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, 2000       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. [X]

     As of March 8, 2001, 13,934,858 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 $1,502,684. This figure was
calculated on the basis of the closing price of a share of Common Stock of
Registrant on the Electronic Bulletin Board on March 8, 2001. As used herein,
non-affiliates means all stockholders of Registrant other than executive
officers, directors and 5% shareholders.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of our Proxy Statement to be delivered to our shareholders in
connection with the Annual Meeting of Shareholders to be held on May 9, 2001
(the "2001 Proxy Statement") are incorporated by reference into Part III of this
Report.
<PAGE>

                            CARLYLE INDUSTRIES, INC.
                 INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH
                     THE SECURITIES AND EXCHANGE COMMISSION
                          YEAR ENDED DECEMBER 31, 2000

                               ITEMS IN FORM 10-K

                                                                            Page

PART I.

Item 1.           BUSINESS....................................................1

Item 2.           PROPERTIES..................................................3

Item 3.           LEGAL PROCEEDINGS...........................................4

Item 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........6

PART II.

Item 5.           MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                  STOCKHOLDER MATTERS.........................................6

Item 6.           SELECTED FINANCIAL DATA.....................................7

Item 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND  RESULTS OF OPERATIONS........................8

Item 7A           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK.......................................................11

Item 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................12

Item 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE........................31

PART III.

Item 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........31

Item 11.          EXECUTIVE COMPENSATION.....................................31

Item 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT.................................................31

Item 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............31

PART IV.

Item 14.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
                  ON FORM 8-K................................................32

                                       i

<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.
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") manufacture, package and distribute buttons, gifts
and craft products. The Company's business is conducted principally through
three subsidiaries: the Blumenthal Lansing Company, Westwater Industries, Inc.
and Button Fashion B.V.

         The Company's principal executive offices are located at One Palmer
Terrace, Carlstadt, New Jersey and its telephone number is 201-935-6220.

         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)
Westwater Enterprises (R) and Button Fashion (R) registered trademarks and the
Le Bouton, La Petite, Classic, Boutique Elegant and Mill Mountain brand names.
The Company also produces and distributes a private-label button line for one of
the nation's best-known retailers. The Company markets complimentary product
lines, including appliques, craft kits and fashion and jewelry accessories, to
its home sewing and craft customers. The Company also manufactures casein and
polyester buttons.

         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 domestic market is concentrated and is served by national and
regional fabric specialty chains, mass merchandisers, independent fabric stores,
notions wholesalers and craft stores and chains. During the years ended December
31, 2000 and 1999 sales to the Company's four largest customers (Wal-Mart,
Jo-Ann Stores, Hancock Fabrics and Michaels) accounted for 71% 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 Button Fashion subsidiary, the
Company has begun to geographically expand the button business beyond its
traditional domestic boundaries and into the major European countries.

                                  Page 1 of 36

<PAGE>

         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 for sale in the U.S.
market are shipped to the Company's 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. Domestic 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 European business is primarily serviced by distributors from a
manufacturing and distribution facility in Holland.

         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 to customers with 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 smaller retailers are serviced by independent
representatives and representative organizations.

         Competitive Factors. The retail button market in the United States 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 mature home-sewing market. 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. In
addition, the Company has sought to expand its markets beyond the traditional
U.S. retail outlets by expansion into the major European countries through the
Button Fashion operation.

         The bulk of the Company 's revenues are derived in the United States.
In 2000, less than 3% of revenues related to export or non-U.S. based sales.
Inventory levels remain relatively constant throughout the year. The Company
believes its policies related to merchandise return and payment terms are in
accordance with industry standards.

                                  Page 2 of 36

<PAGE>

         Employees; Labor Relations. The Company has approximately 199
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,
2000 or 1999.

EXECUTIVE OFFICERS

The Executive Officers of the Company are set forth below.

     Name                   Age                        Title
     ----                   ---                        -----

Robert A. Levinson           75          Chairman of the Board of Directors,
                                         President and  Chief Executive
                                         Officer

Edward F. Cooke              47          Vice President, Chief Financial
                                         Officer and Secretary, and President
                                         of Blumenthal Lansing Company, Inc.

Mr. Levinson was elected Chairman, President and Chief Executive Officer in May
1998. Since June 1989, he has served as Chairman of the Board of Levcor
International, Inc., a public company engaged in textile converting and oil and
gas production.

Mr. Cooke has served as President and Chief Executive Officer of Blumenthal
Lansing Company, a wholly-owned subsidiary of the Company, since January 1,
1999. He was also elected Chief Financial Officer, Secretary and Vice President
of the Company in February 1997, April 1996 and May 1996, respectively. Mr.
Cooke resigned from such positions in September 1997, was reappointed to such
positions in February 1998. From October 1997 to January 1998, Mr. Cooke served
as Chief Financial Officer for an unaffiliated third party. Mr. Cooke served as
Controller of the Company from April 1994 until May 1996 and served as Chief
Accounting Officer of the Company from March 1995 until February 1997.

ITEM 2.  PROPERTIES

         The Company owns a 104,000 square foot packaging and distribution
facility located in Lansing, Iowa and a 35,000 square foot manufacturing and
distribution facility located in Veendam, the Netherlands. 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 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).

                                  Page 3 of 36

<PAGE>

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.

         Approximately five years ago a property owned by the Carlyle
Manufacturing Company, Inc. ("CM") (a non-operating subsidiary) 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 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") (a discontinued operation)
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 $1,626 in connection with a settlement offered to de minimis
parties at the SRS site in 1994. BCTC and CM, along with other PRPs, committed
to perform the Remedial Investigation and Feasibility Study ("RIFS") and two
Non-Time Critical Removal Actions ("NTCRA") at the SRS site. The RIFS, and the
first NTCRA (except for certain maintenance activities) have been completed.
BCTC and CM have been allocated approximately .04% and 1.26%, respectively, of
costs incurred to date, based on their alleged volume of waste shipped to the

                                  Page 4 of 36

<PAGE>

SRS site. It is not presently known 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.

         In early April 2000, CM and BCTC (as well as numerous other member of
the SRS PRP Group) received written notification that they had been designated
as PRPs in connection with the alleged transshipment of waste from the SRS site
to the Angelillo Property Superfund site in Southington, Connecticut (the
"Angelillo Site") from October 30, 1967 through February 28, 1987. To date, the
EPA claims it has incurred approximately $1.2 million in response costs in
connection with the Angelillo Site and it has demanded reimbursement of those
costs (as well as interest and future costs) from CM, BCTC, and other PRPs. To
facilitate a negotiated resolution of this matter, the EPA sent the PRPs a
proposed tolling agreement to toll the statute of limitations while negotiations
proceed. CM and BCTC agreed to the terms of the Angelillo tolling agreement. The
EPA has stated that it is the agency's plan to combine negotiations with respect
to the Angelillo Site with future negotiations for the SRS site.

