SECURITIES AND EXCHANGE
                                   COMMISSION


                             Washington, D.C. 20549

                                    FORM 10-K
                ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1998       Commission file number: 1-3462

                            CARLYLE INDUSTRIES, INC.
             (Exact name of registrant as specified in its charter)

            Delaware                                            13-1574754
(State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                             Identification No.)

1 Palmer Terrace, Carlstadt, New Jersey                            07072
(Address of principal executive offices                          (Zip Code)

        Registrant's telephone number, including area code: (201)935-6220

           Securities registered pursuant to Section 12(b) of the Act:

                                                      Name of each exchange
                  Title of each class                 on which registered
                  -------------------                 -------------------

        Common Stock, par value $0.01 per share

Securities registered pursuant to Section 12(g) of the Act: Not applicable

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

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. Yes[ ] No [X]

         As of March 29, 1999,  7,382,782  shares of  Registrant's  Common Stock
were  outstanding,  and the  aggregate  market value of the voting stock held by
non-affiliates  of  Registrant  was  approximately  $3,857.276.  This figure was
calculated  on the  basis of the  closing  price of a share of  Common  Stock of
Registrant  on the  Electronic  Bulletin  Board March 29, 1999.  As used herein,
non-affiliates  means  all  stockholders  of  Registrant  other  than  executive
officers, directors and 5% shareholders.

         The  information  required by Part III of Form 10-K is  incorporated by
reference to the  Registrant's  definitive  proxy statement to be distributed to
stockholders in connection with its annual meeting scheduled for May 18, 1999.

                                  Page 1 of 45
<PAGE>

THIS ANNUAL REPORT ON FORM 10-K (THE "ANNUAL REPORT") CONTAINS  STATEMENTS WHICH
CONSTITUTE  FORWARD-LOOKING  STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE
SECURITIES  EXCHANGE  ACT OF  1934,  AS  AMENDED  (THE  "EXCHANGE  ACT").  THOSE
STATEMENTS  APPEAR  IN A NUMBER  OF PLACES IN THIS  ANNUAL  REPORT  AND  INCLUDE
STATEMENTS REGARDING THE INTENT,  BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY,
ITS  DIRECTORS OR ITS OFFICERS  WITH  RESPECT TO,  AMONG OTHER  THINGS:  (I) THE
COMPANY'S  FINANCING  PLANS;  (II)  TRENDS  AFFECTING  THE  COMPANY'S  FINANCIAL
CONDITION OR RESULTS OF  OPERATIONS;  (III) THE  COMPANY'S  GROWTH  STRATEGY AND
OPERATING STRATEGY;(IV) CUSTOMER CONCENTRATION AND THE INCREASING  CONSOLIDATION
OF THE  COMPANY'S  CUSTOMER BASE (V) THE  DECLARATION  AND PAYMENT OF DIVIDENDS;
(VI)  IMPACT OF YEAR  2000  ISSUES.  SHAREHOLDERS  ARE  CAUTIONED  THAT ANY SUCH
FORWARD-LOOKING  STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE
RISK AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. .

PART I

ITEM  1. BUSINESS OF THE COMPANY

         Carlyle   Industries,    Inc.    ("Carlyle")   and   its   subsidiaries
(collectively,  the "Company") package and distribute  buttons,  gifts and craft
products.

         Carlyle was the surviving  corporation  in a merger (the "Merger") with
BH Acquisition  Corporation,  a Delaware corporation wholly-owned by Noel Group,
Inc. ("Noel"). The Merger, completed on October 29, 1993, was the second step of
a transaction  pursuant to which Noel acquired the entire equity interest in the
Company.  References herein to the "Predecessor" shall be deemed to refer to the
Company,  as it  existed  prior to  October 1,  1993.  The  Company's  principal
executive  offices  are located in 7,307  square feet of leased  premises at One
Palmer Terrace, Carlstadt, New Jersey and its telephone number is 201-935-6220.

         The   Company's   business  is   conducted   principally   through  two
subsidiaries:  the Blumenthal Lansing Company,  and Westwater  Industries,  Inc.
Blumenthal  Lansing  Company was formed from the merger of B.  Blumenthal & Co.,
Inc.,  a  wholly-owned  subsidiary  of the  Company,  and  Lansing  Company,  B.
Blumenthal's  wholly-owned  subsidiary.   The  corporate  name  was  changed  to
Blumenthal  Lansing  Company  on January 1,  1995.  Westwater  Industries,  Inc.
("Westwater"),  a Delaware  corporation,  was formed in June 1998 to acquire the
assets and business of Westwater Enterprises,  LP. Westwater Industries, Inc. is
a wholly owned subsidiary of the Company.

         PRODUCTS.  The Company packages and distributes an extensive variety of
buttons,  embellishments,   gift  and  craft  products  to  mass  merchandisers,
specialty chains and independent retailers and wholesalers throughout the United
States. Products are sold under the La Mode (R), Le Chic (R), Streamline (R) and
Westwater  Enterprises (R) registered  trademarks and the Le Bouton,  La Petite,
Classic,  Boutique and Mill Mountain brand names.  The Company also produces and
distributes a private-label line for one of the nation's  best-known  retailers.
The Company markets complimentary product lines, including appliques, craft kits
and fashion and jewelry.

         MARKETS.  The Company's  button  products are sold primarily for use in
the  home  sewing  market  where  buttons  are used  for  garment  construction,
replacement and the upgrading and/or restyling of ready-to-wear  clothing.  More
modest  button usage is found in craft  projects,  home  decorating  and garment
manufacturing. The market is concentrated and is served by national and regional

                                  Page 2 of 45

<PAGE>

fabric specialty chains, mass merchandisers,  independent fabric stores, notions
wholesalers  and craft  stores and chains.  During the years ended  December 31,
1998 and 1997  sales to three  major  customers  (Wal-Mart,  Jo-Ann  Stores  and
Hancock  Fabrics)  accounted  for  77%  and 78%  respectively  of the  Company's
aggregate  net sales volume.  A reduction in sales among any of these  customers
could adversely impact the financial  condition and results of operations of the
Company.

         Through its  Westwater  subsidiary,  the Company has a developing  gift
market  program  which is being  directed  toward the myriad and varied  outlets
where gifts are sold.

         PRODUCT SOURCING,  DISTRIBUTION AND SALES. The button lines are sourced
from more than 75 button  manufacturers  around  the  world,  with most  buttons
coming from the  traditional  markets of Europe and Asia.  Button  manufacturers
specialize in different materials (plastic,  wood, glass, leather, metal, jewel,
pearl, etc.) and have varying approaches to fashion,  coloration,  finishing and
other factors. Most craft and gift products are developed within the Company and
produced in Asia.

         All  imported  and  domestically  purchased  buttons are shipped to the
Lansing,  Iowa facility for carding and distribution to customers.  As thousands
of button styles are received in bulk, computerized card printing systems enable
Blumenthal  Lansing to economically  imprint  millions of button cards with such
necessary data as style number,  price, number of buttons,  bar code, country of
origin and care instructions. The Company also blister-packages and shrink-wraps
some products.  Shipments are made primarily to individual stores with a smaller
percentage to warehouse locations.  Craft and gift products are also distributed
from the Lansing, Iowa facility.

         The Company's accounts include fabric and craft specialty chains,  mass
merchandisers  carrying  buttons and crafts,  distributors  and many independent
stores.  Mass  merchandisers  and specialty chain customers are characterized by
the need for sophisticated  electronic support, rapid turn-around of merchandise
and direct-to-store  service for hundreds to thousands of locations  nationwide.
The Company enjoys long-standing ties to all of its key accounts and the average
relationship  with its ten largest  customers  extends over 20 years. Due to the
large account nature of its customer base, most customer  contact is coordinated
by management; additional sales coverage is provided by regional sales managers.
Many retailers are serviced by independent  representatives  and  representative
organizations.

         COMPETITIVE  FACTORS.  The  retail  button  market is served by several
competitors.  The Company competes primarily with full-line button packagers and
distributors in the general button market and several smaller competitors in the
promotional  button  market.  Management  believes that the principal  bases for
competition  are product  innovation,  range of selection,  brand names,  price,
display  techniques  and speed of  distribution.  The craft and gift markets are
served by many and varied  competitors  with innovation and competitive  pricing
being of major importance.

         Management believes that retail button  distribution  depends on trends
in the  home-sewing  market,  which  management  believes is mature.  The retail
customer base for buttons has changed substantially over the past two decades as
department stores and small independent fabric stores have been replaced by mass
merchandisers  and specialty  retail chains which have  continued to consolidate
recently  through  mergers and store  closings.  In response to this trend,  the
Company has broadened its lines to include embellishments,  novelty buttons, and
products  used  in the  craft  and  gift  industries  which  are not  viewed  by
management as mature markets.

                                  Page 3 of 45

<PAGE>

         The bulk of the Company's revenues are derived in the United States. In
1998, less than 1% of revenues related to export sales.  Inventory levels remain
relatively  constant  throughout  the year.  The Company's  policies  related to
merchandise return and payment terms are in accordance with industry standards.

         EMPLOYEES;   LABOR  RELATIONS.   The  Company  has   approximately  170
employees,  none of whom  are  covered  by a  collective  bargaining  agreement.
Management believes relations with employees are satisfactory.

         CURRENT BACKLOG. The Company fills at least 95% of its orders within 48
hours and as a result had no backlog of any  significance at either December 31,
1998 or 1997.

DISCONTINUED OPERATIONS

         In March 1997 the  Company  completed  the sale of its Thread  division
pursuant to an agreement  dated as of December  12, 1996 (the  "Thread  Division
Agreement").  Proceeds  received  on the sale  adjusted  for  closing  costs and
changes in working  capital of the division  subsequent  to  September  30, 1996
totaled $54.9 million cash (of which $3.0 million was placed in escrow) plus the
assumption  of  approximately  $6.8  million  of  liabilities.  A portion of the
proceeds was used to pay down the Company's outstanding bank debt. Consequently,
the results of operations of the Thread  division for 1997 and all prior periods
have been  classified  as  discontinued  operations.  (See ITEM 7.  MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS).

         The business of the Company's  Thread division which was  headquartered
in Charlotte,  North  Carolina,  was  conducted  through  various  subsidiaries,
including  a  wholly-owned   subsidiary,   The  Carlyle  Thread  Group,  LLC,  a
Connecticut  limited  liability  company  ("CTG"),  which was formed through the
transfer of the net assets of the Belding  Corticelli Thread Company, a division
of the  Company  ("BCTC"),  and  the  Carlyle  Manufacturing  Company,  Inc.,  a
wholly-owned subsidiary of the Company ("CM"). The Thread division also included
the business of Carlyle  Threads,  Inc.  ("CTS") which was acquired in June 1994
and Carlyle  International,  Inc. and Culver Textile Corp. (together,  "Culver")
which was  acquired  in August  1995.  CTS and Culver were merged in August 1996
with  CTS  continuing  as  the  surviving   corporation.   The  Thread  division
manufactured and marketed  industrial thread and special engineered yarn used in
non-sewing  products.  CTS's and Culver's main products were  specialty  threads
marketed primarily to the wholesale bedding and embroidery market.

         In July 1996 the  Company  completed  the sale of its Home  Furnishings
division.  Proceeds  received on the sale adjusted for closing costs and changes
in net asset value of the division  subsequent to the contract date totaled $8.2
million, which proceeds were used to pay down the Company's revolving bank loan.
The Company had previously announced its decision to divest the Home Furnishings
division  during  the  fourth  quarter  of 1995.  Consequently,  the  results of
operations of the Home Furnishings  division for 1996 and all prior periods have
been classified as discontinued operations. (See ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS).

                                  Page 4 of 45

<PAGE>

         The Home Furnishings  division operated under the name Belding Hausman,
was  vertically  integrated  and  produced  low to  medium  priced  natural  and
synthetic,  woven,  patterned  and  solid  fabrics  for use in  decorative  home
furnishing products such as draperies, upholstery, slipcovers and pillows.


ITEM 2.  PROPERTIES

See ITEM 1.

         The Company  owns a 104,000  square  foot  packaging  and  distribution
facility  located  in  Lansing,  Iowa.  Corporate  headquarters  and  divisional
management, sales and marketing, product development, fashion and purchasing are
headquartered  in a leased 7,307 square foot office  facility in Carlstadt,  New
Jersey.  Management believes that the Company's facilities are in good condition
and adequate for the Company's present and reasonably foreseeable future needs.

         The Company  owns a former dye facility  located in Emporia,  Virginia,
which is  leased to the  purchaser  of the  Company's  former  Home  Furnishings
division  under a triple  net  fifty-year  lease with a nominal  base  rent.  In
addition,  the Company also owns two facilities no longer used in operations:  a
100,000  square foot former  production  facility at Watertown,  Connecticut  of
which approximately 48,000 square feet are leased to unrelated third parties and
a former production facility at North  Grosvenordale,  Connecticut.  (See Item 3
Legal Proceedings - Environmental Matters).


ITEM 3.           LEGAL PROCEEDINGS

         GENERAL.  The  Company  is not  currently  a party  to any  significant
litigation except as indicated below.

         ENVIRONMENTAL  MATTERS.  The Company is subject to a number of federal,
state and local  environmental laws and regulations,  including those concerning
the  treatment,  storage and disposal of waste,  the discharge of effluents into
waterways,  the  emissions  of  substances  into the air and various  health and
safety  matters.  In  addition,   the  Comprehensive   Environmental   Response,
Compensation  and Liability Act of 1980, as amended  ("CERCLA"),  and comparable
state  statutes  generally  impose  joint and several  liability  on present and
former owners and operators,  transporters  and  generators  for  remediation of
contaminated  properties  regardless  of  fault.  These  parties  are  typically
identified as "potentially responsible parties" or PRP.

         Several  years  ago a  property  owned  by  the  Carlyle  Manufacturing
Company, Inc. ("CM") located at 30 Echo Lake Road in Watertown,  Connecticut was
being investigated by the United States Environmental  Protection Agency ("EPA")
for possible inclusion on the National  Priorities List promulgated  pursuant to
CERCLA but no such listing has  occurred.  A Site  Inspection  conducted at this
location detected certain on-site soil and groundwater contamination, as well as
contamination  of nearby  water.  This site is listed on the  Connecticut  State
Hazardous  Waste  Disposal  Site list,  but  remediation  activity  has not been
required by the Connecticut Department of Environmental Protection ("CTDEP").

