation," to the consolidated financial statements, the Company
has been and continues to be named in a significant number of lawsuits stemming
primarily from the Company's manufacture of asbestos-containing products. The
Company has recorded significant charges to earnings to reflect its estimate of
costs associated with this litigation. On December 31, 2003, Congoleum filed a
voluntary petition with the United States Bankruptcy Court for the District of
New Jersey (Case No. 03-51524) seeking relief under Chapter 11 of the United
States Bankruptcy Code, as a means to resolve claims asserted against it related
to the use of asbestos in its products decades ago. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1,
"Basis of Presentation," to the consolidated financial statements. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.

                                                   /s/ Ernst & Young LLP
Boston, Massachusetts
February 24, 2006, except Note 17, as to which the date is March 17, 2006


                                       84
<PAGE>

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
        ACCOUNTING AND FINANCIAL DISCLOSURE

      Not applicable.

Item 9A. CONTROLS AND PROCEDURES

      (a)   Evaluation of Disclosure Controls and Procedures. The Company's
            Chief Executive Officer and Chief Financial Officer have evaluated
            the effectiveness of the Company's disclosure controls and
            procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)
            under the Securities Exchange Act of 1934, as amended (the "Exchange
            Act")) as of the end of the period covered by this annual report
            (the "Evaluation Date"). Based on this evaluation, such officers
            have concluded that, as of the Evaluation Date, the Company's
            disclosure controls and procedures are effective in alerting them on
            a timely basis to material information relating to the Company
            required to be included in the Company's reports filed or submitted
            under the Exchange Act.

      (b)   Changes in Internal Control Over Financial Reporting. There have not
            been any significant changes in the Company's internal control over
            financial reporting during the last quarter covered by this annual
            report that have materially affected or are reasonably likely to
            materially affect the Company's internal control over financial
            reporting.

Item 9B. OTHER INFORMATION

      On March 17, 2006, Congoleum filed the Eighth Plan. For a description of
the Eighth Plan, see Items 1 and 1A of this Annual Report on Form 10-K and Notes
1 and 17 of the Notes to Consolidated Financial Statements contained in Item 8
of this Annual Report on Form 10-K.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information called for by this Item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be held on May 9, 2006.

Item 11. EXECUTIVE COMPENSATION

      The information called for by this Item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be held on May 9, 2006.


                                       85
<PAGE>

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT AND RELATED STOCKHOLDER MATTERS

      The information called for by this Item (except the Equity Compensation
Plan Information called for by Item 201(d) of Regulation S-K which is included
in Part II hereof) is hereby incorporated by reference to the Registrant's
definitive Proxy Statement for its Annual Meeting of Stockholders to be held on
May 10, 2005.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information called for by this Item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be held on May 9, 2006.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The information called for by this Item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be held on May 9, 2006.

PART IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A)  (1)   The following financial statements of the Company are included
           in this report on Form 10-K:

                                                                           Page
                                                                         Numbers
           Consolidated Balance Sheets at December 31, 2005 and 2004        40
           Consolidated Statements of Operations for each of the three
           years ended December 31, 2005, 2004 and 2003                     41
           Consolidated Statements of Changes in Stockholders' Equity
           (Deficit) for each of the three years ended December 31,
           2005, 2004 and 2003                                              42
           Consolidated Statements of Cash Flows for each of the three
           years ended December 31, 2005, 2004 and 2003                     43
           Notes to Consolidated Financial Statements                       44
           Supplementary Data -- Quarterly Financial Data (Unaudited)       96

     (2)   The following financial statement schedule is included in this
           report on Form 10-K:

           Schedule II - Valuation and Qualifying Accounts                  90
           All other schedules are omitted because they are not required,
           are inapplicable, or the information is otherwise shown in the
           financial statements or notes thereto.


                                       86
<PAGE>

     (3)   Exhibits

           These exhibits, required to be filed by Item 601 of Regulation S-K,
           are listed in the Exhibit Index included in this report at pages 87
           through 89.

