---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

FORM 10-K

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

For the fiscal year ended
December 31, 2007

OR

|  |                                                                                           
|- | ------------------------------------------------------------------------------------------
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number0-50186

LEVCOR INTERNATIONAL, INC.(Exact Name of Registrant as Specified in Its Charter)

|                                  |  |                    
|--------------------------------- |  | -------------------
|Delaware                          |  | 06-0842701         
|(State
  or Other Jurisdiction of |  | (I.R.S.
  Employer 
|Incorporation or Organization)    |  | Identification No.)

| |                                            |  |           
| | ------------------------------------------ |  | ----------
| | 110 West 40th Street, New York,
  New York |  | 10018     
| | (Address of Principal Executive Offices)   |  | (Zip Code)

(212) 354-8500(Registrants Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the
Exchange Act:None

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

Title of Each Class

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Common Stock, par value $0.01 per share


Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.


| |       |      | 
| | ----- | ---- | 
| | Yes o | No x | 

Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.


| |       |      | 
| | ----- | ---- | 
| | Yes o | No x | 

Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

| |       |      | 
| | ----- | ---- | 
| | Yes x | No o | 

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (§229.405 of this chapter) 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. o

Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer, accelerated filer, and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o    
Accelerated filer o

Non-accelerated filer x     
Smaller reporting company o

Indicate by check mark whether the registrant is a shell Company (as
defined in Rule 12b-2 of the Exchange Act)


| |       |      | 
| | ----- | ---- | 
| | Yes o | No x | 

As of March 28, 2008 there were 5,331,881 shares of the registrants
Common Stock outstanding, par value $.01 per share. The aggregate market value
of the voting common stock held by non-affiliates of the registrant as of June
30, 2007 based upon the value of the last sales price of these shares as quoted
on the OTC Bulletin Board, was approximately $1,096,529.

DOCUMENTS INCORPORATED BY REFERENCE:     None

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INDEX TO ANNUAL REPORT ON
FORM 10-K FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED DECEMBER 31, 2007

ITEMS IN FORM 10-K

|            |  |                                                                                                                |     
|----------- |  | -------------------------------------------------------------------------------------------------------------- | ----
|            |  |                                                                                                                | Page
|            |  |                                                                                                                |     
|PART I      |  |                                                                                                                |     
|ITEM 1.     |  | BUSINESS                                                                                                       | 2   
|ITEM 1A.    |  | RISK FACTORS                                                                                                   | 5   
|ITEM 1B.    |  | UNRESOLVED STAFF COMMENTS                                                                                      | 11  
|ITEM 2.     |  | PROPERTIES                                                                                                     | 11  
|ITEM 3.     |  | LEGAL PROCEEDINGS                                                                                              | 12  
|ITEM 4.     |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                            | 13  
|            |  |                                                                                                                |     
|PART II     |  |                                                                                                                |     
|            |  |                                                                                                                |     
|ITEM 5.     |  | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
  ISSUER PURCHASES OF EQUITY SECURITIES | 14  
|ITEM 6.     |  | SELECTED FINANCIAL DATA                                                                                        | 15  
|ITEM 7.     |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
  RESULTS OF OPERATIONS                        | 16  
|ITEM 7A     |  | QUANTITATIVE
  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                   | 30  
|ITEM 8.     |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                    | 32  
|ITEM 9.     |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSURE                         | 62  
|ITEM 9A(T). |  | CONTROLS AND PROCEDURES                                                                                        | 62  
|ITEM 9B.    |  | OTHER INFORMATION                                                                                              | 64  
|            |  |                                                                                                                |     
|PART III    |  |                                                                                                                |     
|            |  |                                                                                                                |     
|ITEM 10.    |  | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                         | 65  
|ITEM 11.    |  | EXECUTIVE COMPENSATION                                                                                         | 68  
|ITEM 12.    |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
  RELATED STOCKHOLDER MATTERS               | 76  
|ITEM 13.    |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
  INDEPENDENCE                                     | 77  
|ITEM 14.    |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                         | 79  
|            |  |                                                                                                                |     
|PART IV     |  |                                                                                                                |     
|            |  |                                                                                                                |     
|ITEM 15.    |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                     | 81  

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PART I

This 2007 Annual Report on Form 10-K contains
statements which constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.
Those statements include statements regarding the intent and belief or
current expectations of the Company and its management team.  Prospective investors are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those projected in the forward-looking statements.  Such risks and uncertainties include, among
other things, the Companys ability to continue to operate as a going concern, the
Companys lenders continuing to support the Company, the Companys ability to
secure additional financing to meet future capital needs, the timing and amount
of required defined benefit plan contributions, the Companys ability to
generate increased revenues from its operations, reliance on short term
advances from a significant stockholder, the Companys ability to generate free
cash flow or obtain additional financing in excess of its debt  service and other current obligations in
order to support and grow its business, reliance on a limited number of
significant customers, future revenue opportunities, inventory risk, growth of
the Companys  business in Europe and
North America, the expansion and future growth of the Companys customer base
and strategic and distribution relationships future capital, marketing and
sales force needs, the Companys ability to manage expenses and maintain
margins, the possible acquisition of complementary products and businesses, and
other risks and uncertainties that may be detailed herein, and from
time-to-time, in the Companys other reports filed with the Securities and
Exchange Commission (SEC).  The
Company undertakes no obligation to publicly update any forward-looking statements
for any reason, even if new information becomes available or other events occur
in the future.

|        |          
|------- | ---------
|Item 1. | BUSINESS.

General

Levcor
International, Inc. (Levcor or the Company or we) a Delaware Corporation,
acquired by merger Carlyle Industries, Inc. (Carlyle) in 2003. This acquisition
formed the basis of the Companys craft business, which constitutes all of its
current operations.

Products and Customers

The Company
sells product in the home sewing and craft retail industry.  Its retail customers are located primarily
in the United States with some additional distribution in Canada and
Europe.

The Companys
strategy to expand its business and improve profitability includes, among other
things:

|  |                                                                                                                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | expanding
  its craft distribution product offerings, business and customer base within
  retail and wholesale markets, including an expansion into international
  markets, primarily in Canada and Europe; and
|  |                                                                                                                                                                                                                 
| | acquiring
  new lines of business within the Craft industry through acquisition.                                                                                                                                

The Company
manufactures, packages and distributes buttons, embellishments, craft products
and complimentary product lines, including appliques, craft kits and fashion
and jewelry accessories.  These products
are marketed to the home sewing and craft customers.  The Companys products are sold to mass merchandisers, specialty
chains and independent retailers and wholesalers.  Products are sold under the La Mode ®, Le Chic ®, Streamline ®,
Favorite Findings ®, Crafters Images ®, and Button Fashion ® 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.

- 2 -

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The 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.

All imported
and domestically purchased products for sale in the North American market are
shipped to the Companys Lansing, Iowa facility for packaging and distribution
to customers.  As thousands of button
styles are received in bulk, computerized card printing systems enable the
Companys wholly-owned subsidiary, Blumenthal Lansing Company, LLC (Blumenthal)
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
to individual stores and  to
warehouse locations. The European business is primarily serviced by third party
distributors from the Companys button manufacturing and distribution facility
in Veendam, the Netherlands.

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 Craft business enjoys long-standing ties to all of its key accounts
and the average relationship with its ten largest customers extends over 30
years.  Due to the large account nature
of its customer base, most customer contact is coordinated by management and
additional sales coverage is provided by regional sales managers.  Many smaller retailers are serviced by
independent representatives and representative organizations.

The Company
believes that its business depends on trends within the craft market including
the more 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.  In response to this trend,
the Company has broadened its lines to include embellishments, novelty buttons
and products used in the craft industry 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.    The
Companys largest two customers (Wal-Mart, a mass merchandiser and Jo-Ann
Stores, a specialty chain,) represented approximately 43% and 32%,
respectively, in 2007, 49% and 23%, respectively, in 2006, and 46% and 25%,
respectively, in 2005 of the Companys net sales.  These customers also represented approximately 73% and 53% of the
Companys outstanding accounts receivable as of December 31, 2007 and 2006,
respectively.  A reduction in sales to
any of these customers could adversely impact the financial condition and
results of operations of the Company.

On March 21,
2007, Hancock, the Companys third largest customer, announced it will close
approximately 134 of its 443 stores in 2007 as it reorganizes under Chapter
11.  On December 31, 2006, the Company
recorded an allowance of $75,000 against the uncollected 2006 accounts
receivable balance of Hancock as of the date of the filing.  In addition, as of March 31, 2007, the
Company recorded an additional allowance of $86,000 against 2007 pre-bankruptcy
sales.  The balance net of all reserves
was collected during the three months ended June 30, 2007.  The reduced store count and lower sales
during the six months following the bankruptcy filing resulted in significantly
lower sales in 2007 as compared to 2006.

- 3 -

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Discontinued Textile
Operations

On November 9,
2005, the Companys Board of Directors approved managements plan to exit the
garment manufacturing business.  On May
11, 2006, management determined to exit its remaining Textile business
completely.  As a result, Textile
operations for the current and prior comparative periods have been presented as
discontinued operations.

As of
September 30, 2005, management concluded that the carrying amounts of goodwill
and trademarks related to the Textile business totaling $2.3 million and $709
thousand, respectively, were deemed to be fully impaired and were written
off.

During 2006
and 2007, the Company disposed of all remaining Textile business
inventory.  As of December 31, 2007 the
Company had no Textile business assets and liabilities remaining.  The Company does not expect to incur any
additional exit costs.

The Textile
business generated the following operating results which have been classified
as discontinued operations in the consolidated statements of operations (in
thousands):

|                                                 |  |                         |    |      |   |       |  |   |        |  
|------------------------------------------------ |  | ----------------------- | -- | ---- | - | ----- |  | - | ------ | -
|                                                 |  | Year Ended December 31, |   
|                                                 |  |                         |   
|                                                 |  | 2007                    |    | 2006 |   | 2005  | 
|                                                 |  |                         |    |      |   |       | 
|                                                 |  |                         |    |      |   |       |  |   |        |  
|Sales                                            |  | $                       | 39 |      | $ | 2,393 |  | $ | 8,184  |  
|Cost
  of sales                                  |  |                         | 17 |      |   | 1,934 |  |   | 8,685  |  
|                                                 |  |                         |    |      |   |       |  |   |        |  
|Gross
  profit                                   |  |                         | 22 |      |   | 459   |  |   | (501   | )
|Selling,
  general and administrative expense    |  |                         |   |      |   | 269   |  |   | 1,628  |  
|Goodwill
  and trademark impairment              |  |                         |   |      |   |      |  |   | 3,009  |  
|Interest
  expense                               |  |                         |   |      |   | 177   |  |   | 311    |  
|                                                 |  |                         |    |      |   |       |  |   |        |  
|Results
  of discontinued operations, net of tax |  | $                       | 22 |      | $ | 13    |  | $ | (5,449 | )
|                                                 |  |                         |    |      |   |       |  |   |        |  

Effective June 30, 2006, the short and long-term debt of the Textile
business became short and long-term debt of the Companys continuing operations
and as such, interest expense related to this debt as of July 1, 2006 has been  classified as part of its continuing
operations.

Competition

The bulk of
the Companys revenues are derived in the United States.  The general craft market in the United
States is served by many competitors including companies that are larger in
size and have financial resources that are greater than that of the
Company.  The Company competes on the
basis of product innovation, range of selection, brand names, price, display
techniques and speed of distribution.
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.  The
Companys button product lines are sourced from more than 75 button
manufacturers from around the world, with most buttons coming from the traditional
markets of Europe and Asia.  Button
manufacturers specialize in different materials (e.g., plastic, wood, glass,
leather, metal, jewel and pearl) and have varying approaches to fashion,
coloration, finishing and other factors.
Craft products are developed by the Companys product development team
and most of these products are sourced and produced in the U.S. and Asia.  The general craft market is served by many
and varied competitors with innovation and competitive pricing being of major
importance.

- 4 -

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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, 2007 or 2006.

Employees

The Company
currently employs 99 persons, all of whom are employed full time, and none of
its employees are represented by a collective bargaining agreement.  The Company believes relations with
employees are satisfactory.

|         |             
|-------- | ------------
|Item 1A. | RISK FACTORS

Going
Concern Consideration

The
accompanying consolidated financial statements have been prepared on a basis
which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business.  The Companys ability to continue as a going
concern is dependent upon its ability to execute managements plans to be
profitable, generate positive cash flow from operations and to continue to have
access to existing financing to meet obligations and repay liabilities when
they come due, including amounts payable with respect to claimed environmental
liabilities in connection with the Solvents Recovery Service of New England
Superfund Site in Southington, Connecticut (SRS site),  in the event the parent corporation is
determined to be responsible for these claimed liabilities and the redemption
of preferred stock in 2007 and thereafter.
Although management continues to pursue these plans and believes it will
be successful, there is no assurance that the Company will be successful in
generating such profitable operations or maintaining such access to existing
financing or obtaining financing for such environmental obligations on terms
acceptable to the Company. The outcome of these matters cannot be predicted
with any certainty at this time. These factors raise substantial doubt about
the Companys ability to continue as a going concern. Management plans to
satisfy the Companys capital needs through cash generated from operations,
advances under its facilities with CIT Group/Financial Services, Inc. (CIT)
and stockholder loans. These consolidated financial statements do not include
any adjustments to the amounts and classification of assets and liabilities
that may be necessary should the Company be unable to continue as a going
concern.

These
circumstances caused our independent registered public accounting firm to
include an explanatory paragraph in their reports dated March 26, 2008 and
March 16, 2007 regarding their concerns about our ability to continue as a
going concern.  Substantial doubt about
our ability to continue as a going concern may create negative reactions to the
price of the common shares of our stock and we may have a more difficult time
obtaining financing.

- 5 -

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The Company Is
Dependent Upon Its Principal Stockholder, and Its Lenders To Fund Its Future
Operations.

The Companys principal
sources of cash flow are from internally generated funds, borrowings under
revolving credit facilities and advances from Robert A. Levinson, a principal
stockholder, officer and director of the Company.

Losses
sustained in prior years have materially adversely affected the Companys
liquidity.  The Company had availability
under its existing credit facilities of $94,000 as of December 31, 2007.    There can be no assurance the Company will
not require additional financing to support its operations, that the Company
will be able to obtain any needed additional financing, or that it can obtain
additional financing on favorable terms.
Robert A. Levinson, the Companys Chairman and principal stockholder,
has agreed to continue to personally support the Companys cash requirements
through January 5, 2009 by providing loans to the Company up to a maximum of $3
million.  As of the date of this report
there is  $2.7 million of availability
from Mr. Levinson.  If we (1) do not
substantially achieve our overall projected revenue levels for 2008, (2) fail
to operate within our projected expense levels as reflected in our business
operating plans, or (3) do not receive the ongoing support of our lenders, then
we will be unable to meet our cash and operating requirements for the next
twelve months, which would in turn require us to seek additional financing to
fund operations and/or implement additional expense reductions.  Levcor has implemented several actions to
reduce losses and improve cash flow, including exiting the textile business,
reduction of headcount, elimination of non-profitable product lines and
reductions in other general and administrative costs. However, there can be no
assurance that Mr. Levinson will continue to personally support the Companys
cash requirements, that such support from Mr. Levinson, together with the
support of the Companys commercial lenders, will be sufficient to address the
Companys liquidity needs and cash requirements or that the actions taken will
be sufficient to allow the Company to generate net income from continuing
operations.

- 6 -

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Maintenance of
Existing Credit Facilities is Necessary for the Company to Continue Operations.

The Company is
dependent on the ongoing support of its commercial lenders.  Under its existing credit facilities (which
are secured by all the Companys assets), the lenders have the right to
accelerate payment of the loans in the event of material adverse changes in the
Companys business.  In addition, CIT
has the right to require repayment of the Companys indebtedness with them on
60 days notice. The Company has had and continues to have discussions with its
lenders. The Companys lenders continue to support the Company, although there
is no assurance they will continue to do so. Management of the Company believes
that it is unlikely that the lenders will accelerate the payment of any of the
obligations under the Companys facility during the next twelve months.

Failing to
substantially achieve our projected revenue levels for 2008 may result in a
default under our credit agreement with our lenders.  If a default were to occur and is not timely cured by us or
waived by our lenders, or if this were to happen and our debt could not be
refinanced or restructured, our lenders could pursue remedies, including: (1)
penalty rates of interest; (2) demand for immediate repayment of the debt;
and/or (3) the foreclosure on any of our assets securing the debt.  If this were to happen and we were
liquidated or reorganized after payment to our creditors, there would likely be
insufficient assets remaining for any distribution to our stockholders.

If Cash Flows from
Operations are Not Sufficient to Meet Our Operational Needs, We may Be Forced
to Sell Assets, Refinance Debt, or Further Downsize our Operations

During 2007,
we commenced and will continue to implement certain expense reduction
initiatives which we anticipate will reduce our operating expenses so that our
operating expenses are in line with our sales forecasts.  Our operating plan for 2008 focuses on
lowering variable expenses and introducing new product lines. Although we
believe the actions we are taking should allow us to generate profit from
continuing operations, we cannot assure our stockholders that we will achieve
the sales necessary to achieve sufficient liquidity and avoid further expense
reduction actions such as selling assets or consolidating operations, reducing
staff, refinancing debt and/or otherwise restructuring our operations.

Pension Funding

The Companys
accumulated benefit obligation in connection with its defined benefit plan at
December 31, 2007 was $20.0 million.
The Plans portfolio of investments totaled $19.2 million.  In 2007, the Company applied for and was
granted a waiver by the Internal Revenue Service with regard to a deferral of
$713,000 which was the remainder of the contribution still due for the 2006
plan year. With respect to the deferral, the Company was required to make a
contribution of $275,000, which was made on September 13, 2007.  Total contributions for the 2006 plan year
were $352,000.  The Company had also
applied to the Internal Revenue Service to permit a change in method of
accounting for plan assets, which was also granted. The Company has contributed
$52,000 for the 2007 plan year and will need to contribute an additional
approximately $72,000 for the 2007 plan year by September 15, 2008, based on
current legislated discount rates and actuarial assumptions. In addition, the
Company anticipates contributions with respect to the 2008 plan year of $93,000
based on actuarial assumptions during the year ending December 31, 2008.

In addition to
the liability of $758,000 for this Company sponsored plan, the Company also has
an additional pension liability in the amount of $912,000 at December 31, 2007
in connection with a terminated multi-employer plan which requires annual
payments of $142,000 inclusive of principal and interest through 2016.  The Company also has a $250,000 deferred
compensation liability payable to the former owner of an acquired business.

- 7 -

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The Company May Not
Have The Necessary Funds To Finance A Required Mandatory Redemption Of The
Series A Preferred Stock.

The Series A
Preferred Stock is subject to mandatory redemption, to the extent the Company
may lawfully do so, in three equal annual installments one of which was due on
June 15, 2007, and the remaining two on June 15, 2008 and June 15, 2009, in
each case, from funds legally available therefore, at a price per share of
Series A Preferred Stock equal to $1 per share, together with an amount
representing accrued and unpaid dividends, whether or not declared, to the date
of redemption.

The first
installment due on June 15, 2007 was not redeemed because under the terms of
the Companys Certificate of Incorporation, the mandatory redemption of the
Series A Preferred Stock can only be made to the extent that such redemptions
do not contravene or cause default under any contract, agreement or other
instrument by which the Company or its subsidiaries or any of their property is
bound.

The mandatory
redemptions represent a significant future liability of the Company.  There can be no assurance that the Companys
business will generate sufficient cash flow from operations or that future
borrowings will be available in sufficient amounts to enable the Company to
redeem the Series A preferred stock when required to do so.  In the event that the Company fails to
redeem the Series A preferred stock on any of the mandatory redemption dates,
the Series A preferred stockholders will be entitled to receive cumulative cash
dividends, and no distribution or dividend in cash, shares of capital stock or
other property will be paid or declared on the common stock.  Similarly, if the redemption on the Series A
preferred is not met, and should the Company liquidate or dissolve, no payment
of any kind may be made to the common stockholders without first satisfying the
accrued cash dividends owed to the Series A preferred stockholders.  In addition, Series A preferred stock
redemption payments are currently restricted under the Companys financing
arrangements with its lenders.

Our Business Is In
An Industry That Is Subject To Significant Fluctuations In Operating Results
That May Result In Unexpected Reductions In Revenue.

Our business
is in an industry that is subject to significant fluctuations in operating
results, which may lead to unexpected reductions in revenues.  Factors that may influence the Companys
operating results include:

|  |                                                                                         
|- | ----------------------------------------------------------------------------------------
| | the volume
  and timing of customer orders received;                                    
|  |                                                                                         
| | the timing
  and magnitude of customers marketing campaigns;                           
|  |                                                                                         
| | the loss or
  addition of a major customer;                                             
|  |                                                                                         
| | the
  availability and pricing of materials for our products;                           
|  |                                                                                         
| | the
  increased expenses incurred in connection with the introduction of new
  products;
|  |                                                                                         
| | currency
  fluctuations;                                                                
|  |                                                                                         
| | delays
  caused by third parties; and                                                   
|  |                                                                                         
| | changes in
  our product mix.                                                           

- 8 -

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The Companys
Business Is Extremely Competitive.