         CM  owns  an  inactive   facility   located  in  North   Grosvenordale,
Connecticut at which soil  contamination  has been found.  The Company  reported
this  contamination to the CTDEP in 1989 and is presently working with the CTDEP
to define remedial  options for the site,  which it expects will focus primarily
on removal and possible  stabilization of contaminated soil on site. The Company
estimates the cost of soil remediation at this site to be approximately $100,000
based upon  information on the costs  incurred by others in remediating  similar
contamination at other locations. As the actual cost of

                                  Page 5 of 45

<PAGE>

remediation  at this site will depend on the areal extent of soil  contamination
and the remediation  options  approved for this site in the future by the CTDEP,
no  assurances  can be given  that the actual  cost will not be higher  than the
Company's current estimate.

         In or about June 1992 the Company  received  notices  from the EPA that
the Company,  Belding Corticelli Thread Co. ("BCTC") and CM had been identified,
along with 1,300 other parties,  as PRPs in connection  with the alleged release
of  hazardous  substances  from the  Solvents  Recovery  Service of New  England
Superfund Site in Southington, Connecticut (the "SRS site").

         The Company  settled its alleged  liability in connection  with the SRS
sites by paying one thousand six hundred twenty six dollars ($1,626), along with
other PRPs, to perform the Remedial Investigation and Feasibility Study ("RIFS")
and two Non-Time  Critical  Removal Actions  ("NTCRA").  The RIFS, and the first
NTCRA (except for certain maintenance activities) have been completed.  BCTC and
CM have been  allocated  approximately  .03% and 1.19%,  respectively,  of costs
incurred  to date,  based on their  alleged  volume of waste  shipped to the SRS
site.  At this time it is not  possible  to predict  when the EPA will issue its
"Record of Decision" concerning the final remedy at the SRS site. The Company is
unable,  at this time,  to estimate the ultimate  cost of the remedy for the SRS
site.

         By letter dated January 21, 1994, the EPA gave notice to CM that it had
been  identified as a PRP along with about 335 other parties in connection  with
the alleged release of hazardous waste at the Old Southington Landfill Superfund
site located in Southington,  Connecticut  (the "OSL site").  The EPA's claim is
predicated  on the  allegation  that certain waste sent to the SRS site prior to
October 1967 was commingled and transshipped to the OSL site.

         On  September 3, 1996,  CM entered into an agreement  (with the EPA and
other members of the SRS PRP Group) to settle its  liability in connection  with
the  First  Operable  Unit of work  ("OU#1")  at the OSL site  for two  thousand
dollars ($2,000).  The OU#1 Consent Decree was entered in June, 1998 by the U.S.
District Court for the District of Connecticut.

         In  September  1997,  Pratt  and  Whitney  and the Town of  Southington
proposed a de minimis  settlement which would allow CM and certain other members
of the SRS PRP Group (as well as certain Direct Shippers) to settle their future
OSL site liability for a sum certain  (subject to certain  reservation of rights
by the U.S.) Under this proposal CM's required payment is approximately  $3,300.
CM has accepted the de minimis offer.  The Consent Decree in connection with the
above de minimus  settlement  will be lodged with the federal  court in the near
future.

         By letter  dated  October 30, 1987,  the  Department  of  Environmental
Protection  of the State of New Jersey  ("DEP")  notified  the Company  that CM,
together with 122 other parties,  had been identified as a party responsible for
cleanup  costs and damage claims paid in  connection  with the Chemical  Control
Corporation hazardous waste site located in Elizabeth,  New Jersey. A settlement
between CM and other members of the Chemical Control Responsible Party Group, on
the one hand,  and the DEP and the New Jersey Spill  Compensation  Fund,  on the
other  hand,  was  finalized  in  December  1998.  The  amount  paid  by CM  was
$142,218.93.

         By  third-party  summons and complaint  dated November 27, 1991, CM was
named as a  third-party  defendant  in an action  pending in the  United  States
District Court for the District of Rhode Island entitled 

                                  Page 6 of 45

<PAGE>

United States v. Davis. In addition to CM, approximately 60 other companies were
joined  as  third-party   defendants.   Amended  third-party   complaints  named
additional third-party defendants.  The third-party complaint against CM alleged
claims for contribution under CERCLA,  common law  indemnification and state law
contribution. The third-party complaint alleged that CM (and the majority of the
other  third-party  defendants)  shipped waste to the CCC site,  which waste was
commingled  and  then  shipped  to  the  Davis  Liquid  Waste  site  located  in
Smithfield, Rhode Island.

         CM has entered into an agreement to settle liability in connection with
the above  claims for payment of the sum of  $200,000.  The  Consent  Decree was
approved in 1998 by the Federal District Court.

         By letter dated February 22, 1999, the EPA notified the Company that it
is  investigating  an  uncontrolled  environmental  hazard  site  at the  former
facilities of Divex,  Inc. (the "Divex  Site") and requested  information  which
would enable the EPA to evaluate the Company's  involvement with the Divex Site.
The EPA informed  the Company  that a serious  accident had occured at the Divex
Site in  September  1993 and  that the EPA is  attempting  to  determine  if the
Company is a potentially  responsible party. The Company is cooperating with the
EPA but has no current information  concerning the Divex Site other than what it
has learned from the EPA, and has requested the EPA to furnish it with copies of
documents  which allegedly  connect the Company to the Divex Site.  Accordingly,
the Company is currently  unable to make any cost  estimate  with respect to the
Divex Site.

         The estimates  provided  above do not include costs that the Company or
its   subsidiaries  may  incur  for  consultants'  or  attorneys'  fees  or  for
administrative  expenses in connection with their  participation  as part of the
PRP group at the SRS and OSL sites.  The reserve the Company has established for
environmental  liabilities,  in the  amount  of  $1.7  million,  represents  the
Company's  best  current  estimate  of the costs of  addressing  all  identified
environmental  problems,  including  the  obligations  of the  Company  and  its
subsidiaries  relating to the Remedial  Investigation  and two Non-Time Critical
Removal Actions at the Solvents Recovery  Superfund site, based on the Company's
review of  currently  available  evidence,  and  takes  into  consideration  the
Company's prior experience in remediation and that of other  companies,  as well
as public information released by EPA and by the PRP groups in which the Company
or its subsidiaries are participating. Although the reserve currently appears to
be sufficient to cover these environmental liabilities,  there are uncertainties
associated with environmental  liabilities,  and no assurances can be given that
the  Company's  estimate of any  environmental  liability  will not  increase or
decrease in the future. The uncertainties relate to the difficulty of estimating
the ultimate  cost of any  remediation  that may be  undertaken,  including  any
operating  costs  associated  with  remedial  measures,   the  duration  of  any
remediation required,  the amount of consultants' or attorneys' fees that may be
incurred,  the administrative  costs of participating in the PRP groups, and any
additional  regulatory  requirements that may be imposed by the federal or state
environmental agencies.

         Escrow Agreement. In connection with the sale of the Thread division to
an affiliate of Hicking Pentecost PLC ("Hicking Pentecost"), $3.0 million of the
proceeds were placed in escrow.

         Pursuant  to a  written  indemnity  contained  in the  Thread  Division
Agreement,  and under a  reservation  of rights,  the  Company  had  assumed the
defense and indemnity of Barbour Threads, Inc. ("Barbour"),  as the successor in
interest to Danfield Threads, Inc., Barbour Industries,  Inc., and Blue Mountain
Industries,  Inc., and an individual,  H.D. Whitlow ("Whitlow"), in an adversary
proceeding  which  relates to a Chapter  11  reorganization,  in re  Needlecraft
Industries, Inc. (":Needlecraft"), Case No. LA 97-

                                  Page 7 of 45

<PAGE>

41233 LF. The Company has had no role in the  bankruptcy or the  prosecution  of
Barbour's claims against  Needlecraft,  and other counsel  represent Barbour for
that purpose.

         In the adversary proceeding, Needlecraft originally sought compensatory
damages of $600,000 and punitive damages of $1 million, reformation of contract,
and  declaratory  relief from  Barbour for alleged  breach of an oral  contract,
detrimental   reliance,   and  negligent  and  intentional   interference   with
prospective  economic  advantage.  At a hearing in January 1998,  the Bankruptcy
Court dismissed the claims against Whitlow.

         On February 9, 1999, the Court permitted Needlecraft to file an amended
complaint  that added new claims,  among other things,  for alleged resale price
maintenance,   price  discrimination,   disparagement/trade  libel,  and  unfair
competition and increased the compensatory  damages claimed to $8.1 million.  On
February 24, 1999, the Company notified Hicking  Pentecost and the defendants in
the litigation that it rejected the claim for indemnification and will no longer
fund the defense.  On March 1, 1999,  Hicking Pentecost and Barbour disputed the
Company's  rejection of their claim for indemnification and made a new claim for
indemnification based on the amended complaint.

        By letter dated February 8, 1999, the CTDEP notified the Company that it
is CTDEP's  position that the Company and the buyer of the Thread Division filed
an  inappropriate  form in connection  with the transfer of certain  Connecticut
property as part of the sale of the Thread Division. The CTDEP has asserted that
an alternate form and an  environmental  condition  assessment is required.  The
Company has notified  Hicking  Pentecost  and Barbour that the Company  believes
that  compliance  within  the  CTDEP's  requirements  are their  responsibility.
Hicking  Pentecost and Barbour have responded by demanding  indemnity  under the
Thread Division Agreement.

        In a complaint filed in the United States  District  Court,  District of
New Jersey,  by Liberty Fabrics Rotterdam B.V.  ("Liberty")  against Barbour and
Danfield Threads,  Inc. Liberty has alleged,  among other things,  breaches of a
distributorship  agreement by Barbour and tortious  interference by Barbour with
Liberty's agreements with third parties (the "Liberty Claim"). The amount of the
damages sought by Liberty is not currently known, but is alleged to be in excess
of $75,000.  Hicking  Pentecost  and Barbour have  asserted  that the Company is
obligated by the Thread  Division  Agreement to indemnify them against costs and
liability  of the  Liberty  claim.  The  Company  has  rejected  the  claim  for
indemnification.

        The Company expects that if its disagreements with Hicking Pentecost and
Barbour  are  not  otherwise  resolved,  the  dispute  will  be  resolved  in an
arbitration proceeding pursuant to the Thread Division Agreement.

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

                  None.

                                  Page 8 of 45

<PAGE>

PART II

ITEM 5.        MARKET FOR  REGISTRANT'S  COMMON  EQUITY AND RELATED  STOCKHOLDER
               MATTERS.

         (A)   Market  Information.  On  September  2, 1998,  the New York Stock
               Exchange  notified  the  Company  that it would be  delisted  for
               failing to meet  listing  criteria  related to  aggregate  market
               value, net income and net tangible assets.  On September 4, 1998,
               the Company  commenced trading on the  over-the-counter  bulletin
               board market under the symbol CRLH.  The  Company's  Common Stock
               had been  trading on the NYSE,  under the symbol CRL since  March
               27, 1997 and as BHY from February 15, 1995 to March 26, 1997. The
               following table sets forth certain information as to the high and
               low sales  prices  per  share of the  Company's  Common  Stock as
               quoted on the NYSE for each of the last two years.

                          CALENDAR  YEAR                   COMMON STOCK
                          --------------                   ------------
                       1997                             Low            High
                       ----                             ---            ----
                  First Quarter                        $2.00          $3.00
                  Second Quarter                       $1.843         $2.25
                  Third Quarter                        $1.625         $2.25
                  Fourth Quarter                       $1.1875        $2.0625

                      1998
                      ----
                  First Quarter                        $1.1875        $1.5625
                  Second Quarter                       $1.1875        $1.625
                  Third Quarter                        $.4375         $1.3125
                  Fourth Quarter                       $.46875        $1.5625

         (B)  Holders.  There were 174 record  holders of the  Company's  Common
Stock as of February 23, 1999. The Company believes that, as of such date, there
were in excess of 2,148 beneficial  holders,  including those stockholders whose
shares are held of record by depository companies.

         (C) Dividends.  No cash dividends on the Common Stock have been paid to
date and the Company has no  intention of paying  dividends  in the  foreseeable
future.  In  addition,  dividends  on the Common  Stock are subject to the prior
right of holders of the Preferred Stock to receive  cumulative  dividends at the
rate of $.06 per annum per share (or, if the Company  defaults on its obligation
to redeem shares of Preferred  Stock on the mandatory  redemption  dates, at the
rate of 6% per  annum  on the  principal  amount  of the  Preferred  Stock  then
outstanding plus accrued and unpaid dividends thereon). In addition, the holders
of Preferred Stock are entitled,  upon a dissolution,  liquidation or winding up
of the Company,  to an unpaid  liquidation  preference  of $1 per share plus all
accrued and unpaid dividends.  Unpaid preferred  dividends accrue dividends at a
rate of 6% per annum.

                                  Page 9 of 45

<PAGE>

ITEM 6.       SELECTED FINANCIAL DATA

         The  following  selected  consolidated  financial  data relating to the
Company  and its  subsidiaries  have been  taken or derived  from the  financial
statements  and  other  records  of  the  Company.  Such  selected  consolidated
financial  data are  qualified  in their  entirety  by,  and  should  be read in
conjunction with, the consolidated financial statements of the Company.

