================================================================================

Congoleum Corporation
Selected Financial Data
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                          For the years ended                    For the ten
                                                             December 31,                       months ended
                                                                                                December 31,
                                           1997       1996(a)        1995(a)        1994(a)        1993 (a)
------------------------------------------------------------------------------------------------------------
<S>                                      <C>         <C>            <C>            <C>            <C>
   
Income Statement Data:
Net sales ............................   $252,526    $269,451       $263,147       $265,784       $211,140
Cost of sales ........................    180,093     182,585        186,382        175,059        143,461
Selling, general and
    administrative expenses ..........     57,094      61,597         55,228         56,315         44,043
    

------------------------------------------------------------------------------------------------------------
Income from operations ...............     15,339      25,269         21,537         34,410         23,636
Interest expense, net ................     (5,258)     (6,369)        (6,708)        (6,968)        (5,341)
Other income (expense), net ..........        974       1,095          1,135          1,184           (562)

------------------------------------------------------------------------------------------------------------
Income before taxes
    and extraordinary item ...........     11,055      19,995         15,964         28,626         17,733
Provision for income
    taxes ............................      4,035       7,898          6,529         11,131          6,561

------------------------------------------------------------------------------------------------------------
Income before
    extraordinary item ...............      7,020      12,097          9,435         17,495         11,172
Extraordinary item ...................       (279)         --             --             --             --

------------------------------------------------------------------------------------------------------------
Net income ...........................   $  6,741    $ 12,097       $  9,435       $ 17,495       $ 11,172
============================================================================================================
Net income per common share (b) ......   $    .69    $   1.21       $    .94       $   1.75       $    .98
Average shares outstanding ...........      9,839      10,007         10,022         10,000         11,447

Balance Sheet Data (at end of period):
Total assets .........................   $196,581    $219,798       $206,842       $204,822       $175,546
Total debt ...........................     76,594      87,750         90,000         90,000         61,423
Stockholders' equity .................     31,783      33,667         22,602         19,410          9,017
</TABLE>

(a)   Prior years (1993-1996) cost of sales and selling, general and
      administrative expenses have been reclassified to conform with the 1997
      presentation.
(b)   Net income per common share has been computed and restated to conform to
      Statement of Financial Accounting Standards, ("SFAS") No. 128. Due to the
      immaterial impact of common stock equivalents, there is no difference
      between basic and diluted net income per common share, except for the
      period ended 1993, in which, basic and diluted net income per share is
      $1.12 and $.98, respectively.


                                        6
<PAGE>

Congoleum Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================

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.

Year Ended December 31, 1997 as Compared to Year Ended December 31, 1996

      Net sales for the year ended December 31, 1997 were $252.5 million as
compared to $269.5 million for the year ended December 31, 1996, a decrease of
$17.0 million or 6.3%. The decline in sales was due to a number of factors.
These were reduced sales volume of higher priced sheet goods, an inventory
reduction by the Company's largest distributor, lower average selling prices for
certain products, and a decline in shipments to Color Tile, Inc., a major
retailer which ceased operations in mid-1997. In addition, the Company's largest
production line was shut down for refurbishment for four months, which limited
its ability to pursue certain sales initiatives.

      Gross profit for the year ended December 31, 1997 was $72.4 million, or
28.7% of sales, compared to $86.9 million, or 32.2% of sales for the previous
year, a decline of $14.5 million or 16.7%. The decline in gross profit was due
to higher raw material costs, a less profitable mix of products sold, and
manufacturing inefficiencies experienced preparing for the shutdown of a major
production line.

      Selling, general and administrative expenses were $57.1 million for the
year ended December 31, 1997 as compared to $61.6 million for the year ended
December 31, 1996, a decline of $4.5 million, or 7.3%. This decrease was due to
declines in sales-related costs and incentive compensation, combined with an
overall program of cost control. As a percent of sales, selling, general and
administrative expenses declined to 22.6% in 1997 from 22.9% in 1996.

      Income from operations was $15.3 million (6.1% of sales) for the year
ended December 31, 1997, down from $25.3 million (9.4% of sales) for 1996, a
decrease of 39.5%. This decline reflects the lower sales and gross profit,
partly offset by reduced selling, general and administrative expenses discussed
above.

      Interest expense decreased from $8.2 million in 1996 to $6.8 million in
1997 as a result of lower average debt outstanding and a greater amount of
interest capitalized in connection with capital expenditures. The provision for
income taxes declined from 39.5% of income before income taxes in 1996 to 36.5%
of income before income taxes in 1997 as a result of the lower income level,
which reduced the average effective statutory rate, and lower effective state
income tax rates.

      The Company recorded an extraordinary charge of $0.3 million or $.03 per
share in 1997 for premiums and writeoff of deferred financing costs in
connection with the open market purchase of $11.2 million of its 9% Senior
Notes.

      Net income for the year ended December 31, 1997 was $6.7 million, down
44.3% from $12.1 million in 1996. Net income per share in 1997 was $.69, down
from $1.21 in 1996.

Year Ended December 31, 1996 as Compared to Year Ended December 31, 1995

      Net sales for the year ended December 31, 1996 were $269.5 million as
compared to $263.1 million for the year ended December 31, 1995, an increase of
$6.3 million or 2.4%. Sales were higher in 1996 due to new customers, increased
demand from the manufactured housing industry and a 2-3% price increase.
Partially offsetting this was a decline in purchases by Color Tile, Inc.

      Gross profit for the year ended December 31, 1996 was $86.9 million, or
32.3% of sales, compared to $76.8 million, or 29.2% of sales for the previous
year, an increase of $10.1 million, or 13.2%. The improvement in gross profit
during 1996 was due to lower raw material costs, increased sales and pricing,


                                        7
<PAGE>

Congoleum Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
================================================================================

and improved manufacturing productivity.

      Selling, general and administrative expenses amounted to $61.6 million for
the year ended December 31, 1996, compared to $55.2 million for 1995, an
increase of $6.4 million or 11.6%. Higher spending on marketing and new product
development programs, together with costs associated with establishing new
distribution in Canada, were the primary contributors to the increase, which was
partially offset by lower bad debt expense in 1996. As a percent of sales,
selling, general and administrative expenses amounted to 22.9% for the year
ended December 31, 1996, compared to 21.0% for 1995.

      Income from operations was $25.3 million (9.4% of net sales) for the year
ended December 31, 1996, up from $21.5 million (8.2% of net sales) for 1995, an
increase of $3.8 million (17.7%). The improvement in operating income during
1996 was the result of higher sales and gross profit margins, net of the
increase in selling, general and administrative costs.

      Interest income increased from $1.5 million in 1995 to $1.8 million in
1996 due to higher average cash and short-term investment balances during the
year ended December 31, 1996. The provision for income taxes declined from 40.9%
of income before income taxes for 1995 to 39.5% for 1996 as a result of lower
effective state income tax rates.