  Exhibit
  Number              Exhibits
  ------              --------
    3.1               Amended Certificate of Incorporation of the Company.
    3.2               Amended and Restated Bylaws of the Company.
    4.1               Registration Rights Agreement, dated as of February 8,
                      1995, by and between the Company and Hillside
                      Industries Incorporated ("Hillside").
    4.2               Indenture, dated as of August 3, 1998, by and
                      between the Company and First Union National
                      Bank, as trustee.
   4.2.1              First Supplemental Indenture, dated as of March
                      28, 2003, between the Company and Wachovia Bank,
                      National Association (as successor to First Union
                      National Bank), as trustee.
   4.2.2              Second Supplemental Indenture, dated as of August
                      7, 2003, between the Company and Wachovia Bank,
                      National Association (as successor to First Union
                      National Bank), as trustee.
   4.2.3              Instrument of Resignation, Appointment and
                      Acceptance dated as of December 14, 2005 among
                      the Company, Wachovia Bank, National Association
                      and HSBC Bank USA, National Association, as
                      Successor Trustee.
   10.1               Joint Venture Agreement, dated as of December 16,
                      1992, by and among Resilient Holdings
                      Incorporated, Hillside, the Company
                      (collectively, the "Congoleum Group"), Hillside
                      Capital Incorporated ("Hillside Capital") and
                      American Biltrite.
   10.2               Closing Agreement, dated as of March 11, 1993, by and
                      among the Congoleum Group, Hillside Capital and
                      American Biltrite.
   10.3               Personal Services Agreement, dated as of March
                      11, 1993 (the "Personal Services Agreement"), by
                      and between American Biltrite and the Company.
  10.3.1              First Amendment, dated February 8, 1995, to
                      Personal Services Agreement, by and between
                      American Biltrite and the Company.
  10.3.2              Second Amendment, dated November 15, 1996, to
                      Personal Services Agreement, by and between
                      American Biltrite and the Company.
  10.3.3              Third Amendment, dated as of March 10, 1998, to
                      Personal Services Agreement, by and between
                      American Biltrite and the Company.
  10.3.4              Fourth Amendment, dated as of November 7, 2002,
                      to Personal Services Agreement, by and between
                      American Biltrite and the Company.
   10.4               Business Relations Agreement, dated as of March 11,
                      1993, by and between American Biltrite and the Company.
   10.4.1             First Amendment, dated August 19, 1997, to
                      Business Relations Agreement, by and between
                      American Biltrite and the Company.
   10.5               Tax Sharing Agreement, dated as of November 1, 1996,
                      between American Biltrite and the Company.
   10.6               Trademark Purchase Agreement, dated November 29,
                      1993, by and between the Company and The Amtico
                      Company LTD ("Amtico Company").
   10.7               First Right of Refusal, dated November 29, 1993, by and
                      between American Biltrite (Canada) Limited and Amtico
                      Company.
   10.8               Undertaking Concerning Amtico Trademark, dated November
                      29, 1993, by and between American Biltrite and Amtico
                      Company.
   10.9               Form of 1995 Stock Option Plan.