Competition in
the Companys business is based on product innovation, range of selection, brand
names, price, display techniques and speed of distribution.  We cannot assure you that our domestic or
foreign competitors will not be able to offer products that are more attractive
to our customers or potential customers than what we are able to provide.  A large number of domestic and foreign
manufacturers supply craft products to the United States market, many of which
have a much more significant market presence and also have substantially
greater financial, marketing, personnel and other resources than the Company.
This may enable the Companys competitors to compete more aggressively in
pricing and marketing and to react more quickly to market trends and to better
weather market downturns.  Increased
competition by existing and future competitors could result in reductions in
sales or reductions in prices of the Companys products.  There is no assurance that the Company will
be able to compete successfully against present or future competitors or that
competitive pressures faced by the Company will not have a material adverse
effect on the Companys results of operations or financial condition.

A Substantial
Portion Of The Companys Revenues And Gross Profits Is Derived From A Small
Number Of Large Customers And The Loss Of Any Of These Customers Could
Substantially Reduce Our Revenues.

The Companys
customer base has been and continues to be highly concentrated.

The Companys largest two customers (Wal-Mart, a mass merchandiser and
Jo-Ann Stores, a specialty chain,) represented approximately 43% and 32%,
respectively, in 2007, 49% and 23%, respectively, in 2006, and 46% and 25%,
respectively, in 2005 of the Companys net sales.  These customers also represented approximately 73% and 53% of the
Companys outstanding accounts receivable as of December 31, 2007, and 2006,
respectively

On March 21,
2007, Hancock Fabrics, the Companys third largest customer in 2006, announced
it will close approximately 134 of its 443 stores in 2007 as it reorganizes
under Chapter 11.  On December 31, 2006,
the Company recorded an allowance of $75,000 against the uncollected 2006
accounts receivable balance of Hancock Fabrics.  In addition, as of March 31, 2007 the Company recorded an
additional allowance of $86,000 against 2007 pre-bankruptcy sales. The balance
net of amounts reserved was collected during the three months ended June 30,
2007. The reduced store count and lower sales during the six months following
the bankruptcy filing resulted in significantly lower sales in 2007 as compared
to 2006.

The Companys
largest customer, Wal-Mart began opening new stores with no cut fabric and a
reduced craft department in 2006. The Company anticipates a reduction in sales
to Wal-Mart in 2008 as a result of the new store lay-outs.

A decision by
any of our major customers, whether motivated by competitive conditions,
financial difficulties or otherwise, to decrease significantly the amount of
merchandise purchased from us, or to change their manner of doing business with
us, could substantially reduce our revenues and have a material adverse effect
on our financial condition and results of operations.  There can be no assurance that the Companys largest customers
will continue to place orders with the Company or that orders by such customers
will continue at their previous levels.

- 9 -

---



The Companys
Business is Subject To The Seasonal Nature Of The Industry

The Companys
business is largely based on reorders from its retail customers and on its
ability to place new product lines with retail customers; as a result, the
business is influenced by the buying habits of consumers.  Home sewing and craft activities take place
on a year-round basis; however, they are generally indoor activities and as a
result they experience an increased participation level during the fall, winter
and early spring months.  Anticipating
this pattern, the Companys retail customers place somewhat larger reorders
during the July through March period.
Sales are influenced by the introduction of new product lines and the
discontinuance of existing product lines.
A successful new program requires the retail customer to add the program
and experience an acceptable level of sell-through.  The Company develops and introduces new program ideas on a
regular basis.  However, there is no
assurance that its retail customers will buy the new product lines and if they
do, there is no assurance the consumer will purchase the new product at an
acceptable level.

The Companys
seasonality, along with other factors that are beyond its control, including
general economic conditions, changes in consumer behavior, weather conditions,
availability of import quotas and currency exchange rate fluctuations, could
adversely affect the Company and cause its results of operations to fluctuate.
Results of operations in any period should not be considered indicative of the
results to be expected for any future period. The sale of the Companys
products can be subject to substantial cyclical fluctuation.  Sales may decline in periods of recession or
uncertainty regarding future economic prospects that affect consumer spending,
particularly on discretionary items. This cyclicality and any related
fluctuation in consumer demand could have a material adverse effect on the
Companys results of operations and financial condition.

The Future Of The
Company Will Depend On Key Personnel That It May Not Be Able To Retain.

If the Company
does not succeed in retaining and motivating existing personnel, its business
will be affected, and the loss of such personnel might result in the Company
not being able to retain customer accounts, generate new business or maintain
sales.  The Company depends on the
continued services of its key personnel particularly its employees comprising
its sales and marketing department, product development, purchasing and distribution
groups as well as its two executive officers, Robert A. Levinson and Pramila D.
Shaheed.  Each of these individuals has
acquired specialized knowledge and skills with respect to the Companys lines
of businesses and their respective operations.  As a result, if any of these individuals were to leave the
Company, the Company could face substantial difficulty in hiring qualified
successors and could experience a loss in productivity while any such successor
obtains the necessary training and experience.

Recently enacted
changes in the Securities Laws and Regulations are likely to increase costs.

The Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) has required
changes in some of our corporate governance, securities disclosure and
compliance practice.  In response to the
requirements of the Sarbanes-Oxley Act, the SEC has promulgated new rules in a
variety of subjects.  Compliance with
these new rules will increase our legal and accounting costs, and we expect
these increased costs to continue indefinitely.  These developments may also make it more difficult for us to
attract and retain qualified members of our board of directors or qualified
executive officers.

- 10 -

---



If
we receive other than an unqualified opinion on the adequacy of our internal
control over financial reporting as of December 31, 2008 and future year-ends
as required by Section 404 of the Sarbanes-Oxley Act, investors could lose
confidence in the reliability of our financial statements, which could result
in a decrease in the value of our common stock.

As required by Section 404 of the Sarbanes-Oxley Act, the SEC adopted
rules requiring public companies to include a report of management on the
companys internal control over financial reporting in their annual reports on
Form 10-K that contains an assessment by management of the effectiveness of the
companys internal control over financial reporting.  In addition, the public accounting firm auditing a companys
financial statements must attest to and report on the effectiveness of the
companys internal control over financial reporting as of December 31, 2008.

If our independent auditors issue other than an unqualified opinion on
the design, operating effectiveness of internal control over financial
reporting, this could result in an adverse reaction in the financial markets
due to a loss of confidence in the reliability of our financial statements,
which could cause the market price of our shares to decline.

The Company Is
Impacted By Environmental Laws And Regulations.

The Company is
subject to a number of federal, state and local environmental laws and
regulations, including the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended (CERCLA), and comparable state statutes
that impose joint and several liability on present and former owners and
operators, transporters and generators for remediation of contaminated
properties regardless of fault.  In
addition, the Company is subject to laws concerning 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 Companys operations must meet extensive
federal, state and local regulatory standards in the areas of safety, health
and environmental pollution controls. Although the Company believes that its
business is operating in compliance in all material respects with such laws,
statutes and regulations, many of which provide for substantial penalties for
violations, there can be no assurance that future changes in federal, state, or
local regulations, interpretations of existing regulations or the discovery of
currently unknown problems or conditions will not require substantial
additional expenditures.  See Item 3-Legal
Proceedings.

|         |                           
|-------- | --------------------------
|Item 1B. | UNRESOLVED STAFF COMMENTS.

None.

|        |            
|------- | -----------
|Item 2. | PROPERTIES.

The Companys
principal offices are located at 110 West 40th Street  Suite 803,
New York, New York 10018.  The Company
leases this property, approximately 1,500 square feet, at $3,448 per month.  The lease expires in August 2009.

The Company also leases an
11,000 square foot office facility in Carlstadt, New Jersey, at $17,798 per
month.  The lease expires on May 31,
2009.  The Company also 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.

- 11 -

---



The Company
owns a former dye facility located in Emporia, Virginia, which is leased at a
nominal amount to the purchaser of the Companys former Home Furnishings
division under a triple net fifty-year lease which expires in 2046.

The Company
believes that the facilities are adequate and suitable to service its present
and reasonably foreseeable needs.

|        |                   
|------- | ------------------
|Item 3. | LEGAL PROCEEDINGS.

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
solid waste, the discharge of effluents into waters of the United States, the
emissions of substances into the air, and various health and safety
matters.  In addition, the Comprehensive Environmental Response Compensation
and Liability Act (CERCLA) and comparable state statutes may impose joint and
several liability on present and former owners and operators, transporters and
generators for remediation of certain properties regardless of fault. 
These parties are typically identified as potentially responsible parties or
PRPs.

In or about
June 1992 the Company received notices from the United States Environmental
Protection Agency (EPA) that the Company, Belding Corticelli Thread Co.
(BCTC) (a discontined operation) and Carlyle Manufacturing
Company, Inc. (CM) (a subsidiary) had been identified, along with 1,300 other
parties, as PRPs in connection with the alleged release of hazardous substances
from the SRS site.  In addition, the
State of Connecticut and the Southington Water District have sought
reimbursement from the PRP Group for alleged Natural Resource Damages (NRD)
and other claimed damages for supposed temporary loss of use of groundwater and
consequential loss of future use of groundwater due to contamination on and
emanating from the SRS site.  The PRP Group has also received a demand
from the federal NRD trustees.

The Company
settled its alleged CERCLA liability to the EPA in connection with the SRS site
by paying $1,626.00 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)
at that time, 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 1.34%, respectively, of costs incurred to date, based on their alleged volume
of waste shipped to the SRS site.  In September of 2005, the EPA issued
its Record of Decision (ROD) for the SRS site.  In September 2006, the
EPA sent special notice letters to the PRPs to initiate consent decree
negotiations concerning, among other things, the scope of the work to be
performed under the ROD and reimbursement of all, or a significant portion, of
EPAs past response costs and future costs to be incurred in overseeing the
remedial work.  In December 2006, CM and BCTC joined in the SRS PRP Group
offer to the EPA to (i) construct and operate the remedial action contemplated
by the ROD (subject to certain proposed changes) and (ii) reimburse EPA for
portions of its past and future site-related costs.  CM and BCTC are
presently engaged in negotiations directly with the EPA to resolve their
potential CERCLA liability arising from the SRS site.

In December
2007, the State of Connecticut Department of Environmental Protection (the
CTDEP or the State) asked the Company for information relating to
transactions involving the property it previously owned, which is located at
107 Providence Street, Putnam, Connecticut.
According to CTDEP, environmental conditions have not been adequately
addressed at this property and it intends to pursue all parties it believes are
responsible for cleaning up those conditions, including the Company.  The Company has been in contact with CTDEP
concerning this site, and the Company will be submitting information to the
State to address certain issues raised by the State.  In addition, the Company intends to notify the current owner of
the property that, in the event the State requires additional investigation at
the site, the current owner assumed that obligation under the purchase and sale
agreement with the Company.

- 12 -

---



The issues
referred to 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 the participation of any of them as part of a PRP Group. 
The accrual the Company has established for these and other environmental
liabilities, in the amount of $1.3 million, represents the Companys estimate
of the costs of addressing all identified environmental situations, 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 the EPA and by the PRP
Groups in which the Company or its subsidiaries are participating.  To the
extent that this accrual relates to the SRS site, it is based on an initial
review of the total potential liability of the PRP Group in connection with
that site.  Although the accrual 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 costs or requirements that may be imposed
or sought by federal, state or local agencies.

The Company is
a party to various other environmental claims, legal proceedings and
administrative actions, all arising from the ordinary course of business. 
Although it is impossible to predict the outcome of any such claims or legal
proceedings, the Company believes any liability that may finally be determined
should not have a material effect on its consolidated financial position,
results of operations or cash flows.

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

During 2007 no
matters were submitted to stockholders for a vote.

- 13 -

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PART II.

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

The Companys
common stock is traded on the Over The Counter Bulletin Board under the symbol
LEVC.OB.  The common stock is thinly
traded and no established liquid trading market currently exists
therefore.

The following
table sets forth the range of high and low bids of the Companys common stock
for the calendar quarters indicated.

|                 |  |      |     |     |   |     | 
|---------------- |  | ---- | --- | --- | - | --- | 
|2007             |  | High |     | Low |  
|                 |  |      |     |     |  
|First
  Quarter  |  | $    | .56 |     | $ | .32 | 
|Second
  Quarter |  |      | .40 |     |   | .25 | 
|Third
  Quarter  |  |      | .35 |     |   | .25 | 
|Fourth
  Quarter |  |      | .35 |     |   | .20 | 

|                 |  |      |      |     |   |     | 
|---------------- |  | ---- | ---- | --- | - | --- | 
|2006             |  | High |      | Low |  
|                 |  |      |      |     |  
|First
  Quarter  |  | $    | 1.25 |     | $ | .80 | 
|Second
  Quarter |  |      | .90  |     |   | .58 | 
|Third
  Quarter  |  |      | .80  |     |   | .51 | 
|Fourth
  Quarter |  |      | .51  |     |   | .28 | 

Holders of Record

As of March 28,
2008 there were approximately 6,303 holders of record of Company common stock.

Dividend Policy

The Company
has not paid any cash dividends on shares of its common stock and has no
present intention to declare or pay cash common stock dividends in the foreseeable
future.  The Company is restricted under
the financing arrangements it has with CIT from declaring or paying dividends
on its common stock without first obtaining CITs consent. Future dividends, if
any, will be determined by our Board of Directors.  For a description of the financing
arrangements, see Liquidity and Capital Resources.

Stock Option Plans

The following table provides information, as
of December 31, 2007, with respect to all of the Companys compensation plans
under which Common Stock is authorized for issuance:

|                                                              |  |                                                                                               |        |                                                                               |   |                                                                                                                                                       |  |  |         | 
|------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------- | ------ | ----------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------- | 
|Plan Category                                                 |  | Number of securities to be issued upon exercise of outstanding
  options, warrants and rights |        | Weighted-average exercise price of outstanding options, warrants
  and rights |   | Number of securities remaining available for future issuance under
  equity compensation plans (excluding securities reflected in the first
  column) | 
|                                                              |  |                                                                                               |        |                                                                               |   |                                                                                                                                                       | 
|                                                              |  |                                                                                               |        |                                                                               |   |                                                                                                                                                       |  |  |         | 
|Equity
  compensation plans approved by security holders      |  |                                                                                               | 82,600 |                                                                               | $ | 2.13                                                                                                                                                  |  |  | 330,000 | 
|Equity
  compensation plans not approved by security holders* |  |                                                                                               | 0      |                                                                               |   | 0                                                                                                                                                     |  |  | 0       | 
|                                                              |  |                                                                                               |        |                                                                               |   |                                                                                                                                                       |  |  |         | 
|Total:                                                        |  |                                                                                               | 82,600 |                                                                               | $ | 2.13                                                                                                                                                  |  |  | 330,000 | 
|                                                              |  |                                                                                               |        |                                                                               |   |                                                                                                                                                       |  |  |         | 

*
Each director of the Company who is not an employee of the Company receives an
annual directors fee of $15,000, plus $1,000 for each Board meeting attended
by such director and $250 for each Board committee meeting which is not held on
the same day as a Board meeting.  The
fees are payable in cash or Common Stock, at the election of the
director.  At this time, each director
has elected to be paid in cash.

- 14 -

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|        |                         
|------- | ------------------------
|Item 6. | SELECTED FINANCIAL DATA.

The following
selected financial information is qualified by reference to, and should be read
in conjunction with, the Companys consolidated financial statements and the
notes thereto, and Managements Discussion and Analysis of Financial Condition
and Results of Operations contained elsewhere herein. The selected
consolidated income statement data for the years ended December 31, 2007,
December 31, 2006 and December 31, 2005 and the selected consolidated balance
sheet data as of December 31, 2007 and December 31, 2006 are derived from the
Companys audited consolidated financial statements which are included
elsewhere herein. The selected consolidated income statement data for the years
ended December 31, 2004 and December 31, 2003 and the selected consolidated
balance sheet data as of December 31, 2005, 2004 and 2003 are derived from the
Companys audited consolidated financial statements not included herein.

|                                                                                |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ---- | - | ------ | - | ---- | ------- | ---- | - | ------ | - | - | ------ | -
|                                                                                |  | Years Ended December 31,              |       
|                                                                                |  |                                       |       
|                                                                                |  | 2007                                  |        | 2006 |   | 2005   |   | 2004 |         | 2003 |  
|                                                                                |  |                                       |        |      |   |        |   |      |         |      |  
|                                                                                |  | (In thousands, except per share data) |       
|Operations Data:                                                                |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|Net sales                                                                       |  | $                                     | 19,385 |      | $ | 21,936 |   | $    | 21,217  |      | $ | 23,104 |   | $ | 22,348 |  
|Gross profit                                                                    |  |                                       | 6,065  |      |   | 7,046  |   |      | 7,260   |      |   | 8,328  |   |   | 8,240  |  
|Operating income                                                                |  |                                       | 1,238  |      |   | 1,245  |   |      | 990     |      |   | 2,049  |   |   | 1,715  |  
|Income tax expense (benefit)                                                    |  |                                       | (6     | )    |   | 149    |   |      | 3,077   |      |   | 617    |   |   | 499    |  
|Income (loss) from continuing operations                                        |  |                                       | 103    |      |   | 1,613  |   |      | (2,855  | )    |   | 729    |   |   | 600    |  
|Income (loss) from discontinued
operations                                      |  |                                       | 22     |      |   | 13     |   |      | (5,449  | )    |   | (70    | ) |   | (6,714 | )
|Net income (loss)                                                               |  |                                       | 125    |      |   | 1,626  |   |      | (8,304  | )    |   | 659    |   |   | (6,114 | )
|                                                                                |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|Per Share Data:                                                                 |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|Income (loss) from continuing operations:                                       |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|Basic                                                                           |  | $                                     | .02    |      | $ | .30    |   | $    | (.54    | )    | $ | .14    |   | $ | .12    |  
|Diluted                                                                         |  | $                                     | .02    |      | $ | .30    |   | $    | (.54    | )    | $ | .14    |   | $ | .12    |  
|Income (loss) from discontinued
operations:                                     |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|Basic                                                                           |  | $                                     | *      |      | $ | *      |   | $    | (1.02   | )    | $ | (.01   | ) | $ | (1.32  | )
|Diluted                                                                         |  | $                                     | *      |      | $ | *      |   | $    | (1.02   | )    | $ | (.01   | ) | $ | (1.32  | )
|Net income (loss):                                                              |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|Basic                                                                           |  | $                                     | .02    |      | $ | .30    |   | $    | (1.56   | )    | $ | .12    |   | $ | (1.20  | )
|Diluted                                                                         |  | $                                     | .02    |      | $ | .30    |   | $    | (1.56   | )    | $ | .12    |   | $ | (1.20  | )
|                                                                                |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|Average shares outstanding:                                                     |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|Basic                                                                           |  |                                       | 5,332  |      |   | 5,332  |   |      | 5,332   |      |   | 5,294  |   |   | 5,104  |  
|Diluted                                                                         |  |                                       | 5,332  |      |   | 5,334  |   |      | 5,332   |      |   | 5,367  |   |   | 5,104  |  
|                                                                                |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|Cash Flow and Related Data:                                                     |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|Net cash provided by (used in) operating
  activities                           |  | $                                     | 1,013  |      | $ | 1,485  |   | $    | (1,137  | )    | $ | (1,382 | ) | $ | (740   | )
|Capital expenditures                                                            |  |                                       | 25     |      |   | 50     |   |      | 100     |      |   | 96     |   |   | 158    |  
|Depreciation and amortization (excluding
amortization
  of debt issuance costs) |  |                                       | 408    |      |   | 404    |   |      | 392     |      |   | 459    |   |   | 470    |  
|                                                                                |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|Balance Sheet Data:                                                             |  |                                       |        |      |   |        |   |      |         |      |   |        |   |   |        |  
|Cash                                                                            |  | $                                     | 46     |      | $ | 69     |   | $    | 50      |      | $ | 32     |   | $ | 44     |  
|Working capital                                                                 |  |                                       | 399    |      |   | (127   | ) |      | 1,497   |      |   | 4,017  |   |   | 3,137  |  
|Total assets                                                                    |  |                                       | 11,924 |      |   | 13,185 |   |      | 16,069  |      |   | 24,884 |   |   | 23,677 |  
|Total long-term debt, net of current
  maturities                               |  |                                       | 10,342 |      |   | 11,082 |   |      | 10,808  |      |   | 8,998  |   |   | 7,575  |  
|Total liabilities                                                               |  |                                       | 20,160 |      |   | 22,772 |   |      | 29,012  |      |   | 28,069 |   |   | 27,627 |  
|Total stockholders deficit                                                     |  |                                       | (8,236 | )    |   | (9,587 | ) |      | (12,943 | )    |   | (3,185 | ) |   | (3,950 | )

* Less than $.005

- 15 -

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
  RESULTS OF OPERATIONS.