      Net income for the year ended December 31, 1996 was $12.1 million,
compared to net income of $9.4 million for 1995, an increase of $2.7 million or
28.7%.

Liquidity and Capital Resources

      On February 8, 1995, the Company completed a public offering of 4,650,000
shares of a new series of Class A Common Stock (the Class A shares) for $13 per
share (the "Offering") and implemented a Plan of Repurchase (see Notes 1 and 17
of Notes to Financial Statements). The Company's capital stock outstanding
immediately prior to the consummation of the merger contemplated in the Plan of
Repurchase was converted in the merger into 10,000,000 shares of a new series of
Class B Common Stock (the Class B shares). The net proceeds of approximately
$55.2 million after deducting fees, together with approximately $5.2 million of
other funds of the Company, were used to repurchase 4,650,000 Class B shares
held by Hillside Capital Incorporated ("Hillside"). As a result, the cash and
stockholders' equity of the Company immediately following the Offering was
approximately $5.2 million lower than it was immediately prior to the Offering.

      The Company's revolving credit facility provides for borrowings up to $30
million with interest at 1% over prime, or 2 3/4% over LIBOR. This financing
agreement contains certain covenants which include the maintenance of minimum
net worth and restrictions on the incurrence of additional debt. Borrowings
under this facility are collateralized by inventory, receivables and documents
of title. At December 31, 1997, the Company had unused borrowing availability
under the amended revolving credit facility of $26.6 million.

      Cash and equivalents, including short-term investments at December 31,
1997, were $19.0 million, a decrease of $29.2 million from December 31, 1996.
Working capital was $39.0 million, down from $62.0 million one year earlier. The
ratio of current assets to current liabilities at December 31, 1997 was 1.9 to
one, compared to 2.1 to one a year earlier. The ratio of debt to total capital
at December 31, 1997 was .39, compared to .40 at December 31, 1996. Net cash
provided by operations during the year ended December 31, 1997 was $11.0
million, down from $23.1 million in 1996. Capital expenditures in 1997 totaled
$19.8 million. The Company is currently planning capital expenditures of $15
million to $20 million in 1998 and $20 million to $25 million in 1999.

      During 1997, the Company repurchased 959,700 shares of its Common Stock
for an aggregate cost of $9.5 million. The Company also purchased $11.2 million
par value of its 9% Senior Notes. The Company may repurchase an additional $6.6
million par value of its 9% Senior Notes pursuant to an existing authorization.
The Company's Board of Directors may change this authorization, or authorize
additional purchases of the Company's Common Stock, in the future.

      The Company has completed an assessment of the steps it believes will be
necessary for its existing and planned data processing systems to operate
properly when confronted with dates beginning in the year 2000. A plan has been
developed which identifies the systems affected and the steps that will be
required to assure year 2000 compliance. The Company's existing plans to improve
operations by replacing or upgrading systems in the ordinary course of business
during 1998


                                        8
<PAGE>

Congoleum Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
================================================================================

and 1999 will have the additional benefit of providing year 2000 compliance in
many instances. The resources required to make the remaining systems compliant
have been estimated, and are being provided by a combination of existing
employees and outside contractors. The Company has retained or believes it will
be able to retain the necessary employees and outside resources to accomplish
this, and that the cost to achieve compliance will not be material to the
Company's financial position, liquidity or results of operations. However, if
any governmental agencies, key customers or key suppliers are unable to make the
necessary computer systems changes on a timely basis, such inability could
negatively impact the Company's results of operations.

      Collective bargaining agreements with hourly employees at two of the
Company's facilities will expire in 1998. In the past five years, there have
been no significant strikes by employees at the Company, and the Company
believes that its employee relations are satisfactory.

      The Company has recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities, including provisions
for testing for potential remediation of conditions at its own facilities. While
the Company believes its estimate of the future amount of these liabilities is
reasonable, that such amounts will not have a material adverse impact on the
Company's financial position, 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 could have a material adverse
effect on its financial position. There can be no assurances that the costs of
any future government regulations could be passed along to its customers.

      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, asbestos-related
claims, and general liability claims (more fully discussed in "Legal
Proceedings" in Part I Item 3. and "Environmental Regulation" in Part I Item 1.
of the Company's 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, environmental and asbestos-related contingencies.

      The Company records a liability for environmental remediation,
asbestos-related claim costs, and general liability claims when a cleanup
program or claim payment becomes probable and the costs can be reasonably
estimated. As assessments and cleanups progress, these liabilities are adjusted
based upon progress in determining the timing and extent of remedial actions and
the related costs and damages. The extent and amounts of the liabilities can
change substantially due to factors such as the nature or extent of
contamination, changes in remedial requirements and technological improvements.
Estimated insurance recoveries related to these liabilities are reflected in
other noncurrent assets (see Note 16 of Notes to Financial Statements).

      Although the outcome of these matters could result in significant expenses
or judgments, management does not believe based on present facts and
circumstances that their disposition will have a material adverse effect on the
financial position the Company.

      The Company's principal sources of capital are net cash provided by
operating activities and borrowings under its Amended and Restated Financing
Agreement. The Company believes these sources will be adequate to fund working
capital requirements, debt service payments and planned capital expenditures
through the foreseeable future.


                                        9
<PAGE>

Congoleum Corporation
Balance Sheets
(dollars in thousands, except share amounts)
================================================================================

<TABLE>
<CAPTION>
                                                                                          December 31,    December 31,
                                                                                              1997            1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>              <C>
ASSETS
Current assets:
   Cash and cash equivalents ........................................................     $  11,069        $  30,629
   Short-term investments ...........................................................         7,900           17,500
   Accounts and notes receivable, less allowance for doubtful accounts and cash
     discounts of $3,294 and $3,406 as of December 31, 1997 and 1996, respectively...        14,512           17,728
   Inventories ......................................................................        44,434           47,450
   Prepaid expenses and other current assets ........................................         2,965            2,172
   Deferred income taxes ............................................................         3,041            2,874
----------------------------------------------------------------------------------------------------------------------
     Total current assets ...........................................................        83,921          118,353
Property, plant, and equipment, net .................................................        88,401           78,313
Goodwill, net .......................................................................        12,251           12,683
Deferred income taxes ...............................................................         2,636            3,068
Other noncurrent assets .............................................................         9,372            7,381
----------------------------------------------------------------------------------------------------------------------
     Total assets ...................................................................     $ 196,581        $ 219,798
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:
   Accounts payable .................................................................     $  13,440        $  19,935
   Accrued liabilities ..............................................................        28,793           32,828
   Accrued income taxes .............................................................           918            1,663
   Deferred income taxes ............................................................         1,752            1,924
----------------------------------------------------------------------------------------------------------------------
     Total current liabilities ......................................................        44,903           56,350
Long-term debt ......................................................................        76,594           87,750
Other liabilities ...................................................................        22,305           19,401
Noncurrent pension liability ........................................................        11,038           12,381
Accrued postretirement benefit obligation ...........................................         9,958           10,249
----------------------------------------------------------------------------------------------------------------------
     Total liabilities ..............................................................       164,798          186,131
----------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Class A common stock, par value $0.01; 20,000,000 shares authorized; 4,650,000
   shares issued; 4,282,800 and 4,645,500
   outstanding as of December 31, 1997 and 1996, respectively .......................            47               47
Class B common stock, par value $0.01; 4,755,000 and 5,350,000 shares authorized,
   issued and outstanding as of December 31, 1997 and 1996, respectively ............            47               53
Additional paid-in capital ..........................................................        49,574           55,172
Retained deficit ....................................................................       (12,820)         (19,561)
Minimum pension liability adjustment ................................................        (1,122)          (1,995)
Common stock held in treasury, at cost; 375,200 shares and 4,500 shares at
   December 31, 1997 and 1996, respectively .........................................        (3,943)             (49)
----------------------------------------------------------------------------------------------------------------------
     Total stockholders' equity .....................................................        31,783           33,667
----------------------------------------------------------------------------------------------------------------------
     Total liabilities and stockholders' equity .....................................     $ 196,581        $ 219,798
======================================================================================================================
</TABLE>