<TABLE>
<CAPTION>
                            CARLYLE INDUSTRIES, INC.
                                AND SUBSIDIARIES
                      SELECTED CONSOLIDATED FINANCIAL DATA
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                                  YEARS ENDED DECEMBER 31,
                                                1998         1997         1996         1995         1994 
                                             -------------------------------------------------------------
<S>                                              <C>          <C>          <C>            <C>        <C>  
SUMMARY OF OPERATIONS:
Net sales                                    $  23,801    $  19,641    $  22,162    $  20,352    $  18,949
                                             =========    =========    =========    =========    =========
Income from continuing operations                3,160        3,727        2,758          932        4,551
Income (loss) from continuing
  operations applicable to common stock (1)      2,021        2,282        1,393         (350)       2,209
Income (loss) from discontinued
  operations, net of taxes                          --         (316)       2,080      (22,502)       3,072
Loss on disposal of discontinued
  operations, net of taxes                          --       (9,801)          --      (17,983)          -- 
                                             ---------    ---------    ---------    ---------    ---------
Income (loss) applicable to common stock
  before extraordinary item                      2,021       (7,835)       3,473      (40,835)       5,281
Extraordinary loss on debt prepayment,
  net of tax benefit                                --           --         (266)          --           --
                                             ---------    ---------    ---------    ---------    ---------
Net income (loss) applicable to common
  stock                                      $   2,021    $  (7,835)   $   3,207    $(40,835)$       5,281
                                             =========    =========    =========    =========    =========

PER COMMON SHARE DATA:
Continuing operations                        $     .27    $     .31    $     .19    $    (.05)   $     .42
Discontinued operations                             --        (1.37)         .28        (5.46)         .58
Extraordinary item                                  --           --         (.04)          --           -- 
                                             ---------    ---------    ---------    ---------    ---------
Total                                        $     .27    $   (1.06)   $     .43    $   (5.51)   $    1.00
                                             =========    ---------    ---------    ---------    ---------
Cash dividend per common share                    None         None         None         None         None
                                             =========    =========    =========    =========    =========

                                                                       DECEMBER 31,                          
                                             -------------------------------------------------------------
                                                1998         1997         1996         1995         1994
                                             -------------------------------------------------------------
BALANCE SHEET DATA:
Working capital                              $   9,188    $  10,646    $  (1,512)   $    (323)   $     (84)
Total assets                                 $  17,824    $  25,062    $  67,169    $  75,727    $ 113,531
Long-term debt, capital
  lease obligations and
  redeemable preferred stock                 $  21,108    $  25,067    $  56,647    $  66,845    $  61,262
Common stockholders' equity                  $ (17,285)   $ (19,306)   $ (11,471)   $ (14,677)   $  26,162
</TABLE>

(1) Net  income in 1994  includes  $4.099  million  or $.78 per share of gain on
preferred stock redemption.

                                 Page 10 of 45

<PAGE>

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

                              RESULTS OF OPERATIONS

1998 COMPARED TO 1997

         Sales  during the year ended  December  31, 1998 were $23.8  million as
compared to $19.6 million during the  comparable  period in 1997 for an increase
of $4.2 million.  Westwater  contributed $4.7 million of incremental  sales, all
occurring  during the second half of 1998.  Somewhat  offsetting  the  favorable
comparison due to Westwater was the impact on sales from customer  consolidation
and related store closings occurring principally during the second half of 1997.

         Gross margin  during the year ended  December  31, 1998  totaled  $10.9
million as compared to $10.1 million during the  comparable  period in 1997. The
increase in gross margin  dollars in 1998 as compared to 1997 was  primarily the
result of Westwater  which  contributed  $1.6 million of gross profit during the
period.  During the year, the Company  incurred  approximately  $398 thousand of
incremental  cost of goods sold in  connection  with  merchandise  distributions
related to new store  openings by  customers.  The gross margin  percent for the
year ended  December 31, 1998 was 46.0% as compared to 51.6%  during  1997.  The
decrease in gross margin percent was the result of lower margin in the Westwater
business and incremental costs associated with merchandise distributions related
to new store openings by customers.

         Selling,  general  and  administrative  expense  during  the year ended
December 31, 1998  totaled  $5.6 million as compared to $4.6 million  during the
year ended  December  31,  1997.  Incremental  Westwater  selling,  general  and
administrative expense totaled $1.4 million. A reduction in selling, general and
administrative  expense  due to lower  corporate  administrative  headcount  and
expense offset some of the increase attributable to Westwater.

         Net interest  expense  during the year ended  December 31, 1998 totaled
$309  thousand as compared to net interest  income of $304  thousand  during the
year ended  December 31, 1997.  The increase in interest  expense during 1998 as
compared to 1997 was the result of bank debt outstanding beginning June 23, 1998
in  connection  with  the  Preferred  stock  payment  and  also  the  subsequent
acquisitions  of Westwater and  Streamline.  In 1997 interest  expense  incurred
prior to March  27,  1997  related  to  outstanding  debt  under  former  credit
facilities has been classified as discontinued operations

         The  provision  for income  taxes  during 1998  totaled $1.9 million as
compared to $2.1 million during the comparable period in 1997. The effective tax
rate in 1998 was 37.1% as compared to 36.3% in 1997.

         Preferred  dividends  accrued  during the year ended  December 31, 1998
totaled  $1.139  million as  compared  to $1.445  million  during the year ended
December 31, 1997. The reduction from 1997 was due to the partial  redemption of
preferred stock in June 1998.

                                Page 11 of 45

<PAGE>

1997 COMPARED TO 1996

         Sales during the year ended  December 31, 1997 totaled $19.6 million as
compared to $22.2 million during the comparable  period in 1996. During the year
ended December 31, 1996 sales were favorably  impacted by the initial  placement
of a new program with two major customers.

         Gross margin  during the year ended  December  31, 1997  totaled  $10.1
million as compared to $11.5 million during the  comparable  period in 1996. The
gross margin percentage during 1997 was 51.6% compared to 52.0% for 1996.

         Selling,  general  and  administrative  expense  during  the year ended
December 31, 1997  totaled  $4.6 million as compared to $7.0 million  during the
year  ended   December  31,  1996.   The  reduction  in  selling,   general  and
administrative  expense in 1997 as compared to 1996 was  primarily the result of
the lower corporate administrative headcount and expense.

         Interest  expense  related  to  outstanding  debt under  former  credit
facilities  is  classified  as  discontinued  operations  during the years ended
December 31, 1997 and 1996, as the outstanding debt under such credit facilities
was  required  to be repaid  in  connection  with the sales of the  discontinued
operations.

         During  March  1997  the  Company  completed  the  sale  of its  Thread
division.  $37.0 million of the proceeds received on the sale were used to repay
outstanding bank indebtedness. The results of the Thread division for the period
January  1, 1997  through  March 26,  1997 and for all prior  periods  have been
presented as results of discontinued operations.

         Summarized  condensed  operating results of the Thread division through
date of sale in 1997 and for the year  ended  December  31,  1996 are as follows
(dollars in thousands):

                                                            1997          1996  
                                                          --------     ---------
       Net sales                                          $  9,671     $  66,845
                                                          ========     =========
       Gross margin                                          1,589        13,945
       Selling, general and administrative                   1,271         6,376
                                                          --------     ---------
       Operating income                                   $    318     $   7,569
                                                          ========     =========


         The  provision  for income  taxes  during 1997  totaled $2.1 million as
compared to $1.7 million  during the  comparable  period in 1996.  The effective
income tax rate in 1997 was 36.3% as compared to 38.7% during 1996.

         Preferred  dividends  accrued  during the year ended  December 31, 1997
totaled  $1.445  million as  compared  to $1.365  million  during the year ended
December 31, 1996.

                                 Page 12 of 45

<PAGE>

                         LIQUIDITY AND CAPITAL RESOURCES

         At December  31, 1998,  the  Company's  principal  sources of liquidity
included cash and cash equivalents of $55 thousand and trade accounts receivable
of $4.7 million.  In addition,  the Company had $2.6 million available under its
revolving credit facility as of December 31, 1998.

         Cash used by operations during the year ended December 31, 1998 totaled
$4.9  million  which  included  income tax payments  totaling  $7.2 million made
during the first quarter of 1998  attributable  to the tax gain from the sale of
the Thread division in 1997.

       On June 23, 1998,  the Company  entered into a new $14 million  revolving
credit agreement (the "Credit Agreement") with Fleet Bank, N.A.  ("Fleet").  The
Credit  Agreement  has a term of five  years  and  amounts  available  under the
agreement  are  reduced  in $1 million  increments  at the end of each six month
period, with the first such reduction occurring December 31, 1998. Advances bear
interest  equal to, at the Company's  option,  (1) the rate at which deposits in
U.S. dollars are offered by the principal office of Fleet in London,  England to
prime  banks in the London  interbank  market  (LIBOR)  plus 1.5% or (2) Fleet's
prime rate. A performance price grid provides that interest rates will step down
upon the Company's  achievement  of specified  ratios of funded debt to earnings
before interest, income taxes, depreciation and amortization.

       The  Credit   Agreement  is   guaranteed   by  all  direct  and  indirect
subsidiaries  of the Company and is secured by a first priority lien or security
interest in substantially all of the assets of the Company. The Credit Agreement
contains  representations  and  warranties,  covenants  and  events  of  default
customary for credit agreements of this nature. Such customary covenants include
restrictions on the ability to incur more debt,  acquire other  companies,  make
preferred  stock  payments  and use of  proceeds  from  the sale of  assets.  In
addition to the semi-annual  reduction in availability,  additional payments may
be required  based on the  Company's  proceeds from asset sales and "excess cash
flow" as defined in the Credit Agreement.

         Under the terms of the  Company's  charter,  dividends are payable upon
the  Preferred  Stock when,  as and if declared by the Board of Directors out of
legally  available  funds.  In addition,  the Preferred  Stock is required to be
redeemed by the Company in annual installments  beginning March 15, 1995 through
March 15, 1999,  subject  among other  things to the  approval of the  Company's
senior lenders,  if any and the extent of legally  available funds as determined
by the Board of Directors. Prior to March 27, 1997, the Company did not make any
payments on account of the Preferred  Stock (either  dividend or  redemption) as
the Company's  lenders  declined to approve such payments.  However,  as of that
date, the Company discharged its credit facility.  Consequently, the Company was
in default of its obligations to redeem the Preferred Stock to the extent of its
legally available funds.

         On June 23,  1998 the  Company  paid  $12.5  million  to holders of its
Series B Preferred  stock of record as of June 22, 1998.  $10.1  million of this
amount represented the original redemption amount and $2.4 million reflected the
increase  in  the  redemption  amount  resulting  from  accumulated  and  unpaid
dividends. The payment was authorized by the Company's board of directors at its
annual  meeting  on May  14,  1998,  which  authorization  was  contingent  upon
obtaining  the  necessary  bank  financing  and

                                 Page 13 of 45

<PAGE>

receipt of an opinion by its  investment  banker that the payment  could be made
from legally available funds. On June 23, 1998 both such conditions were met and
the payment was made.

         As of  December  31,  1998,  the  Preferred  Stock  payment  arrearages
aggregated $8.6 million including accrued but unpaid preferred dividends of $2.9
million.  Accrued but unpaid  dividends are added to the redemption value of the
Preferred Stock and the total continues to accrue interest at a compound rate of
6% per annum.

         The  Company  is  engaged  in  discussions  with  Noel,  with a view to
satisfying the balance of its  obligations to the holders of the Preferred Stock
in accordance  with the terms of its charter and to the extent  consistent  with
the Company's  resources.  Discussions  have dealt with the amount and timing of
payments and possible modifications of the Preferred Stock terms and conditions.
Any such  modifications  would  require  the  agreement  of the  Company and the
holders of the Preferred Stock.

         The  Company  intends to fulfill its  obligation  to the holders of the
Preferred  Stock as required by the Company's  charter to the extent the Company
has cash resources in excess of those  required to operate its business.  As the
Company  believes that it does not  currently  have such excess  resources,  its
ability to make  payments on account of the  Preferred  Stock in the future will
depend on the Company's  future cash flow,  the timing of the  settlement of the
liabilities  recorded in the consolidated  financial  statements of the Company,
the outcome of the  negotiations  with Noel described  above, the ability of the
Company to obtain  additional  financing and  compliance  with the Company's new
Credit Facility which presently permits only specified payment amounts including
25% of "excess cash flow",  as defined in the  agreement.  In  addition,  as the
Company has agreed to notify the Pension Benefit Guaranty  Corporation  ("PBGC")
prior to making any redemption payment,  the Company's decision to make any such
payments will depend on the successful  resolution of any issues which may arise
with the PBGC  relating  to the  Company's  unfunded  liability,  if any, to its
defined  benefit plan. The Company is also exploring  strategic  alternatives to
redemption of the preferred stock.

         On June 30, 1998,  the assets and business of Westwater  Enterprises LP
were  acquired by  Westwater,  a newly  formed  wholly-owned  subsidiary  of the
Company. Westwater is an importer and distributor of craft and gift products for
sale to retail and specialty chain stores.  The Company paid  approximately $3.1
million in cash and assumed $.5 million in bank debt.  In  addition,  contingent
payments  of up to $2  million  may  become  payable  upon  the  achievement  of
specified earnings levels or the event an entity other than Noel acquires a more
than 50% voting control of the Company. The contingent payment period covers the
three years ended December 31, 2000 at which time the contingent  payment period
expires.

         On December 16, 1998 the Company's wholly owned subsidiary,  Blumenthal
Lansing Company acquired the assets and business of Streamline Industries,  Inc.
("Streamline") for approximately $1.6 million in cash.  Streamline  packages and
distributes a line of carded  buttons and  embelishments  for sale to retail and
specialty chain stores.

         The  acquisitions  have  been  recorded  using the  purchase  method of
accounting. The accounts of Westwater and Streamline have been consolidated with
the accounts of the Company based on preliminary allocations of their respective
purchase  prices.  These  allocations are expected to be finalized after various
studies and other work have been completed.  The Company's historical results of
operations include 

                                 Page 14 of 45

<PAGE>

Westwater  results  for  the  period  July 1,  1998 to  December  31,  1998  and
Streamline results for the period December 16, 1998 to December 31, 1998.

                                YEAR 2000 ISSUES

         The Company has  implemented  a plan to address year 2000  issues.  The
Company's  plan  includes  the  identification  and  testing of its  information
technology  components and imbedded  technology.  In connection with this plan a
detailed list of hardware,  software and other  micro-processing  technology has
been compiled.

         The Company's  plan includes an evaluation of each  identified  item as
compliant  or  not  compliant  and  the  testing  of  each  component.   Certain
noncompliant  systems have been upgraded or replaced and others are scheduled to
be replaced.  In addition,  the Company's  plan includes  confirmation  with its
significant  customers and  suppliers  regarding  their state of readiness  with
respect to year 2000  issues.  The  Company  does not  currently  have  complete
information  concerning  the year  2000  compliance  status  of all of its major
customers  and  vendors.  In the  event  that any of the  Company's  significant
customers  or  vendors  do  not   successfully  and  timely  achieve  year  2000
compliance, the Company's business or operations could be adversely affected.