Critical Accounting Policies and Estimates

The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and judgments
related to the application of certain accounting policies.

While we base
our estimates on historical experience, current information and other factors
deemed relevant, actual results could differ from those estimates. We consider
accounting estimates to be critical to our reported financial results if
(i) the accounting estimate requires us to make assumptions about matters
that are uncertain and (ii) different estimates that we reasonably could
have used for the accounting estimate in the current period, or changes in the
accounting estimate that are reasonably likely to occur from period to period,
would have a material impact on our consolidated financial statements.

We consider
our policies for revenue recognition to be critical due to the continuously
evolving standards and industry practice related to revenue recognition,
changes to which could materially impact the way we report revenues. Accounting
polices related to: allowance for doubtful accounts, inventories, impairment of
long-lived assets, deferred taxes, pension liabilities and loss contingencies
are also considered to be critical as these policies involve considerable subjective
judgment and estimation by management. Critical accounting policies, and our
procedures related to these policies, are described in detail below. Also, see Note 1Summary of Business and Significant Accounting Policies.

Allowance for
Doubtful Accounts

The Company extends credit to
customers that satisfy established credit criteria.  The Company has a significant concentration of credit risk due to
the large volume of business conducted with a few major retail customers.  Our largest retail customers are public
companies and as such, the Company monitors their financial reports on a
regular basis and obtains accounts receivable insurance in certain
circumstances.

- 16 -

---



Accounts
receivable, trade, is reported net of reserves for bad debts, returns and
allowances.  A reserve for bad debts is
determined through analysis of the aging of accounts receivable at the date of
the financial statements and assessments of collectability based on historical
trends.  The reserve for bad debts includes 100% of all invoices that management
deems doubtful of collection.
The Company also estimates reserves for sales returns and allowances
based on historical experience.

Inventories

Inventories
are stated at the lower of cost (principally average cost) or market.  Inventories consist of loose buttons,
packaged buttons and craft products.
The Company estimates markdowns required for inventories based upon
future marketability as well as general economic conditions.  The Company regularly reviews inventory
quantities on hand, by item, and records a provision for excess inventory based
primarily upon the Companys historical experience and estimated forecast of
product demand using historical and recent ordering data relative to the
quantity on hand for each item. A significant decrease in demand for the
Companys products could result in an increase in the amount of excess
inventory quantities on hand; however, the Company manages inventory and
monitors product purchasing to reduce this risk.

Impairment
of Long-Lived Assets

The Company
evaluates goodwill and indefinite lived intangible assets on an annual basis
and whenever events or changes in circumstances indicate that the carrying
amount may not be fully recoverable. Long-lived assets, including property and
equipment, long-term assets and amortizable intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be fully recoverable. Conditions that would necessitate
an impairment assessment include a significant decline in the observable market
value of an asset, a significant change in the extent or manner in which an
asset is used, or a significant adverse change that would indicate that the
carrying amount of an asset or group of assets is not recoverable. The Company
assesses impairment in accordance with the requirements of Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
The Company assesses the impairment of goodwill and intangible assets in
accordance with the provisions of SFAS No. 142, Goodwill
and Other Intangible Assets. The Company determines the
recoverability of the assets by comparing the carrying amount of the assets to
net future cash flows that the assets are expected to generate. The impairment
recognized is the amount by which the carrying amount exceeds the fair market
value of the assets.

In the quarter
ended September 30, 2005, management concluded that the carrying amounts of
goodwill and trademarks related to the discontinued Textile business totaling
$2.3 million and $0.7 million, respectively, were deemed to be fully impaired
and were written off accordingly.  The
Companys annual goodwill and other intangible asset impairment tests performed
in the fourth quarter of 2007 and 2006 with respect to the Craft business
indicated no impairment of goodwill as of December 31, 2007 and 2006.

Deferred
Taxes

Deferred tax
assets and liabilities represent estimated future tax amounts attributable to
the differences between the carrying amounts of assets and liabilities in the
consolidated financial statements and their respective tax bases. These
estimates are computed using the tax rates in effect for the applicable period.
Realization of our deferred tax assets is, for the most part, dependent upon
our U.S. consolidated tax group of companies having sufficient federal taxable
income in future years to utilize our domestic net operating loss carryforwards
before they expire. We assess our deferred tax valuation allowance on a
quarterly basis in light of certain factors, including our financial
performance, and adjust the allowance if necessary.

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Pension Liabilities

The
determination of pension obligations and the related pension expense or credits
to operations involves significant estimates. The most significant estimates
are the discount rate used to calculate the actuarial present value of benefit
obligations and the expected long-term rate of return on assets used in
calculating the pension charges or credits for the year. Under the Companys
defined benefit plan, the Company uses discount rates based on yields of highly
rated fixed income debt securities at the end of the year. At December 31,
2007, the weighted average discount rate for the plan was 5.75%. The Company
uses an expected long-term rate of return on assets that is based on both past
performance of the plans assets and estimated future performance of the
assets. At December 31, 2007, the expected long-term rate of return used was
8%. Due to the nature of the plans assets and the volatility of debt and
equity markets, results may vary significantly from year to year.

In accordance
with the provision of SFAS No. 158, Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB Statements No. 87,
88, 106 and 132(R) (SFAS 158), the prepaid pension balance has been used to
reduce the pension plan liability as of December 31, 2007 and 2006 and as such
there was no prepaid pension as of December 31, 2007 and 2006. The minimum
pension liabilities as of December 31, 2007 and 2006 were based on the plans
portfolio investments as of such date which totaled $19.2 million and $18.4 million,
respectively, and the actuarially determined accumulated benefit obligation.

Loss
Contingencies

There are
times when non-recurring events occur that require management to consider
whether an accrual for a loss contingency is appropriate. Accruals for loss
contingencies typically relate to certain legal proceedings, customer and other
claims and litigation. As required by SFAS No. 5, if the assessment of a
contingency indicates that it is probable that a material loss has been
incurred and the amount of liability can be estimated, then the estimated
liability would be accrued in our financial statements.  If the assessment indicates that a
potentially material loss contingency is not probable but is reasonably possible,
or is probable but cannot be estimated, then the nature of the contingent
liability, together with an estimate of the range of possible loss if
determinable and material, is disclosed.
We analyze our legal proceedings, warranty and other claims and litigation
based on available information to assess potential liability. We develop our
views on estimated losses in consultation with outside counsel handling our
defense in these matters, which involves an analysis of potential results
assuming a combination of litigation and settlement strategies.  As a result of the significant judgment
required in assessing and estimating loss contingencies, actual losses realized
in future periods could differ significantly from our estimates. The adverse
resolution of any one or more of these matters over and above the amounts that
have been estimated and accrued in the consolidated financial statements could
have a material adverse effect on our business, results of operations and
financial condition.

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Revenue Recognition

Revenue is
recognized when goods are shipped to customers.  Shipment is made by UPS or common carrier.  Deliveries generally take place within three
days of shipment. Standard terms for shipments are F.O.B. shipping point, at
which time the Company has completed all performance obligations to consummate
the sale. In some circumstances, shipments are made F.O.B. destination, in
which case the Company insures the sales value of most shipments.

Revenue is
reported net of a reserve for sales returns and allowances.  Sales returns and allowances are estimated
based upon specific agreements and historical patterns with major accounts and
are accrued in the period in which a customer becomes entitled to an allowance
or return of product.

Stock-Based
Compensation

On January 1,
2006, we adopted Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (FAS 123(R)), that addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for either equity instruments of the enterprise or
liabilities that are based on the fair value of the enterprises equity
instruments or that may be settled by the issuance of such equity
instruments.  The statement eliminates
the ability to account for share-based compensation transactions, as we
formerly did using the intrinsic value method as prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and generally requires that such transactions be accounted for
using a fair-value-based method and recognized as expenses in our consolidated
statement of operations.

The Company
adopted FAS 123(R) using the modified prospective transition method which
requires the application of the accounting standard as of January 1, 2006.  The Companys consolidated financial
statements as of and for the years ended December 31, 2007 and 2006 reflect the
impact of adopting FAS 123(R).  In
accordance with the modified prospective transition method, the consolidated
financial statements for year ended December 31, 2005 have not been restated to
reflect, and do not include the impact of FAS 123(R).

For all
unvested options outstanding as of January 1, 2006, the previously measured but
unrecognized compensation expense, based on the fair value at the original
grant date, has been recognized in the Companys financial statements over the
remaining vesting period. For equity-based compensation awards granted or
modified subsequent to January 1, 2006, compensation expense, based on the fair
value on the date of grant or modification has been or will be recognized in
the Companys consolidated financial statements over the vesting period.  The Company utilizes the Black-Scholes
option pricing model to measure the fair value of stock options.

Results of Operations

Year Ended December 31, 2007 Compared Year
Ended December 31, 2006

Net sales for
the year ended December 31, 2007 totaled $19.4 million as compared to $21.9
million in 2006, a decrease of $2.5 million or 11.4%.  The decrease in sales is attributable in part to the
reorganization under Chapter 11 of one of the Companys largest customers and
the cancellation of two product lines by the Companys largest customer. The
decrease in sales for the year ended December 31, 2007 was offset by an annual
product changeover by a major customer. There was no such product changeover
for this customer in 2006.

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Gross profit
totaled $6.1 million in 2007 as compared to $7.0 million in 2006 for a decrease
of $981,000 or 13.9%.  The gross profit
percent totaled 31.3% in 2007 as compared to 32.1% in 2006.  The lower gross profit percent in 2007 was
the result of a change in sales mix as products with lower margins performed
ahead of 2006.

Selling,
general and administrative expenses totaled $4.8 million in 2007 as compared to
$5.8 million in 2006 for a decrease of $1.0 million or 16.8%.  The decrease in selling, general and
administrative expenses in the year ended December 31, 2007 was the direct
result of managements efforts to lower operating costs due to the reduction in
sales as described above. This decrease included $379,000 of compensation costs
due to a lower headcount in 2007, $261,000 of pension expense and $447,000 of
various selling, general and administrative expenses.

Income from
continuing operations before gain on termination of post retirement plan,
interest, preferred dividends and income tax expense (benefit) totaled $1.2
million for the year ended December 31, 2007 and 2006 respectively. Although
there was a reduction in sales of $2.5 million or 11.4% in 2007, management was
able to lower selling, general and administration expense.

The Company
recorded a non-cash $1.7 million gain on termination of post retirement medical
plan in 2006.  There was no such gain in
2007.

Interest
expense totaled $839,000 in 2007 as compared to $872,000 in 2006.  The higher interest expense in the year
ended December 31, 2006 is partly due to an accrual of a $100,000 interest
payable to the State of Connecticut related to the 2006 settlement of the  1994 and 1995 state income tax audits of a
previously disposed of entity, Danfield Threads, Inc. The average outstanding
debt during the year ended December 31, 2007 was $9.9 million as compared to
$11.3 million during the year ended December 31, 2006. The weighted average
interest rate during the year ended December 31, 2007 was 7.47% as compared to
7.20% during the year ended December 31, 2006.

Dividends on
mandatorily redeemable preferred stock totaled $302,000 during the year ended
December 31, 2007 as compared to $273,000 during the year ended December 31,
2006.  The increase in dividends was a
result of the unpaid accumulated dividends that also began to accrue dividends
as of June 15, 2007, because the Company was not able to redeem the first
installment of the mandatorily redeemable preferred stock on June 15, 2007, the
first redemption date, which under the terms of the Companys Certificate of
Incorporation prohibit the mandatory redemption of the Series A Preferred Stock
when the redemption would contravene or cause default under any contract,
agreement or other instrument by which the Company or its subsidiaries or any
of their property is bound.  Under the
terms of the Companys credit facility with CIT, preferred stock redemption
payments are prohibited.

The Company
has a net operating loss (NOL) carryforward and a full valuation allowance
against its deferred tax asset. The Company was not required to record a
current provision for income taxes related to its 2007 or 2006 pretax income
except for minimum taxes. An income tax benefit of $6,000 was recorded as a
result of a refund of state income taxes during the year ended December 31,
2007. There was an income tax provision of $200,000 during the year ended
December 31, 2006, which was the result of a settlement of 1994 and 1995 state
income tax audits of a previously disposed of entity, Danfield Threads, Inc.,
offset by $51,000 of federal and state income tax refunds.

- 20 -

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Year Ended December 31, 2006 Compared Year
Ended December 31, 2005

Net sales for
the year ended December 31, 2006 totaled $21.9 million as compared to $21.2
million in 2005 for an increase of $719,000 or 3.3%.  The increase in sales was primarily attributable to several new
product line extensions introduced in 2006.

Gross profit
totaled $7.0 million in 2006 as compared to $7.3 million in 2005 for a decrease
of $214,000 or 2.9%.  The gross profit
percent totaled 32.1% in 2006 as compared to 34.2% in 2005.  The lower gross profit in 2006 was the
result of a change in sales mix as product with lower margins performed ahead
of 2005.

Selling,
general and administrative expenses totaled $5.8 million in 2006 as compared to
$6.3 million in 2005 for a decrease of $469,000 or 7.5%.  The reduction in selling, general and
administrative expenses in 2006 was the result of lower compensation expense in
2006, partially as a result of lower headcount and lower bonuses.

Operating
income or income from continuing operations before gain on termination of post
retirement medical plan, interest, and income taxes totaled $1.2 million as
compared to $990,000 in 2005 for an increase of $255,000 or 25.8%.  The increase in operating income was
primarily the result of the reduction in selling, general and administrative
expenses, partially offset by the decrease in gross profit as described above.

Gain on
termination of post retirement benefit plan in 2006 totaled $1.7 million.  There was no such gain in 2005.

Interest
expense totaled $872,000 in 2006 as compared to $495,000 in 2005.  The increase in interest expense was the
result of higher average interest rates and higher average borrowing levels in
2006 as compared to 2005.

Preferred
dividends totaled $273,000 in both 2006 and 2005.  In 2006, the preferred dividends were accrued and not paid in
cash; in 2005 the preferred dividends were accrued and were paid in cash.

The provision
for income taxes totaled $149,000 in 2006 as compared to $3.1 million in
2005.   In 2006, because of the
Companys NOL carryforward and the full valuation allowance against its
deferred tax asset, the Company was not required to record a provision for
income taxes related to its 2006 pretax income except for minimum taxes.  During 2006, an income tax provision of
$200,000 was recorded as the result of a settlement of 1994 and 1995 state income
tax audits of a previously disposed of entity, Danfield Threads, Inc offset by
$51,000 of federal and state income tax refunds.  During the year ended December 31, 2005 the income tax provision
totaled $3.1 million.

- 21 -

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Going Concern

The accompanying
consolidated financial statements have been prepared on a basis which
contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business.
The Companys ability to continue as a going concern is dependent upon
its ability to execute managements plans to be profitable, generate positive
cash flow from operations and to continue to have access to existing financing
to meet obligations and repay liabilities when they come due, including amounts
payable with respect to claimed environmental liabilities in connection with
the SRS site in the event the parent corporation is determined to be
responsible for these claimed liabilities and the redemption of preferred stock
due in 2007 and thereafter.  Although
management continues to pursue these plans and believes it will be successful,
there is no assurance that the Company will be successful in generating such
profitable operations or maintaining such access to existing financing or
obtaining financing for such environmental obligations on terms acceptable to
the Company. The outcome of these matters cannot be predicted with any
certainty at this time. These factors raise substantial doubt about the
Companys ability to continue as a going concern. Management plans to satisfy
the Companys capital needs through cash generated from operations, advances
under its facilities with CIT and stockholder loans. These consolidated
financial statements do not include any adjustments to the amounts and
classification of assets and liabilities that may be necessary should the
Company be unable to continue as a going concern

These
circumstances caused our independent registered public accounting firm to
include an explanatory paragraph in their reports dated March 26, 2008 and
March 16, 2007 regarding their concerns about our ability to continue as a
going concern.  Substantial doubt about
our ability to continue as a going concern may create negative reactions to the
price of the common shares of our stock and we may have a more difficult time
obtaining financing.

Liquidity and Capital Resources

The Companys
principal sources of cash flow are from internally generated funds, borrowings
under revolving credit facilities, advances under its factoring agreement and
advances from Robert A. Levinson, a principal stockholder, officer and director
of the Company.  The Company believes
these sources of cash will be sufficient to meet its liquidity needs for at
least the next 12 months.  The Company
had a positive cash flow from operations during 2007.

Losses
sustained in prior years have materially adversely affected the Companys
long-term liquidity.  While the Company
has taken recent steps to improve its long term liquidity outlook, the Company
still has limited availability under its existing credit facilities, and there
can be no assurance the Company will not require additional financing to
support its operations, that the Company will be able to obtain any needed
additional financing, or that it can obtain additional financing on favorable
terms.  Robert A. Levinson, the
Companys Chairman and principal stockholder, has agreed to continue to
personally support the Companys cash requirements through January 5, 2009 by
providing loans to the Company up to a maximum of $3.0 million.  As of the date of this report there is  $2.7 million of availability from Mr.
Levinson.  If we (1) do not
substantially achieve our overall projected revenue levels for 2008, (2) fail to
operate within our projected expense levels as reflected in our business operating
plans, or (3) do not receive the ongoing support of our lenders, then we will
be unable to meet our cash and operating requirements for the next twelve
months, which would in turn require us to seek additional financing to fund
operations and/or implement additional expense reductions.  The Company has implemented several actions
to reduce losses and improve cash flow, including exiting the textile business,
reduction of headcount, elimination of
non-profitable product lines, termination of the post retirement medical
plan and reductions in other general and administrative costs. However, there
can be no assurance that Mr. Levinson will continue to personally support the
Companys cash requirements, that such support from Mr. Levinson, together with
the support of the Companys commercial lenders, will be sufficient to address
the Companys liquidity needs and cash requirements or that the actions taken
by management will be sufficient to allow the Company to generate net income
from continuing operations.

- 22 -

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The Company is
dependent on the ongoing support of its commercial lenders.  Under its existing credit facilities (which
are secured by all the Companys assets), the lenders have the right to
accelerate payment of the loans in the event of material adverse changes in the
Companys business. CIT has the right to require repayment of the Companys
indebtedness owed to them on 60 days notice.
The Companys lenders continue to support the Company, although there is
no assurance they will continue to do so. Management of the Company believes
that it is unlikely that the lenders will accelerate the payment of any of the
obligations under the Companys facility during the next twelve months.

Failing to
substantially achieve our projected cash flow levels for 2008 may also result
in a default under our credit agreement with our lenders.  If a default were to occur and is not timely
cured by us or waived by our lenders, or if this were to happen and our debt could
not be refinanced or restructured, our lenders could pursue remedies,
including: (1) penalty rates of interest; (2) demand for immediate repayment of
the debt; and/or (3) the foreclosure on any of our assets securing the
debt.  If this were to happen and we
were liquidated or reorganized after payment to our creditors, there would
likely be insufficient assets remaining for any distribution to our
stockholders.

At December
31, 2007, the Companys principal sources of liquidity included cash of $46,000
and trade accounts receivable of $2.4 million.
There was $94,000 of unused borrowing capacity available under the
Companys credit facility with CIT as of December 31, 2007.  The Company also had an additional $2.7 million
of borrowing available from Mr. Levinson who has agreed to fund until January
5, 2009, up to $3.0 million of temporary advances to the Company.

The following
information regarding the Companys cash flows for the years ended December 31,
2007, 2006 and 2005 is inclusive of both continuing and discontinued operating
activities.

Cash Flow
Summary:
(in thousands)

|                                  |  |   |       |   |   |        |   |   |        |  
|--------------------------------- |  | - | ----- | - | - | ------ | - | - | ------ | -
|                                  |  |   | 2007  |   |   | 2006   |   |   | 2005   |  
|                                  |  |   |       |   |   |        |   |   |        |  
|Net
  cash provided by (used in): |  |   |       |   |   |        |   |   |        |  
|Operating activities              |  | $ | 1,013 |   | $ | 1,485  |   | $ | (1,137 | )
|Investing activities              |  |   | (72   | ) |   | (85    | ) |   | (141   | )
|Financing activities              |  |   | (964  | ) |   | (1,381 | ) |   | 1,296  |  
|                                  |  |   |       |   |   |        |   |   |        |  
|Net increase
  (decrease) in cash |  | $ | (23   | ) | $ | 19     |   | $ | 18     |  
|                                  |  |   |       |   |   |        |   |   |        |  

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Net cash flow
provided by operating activities totaled $1.0 million during the year ended
December 31, 2007, as compared to $1.5 million during 2006.

In 2007, the
components of net cash provided by operating activities were $891,000 of cash
provided by net income adjusted for non-cash items, consisting primarily of
depreciation and amortization, non-cash stock-based compensation, accrued interest
on stockholder loans and accrued dividends on preferred stock, plus $122,000 of
cash provided by operating assets and liabilities.

In 2006, the
components of net cash provided by operating activities were $843,000 of cash
provided by net income adjusted for non-cash items, consisting primarily of
gain on termination of post retirement medical plan, depreciation and
amortization, non-cash stock based compensation, accrued interest on
stockholder loans and accrued dividends on preferred stock, plus $642,000 of
cash provided by operating assets and liabilities.