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


                                       10
<PAGE>

Congoleum Corporation
Statements of Operations
(in thousands, except per share amounts)
================================================================================

<TABLE>
<CAPTION>
                                                                              For the years ended
                                                                                  December 31,
                                                                     -----------------------------------
                                                                        1997         1996         1995
--------------------------------------------------------------------------------------------------------
<S>                                                                  <C>          <C>          <C>
Net sales ....................................................       $ 252,526    $ 269,451    $ 263,147
Cost of sales ................................................         180,093      182,585      186,382
Selling, general and administrative expenses .................          57,094       61,597       55,228
--------------------------------------------------------------------------------------------------------
       Income from operations ................................          15,339       25,269       21,537
Other income (expense):
   Interest income ...........................................           1,539        1,784        1,479
   Interest expense ..........................................          (6,797)      (8,153)      (8,187)
   Other income ..............................................           1,287        1,436        1,407
   Other expense .............................................            (313)        (341)        (272)
--------------------------------------------------------------------------------------------------------
       Income before income taxes and extraordinary item .....          11,055       19,995       15,964
   Provision for income taxes ................................           4,035        7,898        6,529
========================================================================================================
       Income before extraordinary item ......................       $   7,020    $  12,097    $   9,435
       Extraordinary item-early retirement of debt,
             net of income tax benefit .......................            (279)          --           --
--------------------------------------------------------------------------------------------------------
       Net income ............................................       $   6,741    $  12,097    $   9,435
========================================================================================================
       Net income per common share before extraordinary item..       $     .72    $    1.21    $     .94
       Extraordinary item ....................................            (.03)          --           --
--------------------------------------------------------------------------------------------------------
             Net income per common share, basic and diluted...       $     .69    $    1.21    $     .94
========================================================================================================
       Weighted average number of common and
             equivalent shares outstanding ...................           9,839       10,007       10,022
========================================================================================================
</TABLE>

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


                                       11
<PAGE>

Congoleum Corporation
Statements of Changes in Stockholders' Equity
(dollars in thousands, except share amounts)
================================================================================

<TABLE>
<CAPTION>
                                                                                           Accumulated
                                         Common Stock                                         Other
                                        par value $0.01        Additional                 Comprehensive
                                       -----------------         Paid-in      Retained     Income/(Loss)    Treasury
                                     Class A       Class B       Capital       Deficit      Adjustment*       Stock          Total
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>             <C>        <C>          <C>             <C>            <C>            <C>
Balance, December 31, 1994 ........   $   --          $100       $55,570      $(36,260)       $    --        $    --        $19,410
Initial public offering of
   4,650,000 shares of Class A
   common stock ...................       47                      55,172                                                     55,219
Repurchase and retirement of
   4,650,000 shares of Class B
   common stock ...................                    (47)      (55,570)       (4,833)                                     (60,450)
Minimum pension liability
   adjustment, net of tax benefit..                                                            (1,012)                       (1,012)
Net income ........................                                              9,435                                        9,435
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 ........       47            53        55,172       (31,658)        (1,012)                       22,602
Purchase of treasury stock ........                                                                              (49)           (49)
Minimum pension liability
   adjustment, net of tax benefit..                                                              (983)                         (983)
Net income ........................                                             12,097                                       12,097
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 ........       47            53        55,172       (19,561)        (1,995)           (49)        33,667
Purchase of treasury stock ........                                                                           (3,894)        (3,894)
Purchase and retirement of
   Class B stock ..................                     (6)       (5,624)                                                    (5,630)
Exercise of stock options .........                                   26                                                         26
Minimum pension liability
   adjustment, net of tax .........                                                               873                           873
Net income ........................                                              6,741                                        6,741
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 ........      $47           $47       $49,574      $(12,820)       $(1,122)       $(3,943)       $31,783
===================================================================================================================================
</TABLE>

*Entire amount relates to minimum pension liability adjustment.

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


                                       12
<PAGE>

Congoleum Corporation
Statements of Cash Flows
(dollars in thousands)
================================================================================

<TABLE>
<CAPTION>
                                                                              For the years ended
                                                                                   December 31,
                                                                     ----------------------------------
                                                                          1997        1996        1995
-------------------------------------------------------------------------------------------------------
<S>                                                                   <C>         <C>         <C>
Cash flows from operating activities:
   Net income .....................................................   $  6,741    $ 12,097    $  9,435
   Adjustments to reconcile net income to net
      cash provided (used) by operating activities:
         Depreciation .............................................      9,102       8,696       7,593
         Amortization and writeoff of deferred refinancing fees ...      1,244       1,087       1,025
         Provision for doubtful accounts ..........................         --         600       2,800
         Deferred income taxes ....................................         93         994       1,107
         Loss on disposition of assets ............................        331          16          94
         Changes in certain assets and liabilities:
              Accounts and notes receivable .......................      3,216      (3,897)     (1,362)
              Inventories .........................................      3,016         568      (1,124)
              Prepaid expenses and other current assets ...........     (1,294)       1026        (506)
              Accounts payable ....................................     (6,495)     (1,151)       (350)
              Accrued liabilities .................................     (4,781)      4,200      (1,422)
              Other liabilities ...................................       (156)     (1,094)       (596)
-------------------------------------------------------------------------------------------------------
                 Net cash provided by operating activities ........     11,017      23,142      16,694
-------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
   Proceed from sale of property, plant and equipment .............        244          --          --
   Capital expenditures ...........................................    (19,767)    (12,817)    (10,178)
   Purchase of short-term investments .............................    (40,200)    (45,000)    (12,500)
   Maturities of short-term investments ...........................     49,800      27,500      36,500
-------------------------------------------------------------------------------------------------------
                 Net cash provided (used) by investing activities..     (9,923)    (30,317)     13,822
-------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
   Exercise of stock options ......................................         26          --          --
   Payments to reduce long-term debt ..............................    (11,156)     (2,250)         --
   Equity offering cost ...........................................         --          --      (1,000)
   Proceeds from equity offering ..................................         --          --      56,219
   Purchase and retirement of Class B stock .......................     (5,630)         --     (60,450)
   Purchase of treasury stock .....................................     (3,894)        (49)         --
-------------------------------------------------------------------------------------------------------
                 Net cash used by financing activities ............    (20,654)     (2,299)     (5,231)
-------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash ...................................    (19,560)     (9,474)     25,285
Cash and cash equivalents:
   Beginning of year ..............................................     30,629      40,103      14,818
-------------------------------------------------------------------------------------------------------
   End of year ....................................................   $ 11,069    $ 30,629    $ 40,103
=======================================================================================================
</TABLE>