                                       87
<PAGE>

  Exhibit
  Number              Exhibits
  ------              --------
  10.9.1              Form of Amendment to 1995 Stock Option Plan.
  10.9.2              Form of Nonqualified Stock Option Award Agreement Under
                      the Congoleum 1995 Stock Option Plan.
   10.10              Congoleum Corporation 1999 Stock Option Plan for
                      Non-Employee Directors.
  10.10.1             Form of Amendment to Non-qualified, Non-employee
                      Directors Stock Option Plan.
  10.10.2             Form of Stock Option Agreement Under the Congoleum
                      Corporation 1999 Stock Option Plan for Non-Employee
                      Directors.
   10.11              Loan and Security Agreement, dated December 10, 2001
                      (the "Congress Financial Loan Agreement") by and
                      between Congress Financial Corp. (the "Lender") and the
                      Company.
  10.11.1             Amendment No. 1 to Loan and Security Agreement, dated
                      September 24, 2002, by and between Congress Financial
                      Corporation and Congoleum Corporation.
  10.11.2             Amendment No. 2 to Loan and Security Agreement, dated
                      as of February 27, 2003, by and between Congress
                      Financial Corporation and Congoleum Corporation.
  10.11.3             Ratification and Amendment Agreement dated
                      January 7, 2004, by and between the Company and
                      Congress Financial Corporation.
  10.11.4             Ratification and Amendment Agreement dated
                      December 14, 2004, by and between the Company and
                      Congress Financial Corporation.
  10.11.5             Amendment No. 4 to Ratification and Amendment Agreement
                      and Amendment No. 6 to Loan and Security Agreement.
   10.12              Settlement Agreement Between the Company and Various
                      Asbestos Claimants dated April 10, 2003.
  10.12.1             First Amendment to Settlement Agreement Between the
                      Company and Various Asbestos Claimants dated June 6,
                      2003.
   10.13              Collateral Trust Agreement, dated April 16, 2003,
                      by and between the Company, Arthur J. Pergament,
                      solely in his capacity as the Collateral Trustee
                      of the Collateral Trust, and Wilmington Trust
                      Company, solely in its capacity as Delaware
                      Trustee of the Collateral Trust.
  10.13.1             First Amendment to Collateral Trust Agreement,
                      dated June 6, 2003, by and between the Company,
                      Arthur J. Pergament, solely in his capacity as
                      the Collateral Trustee of the Collateral Trust,
                      and Wilmington Trust Company, solely in its
                      capacity as Delaware Trustee of the Collateral
                      Trust.
   10.14              Security Agreement, dated April 16, 2003, by and
                      between the Company and Arthur J. Pergament, solely in
                      his capacity as the Collateral Trustee of the
                      Collateral Trust.
  10.14.1             Second Security Agreement, dated April 17, 2003,
                      by and between the Company and Arthur J.
                      Pergament, solely in his capacity as the
                      Collateral Trustee of the Collateral Trust.
  10.14.2             Termination Agreement, dated June 6, 2003, by and
                      between the Company and Arthur J. Pergament,
                      solely in his capacity as the Collateral Trustee
                      of the Collateral Trust.
  10.14.3             Superseding Security Agreement, dated June 11,
                      2003, by and between the Company and Arthur J.
                      Pergament, solely in his capacity as the
                      Collateral Trustee of the Collateral Trust.
   12.1               Statement Regarding Computation of Ratio of Earnings to
                      Fixed Charges.
   14.1               Code of Ethics.
   21.1               Subsidiaries of the Company.
   23.1               Consent of Registered Public Accounting Firm, Ernst &
                      Young LLP.
   31.1               Certification of the Chief Executive Officer pursuant
                      to Rule 13a-14(a)/15d-14(a).


                                       88
<PAGE>

  Exhibit
  Number              Exhibits
  ------              --------
   31.2               Certification of the Chief Financial Officer pursuant
                      to Rule 13a-14(a)/15d-14(a).
   32.1               Certification of the Chief Executive Officer pursuant
                      to 18 U.S.C. Section 1350, as adopted pursuant to
                      Section 906 of the Sarbanes-Oxley Act of 2002.
   32.2               Certification of the Chief Financial Officer
                      pursuant to 18 U.S.C. Section 1350, as adopted
                      pursuant to Section 906 of the Sarbanes-Oxley Act
                      of 2002.
   99.1               Settlement Agreement and Release by and between
                      Congoleum Corporation and Liberty Mutual Insurance
                      Company.
   99.2               Settlement Agreement and Release by, between and among
                      Congoleum Corporation and certain AIG Member Companies.
   99.3               Confidential Settlement Agreement and Release among
                      Congoleum Corporation, The Plan Trust and Certain
                      Underwriters at Lloyd's, London.
   99.4               Amendment to the Confidential Settlement
                      Agreement and Release among Congoleum
                      Corporation, The Plan Trust and Certain
                      Underwriters at Lloyd's, London, dated June 22,
                      2005.
   99.5               Settlement Agreement and Release by, between and among
                      Congoleum Corporation and Federal Insurance Company.
   99.6               Confidential Settlement Agreement and Release among
                      Congoleum Corporation, the Plan Trust and Mt. McKinley
                      Insurance Company and Everest Reinsurance Company.
   99.7               Eighth Modified Joint Plan of Reorganization Under
                      Chapter 11 of the Bankruptcy Code of Congoleum
                      Corporation, et al., dated as of March 17, 2006.
   99.8               Proposed Disclosure Statement with respect to the
                      Eighth Modified Joint Plan of Reorganization Under
                      Chapter 11 of the Bankruptcy Code of Congoleum
                      Corporation, et al., dated as of March 17, 2006.