         The Company's  primary risks related to year 2000 issues are associated
with the failure of its management  information systems,  which include billing,
production  scheduling,  raw  material  ordering  and  financial  reporting.  In
addition,  the Company  may be at risk if any of its  significant  customers  or
vendors experience risk of failures related to year 2000 issues.

         Based  on  information   currently   available,   management  does  not
anticipate  that the Company  will incur  significant  operating  expenses or be
required  to invest  heavily in  computer  system  improvements  to be year 2000
compliant.  The cost  associated  with the  Company's  year 2000  compliance  is
estimated to be less than $50,000.  To the extent the Company's  systems are not
fully year 2000  compliant,  there can be no assurance  that  potential  systems
interruptions or the cost necessary to update software would not have a material
adverse  effect on the  Company's  business,  financial  condition,  results  of
operations and business prospects.

                                 Page 15 of 45

<PAGE>

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULE


Report of Independent Public Accountants......................................17

Consolidated Balance Sheets- December 31, 1998 and 1997.......................18

Consolidated Statements of Operations -
         Years Ended December 31, 1998, 1997 and 1996.........................20

Consolidated Statements of Cash Flows -
         Years Ended December 31, 1998, 1997 and 1996 ........................21

Consolidated Statements of Stockholders' Equity
         for the Years Ended December 31, 1998, 1997  and 1996................22

Notes to Consolidated Financial Statements
         for the Years Ended December 31, 1998, 1997 and 1996.................23

Consolidated Financial Statements Schedule
         Schedule II - Valuation, Qualifying Accounts and Reserves............37

                                 Page 16 of 45

<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors
  of Carlyle Industries, Inc.


         We have audited the accompanying consolidated balance sheets of Carlyle
Industries,  Inc. (a Delaware  corporation)  and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations, cash flows
and  stockholders'  equity  for  each of the  three  years in the  period  ended
December  31,   1998.   These   consolidated   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.

         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  financial  statements  referred to above  present
fairly, in all material respects, the consolidated financial position of Carlyle
Industries,  Inc. and  subsidiaries  as of December  31, 1998 and 1997,  and the
results of their  operations and their cash flows for each of the three years in
the period  ended  December  31,  1998 in  conformity  with  generally  accepted
accounting principles.

         Our audits were made for the purpose of forming an opinion on the basic
financial  statements  taken as a whole. The 1998, 1997 and 1996 schedule listed
in the index to financial  statements  and schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic  financial  statements.  The  1998,  1997 and 1996  schedule  has been
subjected  to the  auditing  procedures  applied  in  the  audits  of the  basic
financial statements and, in our opinion, fairly states in all material respects
the  financial  data  required to be set forth  therein in relation to the basic
financial statements taken as a whole.

                                                ARTHUR ANDERSEN LLP


New York, New York
February 25, 1999

                                 Page 17 of 45

<PAGE>

<TABLE>
<CAPTION>
                                       CARLYLE INDUSTRIES, INC.
                                           AND SUBSIDIARIES
                                     CONSOLIDATED BALANCE SHEETS
                                        (DOLLARS IN THOUSANDS)


                                                            DECEMBER 31, 1998       DECEMBER 31, 1997
ASSETS                                                      -----------------       -----------------
<S>                                                             <C>                      <C>     
Current Assets:
     Cash and cash equivalents                                  $     55                 $ 12,475
     Accounts receivable trade (net of allowance
         of $1,263 and $879, respectively)                         4,701                    3,040
     Inventories, net                                              4,592                    2,541
     Current deferred tax asset                                    2,646                    2,740
     Other current assets                                            219                      118
                                                                --------                 --------
         Total current assets                                     12,213                   20,914
                                                                --------                 --------
Property, plant and equipment, at cost:
     Land                                                             40                       40
     Building and improvements                                     1,868                    1,852
     Machinery and equipment                                         843                      617
                                                                --------                 --------
                                                                   2,751                    2,509
Less: Accumulated depreciation and amortization                     (922)                   (739)
                                                                --------                 --------
Net property, plant and equipment                                  1,829                    1,770
                                                                --------                 --------

Goodwill (net of amortization of $759 and $656, respectively)      2,955                    2,152
Other assets                                                         827                      226
                                                                --------                 --------
         Total Assets                                           $ 17,824                 $ 25,062
                                                                ========                 ========
</TABLE>
See Notes to Consolidated Financial Statements

                                            Page 18 OF 45

<PAGE>

<TABLE>
<CAPTION>
                                       CARLYLE INDUSTRIES, INC.
                                           AND SUBSIDIARIES
                               CONSOLIDATED BALANCE SHEETS (CONTINUED)
                      (DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE AND SHARE DATA)

                                                          DECEMBER 31, 1998        DECEMBER 31, 1997
                                                          -----------------        -----------------
<S>                                                           <C>                       <C>     
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
     Accounts payable                                         $  1,296                  $    731
     Current maturities of long-term debt                           56                        51
     Federal income taxes payable                                  390                     6,514
     Other current liabilities                                   1,283                     2,972
                                                              --------                  --------
                                                                 3,025                    10,268
                                                              --------                  --------

Long-term Debt                                                  10,421                        78
Other Liabilities                                                8,034                     9,033
                                                              --------                  --------
         Total Liabilities                                      21,480                    19,379
                                                              --------                  --------

Redeemable Preferred Stock, par value $0.01 per share 
     Shares authorized:
         21,305,055 at December 31, 1997
         11,187,451 at December 31, 1998
     Shares issued and outstanding:                             10,687                    20,805
         Series A - None
         Series B - 20,805,060 at December 31, 1997
                    10,687,456 at December 31, 1998
     Accumulated dividends on preferred stock                    2,942                     4,184
                                                              --------                  --------
                                                                13,629                    24,989
                                                              --------                  --------
Common Stock, par value $0.01 per share
         20,000,000 shares authorized;
         Shares issued and outstanding:                             74                        74
         7,382,782 at December 31, 1997 and 1998
Paid in Capital                                                 19,858                    19,858
Retained Earnings                                              (37,217)                 (39,238)
                                                              --------                  --------
Total Common Stockholders' Equity                              (17,285)                 (19,306)
                                                              --------                  --------

Total Liabilities and Stockholders' Equity                    $ 17,824                  $ 25,062
                                                              ========                  ========
</TABLE>

See Notes to Consolidated Financial Statements

                                            Page 19 of 45

<PAGE>

<TABLE>
<CAPTION>
                                      CARLYLE INDUSTRIES, INC.
                                          AND SUBSIDIARIES
                               CONSOLIDATED STATEMENTS OF OPERATIONS
                           (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

                                                                  YEARS ENDED DECEMBER 31,
                                                             1998          1997            1996   
                                                          ---------     ----------       ---------
<S>                                                       <C>             <C>            <C>      
Net sales                                                 $  23,801       $ 19,641       $  22,162
Cost of sales                                                12,852          9,497          10,638
                                                          ---------       --------       ---------
                                                             10,949         10,144          11,524
Selling, general & administrative expenses                    5,623          4,612           7,022
Other income, net                                               (10)           (12)            (52)
                                                          ---------       --------       ---------
Income from continuing operations before
   interest and  income taxes                                 5,336          5,544           4,554
Interest income (expense)                                      (309)           304             (52)
                                                          ---------       --------       ----------
Income  from continuing operations before taxes               5,027          5,848           4,502
Provision for income taxes                                    1,867          2,121           1,744
                                                          ---------       --------       ---------
Income from continuing operations                             3,160          3,727           2,758
Less dividends on preferred stock                             1,139          1,445           1,365
                                                          ---------       --------       ---------
Income from continuing operations applicable
   to common stock                                            2,021          2,282           1,393
Income (loss) from discontinued operations,
   net of income tax provision                                   --           (316)          2,080
Loss on disposal of discontinued operations,
   net of income tax                                             --         (9,801)             --
                                                          ---------       --------       ---------
Income (loss) applicable to common stock
   before extraordinary item                                  2,021         (7,835)          3,473
Extraordinary loss on debt prepayment, net of tax
   benefit of $178 in 1996                                       --             --            (266)
                                                          ---------       --------       ---------
Net income (loss) applicable to common stock              $   2,021       $ (7,835)      $   3,207
                                                          =========       ========       =========

Basic earnings per common share:
   Continuing operations                                  $     .27       $    .31       $    .19
   Discontinued operations                                       --          (1.37)           .28
   Extraordinary item                                            --             --           (.04)
                                                          ---------       --------       --------
   Total                                                  $     .27       $  (1.06)      $   0.43
                                                          =========       ========       ========

Diluted earnings (loss) per common share:
   Continuing operations                                  $     .27       $    .31       $    .19
   Discontinued operations                                       --          (1.37)           .28
   Extraordinary item                                            --             --           (.04)
                                                          ---------       --------       --------
   Total                                                  $     .27       $  (1.06)      $    .43
                                                          =========       ========       ========

Dividend declared per common share                               --             --             --
                                                          =========       ========       ========
Weighted average common shares
   outstanding (in thousands)                                 7,383          7,386          7,395
                                                          =========       ========       ========
</TABLE>
See Notes to Consolidated Financial Statements.

                                           Page 20 of 45

<PAGE>

<TABLE>
<CAPTION>
                                       CARLYLE INDUSTRIES, INC.
                                           AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                                        (DOLLARS IN THOUSANDS)

                                                                       YEARS ENDED DECEMBER 31,
                                                                1998            1997           1996 
                                                              ---------      ---------       --------
<S>                                                           <C>            <C>             <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations                             $   3,160      $   3,727       $  2,758
Reconciliation of net income from continuing
operations to net cash  provided (used) by operations:
  Depreciation and amortization                                     611            452            480
  Deferred tax provision                                            383          2,521          1,609
  Changes in operating assets and liabilities:
   Accounts receivable                                              167           (193)           275
   Inventory                                                      1,015            297            682
   Federal income taxes receivable                                   --             --            675
   Other current assets                                              --             --         (2,031)
   Federal income taxes payable                                  (6,248)            --             --
   Accounts payable                                                (240)          (790)           198
   Other current liabilities                                     (1,463)            80           (273)
   Other operating assets and liabilities                        (1,889)        (2,363)          (554)
   Cash flow from extraordinary item                                 --             --           (266)
   Cash flow from discontinued operations                          (393)        (5,968)        (1,093)
                                                              ---------      ---------       --------
                                                                 (4,897)        (2,237)         2,460
                                                              ---------      ---------       --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of discontinued operations                        --         51,924          8,190
Investment in net assets of acquired businesses                  (5,249)            --             --
Capital expenditures                                               (113)          (323)           (56)
                                                              ---------      ---------       --------
                                                                 (5,362)        51,601          8,134
                                                              ---------      ---------       --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility and
   capitalized lease obligations                                 19,769         20,279         31,809
Repayment of long-term debt and capital lease obligations        (9,430)       (57,299)       (43,268)
Preferred stock payment                                         (12,500)            --             --
                                                              ---------      ---------       --------
                                                                 (2,161)       (37,020)       (11,459)
                                                              ---------      ---------       --------

Increase (decrease) in cash and cash equivalents                (12,420)        12,344           (865)
Cash and cash equivalents beginning of year                      12,475            131            996
                                                              ---------      ---------       --------
Cash and cash equivalents end of year                         $      55      $  12,475       $    131
                                                              =========      =========       ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
   Interest                                                   $     380      $     856       $  4,321
                                                              =========      =========        =======
   Income taxes                                               $   8,420      $     152       $    185
                                                              =========      =========        =======
</TABLE>
See Notes to Consolidated Financial Statements

                                 Page 21 of 45

<PAGE>

<TABLE>
<CAPTION>
                                            CARLYLE INDUSTRIES, INC. AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                      (DOLLARS IN THOUSANDS)

                                                                                                           PAID IN      RETAINED
                                        SERIES B PREFERRED STOCK                  COMMON STOCK             CAPITAL      EARNINGS
                               ------------------------------------------   -------------------------      -------      --------
                                                                 Accum.
                                                                 ------
                                Shares           Amount         Dividend      Shares         Amount
                                ------           ------         --------      ------         ------
<S>                            <C>             <C>             <C>           <C>           <C>            <C>          <C>        
DECEMBER 31, 1995              20,805,060      $   20,805      $    1,374    7,409,282     $       74     $   19,859   $  (34,610)
                               ==========      ==========      ==========   ==========     ==========     ==========   ==========
Net income                                                                                                                  4,572
Dividends accrued on
  preferred stock                                                   1,365                                                  (1,365)
Common stock returned                                                          (21,000)                           (1)
                                               ----------      ----------   ----------     ----------     ----------   ----------
DECEMBER 31, 1996              20,805,060      $   20,805      $    2,739    7,388,282     $       74     $   19,858   $  (31,403)
                               ==========      ==========      ==========   ==========     ==========     ==========   ==========
Net loss                                                                                                                   (6,390)
Dividends accrued on
  preferred stock                                                   1,445                                                  (1,445)
Common stock returned                                                           (5,500)
                               ----------      ----------      ----------   ----------     ----------     ----------   ----------
DECEMBER 31, 1997              20,805,060      $   20,805      $    4,184    7,382,782     $       74     $   19,858   $  (39,238)
                               ==========      ==========      ==========   ==========     ==========     ==========   ==========
Net income                                                                                                                  3,160
Dividends accrued on
  preferred stock                                                   1,139                                                  (1,139)
Dividends paid on
  preferred stock                                                  (2,381)
Preferred stock redemption
                              (10,117,604)     $  (10,118)
                               ----------      ----------      ----------   ----------     ----------     ----------   ----------
DECEMBER 31, 1998              10,687,456      $   10,687      $    2,942    7,382,782     $       74     $   19,858   $  (37,217)
                               ==========      ==========      ==========   ==========     ==========     ----------   ==========
</TABLE>
See Notes to Consolidated Financial Statements

                                                          Page 22 of 45

<PAGE>

                    CARLYLE INDUSTRIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         NATURE OF OPERATION:  Carlyle Industries,  Inc. (the "Company") and its
Subsidiaries  distribute a line of buttons, craft and gift products. The Company
was organized under the laws of the State of Delaware in 1947.

         CONSOLIDATION:   The  accompanying  consolidated  financial  statements
include the accounts of the Company and all  subsidiaries  after  elimination of
intercompany items and transactions.

         RECLASSIFICATIONS AND DISCONTINUED  OPERATIONS:  In order to conform to
the 1998 presentation,  certain  reclassifications were made to the prior years'
financial statements. See Note 4 regarding discontinued operations.