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


                                       13
<PAGE>

Congoleum Corporation
Notes to Financial Statements
(dollars in thousands, except per share amounts)
================================================================================

1. Summary of Significant
Accounting Policies:

Nature of Business and Basis of Presentation - Congoleum Corporation (the
"Company" or "Congoleum") manufactures and sells resilient sheet and tile
flooring products primarily to wholesale distributors and major retailers in the
United States and Canada. Prior to the closing of a public offering in February
1995 (the "Offering" - Note 17), the Company was an indirect subsidiary of
Congoleum Holdings Incorporated ("Holdings"), which was controlled jointly by
Hillside Industries Incorporated ("Hillside") and American Biltrite Inc.
("ABI").

      Upon completion of the Offering, the Company implemented a Plan of
Repurchase pursuant to which its two-tiered holding company ownership structure
was eliminated through the merger of Congoleum Holdings with and into the
Company, with the Company as the surviving corporation.

Use of Estimates - Some of the information presented in this report constitutes
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and 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 could differ from those estimates.

Revenue Recognition - Revenue is recognized when products are shipped. Net sales
are comprised of the total sales billed during the period less the sales value
of goods returned, trade discounts and customers' allowances.

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.

Short-Term Investments - Investments in A1/P1 Commercial Paper with a maturity
greater than three months, but less than six months at the time of purchase are
considered to be short-term investments. The carrying amount of the Commercial
Paper approximates fair value due to its short maturity.

Inventories - Inventories are stated at the lower of cost or market. The LIFO
(last-in, first-out) method of determining cost is used for substantially all
inventories.

Property, Plant, and Equipment - Property, plant, and equipment are recorded at
cost and are depreciated over their estimated useful lives (30 years for
buildings and building improvements, 15 years for production equipment and heavy
duty vehicles, 4 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 long-term
debt have been capitalized and are being amortized over the life of the related
debt agreements. Such costs, net of accumulated amortization, amounted to $1,547
and $2,359 at December 31, 1997 and 1996, respectively, and are included in
other noncurrent assets.

Goodwill - The excess of purchase cost over the fair value of net assets
acquired (goodwill) is being amortized on a straight-line basis over 40 years.
At each balance sheet date, the Company evaluates the recoverability of its
goodwill using certain financial indicators, such as historical and future
ability to generate income from operations. Accumulated amortization amounted to
$4,841 and $4,409 at December 31, 1997 and 1996, respectively.

Income Taxes - The provision for income taxes is based on earnings reported in
the financial statements under an asset and liability approach in accordance
with SFAS No. 109, "Accounting for Income Taxes," that requires the


                                       14
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

recognition of deferred tax assets and liabilities for the difference between
the tax basis of assets and liabilities and their reported amounts for financial
statement purposes.

Reclassifications - For comparative purposes, certain amounts have been
reclassfied to conform to the current year presention.

Income Per Share - Effective October 1, 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share." This
statement establishes new standards for computing and presenting earnings per
share. Earnings per share data for prior periods have been restated to conform
to SFAS 128. The effect of the restatement on prior periods was immaterial. Due
to the immaterial effect of common stock equivalents there is no difference
between basic and fully diluted earnings per share for any period presented.

Changes in Accounting Principles - Effective December 31, 1997, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement establishes new rules for the reporting
and display of comprehensive income. The adoption of this standard had no impact
on the Company's financial position, income or liquidity.

      In June 1997, the Financial Accounting Standards Board issued ("SFAS") No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way that companies report information
about operating segments and is effective for financial statements for the year
ended December 31, 1998 for the Company. The Company believes that it operates
in one segment, resilient flooring products. The adoption of SFAS No. 131 is
expected to have no effect on the Company's financial position, income or
liquidity.

      Effective January 1, 1997, the Company adopted the American Institute of
Certified Public Accountants ("AICPA") SOP 96-1, "Environmental Remediation
Liabilities," which provides authoritative guidance on the recognition,
measurement, display and disclosure of environmental remediation liabilities.
The adoption of this standard did not have a material effect on the Company's
financial position, income or liquidity.

      Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." SFAS 123 requires the recognition of, or disclosure of,
compensation expense for grants of stock options or other equity instruments
issued to employees based on their fair value at the date of grant. As permitted
by SFAS No 123, the Company elected the disclosure requirements instead of
recognition of compensation expense and therefore will continue to apply
existing rules under APB Opinion 25. The adoption of this standard had no effect
on the Company's financial position, income or liquidity.

2. Inventories:

A summary of the major components of inventories is as follows:

                                      December 31,     December 31,
                                          1997            1996
--------------------------------------------------------------------------------

Finished goods ..............           $34,914         $34,920
Work-in-process .............             3,160           2,089
Raw materials and supplies...             6,360          10,441
--------------------------------------------------------------------------------
Total inventories............           $44,434         $47,450
================================================================================

      If the FIFO (first-in, first-out) method of inventory accounting (which
approximates current cost) had been used, inventories would have been
approximately $340 and $2,027 lower than reported at December 31, 1997 and 1996,
respectively. The carrying value of certain LIFO inventories was reduced by
market valuation reserves of $229 and $650 at December 31, 1997 and 1996,
respectively.

3. Property, Plant, and Equipment:

A summary of the major components of property, plant, and equipment is as
follows:

                                 December 31,   December 31,
                                     1997          1996
--------------------------------------------------------------------------------

Land ..........................  $   2,930     $   2,960
Buildings and improvements ....     33,259        27,706
Machinery and equipment .......    132,414       113,352
Construction-in-progress ......      3,819        11,844
--------------------------------------------------------------------------------
                                   172,422       155,862
Less accumulated
   depreciation ...............    (84,021)      (77,549)
--------------------------------------------------------------------------------
Total property, plant,
and equipment, net ............    $88,401      $ 78,313
================================================================================


                                       15
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

Interest is capitalized in connection with the construction of major facilities.
The capitalized interest is recorded as part of the asset to which it relates
and is amortized over the asset's estimated useful life. In 1997, $823 of
interest cost was capitalized. The impact of capitalized interest in 1996 and
1995 was not material.

      The amount of approved but unexpended capital appropriations at December
31, 1997 was $3,795, substantially all of which is planned to be expended during
1998.