                                       89
<PAGE>

SCHEDULE II
CONGOLEUM CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

<TABLE>
<CAPTION>
                                           Balance at        Reversed to                                         Balance
                                            Beginning          Income          Other                             At end
                                            Of Period        Statement        Changes        Deductions (a)     of Period
                                            ---------        ---------        -------        --------------     ---------

<S>                                         <C>               <C>            <C>                <C>             <C>
Year ended December 31, 2005:               $(1,174)          $  --          $(169)(b)          $(137)          $(1,142)
Allowance for doubtful
     accounts and cash
     discounts

Year ended December 31, 2004:                $(1,049)          $  --          $(142)(b)          $  17           $(1,174)
Allowance for doubtful
     accounts and cash
      iscounts

Year ended December 31, 2003:                $(1,204)          $  34          $ 121(b)           $  --           $(1,049)
     Allowance for doubtful
     accounts and cash
     discounts
</TABLE>

      (a)   Balances written off, net of recoveries.
      (b)   Represents (provision) utilization of the allowance for doubtful
            accounts and cash discounts.


                                       90
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
14th day of March, 2006.

                               CONGOLEUM CORPORATION


                               By: /s/  Roger S. Marcus
                                   ---------------------------------------------
                               Roger S. Marcus
                               President, Chairman & Chief Executive Officer
                               (Principal Executive Officer)

      Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.

Signature                           Title                          Date
---------                           -----                          ----

/s/ Roger S. Marcus             President, Chairman, Chief    March 14, 2006
-------------------------       Executive Officer
Roger S. Marcus                 and Director (Principal
                                Executive Officer)

/s/ Howard N. Feist III         Chief Financial Officer       March 14, 2006
------------------------        (Principal Financial and
Howard N. Feist III             Accounting Officer)

/s/ Richard G. Marcus           Vice Chairman and Director    March 14, 2006
------------------------
Richard G. Marcus

/s/ William M. Marcus           Director                      March 14, 2006
------------------------
William M. Marcus

/s/ John N. Irwin III           Director                      March 14, 2006
------------------------
John N. Irwin III

/s/ Mark S. Newman              Director                      March 14, 2006
------------------------
Mark S. Newman

/s/ Mark N. Kaplan              Director                      March 14, 2006
------------------------
Mark N. Kaplan

/s/ C. Barnwell Straut          Director                      March 14, 2006
------------------------
C. Barnwell Straut

/s/ Jeffrey H. Coats            Director                      March 14, 2006
------------------------
Jeffrey H. Coats

/s/ Adam H. Slutsky             Director                      March 14, 2006
------------------------
Adam H. Slutsky