Major
components of the changes in operating assets and liabilities in 2007 as
compared to 2006 were accounts receivable, inventories, accounts payable and
pension liabilities.

Changes in
accounts receivable provided $563,000 of cash flow in 2007 as compared to
utilizing $186,000 of cash flow in 2006.
The reduction in accounts receivable in 2007 was primarily due to
decreased sales attributable to the reorganization under Chapter 11 of the
Companys third largest customer and the cancellation of two product lines by
the Companys largest customer.

Changes in
inventories provided $712,000 in cash flow in 2007 as compared to $2.3 million
in 2006.  In 2007, approximately
$350,000 in
inventory reduction was the result of the cancellation of two product lines by
the Companys largest customer.  During
the year ended December 31, 2006, the Company had been liquidating inventory
related to its discontinued textile business.

Changes in
accounts payable provided $288,000 of cash flow in 2007 as compared to
utilizing $839,000 of cash flow in the year ended December 31, 2006.  The reduction in accounts payable in 2006
was the result of the payment of 2005 accounts payable balances related to the
discontinued Textile business and in 2007 the Company negotiated better terms
with its vendors.

Changes in
pension liabilities utilized $662,000 during the year ended December 31, 2007
as compared to $146,000 during the same period in 2006.  This increase was due primarily to a
contribution of $275,000 with respect to the 2006 Plan year, based on a waiver
that was granted to the Company by the Internal Revenue Service.

Net cash used
in investing activities totaled $72,000 during the year ended December 31,
2007, as compared to $85,000 during the same period in 2006.  This decrease was primarily a result of
lower capital expenditures during 2007.

Net cash used
in financing activities totaled $964,000 during the year ended December 31,
2007 as compared to $1.4 million during the year ended December 31, 2006.  In 2007 and 2006 cash flow from operating
activities was positive and was sufficient to fund investing activities and
reduce borrowings.

During the
year ended December 31, 2007, the Company had net repayments to Mr. Levinson of
$1.2 million against his stockholder loans.
During the year ended December 31, 2006, the Company repaid Mr. Levinson
$850,000 against his advances.  There
were no additional borrowings from Mr. Levinson during 2006.

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Total
borrowings during 2007 and 2006 under the CIT revolving credit facility were
$18.1 million and $20.4 million respectively; total repayments during the
periods under this facility were $18.0 million and $20.0 million, respectively.  Repayments under the Companys term loan
totaled $144,000 during 2007 and 2006.
Net amounts repaid to factor totaled $775,000 in 2006; there were no
such repayments in 2007.

The Company
has a credit facility with CIT and a promissory note payable to JPMorgan Chase
Bank (JPMorgan).  In addition, the
Company has borrowings and advances outstanding from Robert A. Levinson, a
stockholder, officer and director of the Company.

At December
31, 2007, the Companys credit facility with CIT (the CIT Facility) provided
for maximum aggregate borrowings of up to $7.5 million in the form of revolving
credit, letters of credit and term loans.
The CIT Facility is comprised of separate financing agreements with the
Company and its wholly-owned subsidiary, Blumenthal Lansing Company, LLC
(Blumenthal).  The CIT Facility
provides advances up to 40% of eligible inventory and 90% of eligible accounts
receivable, as defined in the agreements.
There was approximately $94,000 of unused availability under the
Companys CIT Facility as of December 31, 2007.

The CIT
Facility provides for (i) a term loan to the Company (the Term Loan) in the
initial amount of $2.0 million, $1.2 million of which was outstanding at
December 31, 2007, (ii) revolving credit advances to the Company, $1.6 million of
which was outstanding at December 31, 2007 and (iii) revolving credit advances
to Blumenthal based upon eligible accounts receivable and inventory, $3.0
million of which was outstanding at December 31, 2007, and a Letter of Credit
facility with a limit of $500,000, of which there was none outstanding at
December 31, 2007.  The Term Loan is
amortized at $12,000 per month followed by a final installment payment of $1.0
million due on January 1, 2009. The revolving credit advances are also due on
January 1, 2009.  At December 31, 2007,
all amounts outstanding under the CIT Facility in excess of $2.5 million bear
interest at 7.75% (the Chase Bank N.A. prime rate plus 0.5%) with a minimum
rate of 5.0%.  The first $2.5 million of
advances from CIT bears interest at the prime rate (7.25%).

In connection
with the CIT Facility, the Company and its subsidiary have made cross corporate
guarantees and have issued first priority liens covering substantially all of
the assets of the Company and its subsidiary. The guarantees are full and
unconditional.  The non-guarantor
subsidiary is immaterial and the Companys financial statements are
representative of the combined guarantors of which the guarantor subsidiary is
100% owned.  In addition, Mr. Robert A.
Levinson, a stockholder, officer and director of the Company, provided certain
collateral against advances provided under the CIT Facility in the approximate
amount of $2.5 million.

The CIT
Facility contains representations and warranties and events of default
customary for agreements of this nature such as restrictions on incurring more
debt, acquisitions, the use of proceeds from the sales of assets, the
prohibition of preferred stock redemptions, dividend payments in excess of
$300,000 per year, and a change in voting control of the Company.  The CIT Facility also contains a subjective
acceleration clause which states that all obligations shall, at CITs option,
be immediately due and payable without notice or demand upon the occurrence of
any change in the Companys condition or affairs (financial or otherwise) that,
in CITs sole discretion exercised by CIT in accordance with CITs business
judgment, materially impairs the collateral or increases CITs risk.  CIT may terminate the CIT Facility upon 60
days written notice.  In the case of the
Term Loan, CIT may accelerate the maturity in the event of a default by the
Company after thirteen months notice of such acceleration.  Management of the Company believes that it
is unlikely that the lenders will accelerate the payment of any of the
obligations under the Companys facility during the next twelve months.

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The Company
also has a factoring agreement with CIT.
As of December 31, 2007 there was no balance due to or from CIT under
the factoring agreement.

The promissory
note payable to JPMorgan in the amount of $3.2 million is dated May 2, 2002 and
has a maturity date of January 5, 2009, as amended.  The first $3.0 million of the note bears interest at a fixed rate
per annum equal to the Adjusted LIBOR rate applicable to such note plus 0.75%
(a Eurodollar Loan) and the remaining $200,000 bears interest at the Chase
Bank N.A. prime rate. The interest rate on the first $3.0 million of the note
at December 31, 2007 was 6.14% and 7.25% on the remaining balance of $200,000.  In addition, Robert A. Levinson, a
stockholder, officer and director of the Company, has provided certain
additional collateral guaranteeing the note.

Mr. Robert A.
Levinson, a stockholder, has agreed to personally support the Companys cash
requirements to enable it to fulfill its obligations through January 5, 2009,
to the extent necessary, up to a maximum amount of $3.0 million. The Company
believes its reliance on such commitment is reasonable and that Mr. Levinson
has sufficient liquidity and net worth to honor such commitment.  The Company believes that Mr. Levinsons
written commitment provides the Company with the legal right to request and
receive such advances.  In the event
that Mr. Levinson did not honor such commitment, the Company would have the
right to sue Mr. Levinson for breach of his agreement.  Mr. Levinson reaffirmed this undertaking in
writing in a commitment letter dated March 24, 2008.

The Company
had outstanding loans payable to Mr. Levinson totaling $350,000 and $1.5 million
as of December 31, 2007 and 2006, respectively.  In addition, Mr. Levinson has pledged collateral in support of
certain Company obligations.  Accrued
interest on Mr. Levinsons loans has been classified as non-current liabilities
on the Companys balance sheet and totaled $639,000 and $587,000, respectively,
at December 31, 2007 and December 31, 2006, respectively.  He has also agreed not to demand any
repayment of principal or interest currently owed until January 6, 2009.

As of December
31, 2007, the Company was in compliance with all debt covenants, as defined in
the agreements.

Future
maturities of long-term debt during each of the next five years ending December
31 and thereafter were as follows (in thousands):

|     |  |   |       | 
|---- |  | - | ----- | 
|2008 |  | $ | 144   | 
|2009 |  |   | 4,561 | 
|     |  |   |       | 
|     |  | $ | 4,705 | 
|     |  |   |       | 

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The Series A
Preferred Stock is subject to mandatory redemption, to the extent the Company
may lawfully do so, in three equal annual installments one of which was due on
June 15, 2007, and the remaining two on June 15, 2008 and June 15, 2009, in
each case, from funds legally available therefore, at a price per share of
Series A Preferred Stock equal to $1 per share, together with an amount
representing accrued and unpaid dividends, whether or not declared, to the date
of redemption.  The first installment
due on June 15, 2007 was not redeemed because under the terms of the Companys
Certificate of Incorporation, the mandatory redemption of the Series A
Preferred Stock can only be made to the extent that such redemptions do not
contravene or cause default under any contract, agreement or other instrument
by which the Company or its subsidiaries or any of their property is
bound.  Under the terms of the CIT
Facility, preferred stock redemption payments are prohibited and preferred
stock dividend payments are limited to $300,000 per year.  Because preferred stock redemption payments
are prohibited under the CIT Facility, the Company is precluded by its
Certificate of Incorporation from making any such payments so long as the CIT
Facility is outstanding.  In addition,
the amount redeemable within the next twelve months, including accumulated
dividends, will continue to be classified as a noncurrent liability so long as
any portion of the CIT Facility has a maturity of more than one year.  The CIT Facility is currently scheduled to
mature on January 1, 2009.

Dividends on
the Series A Preferred Stock accrue at a rate of $0.06 per annum per share
when, as and if declared by the Company and are payable quarterly on March 15,
June 15, September 15 and December 15.
Quarterly dividends which are not paid in full in cash on any dividend
payment date will accumulate without interest until the first mandatorily
redemption date.  In the event that the
Company does not redeem shares of Series A Preferred Stock as scheduled, any
unpaid accumulated dividends will also begin to accrue dividends from that date
forward at the rate of 6% per year.

The
availability of resources to make dividend payments to the holders of Series A
Preferred Stock in the future will depend on the Companys future earnings and
cash flow.  Under Delaware law,
preferred dividend payments are restricted to the Companys accumulated or
current earnings and profits.  Losses in
2005 and earlier years have depleted the Companys accumulated earnings and
profits and, as such, future preferred dividend payments will be limited to
future earnings and profits.  Preferred
dividends which cannot be paid under Delaware law will continue to accrue and
will be added to the Preferred Stock liability account.

As of December
31, 2007, unpaid preferred stock dividends totaled approximately $587,000 and
have been classified as a noncurrent liability on the Companys balance
sheet.   The preferred stock is owned
99.5% by Mr. Robert A. Levinson, a stockholder, officer and director of the
Company.  The mandatorily redeemable
preferred stock is redeemable at $1.00 per share plus accrued and unpaid
dividends.

In 2007 the
Company applied for and was granted a waiver by the Internal Revenue Service with
regard to a deferral of $713,000 which was the remainder of the contribution
still due for the 2006 plan year. With respect to the deferral, the Company was
required to make a contribution of $275,000, which was made on September 13,
2007.  Total contributions for the 2006
plan year were $352,000.  The Company
had also applied to the Internal Revenue Service to permit a change in method
of accounting for plan assets, which was also granted. The Company has contributed
$52,000 for the 2007 plan year and will need to contribute an additional
approximately $72,000 for the 2007 plan year by September 15, 2008 based on
current legislated discount rates and actuarial assumptions. In addition, the
Company anticipates contributions with respect to the 2008 plan year of
approximately $93,000 based on actuarial assumptions during the year ending
December 31, 2008.

- 27 -

---



In addition to
the liability of $758,000 for this Company sponsored plan, the Company also has
an additional pension liability in the amount of $912,000 at December 31, 2007
in connection with a terminated multi-employer plan which requires annual
payments of $142,000 inclusive of principal and interest through 2016.  The Company also has a $250,000 deferred
compensation liability payable to the former owner of an acquired
business.

A summary of
the Companys December 31, 2007 contractual obligations and commitments is as
follows:

|                                        |  |       |        |           |   |           |  |           |        |           |   |     |  |   |     | 
|--------------------------------------- |  | ----- | ------ | --------- | - | --------- |  | --------- | ------ | --------- | - | --- |  | - | --- | 
|                                        |  |       |        | Less than |   |           |  |           |        | More than |  
|                                        |  | Total |        | 1 year    |   | 1-3 years |  | 3-5 years |        | 5 years   |  
|                                        |  |       |        |           |   |           |  |           |        |           |  
|CIT asset
  based loan                  |  | $     | 4,577  |           | $ | 4,577     |  | $         |       |           | $ |    |  | $ |    | 
|Term loans                              |  |       | 4,355  |           |   | 144       |  |           | 4,211  |           |   |    |  |   |    | 
|Long term debt
   stockholder loans    |  |       | 350    |           |   |          |  |           | 350    |           |   |    |  |   |    | 
|Long term debt
   stockholder interest |  |       | 639    |           |   |          |  |           | 639    |           |   |    |  |   |    | 
|Pension
  liabilities                   |  |       | 1,920  |           |   | 273       |  |           | 528    |           |   | 466 |  |   | 653 | 
|Environmental
  liabilities             |  |       | 1,287  |           |   |           |  |           | 1,130  |           |   |    |  |   | 157 | 
|Preferred
  stock                       |  |       | 4,555  |           |   |          |  |           | 4,555  |           |   |    |  |   |    | 
|Preferred
  dividends                   |  |       | 587    |           |   |          |  |           | 587    |           |   |    |  |   |    | 
|Operating
  lease obligations           |  |       | 469    |           |   | 304       |  |           | 151    |           |   | 14  |  |   |    | 
|                                        |  |       |        |           |   |           |  |           |        |           |   |     |  |   |     | 
|                                        |  | $     | 18,739 |           | $ | 5,298     |  | $         | 12,151 |           | $ | 480 |  | $ | 810 | 
|                                        |  |       |        |           |   |           |  |           |        |           |   |     |  |   |     | 

Interest is payable monthly at rates between 6% and 8% on
third-party loans and accrues at 6% on stockholder loans pursuant to the terms
of the loans.  Dividends on the
preferred stock accrue at a rate of 6%.

Seasonality and New Product Lines

The Companys
business is largely based on its ability to fulfill reorders of existing
product lines and to place new product lines with its retail customers. The
business is fundamentally influenced by the buying habits of consumers.  Home sewing and craft activities take place
on a year-round basis; however, they are generally indoor activities and as a
result they experience an increased participation level during the fall, winter
and early spring months.  Anticipating
this pattern, the Companys retail customers place somewhat larger reorders
during the July through March period.
Sales are influenced by the introduction of new product lines and the
discontinuance of existing product lines.
A successful new program requires the retail customer to add the program
and experience an acceptable level of sell-through.  The Company develops and introduces new program ideas on a regular
basis.  However, there is no assurance
that its retail customers will buy the new product lines and if they do, there
is no assurance the consumer will purchase the new product at an acceptable
level.

The sale of
the Companys products can be subject to substantial cyclical fluctuation.  Sales may decline in periods of recession or
uncertainty regarding future economic prospects that affect consumer spending,
particularly on discretionary items.
This cyclicality and any related fluctuation in consumer demand could
have a material adverse effect on the Companys results of operations and
financial condition.

- 28 -

---



Impact of Inflation

The Companys
results are affected by the impact of inflation on operating costs.  Historically, the Company has used selling
price adjustments, cost containment programs and improved operating
efficiencies to offset the otherwise negative impact of inflation on its
operations.

Recently
Issued Accounting Pronouncements

In October
2006, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) No. Financial Accounting Standard (FAS) 123(R)-5, Amendment of FSP FAS 123(R)-1, (FSP
FAS 123(R)-5) to address whether a change to an equity instrument in connection
with an equity restructuring should be considered a modification for the
purpose of applying FSP No. FAS 123(R)-1, Classification
and Measurement of Freestanding Financial Instruments Originally Issued in
Exchange for Employee Services under FAS Statement No 123(R) (FSP
FAS 123(R)-1).  FSP FAS 123(R)-1 states
that financial instruments issued to employees in exchange for past or future
services are subject to the provisions of FAS 123(R) unless the terms of the
award are modified when the holder is no longer an employee.  In FSP FAS 123(R)-5, the FASB staff
concluded that changes to the terms of an award that are made solely due to an
equity restructuring are not considered modifications as described in FSP FAS
123(R)-1 unless the fair value of the award increases, anti-dilution provisions
are added, or holders of the same class of equity instruments are treated
unequally.  FSP FAS 123(R)-5 is
effective for the first reporting period beginning after October 10, 2006. The
adoption of FSP FAS 123(R)-5 did not have a material impact on the Companys consolidated
financial statements.

In June 2007,
the FASB ratified the consensus on Emerging Issues Task Force (EITF) Issue
No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based
Payment Awards (EITF 06-11). EITF 06-11 requires companies to recognize the
income tax benefit realized from dividends or dividend equivalents that are
charged to retained earnings and paid to employees for non-vested
equity-classified employee share-based payment awards as an increase to
additional paid-in capital. EITF 06-11 is effective for fiscal years beginning
after September 15, 2007 (fiscal year 2008 for the Company). The adoption is not
expected to have a material impact on the Companys consolidated financial
statements.

In December 2007, the FASB issued
SFAS No. 141 (revised 2007), Business
Combinations (SFAS No. 141(R)). SFAS No. 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No.
141(R) also establishes disclosure requirements to enable the evaluation of the
nature and financial effects of the business combination. SFAS No. 141(R) is
effective for fiscal years beginning after December 15, 2008. The Company is
currently evaluating the potential impact, if any, of the adoption of SFAS No.
141(R) on its consolidated results of operations and financial condition.

In December 2007, the FASB
issued SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statementsan amendment of Accounting Research
Bulletin No. 51 (SFAS No. 160). SFAS No. 160 establishes accounting
and reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to
the parent and to the noncontrolling interest, changes in a parents ownership
interest, and the valuation of retained noncontrolling equity investments when
a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SFAS No. 160 is effective
for fiscal years beginning after December 15, 2008. The Company is currently
evaluating the potential impact, if any, of the adoption of SFAS No. 160 on its
consolidated results of operations and financial condition.

- 29 -

---



In March 2008, the FASB issued
SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FASB 133, Accounting for Derivative Instruments and Hedging
Activities. This statement requires enhanced disclosures about an entitys
derivative and hedging activities and thereby improves the transparency of
financial reporting. The Statement is effective for financial statements for
fiscal years and interim periods beginning after November 15, 2008 and is not
expected to have an impact on the Companys consolidated financial statements.

OFF BALANCE
SHEET ARRANGEMENTS

The Company
has no off balance sheet arrangements.

|         |                                                             
|-------- | ------------------------------------------------------------
|Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES
  ABOUT MARKET RISK

We are exposed
to certain market risks arising from transactions in the normal course of our
business, and from obligations under our short-term and long-term debt
arrangements. Such risk is principally associated with interest rate
fluctuation.  We do not use derivative
instruments to manage our exposure and do not currently hold any market risk
sensitive instruments for trading purposes.
See Managements Discussion and Analysis of Financial Condition and
Results of OperationsLiquidity and Capital Resources for a detailed
discussion of our credit arrangements.

Interest Rate Risk

Our short term
and long-term third party debt bears interest at floating rates, and
accordingly we are sensitive to changes in prevailing interest rates.  At December 31, 2007, our indebtedness with
CIT was at 8.00% interest rate (based on the Chase Bank N.A. prime rate plus
..5%).  The applicable rate is the Chase
Bank, N.A. prime rate on the first $2.5 million of outstanding borrowing plus
..05% on outstanding borrowing in excess of $2.5 million but in either case not
less than 5% per annum. Our indebtedness with JP Morgan Chase was at a 6.14%
interest rate (based on Adjusted LIBOR plus .75%) on the first $3.0 million and
7.25% (based on Chase Bank N.A. prime rate) in excess of the $3.0 million at
December 31, 2007.  Our stockholder loan
interest is not variable and bears a 6% interest rate.  A 1% increase or decrease in market interest
rates that affect our borrowing arrangements would have a material impact on
earnings and cash flow of approximately $89,000 during the next fiscal year.

- 30 -

---



Foreign Currency Exchange Rates

Foreign
currency exposures arise from transactions denominated in a currency other than
an entitys functional currency and from foreign-denominated revenues
translated into U.S. dollars.

We generally
purchase our products in U.S. dollars. However, we source most of our products
in Europe and Asia and, as such, the cost of these products may be affected by
changes in the value of the relevant currencies and related exchange rates.
Changes in currency exchange rates may also affect the relative prices at which
we and our foreign competitors sell products in the same market. We currently
do not hedge our exposure to changes in foreign currency exchange rates. We
cannot assure you that foreign currency fluctuations will not have a material
adverse impact on our financial condition and results of operations.