         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 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. At least one non-settling party
appealed from the District Court's approval of the Consent Decree.

         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 site. The reserve the Company has established for
environmental liabilities, in the amount of $1.6 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.

                                  Page 5 of 36

<PAGE>

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

         None.


PART II

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

         (A) MARKET INFORMATION. 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 OTCBB for each of the last two years.

         Calendar Year                       Common Stock
         -------------                       ------------
             2000                        Low              High
             ----                        ---              ----
         First Quarter                 $   .56           $ 1.06
         Second Quarter                $   .50           $  .81
         Third Quarter                 $   .31           $  .53
         Fourth Quarter                $   .22           $  .44

                                          1999

         First Quarter                 $   .72           $ 1.25
         Second Quarter                $   .50           $ 1.75
         Third Quarter                 $   .69           $ 1.25
         Fourth Quarter                $   .44           $  .69

         (B) HOLDERS. There were 211 record holders of the Company's Common
Stock as of February 28, 2001. The Company believes that, as of such date, there
were in excess of 1600 beneficial holders, including those stockholders whose
shares are held of record by depositary 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. Preferred dividends accrue at a rate of 6% per
annum and are paid quarterly.

                                  Page 6 of 36

<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,
                                             --------------------------------------------------------
                                               2000        1999        1998        1997        1996
                                             --------------------------------------------------------
<S>                                          <C>         <C>         <C>         <C>         <C>
SUMMARY OF OPERATIONS:
Net sales                                    $ 27,076    $ 28,889    $ 23,801    $ 19,641    $ 22,162
                                             ========    ========    ========    ========    ========
Income from continuing operations               1,145       2,538       3,160       3,727       2,758
Income (loss) from continuing
  operations applicable to common stock           871       1,927       2,021       2,282       1,393
Income (loss) from discontinued
  operations, net of income taxes                  --          --          --        (316)      2,080
Income (loss) on disposal of discontinued
  operations, net of income taxes                  --       1,544          --      (9,801)         --
Extraordinary loss on debt prepayment,
  net of tax benefit                               --          --          --          --        (266)
Gain on preferred stock redemption                 --       3,011          --          --          --
                                             --------    --------    --------    --------    --------
Net income (loss) applicable to common
  stock                                      $    871    $  6,482    $  2,021    $ (7,835)   $  3,207
                                             ========    ========    ========    ========    ========
Weighted average common shares outstanding     13,935       9,896       7,383       7,386       7,395
                                             ========    ========    ========    ========    ========

PER COMMON SHARE DATA (BASIC AND DILUTED):
Continuing operations                        $    .06    $    .20    $    .27    $    .31    $    .19
Discontinued operations                            --         .16          --       (1.37)        .28
Extraordinary item                                 --          --          --          --        (.04)
Gain on preferred stock redemption                 --         .30          --          --          --
                                             --------    --------    --------    --------    --------
Net income (loss) per share                  $    .06    $    .66    $    .27    $  (1.06)   $    .43
                                             ========    ========    ========    ========    ========
Cash dividend per common share                   None        None        None        None        None
                                             ========    ========    ========    ========    ========

                                                                   December 31,
                                             ---------------------------------------------------------
                                               2000        1999        1998        1997        1996
                                             ---------------------------------------------------------
BALANCE SHEET DATA:
Working capital                              $  8,294    $  8,564    $  9,188    $ 10,646    $ (1,512)
Total assets                                 $ 17,102    $ 18,512    $ 17,824    $ 25,062    $ 67,169
Long-term debt, capital
   lease obligations and
   redeemable preferred stock                $ 10,892    $ 11,767    $ 21,108    $ 25,067    $ 56,647
Common stockholders' equity                  $ (3,463)   $ (4,251)   $(17,285)   $(19,306)   $(11,471)
</TABLE>

                                  Page 7 of 36
<PAGE>

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

                              RESULTS OF OPERATIONS

2000 COMPARED TO 1999

Net sales during the year ended December 31, 2000 totaled $27.1 million as
compared to $28.9 million during the year ended December 31, 1999 for a decrease
of $1.8 million or 6%. The decline in net sales was mostly attributable to a
softness of the button product line. Incremental sales from our new European
button business (Button Fashion B.V.) during the year ended December 31, 2000
was insufficient to fully offset a decline in the domestic sales of buttons.
This decline was the result of, among other things, a continued decline in home
sewing as well as the current fashion cycle, which has been placing less
emphasis on buttons and other embellishments. The softness in our market has
also caused our retail customers to be more cautious with regard to controlling
inventory dollars at store level. During the year, two of our largest button
customers made changes in their ordering patterns in response to market
conditions in an effort to reduce store inventory levels. These changes had a
direct impact on our sales of buttons during the year and are expected to have a
continuing impact at least through the end of 2001. Sales of our craft and gift
product line increased modestly by approximately $261 thousand during the year
ended December 31, 2000.

Gross margin during the year ended December 31, 2000 totaled $11.1 million as
compared with $13.0 million in 1999. The gross margin percent during the year
ended December 31, 2000 was 40.9% as compared to 45.0% during last year. The
gross margin decline, in both dollars and percent, was the result of a change in
sales mix as revenues from higher margin product lines declined, for the reasons
noted above. Sales of lower margin product lines were modestly higher but
experienced significantly lower margins as a result of higher variable cost of
sales caused partially by inventory write-offs.

Selling, general and administrative expenses during the year ended December 31,
2000 totaled $8.5 million or 31% of net sales as compared to $8.2 million or
28.5% of net sales in 1999. The increase in selling, general and administrative
expenses was primarily the result of incremental costs associated with new
product lines.

Income from continuing operations before interest and income taxes totaled $2.6
million during the year ended December 31, 2000 as compared to $4.8 million
during last year. The reduction was the result of a combination of the lower
gross margin and higher selling, general and administrative expenses as
described above.

Net interest expense during the year ended December 31, 2000 totaled $746
thousand as compared to $753 thousand during 1999. The decrease in interest
expense in 2000 was the result of the lower average level of bank debt
outstanding during 2000 offset by an increase in interest rates. The average
level of outstanding bank debt in 2000 was $8.6 million as compared to $9.0
million for the year ended December 31, 1999. The weighted average interest rate
during the year ended December 31, 2000 was 7.61% as compared to 6.78% during
the year ended December 31, 1999.