4. Accrued Liabilities:

Accrued liabilities consists of the following:

                           December 31,    December 31,
                              1997            1996
--------------------------------------------------------------------------------
Accrued marketing
   and sales
   promotion...............$ 17,244         $16,565
Employee
   compensation and
   related benefits ........  5,766           8,709
Interest ...................  2,935           3,362
Environmental
   remediation and
   product-related
   liabilities .............  1,035             957
Other ......................  1,813           3,235
--------------------------------------------------------------------------------

Total accrued
   liabilities.............$ 28,793         $32,828
================================================================================

5. Long-Term Debt:

Long-term debt consists of the following:

                           December 31,    December 31,
                              1997            1996
--------------------------------------------------------------------------------
9% Senior Notes
    due 2001...............$ 76,594        $ 87,750
================================================================================

      On February 1, 1994, the Company completed a public offering for $90,000
of Senior Notes (the "Senior Notes") due 2001. The Senior Notes, issued at par,
bear interest at 9.0%. The Indenture under which the notes were issued includes
certain restrictions on additional indebtedness and dividend payments.

      The Senior Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after February 1, 1998 at a predetermined redemption
price (ranging from 103% to 100%), plus accrued and unpaid interest to the date
of redemption.

      The fair value of the Senior Notes, estimated based on the quoted market
price, was approximately $77,743 at December 31, 1997.

      In 1996, the Company's Board of Directors had approved a program to
repurchase up to $10,000 of its outstanding Senior Notes either in the open
market or in privately negotiated transactions. During 1997, the Board of
Directors increased the repurchase program to $20,000. During 1996 and 1997, the
Company had repurchased $2,250 and $11,156, respectively, of its Senior Notes.
In connection with the repurchases in 1997, the Company recorded an
extraordinary charge of $279, net of $160 of income tax benefits, or $ 0.03 per
common share, to write off the portion of the debt issuance cost and premiums
associated with the repurchased Senior Notes. Such writeoffs were immaterial to
the financial statements for 1996 and were included in other expense.

      The Company has a revolving credit facility which expires in 2000 that
provides for borrowings up to $30,000 with interest at 1% over prime, or 2 3/4%
over LIBOR, at the Company's option. This agreement provides for a commitment
fee based on the average daily unused portion of the commitment equal to one
quarter of one percent per annum. This financing agreement contains certain
covenants which include the maintenance of minimum net worth and restrictions on
the incurrence of additional debt. Borrowings under this facility are
collateralized by inventory and receivables. There were no borrowings
outstanding under this facility at December 31, 1997, however, the facility
provides for standby letters of credit which total $3,380 at December 31, 1997.

6. Comprehensive Income:

Comprehensive income for the three years ended December 31, 1997 includes the
following components:

                               1997        1996       1995
--------------------------------------------------------------------------------
Net income...................$ 6,741     $12,097    $ 9,435
Other comprehensive
   income (loss):
     Minimum pension
     liability adjustment        873        (983)    (1,012)
--------------------------------------------------------------------------------
Comprehensive income         $ 7,614     $11,114    $ 8,423
================================================================================


                                       16
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

7. Other Liabilities:

Other liabilities consists of the following:

                           December 31,     December 31,
                               1997            1996
--------------------------------------------------------------------------------
Environmental
   remediation and
   product-related
   liabilities............  $ 13,981         $ 10,926
Accrued workers'
   compensation
   claims.................     4,425            4,871
Other.....................     3,899            3,604
--------------------------------------------------------------------------------
Total other liabilities...  $ 22,305         $ 19,401
================================================================================

8. Research and Development Costs:

Total research and development costs charged to operations amounted to $3,718,
$4,552 and $3,683 for the years ended December 31, 1997, 1996 and 1995,
respectively.

9.Operating Lease Commitments and Rent Expense:

The Company leases certain office facilities and equipment under leases with
varying terms.

      Future minimum lease payments of significant, noncancelable operating
leases having initial or remaining lease terms in excess of one year as of
December 31, 1997 are as follows:

Years Ending
--------------------------------------------------------------------------------

1998.............................................         $1,486
1999.............................................          1,178
2000.............................................            843
2001.............................................             42
2002.............................................              5
Thereafter.......................................             --
--------------------------------------------------------------------------------
Total minimum lease payments.....................         $3,554
================================================================================

      Rent expense was $1,902, $1,772 and $1,791 for the years ended December
31, 1997, 1996 and 1995, respectively.

10. Retirement Plans:

Retirement benefits are provided for substantially all employees under
Company-sponsored defined benefit pension plans. The plans are noncontributory
and generally provide monthly lifetime payments, normally commencing at age 65.
Benefits under the plans are based upon the provisions of negotiated labor
contracts and years of service. It is the Company's policy to make contributions
to these plans sufficient to meet the minimum funding requirements of applicable
laws and regulations plus such additional amounts, if any, as the Company's
actuarial consultants advise to be appropriate. The projected unit credit and
unit credit methods were utilized for determination of the actuarial cost.

      Net periodic pension cost includes the following components:

                                                   For the years ended
                                                       December 31,
                                         --------------------------------------
                                            1997           1996           1995
-------------------------------------------------------------------------------

Benefits earned
    during the year
    (service cost) ................        $1,144         $1,113           $919
Interest cost on
    projected benefit
    obligation ....................         3,863          3,743          3,797
Return on plan assets .............        (7,130)        (2,515)        (6,088)
Net amortization
    and deferral ..................         3,640         (1,088)         2,745
-------------------------------------------------------------------------------

Net periodic
    pension cost ..................        $1,517         $1,253         $1,373
===============================================================================


                                       17
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

      The following tables present a reconciliation of the Plans' status at
December 31, 1997 and 1996:

                                                     Plan Whose    Plan(s) Whose
                                                   Assets Exceed    Accumulated
                                                    Accumulated       Benefits
                                                      Benefits     Exceed Assets
December 31, 1997:
   Actuarial present value of
      benefit obligations:
   Vested benefit obligations ................        $ 29,941         $ 25,790
===============================================================================
   Accumulated benefit
      obligations ............................        $ 30,527         $ 26,758
===============================================================================

   Projected benefit
      obligations ............................        $ 31,242         $ 26,758
   Plan assets at fair
      market value ...........................          31,336           15,069
-------------------------------------------------------------------------------

   Projected benefit obligations
      in excess of plan assets ...............              94          (11,689)
   Unrecognized net loss .....................           3,070            1,339
   Unrecognized net
      obligation .............................             434             (349)
   Unrecognized prior
      service cost ...........................          (3,404)           1,183
   Adjustment required to
      recognize minimum
      liability ..............................              --           (2,604)
-------------------------------------------------------------------------------
   Prepaid (accrued) pension
     liability ($1,082 included
     in accrued liabilities)  ................        $    194         $(12,120)
===============================================================================

December 31, 1996:
   Actuarial present value
      of benefit obligations:
   Vested benefit obligations ................        $     --         $ 54,168
===============================================================================
   Accumulated benefit
      obligations ............................        $     --         $ 55,678
===============================================================================

   Projected benefit obligations .............        $     --         $ 56,182
   Plan assets at fair
      market value ...........................              --           41,010
-------------------------------------------------------------------------------
   Projected benefit obligations
      in excess of plan assets ...............              --          (15,172)
   Unrecognized net loss .....................              --            7,108
   Unrecognized net obligation ...............              --              161
   Unrecognized prior
      service cost ...........................              --           (2,463)
   Adjustment required to
      recognize minimum
      liability ..............................              --           (4,302)
-------------------------------------------------------------------------------
   Accrued pension
     liability ($2,287 included
     in accrued liabilities)  ................        $     --         $(14,668)
===============================================================================

      Plan assets which are deposited with a trustee consist principally of
fixed income, equity and short-term investments and cash equivalents.