Customer Concentration

Our sales are
concentrated with major retail chains and as such, approximately 70-80% of our
sales in 2008 are expected to be from our top two accounts. These accounts
represented appromimately 75% of net sales for the year ended December 31, 2007
and approximately 73% of our trade accounts receivable at December 31,
2007.  The loss of any one of our major
accounts would have a material adverse impact on our financial condition and
results of operations.

- 31 -

---



|        |                                            
|------- | -------------------------------------------
|Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                        |      | 
|------------------------------------------------------------------------------------------------------- | ---- | 
|                                                                                                        | Page
|                                                                                                        |     
|                                                                                                        |      | 
|Levcor International, Inc. Consolidated
  Financial Statements                                          |      | 
|                                                                                                        |      | 
|Report of Independent Registered Public Accounting Firm                                                 | 33   | 
|                                                                                                        |      | 
|Consolidated Balance Sheets as of December 31, 2007 and 2006                                            | 34   | 
|                                                                                                        |      | 
|Consolidated Statements of Operations for the Years Ended December
  31, 2007, 2006 and 2005            | 35   | 
|                                                                                                        |      | 
|Consolidated Statements of Stockholders Deficit for the Years Ended
  December 31, 2007, 2006 and 2005 | 36   | 
|                                                                                                        |      | 
|Consolidated Statements of Cash Flows for the Years Ended December
  31, 2007, 2006 and 2005            | 37   | 
|                                                                                                        |      | 
|Notes to Consolidated Financial Statements                                                              | 38   | 

- 32 -

---



REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board
of Directors and StockholdersLevcor
International, Inc.

We have audited the
accompanying consolidated balance sheets of Levcor International, Inc. and
Subsidiaries as of December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders deficit, and cash flows for each of the
years in the three-year period ended December 31, 2007.  These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States).  Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control
over financial reporting.  Accordingly,
we express no such opinion.  An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such
consolidated financial statements present fairly, in all material respects, the
financial position of Levcor International, Inc. and Subsidiaries as of
December 31, 2007 and 2006, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2007,
in conformity with accounting principles generally accepted in the United
States of America.

The accompanying
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern.  As
discussed in Note 2 to the consolidated financial statements, the Companys
historical losses from operations raise substantial doubt about its ability to
continue as a going concern.
Managements plans concerning these matters are also described in Note
2.  The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

/s/ Friedman LLP


---

Friedman LLP


New York, New York
March 26, 2008

- 33 -

---



LEVCOR
INTERNATIONAL, INC.  AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

|                                                                                                                                                     |  |                   |         |                   |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ----------------- | - | ------- | -
|                                                                                                                                                     |  | December 31, 2007 |         | December 31, 2006 |  
|                                                                                                                                                     |  |                   |         |                   |  
|                                                                                                                                                     |  |                   |         |                   |   |         |  
|ASSETS                                                                                                                                               |  |                   |         |                   |   |         |  
|Current Assets:                                                                                                                                      |  |                   |         |                   |   |         |  
|Cash                                                                                                                                                 |  | $                 | 46      |                   | $ | 69      |  
|Accounts receivable trade, net                                                                                                                       |  |                   | 2,383   |                   |   | 2,946   |  
|Inventories, net                                                                                                                                     |  |                   | 4,715   |                   |   | 5,343   |  
|Other current assets                                                                                                                                 |  |                   | 139     |                   |   | 86      |  
|                                                                                                                                                     |  |                   |         |                   |   |         |  
|Total current assets                                                                                                                                 |  |                   | 7,283   |                   |   | 8,444   |  
|                                                                                                                                                     |  |                   |         |                   |   |         |  
|Property, Plant and Equipment, net                                                                                                                   |  |                   | 1,720   |                   |   | 1,917   |  
|Goodwill                                                                                                                                             |  |                   | 2,543   |                   |   | 2,543   |  
|Other assets                                                                                                                                         |  |                   | 378     |                   |   | 281     |  
|                                                                                                                                                     |  |                   |         |                   |   |         |  
|Total Assets                                                                                                                                         |  | $                 | 11,924  |                   | $ | 13,185  |  
|                                                                                                                                                     |  |                   |         |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                |  |                   |         |                   |   |         |  
|Current Liabilities:                                                                                                                                 |  |                   |         |                   |   |         |  
|Revolving loan and current maturities of long-term
debt                                                                                              |  | $                 | 4,721   |                   | $ | 4,591   |  
|Accounts payable                                                                                                                                     |  |                   | 1,346   |                   |   | 1,058   |  
|Pension liabilities, current portion                                                                                                                 |  |                   | 273     |                   |   | 1,859   |  
|Income taxes payable                                                                                                                                 |  |                   |        |                   |   | 204     |  
|Other current liabilities                                                                                                                            |  |                   | 544     |                   |   | 859     |  
|                                                                                                                                                     |  |                   |         |                   |   |         |  
|Total current liabilities                                                                                                                            |  |                   | 6,884   |                   |   | 8,571   |  
|                                                                                                                                                     |  |                   |         |                   |   |         |  
|Long-term debt, less current maturities                                                                                                              |  |                   | 4,211   |                   |   | 4,155   |  
|Stockholder loans                                                                                                                                    |  |                   | 350     |                   |   | 1,500   |  
|Accrued interest, stockholder loans                                                                                                                  |  |                   | 639     |                   |   | 587     |  
|Pension liabilities, less current portion                                                                                                            |  |                   | 1,647   |                   |   | 1,494   |  
|Environmental liabilities                                                                                                                            |  |                   | 1,287   |                   |   | 1,290   |  
|Other liabilities                                                                                                                                    |  |                   |        |                   |   | 335     |  
|Mandatorily Redeemable Preferred Stock, par value $0.01 per share
8,000,000
  shares authorized; Shares issued and outstanding: Series A - 4,555,007 |  |                   | 4,555   |                   |   | 4,555   |  
|Accumulated dividends on Mandatorily Redeemable Stock                                                                                                |  |                   | 587     |                   |   | 285     |  
|                                                                                                                                                     |  |                   |         |                   |   |         |  
|                                                                                                                                                     |  |                   |         |                   |   |         |  
|Total Liabilities                                                                                                                                    |  |                   | 20,160  |                   |   | 22,772  |  
|                                                                                                                                                     |  |                   |         |                   |   |         |  
|                                                                                                                                                     |  |                   |         |                   |   |         |  
|Commitments and contingencies                                                                                                                        |  |                   |         |                   |   |         |  
|                                                                                                                                                     |  |                   |         |                   |   |         |  
|STOCKHOLDERS DEFICIT                                                                                                                                |  |                   |         |                   |   |         |  
|Common Stock, par value $0.01 per share 15,000,000 shares
  authorized; Shares issued and outstanding: 5,331,881 as of December 31, 2007
  and 2006  |  |                   | 54      |                   |   | 54      |  
|Additional paid-in capital                                                                                                                           |  |                   | 33,235  |                   |   | 33,231  |  
|Accumulated Deficit                                                                                                                                  |  |                   | (40,088 | )                 |   | (40,213 | )
|Accumulated Other Comprehensive Loss                                                                                                                 |  |                   | (1,437  | )                 |   | (2,659  | )
|                                                                                                                                                     |  |                   |         |                   |   |         |  
|Total Stockholders Deficit                                                                                                                          |  |                   | (8,236  | )                 |   | (9,587  | )
|                                                                                                                                                     |  |                   |         |                   |   |         |  
|Total Liabilities and Stockholders Deficit                                                                                                          |  | $                 | 11,924  |                   | $ | 13,185  |  
|                                                                                                                                                     |  |                   |         |                   |   |         |  

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

- 34 -

---



LEVCOR INTERNATIONAL, INC.
AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)

|                                                                                                                                                                 |  |                          |        |      |   |        |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------ | -
|                                                                                                                                                                 |  | Years Ended December 31, |       
|                                                                                                                                                                 |  |                          |       
|                                                                                                                                                                 |  | 2007                     |        | 2006 |   | 2005   | 
|                                                                                                                                                                 |  |                          |        |      |   |        | 
|Net sales                                                                                                                                                        |  | $                        | 19,385 |      | $ | 21,936 |  | $ | 21,217 |  
|Cost of sales                                                                                                                                                    |  |                          | 13,320 |      |   | 14,890 |  |   | 13,957 |  
|                                                                                                                                                                 |  |                          |        |      |   |        |  |   |        |  
|Gross profit                                                                                                                                                     |  |                          | 6,065  |      |   | 7,046  |  |   | 7,260  |  
|Selling, general and administrative expenses                                                                                                                     |  |                          | 4,827  |      |   | 5,801  |  |   | 6,270  |  
|                                                                                                                                                                 |  |                          |        |      |   |        |  |   |        |  
|Income from continuing operations before gain on termination of post
  retirement benefit plan, interest, preferred dividends and income tax expense
  (benefit) |  |                          | 1,238  |      |   | 1,245  |  |   | 990    |  
|Gain on termination of post retirement benefit plan                                                                                                              |  |                          |       |      |   | 1,662  |  |   |       |  
|                                                                                                                                                                 |  |                          |        |      |   |        |  |   |        |  
|Income from continuing operations before interest, preferred
  dividends and income tax expense (benefit)                                                        |  |                          | 1,238  |      |   | 2,907  |  |   | 990    |  
|Interest expense                                                                                                                                                 |  |                          | 839    |      |   | 872    |  |   | 495    |  
|Dividends on mandatorily redeemable preferred stock                                                                                                              |  |                          | 302    |      |   | 273    |  |   | 273    |  
|                                                                                                                                                                 |  |                          |        |      |   |        |  |   |        |  
|Income from continuing operations before income taxes expense
  (benefit)                                                                                        |  |                          | 97     |      |   | 1,762  |  |   | 222    |  
|Income tax expense (benefit)                                                                                                                                     |  |                          | (6     | )    |   | 149    |  |   | 3,077  |  
|                                                                                                                                                                 |  |                          |        |      |   |        |  |   |        |  
|Income (loss) from continuing operations                                                                                                                         |  |                          | 103    |      |   | 1,613  |  |   | (2,855 | )
|Income (loss) from discontinued operations, net of tax                                                                                                           |  |                          | 22     |      |   | 13     |  |   | (5,449 | )
|                                                                                                                                                                 |  |                          |        |      |   |        |  |   |        |  
|Net income (loss)                                                                                                                                                |  | $                        | 125    |      | $ | 1,626  |  | $ | (8,304 | )
|                                                                                                                                                                 |  |                          |        |      |   |        |  |   |        |  
|                                                                                                                                                                 |  |                          |        |      |   |        |  |   |        |  
|Income (loss) per common share:                                                                                                                                  |  |                          |        |      |   |        |  |   |        |  
|Basic:                                                                                                                                                           |  |                          |        |      |   |        |  |   |        |  
|Income (loss) from continuing operations                                                                                                                         |  | $                        | .02    |      | $ | .30    |  | $ | (.54   | )
|Income (loss) from discontinued
operations                                                                                                                       |  |                          | *      |      |   | *      |  |   | (1.02  | )
|                                                                                                                                                                 |  |                          |        |      |   |        |  |   |        |  
|Net income (loss)                                                                                                                                                |  | $                        | .02    |      | $ | .30    |  | $ | (1.56  | )
|                                                                                                                                                                 |  |                          |        |      |   |        |  |   |        |  
|                                                                                                                                                                 |  |                          |        |      |   |        |  |   |        |  
|Diluted:                                                                                                                                                         |  |                          |        |      |   |        |  |   |        |  
|Income (loss) from continuing operations                                                                                                                         |  | $                        | .02    |      | $ | .30    |  | $ | (.54   | )
|Income (loss) from discontinued
operations                                                                                                                       |  |                          | *      |      |   | *      |  |   | (1.02  | )
|                                                                                                                                                                 |  |                          |        |      |   |        |  |   |        |  
|Net income (loss)                                                                                                                                                |  | $                        | .02    |      | $ | .30    |  | $ | (1.56  | )
|                                                                                                                                                                 |  |                          |        |      |   |        |  |   |        |  
|                                                                                                                                                                 |  |                          |        |      |   |        |  |   |        |  
|Weighted average shares outstanding - basic                                                                                                                      |  |                          | 5,332  |      |   | 5,332  |  |   | 5,332  |  
|Potential common stock                                                                                                                                           |  |                          |       |      |   | 2      |  |   |       |  
|                                                                                                                                                                 |  |                          |        |      |   |        |  |   |        |  
|Weighted average shares outstanding - diluted                                                                                                                    |  |                          | 5,332  |      |   | 5,334  |  |   | 5,332  |  
|                                                                                                                                                                 |  |                          |        |      |   |        |  |   |        |  

* Less than $.005

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

- 35 -

---



LEVCOR INTERNATIONAL, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT(In thousands, except share amounts)

|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|------------------------------------ |  | ----- | ------- | ------------- | - | ----------- | - | ---------- | ------- | ----------- | - | -------------- | - | -------- | ------ | ------------ | - | -- |  |  | --------- |  | - | --- | -
|                                     |  |       |         |               |   |             |   |            |         | Accum.Other |   |                |   |          |        |              |  
|                                     |  |       |         | Comprehensive |   |             |   | Additional |         | Compre-     |   | Common
  Stock |   |          |       
|                                     |  |       |         | Income        |   | Accumulated |   | Paid-in    |         | hensive     |   |                |   | Unearned |       
|                                     |  | Total |         | (Loss)        |   | Deficit     |   | Capital    |         | Loss        |   | Amount         |   | Shares   |        | Compensation |  
|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |  
|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|January
  1, 2005                    |  | $     | (3,185  | )             |   |             |   | $          | (33,535 | )           | $ | 33,234         |   | $        | (2,858 | )            | $ | 54 |  |  | 5,329,564 |  | $ | (80 | )
|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|Stock-based
  compensation           |  |       | 4       |               |   |             |   |            |         |             |   | 4              |   |          |        |              |   |    |  |  | 2,317     |  |   |     |  
|Net loss                             |  |       | (8,304  | )             |   | (8,304      | ) |            | (8,304  | )           |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|Foreign
  translation adjustment     |  |       | (9      | )             |   | (9          | ) |            |         |             |   |                |   |          | (9     | )            |   |    |  |  |           |  |   |     |  
|Amortization
  unearned compensation |  |       | 16      |               |   | 16          |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   | 16  |  
|Pension
  adjustment                 |  |       | (1,465  | )             |   | (1,465      | ) |            |         |             |   |                |   |          | (1,465 | )            |   |    |  |  |           |  |   |     |  
|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|Total
  comprehensive loss           |  |       |         |               | $ | (9,762      | ) |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|December
  31, 2005                  |  | $     | (12,943 | )             |   |             |   | $          | (41,839 | )           | $ | 33,238         |   | $        | (4,332 | )            | $ | 54 |  |  | 5,331,881 |  | $ | (64 | )
|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|Net Income                           |  |       | 1,626   |               |   | 1,626       |   |            | 1,626   |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|Foreign
  translation adjustment     |  |       | (29     | )             |   | (29         | ) |            |         |             |   |                |   |          | (29    | )            |   |    |  |  |           |  |   |     |  
|Pension
  adjustment                 |  |       | 1,702   |               |   | 1,702       |   |            |         |             |   |                |   |          | 1,702  |              |   |    |  |  |           |  |   |     |  
|Stock-based
  compensation           |  |       | 57      |               |   | 57          |   |            |         |             |   | 57             |   |          |        |              |   |    |  |  |           |  |   |     |  
|Reclassification                     |  |       |         |               |   |            |   |            |         |             |   | (64            | ) |          |        |              |   |    |  |  |           |  |   | 64  |  
|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|Total comprehensive
  income         |  |       |         |               | $ | 3,356       |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|December
  31, 2006                  |  | $     | (9,587  | )             |   |             |   | $          | (40,213 | )           | $ | 33,231         |   | $        | (2,659 | )            | $ | 54 |  |  | 5,331,881 |  | $ |    |  
|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|Net income                           |  |       | 125     |               |   | 125         |   |            | 125     |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|Foreign
  translation adjustment     |  |       | 452     |               |   | 452         |   |            |         |             |   |                |   |          | 452    |              |   |    |  |  |           |  |   |     |  
|Pension
  adjustment                 |  |       | 770     |               |   | 770         |   |            |         |             |   |                |   |          | 770    |              |   |    |  |  |           |  |   |     |  
|Stock-based
  compensation           |  |       | 4       |               |   | 4           |   |            |         |             |   | 4              |   |          |        |              |   |    |  |  |           |  |   |     |  
|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|Total
  comprehensive income         |  |       |         |               | $ | 1,351       |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  
|December
  31, 2007                  |  | $     | (8,236  | )             |   |             |   | $          | (40,088 | )           | $ | 33,235         |   | $        | (1,437 | )            | $ | 54 |  |  | 5,331,881 |  | $ |    |  
|                                     |  |       |         |               |   |             |   |            |         |             |   |                |   |          |        |              |   |    |  |  |           |  |   |     |  

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

- 36 -

---



LEVCOR INTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)

|                                                                                    |  |                          |         |      |   |         |   |   |         |  
|----------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                    |  | Years Ended December 31, |        
|                                                                                    |  | 2007                     |         | 2006 |   | 2005    |  
|                                                                                    |  |                          |         |      |   |         |  
|                                                                                    |  |                          |         |      |   |         |   |   |         |  
|Cash Flows From Operating
  Activities:                                             |  |                          |         |      |   |         |   |   |         |  
|Net income (loss)                                                                   |  | $                        | 125     |      | $ | 1,626   |   | $ | (8,304  | )
|Reconciliation of net income (loss) to net cash provided by (used in)
  operations: |  |                          |         |      |   |         |   |   |         |  
|Non-cash gain on post retirement medical plan
termination                           |  |                          |        |      |   | (1,662  | ) |   |        |  
|Goodwill and Trademarks impairment  Textile
business                               |  |                          |        |      |   |        |   |   | 3,009   |  
|Depreciation and amortization                                                       |  |                          | 408     |      |   | 404     |   |   | 392     |  
|Deferred income taxes                                                               |  |                          |        |      |   |        |   |   | 2,908   |  
|Non-cash stock-based compensation                                                   |  |                          | 4       |      |   | 57      |   |   | 4       |  
|Accrued interest on stockholder loans                                               |  |                          | 52      |      |   | 133     |   |   | 137     |  
|Accrued dividends on mandatorily redeemable
preferred stock                         |  |                          | 302     |      |   | 285     |   |   |        |  
|Changes in operating assets and
liabilities:                                        |  |                          |         |      |   |         |   |   |         |  
|Accounts receivable trade, net                                                      |  |                          | 563     |      |   | (186    | ) |   | 841     |  
|Inventories, net                                                                    |  |                          | 712     |      |   | 2,261   |   |   | 83      |  
|Other current assets                                                                |  |                          | (53     | )    |   | 87      |   |   | 41      |  
|Other assets                                                                        |  |                          | (204    | )    |   | (83     | ) |   | 105     |  
|Accounts payable                                                                    |  |                          | 288     |      |   | (839    | ) |   | 49      |  
|Income taxes payable                                                                |  |                          | (204    | )    |   | 175     |   |   | (44     | )
|Other current liabilities                                                           |  |                          | (228    | )    |   | (514    | ) |   | 140     |  
|Pension liabilities                                                                 |  |                          | (662    | )    |   | (146    | ) |   | (94     | )
|Post retirement medical liabilities                                                 |  |                          | (87     | )    |   | (211    | ) |   | (194    | )
|Environmental liabilities                                                           |  |                          | (3      | )    |   | (58     | ) |   | (40     | )
|Other liabilities                                                                   |  |                          |        |      |   | 156     |   |   | (170    | )
|                                                                                    |  |                          |         |      |   |         |   |   |         |  
|Net
  cash provided by (used in) operating activities                               |  |                          | 1,013   |      |   | 1,485   |   |   | (1,137  | )
|                                                                                    |  |                          |         |      |   |         |   |   |         |  
|                                                                                    |  |                          |         |      |   |         |   |   |         |  
|Cash Flows From Investing Activities:                                               |  |                          |         |      |   |         |   |   |         |  
|Capital expenditures                                                                |  |                          | (25     | )    |   | (50     | ) |   | (100    | )
|Investment in other assets                                                          |  |                          | (47     | )    |   | (35     | ) |   | (41     | )
|                                                                                    |  |                          |         |      |   |         |   |   |         |  
|Net cash used in investing activities                                               |  |                          | (72     | )    |   | (85     | ) |   | (141    | )
|                                                                                    |  |                          |         |      |   |         |   |   |         |  
|                                                                                    |  |                          |         |      |   |         |   |   |         |  
|Cash Flows From Financing
  Activities:                                             |  |                          |         |      |   |         |   |   |         |  
|Borrowings under revolving loan                                                     |  |                          | 18,129  |      |   | 20,383  |   |   | 21,055  |  
|Repayments under revolving loan                                                     |  |                          | (17,999 | )    |   | (19,995 | ) |   | (20,838 | )
|Borrowing of long - term debt                                                       |  |                          | 200     |      |   |        |   |   |        |  
|Repayment of long  term debt                                                       |  |                          | (144    | )    |   | (144    | ) |   | (144    | )
|Borrowings under stockholder loan                                                   |  |                          | 850     |      |   |        |   |   | 2,501   |  
|Repayments under stockholder loan                                                   |  |                          | (2,000  | )    |   | (850    | ) |   | (650    | )
|Due to factor                                                                       |  |                          |        |      |   | (775    | ) |   | (628    | )
|                                                                                    |  |                          |         |      |   |         |   |   |         |  
|Net cash provided by (used in) financing
activities                                 |  |                          | (964    | )    |   | (1,381  | ) |   | 1,296   |  
|                                                                                    |  |                          |         |      |   |         |   |   |         |  
|Increase (decrease)  in cash                                                        |  |                          | (23     | )    |   | 19      |   |   | 18      |  
|Cash at beginning of year                                                           |  |                          | 69      |      |   | 50      |   |   | 32      |  
|                                                                                    |  |                          |         |      |   |         |   |   |         |  
|Cash at end of year                                                                 |  | $                        | 46      |      | $ | 69      |   | $ | 50      |  
|                                                                                    |  |                          |         |      |   |         |   |   |         |  
|                                                                                    |  |                          |         |      |   |         |   |   |         |  
|Supplemental Disclosure of Cash Flow Information:                                   |  |                          |         |      |   |         |   |   |         |  
|Cash paid (refunded) during the period for:                                         |  |                          |         |      |   |         |   |   |         |  
|Interest                                                                            |  | $                        | 888     |      | $ | 809     |   | $ | 653     |  
|                                                                                    |  |                          |         |      |   |         |   |   |         |  
|Income taxes                                                                        |  | $                        | 194     |      | $ | (26     | ) | $ | 17      |  
|                                                                                    |  |                          |         |      |   |         |   |   |         |  

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

- 37 -

---



LEVCOR INTERNATIONAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007

|    |                                                          
|--- | ---------------------------------------------------------
|1 - | SUMMARY OF BUSINESS AND SIGNIFICANT
  ACCOUNTING POLICIES

Nature of Operations and Liquidity:

Levcor
International, Inc. (the Company or Levcor or we) manufactures, packages
and distributes a line of buttons and other craft products for sale in the home
sewing and craft retail industry. The Company formerly operated a textile
business which is treated as a discontinued operation as described in Note 3.
The Company sells its products to customers primarily in the United States and
also has distribution in Canada and Europe.