                                  Page 8 of 36
<PAGE>

The provision for income tax during the year ended December 31, 2000 totaled
$709 thousand as compared to $1.477 million during last year. The combined
effective income tax rate totaled 38.2% in 2000 and 36.8% in 1999. The combined
effective income tax rates are higher than combined statutory rates because of
nondeductible goodwill.

Preferred dividends during the year ended December 31, 2000 totaled $274
thousand as compared to $611 thousand during 1999. The reduction from 1999 was
due to the partial redemption of preferred stock in August 1999.

1999 COMPARED TO 1998

         Sales during the year ended December 31, 1999 were $ 28.9 million as
compared to $23.8 million during the year ended December 31, 1998 for an
increase of $5.1 million or 21.3%. Incremental sales contributed by acquired
businesses totaled $ 6.6 million. The Company estimates that approximately $ .5
million of this amount represented the filling of backlog orders related to the
acquired Streamline product line. Somewhat offsetting this increase was a
reduction in sales of previously existing product lines. The negative sales
comparison in previously existing product lines was the result of several
factors. First, fewer new programs shipped in 1999 as compared to 1998. New
programs provide both initial shipment revenues and reorder revenues during the
year of initial shipment. In addition, a general softness in sales of previously
existing product lines was experienced, particularly during the second half of
1999. This softness was the result of, among other things, both the current
fashion trend and the continued consolidation of the Company's customer base.
These factors are expected to continue to negatively impact sales through the
balance of the year 2001.

         Gross margin during the year ended December 31, 1999 totaled $13.0
million or 45.0% as compared to $10.9 million or 46.0% during the comparable
period in 1998. The increase in gross margin dollars in 1999 over 1998 is
primarily the result of gross margin from acquired businesses which totaled $
3.2 million in 1999. The decrease in gross margin percent was the result of the
acquired businesses operating at a lower margin during 1999.

         Selling, general and administrative expense during the year ended
December 31, 1999 increased $2.6 million to $8.2 million as compared to $ 5.6
million during the year ended December 31, 1998. Selling, general and
administrative expense as a percent of net sales increased to 28.5% from 23.5%
primarily as a result of expenses incurred by acquired businesses which totaled
$ 1.4 million. In addition, approximately $ .5 million was incurred in
connection with new product lines which are under development, $ 186 thousand of
consolidation expense was recorded in connection with the Streamline acquisition
and $ 158 thousand in various legal and consulting expenses were incurred in
connection with the preferred stock recapitalization as described in Note 12 and
the Thread escrow issue, as discussed in Note 3.

         Net interest expense during the year ended December 31, 1999 totaled
$753 thousand as compared to net interest expense of $309 thousand during the
year ended December 31, 1998. The increase in interest expense in 1999 as
compared to 1998 was the result of bank debt outstanding beginning June 23, 1998
in connection with the Preferred Stock payment and subsequent acquisitions.

         The provision for income taxes on income from continuing operations
during 1999 totaled $ 1.5 million as compared to $ 1.9 million during the
comparable period in 1998. The combined effective tax rate was 36.8% in 1999 as

                                  Page 9 of 36
<PAGE>

compared to 37.1% in 1998. Income on disposal of discontinued operations of $1.5
million was net of a provision for income taxes totaling $869 thousand. The gain
on preferred stock redemption of $3.0 million in 1999 was not a taxable item.

         Preferred dividends accrued during the year ended December 31, 1999
totaled $ 611 thousand as compared to $ 1.1 million during the year ended
December 31, 1998. The reduction from 1998 was due to the partial redemption of
preferred stock which occurred during the third quarter of 1999.

         Weighted average common shares outstanding increased to 9.9 million in
1999 as compared to 7.4 million in 1998 as the result of common shares issued in
connection with the preferred stock recapitalization.


                         LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 2000, the Company's principal sources of liquidity
included cash and cash equivalents of $197 thousand and trade accounts
receivable of $3.1 million. In addition, the Company had $2.7 million available
under its revolving credit facility as of December 31, 2000. Cash provided by
operations during the year ended December 31, 2000 totaled $1.2 million.

         The Company's revolving credit facility contains certain financial
covenants with which the failure to comply may lead to an event of default. As a
result of losses incurred by its Westwater subsidiary during 2000, the Company
expects it will be in violation of a financial covenant during the first quarter
of 2001 and it will, therefore, be necessary to renegotiate the financial
covenant during 2001 in order to avoid an event of default. Although there can
be no assurance that it will be successful, the Company believes that it will be
able to complete satisfactory arrangements with the provider of the credit
facility so as to avoid any event of default.

         On December 29, 1999, the Company's wholly owned subsidiary Button
Fashion B.V. acquired the operating assets of Button Fashion Holland B.V. for
approximately $834 thousand in cash including transaction costs. An additional
$162 thousand may be payable over four years contingent on the realizability of
certain inventory assets acquired. Button Fashion manufactures and distributes
buttons for sale principally in the European market.

         The Company intends to fulfill its remaining obligation to the holders
of the Preferred Stock as required by the Company's charter to the extent that
the Company has cash resources in excess of those required to operate its
business and to the extent of limitations imposed by the Company's credit
facility, which only permit principal payments out of "excess cash" flow as
defined. As a result, the Company's redemption 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 and compliance with the Company's Credit
Facility. In addition, the Company's decision to make any such payments will
depend on the successful resolution of any issues which may arise with the
Pension Benefit Guaranty Corp. ("PBGC") relating to the Company's unfunded
liability, if any, to its defined benefit plan.

                                 Page 10 of 36
<PAGE>

         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. Under the terms of the Company's credit facility, the net
proceeds of $1.5 million received from the settlement of the Thread escrow are
available for purposes of making preferred stock dividend payments. As a result,
the Company expects to remain current with respect to quarterly preferred
dividends which total approximately $274 thousand per year.

         The amount of the dividends in arrears was zero at December 31, 2000
and at December 31, 1999. The availability of resources to make dividend
payments to the holders of Preferred Stock in the future will depend on the
Company's future cash flow and the timing of the settlement of the liabilities
recorded in the financial statements of the Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company is exposed to interest rate change market risk in
connection with its credit facility with a financial institution. The interest
rate with respect to this facility is fixed from time to time, at the Company's
option, based on either LIBOR or the bank's prime rate. Changes in this variable
interest rate will have a positive or negative effect on the Company's interest
expense.