         REVENUE RECOGNITION:Revenue is recognized upon shipment of merchandise.

         SALES  RETURNS:  The Company  estimates an allowance  for sales returns
based on historical sales and sales returns and records a related allowance,  if
significant.

         ALLOWANCE FOR DOUBTFUL  ACCOUNTS:  The Company  maintains a reserve for
doubtful  accounts  which  includes 100% of all invoices that  management  deems
doubtful of collection.

         DEPRECIATION  AND  AMORTIZATION:   Depreciation  and  amortization  are
computed  principally by the straight-line  method for each class of depreciable
and  amortizable  asset based on their  estimated  useful  lives.  Buildings and
improvements,  machinery and equipment,  and  furniture,  fixtures and leasehold
improvements  are  generally  depreciated  over periods of 20-35,  5-25 and 5-10
years, respectively.

         INCOME TAXES:  Deferred income taxes are determined using the liability
method following the provisions of Statement of Financial  Accounting  Standards
("SFAS")  No. 109  (Accounting  for Income  Taxes)  whereby the future  expected
consequences  of  temporary  differences  between  the tax basis of  assets  and
liabilities  and  their  reported  amounts  in  the  financial   statements  are
recognized as deferred tax assets and liabilities.

         IMPAIRMENT:  Long term assets are reviewed for impairment following the
provisions of SFAS No. 121 (Accounting  for the Impairment of Long-Lived  Assets
and for  Long-Lived  Assets to be Disposed  Of).  Goodwill not  associated  with
particular   assets  is  reviewed  for  impairment   based  on  an  analysis  of
undiscounted future cash flows associated with the related operation.

         GOODWILL:  Goodwill is amortized on a straight  line basis over periods
ranging from 15 to 30 years.

         ENVIRONMENTAL  LIABILITIES:  The Company accrues for losses  associated
with  environmental  remediation  obligations  when such losses are probable and
reasonably   estimable.   Accruals  for  estimated  losses  from   environmental
remediation obligations generally are recognized no later than completion of the
remedial  feasibility  study. Such accruals are adjusted as further  information
develops or circumstances

                                 Page 23 of 45

<PAGE>

change. Costs of future expenditures for environmental  remediation  obligations
are not discounted to their present value.

         CASH EQUIVALENTS:  The Company considers all highly liquid  investments
with a maturity of three months or less when purchased to be cash equivalents.

         USE OF ESTIMATES: The preparation of financial statements in conformity
with  generally  accepted  accounting  principles  requires  the Company 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.

2.       ACQUISITIONS

         On June 30, 1998,  the assets and business of Westwater  Enterprises LP
were  acquired by  Westwater  Industries,  Inc.  ("Westwater"),  a newly  formed
wholly-owned subsidiary of the Company. Westwater is an importer and distributor
of craft and gift  products for sale to retail and specialty  chain stores.  The
Company paid  approximately  $3.1  million in cash,  assumed $.5 million in bank
debt. In addition,  contingent  payments of up to $2 million may become  payable
upon the  achievement of specified  earnings levels or the event an entity other
than Noel Group,  Inc.  acquires a more than 50% voting  control of the Company.
The contingent  payment period covers the three years ended December 31, 2000 at
which time the contingent payment period expires.

         On  December  16,  1998 the  Company  acquired  certain  assets and the
business of Streamline  Industries,  Inc.  ("Streamline") for approximately $1.6
million in cash.  Streamline  packages and  distributes a line of carded buttons
and embelishments for sale to retail and specialty chain stores.

         Both  acquisitions  have been  recorded  using the  purchase  method of
accounting. The accounts of Westwater and Streamline have been consolidated with
the accounts of the Company based on preliminary allocations of their respective
purchase  prices.  These  allocations are expected to be finalized after various
studies and other work have been completed.  The Company's historical results of
operations include Westwater results for the period July 1, 1998 to December 31,
1998 and  Streamline  results for the period  December  16, 1998 to December 31,
1998.

3.       PRO FORMA INFORMATION

         The following pro forma condensed  consolidated  financial  information
was  prepared  assuming  Westwater  was  acquired  on  January  1, 1998 and 1997
respectively,  and that the transaction  was accounted for as a purchase.  These
pro forma  results are based on a preliminary  allocation of the purchase  price
and  such  pro  forma  results  may  change  as the  respective  purchase  price
allocations change. Pro forma information is presented for comparative  purposes
only and does not purport to be  indicative of the results which would have been
achieved  had  the  acquisition   occurred  as  of  January  1,  1998  and  1997
respectively,  nor does it  purport  to be  indicative  of  results  that may be
achieved in the future.  Sales and income during the period December 16, 1998 to
December  31,  1998   attributable  to  the  Streamline   acquisition  were  not
significant and, therefore,  pro forma amounts presented in this footnote do not
include the pro forma effects of such acquisition.

                                 Page 24 of 45

<PAGE>

<TABLE>
<CAPTION>
                                                               Unaudited
                                             (Dollars in thousands except per share data)
                                                        Years Ended December 31
                                                        ----------------------
                                                        1998              1997
                                                        ----              ----
<S>                                                  <C>              <C>       
       Net Sales                                     $   27,924       $   28,863
                                                     ==========       ==========

       Income before taxes                           $    4,933       $    6,908
                                                     ==========       ==========

       Net income before preferred dividends         $    3,132       $    4,397
                                                     ==========       ==========

       Preferred stock dividends                     $    1,139       $    1,445
                                                     ==========       ==========

       Net income (loss) attributable to
       common stock                                  $    1,993       $    2,952
                                                     ==========       ==========

       Earnings per share                            $      .27       $      .40
                                                     ==========       ==========
</TABLE>

4.       DISCONTINUED OPERATIONS:

         On  March  26,  1997,   the  Company  sold  the  assets  and  specified
liabilities  of  the  Company's  Thread  division  to an  affiliate  of  Hicking
Pentecost PLC ("HP").  The aggregate cash  consideration  was $54.9 million,  of
which  $3.0  million  was  placed  in escrow  subject  to  certain  post-closing
adjustments,  plus the  assumption  of  approximately  $6.8 million of long term
liabilities.  The proceeds from the $3.0 million held in escrow, if any, will be
recognized as income from discontinued  operations,  net of related income taxes
when, and if, the funds become receivable by the Company.

         In connection with this sale, the Company repaid all of its outstanding
bank debt using proceeds received in the transaction. No penalties were incurred
by the Company in connection with this prepayment. In addition, the Company paid
approximately  $7.3  million of income taxes  related to the tax gain  resulting
from this transaction in March 1998.  Nondeductible goodwill associated with the
Thread  division  amounting  to  approximately  $18.0  million  was  charged  to
discontinued  operations in connection with the sale.  Operating  results of the
Thread  division  for 1997  through  the date of  disposition  and for all prior
periods have been presented as discontinued operations.  The Thread division had
revenues  of $9.8  million  through  the date of  disposition  in 1997 and $66.8
million during the year ended December 31, 1996.

         During the fourth quarter of 1995,  the Company  announced its decision
to divest the Home Furnishings division. Consequently, the results of operations
of the Home  Furnishings  division for 1996 through the date of its sale on July
31, 1996 are classified as discontinued operations.

         Proceeds of $8.2 million were received on the sale of this division and
were used to pay down the  Company's  revolving  bank  loan.  Such net  proceeds
approximated  the amount  that had been  borrowed  under the  revolving  loan in
support of the Home  Furnishings  division's  inventories and  receivables.  The
repayment  of bank debt was  sufficient  in amount to avoid bank fees that would
have been payable had the Company not  completed  the sale within the time frame
prescribed by the Company's  former credit  agreement dated October 29, 1993, as
amended,  or in an amount  sufficient  to repay  amounts  borrowed  against  the
division's  inventories  and  receivables.  The Home  Furnishings  division  had
revenues of $19.2 million through the date of disposition in 1996.

                                 Page 25 of 45

<PAGE>

5.       INVENTORIES:

         The components of inventories as of December 31, net of reserves are as
follows (dollars in thousands):
                                           1998                  1997 
                                        ---------             ---------
         Raw materials                  $   1,790             $   1,976
         Work in progress                      10                    10
         Finished goods                     2,792                   555
                                        ---------             ---------
                                        $   4,592             $   2,541
                                        =========             =========

         At  December  31,  1998  inventories  were  valued on both the  last-in
first-out  ("LIFO") basis and the first-in first-out ("FIFO") basis. At December
31, 1997, all inventories were valued by the last-in  first-out  ("LIFO") basis.
If the  first-in,  first-out  ("FIFO")  method (which  approximates  replacement
costs) of inventory  accounting had been used by the Company,  inventories would
not have been materially affected.

         Inventories  are  stated  at lower  of cost or  market.  Cost  elements
included in inventory are material, labor and overhead, primarily using standard
cost, which approximates actual cost.

6.       OTHER CURRENT LIABILITIES AND OTHER LIABILITIES:

         Other  liabilities as of December 31 consist of the following  (dollars
in thousands):

<TABLE>
<CAPTION>
         CURRENT                                                      1998             1997
         -------                                                      ----             ----
<S>                                                               <C>               <C>      
         Insurance............................................    $      --         $     725
         Salaries, wages, bonuses and other compensation......          513               570
         State income taxes...................................           --               731
         Other................................................          762               946
                                                                  ---------         ---------
                                                                  $   1,275         $   2,972
                                                                  =========         =========


         LONG TERM                                                    1998             1997
         ---------                                                    ----             ----
         Pension liabilities..................................    $   1,894         $   2,855
         Environmental accruals...............................        1,656             1,911
         Other post-retirement benefits.......................        3,166             2,873
         Other................................................        1,318             1,394
                                                                  ---------         ---------
                                                                  $   8,034         $   9,033
                                                                  =========         =========
</TABLE>

7.       LONG TERM DEBT:

         On June 23, 1998, the Company entered into a new $14 million  revolving
credit agreement (the "Credit Agreement") with Fleet Bank, N.A.  ("Fleet").  The
Credit  Agreement  has a term of five  years  and  amounts  available  under the
agreement  are  reduced  in $1 million  increments  at the end of each six month
period, with the first such reduction occurring December 31, 1998. Advances bear
interest  equal to, at the Company's  option,  (1) the rate at which deposits in
U.S. dollars are offered by the principal office of Fleet in London,  England to
prime  banks in the London  interbank  market  (LIBOR)  plus 1.5% or (2) Fleet's
prime rate. A performance price grid provides that interest rates will step down
upon the Company's  achievement  of specified  ratios of funded debt to earnings
before interest, income taxes, depreciation and amortization.

                                 Page 26 of 45

<PAGE>

         The  Credit   Agreement  is  guaranteed  by  all  direct  and  indirect
subsidiaries  of the Company and is secured by a first priority lien or security
interest in substantially all of the assets of the Company. The Credit Agreement
contains  representations  and  warranties,  covenants  and  events  of  default
customary for credit agreements of this nature. Such customary covenants include
restrictions on the ability to incur more debt,  acquire other  companies,  make
preferred  stock  payments  and use of  proceeds  from  the sale of  assets.  In
addition to the semi-annual  reduction in availability,  additional payments may
be required  based on the  Company's  proceeds from asset sales and "excess cash
flow" as defined in the Credit Agreement.

       Debt obligations as of December 31 consist of (dollars in thousands):

<TABLE>
<CAPTION>
                                                                      1998             1997
                                                                      ----             ----
<S>                                                               <C>               <C>      
         Revolving credit facility............................    $  10,400         $      --
         Capitalized lease obligations........................           77               129
                                                                  ---------         ---------
              ................................................       10,477               129
         Less:  Current maturities............................           56                51
                                                                  ---------         ---------
                                                                  $  10,421         $      78
                                                                  =========         =========
</TABLE>

8.       LEASE PAYMENTS:

         The  following is a schedule of future  minimum  lease  payments  under
capital and  non-cancelable  operating leases with initial or remaining terms of
one year or more at December 31, 1998 (dollars in thousands):

                  1999                                        $    70
                  2000                                             26
                                                              -------
                  Total minimum lease payments                     96
                  Amount representing interest                     11
                                                              -------
                  Present value of future minimum lease
                  payments (including current portion of $64) $    85
                                                              =======

         Rental  expense for premises and machinery and equipment  leased by the
Company under operating leases was as follows (dollars in thousands):

                                              YEARS ENDED DECEMBER 31,
                                         1998           1997            1996   
                                       --------       ---------      ---------
         Premises                        $ 132          $  101         $  374
         Machinery                       $   5          $    8         $    8

9.       FINANCIAL INSTRUMENTS:

         The  Company's  financial  instruments  are  comprised  of  cash,  cash
equivalents, accounts receivable, long term debt and Series B Preferred Stock at
December 31, 1998.  The carrying  amounts of cash,  cash  equivalents,  accounts
receivable  and long term debt  approximate  fair  values due to the  short-term
maturity of cash, cash  equivalents  and accounts  receivable and in the case of
long term debt due to the  Company's  forecasted  ability to repay such debt and
accrued interest. It was not practicable to obtain an estimate of the fair value
of the Company's Series B Preferred Stock.

                                 Page 27 of 45

<PAGE>

10.      CUSTOMER CONCENTRATION:
         During the years ended  December 31, 1998,  1997 and 1996,  the Company
conducted  business with four customers whose aggregate sales volume represented
approximately  77%, 78% and 75% of the  Company's  net  revenues,  respectively.
These  customers  also  represented  approximately  72%  and  87% of  the  total
outstanding accounts receivable as of December 31, 1998 and 1997 respectively. A
reduction  in  sales  to any of  these  customers  could  adversely  impact  the
financial condition and results of operations of the Company.


11.      PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS:

         The  Company   sponsors  a  defined  benefit  plan  which  requires  no
contribution  from the  employees.  The plan was frozen as of December 31, 1994,
and no new employees have been eligible to join this plan after that date. Prior
to  December  31,  1994,  the Plan  covered  substantially  all  employees.  The
employees  covered  under this plan do not receive any  additional  accruals for
service  rendered  after December 31, 1994.  Plan assets consist  principally of
common stocks and U.S. Government and corporate obligations.  The benefits under
this plan are determined based on formulas which reflect the employees' years of
service and  compensation  during their  employment  period.  The projected unit
credit method is used to determine  pension cost.  Funding  requirements for the
plan are  based on the unit  credit  method.  The  Company's  policy  is to fund
pension cost as required by ERISA.