Consolidation:

The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Blumenthal Lansing Company, LLC and Button Fashion
B.V. after elimination of intercompany items and transactions.

Use of Estimates:

The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.

Cash and Cash Equivalents:

The Company
considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents. The Company did not have any cash
equivalents at December 31, 2007, 2006 and 2005.

Property, Plant and Equipment:

Property,
plant and equipment is stated at cost less accumulated 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 and fixtures are generally depreciated over periods of
20-35, 3-25 and 5-10 years, respectively. Leasehold improvements are amortized
over the shorter of the lease or its estimated useful life.

Credit Risk:

Financial
instruments which potentially subject us to concentration of credit risk
consist principally of accounts receivable. We perform ongoing credit
evaluations of our customers financial condition and, generally, require no
collateral from our customers.

Accounts Receivable:

Accounts
receivable are stated at the net realizable value. An allowance for doubtful accounts
is recorded based on a combination of historical experience, aging analysis and
information on specific accounts. Account balances are written off against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. The allowance for doubtful accounts was
$17,000 at December 31, 2007 and $106,000 at December 31, 2006.

- 38 -

---



Inventories:

Inventories
are valued at the lower of cost or market using a weighted-average cost method
basis. We make provisions for obsolete or slow moving inventories as necessary
to properly reflect inventory value.

Long-Lived Assets:

The Company
evaluates the carrying value of long-lived assets whenever events or changes in
circumstances indicate the carrying value of an asset may not be recoverable.
When factors indicate the asset may not be recoverable, the Company compares
the related undiscounted future net cash flows to the carrying value of the
asset to determine if impairment exists. If the expected future net cash flows
are less than the carrying value, the asset is written down to its estimated
fair value. When assets are removed from operations and held for sale, the
impairment loss is estimated as the excess of the carrying value of the assets
over their fair value. No such impairments of long-lived assets were recorded
for the years ended December 31, 2007 and 2006.

Goodwill:

The Company
reviews goodwill for impairment annually, or more frequently if impairment
indicators arise and goodwill is written off when impaired. Impairment, if any,
would be determined based on an implied fair value model for determining the
carrying value of goodwill. The impairment test is a two-step process. The
first step requires comparing the fair value of each reporting unit to its net
book value. The Company uses management estimates of future cash flows to
perform the first step of the goodwill impairment test. Estimates made by
management include assumptions about future conditions such as future revenues,
gross margins and operating expenses. The second step is only performed if
impairment is indicated after the first step is performed, as it involves
measuring the actual impairment to goodwill.

Income Taxes:

The liability
method is used in accounting for income taxes as required by Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under this method, deferred tax
assets and liabilities are recognized for operating income and tax credit
carryforwards and for the future tax consequences attributable to the
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the results of operations in the period
that includes the enactment date.

Realization of
our deferred tax assets is, for the most part, dependent upon our U.S.
consolidated tax group of companies having sufficient federal taxable income in
future years to utilize our domestic net operating loss carryforwards before
they expire. We adjust our deferred tax valuation allowance on a quarterly
basis in light of certain factors, including our financial performance.

The Company
has significant deferred tax assets, resulting from net operating loss
carryforwards and deductible temporary differences. As of December 31, 2007 and
2006, the Company has provided a full valuation allowance against our deferred
tax assets. Management weighs the positive and negative evidence to determine
if it is more likely than not that some or all of the deferred tax assets will
be realized. Forming a conclusion that a valuation allowance is not needed is
difficult when there is negative evidence such as cumulative losses in past
years.  The Company will continue to
maintain a full valuation allowance on its tax benefits until profitability has
been sustained over a time period and in amounts that are sufficient to support
a conclusion that it is more likely than not that a portion or all of the
deferred tax assets will be realized. A decrease in our valuation allowance
would result in an immediate material income tax benefit, an increase in total
assets and decrease stockholders deficit, and could have a significant impact
on earnings in future periods. Because of the Companys net operating loss
carryforward, the Company is not required to record a provision for income
taxes related to its pretax income except in instances where minimum taxes are
payable.

- 39 -

---



Environmental Liabilities:

The Company
accrues for losses associated with environmental remediation obligations when
such losses are probable and reasonably estimable. Accruals for estimated
losses from environmental remediation obligations generally are recognized no
later than completion of the remedial feasibility study. Such accruals are adjusted
as further information develops or circumstances change. Costs of future
expenditures for environmental remediation obligations are not discounted to
their present value.

Loss Contingencies:

There are
times when non-recurring events occur that require management to consider
whether an accrual for a loss contingency is appropriate. Accruals for loss
contingencies typically relate to certain legal proceedings, customer and other
claims and litigation. As required by SFAS No. 5, we determine whether an accrual
for a loss contingency is appropriate by assessing whether a loss is deemed
probable and can be reasonably estimated. We analyze our legal proceedings,
warranty and other claims and litigation based on available information to
assess potential liability. We develop our views on estimated losses in
consultation with outside counsel handling our defense in these matters, which
involves an analysis of potential results assuming a combination of litigation
and settlement strategies. The adverse resolution of any one or more of these
matters over and above the amounts that have been estimated and accrued in the
consolidated financial statements could have a material adverse effect on our
business, results of operations and financial condition.

Foreign Currency Translation:

The assets and
liabilities of the Companys foreign subsidiaries, whose functional currencies
are the local currencies, are translated into United States dollars at the
current exchange rate as of the applicable balance sheet date. Revenues and
expenses are translated at the average exchange rate prevailing during the
period. Gains and losses resulting from the translation of the financial
statements are reported as a separate component of stockholders deficit. Net
currency transaction gains and losses included in income were not material.

Fair Value of Financial Instruments:

The Companys
financial instruments are comprised of revolving debt, long-term debt, loans
payable to stockholder, Robert A. Levinson, and Series A Mandatory Redeemable
Preferred Stock at December 31, 2007 and 2006.
The fair values of the revolving debt, long-term debt, loans payable to
Robert A. Levinson and Series A Mandatory Reedemable Preferred Stock
approximate the carrying values because these obligations had market-based
interest rates.

- 40 -

---



Revenue Recognition:

Revenue is
recognized when goods are shipped to customers. Shipment is made by UPS or
common carrier. Deliveries generally take place within three days of shipment.
Standard terms for shipments are F.O.B. shipping point, at which time the
Company has completed all performance obligations to consummate the sale. In
some circumstances, shipments are made F.O.B. destination, in which case the
Company insures the sales value of most shipments.

Revenue is
reported net of a reserve for sales returns and allowances. Sales returns and
allowances are estimated based upon specific agreements and or historical
patterns with major accounts.

Advertising:

The Company
expenses the cost of advertising at the time the cost is incurred. Advertising
expense totaled approximately $27,000, $50,000 and $133,000 during the years
ended December 31, 2007, 2006 and 2005, respectively.

Income (Loss) Per Common Share:

Basic income
(loss) per share is computed by dividing income (loss) available to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted income (loss) per share reflects the potential increase in
outstanding shares that could result from exercising in-the-money stock
options. The shares issuable upon the exercise of in-the-money stock options
were not included in the computation of loss per common share, for the year
ended December 31, 2005 as the effect would be anti-dilutive. Accordingly, the
2005 diluted loss per share is the same as the basic loss per share.

At December
31, 2005, the Company had 86,300 options outstanding that could potentially
dilute basic loss per share in the future but were not included in the
calculation of diluted loss per share because this inclusion would have been
anti-dilutive.

Mandatorily Redeemable Preferred Stock:

The Company
accounts for mandatorily redeemable preferred stock in accordance with SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS 150). SFAS 150 requires an issuer to classify
certain financial instruments within its scope, such as mandatorily redeemable
preferred stock, as liabilities (or assets in some circumstances). SFAS 150
defines a financial instrument as mandatorily redeemable if it embodies an
unconditional obligation requiring the issuer to redeem the instrument by
transferring its assets at a specified or determinable date(s) or upon an event
certain to occur.

Stock-Based Compensation:

On January 1,
2006, we adopted Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (FAS 123(R)), that addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for either equity instruments of the enterprise or
liabilities that are based on the fair value of the enterprises equity
instruments or that may be settled by the issuance of such equity instruments.
The statement eliminates the ability to account for share-based compensation
transactions, as we formerly did using the intrinsic value method as prescribed
by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and generally requires that such transactions be
accounted for using a fair-value-based method and recognized as expenses in our
consolidated statement of operations.

- 41 -

---



We adopted FAS
123(R) using the modified prospective transition method which requires the
application of the accounting standard as of January 1, 2006. Our consolidated
financial statements as of and for the years ended December 31, 2007 and 2006
reflect the impact of adopting FAS 123(R). In accordance with the modified
prospective transition method, the consolidated financial statements for the year
ended December 31, 2005 have not been restated to reflect, and do not include
the impact of FAS 123(R). See Note 17, Stock Option Plan for further details.

For all
unvested options outstanding as of January 1, 2006, the previously measured but
unrecognized compensation expense, based on the fair value at the original
grant date, has been recognized in the Companys financial statements over the
remaining vesting period. For equity-based compensation awards granted or
modified subsequent to January 1, 2006, compensation expense, based on the fair
value on the date of grant or modification has been or will be recognized in
the Companys consolidated financial statements over the vesting period. The
Company utilizes the Black-Scholes option pricing model to measure the fair
value of stock options.

Recently Issued Accounting Pronouncements:

In October
2006, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) No. Financial Accounting Standard (FAS) 123(R)-5, Amendment of FSP FAS 123(R)-1, (FSP
FAS123(R)-5) to address whether a change to an equity instrument in connection
with an equity restructuring should be considered a modification for the
purpose of applying FSP No. FAS 123(R)-1, Classification
and Measurement of Freestanding Financial Instruments Originally Issued in
Exchange for Employee Services under FAS Statement No 123(R) (FSP
FAS123(R)-1). FSP FAS 123(R)-1 states that financial instruments issued to
employees in exchange for past or future services are subject to the provisions
of FAS 123(R) unless the terms of the award are modified when the holder is no
longer an employee. In FSP FAS 123(R)-5, the FASB staff concluded that changes
to the terms of an award that are made solely due to an equity restructuring are
not considered modifications as described in FSP FAS 123(R)-1 unless the fair
value of the award increases, anti-dilution provisions are added, or holders of
the same class of equity instruments are treated unequally. FSP FAS 123(R)-5 is
effective for the first reporting period beginning after October 10, 2006. The
adoption of FSP FAS 123(R)-5 did not have a material impact on the Companys
consolidated financial statements.

In June 2007, the FASB ratified the consensus on Emerging Issues Task
Force (EITF) Issue No. 06-11, Accounting for Income Tax Benefits of Dividends
on Share-Based Payment Awards (EITF 06-11). EITF 06-11 requires companies to
recognize the income tax benefit realized from dividends or dividend
equivalents that are charged to retained earnings and paid to employees for
non-vested equity-classified employee share-based payment awards as an increase
to additional paid-in capital. EITF 06-11 is effective for fiscal years
beginning after September 15, 2007 (fiscal year 2008 for the Company). The
adoption is not expected to have a material impact on the Companys
consolidated financial statements.

- 42 -

---



In December 2007, the FASB
issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS No. 141(R)). SFAS No. 141(R) establishes principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS No.
141(R) also establishes disclosure requirements to enable the evaluation of the
nature and financial effects of the business combination. SFAS No. 141(R) is
effective for fiscal years beginning after December 15, 2008. The Company is
currently evaluating the potential impact, if any, of the adoption of SFAS No.
141(R) on its consolidated results of operations and financial condition.

In December 2007, the FASB
issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statementsan amendment of Accounting
Research Bulletin No. 51 (SFAS No. 160). SFAS No. 160 establishes
accounting and reporting standards for ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parents ownership interest, and the valuation of retained noncontrolling
equity investments when a subsidiary is deconsolidated. SFAS No. 160 also
establishes disclosure requirements that clearly identify and distinguish between
the interests of the parent and the interests of the noncontrolling owners.
SFAS No. 160 is effective for fiscal years beginning after December 15, 2008.
The Company is currently evaluating the potential impact, if any, of the
adoption of SFAS No. 160 on its consolidated results of operations and
financial condition.

In March 2008, the FASB issued
SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FASB 133, Accounting for Derivative Instruments and Hedging Activities.
This statement requires enhanced disclosures about an entitys derivative and
hedging activities and thereby improves the transparency of financial
reporting. The Statement is effective for financial statements for fiscal years
and interim periods beginning after November 15, 2008 and is not expected to
have an impact on the Companys consolidated financial statements.

|   |              
|-- | -------------
|2- | GOING CONCERN

The
accompanying consolidated financial statements have been prepared on a basis
which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The Companys
ability to continue as a going concern is dependent upon its ability to execute
managements plans to be profitable, generate positive cash flow from
operations and to continue to have access to existing financing to meet
obligations and repay liabilities when they come due, including amounts payable
with respect to claimed environmental liabilities in connection with the
Solvents Recovery Service of New England Superfund Site in Southington,
Connecticut (the SRS site) (see Note 18) in the event the parent corporation
is determined to be responsible for these claimed liabilities and the
redemption of preferred stock (see Note 15) in 2007 and thereafter. Although
management continues to pursue these plans and believes it will be successful,
there is no assurance that the Company will be successful in generating such
profitable operations or maintaining such access to existing financing or obtaining
financing for such environmental obligations on terms acceptable to the
Company. The outcome of these matters cannot be predicted with any certainty at
this time. These factors raise substantial doubt about the Companys ability to
continue as a going concern. Management plans to satisfy the Companys capital
needs through cash generated from operations, advances under its facilities
with CIT Group/Financial Services, Inc. (CIT) and stockholder loans. These
consolidated financial statements do not include any adjustments to the amounts
and classification of assets and liabilities that may be necessary should the
Company be unable to continue as a going concern.

- 43 -

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|   |                        
|-- | -----------------------
|3- | DISCONTINUED OPERATIONS

During the
fourth quarter of 2005, the Companys Board of Directors approved managements
plan to exit the garment manufacturing business. On May 11, 2006, management
determined to exit its remaining Textile business completely. As a result,
Textile operations for the current and prior comparative periods have been
presented as discontinued operations.

Management
concluded that the carrying amounts of goodwill and trademarks totaling $2.3
million and $709,000, respectively, related to the Textile business were deemed
to be fully impaired as of September 30, 2005 and were written off accordingly
at that time.

During 2006
and 2007, the Company disposed of all remaining Textile business inventory. As
of December 31, 2007 the Company had no Textile business assets and liabilities
remaining. The Company does not expect to incur any additional exit costs.

The Textile
business generated the following operating results which have been classified
as discontinued operations in the consolidated statements of operations (in
thousands):

|                                               |  |                         |    |      |   |       |  |   |        |  
|---------------------------------------------- |  | ----------------------- | -- | ---- | - | ----- |  | - | ------ | -
|                                               |  | Year Ended December 31, |   
|                                               |  |                         |   
|                                               |  | 2007                    |    | 2006 |   | 2005  | 
|                                               |  |                         |    |      |   |       | 
|                                               |  |                         |    |      |   |       |  |   |        |  
|Sales                                          |  | $                       | 39 |      | $ | 2,393 |  | $ | 8,184  |  
|Cost of sales                                  |  |                         | 17 |      |   | 1,934 |  |   | 8,685  |  
|                                               |  |                         |    |      |   |       |  |   |        |  
|Gross profit                                   |  |                         | 22 |      |   | 459   |  |   | (501   | )
|Selling, general and administrative expense    |  |                         |   |      |   | 269   |  |   | 1,628  |  
|Goodwill and trademark impairment              |  |                         |   |      |   |      |  |   | 3,009  |  
|Interest expense                               |  |                         |   |      |   | 177   |  |   | 311    |  
|                                               |  |                         |    |      |   |       |  |   |        |  
|Results of discontinued operations, net of tax |  | $                       | 22 |      | $ | 13    |  | $ | (5,449 | )
|                                               |  |                         |    |      |   |       |  |   |        |  

Effective June 30, 2006, the
short and long-term debt of the Textile business became short and long-term
debt of the Companys continuing operations and as such, interest expense
related to this debt as of July 1, 2006 has been classified as part of its
continuing operations.

- 44 -

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|   |                                            
|-- | -------------------------------------------
|4- | TERMINATION OF POST RETIREMENT MEDICAL PLAN

In September 2006, the
Company determined that it would terminate its post retirement medical plan as
of December 31, 2006. As a result, the Company reduced the balance sheet
liability for post retirement medical costs by $1.7 million as of September 30,
2006 and recorded a corresponding non-cash gain on the plan termination. As of
December 31, 2006, the Company had approximately $87,000 included in other
current liabilities related to payments to be made under the plan during the
run off period in 2007 for 2006 claims. (See Note 10)

|   |            
|-- | -----------
|5- | INVENTORIES

The components
of inventories as of December 31, 2007 and 2006, are as follows (in thousands):

|                 |  |      |       |      |   |       | 
|---------------- |  | ---- | ----- | ---- | - | ----- | 
|                 |  | 2007 |       | 2006 |  
|                 |  |      |       |      |  
|Raw materials    |  | $    | 2,132 |      | $ | 2,614 | 
|Work in progress |  |      | 95    |      |   | 87    | 
|Finished goods   |  |      | 2,488 |      |   | 2,642 | 
|                 |  |      |       |      |   |       | 
|                 |  | $    | 4,715 |      | $ | 5,343 | 
|                 |  |      |       |      |   |       | 

At December
31, 2007 and 2006 inventories were valued on a weighted-average cost method
basis. Inventories are stated at the lower of cost or market. Cost elements
included in inventory are material, labor and overhead, primarily using
standard cost, which approximates actual cost.

|   |                              
|-- | -----------------------------
|6- | PROPERTY, PLANT AND EQUIPMENT

The components
of property, plant and equipment as of December 31, are as follows (in
thousands):

|                                                  |  |      |        |      |   |        |  
|------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                                  |  | 2007 |        | 2006 |  
|                                                  |  |      |        |      |  
|Land and improvements                             |  | $    | 83     |      | $ | 79     |  
|Buildings and improvements                        |  |      | 2,516  |      |   | 2,491  |  
|Machinery and equipment                           |  |      | 2,007  |      |   | 2,248  |  
|                                                  |  |      |        |      |   |        |  
|                                                  |  |      | 4,606  |      |   | 4,818  |  
|Less: Accumulated
  depreciation and amortization |  |      | (2,886 | )    |   | (2,901 | )
|                                                  |  |      |        |      |   |        |  
|                                                  |  | $    | 1,720  |      | $ | 1,917  |  
|                                                  |  |      |        |      |   |        |  

Depreciation and amortization
expense for the years ended December 31, 2007, 2006 and 2005 totaled
approximately $408,000, $404,000 and $392,000, respectively.

|   |                              
|-- | -----------------------------
|7- | SHORT-TERM AND LONG-TERM DEBT

The Company
has a credit facility with CIT and a promissory note payable to JPMorgan Chase
Bank (JPMorgan). In addition, the Company has borrowings and advances
outstanding from Robert A. Levinson, a stockholder, officer and director of the
Company.