         In addition, in December 1999 the Company acquired a business in the
Netherlands. Therefore, the Company is exposed to currency fluctuation risk. As
the exchange rate of the U.S. Dollar versus the Euro fluctuates, this may have
an impact on the amount of time it will take the Company to recoup its
investment made in connection with this acquisition.

                                 Page 11 of 36
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

Report of Independent Public Accountants......................................13

Consolidated Balance Sheets- December 31, 2000 and 1999.......................14

Consolidated Statements of Operations -
         for the Years Ended December 31, 2000, 1999 and 1998.................16

Consolidated Statements of Cash Flows -
         for the Years Ended December 31, 2000, 1999 and 1998 ................17

Consolidated Statements of Stockholders' Equity
         for the Years Ended December 31, 2000, 1999 and 1998.................18

Notes to Consolidated Financial Statements
         for the Years Ended December 31, 2000, 1999 and 1998.................19

Consolidated Financial Statements Schedule
         Schedule II - Valuation, Qualifying Accounts and Reserves............32

                                 Page 12 of 36
<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,
2000 and 1999, and the related consolidated statements of operations, cash flows
and stockholders' equity for each of the three years in the period ended
December 31, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States.

         Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The 2000, 1999 and 1998 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 2000, 1999 and 1998 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
March 2, 2001

                                 Page 13 of 36
<PAGE>

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

                                                              December 31, 2000   December 31, 1999
                                                              -----------------   -----------------
<S>                                                               <C>                 <C>
ASSETS
Current Assets:
     Cash and cash equivalents                                    $    197            $    433
     Accounts receivable trade (net of allowance
         of $636 and $936, respectively)                             3,090               4,301
     Inventories, net                                                5,313               4,488
     Current deferred tax asset                                      2,169               2,615
     Other current assets                                              189                 217
                                                                  --------            --------
         Total current assets                                       10,958              12,054
                                                                  --------            --------
Property, Plant and Equipment, at cost:
     Land                                                               60                 140
     Building and improvements                                       2,235               2,013
     Machinery and equipment                                         1,581               1,561
                                                                  --------            --------
                                                                     3,876               3,714
Less: Accumulated Depreciation and Amortization                     (1,372)             (1,116)
                                                                  --------            --------
Net property, plant and equipment                                    2,504               2,598
                                                                  --------            --------

Goodwill (net of amortization of $1,090 and $925, respectively)      2,700               3,147
Other Assets                                                           940                 713
                                                                  --------            --------
         Total Assets                                             $ 17,102            $ 18,512
                                                                  ========            ========
</TABLE>

See Notes to Consolidated Financial Statements

                                 Page 14 of 36
<PAGE>

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

                                                      December 31,  December 31,
                                                          2000          1999
                                                      ------------  ------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
     Accounts payable                                   $  1,439      $  1,235
     Current maturities of long-term debt                     --            21
     Federal income taxes payable                             15           460
     Other current liabilities                             1,210         1,774
                                                        --------      --------
                                                           2,664         3,490
                                                        --------      --------

Long-term Debt                                             6,325         7,200
Other Liabilities                                          7,009         7,506
                                                        --------      --------
         Total Liabilities                                15,998        18,196
                                                        --------      --------

Redeemable Preferred Stock, par value $0.01 per share
     11,187,451 shares authorized:
     Shares issued and outstanding:
         Series A - None                                      --            --
         Series B - 4,555,007 at December 31, 1999
                    and at December 31, 2000               4,555         4,555
     Accumulated dividends on preferred stock                 12            12
                                                        --------      --------
                                                           4,567         4,567
                                                        --------      --------
Common Stock, par value $0.01 per share
     20,000,000 shares authorized;
     Shares issued and outstanding:
     13,934,858 at December 31, 1999
     and at December 31, 2000                                139           139
Paid in Capital                                           26,345        26,345
Retained Earnings                                        (29,864)      (30,735)
Accumulated Other Comprehensive Earnings                     (83)           --
                                                        --------      --------
Total Common Stockholders' Equity                         (3,463)       (4,251)
                                                        --------      --------

Total Liabilities and Stockholders' Equity              $ 17,102      $ 18,512
                                                        ========      ========

See Notes to Consolidated Financial Statements

                                 Page 15 of 36
<PAGE>

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

                                                           Years Ended December 31,
                                                           2000      1999      1998
                                                         -------   -------   -------
<S>                                                      <C>       <C>       <C>
Net sales                                                $27,076   $28,889   $23,801
Cost of sales                                             15,998    15,887    12,852
                                                         -------   -------   -------
                                                          11,078    13,002    10,949
Selling, general & administrative expenses                 8,478     8,234     5,613
                                                         -------   -------   -------
Income from continuing operations before
   interest and  income taxes                              2,600     4,768     5,336
Interest expense                                             746       753       309
                                                         -------   -------   -------
Income  from continuing operations before income taxes     1,854     4,015     5,027
Provision for income taxes                                   709     1,477     1,867
                                                         -------   -------   -------
Income from continuing operations                          1,145     2,538     3,160
Income on disposal of discontinued operations,
   net of income tax                                          --     1,544        --
                                                         -------   -------   -------
Net income before preferred stock activity                 1,145     4,082     3,160
Less dividends on preferred stock                            274       611     1,139
Gain on preferred stock redemption                            --     3,011        --
                                                         -------   -------   -------
Income applicable to common stock                        $   871   $ 6,482   $ 2,021
                                                         =======   =======   =======

Basic earnings per common share:
   Continuing operations                                 $   .06   $   .20   $   .27
   Gain on preferred stock redemption                         --       .30        --
   Discontinued operations                                    --       .16        --
                                                         -------   -------   -------
   Total                                                 $   .06   $   .66   $   .27
                                                         =======   =======   =======

Diluted earnings per common share:
   Continuing operations                                 $   .06   $   .20   $   .27
   Gain on preferred stock redemption                         --       .30        --
   Discontinued operations                                    --       .16        --
                                                         -------   -------   -------
   Total                                                 $   .06   $   .66   $   .27
                                                         =======   =======   =======

Dividend declared per common share                            --        --        --
                                                         =======   =======   =======
Weighted average common shares
   outstanding - basic and diluted (in thousands)         13,935     9,896     7,383
                                                         =======   =======   =======
</TABLE>

See Notes to Consolidated Financial Statements.