      The provisions of FASB Statement No. 87, "Employers' Accounting for
Pensions," require the recognition of an additional minimum liability for plans
whose accumulated benefits exceed assets. These amounts have been recorded as a
long-term liability with an offsetting intangible asset included in other
noncurrent assets amounting to $837 and $1,005 at December 31, 1997 and 1996,
respectively. Because the asset recognized may not exceed the amount of
unrecognized prior service cost, the difference of $1,122, net of tax benefits
of $645, is reported as a separate reduction of stockholders' equity at December
31, 1997.

      The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations are 7.0% and 5.5% as of December 31, 1997 and
1996, respectively. The expected long-term rate of return on plan assets is 9.0%
for all years presented.

      The Company also has two 401(k) defined contribution retirement plans that
cover substantially all employees. Eligible employees may contribute up to 15%
of compensation with partially matching Company contributions. Defined
contribution pension expense for the Company was $1,316, $1,363 and $1,128 for
the years ended December 31, 1997, 1996 and 1995, respectively.

11. Postretirement Benefits
Other Than Pensions:

The Company provides certain health care and life insurance benefits for certain
retirees. The determination of benefit cost for postretirement plans is based on
plan provisions. These benefits are provided through insurance companies whose
premiums are based on benefits paid or claims experience.


                                       18
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

Net periodic postretirement benefits cost, calculated in accordance with SFAS
No. 106, is as follows:

                                                     For the years ended
                                                          December 31,
                                               ---------------------------------
                                                 1997         1996         1995
-------------------------------------------------------------------------------
Service cost-benefits earned
    during the year .....................       $ 139        $ 141        $ 137
Interest cost on
    postretirement
    benefit obligations .................         505          484          480
Amortization of
    prior service cost ..................        (409)        (447)        (524)
Amortization of losses ..................          99           90           47
-------------------------------------------------------------------------------
Net periodic postretirement
    benefits cost .......................       $ 334        $ 268        $ 140
===============================================================================

At December 31, 1997 and 1996, the actuarial and recorded liabilities for these
postretirement benefits, none of which have been funded, were as follows:

                                                    December 31,    December 31,
                                                        1997            1996
-------------------------------------------------------------------------------
Accumulated present value
  of postretirement benefit
  obligations:
     Retirees and
       dependents ............................        $ (4,106)        $ (4,136)
     Fully eligible active
       plan participants .....................          (1,191)            (999)
     Other active plan
       participants ..........................          (2,255)          (2,355)
     Unrecognized prior
       service cost ..........................          (3,224)          (3,633)
     Unrecognized net loss ...................             220              303
-------------------------------------------------------------------------------
     Accrued postretirement
       benefit obligation ....................         (10,556)         (10,820)
     Less current portion ....................             598              571
-------------------------------------------------------------------------------
     Noncurrent postretirement
       benefit obligations ...................        $ (9,958)        $(10,249)
===============================================================================

      A weighted average assumed discount rate of 7.0% was used to measure the
accumulated postretirement benefit obligations as of December 31, 1997 and 1996.
The annual rate of increase in the per capita cost of covered health care
benefits was assumed to be 6.1% in 1997; the rate was assumed to decrease
gradually to 5.0% over the next 10 years and remain level thereafter. An
increase of one percentage point in the assumed health care cost trend rates for
each future year would increase the aggregate of the service and interest cost
components of net periodic postretirement benefits cost by $70, for the year
ended December 31, 1997, and would increase the accumulated postretirement
benefit obligations by $706 at December 31, 1997.

12. Income Taxes:

The provision for income taxes is comprised of the following:

                                                    For the years ended
                                                        December 31,
                                       -----------------------------------------
                                          1997             1996            1995
--------------------------------------------------------------------------------
Current:
   Federal ....................         $ 3,980          $ 5,591         $ 4,114
   State ......................             246              711             608
Deferred:
   Federal ....................            (213)           1,348           1,272
   State ......................              22              248             535
--------------------------------------------------------------------------------
Provision for
   income taxes ...............         $ 4,035          $ 7,898         $ 6,529
================================================================================


                                       19
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

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,
                                           ------------------------------------
                                             1997            1996         1995
-------------------------------------------------------------------------------

Statutory federal
    income tax rate ..............            34.0%           35.0%        35.0%
State income taxes,
    net of federal
    benefit ......................             1.6             3.5          4.4
Goodwill .........................             1.4             0.8          1.0
Other ............................            (0.5)            0.2          0.5
-------------------------------------------------------------------------------
Effective tax rate ...............            36.5%           39.5%        40.9%
===============================================================================

      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:

                                                    December 31,    December 31,
                                                        1997            1996
-------------------------------------------------------------------------------
Deferred tax asset:
    Accounts receivable ....................         $    933          $  1,021
    Unfunded pension
       liability ...........................            4,362             5,264
    Environmental
       remediation and
       product-related
       reserves ............................            9,050             8,009
    Postretirement
       benefit obligations .................            4,091             4,241
    Other accruals .........................            1,071               974
-------------------------------------------------------------------------------
     Total deferred
       tax asset ...........................           19,507            19,509
-------------------------------------------------------------------------------
Deferred tax liability:
    Depreciation and
       amortization ........................          (11,169)          (12,023)
    Inventory ..............................           (1,752)           (1,924)
    Other ..................................           (2,661)           (1,544)
-------------------------------------------------------------------------------
     Total deferred tax
       liability ...........................          (15,582)          (15,491)
-------------------------------------------------------------------------------
Net deferred
       tax asset ...........................         $  3,925          $  4,018
===============================================================================


                                       20
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

13. Supplemental Cash Flow Information:

Cash payments for interest were $7,710, $8,168 and $8,102 for the years ended
December 31, 1997, 1996 and 1995, respectively. Cash payments for income taxes
were $4,964, $4,335 and $6,183 for the years ended December 31, 1997, 1996 and
1995, respectively.