         The Company  provides  certain health and life  insurance  benefits for
eligible retirees and their dependents. The Company accounts for post retirement
benefits  in  accordance   with  SFAS  No.  106   (Employers'   Accounting   for
Post-retirement   Benefits   Other   Than   Pensions),   whereby   the  cost  of
post-retirement benefits are accrued during employees' working careers. The plan
is not funded.  The Company's policy is to pay the cost of benefits as incurred.
Certain  benefits are available to full-time  employees who were over age 30, as
of January 1, 1992,  provided such  employees  work for the Company for 25 years
and reach certain ages, but not less than age 55.  Employees hired after January
1, 1993 are not  eligible  to receive  benefits  under this  Plan.  (dollars  in
thousands):

<TABLE>
<CAPTION>
                                              PENSION BENEFITS        OTHER BENEFITS
                                                YEARS ENDED             YEARS ENDED
                                                DECEMBER 31,            DECEMBER 31,
                                            1998        1997        1998        1997  
                                          --------    --------    --------    --------
<S>                                       <C>         <C>         <C>         <C>     
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year   $ 20,704    $ 19,525    $  3,356    $  3,402
Service cost                                    --          --           1          --
Interest costs                               1,457       1,481         218         251
Actuarial loss (gain)                        1,138       1,350        (240)       (110)
Benefits paid                               (1,649)     (1,652)       (167)       (187)
                                          --------    --------    --------    --------
Benefit obligation at end of year         $ 21,650    $ 20,704    $  3,168    $  3,356
                                          ========    ========    ========    ========
</TABLE>

                                 Page 28 of 45

<PAGE>

<TABLE>
<CAPTION>

CHANGE IN PLAN ASSETS
<S>                                               <C>          <C>          <C>          <C>     
Fair value of plan assets at beginning of year    $ 22,542     $ 19,877     $     --     $     --
Actual return on plan assets                         1,679        4,176           --           --
Employer contribution                                   --          141           --           --
Benefits paid                                       (1,649)      (1,652)          --           --
                                                  --------     --------     --------     --------
Fair value of plan assets at end of year          $ 22,572     $ 22,542     $     --     $     --
                                                  ========     ========     ========     ========

Funded status                                     $    922     $  1,838     $ (3,168)    $ (3,356)
Unrecognized net actuarial loss (gain)              (1,283)      (2,864)         177          429
Unrecognized prior service cost                         --           --         (175)        (190)
                                                  --------     --------     --------     --------
Accrued benefit cost                              $   (361)    $ (1,026)    $ (3,166)    $ (3,117)
                                                  ========     ========     ========     ========

Weighted average assumptions as of December 31:
Discount rate                                         6.75%        7.25%        6.75%        7.25%
Expected return on plan assets                        9.50%        9.50%         N/A          N/A
Rate of compensation increase                          N/A          N/A          N/A          N/A

COMPONENTS OF NET PERIODIC BENEFIT COST
Service                                                 --           --            1           --
Interest cost                                        1,457        1,481          218          251
Expected return on plan assets                      (2,073)      (1,816)          --           --
Amortization of prior service cost                      --           --          (15)          54
Recognized net actuarial loss (gain)                   (49)          --           11           --
                                                  --------     --------     --------     --------
Net periodic benefit cost                         $   (665)    $   (335)    $    215     $    305
                                                  ========     ========     ========     ========
</TABLE>

         A  one-percentage-point  change in assumed health care cost trend rates
would not change the actuarial present value of the accumulated  post-retirement
benefit  obligations  due to annual  limitations  of Company  contributions  per
employee.


12.      PENSION BENEFIT GUARANTY CORPORATION:

         In January 1997,  the Pension  Benefit  Guaranty  Corporation  ("PBGC")
notified  the  Company  that it was  considering  whether the sale of the Thread
division to HP would create an obligation  under ERISA to  immediately  fund, in
whole or in part, the Company's  unfunded liability to its defined benefit plan.
In February  1997, at the request of the PBGC, the Company agreed to provide the
PBGC with at least  thirty (30) days advance  notice of any  proposed  dividend,
stock redemption,  stockholder  buyback or other distribution to shareholders of
any class of equity  which is  projected to occur at any time prior to March 31,
2002. In  consideration  of such  agreement,  the PBGC agreed not to take action
solely with respect to the proposed  sale  transaction.  In December  1997,  the
Company  notified  the PBGC that it intends to redeem $10  million of  Preferred
Stock  as soon  after  year  end as was  practicable,  plus  additional  amounts
quarterly  thereafter,  but only to the  extent of  legally  available  funds as
determined by the Board of Directors and if appropriate  bank financing had been
satisfactorily obtained. Following such notice, the PBGC indicated that it would
not take any action with respect to such payments.

         If the PBGC had taken the position  that the Company  should  fund,  in
whole or in part,  the unfunded  liability to the defined  benefit  plan,  after
receiving notice of a proposed dividend,  stock redemption,  stockholder buyback
or other  distribution to  shareholders,  and if such position were upheld,  the
ability  of the  Company to take any such  proposed  action  could be  adversely
affected.  The Company's  liability to its defined benefit plan is recorded,  in
accordance with financial accounting standards,  at $361 thousand as of 

                               Page 29 of 45

<PAGE>

December 31, 1998.  Were the plan to be  terminated  or were the PBGC to require
that  the  plan be  funded  according  to  different  standards,  the  Company's
obligation  to  transfer  cash to the plan  could be larger  than the  liability
reflected on the balance sheet. Based on an actuarial  estimate,  the obligation
to transfer cash in the event of a  termination  would be $3.3 million in excess
of the balance sheet liability. Any actual amounts transferred in the event of a
plan termination  would depend on PBGC action and market  conditions at the time
of transfer and could differ  significantly from this estimate.  For information
with respect to the Company's  liability to its defined  benefit plan,  see Note
11.


13.      STOCKHOLDERS' EQUITY:

         COMMON STOCK
         Each share of Common  Stock is  entitled  to one vote per share.  As of
December 31, 1998 there were  20,000,000  shares of Common Stock  authorized and
7,382,782 shares outstanding.

         PREFERRED STOCK
         Each  share of Series B  Preferred  Stock is  entitled  to one vote per
 share. As of December 31, 1998 there were 11,187,451  shares of Preferred Stock
 authorized  and  10,687,456  shares  of Series B  Preferred  Stock  issued  and
 outstanding.  The Series B  Preferred  Stock is  entitled  to a  preference  on
 liquidation equal to $1 per share plus accrued and unpaid dividends at the rate
 of $.06 per annum per share.  There remain  499,995  shares of  authorized  but
 unissued shares of blank check Preferred Stock.

         Twenty  percent of the shares of Series B Preferred are scheduled to be
 redeemed by the Company, from funds legally available therefore,  on March 15th
 of each year  commencing  in 1995 and ending in 1999.  Such  shares may also be
 redeemed at any time at the Company's option. On June 23, 1998 the Company paid
 $12.5  million to holders of its Series B Preferred  stock of record as of June
 22, 1998.  $10.1  million of this amount  represented  the original  redemption
 amount  and $2.4  million  reflected  the  increase  in the  redemption  amount
 resulting from accumulated and unpaid dividends.

         Dividends  on the Series B Preferred  Stock accrue at an annual rate of
6% and are payable  quarterly on March 15, June 15,  September  15, and December
15. Additional  dividends accrue on all scheduled but unpaid dividends at a rate
of 6% per annum.

         The amount of accrued but unpaid  dividends  at  December  31, 1998 was
approximately  $2.9  million  or  $.40  per  common  share.  In  addition,   the
availability  of resources to make payments to the holders of Preferred Stock in
the future will  depend on the  Company's  future  cash flow,  the timing of the
settlement  of the  liabilities  recorded  in the  financial  statements  of the
Company; and the ability of the Company to obtain financing.

         Because of its holdings of Preferred Stock,  Noel Group,  Inc. ("Noel")
has approximately 54.9% of the vote with respect to the Company's capital stock.


14.      DEFAULT ON PREFERRED STOCK

         Under the terms of the  Company's  charter,  dividends are payable upon
the  Preferred  Stock when,  as and if declared by the Board of Directors out of
legally  available  funds.  In addition,  the Preferred  Stock is required to be
redeemed by the Company in annual installments  beginning March 15, 1995 

                                 Page 30 of 45

<PAGE>

through  March 15,  1999,  subject  among  other  things to the  approval of the
Company's senior lenders, if any and to the extent of legally available funds as
determined by the Board of Directors.  Prior to March 27, 1997,  the Company did
not make any  payments on account of the  Preferred  Stock  (either  dividend or
redemption) as the Company's lenders declined to approve such payments. However,
as of that date, the Company discharged its credit facility.  Consequently,  the
Company was in default of its  obligations to redeem the Preferred  Stock to the
extent of its legally available funds.

         On June 23,  1998 the  Company  paid  $12.5  million  to holders of its
Series B Preferred  stock of record as of June 22, 1998.  $10.1  million of this
amount represented the original  redemption amount and $2.4 million  represented
the increase in the required  redemption  payment resulting from accumulated and
unpaid dividends.  The payment was previously  authorized by the Company's Board
of Directors  at its annual  meeting on May 14, 1998,  which  authorization  was
contingent upon obtaining the necessary bank financing and receipt of an opinion
by its investment  banker that the payment could be made from legally  available
funds. On June 23, 1998 both such conditions were met and the payment was made.

         As of  December  31,  1998,  the  Preferred  Stock  payment  arrearages
aggregated $9.5 million including accrued but unpaid preferred dividends of $2.9
million.  Accrued but unpaid  dividends are added to the redemption value of the
Preferred Stock and the total continues to accrue interest at a compound rate of
6% per annum.

         The  Company  is  engaged  in  discussions  with  Noel,  with a view to
satisfying the balance of its  obligations to the holders of the Preferred Stock
in accordance  with the terms of its charter and to the extent  consistent  with
the Company's  resources.  Discussions  have dealt with the amount and timing of
payments and possible modifications of the Preferred Stock terms and conditions.
Any such  modifications  would  require  the  agreement  of the  Company and the
holders of the Preferred Stock.

         The  Company  intends to fulfill its  obligation  to the holders of the
Preferred  Stock as required by the Company's  charter to the extent the Company
has cash resources in excess of those  required to operate its business.  As the
Company  believes that it does not  currently  have such excess  resources,  its
ability to make  payments on account of the  Preferred  Stock in the future will
depend on the Company's  future cash flow,  the timing of the  settlement of the
liabilities  recorded in the consolidated  financial  statements of the Company,
the outcome of the  negotiations  with Noel described  above, the ability of the
Company to obtain  additional  financing and  compliance  with the Company's new
Credit Facility which presently permits only specified payment amounts including
25% of "excess cash flow",  as defined in the  agreement.  In  addition,  as the
Company  has agreed to notify the PBGC prior to making any  redemption  payment,
the Company's  decision to make any such payments will depend on the  successful
resolution of any issues which may arise with the PBGC relating to the Company's
unfunded  liability,  if any, to its defined  benefit plan.  The Company is also
exploring strategic alternatives to redemption of the Preferred Stock.


15.      INCOME TAXES:

         The income (loss)  before  income taxes for the periods ended  December
31, 1998, 1997 and 1996 are substantially all domestic in origin.

         The  components  of the income tax provision or benefit are (dollars in
thousands):

                                 Page 31 of 45

<PAGE>

CONTINUING OPERATIONS
                                                YEARS ENDED DECEMBER 31,
                                            1998         1997         1996   
                                        -------------------------------------
       Current provision (benefit)           383     $    (400)      $    135
       Deferred provision                  1,484         2,521          1,609
                                        --------     ---------       --------
                                        $  1,867     $   2,121       $  1,744
                                        ========     =========       ========


DISCONTINUED OPERATIONS
                                               YEARS ENDED DECEMBER 31,
                                           1998         1997         1996   
                                       -------------------------------------
       Current provision                     --     $   7,503       $    111
       Deferred provision (benefit)    $     --        (2,162)         1,324
                                       --------     ----------      --------
                                       $     --     $   5,341       $  1,435
                                       ========     =========       ========

       The  Company's  tax  provision or benefit  differed from that which would
have been provided at a 34% rate as follows (dollars in thousands):

CONTINUING OPERATIONS
                                                YEARS ENDED DECEMBER 31,
                                           1998         1997         1996  
                                       -------------------------------------
       Federal provision at 34%        $   1,709    $   1,988       $  1,531
       State and local provision, net        100           95            170
       Amortization of goodwill               32           32             31
       Other, net                             26            6             12
                                       ---------    ---------       --------
                                       $   1,867    $   2,121       $  1,744
                                       =========    =========       ========

DISCONTINUED OPERATIONS
YEARS ENDED DECEMBER 31,
                                            1998         1997         1996  
                                       -------------------------------------
       Federal provision at 34%        $      --    $  (1,624)      $  1,160
       Foreign loss (income)                  --           --             --
       State and local provision, net         --          352             15
       Amortization/write-off of goodwill     --        6,119            257
       Other, net                             --          494              3
                                       ---------    ---------       --------
                                       $      --    $   5,341       $  1,435
                                       =========    =========       ========

                                 Page 32 of 45

<PAGE>

     At December 31, 1998 and 1997, the components of the net deferred tax asset
are (dollars in thousands):

                                                      1998              1997  
                                                   ---------         --------
       Book value of fixed assets over tax basis   $    (536)        $   (536)
       Pension liabilities                               701            1,056
       Other post-retirement benefit liability         1,171            1,063
       Environmental accruals                            613              707
       Operating and capital loss carryforwards          402              402
       Other,  net                                       295               48
                                                   ---------         --------
                                                   $   2,646         $  2,740
                                                   =========         ========

         Based on the Company's  business plan for the future,  management is of
the  opinion  that it is more  likely  than not that the  deferred  tax asset at
December 31, 1998 will be realized.


16.      INCENTIVE PROGRAM:

         As of December 6, 1994, the Company's voting  stockholders  adopted the
1994 Incentive Program (the "Program").  Grants under the Program may consist of
incentive stock options,  non-qualified stock options, stock appreciation rights
in tandem  with stock  options or  freestanding,  restricted  stock  grants,  or
restored options. In connection with the Program, 500,000 shares of Common Stock
were available for grants at the start of the Program. In addition, on April 22,
1997,  the  stockholders  voted to amend the Program by increasing the number of
shares available for grant by 500,000.