                                 Page 16 of 36
<PAGE>

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

                                                                Years Ended December 31,
                                                              2000        1999        1998
                                                            --------    --------    --------
<S>                                                         <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations                           $  1,145    $  2,538    $  3,160
Reconciliation of net income from continuing
operations to net cash  provided (used) by operations:
  Depreciation and amortization                                  818         719         611
  Deferred tax provision                                         446         172         383
  Changes in operating assets and liabilities, net of
  effect from acquired businesses:
   Accounts receivable                                         1,211         400         167
   Inventory                                                    (855)        357       1,015
   Federal income taxes payable                                 (390)         70      (6,248)
   Accounts payable                                              204         (61)       (240)
   Other current liabilities                                    (619)        662      (1,463)
   Other operating assets and liabilities                       (758)     (1,347)     (1,889)
Cash flow from discontinued operations                            --        (163)       (393)
                                                            --------    --------    --------
                                                               1,202       3,347      (4,897)
                                                            --------    --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of discontinued operations                     --       1,544          --
Investment in net assets of acquired businesses                   --        (834)     (5,249)
Capital expenditures                                            (207)       (220)       (113)
Investment in other assets                                       (53)        (85)         --
                                                            --------    --------    --------
                                                                (260)        405      (5,362)
                                                            --------    --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility and
   capitalized lease obligations                               4,850       4,975      19,769
Repayment of long-term debt and capital lease obligations     (5,746)     (8,239)     (9,430)
Preferred stock payments                                        (274)       (110)    (12,500)
                                                            --------    --------    --------
                                                              (1,170)     (3,374)     (2,161)
                                                            --------    --------    --------

Effect of exchange rate changes on cash balances                  (8)         --          --
Increase (decrease) in cash and cash equivalents                (236)        378     (12,420)
Cash and cash equivalents beginning of year                      433          55      12,475
                                                            --------    --------    --------
Cash and cash equivalents end of year                       $    197    $    433    $     55
                                                            ========    ========    ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
   Interest                                                 $    733    $    729    $    380
                                                            ========    ========    ========
   Income taxes                                             $    906    $  2,089    $  8,420
                                                            ========    ========    ========
</TABLE>

See Notes to Consolidated Financial Statements

                                 Page 17 of 36
<PAGE>

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

                                                                                             Accumulated
                                                                                                Other
                                                                                                Compre-                Compre-
                                                                                     Paid in    hensive     Retained   hensive
                            Series B Preferred Stock              Common Stock       Capital    Earnings    Earnings   Earnings
                            ------------------------              ------------       -------    --------    --------   --------
                                                  Accum.
                                                  ------
                           Shares      Amount    Dividend      Shares      Amount
                           ------      ------    --------      ------      ------

<S>      <C> <C>         <C>          <C>        <C>          <C>         <C>       <C>         <C>         <C>         <C>
DECEMBER 31, 1997        20,805,060   $ 20,805   $  4,184     7,382,782   $    74   $  19,858   $     --    $(39,238)   $     --
                         ----------   --------   --------    ----------   -------   ---------   --------    --------    --------
Net income                                                                                                     3,160       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)   $  3,160
                         ----------   --------   --------    ----------   -------   ---------   --------    --------    ========
Net income                                                                                                     7,093       7,093
Preferred stock
  dividends accrued                                   611                                                       (611)
Preferred stock
  dividends paid                                   (3,541)
Preferred stock
  redeemed               (6,132,449)    (6,132)
Common stock issued                                           6,552,076        65       6,487
                         ----------   --------   --------    ----------   -------   ---------   --------    --------    --------

DECEMBER 31, 1999         4,555,007   $  4,555   $     12    13,934,858   $   139   $  26,345   $     --    $(30,735)   $  7,093
                         ----------   --------   --------    ----------   -------   ---------   --------    --------    ========
Net income                                                                                                     1,145       1,145
Preferred stock
  dividends accrued                                   274                                                       (274)
Preferred stock
  dividends paid                                     (274)
Foreign translation
  adjustment                                                                                         (83)                    (83)
                         ----------   --------   --------    ----------   -------   ---------   --------    --------    --------

DECEMBER 31, 2000         4,555,007   $  4,555   $     12    13,934,858   $   139   $  26,345   $    (83)   $(29,864)   $  1,062
                         ==========   ========   ========    ==========   =======   =========   ========    ========    ========
</TABLE>

See Notes to Consolidated Financial Statements

                                 Page 18 of 36
<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 manufacture and distribute a line of buttons, craft and gift
products. Substantially all of the Company's operations and assets are currently
in the United States; however, the Company has begun to service the European
market from a location in the Netherlands. 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 2000 presentation, certain reclassifications were made to the prior years'
financial statements. See Note 3 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

                                 Page 19 of 36
<PAGE>

remedial feasibility study. Such accruals are adjusted as further information
develops or circumstances 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 December 29, 1999, the Company's wholly owned subsidiary Button
Fashion B.V. ("Button Fashion") acquired the operating assets of Button Fashion
Holland B.V. for approximately $834 thousand in cash including transaction
costs. An additional $162 may be payable over four years contingent on the
realizability of certain inventory assets acquired. No goodwill was recorded
with respect to this transaction. Button Fashion manufactures and distributes
buttons for sale principally in the European market.

         On December 16, 1998 the Company acquired certain assets and the
business of Streamline Industries, Inc. ("Streamline") for approximately $1.6
million in cash. No goodwill was recorded with respect to this transaction.
Streamline packages and distributes a line of carded buttons and embellishments
for sale to retail and specialty chain stores.

         On June 30, 1998, the assets and business of Westwater Enterprises LP
were acquired by Westwater Industries, Inc. ("Westwater"), a wholly-owned
subsidiary of the Company. The Company paid approximately $3.1 million in cash
and assumed $.5 million in bank debt. Goodwill in the amount of $267 thousand
was recorded in connection with this transaction of which $60 thousand has been
amortized as of December 31, 2000. Westwater is an importer and distributor of
craft and gift products for sale to retail and specialty chain stores.

         All acquisitions have been recorded using the purchase method of
accounting. The accounts of Button Fashion have been consolidated with the
accounts of the Company based on a preliminary allocation of the purchase price.
Such allocation will be finalized after various studies and other work have been
completed. The Company's historical results of operations include Button
Fashion, Westwater and Streamline from their respective acquisition dates.

3.       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. On October 22, 1999, the Company reached final agreement with HP

                                 Page 20 of 36
<PAGE>

regarding all outstanding issues related to the sale transaction and $2.4
million of escrow proceeds were received from the escrow agent. This receipt was
reported as income from discontinued operations totaling $1.5 million, after tax
during the year ended December 31, 1999.