14. Related Party Transactions:

The Company and ABI provide certain goods and services to each other pursuant to
agreements negotiated at arm's length. The Company had the following
transactions with ABI:

                                                    For the years ended
                                                         December 31,
                                          --------------------------------------
                                              1997           1996           1995
--------------------------------------------------------------------------------

Sales .............................         $  964         $1,213         $1,409
Raw material
   transfers to ABI ...............          2,942          3,115          2,899
Computer service
   income .........................            145            226            262
Material purchases
   from ABI .......................          5,269          5,814          3,817
Management fees ...................          1,221          1,265            993
================================================================================

      Amounts as of December 31, 1997 and 1996 due from an affiliate of ABI
totaled $290 and $620, respectively. Amounts as of December 31, 1997 and 1996
due to ABI and its affiliates totaled $1,094 and $1,586, respectively.

15. Major Customers:

Substantially all the Company's sales are to select flooring distributors and
retailers located in the United States. 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 accounted for 23% and 19% of the Company's net sales for the
year ended December 31, 1997, 22% and 20% for the year ended December 31, 1996,
and 21% and 21% for the year ended December 31, 1995 and accounted for 40% and
41% of accounts receivable at December 31, 1997 and 1996, respectively.

16. Contingent and Other Liabilities:

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, asbestos-related
claims, and general liability claims. 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 records a liability for environmental remediation,
asbestos-related claim costs, and general liability claims when a cleanup
program or claim payment becomes probable and the costs can be reasonably
estimated. As assessments and cleanups progress, these liabilities are adjusted
based upon progress in determining the timing and extent of remedial actions and
the related costs and damages. The extent and amounts of the liabilities can
change substantially due to factors such as the nature or extent of
contamination, changes in remedial requirements and technological improvements.
The recorded liabilities (Notes 4 and 7) are not discounted for delays in future
payments and are not reduced by the amount of estimated insurance recoveries.
Such estimated insurance recoveries of $6,918 and $3,939 are reflected in other
noncurrent assets at December 31, 1997 and 1996 and are considered probable of
recovery.

      Although the outcome of these matters could result in significant expenses
or judgments, management does not believe based on present facts and
circumstances that their disposition will have a material adverse effect on the
financial position of the Company.


                                       21
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

17. Initial Public Offering:

On February 8, 1995, the Company completed a public offering of 4,650,000 shares
of a new series of Class A Common Stock (the Class A shares) for $13 per share
(the "Offering") and implemented a Plan of Repurchase (Note 1). The Company's
capital stock outstanding immediately prior to the consummation of the merger
contemplated in the Plan of Repurchase was converted in the merger into
10,000,000 shares (the "Recapitalization") of a new series of Class B Common
Stock (the Class B shares). Hillside and ABI as holders of the Class B shares
are entitled to two votes per share on all matters submitted to a vote of
stockholders other than certain extraordinary matters. The holders of the Class
A shares are entitled to one vote per share on all matters submitted to a vote
of stockholders. In addition, the Stockholders' Agreement among the Company,
Holdings, ABI and Hillside, and certain other agreements were either amended or
terminated, and Hillside made a cash payment of $2,000 to ABI in consideration
of ABI's agreement to enter into the Plan of Repurchase and consummate the
transactions contemplated thereby. The net proceeds of approximately $55,219
after deducting fees, together with approximately $5,231 of other funds of the
Company, were used to repurchase 4,650,000 Class B shares held by Hillside.

      In 1996, the Company's Board of Directors approved a plan to repurchase up
to $5,000 (increased to $10,000 in 1997) of the Company's common stock (Class A
and Class B shares). At December 31, 1997, the Company had repurchased $9,573 of
common stock under this program. Shares of Class B stock repurchased (totalling
595,00) have been retired. As of December 31, 1997, ABI owned 4,395,605 Class B
shares that represented 63.7% of the voting control of the Company.

18. 1995 Stock Option Plan:

Effective with the public offering (Note 17), the Company adopted the 1995 stock
option plan ("The Plan"). Under The Plan, options to purchase up to 550,000
shares of the Company's Class A common stock may be issued to officers and key
employees. The Company amended the plan to increase the number of shares
authorized to be issued from 550,000 to 800,000, an increase of 250,000 shares.
These 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
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.

      Effective January 1, 1996, the Company adopted the disclosure-only option
under SFAS No.123, "Accounting for Stock-Based Compensation." The Company
continues to use the accounting method under APB Opinion No. 25 (APB 25) and
related interpretations for its employee stock options. Under APB 25, when the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.

      Pro forma disclosure, as required by SFAS No.123, regarding net income and
earnings per share has been determined as if the Company had accounted for its
employee stock options under the fair value method of the statement.

      The fair value for these options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: option forfeiture of 15%;
risk-free interest rates of 5.76%, 5.99% and 5.9%; no dividends; volatility
factors of the expected market price of the Company's common stock of .356 for
1997 and .388 for 1996 and 1995; and a weighted-average expected life of the
options of 7 years.

      For purposes of pro forma disclosures, the estimated fair value of the
options ($243 for the 1997 grant, $103 for the 1996 grant, and $2,832 for the
1995 grant) is amortized to expense over the options' vesting period. The
initial impact on pro forma net income may not be representative of compensation
expense in future years, when the effect of the amortization of multiple awards
would be reflected in the pro forma disclosures. The Company's pro forma
information follows:


                                       22
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

                                                   For the years ended
                                                        December 31,
                                       -----------------------------------------
                                             1997           1996           1995
-------------------------------------------------------------------------------

Net income ........................      $  6,741       $ 12,097       $  9,435
Estimated pro forma
   compensation expense
   from stock options:
     1995 grant ...................          (566)          (566)          (518)
     1996 grant ...................           (21)           (19)            --
     1997 grant ...................           (44)            --             --
-------------------------------------------------------------------------------

Pro forma net income ..............      $  6,110       $ 11,512       $  8,917
================================================================================

Pro forma basic and diluted net
   income per share ...............      $    .62       $   1.15       $    .89
================================================================================

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

December 31, 1997:

--------------------------------------------------------------------------------
                                                      Shares    Weighted average
                                                                 exercise price
--------------------------------------------------------------------------------
Options outstanding
   beginning of year ..........................       484,500             --
Options granted ...............................        56,000      $   14.25
Options exercised .............................        (2,000)         13.00
Options forfeited .............................       (26,600)         13.53
--------------------------------------------------------------------------------
Options outstanding
   end of year ................................       511,900      $   13.01
================================================================================
Exercisable at end of year ....................       185,200      $   12.95
Stock options available for
   future issuance ............................       286,100             --
================================================================================

December 31, 1996:

--------------------------------------------------------------------------------
                                                      Shares    Weighted average
                                                                 exercise price
--------------------------------------------------------------------------------
Options outstanding
   beginning of year .............................    481,000            --
Options granted ..................................     22,000        $10.63
Options exercised ................................         --            --
Options forfeited ................................    (18,500)        13.00
--------------------------------------------------------------------------------
Options outstanding
   end of year ...................................    484,500        $12.89
================================================================================
Exercisable at end of year .......................     94,100        $13.00
Stock options available for
   future issuance ...............................     65,500            --
================================================================================

December 31, 1995:

--------------------------------------------------------------------------------
                                                      Shares    Weighted average
                                                                 exercise price
--------------------------------------------------------------------------------
Options outstanding
   beginning of year ..............................        --            --
Options granted ...................................   498,000        $13.00
Options exercised .................................        --            --
Options forfeited .................................   (17,000)        13.00
--------------------------------------------------------------------------------
Options outstanding
   end of year ....................................   481,000        $13.00
================================================================================
Exercisable at end of year ........................        --            --
Stock options available for
   future issuance ................................    69,000            --
================================================================================

19. Quarterly Financial Data (Unaudited):

The following table sets forth certain unaudited quarterly financial
information.