The Companys
credit facility with CIT (the CIT Facility) provides for maximum aggregate
borrowings of up to $7.5 million in the form of revolving credit, letters of
credit and term loans. The CIT Facility is comprised of separate financing
agreements with the Company and its wholly-owned subsidiary, Blumenthal Lansing
Company, LLC (Blumenthal). The CIT Facility provides advances up to 40% of
eligible inventory and 90% of eligible accounts receivable, as defined in the
agreements. Availability under the Companys CIT Facility totaled $94,000 as of
December 31, 2007.

- 45 -

---



The CIT
Facility provides for (i) a term loan to the Company (the Term Loan) in the
initial amount of $2.0 million, of which $1.2 million was outstanding at
December 31, 2007, (ii) revolving credit advances to the Company, of which $1.6
million was outstanding at December 31, 2007 and (iii) revolving credit
advances to Blumenthal based upon eligible accounts receivable and inventory,
of which $3.0 million was outstanding at December 31, 2007, and a Letter of
Credit facility with a limit of $500,000, of which there was none outstanding
at December 31, 2007. The Term Loan amortizes $12,000 per month followed by a
final installment payment of $1.0 million due on January 1, 2009. The revolving
credit advances are due on January 1, 2009. $2.5 million of the amounts
outstanding under the CIT Facility bear interest at Chase Bank N.A. prime rate
(7.25%) and amounts in excess of $2.5 million bear interest at the Chase Bank
N.A. prime rate plus 0.5% (7.75%) with a minimum rate of 5.0%.

In connection
with the CIT Facility, the Company and its subsidiary have made cross corporate
guarantees and have issued first priority liens covering substantially all of
the assets of the Company and its subsidiary. The guarantees are full and
unconditional. The non-guarantor subsidiary is immaterial and the Companys
financial statements are representative of the combined guarantors of which the
guarantor subsidiary is 100% owned. In addition, Mr. Robert A. Levinson, a
stockholder, officer and director of the Company, provided certain collateral
against advances provided under the CIT Facility in the approximate amount of
$2.5 million.

The CIT
Facility contains representations and warranties and events of default
customary for agreements of this nature such as restrictions on incurring more
debt, acquisitions, the use of proceeds from the sales of assets, the
prohibition of preferred stock redemptions, dividend payments in excess of
$300,000 per year, and a change in voting control of the Company. The CIT
Facility also contains a subjective acceleration clause which states that all
obligations shall, at CITs option, be immediately due and payable without
notice or demand upon the occurrence of any change in the Companys condition
or affairs (financial or otherwise) that, in CITs sole discretion exercised by
CIT in accordance with CITs business judgment, materially impairs the
collateral or increases CITs risk. CIT may terminate the Credit facility upon
60 days written notice. In the case of the Term Loan, CIT may accelerate the
maturity in the event of a default by the Company after thirteen months notice
of such acceleration. Management of the Company believes that it is unlikely
that the lenders will accelerate the payment of any of the obligations under
the Companys facility during the next twelve months.

The Company
also has a factoring agreement with CIT. As of December 31, 2007 there was no
balance due to or from CIT under the factoring agreement.

The promissory
note payable to JPMorgan in the amount of $3.2 million is dated May 2, 2002 and
has a maturity date of January 5, 2009, as amended. The first $3.0 million
bears interest at a fixed rate per annum equal to the Adjusted LIBOR rate
applicable to such note plus 0.75% (a Eurodollar Loan) and the remaining
$200,000 bears interest at Chase Bank N.A. prime rate. The interest rate on the
note at December 31, 2007 was 6.14% for the $3.0 million and 7.25% for the
remaining balance of $200,000. In addition, Robert A. Levinson, a stockholder,
officer and director of the Company, has provided certain additional collateral
guaranteeing the note.

- 46 -

---



Mr. Robert A.
Levinson, a stockholder, has agreed to personally support the Companys cash
requirements to enable it to fulfill its obligations through January 5, 2009,
to the extent necessary, up to a maximum amount of $3.0 million. The Company
believes its reliance on such commitment is reasonable and that Mr. Levinson
has sufficient liquidity and net worth to honor such commitment. The Company
believes that Mr. Levinsons written commitment provides the Company with the
legal right to request and receive such advances. In the event that Mr.
Levinson did not honor such commitment, the Company would have the right to sue
Mr. Levinson for breach of his agreement. Mr. Levinson reaffirmed this
undertaking in writing in a commitment letter dated March 24, 2008.

The Company
had outstanding loans payable to Mr. Levinson totaling $350,000 and $1.5
million as of December 31, 2007 and 2006, respectively. In addition, Mr.
Levinson has pledged collateral in support of certain Company obligations.
Accrued interest on Mr. Levinsons loans has been classified as noncurrent
liabilities on the Companys balance sheet and totaled $639,000 and $587,000, respectively,
at December 31, 2007 and 2006. He has also agreed not to demand any repayment
of principal or interest currently owed until January 6, 2009. (See Note 13)

During the
year ended December 31, 2007, the Company was in compliance with all debt covenants
as defined in the respective agreements.

Future
maturities of long-term debt during each of the next five years ending December
31 and thereafter were as follows (in thousands):

|     |  |   |       | 
|---- |  | - | ----- | 
|2008 |  | $ | 144   | 
|2009 |  |   | 4,561 | 
|     |  |   |       | 
|     |  | $ | 4,705 | 
|     |  |   |       | 

|   |                          
|-- | -------------------------
|8- | OTHER CURRENT LIABILITIES

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

|                                         |  |      |     |      |   |     | 
|---------------------------------------- |  | ---- | --- | ---- | - | --- | 
|                                         |  | 2007 |     | 2006 |  
|                                         |  |      |     |      |  
|Salaries, bonuses and other compensation |  | $    | 209 |      | $ | 339 | 
|Post retirement medical liability        |  |      |    |      |   | 86  | 
|Other                                    |  |      | 335 |      |   | 434 | 
|                                         |  |      |     |      |   |     | 
|                                         |  | $    | 544 |      | $ | 859 | 
|                                         |  |      |     |      |   |     | 

- 47 -

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|   |               
|-- | --------------
|9- | LEASE PAYMENTS

The following
is a schedule of future minimum lease payments under non-cancelable operating
leases at December 31, 2007 (in thousands):

|     |  |   |     | 
|---- |  | - | --- | 
|2008 |  | $ | 304 | 
|2009 |  |   | 126 | 
|2010 |  |   | 25  | 
|2011 |  |   | 14  | 
|     |  |   |     | 
|     |  | $ | 469 | 
|     |  |   |     | 

Rental expense
for premises leased by the Company under operating leases totaled $306,000,
$271,000, and $208,000 during the years ended December 31, 2007, 2006 and 2005,
respectively.

|    |                                                  
|--- | -------------------------------------------------
|10- | PENSION AND
  OTHER POST-RETIREMENT 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 the plan since that date. Prior to December 31,
1994, the plan covered substantially all employees. The employees covered under
the plan do not receive any additional accruals for service rendered after
December 31, 1994. Plan assets consist principally of common stocks, U.S.
Government obligations, and mutual funds.

On August 17,
2006 The Pension Protection Act of 2006 was signed into law. New pension
funding rules are effective for plan years beginning on or after January 1,
2008. For 2006 and 2007, the prior law funding rules remain in effect. Under
the new law, the 90% funding target is replaced with a 100% target. Shortfalls
from the 100% target must be amortized over a seven year period.

The benefits
under the 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. In 2007 the Company applied for and was
granted a waiver by the Internal Revenue Service with regard to a deferral of
$713,000 which was the remainder of the contribution still due for the 2006
plan year. With respect to the deferral, the Company was required to make a
contribution of $275,000, which was made on September 13, 2007. Total
contributions for the 2006 plan year were $352,000. The Company had also
applied to the Internal Revenue Service to permit a change in method of
accounting for plan assets which was also granted. With respect to the 2007
plan year, the Company has made contributions to the plan in 2007 of $52,000
with an additional approximately $72,000 due in 2008, based on current
legislated discount rates and actuarial assumptions. In addition, the Company
anticipates contributions with respect to the 2008 plan year of $93,000 based
on actuarial assumptions during the year ending December 31, 2008.

- 48 -

---



In addition to
the liability of $758,000 for this Company sponsored plan, the Company also has
an additional pension liability in the amount of $912,000 at December 31, 2007
in connection with a terminated multi-employer plan which requires annual
payments of $142,000 inclusive of principal and interest through 2016. The Company
also has a $250,000 deferred compensation liability payable to the former owner
of an acquired business.

In accordance
with the provision of SFAS 158, the prepaid pension balance has been used to
reduce the pension plan liability as of December 31, 2007 and 2006 and as such
there was no prepaid pension as of December 31, 2007 and 2006. The 2005 pension
adjustment in stockholders deficit included the increase in the deferred tax
assets valuation allowance related to the pension liability of $1,601,000.
These adjustments were recognized and credited to Accumulated Other
Comprehensive Earnings. The minimum pension liabilities as of December 31,
2007 and 2007 were based on the plans portfolio investments as of such date
which totaled $19.2 million and $18.4 million, respectively, and the
actuarially determined accumulated benefit obligation.

- 49 -

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|                                                |  |                            |        |                            |   |        |   |      |     |   |   |      |  
|----------------------------------------------- |  | -------------------------- | ------ | -------------------------- | - | ------ | - | ---- | --- | - | - | ---- | -
|                                                |  |                            |        | Other
  Post-              |  
|                                                |  | Pension
  Plan             |        | Retirement
  Benefit Plan  |  
|                                                |  | Years
  Ended December 31, |        | Years
  Ended December 31, |  
|                                                |  |                            |        |                            |  
|In thousands:                                   |  | 2007                       |        | 2006                       |   | 2007   |   | 2006 |    
|                                                |  |                            |        |                            |   |        |   |      |    
|Change in
  benefit obligation                  |  |                            |        |                            |   |        |   |      |     |   |   |      |  
|Benefit obligation at beginning of year         |  | $                          | 20,505 |                            | $ | 21,387 |   | $    | 87  |   | $ | 979  |  
|Interest costs                                  |  |                            | 1,134  |                            |   | 1,186  |   |      |    |   |   |     |  
|Actuarial (gain) loss                           |  |                            | 236    |                            |   | (236   | ) |      |    |   |   |     |  
|Effect of plan termination                      |  |                            |       |                            |   |       |   |      | (8  | ) |   | (721 | )
|Benefits paid                                   |  |                            | (1,879 | )                          |   | (1,832 | ) |      | (79 | ) |   | (171 | )
|                                                |  |                            |        |                            |   |        |   |      |     |   |   |      |  
|Benefit obligation at end of year               |  | $                          | 19,996 |                            | $ | 20,505 |   | $    |    |   | $ | 87   |  
|                                                |  |                            |        |                            |   |        |   |      |     |   |   |      |  
|                                                |  |                            |        |                            |   |        |   |      |     |   |   |      |  
|Change in
  plan assets:                        |  |                            |        |                            |   |        |   |      |     |   |   |      |  
|Fair value of plan assets at beginning of year  |  | $                          | 18,418 |                            | $ | 17,550 |   | $    |    |   | $ |     |  
|Actual return on plan assets                    |  |                            | 2,372  |                            |   | 2,623  |   |      |    |   |   |     |  
|Employer contribution                           |  |                            | 327    |                            |   | 77     |   |      |    |   |   |     |  
|Benefits paid                                   |  |                            | (1,879 | )                          |   | (1,832 | ) |      |    |   |   |     |  
|                                                |  |                            |        |                            |   |        |   |      |     |   |   |      |  
|Fair value of plan assets at end of year        |  | $                          | 19,238 |                            | $ | 18,418 |   | $    |    |   | $ |     |  
|                                                |  |                            |        |                            |   |        |   |      |     |   |   |      |  
|                                                |  |                            |        |                            |   |        |   |      |     |   |   |      |  
|Funded status /Accrued benefit cost             |  | $                          | (758   | )                          | $ | (2,087 | ) | $    |    |   | $ | (87  | )
|                                                |  |                            |        |                            |   |        |   |      |     |   |   |      |  
|                                                |  |                            |        |                            |   |        |   |      |     |   |   |      |  
|Weighted average assumptions as of December 31: |  |                            |        |                            |   |        |   |      |     |   |   |      |  
|Discount rate                                   |  |                            | 5.75   | %                          |   | 5.75   | % |      | N/A |   |   | N/A  |  
|Expected return on plan assets                  |  |                            | 8.00   | %                          |   | 8.00   | % |      | N/A |   |   | N/A  |  
|Rate of compensation increase                   |  |                            | N/A    |                            |   | N/A    |   |      | N/A |   |   | N/A  |  
|                                                |  |                            |        |                            |   |        |   |      |     |   |   |      |  
|Components
  of net periodic benefit cost:      |  |                            |        |                            |   |        |   |      |     |   |   |      |  
|Interest cost                                   |  | $                          | 1,134  |                            | $ | 1,186  |   | $    |    |   | $ |     |  
|Expected return on plan assets                  |  |                            | (1,404 | )                          |   | (1,335 | ) |      |    |   |   |     |  
|Recognized net actuarial loss (gain)            |  |                            | 38     |                            |   | 179    |   |      |    |   |   | (39  | )
|                                                |  |                            |        |                            |   |        |   |      |     |   |   |      |  
|Net periodic benefit cost (gain)                |  | $                          | (232   | )                          | $ | 30     |   | $    |    |   | $ | (39  | )
|                                                |  |                            |        |                            |   |        |   |      |     |   |   |      |  

The Companys accumulated
benefit obligation under its defined benefit plan at December 31, 2007 and 2006
was $19,996,000 and $20,505,000, respectively.

The Companys defined
benefit plan asset target allocation for 2008, the actual allocation as of
December 31, 2007 and 2006, and the expected long-term rates of return by asset
category for 2007 are as follows:

|                  |  |                     |       |                                                 |  |                                 |     |        |  |     |   |  |  |     |   | 
|----------------- |  | ------------------- | ----- | ----------------------------------------------- |  | ------------------------------- | --- | ------ |  | --- | - |  |  | --- | - | 
|                  |  |                     |       |                                                 |  | Weighted
  Average              |    
|                  |  | Target
  Allocation |       | Percentage
  of Plan Asset
  as of December 31, |  | Expected
  Long-term Rates
  of |    
|Asset Category    |  | 2008                |       | 2007                                            |  | 2006                            |     | Return | 
|                  | 
|Equity securities |  |                     | 40-90 | %                                               |  |                                 | 89  | %      |  | 86  | % |  |  | 9.5 | % | 
|Debt securities   |  |                     | 5-16  | %                                               |  |                                 | 11  | %      |  | 14  | % |  |  | 4.5 | % | 
|Other             |  |                     | 0-10  | %                                               |  |                                 | 0   | %      |  | 0   | % |  |  |    |   | 
|                  |  |                     |       |                                                 |  |                                 |     |        |  |     |   |  |  |     |   | 
|Total             |  |                     |       |                                                 |  |                                 | 100 | %      |  | 100 | % |  |  | 8.0 | % | 
|                  |  |                     |       |                                                 |  |                                 |     |        |  |     |   |  |  |     |   | 

- 50 -

---



|    |                      
|--- | ---------------------
|11- | EMPLOYEE BENEFIT PLAN

The Companys eligible
employees may participate in a Company-sponsored 401(k) benefit plan. This Plan
covers substantially all employees and permits employees to defer up to 15% of
their salary up to statutory maximums. For 2006 and earlier years, the plan
also provided for matching contributions by the Company of up to 75% of the
first 2% of salary deferral and 50% of the next 2% of salary deferral. The
Companys matching contribution has been suspended since January 1, 2007. Total
Company matching contributions for the years ended December 31, 2006 and 2005
were $87,000 and $102,000, respectively. As of December 31, 2007 there were 79
active employees participating in the plan.

|    |                        
|--- | -----------------------
|12- | CUSTOMER CONCENTRATIONS

The
Companys largest two customers (Wal-Mart, a mass merchandiser and Jo-Ann
Stores, a specialty chain,) represented approximately 43% and 32%,
respectively, in 2007, 49% and 23%, respectively, in 2006, and 46% and 25%,
respectively, in 2005 of the Companys net sales. These customers also
represented approximately 73% and 53% of the Companys outstanding accounts
receivable as of December 31, 2007, and 2006, respectively. A reduction in
sales to any of these customers could adversely impact the financial condition
and results of operations of the Company.

On March 21,
2007, Hancock, the Companys third largest customer, announced it will close
approximately 134 of its 443 stores in 2007 as it reorganizes under Chapter 11.
On December 31, 2006, the Company recorded an allowance of $75,000 against the
uncollected 2006 accounts receivable balance of Hancock as of the date of the
filing. In addition, as of March 31, 2007, the Company recorded an additional
allowance of $86,000 against 2007 pre-bankruptcy sales. The balance net of all
reserves was collected during the three months ended June 30, 2007.

|    |                           
|--- | --------------------------
|13- | RELATED PARTY TRANSACTIONS

Robert A.
Levinson, a stockholder, officer and director had outstanding loans of $350,000
and $1.5 million as of December 31, 2007 and 2006, respectively. The Company
also had $639,000 and $587,000 of accrued interest payable to Mr. Levinson with
respect to such loans as of December 31, 2007 and 2006, respectively. He has
also pledged collateral in support of certain Company obligations. See Note 7
for a description of these transactions.

In addition to being a director of the Company, Edward H. Cohen serves
as counsel to Katten Muchin Rosenman LLP, legal counsel to the Company. During
the years ended December 31,
2007, 2006 and 2005, fees for services provided to the Company by Katten Muchin
Rosenman LLP totaled approximately $175,000, $266,000 and $177,000,
respectively. Mr. Cohen does not share in the fees that the Company pays to
such law firm and his compensation is not based on such fees.

On December
20, 2007, Mr. Cohen resigned from the Board of Directors of the Company. The
resignation is effective as of December 31, 2007.

- 51 -

---



|    |             
|--- | ------------
|14- | INCOME TAXES

Income (loss) from continuing operations before income taxes for the
years ended December 31 consisted of the following components (in thousands):

|              |  |      |      |      |   |       |   |   |     |  
|------------- |  | ---- | ---- | ---- | - | ----- | - | - | --- | -
|              |  | 2007 |      | 2006 |   | 2005  |  
|              |  |      |      |      |   |       |  
|United States |  | $    | 294  |      | $ | 1,900 |   | $ | 318 |  
|Foreign       |  |      | (197 | )    |   | (138  | ) |   | (96 | )
|              |  |      |      |      |   |       |   |   |     |  
|              |  | $    | 97   |      | $ | 1,762 |   | $ | 222 |  
|              |  |      |      |      |   |       |   |   |     |  

- 52 -

---



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

|                                                                             |  |                            |    |      |   |      |   |   |       |  
|---------------------------------------------------------------------------- |  | -------------------------- | -- | ---- | - | ---- | - | - | ----- | -
|                                                                             |  | Years
  Ended December 31, |   
|                                                                             |  | 2007                       |    | 2006 |   | 2005 |  
|                                                                             |  |                            |    |      |   |      |  
|Current provision (benefit):                                                 |  |                            |    |      |   |      |   |   |       |  
|Federal                                                                      |  | $                          |   |      | $ | (8   | ) | $ | (4    | )
|State                                                                        |  |                            | (6 | )    |   | 157  |   |   | (25   | )
|                                                                             |  |                            |    |      |   |      |   |   |       |  
|                                                                             |  |                            | (6 | )    |   | 149  |   |   | (29   | )
|                                                                             |  |                            |    |      |   |      |   |   |       |  
|Deferred provision:                                                          |  |                            |    |      |   |      |   |   |       |  
|Federal                                                                      |  |                            |   |      |   |     |   |   | 2,640 |  
|State                                                                        |  |                            |   |      |   |     |   |   | 466   |  
|                                                                             |  |                            |    |      |   |      |   |   |       |  
|                                                                             |  |                            |   |      |   |     |   |   | 3,106 |  
|                                                                             |  |                            |    |      |   |      |   |   |       |  
|Income tax provision (benefit) as per Consolidated Statement of
  Operations |  | $                          | (6 | )    | $ | 149  |   | $ | 3,077 |  
|Deferred provision                                                           |  |                            |    |      |   |      |   |   |       |  
|-Tax effect of other comprehensive loss                                      |  |                            |   |      |   |     |   |   | 1,601 |  
|                                                                             |  |                            |    |      |   |      |   |   |       |  
|Total provision (benefit)                                                    |  | $                          | (6 | )    | $ | 149  |   | $ | 4,678 |  
|                                                                             |  |                            |    |      |   |      |   |   |       |  

An income tax
benefit of $6,000 was recorded in 2007 as a result of refunds of state income
taxes during the year. A state income tax provision of $200,000 was recorded
during the third quarter of 2006 in connection with a proposed audit settlement
with the State of Connecticut related to 1994 and 1995 filings by a previously
disposed of entity, Danfield Threads, Inc, which was reduced by an income tax
benefit as a result of refunds of federal and state income taxes during 2006.
Income tax expense of $3.1 million was recorded during 2005, representing the
establishment of a valuation allowance against the deferred tax asset.