4.       INVENTORIES:

         The components of inventories as of December 31, net of reserves are as
follows (dollars in thousands):

                                       2000                 1999
                                       ----                 ----
         Raw materials               $   2,115            $   2,503
         Work in progress                   21                   10
         Finished goods                  3,177                1,975
                                     ---------            ---------
                                     $   5,313            $   4,488
                                     =========            =========

         At December 31, 2000 and December 31, 1999 inventories were valued on
the first-in first-out ("FIFO") basis. 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.

5.       OTHER CURRENT LIABILITIES AND OTHER LIABILITIES:

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

         Current                                              2000     1999
         -------                                              ----     ----
         Salaries, wages, bonuses and other compensation..   $  425   $  618
         Accrued acquisition costs .......................       --      226
         Other ...........................................      785      930
                                                             ------   ------
                                                             $1,210   $1,774
                                                             ======   ======


         Long Term                            2000      1999
         ---------                            ----      ----
         Pension liabilities .............   $ 1,394   $ 1,467
         Environmental accruals ..........     1,609     1,669
         Other post-retirement benefits...     2,947     3,111
         Accrued acquisition costs .......     1,059     1,068
         Other ...........................        --       191
                                             -------   -------
                                             $ 7,009   $ 7,506
                                             =======   =======

6.       LONG TERM DEBT:

         On June 23, 1998, the Company entered into a revolving credit agreement
(the "Credit Agreement") with Fleet Bank, N.A. ("Fleet") under which $9 million
was available as of December 31, 2000. Unused availability as of December 31,
2000 totaled $2.675 million. 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 next such reduction occurring June
30, 2001. 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

                                 Page 21 of 36
<PAGE>

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 weighted average interest rate on outstanding debt under the
Company's credit facility was 7.61% during the year ended December 31, 2000 and
6.78% during the year ended December 31, 1999. The weighted average outstanding
debt under the facility during the year ended December 31, 2000 was $8.6 million
and in 1999 was $9.0 million.

         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):

                                             2000     1999
                                             ----     ----
         Revolving credit facility ......   $6,325   $7,200
         Capitalized lease obligations...       --       21
                                            ------   ------
                                             6,325    7,221
         Less:  Current maturities ......       --       21
                                            ------   ------
                                            $6,325   $7,200
                                            ======   ======

7.       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, 2000 (dollars in thousands):

                 2001                               $  249
                 2002                                   87
                 2003                                   34
                 2004                                   14
                                                    ------
                                                    $  384
                 Amount representing interest           --
                                                    ------

                 Present value of minimum lease
                 payments (all current)             $  384
                                                    ======

                                 Page 22 of 36
<PAGE>

         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,
                                 2000            1999           1998
                                 ----            ----           ----
         Premises               $  304          $  259         $  132
         Machinery              $   15          $   20         $    5

8.       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, 2000. 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.

9.       CUSTOMER CONCENTRATION:

         During the years ended December 31, 2000, 1999 and 1998, the Company
conducted business with four customers whose aggregate sales volume represented
approximately 71%, 78% and 77% of the Company's net revenues, respectively.
These customers also represented approximately 78%, and 72% respectively of the
total outstanding accounts receivable as of December 31, 2000 and 1999. A
reduction in sales to any of these customers could adversely impact the
financial condition and results of operations of the Company.

10.      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):

                                 Page 23 of 36
<PAGE>

<TABLE>
<CAPTION>
                                                            Pension Benefits              Other Benefits
                                                               Years Ended                  Years Ended
                                                               December 31,                 December 31,
                                                            2000         1999            2000         1999
                                                          --------     --------        --------     --------
         CHANGE IN BENEFIT OBLIGATION

         <S>                                              <C>          <C>             <C>          <C>
         Benefit obligation at beginning of year          $ 19,350     $ 21,650        $  2,730     $  3,168
         Service cost                                           --           --               1            1
         Interest costs                                      1,470        1,438             157          181
         Actuarial (gain) loss                               1,242       (1,462)           (567)        (428)
         Benefits paid                                      (1,784)      (2,276)           (231)        (192)
                                                          --------     --------        --------     --------
         Benefit obligation at end of year                $ 20,278     $ 19,350        $  2,090     $  2,730
                                                          ========     ========        ========     ========

         CHANGE IN PLAN ASSETS

         Fair value of plan assets at beginning of year   $ 21,070     $ 22,572        $     --     $     --
         Actual return on plan assets                        2,223          774              --           --
         Employer contribution                                  --           --              --           --
         Benefits paid                                      (1,784)      (2,276)             --           --
                                                          --------     --------        --------     --------
         Fair value of plan assets at end of year         $ 21,509     $ 21,070        $     --     $     --
                                                          ========     ========        ========     ========

         Funded status                                    $  1,231     $  1,721        $ (2,090)    $ (2,730)
         Unrecognized net actuarial loss (gain)               (826)      (1,615)           (712)        (221)
         Unrecognized prior service cost                        --           --            (145)        (160)
                                                          --------     --------        ---------    --------
         Accrued benefit (cost) prepaid                   $    405     $    106        $ (2,947)    $ (3,111)
                                                          ========     ========        ========     ========

         Weighted average assumptions as of December 31:

         Discount rate                                         7.5%        7.75%            7.5%        7.75%
         Expected return on plan assets                        8.5%        8.75%            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                                       1,470        1,438             157          181
         Expected return on plan assets                     (2,223)      (1,905)             --           --
         Amortization of prior service cost                    453           --             (15)         (15)
         Recognized net actuarial loss (gain)                   --           --             (75)         (29)
                                                          --------     --------        --------     --------
         Net periodic benefit cost                        $   (300)    $   (467)       $     67     $    138
                                                          ========     ========        ========     ========
</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.

11.      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

                                 Page 24 of 36
<PAGE>

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 has a prepaid pension asset totaling $405 thousand as
recorded in accordance with financial accounting standards as of December 31,
2000. Were the plan to be terminated or were the PBGC to require that the plan
be funded according to different standards, the Company could have a resulting
obligation to transfer cash to the plan. Based on an actuarial estimate, the
obligation to transfer cash in the event of a termination would be $2.9 million.
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 10.

12.      STOCKHOLDERS' EQUITY:

         COMMON STOCK
         Each share of Common Stock is entitled to one vote per share. As of
December 31, 2000 there were 20,000,000 shares of Common Stock authorized and
13,934,858 shares issued and outstanding.