                                       91
<PAGE>

INDEX TO EXHIBITS
-----------------

 Exhibit
  Number             Exhibits
  ------             --------
   3.1               Amended Certificate of Incorporation of the Company. (3)
   3.2               Amended and Restated Bylaws of the Company. (3)
   4.1               Registration Rights Agreement, dated as of February 8,
                     1995, by and between the Company and Hillside Industries
                     Incorporated ("Hillside"). (2)
   4.2               Indenture, dated as of August 3, 1998, by and
                     between the Company and First Union National
                     Bank, as trustee. (4)
  4.2.1              First Supplemental Indenture, dated as of March 28,
                     2003, between the Company and Wachovia Bank, National
                     Association (as successor to First Union National Bank),
                     as trustee. (11)
  4.2.2              Second Supplemental Indenture, dated as of August 7,
                     2003, between the Company and Wachovia Bank, National
                     Association (as successor to First Union National Bank),
                     as trustee. (12)
  4.2.3              Instrument of Resignation, Appointment and
                     Acceptance dated as of December 14, 2005 among
                     the Company, Wachovia Bank, National Association
                     and HSBC Bank USA, National Association, as
                     Successor Trustee.
   10.1              Joint Venture Agreement, dated as of December 16, 1992,
                     by and among Resilient Holdings Incorporated, Hillside,
                     the Company (collectively, the "Congoleum Group"),
                     Hillside Capital Incorporated ("Hillside Capital") and
                     American Biltrite. (1)
   10.2              Closing Agreement, dated as of March 11, 1993, by and
                     among the Congoleum Group, Hillside Capital and American
                     Biltrite. (1)
   10.3              Personal Services Agreement, dated as of March 11, 1993
                     (the "Personal Services Agreement"), by and between
                     American Biltrite and the Company. (1)
  10.3.1             First Amendment, dated February 8, 1995, to Personal
                     Services Agreement, by and between American Biltrite and
                     the Company. (2)
  10.3.2             Second Amendment, dated November 15, 1996, to Personal
                     Services Agreement, by and between American Biltrite and
                     the Company. (5)
  10.3.3             Third Amendment, dated as of March 10, 1998, to Personal
                     Services Agreement, by and between American Biltrite and
                     the Company. (5)
  10.3.4             Fourth Amendment, dated as of November 7, 2002, to
                     Personal Services Agreement, by and between American
                     Biltrite and the Company. (11)
   10.4              Business Relations Agreement, dated as of March 11,
                     1993, by and between American Biltrite and the Company. (1)
  10.4.1             First Amendment, dated August 19, 1997, to Business
                     Relations Agreement, by and between American Biltrite
                     and the Company. (5)
   10.5              Tax Sharing Agreement, dated as of November 1, 1996,
                     between American Biltrite and the Company. (5)
   10.6              Trademark Purchase Agreement, dated November 29, 1993,
                     by and between the Company and The Amtico Company LTD
                     ("Amtico Company"). (2)
   10.7              First Right of Refusal, dated November 29, 1993, by and
                     between American Biltrite (Canada) Limited and Amtico
                     Company. (2)
   10.8              Undertaking Concerning Amtico Trademark, dated November
                     29, 1993, by and between American Biltrite and Amtico
                     Company. (2)
   10.9              Form of 1995 Stock Option Plan. (2)
  10.9.1             Form of Amendment to 1995 Stock Option Plan. (6)
  10.9.2             Form of Nonqualified Stock Option Award Agreement Under
                     the Congoleum 1995 Stock Option Plan.(15)