         SFAS No. 123  (Accounting for  Stock-Based  Compensation)  modifies the
accounting and reporting  standards for the Company's  stock-based  compensation
plans. SFAS 123 provides that stock-based awards be measured at their fair value
at the grant date in accordance  with a valuation  model.  This  measurement may
either be recorded in the Company's basic financial  statements or the pro forma
effect on earnings may be disclosed in its financial statements. The Company has
elected to provide the pro forma disclosures.
The  Company's  reported  and pro forma net income and earnings per share are as
follows:

                                   1998              1997              1996  
                                 ---------         ---------         --------
       Net Income (loss):
         As Reported             $   2,021         $  (7,835)        $  3,207
         Pro Forma               $   1,881         $  (7,917)        $  3,017
       Basic EPS:
         As Reported             $     .27         $   (1.06)        $    .43
         Pro Forma               $     .25         $   (1.07)        $    .41
       Diluted EPS:
         As Reported             $     .27         $   (1.06)        $    .43
         Pro Forma               $     .25         $   (1.07)        $    .41

         The Company  may grant  options for up to  1,000,000  shares  under the
Program.  The Company has granted options on 773,081 shares through December 31,
1998.  Under the Program the option  exercise  price  equals the stock's  market
price on date of grant.
Program  options  vest over a three to  four-year  period and  expire  after ten
years.

                                 Page 33 of 45

<PAGE>

         A  summary  of the  status  of the  Program's  outstanding  grants  and
weighted average exercise prices at December 31, 1998, 1997 and 1996 and changes
during  the years  then  ended is  presented  in the table and  narrative  below
(shares in thousands):

<TABLE>
<CAPTION>
                                          1998                       1997                      1996
                                   -------------------       -------------------       -------------------
                                   SHARES       PRICE        SHARES       PRICE        SHARES        PRICE  
                                   ------       -----        ------       -----        ------        -----  
<S>                                  <C>        <C>            <C>        <C>            <C>        <C>   
   Beginning of year                 706        $ 4.83         448        $ 5.38         246        $ 8.54
   Granted                           172         1.185         330          2.00         217          2.11
   Exercised                          --            --          --            --          --            --
   Forfeited                        (105)         2.02         (72)         5.14         (15)        10.00
   Expired                            --            --          --            --          --            -- 
                                   -----        ------       -----        ------       -----        ------
   End of year                       773        $ 4.40         706        $ 4.83         448        $5.385
                                   =====        ======       =====        ======       =====        ======
   Shares exercisable at end
     of year                         541                       427                       123
                                   =====                     =====                     =====
   Weighted average exercise
     price of exercisable options  $4.15                     $4.38                     $8.83
                                   =====                     =====                     =====
</TABLE>

         The fair value of each option  grant is  estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions  used for  grants in 1998,  1997 and 1996,  respectively:  risk-free
interest  rates of 5.7, 6.5 and 6.7 percent,  expected  dividend  yields of zero
percent; expected lives of 5.4, 4.9 and 6.1 years; expected volatility of 75, 35
and 83 percent.


17.      EARNINGS PER COMMON SHARE:

         In 1997,  the Company  adopted SFAS No. 128 (Earnings  per Share).  The
adoption  of SFAS No.  128 had no effect on  previously  reported  earnings  per
share.  Options to purchase  shares of common stock of the Company had no effect
on earnings per share  because the exercise  price of such options  exceeded the
market price of the Company's  common stock in each of the years ended  December
31, 1998, 1997 and 1996.  Basic earnings per common share have been presented as
earnings from continuing operations,  earnings from discontinued operations, and
earnings  from  extraordinary  item.  Basic  earnings per share from  continuing
operations have been calculated as net income from continuing  operations  after
preferred  dividend  requirements  of $1,139,000,  $1,445,000 and $1,365,000 for
1998,  1997 and 1996  respectively,  divided by weighted  average  common shares
outstanding during the period. Basic earnings per common share from discontinued
operations  have been calculated as income (loss) from  discontinued  operations
plus net loss on disposition of discontinued  operations divided by the weighted
average number of common shares outstanding.


18.      COMMITMENT AND CONTINGENCIES:

         In connection  with the sale of the Thread  division to an affiliate of
HP, $3.0 million of the proceeds were placed in escrow.

         Pursuant to a written indemnity, and under a reservation of rights, the
Company  has  assumed  the  defense  and  indemnity  of  Barbour  Threads,  Inc.
("Barbour"),  as the successor in interest to Danfield  Threads,  Inc.,  Barbour
Industries,  Inc., and Blue Mountain Industries,  Inc., and an individual,  H.D.
Whitlow

                                 Page 34 of 45

<PAGE>

("Whitlow"),   in  an  adversary  proceeding  which  relates  to  a  Chapter  11
reorganization, in re Needlecraft Industries, Inc. ("Needlecraft"),  Case No. LA
97-41233 LF. The Company has no role in the  bankruptcy  or the  prosecution  of
Barbour's claims against  Needlecraft,  and other counsel  represent Barbour for
that purpose.

         In the adversary proceeding, Needlecraft originally sought compensatory
damages of $600,000 and punitive damages of $1 million, reformation of contract,
and  declaratory  relief from  Barbour for alleged  breach of an oral  contract,
detrimental   reliance,   and  negligent  and  intentional   interference   with
prospective  economic  advantage.  At a hearing in January 1998,  the Bankruptcy
Court dismissed the claims against Whitlow.

         On February 9, 1999, the Court permitted Needlecraft to file an amended
complaint  that added new claims,  among other things,  for alleged resale price
maintenance,   price  discrimination,   disparagement/trade  libel,  and  unfair
competition and increased the compensatory damages claimed to $8.1 million.

         Discovery has been continued until June 15, 1999. A pretrial conference
is scheduled on July 20, 1999.

         On February  24,  1999,  the Company  notified  the  defendants  in the
litigation that it is rejecting the claim for indemnification and will no longer
fund the defense.

         Although  there can be no assurances,  based on  information  currently
available,  the  Company  does not  believe  that the  outcome  of all  known or
threatened  litigation  and other claims will have a material  adverse effect on
the Company's financial condition, liquidity or operating results.

<TABLE>
<CAPTION>
19.      UNAUDITED QUARTERLY RESULTS OF OPERATIONS: (IN THOUSANDS EXCEPT FOR PER
         SHARE DATA)


                                                 DECEMBER 31,     SEPTEMBER 30,     JUNE 30,          MARCH 31,
QUARTER ENDED                                        1998              1998           1998              1998  
                                                 ------------     -------------    ----------        ---------
<S>                                              <C>              <C>               <C>              <C>      
Net sales                                        $   6,798        $   8,111         $   3,835        $   5,057
Cost of sales                                        3,580            4,890             1,882            2,500
                                                 ---------        ---------         ---------        ---------
Gross profit                                     $   3,218        $   3,221         $   1,953        $   2,557
                                                 =========        =========         =========        =========

Income applicable to common stock                $     517        $     649         $     238        $     617
                                                 =========        =========          ========        =========

BASIC AND DILUTED INCOME PER COMMON SHARE:       $     .07        $     .09         $     .03        $     .08
                                                 =========        =========         =========        =========
</TABLE>

                                 Page 35 of 45

<PAGE>

<TABLE>
<CAPTION>

                                                 DECEMBER 31,     SEPTEMBER 30,     JUNE 30,         MARCH 31,
QUARTER ENDED                                        1997             1997            1997              1997  
                                                 -------------    --------------   ----------        ---------
<S>                                              <C>              <C>               <C>              <C>      
Net sales                                        $   5,116        $   5,050         $   4,470        $   5,005
Cost of sales                                        2,638            2,568             1,939            2,352
                                                 ---------        ---------         ---------        ---------
Gross Profit                                     $   2,478        $   2,482         $   2,531        $   2,653
                                                  ========        =========         =========        =========

Income from continuing operations
   applicable to common stock                    $     615        $     589         $     575        $     503
Income (loss) from discontinued operations              --               --                --        $ (10,117)
                                                 ---------        ---------         ---------        ---------
Income (loss) applicable to common stock         $     615        $     589         $     575        $  (9,614)
                                                 =========        =========         =========        =========

BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
Continuing operations                            $     .08        $     .08         $     .08        $    .07
Discontinued operations                                 --               --                --           (1.37)
                                                 ---------        ---------         ---------        ---------
                                                 $     .08        $     .08         $     .08        $  (1.30)
                                                 =========        =========         =========        =========
</TABLE>

                                 Page 36 of 45

<PAGE>

ITEM 9.     

                CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                ACCOUNTING AND FINANCIAL DISCLOSURE

                                 Not applicable.

PART III.

         Pursuant to instruction (G) 3 to Form 10-K, the information required in
Items 10-13 is  incorporated  by reference from the Company's  definitive  proxy
statement  which is expected to be filed by the Company  pursuant to  regulation
14A on or around April 20, 1999.


PART IV.
<TABLE>
<CAPTION>

ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

                                    SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

                                              CARLYLE INDUSTRIES, INC. AND SUBSIDIARIES

             COLUMN A                    COLUMN B                   COLUMN C                 COLUMN D           COLUMN E
----------------------------------- -------------------- ------------------------------- ------------------ -----------------

                                                                   Additions
----------------------------------- -------------------- ------------------------------- ------------------ -----------------
           Description                    Balance at           (1)              (2)            Deductions      Balance at End
                                          Beginning         Charged to       Charged to                          of Period
                                          of Period         Costs and      Other Accounts
                                                            Expenses
          -------------------------------------------------------------------------------------------------------------------
<S>                                       <C>                <C>              <C>              <C>                <C>       
  YEAR ENDED DECEMBER 31, 1998
  Allowance deducted from assets to
  which they apply:
  Allowance for doubtful accounts         $      108         $       48       $      502       $      (120)       $      538
                                          ==========         ==========       ==========       ===========        ==========
  YEAR ENDED DECEMBER 31, 1997
  Allowance deducted from assets                                           
  to which they apply:

  Allowance for doubtful accounts         $      379         $       --       $       --       $      (271)       $      108
                                          ==========         ==========       ==========       ===========        ==========
  YEAR ENDED  DECEMBER  31, 1996  
  Allowance  deducted  from assets 
  to which they apply:

Allowance for doubtful accounts           $      433         $       --       $       --        $       (54)      $     379
                                          ==========         ==========       ==========        ===========       =========
</TABLE>

                                                            Page 37 of 45

<PAGE>

                                  EXHIBIT LIST


         14   (a) Documents filed as part of this Form 10-K:

         1.   FINANCIAL  STATEMENTS.  A list of  financial  statements  included
herein is set forth in the Index to Financial Statements, Schedules and Exhibits
appearing in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."

         2.   FINANCIAL  STATEMENT  SCHEDULES.  A list  of  financial  statement
schedules  included  herein is set forth in the Index to  Financial  Statements,
Schedules  and  Exhibits   appearing  in  "ITEM  8.  FINANCIAL   STATEMENTS  AND
SUPPLEMENTAL  DATA."  All other  schedules  for which  provision  is made in the
applicable accounting  regulations of the Securities and Exchange Commission are
not required under the related  instructions or are inapplicable,  and therefore
have been omitted.

         3.   EXHIBITS FILED UNDER ITEM 601 OF REGULATION S-K.

EXHIBIT NO.                               DESCRIPTION
3.1                   Restated  Certificate of Incorporation of the Company    *
                      incorporated  by  reference  to  Exhibit  3.1  to the
                      Company  Statement on Form 10/A (Amendment No. 4), as
                      filed   with  the   Commission   on  March  3,  1994,
                      Commission File No. 0-23082.

3.2                   By-laws of the Company  incorporated  by reference to    *
                      Exhibit  3.2 to the  Registration  Statement  on Form
                      10/A  (Amendment No. 3), as filed with the Commission
                      on February 18, 1994, Commission File No. 0-23082.

4.1                   See Exhibit 3.1                                          *

10.1                  Agreement  dated as of April 13, 1993 between Belding
                      Heminway Company,  Inc.,  Pentapco,  Inc. and ConAgra
                      Pet Products  Company,  incorporated  by reference to
                      Exhibit  2 to  the  Current  Report  on  Form  8-K of
                      Belding  Heminway  Company,  Inc.  filed on April 28,
                      1993, Commission File No. 1-3462.

10.2                  Letter  Agreement  dated as of July 21, 1993  between    *
                      Gregory H. Cheskin and Belding Heminway Company, Inc.
                      incorporated  by  reference  to  Exhibit  10.2 to the
                      Registration  Statement on Form 10, as filed with the
                      Commission on December 15, 1993,  Commission File No.
                      0-23082.

10.3                  Letter  Agreement  dated as of August 9, 1993 between    *
                      Winton J. Tolles and   Belding Heminway Company, Inc.
                      incorporated  by  reference  to  Exhibit  10.3 to the
                      Registration  Statement on Form 10, as filed with the
                      Commission on December 15, 1993,  Commission File No.
                      0-23082.

                               Page 38 of 45

<PAGE>

10.4                  Agreement  and  Plan of  Merger  dated as of June 16,    *
                      1993  among  Noel   Group,   Inc.,   BH   Acquisition
                      Corporation  and  Belding  Heminway   Company,   Inc.
                      incorporated   by  reference  to  Exhibit  A  to  the
                      Schedule   14C   Information   Statement  of  Belding
                      Heminway Company filed on October 8, 1993, Commission
                      File No. 1-3462.

10.5                  Credit  Agreement  among  Belding  Heminway  Company,    *
                      Inc.,  NationsBank  of North  Carolina,  N.A.,  Fleet
                      Bank,  The Bank of New York and the Daiwa Bank,  Ltd.
                      dated  as  of  October  29,  1993   incorporated   by
                      reference  to  Exhibit   10.5  to  the   Registration
                      Statement on Form 10, as filed with the Commission on
                      December 15, 1993, Commission File No. 0-23082.

10.6                  Stock  Purchase  Agreements  dated as of December 17,    *
                      1993  between  Noel  Group,  Inc.,  Belding  Heminway
                      Company,  and the Purchasers  listed on the signature
                      pages  therein  incorporated  by reference to Exhibit
                      10.6  to the  Registration  Statement  on  Form  10/A
                      (Amendment  No. 3), as filed with the  Commission  on
                      February 18, 1994, Commission File No. 0-23082.