         PREFERRED STOCK
         Each share of Series B Preferred Stock is entitled to one vote per
share. As of December 31, 2000 there were 11,187,451 shares of Preferred Stock
authorized and 4,555,007 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 6% per annum per share. There remain 499,995 shares of authorized but
un-issued shares of blank check Preferred Stock.

         Twenty percent of the shares of Series B Preferred were 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.

         On July 30, 1999 the Company announced that its Board had adopted a
voluntary Plan of Recapitalization (the "Plan") to provide for the issuance of
shares of common stock in exchange for accrued and unpaid preferred stock
dividends and the exchange of additional shares of common stock for preferred
stock. Pursuant to the Plan the Board authorized the issuance of 2,757,363
shares of common stock in exchange for $3.4 million accrued dividends through
August 13, 1999, on its Series B preferred stock. The dividend exchange offer
valued the common stock at $1.25 per share. The offer was made to holders of
record as of July 16, 1999. At that date there were twelve holders of preferred
stock holding a total of 10,687,456 shares.

                                 Page 25 of 36
<PAGE>

         Pursuant to the Plan, the Company's Board also approved an offer to the
preferred stockholders to exchange their shares of preferred stock for shares of
the Company's common stock at the rate .620911 of a share of common stock for
each share of preferred stock. In connection with this exchange offer 6,132,449
shares of preferred stock were exchanged for 3,807,704 shares of common stock.

         On August 13, 1999, the Company paid $3.4 million of accrued preferred
dividends and made a Preferred Stock redemption payment of $6.1 million all by
issuance of common stock. As of December 31, 2000, the Preferred Stock payment
arrearages aggregated $4.6 million.

         The Company intends to fulfill its remaining obligation to the holders
of the Preferred Stock as required by the Company's charter to the extent that
the Company has cash resources in excess of those required to operate its
business. As provided for under the Company's credit facility, payments on
preferred stock are permitted up to the net amount received in connection with
the Thread escrow account distribution. As a result, the Company expects to stay
current with respect to preferred stock dividends. However, the Company's
redemption 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 ability of the Company to obtain additional financing and compliance with
the Company's Credit Facility which presently permits only specified payment
amounts including 25% of "excess cash flow", as defined in the agreement. In
addition, 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.

         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.

         There were no dividends in arrears at December 31, 2000 and 1999. In
addition, the availability of resources to make dividend payments to the holders
of Preferred Stock in the future will depend on the Company's future cash flow
and the timing of the settlement of the liabilities recorded in the financial
statements of the Company.

13.      INCOME TAXES:

         Income from continuing operations before income taxes for the years
ended December 31 consisted of the following components:

                                            2000        1999        1998
                                          -------------------------------
         United States                    $ 2,048     $ 4,015     $ 5,027
         Other                               (194)         --          --
                                          -------     -------     -------
                                          $ 1,854     $ 4,015     $ 5,027
                                          =======     =======     =======

                                 Page 26 of 36
<PAGE>

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

CONTINUING OPERATIONS
                                              Years Ended December 31,
                                            2000        1999        1998
                                          -------------------------------
       Current provision                  $   331     $ 1,305     $ 1,484
       Foreign provision (benefit)            (68)         --          --
       Deferred provision                     446         172         383
                                          -------     -------     -------
                                          $   709     $ 1,477     $ 1,867
                                          =======     =======     =======


DISCONTINUED OPERATIONS
                                              Years Ended December 31,
                                            2000        1999       1998
                                          -------------------------------
       Current provision                  $    --     $   869     $    --
       Deferred provision                      --          --          --
                                          -------     -------     -------
                                          $    --     $   869     $    --
                                          =======     =======     =======

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

CONTINUING OPERATIONS
                                              Years Ended December 31,
                                            2000        1999        1998
                                          -------------------------------
       Federal provision at 34%           $   630     $ 1,321     $ 1,709
       State and local provision, net          46         123         100
       Amortization of goodwill                33          33          32
       Other, net                              --          --          26
                                          -------     -------     -------
                                          $   709     $ 1,477     $ 1,867
                                          =======     =======     =======


DISCONTINUED OPERATIONS
                                              Years Ended December 31,
                                            2000        1999        1998
                                          -------------------------------
         Federal provision at 34%         $    --     $   797     $    --
         State and local provision, net        --          72          --
                                          -------     -------     -------
                                          $    --     $   869     $    --
                                          =======     =======     =======

         At December 31, 2000 and 1999, the components of the net deferred tax
asset are (dollars in thousands):

                                                       2000       1999
                                                     -------    -------
         Book value of fixed assets over tax basis   $  (536)   $  (346)
         Pension liabilities                             546        571
         Other post-retirement benefit liability       1,090      1,151
         Environmental accruals                          771        808
         Operating and capital loss carryforwards        402        402
         Other,  net                                    (104)        29
                                                     -------    -------
                                                     $ 2,169    $ 2,615
                                                     =======    =======

         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, 2000 will be realized.

                                 Page 27 of 36
<PAGE>

14.      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:

                                     2000              1999              1998
                                   ---------         ---------         ---------
Net Income
  As Reported                      $     871         $   6,482         $   2,021
  Pro Forma                        $     871         $   6,327         $   1,881
Basic EPS:
  As Reported                      $     .06         $     .66         $     .27
  Pro Forma                        $     .06         $     .65         $     .25
Diluted EPS:
  As Reported                      $     .06         $     .66         $     .27
  Pro Forma                        $     .06         $     .65         $     .25

         The Company has granted options on 929,000 shares through December 31,
2000. 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.

         A summary of the status of the Program's outstanding grants and
weighted average exercise prices at December 31, 2000, 1999 and 1998 and changes
during the years then ended is presented in the table and narrative below
(shares in thousands):

<TABLE>
<CAPTION>
                                           2000                        1999                        1998
                                   ---------------------       --------------------       ---------------------
                                   Shares         Price        Shares        Price        Shares         Price
                                   -------       -------       -------      -------       -------       -------
<S>                                <C>           <C>           <C>          <C>           <C>           <C>
Beginning of year                      987       $  1.47           773      $  4.40           706       $  4.83
Granted                                 --            --           585          .50           172         1.185
Exercised                               --            --            --           --            --            --
Forfeited                              (58)          .83          (371)        4.07          (105)         2.02
Expired                                 --            --            --           --            --            --
                                   -------       -------       -------      -------       -------       -------
End of year                            929       $  1.51           987      $  1.47           773       $  4.40
                                   =======       =======       =======      =======       =======       =======

Shares exercisable at end
  of year                              502                         382                        541
                                   =======                     =======                    =======
Weighted average exercise

  price of exercisable options     $  2.19                     $  2.73                    $  4.15
                                   =======                     =======                    =======
</TABLE>

                                 Page 28 of 36
<PAGE>

         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 2000, 1999 and 1998, respectively: risk-free
interest rates of 5.5, 6.25 and 5.85 percent, expected dividend yields of zero
percent; expected lives of 3.0, 4.0 and 5.4 years; expected volatility of 67, 92
and 75 percent.