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<PAGE>

 Exhibit
  Number             Exhibits
  ------             --------
  10.10              Congoleum Corporation 1999 Stock Option Plan for
                     Non-Employee Directors. (8)
 10.10.1             Form of Amendment to Non-qualified, Non-employee
                     Directors Stock Option Plan. (9)
 10.10.2             Form of Stock Option Agreement Under the Congoleum
                     Corporation 1999 Stock Option Plan for Non-Employee
                     Directors. (15)
  10.11              Loan and Security Agreement, dated December 10, 2001
                     (the "Congress Financial Loan Agreement") by and
                     between Congress Financial Corp. (the "Lender") and the
                     Company. (9)
 10.11.1             Amendment No. 1 to Loan and Security Agreement, dated
                     September 24, 2002, by and between Congress Financial
                     Corporation and Congoleum Corporation. (10)
 10.11.2             Amendment No. 2 to Loan and Security Agreement, dated
                     as of February 27, 2003, by and between Congress
                     Financial Corporation and Congoleum Corporation. (11)
 10.11.3             Ratification and Amendment Agreement dated January 7,
                     2004, by and between the Company and Congress Financial
                     Corporation. (13)
 10.11.4             Ratification and Amendment Agreement dated December 14,
                     2004, by and between the Company and Congress Financial
                     Corporation. (14)
 10.11.5             Amendment No. 4 to Ratification and Amendment Agreement
                     and Amendment No. 6 to Loan and Security Agreement.
  10.12              Settlement Agreement Between the Company and Various
                     Asbestos Claimants dated April 10, 2003. (12)
 10.12.1             First Amendment to Settlement Agreement Between the
                     Company and Various Asbestos Claimants dated
                     June 6, 2003. (12)
  10.13              Collateral Trust Agreement, dated April 16, 2003, by
                     and between the Company, Arthur J. Pergament, solely in
                     his capacity as the Collateral Trustee of the
                     Collateral Trust, and Wilmington Trust Company, solely
                     in its capacity as  Delaware Trustee of the Collateral
                     Trust. (12)
 10.13.1             First Amendment to Collateral Trust Agreement,
                     dated June 6, 2003, by and between the Company,
                     Arthur J. Pergament, solely in his capacity as
                     the Collateral Trustee of the Collateral Trust,
                     and Wilmington Trust Company, solely in its
                     capacity as Delaware Trustee of the Collateral
                     Trust. (12)
  10.14              Security Agreement, dated April 16, 2003, by and
                     between the Company and Arthur J. Pergament, solely in
                     his capacity as the Collateral Trustee of the
                     Collateral Trust. (12)
 10.14.1             Second Security Agreement, dated April 17, 2003, by and
                     between the Company and Arthur J. Pergament, solely in
                     his capacity as the Collateral Trustee of the
                     Collateral Trust. (12)
 10.14.2             Termination Agreement, dated June 6, 2003, by and
                     between the Company and Arthur J. Pergament, solely in
                     his capacity as the Collateral Trustee of the
                     Collateral Trust. (12)
 10.14.3             Superseding Security Agreement, dated June 11, 2003, by
                     and between the Company and Arthur J. Pergament, solely
                     in his capacity as the Collateral
                     Trustee of the Collateral Trust. (12)
   12.1              Statement Regarding Computation of Ratio of Earnings to
                     Fixed Charges.
   14.1              Code of Ethics. (14)
   21.1              Subsidiaries of the Company. (7)
   23.1              Consent of Registered Public Accounting Firm, Ernst &
                     Young LLP.
   31.1              Certification of the Chief Executive Officer pursuant
                     to Rule 13a-14(a)/15d-14(a).


                                       93
<PAGE>

 Exhibit
  Number             Exhibits
  ------             --------
   31.2              Certification of the Chief Financial Officer pursuant
                     to Rule 13a-14(a)/15d-14(a).
   32.1              Certification of the Chief Executive Officer
                     pursuant to 18 U.S.C. Section 1350, as adopted
                     pursuant to Section 906 of the Sarbanes-Oxley Act
                     of 2002.
   32.2              Certification of the Chief Financial Officer
                     pursuant to 18 U.S.C. Section 1350, as adopted
                     pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   99.1              Settlement Agreement and Release by and between
                     Congoleum Corporation and Liberty Mutual Insurance
                     Company. (16)
   99.2              Settlement Agreement and Release by, between and among
                     Congoleum Corporation and certain AIG Member Companies.
                     (16)
   99.3              Confidential Settlement Agreement and Release among
                     Congoleum Corporation, The Plan Trust and Certain
                     Underwriters at Lloyd's, London. (16)
   99.4              Amendment to the Confidential Settlement Agreement and
                     Release among Congoleum Corporation, The Plan Trust and
                     Certain Underwriters at Lloyd's, London, dated June 22,
                     2005. (16)
   99.5              Settlement Agreement and Release by, between and among
                     Congoleum Corporation and Federal Insurance Company. (15)
   99.6              Confidential Settlement Agreement and Release among
                     Congoleum Corporation, the Plan Trust and Mt. McKinley
                     Insurance Company and Everest Reinsurance Company. (15)
   99.7              Eighth Modified Joint Plan of Reorganization Under
                     Chapter 11 of the Bankruptcy Code of Congoleum
                     Corporation, et al., dated as of March 17, 2006.
   99.8              Proposed Disclosure Statement with respect to the
                     Eighth Modified Joint Plan of Reorganization Under
                     Chapter 11 of the Bankruptcy Code of Congoleum
                     Corporation, et al., dated as of March 17, 2006.