                                          Year ended December 31, 1997
                                          ----------------------------
                                First        Second        Third       Fourth
                               Quarter       Quarter       Quarter    Quarter(a)
--------------------------------------------------------------------------------

Net sales ..............       $61,083       $64,909       $69,526     $57,008
Gross profit ...........        18,241        19,805        19,676      14,710
Net income .............         1,013         2,104         2,198       1,426
Net income per
  common share .........           .10           .21           .22         .15
================================================================================

                                          Year ended December 31, 1996
                                          ----------------------------
                                First        Second        Third       Fourth
                               Quarter       Quarter       Quarter    Quarter(b)
--------------------------------------------------------------------------------

Net sales .............       $54,118        $74,380       $71,900     $69,053
Gross profit ..........        13,935         25,056        24,373      23,502
Net income
   (loss) .............        (1,044)         4,850         4,392       3,899
Net income
   (loss) per
   common share .......          (.10)           .48           .44         .39
================================================================================

(a)   Fourth quarter 1997 includes a $0.3 million (after tax) charge (0.03 per
      share) for an extraordinary item. (See Note 5.)
(b)   Fourth quarter 1996 includes a $0.6 million (after tax) charge for
      accelerated depreciation of certain machinery and equipment.


                                       23
<PAGE>

Congoleum Corporation
Report of Independent Auditors

================================================================================

To the Board of Directors
and Shareholders of
Congoleum Corporation:

We have audited the accompanying balance sheets of Congoleum Corporation as of
December 31, 1997 and 1996, and the related statements of operations, changes in
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The statements of operations, changes in stockholders' equity, and
cash flows for the year ended December 31, 1995 were audited by other auditors
whose report dated February 20, 1996, expressed an unqualified opinion on those
financial statements.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the 1997 and 1996 financial statements present fairly, in all
material respects, the financial position of Congoleum Corporation at December
31, 1997, and 1996, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.


/s/ Ernst & Young LLP

ERNST & YOUNG LLP

Philadelphia, Pennsylvania
February 18, 1998


                                       24
<PAGE>

Directors and Officers
================================================================================

Board of Directors

Roger S. Marcus
Chairman of the Board, President and
Chief Executive Officer of Congoleum 
Corporation and Chairman of the Board 
and Chief Executive Officer of American 
Biltrite Inc.

Cyril C. Baldwin, Jr.
Chairman of the Board of
Cambrex Corporation

David N. Hurwitz
President and Chief Executive Officer
of Goodson Newspaper Group

John N. Irwin III
Managing Director of Hillside Capital 
Incorporated

Mark N. Kaplan
Partner, Skadden, Arps, Slate,
Meagher & Flom (Attorneys)

Richard G. Marcus
Vice Chairman of Congoleum Corporation 
and President and Chief Operating
Officer of American Biltrite Inc.

William M. Marcus
Executive Vice President and
Treasurer of American Biltrite Inc.

C. Barnwell Straut
Managing Director of Hillside
Capital Incorporated

Corporate Officers

Roger S. Marcus
Chairman of the Board,
President and Chief Executive Officer

Richard G. Marcus
Vice Chairman

Robert N. Agate
Senior Vice President - Manufacturing

Howard N. Feist III
Senior Vice President - Finance and Secretary

Dennis P. Jarosz
Senior Vice President - Marketing

Anthony C. Prestipino
Senior Vice President - Sales

Peter J. Rohrbacher
Senior Vice President - Research and Engineering

Thomas A. Sciortino
Senior Vice President - Administration

Merrill M. Smith
Senior Vice President - Technology

Corporate Information
================================================================================

Corporate Headquarters

Congoleum Corporation
3705 Quakerbridge Road
P.O. Box 3127
Mercerville, NJ  08619-0127
(609) 584-3000

Annual Meeting

The 1998 Annual Meeting of the Stockholders of Congoleum Corporation will be
held on Thursday, May 14, 1998 in Conference Room 6, 8th Floor, Fleet Bank, 1
Federal Street Boston, Massachusetts at 1:00 p.m. local time.

General Counsel

Patterson, Belknap, Webb & Tyler L.L.P.
1133 Avenue of the Americas
New York, NY  10036-6710

Independent Auditors

Ernst & Young LLP
Two Commerce Square
Suite 4000
2001 Market Street
Philadelphia, PA  19103

Market Information

The Company's Class A Common Stock is listed on the New York Stock Exchange. The
following table reflects the high and low prices (rounded to the nearest
one-eighth) based on New York Stock Exchange trading over the past two years.

      The Company does not anticipate paying any cash dividends in the
foreseeable future. Any future change in the Company's dividend policy is within
the discretion of the Board of Directors and will depend, among other things, on
the Company's earnings, debt service and capital requirements, restrictions in
financing agreements, business conditions and other factors that the Board of
Directors deem relevant. The payment of cash dividends is limited under the
terms of the Indenture relating to the Company's Senior Notes and the terms of
the Company's existing revolving credit facility, subject to the Company's
cumulative earnings and other factors.

      The number of registered and beneficial holders of the Class A Common
Stock on February 7, 1998 was approximately 2,000.

1997                                                High             Low
--------------------------------------------------------------------------------
First Quarter ...............................      14 7/8          11 3/4
Second Quarter ..............................      13 1/8          10 1/2
Third Quarter ...............................      13 3/4        10 11/16
Fourth Quarter ..............................     11 9/16           8 3/4

1996                                                High             Low
--------------------------------------------------------------------------------
First Quarter ...............................      12 3/4           9 1/8
Second Quarter ..............................      12 5/8           8 7/8
Third Quarter ...............................          13          11 1/8
Fourth Quarter ..............................      14 1/4          12 1/2


Stockholder Information

The Company will supply any owner of common stock, upon written request to Mr.
Howard N. Feist III of the Company at the address set forth herein, and without
charge, a copy of the Annual Report on Form 10-K for the year ended December 31,
1997, which has been filed with the Securities and Exchange Commission.

Registrar and Transfer Agent

BankBoston N.P.
c/o Boston Equiserve L.P.
P.O. Box 8040
Boston, MA  02266-8040
(718) 575-3400
www.equiserve.com

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