15.      EARNINGS PER COMMON 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, 2000, 1999 and 1998. Basic earnings per common share have been presented as
earnings from continuing operations and earnings from discontinued operations.
Basic earnings per share from continuing operations have been calculated as net
income from continuing operations after preferred dividend requirements of
$274,000, $611,000, and $1,139,000 for 2000, 1999 and 1998 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.

16.      COMMITMENT AND CONTINGENCIES:

         The Company may be involved in various legal actions from time to time
arising in the normal course of business. In the opinion of management, there
are no matters outstanding that would have a material adverse effect on the
consolidated financial position or results of operations of the Company.

         The Company is also 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.

         The reserve the Company has established for environmental liabilities,
in the amount of $1.6 million, represents the Company's best current estimate of
the costs of addressing all identified environmental problems.

17.      UNAUDITED QUARTERLY RESULTS OF OPERATIONS:
         (IN THOUSANDS EXCEPT FOR PER SHARE DATA)

                                  December 31, September 30, June 30,  March 31,
                                      2000        2000        2000        2000
QUARTER ENDED                        ------      ------      ------      ------
Net sales                            $5,688      $8,206      $6,934      $6,248
Cost of sales                         3,392       5,156       4,140       3,310
                                     ------      ------      ------      ------
Gross profit                         $2,296      $3,050      $2,794      $2,938
                                     ======      ======      ======      ======

Income applicable to common stock    $   62      $  384      $  211      $  214
                                     ======      ======      ======      ======

Basic and diluted income per
  common share:
Continuing operations                $   --      $  .03      $  .02      $  .02
                                     ======      ======      ======      ======

                                 Page 29 of 36
<PAGE>

                                  December 31, September 30, June 30,  March 31,
                                      1999        1999        1999        1999
QUARTER ENDED                        ------      ------      ------      ------
Net sales                            $7,299      $8,065      $6,912      $6,613
Cost of sales                         4,152       4,849       3,529       3,357
                                     ------      ------      ------      ------
Gross profit                         $3,147      $3,216      $3,383      $3,256
                                     ======      ======      ======      ======

Income applicable to common stock    $2,024      $3,426      $  565      $  467
                                     ======      ======      ======      ======

Basic and diluted income per
  common share:

Continuing operations                $  .04      $  .04      $  .08      $  .06
Gain on preferred stock redemption       --         .28          --          --
Discontinued operations                 .16          --          --          --
                                     ------      ------      ------      ------
                                     $  .20      $  .32      $  .08      $  .06
                                     ======      ======      ======      ======

                                 Page 30 of 36
<PAGE>

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

                                 Not applicable.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Information called for by Item 10 is set forth under the heading
         "Election of Directors" in the Company's 2001 Proxy Statement which is
         incorporated herein by this reference and "Executive Officers" of Part
         I of this Report.

ITEM 11. EXECUTIVE COMPENSATION.

         Information called for by Item 11 is set forth under the heading
         "Executive Compensation" in the 2001 Proxy Statement, which is
         incorporated herein by this reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         Information called for by Item 12 is set forth under the heading
         "Security Ownership of Certain Beneficial Owners and Management" in the
         2001 Proxy Statement, which is incorporated herein by this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Information called for by Item 13 is set forth under the heading
         "Certain Relationships and Related Transactions" in the 2001 Proxy
         Statement, which is incorporated herein by this reference.

                                 Page 31 of 36
<PAGE>

PART IV.

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

         (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.

                           SCHEDULE II - Valuation and Qualifying Accounts and
                                         Reserves

                                 Page 32 of 36
<PAGE>

                                                                     SCHEDULE II

<TABLE>
<CAPTION>
                    CARLYLE INDUSTRIES, INC. AND SUBSIDIARIES
          SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

---------------------------------------------------------------------------------------------------------------
    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
                                                Expenses       Accounts
---------------------------------------------------------------------------------------------------------------

<S>                               <C>           <C>            <C>           <C>             <C>
YEAR ENDED DECEMBER 31, 2000

Allowance deducted from assets
to which they apply:

Allowance for doubtful accounts   $     187     $      77      $      68     $     (92)      $     240
                                  =========     =========      =========     =========       =========

YEAR ENDED DECEMBER 31, 1999

Allowance deducted from assets
to which they apply:

Allowance for doubtful accounts   $     538     $      48      $     150     $    (549)      $     187
                                  =========     =========      =========     =========       =========

YEAR ENDED DECEMBER 31, 1998

Allowance deducted from assets
to which they apply:

Allowance for doubtful accounts   $     108     $      48      $     502     $    (120)      $     538
                                  =========     =========      =========     =========       =========
</TABLE>

All other schedules have been omitted because the information is not applicable
or is presented in the Financial Statements or Notes thereto.

                                 Page 33 of 36
<PAGE>

                                  EXHIBIT LIST

              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                                                       *

10.12    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.

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

10.31    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.

                                 Page 34 of 36
<PAGE>

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

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

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

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.     *

10.39    Amendment No. 2 to Fleet Credit Agreement dated December 29, 1999.    *

21       Subsidiaries of Carlyle Industries, Inc.                              *


*        INCORPORATED BY REFERENCE

+        MANAGEMENT COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN
         EXHIBIT PURSUANT TO ITEM 14(c) OF FORM 10-K.

         14 (b). NONE

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

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

                                 Page 35 of 36

<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 21, 2001
        --------------

         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 21, 2001
----------------------         and Chief Executive Officer
Robert A. Levinson

/s/ RALPH LANGER               Vice Chairman                      March 21, 2001
----------------
Ralph Langer

/s/ JOSEPH S. DIMARTINO        Director                           March 21, 2001
-----------------------
Joseph S. DiMartino

/s/ EDWARD F. COOKE            Vice President,                    March 21, 2001
-------------------            Chief Financial Officer,
Edward F. Cooke                Director

/s/ GIANDOMENICO PICCO         Director                           March 21, 2001
----------------------
Giandomenico Picco

                                 Page 36 of 36
<PAGE>