                                       94
<PAGE>

(1)   Incorporated by reference to the exhibit bearing the same description
      filed with the Company's Registration Statement on Form S-1 (File No.
      33-71836) declared effective by the Securities and Exchange Commission on
      January 25, 1994.

(2)   Incorporated by reference to the exhibit bearing the same description
      filed with the Company's Registration Statement on Form S-1 (File No.
      33-87282) declared effective by the Securities and Exchange Commission on
      February 1, 1995.

(3)   Incorporated by reference to the exhibit bearing the same description
      filed with the Company's Quarterly Report on Form 10-Q (File No.
      001-13612) for the period ended June 30, 1996.

(4)   Incorporated by reference to the exhibit bearing the same description
      filed with the Company's Quarterly Report on Form 10-Q (File No.
      001-13612) for the period ended June 30, 1998.

(5)   Incorporated by reference to the exhibit bearing the same description
      filed with the Company's Annual Report on Form 10-K (File No. 001-13612)
      for the period ended December 31, 1997.

(6)   Incorporated by reference to the exhibit bearing the same description
      filed with the Company's Annual Report on Form 10-K (File No. 001-13612)
      for the period ended December 31, 1996.

(7)   Incorporated by reference to the exhibit bearing the same description
      filed with the Company's Annual Report on Form 10-K (File No. 001-13612)
      for the period ended December 31, 1998.

(8)   Incorporated by reference to the exhibit bearing the same description
      filed with the Company's Registration Statement on Form S-8 (File No.
      333-84387) declared effective by the Securities and Exchange Commission on
      August 3, 1999.

(9)   Incorporated by reference to the exhibit bearing the same description
      filed with the Company's Annual Report on Form 10-K (File No. 001-13612)
      for the period ended December 31, 2001.

(10)  Incorporated by reference to the exhibit bearing the same description
      filed with the Company's Quarterly Report on Form 10-Q (File No.
      001-13612) for the period ended September 30, 2002.

(11)  Incorporated by reference to the exhibit bearing the same description
      filed with the Company's Annual Report on Form 10-K (File No. 001-13612)
      for the period ended December 31, 2002.

(12)  Incorporated by reference to the exhibit bearing the same description
      filed with the Company's Quarterly Report on Form 10-Q (File No.
      001-13612) for the period ended June 30, 2003.

(13)  Incorporated by reference to the exhibit bearing the same description
      filed with the Company's Annual Report on Form 10-K (File No. 001-13612)
      for the period ended December 31, 2003.

(14)  Incorporated by reference to the exhibit bearing the same description
      filed with the Company's Annual Report on Form 10-K (File No. 001-13612)
      for the period ended December 31, 2004.

(15)  Incorporated by reference to the exhibit bearing the same description
      filed with the Company's Quarterly Report on Form 10-Q (File No.
      001-13612) for the period ended September 30, 2005.

(16)  Incorporated by reference to the exhibit bearing the same description
      filed with the Company's Quarterly Report on Form 10-Q (File No.
      001-13612) for the period ended June 30, 2005.


                                       95