10.7                  Amendment No. 1 to Credit Agreement dated as of March    *
                      23, 1994 between the Company and NationsBank of North
                      Carolina,  N.A.,  individually and as agent for Fleet
                      Bank,  The  Bank  of New  York  and  the  Daiwa  Bank
                      Limited, incorporated by reference to exhibit 10.1 to
                      the Company's  quarterly  report on Form 10-Q for the
                      fiscal  quarter  ended March 31, 1994,  as filed with
                      the Commission on May 16, 1994,  Commission  File No.
                      0-23082.

10.8                  Stock  Acquisition  Agreement dated June 10, 1994, by    *
                      and among Belding Heminway  Company,  Inc.,  Danfield
                      Threads,  Inc., The Bridge Realty Company,  Alexander
                      H.  Dankin and  Dorothy  B.  Dankin  incorporated  by
                      reference to exhibit  7(b)(1) the  Company's  current
                      report on Form 8-K filed with the  Commission on June
                      15, 1994, Commission File No. 0-23082.

10.9                  First Amendment to Stock Acquisition  Agreement dated    *
                      June 30, 1994 by and among Belding Heminway  Company,
                      Inc.,  Danfield  Threads,  Inc.,  The  Bridge  Realty
                      Company,  Alexander  H.  Dankin and Dorothy B. Dankin
                      incorporated  by  reference  to exhibit  7(b)(2)  the
                      Company's  current  report on Form 8-K filed with the
                      Commission  on June  15,  1994,  Commission  File No.
                      0-23082.

10.10                 Non-Competition Agreement dated June 30, 1994 between    *
                      Belding  Heminway  Company,  Inc.  and  Alexander  H.
                      Dankin.  incorporated by reference to exhibit 7(b)(3)
                      the Company's  current  report on Form 8-K filed with
                      the Commission on June 15, 1994,  Commission File No.
                      0-23082.

                               Page 39 of 45

<PAGE>

10.11                 Amendment No. 2 to Credit  Agreement dated as of June    *
                      30, 1994 between the Company and NationsBank of North
                      Carolina , N.A.,  individually and as agent for Fleet
                      Bank,  The  Bank  of New  York  and  the  Daiwa  Bank
                      Limited, incorporated by reference to exhibit 10.2 to
                      the Company's  quarterly  report on Form 10-Q for the
                      fiscal quarter ended June 30, 1994, as filed with the
                      Commission  on August 15, 1994,  Commission  File No.
                      0-23082.

10.12                 Belding  Heminway  Company  Restated  1994  Voluntary    *
                      Recapitalization  Plan dated as of November 14, 1994,
                      as  amended,  incorporated  by  reference  to exhibit
                      7(c)(1) to the Company's  current  report on Form 8-K
                      filed  with the  Commission  on  December  15,  1994,
                      Commission File No. 0-23082.

10.13                 Belding   Heminway   Company,   Inc.  1994  Incentive    *
                      Program,   effective  as  of  December  6,  1994,  as
                      amended, incorporated by reference to exhibit 7(c)(2)
                      to the  Company's  current  report  on Form 8-K filed
                      with the Commission on December 15, 1994,  Commission
                      File No. 0-23082.

10.14                 Exchange  Agreement  dated as of  November  14,  1994    *
                      between Belding  Heminway  Company and the holders of
                      its  Preferred  Stock  as  amended,  incorporated  by
                      reference to exhibit 7(c)(3) to the Company's current
                      report  on Form  8-K  filed  with the  Commission  on
                      December 15, 1994, Commission File No. 0-23082.

10.15                 Amendment to Restated Certificate of Incorporation of    *
                      Company  filed on  December  13,  1994,  as  amended,
                      incorporated  by reference to exhibit  7(c)(4) to the
                      Company's  current  report on Form 8-K filed with the
                      Commission on December 15, 1994,  Commission File No.
                      0-23082.

10.16                 Sale - Purchase  Agreement  dated as of November  24,    *
                      1993   by  and   between   Corticelli   Real   Estate
                      Corporation and Akwa Inc. , incorporated by reference
                      to the  corresponding  exhibit  on  Company's  annual
                      report  on  Form  10-K  for  the  fiscal  year  ended
                      December 31, 1993,  as filed with the  Commission  on
                      March 31, 1994, Commission File No. 1-3462.

10.17                 Amendment  No.  3 to  Credit  Agreement,  dated as of    *
                      February 1, 1995, between the Company and NationsBank
                      of North Carolina,  N.A.,  individually  and as agent
                      for Fleet Bank,  The Bank of New York,  and the Daiwa
                      Bank,  Limited,  incorporated by reference to exhibit
                      10.1 to the Company's  quarterly  report on Form 10-Q
                      for the fiscal quarter ended March 31, 1995, as filed
                      with the Commission on May 10, 1995,  Commission File
                      No. 0-23082.

10.18                 Amendment No. 4 to Credit Agreement dated as of March    *
                      29,  1995,  between the Company  and  NationsBank  of
                      North Carolina,  N.A.,  individually and as agent for
                      Fleet Bank, The Bank of New York, and 

                               Page 40 of 45

<PAGE>

                      the Daiwa Bank, Limited, incorporated by reference to
                      exhibit  10.2 to the  Company's  quarterly  report on
                      Form  10-Q for the  fiscal  quarter  ended  March 31,
                      1995,  as filed with the  Commission on May 10, 1995,
                      Commission File No. 0-23082.

10.19                 Amendment No. 5 to Credit Agreement dated as of April    *
                      17,  1995,  between the Company  and  NationsBank  of
                      North Carolina,  N.A.,  individually and as agent for
                      Fleet Bank, The Bank of New York, and the Daiwa Bank,
                      Limited, incorporated by reference to exhibit 10.3 to
                      the Company's  quarterly  report on Form 10-Q for the
                      fiscal  quarter  ended March 31, 1995,  as filed with
                      the Commission on May 10, 1995,  Commission  File No.
                      0-23082.

10.20                 Amendment  No.  6 to  Credit  Agreement  dated  as of    *
                      August 30, 1995,  between the Company and NationsBank
                      of North Carolina,  N.A.,  individually  and as agent
                      for Fleet Bank,  The Bank of New York,  and the Daiwa
                      Bank,  Limited,  incorporated by reference to exhibit
                      10.1 to the Company's  quarterly  report on Form 10-Q
                      for the fiscal  quarter ended  September 30, 1995, as
                      filed  with the  Commission  on  November  14,  1995,
                      Commission File No. 0-23082.

10.21                 Amendment  No.  7 to  Credit  Agreement  dated  as of    *
                      October 31, 1995, between the Company and NationsBank
                      of North Carolina,  N.A.,  individually  and as agent
                      for Fleet Bank,  The Bank of New York,  and the Daiwa
                      Bank,  Limited,  incorporated by reference to exhibit
                      10.2 to the Company's  quarterly  report on Form 10-Q
                      for the fiscal  quarter ended  September 30, 1995, as
                      filed  with the  Commission  on  November  14,  1995,
                      Commission File No. 0-23082.

10.22                 Letter  Agreement  dated October 31, 1995 between the    *
                      Company  and  NationsBank  of North  Carolina,  N.A.,
                      incorporated  by  reference  to  exhibit  10.3 to the
                      Company's  quarterly  report  on  Form  10-Q  for the
                      fiscal  quarter  ended  September  30, 1995, as filed
                      with the Commission on November 14, 1995,  Commission
                      File No. 0-23082.

10.23                 Amendment No. 8 to Credit Agreement dated as of March    *
                      15,  1996,  between the Company  and  NationsBank  of
                      North Carolina,  N.A.,  individually and as agent for
                      Fleet Bank, The Bank of New York, and the Daiwa Bank,
                      Limited,    incorporated    by   reference   to   the
                      corresponding  exhibit to the Company's annual report
                      on Form 10-K for the fiscal year ended  December  31,
                      1996, as filed with the Commission on March 14, 1997,
                      Commission File No. 1-3462.

10.24                 Consulting  Agreement,  dated March 22, 1996  between    *
                      the  Company  and  Karen  Brenner   incorporated   by
                      reference to Exhibit 10.1 to the Company's  quarterly
                      report  on Form  10-Q for the  fiscal  quarter  ended
                      March 31, 1996, as filed with the Commission on March
                      15, 1996, Commission File No. 0-23082.

10.25                 Stock  Purchase  Agreement,   dated  July  12,  1996,    *
                      between the Company  and Lewis  Textiles  Corporation
                      incorporated  by  reference to

                               Page 41 of 45

<PAGE>

                      Exhibit (a) (1) to the Company's  quarterly report on
                      Form 10-Q for the fiscal quarter ended June 30, 1996,
                      as filed  with the  Commission  on August  12,  1996,
                      Commission File No. 0-23082.

10.26                 Amendment,  dated as of  November  12, 1996 to Credit    *
                      Agreement,   dated  as  of  October   29,   1996  (as
                      previously   amended)   between   the   Company   and
                      NationsBank of North Carolina, N.A., individually and
                      as agent for Fleet  Bank,  The Bank of New York,  and
                      The Daiwa Bank, Limited, incorporated by reference to
                      Exhibit  10.23A to the Company's  Form 10-Q/A for the
                      quarterly  period ended  September 30, 1996, as filed
                      with the Commission on November 25, 1996,  Commission
                      File No. 0-23082.

10.27                 Loan  and  Security  Agreement,  among  the  Company,    *
                      Blumenthal/Lansing  Company, The Belding Thread Group
                      LLC, Culver  International  Inc.,  Danfield  Threads,
                      Inc.,  American  Collars,  Inc.,  The  Bridge  Realty
                      Company, Sanwa Business Credit Corporation and Heller
                      Financial,  Inc.,  dated  as of  December  30,  1996,
                      incorporated   by  reference  to  the   corresponding
                      exhibit and Company's  annual report on Form 10-K for
                      the fiscal year ended  December  31,  1996,  as filed
                      with the  Commission  on March 14,  1997,  Commission
                      File No. 1-3462.

10.28                 Separation Agreement, between the Company and Gregory    *
                      H. Cheskin dated as of October 7, 1996,  incorporated
                      by  reference  to  the   corresponding   exhibit  and
                      Company's  annual  report on Form 10-K for the fiscal
                      year  ended  December  31,  1996,  as filed  with the
                      Commission  on March 14,  1997,  Commission  File No.
                      1-3462.

10.29                 Separation Agreement,  between the Company and Winton    *
                      J. Tolles dated as of June 20, 1996,  incorporated by
                      reference to the corresponding  exhibit and Company's
                      annual  report on Form 10-K for the fiscal year ended
                      December 31, 1996,  as filed with the  Commission  on
                      March 14, 1997, Commission File No. 1-3462.

10.30                 Separation Agreement, between the Company and Gary P.    *
                      Silverman, dated as of January 31, 1997, incorporated
                      by  reference  to  the   corresponding   exhibit  and
                      Company's  annual  report on Form 10-K for the fiscal
                      year  ended  December  31,  1996,  as filed  with the
                      Commission  on March 14,  1997,  Commission  File No.
                      1-3462.

10.31                 Selected  provisions of the  Registrant's  Definitive    *
                      Proxy Statement filed with the Commission on March 3,
                      1997,  incorporated by reference to the corresponding
                      exhibit and Company's  annual report on Form 10-K for
                      the fiscal year ended  December  31,  1996,  as filed
                      with the  Commission  on March 14,  1997,  Commission
                      File No. 1-3462.

10.32                 Letter  Agreement  dated  as  of  February  25,  1998    +
                      between Karen Brenner and Carlyle Industries, Inc.

                               Page 42 of 45

<PAGE>

10.33                 Letter  Agreement  dated as of March 24, 1998 between    +
                      Edward F. Cooke and Carlyle Industries, Inc.

10.34                 Letter Agreement dated May 29, 1998 between Carlyle      +
                      Industries, Inc. and Karen Brenner.

10.35                 Employment Agreement dated as of November 25, 1998       +
                      between Carlyle Industries, Inc. and Ralph Langer.

10.36                 Consulting Agreement by and between Blumenthal Lansing   +
                      Company and David J. Schoenfarber dated December 16,
                      1998.

10.37                 Employment Agreement dated February 22, 1999 and made    +
                      effective as of January 1, 1999 among Carlyle
                      Industries, Inc. and Robert A. Levinson.

10.38                 Amendment No 1. To Fleet Credit  Agreement  dated December
                      16, 1998.

16                    Letter  from Ernst & Young with  respect to change in    *
                      accountants incorporated by reference to Exhibit 16
                      to the Registration Statement

21                    Subsidiaries of Carlyle Industries, Inc.



*  INCORPORATED BY REFERENCE
+  MANAGEMENT CONTRACT

         14 (b). REPORTS ON FORM 8-K.
                 On July 15, 1998, the Company filed a Current Report on Form
                 8-K to reflect the acquisition of Westwater Enterprises, LLP.

                 On September 11, 1998, the Company filed a Current Report on
                 Form 8-KA to reflect the pro forma financial information
                 related to the Westwater acquisition.

         14 (c). See item 14 (a)(3),  above.

         14 (d). See item 14 (a)(2),  above.

                               Page 43 of 45

<PAGE>

                                         SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                         CARLYLE INDUSTRIES, INC.

                                         By:/s/ ROBERT A. LEVINSON
                                         ---------------------------------------
                                         Robert A. Levinson, Chairman, President
                                             and Chief Executive Officer
Date:   March  23,  1999
        ----------------
         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registration in the capacities and on the dates indicated.

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

/s/ROBERT A. LEVINSON                Chairman, President          March 23, 1999
-----------------------              and Chief Executive Officer
Robert A. Levinson


/Ralph Langer                                                     March 23, 1999
-----------------------
Ralph Langer                         Vice Chairman

/s/JOSEPH S. DIMARTINO                                            March 23, 1999
-----------------------              Director
Joseph S. DiMartino


/s/ HERBERT FRIEDMAN                                              March 23, 1999
-----------------------              Director
Herbert Friedman


/s/ EDWARD F. COOKE                                               March 23, 1999
-----------------------
Edward F. Cooke                      Chief Financial Officer

                               Page 44 of 45