The components
of the net deferred tax asset are (In thousands):

|                                          |  |                |        |      |   |        |  
|----------------------------------------- |  | -------------- | ------ | ---- | - | ------ | -
|                                          |  | December
  31, |       
|                                          |  |                |       
|                                          |  | 2007           |        | 2006 |  
|                                          |  |                |        |      |  
|Deferred tax assets:                      |  |                |        |      |   |        |  
|Book value of fixed assets over tax basis |  | $              | (458   | )    | $ | (508   | )
|Pension liabilities                       |  |                | 1,233  |      |   | 1,341  |  
|Other post-retirement benefit liability   |  |                |       |      |   | 35     |  
|Environmental accruals                    |  |                | 515    |      |   | 516    |  
|Operating and capital loss carryforwards  |  |                | 2,476  |      |   | 2,704  |  
|Other, net                                |  |                | 23     |      |   | 257    |  
|                                          |  |                |        |      |   |        |  
|Deferred tax asset                        |  |                | 3,789  |      |   | 4,345  |  
|Valuation allowance                       |  |                | (3,789 | )    |   | (4,345 | )
|                                          |  |                |        |      |   |        |  
|Deferred tax asset, net                   |  | $              |       |      | $ |       |  
|                                          |  |                |        |      |   |        |  

The valuation
allowance increased (decreased) as follows:

| |  |                          |       |      |   |        |   |   |       | 
| |  | ------------------------ | ----- | ---- | - | ------ | - | - | ----- | 
| |  | Years Ended December 31, |      
| | 
| |  | 2007                     |       | 2006 |   | 2005   |  
| |  |                          |       |      |   |        |  
| |  | $                        | (556) |      | $ | (1,629 | ) | $ | 5,973 | 
| |  |                          |       |      |   |        |   |   |       | 

- 53 -

---



A reconciliation of the
federal statutory rate to the Companys effective tax rate is as follows:

|                                                  |  |                            |        |      |  |       |    |  |         |   
|------------------------------------------------- |  | -------------------------- | ------ | ---- |  | ----- | -- |  | ------- | --
|                                                  |  | Years
  Ended December 31, |       
|                                                  |  |                            |       
|                                                  |  | 2007                       |        | 2006 |  | 2005  |   
|                                                  |  |                            |        |      |  |       |   
|Tax provision (benefit) at statutory federal rate |  |                            | 34.0   | %    |  | 34.0  | %  |  | 34.0    | % 
|State income taxes, net                           |  |                            | 3.9    | %    |  | 6.0   | %  |  | 5.9     | % 
|Permanent items                                   |  |                            | 194.2  | %    |  | 6.2   | %  |  | 49.1    | % 
|Change in valuation allowance                     |  |                            | (533.0 | )%   |  | (92.2 | )% |  | 1,948.6 | % 
|Over (under) accrual in prior year                |  |                            | (3.9   | )%   |  | 8.5   | %  |  | (11.7   | )%
|Non-includable (income) expense                   |  |                            | 299.0  | %    |  | 46.0  | %  |  | (640.1  | )%
|                                                  |  |                            |        |      |  |       |    |  |         |   
|Effective tax                                     |  |                            | (5.8   | )%   |  | 8.5   | %  |  | 1,385.8 | % 
|                                                  |  |                            |        |      |  |       |    |  |         |   

As of December 31, 2007, the
Company had a net operating loss carryforward of approximately $6.0 million
expiring through 2027.

In June 2006, the FASB
issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109 (FIN 48), which clarifies
the accounting for uncertainty in income taxes recognized in a companys
financial statements. The interpretation prescribes a recognition threshold and
measurement attribute criteria for the financial statement recognition and
measurement of an uncertain tax position taken or expected to be taken in a tax
return. The interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.

The Company adopted the
provisions of FIN 48 and FASB Staff Position No. FIN 48-1 on January 1, 2007.
The implementation of FIN 48 did not have a material impact on its consolidated
financial statements. The Company files tax returns in the U.S. federal
jurisdiction and in various states. All federal and state tax filings for the
Company as of December 31, 2006 have been timely filed. The Company
is subject to U.S. federal or state income tax examinations by tax authorities
for years after 2003. During the periods open to examination, the Company has
utilized net operating loss carry forwards that have attributes from closed
periods. Since these net operating loss carry forwards were utilized in the
open periods, they remain subject to examination.

As of December
31, 2007, we do not have any uncertain tax positions under FIN 48. As a result,
there are no unrecognized tax benefits as of December 31, 2007. If we were to
incur any interest and penalties in connection with income tax deficiencies, we
would classify interest in the interest expense category and classify
penalties in the non-interest expense category within the consolidated
statements of operations.

|    |                                       
|--- | --------------------------------------
|15- | MANDATORILY REDEEMABLE PREFERRED STOCK

The Series A
Preferred Stock is subject to mandatory redemption, to the extent the Company
may lawfully do so, in three equal annual installments one of which was due on
June 15, 2007, and the remaining two on June 15, 2008 and June 15, 2009, in
each case, from funds legally available therefore, at a price per share of
Series A Preferred Stock equal to $1 per share, together with an amount
representing accrued and unpaid dividends, whether or not declared, to the date
of redemption. Under the terms of the Companys Certificate of Incorporation,
the mandatory redemption of the Series A Preferred Stock can only be made to
the extent that such redemptions can be made without contravening or causing a
default under any contract, agreement or other instrument by which the Company
or its subsidiaries or any of their property is bound. Under the terms of the
CIT Facility, preferred stock redemption payments are prohibited and preferred
stock dividend payments are limited to $300,000 per year. Because preferred
stock redemption payments are prohibited under the CIT Facility, the Company is
precluded by its Certificate of Incorporation from making any such payments so
long as the CIT Facility is outstanding. In addition, the amount redeemable
within the next twelve months, including accumulated dividends, will continue
to be classified as a noncurrent liability so long as any portion of the CIT Facility
has a maturity of more than one year. The CIT Facility is currently scheduled
to mature on January 1, 2009.

- 54 -

---



Dividends on
the Series A Preferred Stock accrue at a rate of $0.06 per annum per share
when, as and if declared by the Company and are payable quarterly on March 15,
June 15, September 15 and December 15. Quarterly dividends which are not paid
in full in cash on any dividend payment date will accumulate without interest
until the first mandatory redemption date. In the event that the Company does
not redeem shares of Series A Preferred Stock as scheduled, any unpaid
accumulated dividends will also begin to accrue dividends from that date
forward at the rate of 6% per year.

The availability of
resources to make dividend payments to the holders of Series A Preferred Stock
in the future will depend on the Companys future earnings and cash flow. Under
Delaware law, preferred dividend payments are restricted to the Companys
accumulated or current earnings and profits. Losses in 2005 and earlier years
have depleted the Companys accumulated earnings and profits and, as such,
future preferred dividend payments will be limited to future earnings and
profits. Preferred dividends which cannot be paid under Delaware law will
continue to accrue and will be added to the Preferred Stock liability account.
As of December 31, 2007,
unpaid preferred stock dividends totaled approximately $587,000 and have been
classified as a noncurrent liability on the Companys balance sheet. The
preferred stock is owned 99.4% by Mr. Robert A. Levinson, a stockholder,
officer and director of the Company. The mandatorily redeemable preferred stock
is redeemable at $1.00 per share plus accrued and unpaid dividends.

|    |                                                  
|--- | -------------------------------------------------
|16- | COMMON STOCK AND INCOME (LOSS) PER COMMON
  SHARE

During the year
ended December 31, 2005, the Company issued an aggregate of 2,317 shares of
common stock to a Director in lieu of cash for Director fees and recorded such
issuance as stock-based compensation expense. There were no such issuance in
2007 and 2006.

Basic income
(loss) per common share have been computed on the basis of weighted average
common shares outstanding after providing for preferred dividend requirements.
Diluted income per common share in 2006 include the effect of stock options.

The following
is a reconciliation of the numerators and denominators of the basic and diluted
income (loss) per common share computations for the years ended December 31,
2007, 2006 and 2005 (dollars in thousands, except per share amounts):

|                                                          |  |        |        |          |  |           |  |   |       |  
|--------------------------------------------------------- |  | ------ | ------ | -------- |  | --------- |  | - | ----- | -
|                                                          |  |        |        | Weighted |  | Income    | 
|                                                          |  | Income |        | Average  |  | (Loss)    | 
|                                                          |  | (Loss) |        | Shares   |  | Per Share | 
|                                                          |  |        |        |          |  |           | 
|Year ended December 31, 2007:                             |  |        |        |          |  |           |  |   |       |  
|Basic and diluted income applicable to common
stockholder |  | $      | 125    |          |  | 5,331,881 |  | $ | .02   |  
|                                                          |  |        |        |          |  |           |  |   |       |  
|                                                          |  |        |        |          |  |           |  |   |       |  
|Year
  ended December 31, 2006:                           |  |        |        |          |  |           |  |   |       |  
|Basic income applicable to common
stockholders            |  | $      | 1,626  |          |  | 5,331,881 |  | $ | .30   |  
|Effect of dilutive options                                |  |        |       |          |  | 1,910     |  |   | *     |  
|                                                          |  |        |        |          |  |           |  |   |       |  
|Diluted income applicable to common
stockholders          |  | $      | 1,626  |          |  | 5,333,791 |  | $ | .30   |  
|                                                          |  |        |        |          |  |           |  |   |       |  
|                                                          |  |        |        |          |  |           |  |   |       |  
|Year
  ended December 31, 2005:                           |  |        |        |          |  |           |  |   |       |  
|Basic and diluted loss applicable to common
stockholders  |  | $      | (8,304 | )        |  | 5,331,881 |  | $ | (1.56 | )
|                                                          |  |        |        |          |  |           |  |   |       |  

*     Less than
$.005

- 55 -

---



|    |                  
|--- | -----------------
|17- | STOCK OPTION PLAN

We adopted FAS 123(R) using
the modified prospective transition method beginning January 1, 2006.
Accordingly, during the year ended December 31, 2006, we recorded stock-based
compensation expense for awards granted prior to, but not yet vested, as of
January 1, 2006, as if the fair value method required for pro forma disclosure
under FAS 123 were in effect for expense recognition purposes, adjusted for
estimated forfeitures. For awards granted prior to, but not yet vested, as of
January 1, 2006, we have recognized compensation expense using a straight-line
amortization method. There were no stock-based awards granted after January 1,
2006. The impact on our results of operations of recording stock-based
compensation was an expense of $4,000, $57,000 and $4,000, for the years ended
December 31, 2007, 2006 and 2005, respectively, which is included in general
and administrative expense.

Prior to the adoption of FAS
123(R), the intrinsic value of unvested common stock options assumed in the
January 3, 2003 Carlyle Industries, Inc. (Carlyle) acquisition was recorded
as unearned stock-based compensation. Upon the adoption of FAS 123(R) in
January 2006, the unearned stock-based compensation balance of approximately
$64,000 was reclassified to additional paid-in capital.

Prior to the adoption of FAS
No. 123(R), we provided the disclosures required under FAS No. 123, as amended
by FAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosures. Employee stock-based compensation expense recognized under FAS
123(R) was not reflected in our results of operations for the year ended
December 31, 2005 for employee stock option awards as all options were granted
with an exercise price equal to the market value of the underlying common stock
on the date of grant. Forfeitures of awards were recognized as they occurred.
Previously reported amounts have not been restated.

- 56 -

---



The pro forma information
for year ended December 31, 2005 was as follows (in thousands, except per share
amounts):

|                                                                                                      |  |      |        |  
|----------------------------------------------------------------------------------------------------- |  | ---- | ------ | -
|                                                                                                      |  | 2005 |       
|                                                                                                      |  |      |       
|Net loss, as reported                                                                                 |  | $    | (8,304 | )
|Deduct: Total stock-based compensation expense determined under fair
  value based method, net of tax |  |      | (106   | )
|                                                                                                      |  |      |        |  
|Pro forma net loss                                                                                    |  | $    | (8,410 | )
|                                                                                                      |  |      |        |  
|Loss per share:                                                                                       |  |      |        |  
|Basic -   Reported                                                                                    |  | $    | (1.56  | )
|Pro forma                                                                                             |  | $    | (1.58  | )
|Diluted - Reported                                                                                    |  | $    | (1.56  | )
|Pro forma                                                                                             |  | $    | (1.58  | )

Grants under the 2002 Stock
Option Plan (the Plan) 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 Plan, 550,000 shares of Common Stock were available for grants at the start
of the Plan. The Company has granted options on 220,000 shares through December
31, 2007 in connection with the Plan. Under the Plan, the option exercise price
equals the stocks market price on date of grant. Plan options vest over a
three-year period and expire after ten years.

- 57 -

---



A summary of
the status of outstanding grants and weighted average exercise prices at
December 31, 2007, 2006 and 2005 and changes during the years then ended is
presented in the table and narrative below (shares in thousands):

|                                                         |  |        |      |       |   |        |   |       |      |        |   |       |   |   |      |   |   |        |  
|-------------------------------------------------------- |  | ------ | ---- | ----- | - | ------ | - | ----- | ---- | ------ | - | ----- | - | - | ---- | - | - | ------ | -
|                                                         |  | 2007   |      | 2006  |   | 2005   |  
|                                                         |  |        |      |       |   |        |  
|                                                         |  | Shares |      | Price |   | Shares |   | Price |      | Shares |   | Price |  
|                                                         |  |        |      |       |   |        |   |       |      |        |   |       |  
|Beginning of year                                        |  |        | 363  |       | $ | 2.96   |   |       | 411  |        | $ | 2.79  |   |   | 445  |   | $ | 2.70   |  
|Granted                                                  |  |        |     |       |   |       |   |       |     |        |   |      |   |   |     |   |   |       |  
|Exercised                                                |  |        |     |       |   |       |   |       |     |        |   |      |   |   |     |   |   |       |  
|Forfeited                                                |  |        | (257 | )     |   | (2.60  | ) |       | (48  | )      |   | (1.50 | ) |   | (32  | ) |   | (.73   | )
|Expired                                                  |  |        | (23  | )     |   | (10.00 | ) |       |     |        |   |      |   |   | (2   | ) |   | (15.63 | )
|                                                         |  |        |      |       |   |        |   |       |      |        |   |       |   |   |      |   |   |        |  
|End of year                                              |  |        | 83   |       | $ | 2.13   |   |       | 363  |        | $ | 2.96  |   |   | 411  |   | $ | 2.79   |  
|                                                         |  |        |      |       |   |        |   |       |      |        |   |       |   |   |      |   |   |        |  
|Shares exercisable at year-end                           |  |        | 83   |       |   |        |   |       | 360  |        |   |       |   |   | 331  |   |   |        |  
|                                                         |  |        |      |       |   |        |   |       |      |        |   |       |   |   |      |   |   |        |  
|Weighted average exercise price of exercisable
  options |  | $      | 2.13 |       |   |        |   | $     | 2.97 |        |   |       |   | $ | 2.90 |   |   |        |  
|                                                         |  |        |      |       |   |        |   |       |      |        |   |       |   |   |      |   |   |        |  

There were no
options issued in 2007, 2006 or 2005.

Summary
information about the Companys stock options outstanding and exercisable at
December 31, 2007 is as follows:

|               |  |                     |        |                                       |                     |         |                       |  |     |                    |  |                                       |  |   |         | 
|-------------- |  | ------------------- | ------ | ------------------------------------- | ------------------- | ------- | --------------------- |  | --- | ------------------ |  | ------------------------------------- |  | - | ------- | 
|               |  | Options Outstanding |        |                                       | Options Exercisable |        
|               |  |                     |        |                                       |                     |        
|Date
  Granted |  | Number
  of shares  |        | Weighted
  Average
  Exercise
  Price |                     |         | Contractual
  Periods |  |     | Number
  of shares |  | Weighted
  Average
  Exercise
  Price | 
|               |  |                     |        |                                       |                     |         |                       |  |    
|               |  |                     |        |                                       |                     |         |                       |  |     |                    |  |                                       |  |   |         | 
|01/04/1999     |  |                     | 1,500  |                                       |                     | 2.00000 |                       |  | 1.0 |                    |  | 1,500                                 |  |   | 2.00000 | 
|12/29/1999     |  |                     | 50,000 |                                       |                     | 2.50000 |                       |  | 2.0 |                    |  | 50,000                                |  |   | 2.50000 | 
|01/03/2000     |  |                     | 2,700  |                                       |                     | 1.11100 |                       |  | 2.0 |                    |  | 2,700                                 |  |   | 1.11100 | 
|01/02/2001     |  |                     | 2,400  |                                       |                     | 1.25000 |                       |  | 3.0 |                    |  | 2,400                                 |  |   | 1.25000 | 
|02/14/2002     |  |                     | 6,000  |                                       |                     | .95000  |                       |  | 4.1 |                    |  | 6,000                                 |  |   | .95000  | 
|06/03/2004     |  |                     | 20,000 |                                       |                     | 1.83000 |                       |  | 6.4 |                    |  | 20,000                                |  |   | 1.83000 | 
|               |  |                     |        |                                       |                     |         |                       |  |     |                    |  |                                       |  |   |         | 
|               |  |                     |        |                                       |                     |         |                       |  |     |                    |  |                                       |  |   |         | 
|               |  |                     | 82,600 |                                       | $                   | 2.13000 |                       |  | 3.2 |                    |  | 82,600                                |  | $ | 2.13000 | 
|               |  |                     |        |                                       |                     |         |                       |  |     |                    |  |                                       |  |   |         | 

- 58 -

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|18- | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | Employment Agreement.The
  Company has an employment agreement with Robert A. Levinson, President and
  Chief Executive Officer.  Mr.
  Levinsons employment agreement with the Company is automatically renewed
  annually unless Mr. Levinson or the Company gives not less than thirty days
  written notice.  The employment
  agreement currently provides for a base salary of $200,000 per year (subject
  to increases as may be approved by the Board of Directors from time to time).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | Enviromental. 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 solid waste, the discharge of effluents into waters of the United
  States, the emissions of substances into the air, and various health and
  safety matters. In addition, the Comprehensive Environmental Response
  Compensation and Liability Act (CERCLA) and comparable state statutes may
  impose joint and several liability on present and former owners and
  operators, transporters and generators for remediation of certain properties
  regardless of fault. These parties are typically identified as potentially
  responsible parties or PRPs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | In or about
  June 1992 the Company received notices from the United States Environmental
  Protection Agency (EPA) that the Company, Belding Corticelli Thread Co.
  (BCTC) (a discontinued operation) and Carlyle Manufacturing
  Company, Inc. (CM) (a subsidiary) had been identified, along with 1,300
  other parties, as PRPs in connection with the alleged release of hazardous
  substances from the SRS site.
  In addition, the State of Connecticut and the Southington Water
  District have sought reimbursement from the PRP Group for alleged Natural
  Resource Damages (NRD) and other claimed damages for supposed temporary
  loss of use of groundwater and consequential loss of future use of
  groundwater due to contamination on and emanating from the SRS site. The PRP
  Group has also received a demand from the federal NRD trustees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The Company
  settled its alleged CERCLA liability to the EPA in connection with the SRS
  site by paying $1,626.00 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) at that time, 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 1.34%, respectively, of costs incurred to date, based
  on their alleged volume of waste shipped to the SRS site. In September of
  2005, the EPA issued its Record of Decision (ROD) for the SRS site. In
  September 2006, the EPA sent special notice letters to the PRPs to initiate
  consent decree negotiations concerning, among other things, the scope of the
  work to be performed under the ROD and reimbursement of all, or a significant
  portion, of EPAs past response costs and future costs to be incurred in
  overseeing the remedial work. In December 2006, CM and BCTC joined in the SRS
  PRP Group offer to the EPA to (i) construct and operate the remedial action
  contemplated by the ROD (subject to certain proposed changes) and (ii)
  reimburse EPA for portions of its past and future site-related costs. CM and
  BCTC are presently engaged in negotiations directly with the EPA to resolve
  their potential CERCLA liability arising from the SRS site.

- 59 -

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In December
  2007, the State of Connecticut Department of Environmental Protection (the
  CTDEP or the State) asked the Company for information relating to
  transactions involving the property it previously owned, which is located at
  107 Providence Street, Putnam, Connecticut.
  According to CTDEP, environmental conditions have not been adequately
  addressed at this property and it intends to pursue all parties it believes
  are responsible for cleaning up those conditions, including the Company.  The Company has been in contact with CTDEP
  concerning this site, and the Company will be submitting information to the
  State to address certain issues raised by the State.  In addition, the Company intends to notify
  the current owner of the property that, in the event the State requires
  additional investigation at the site, the current owner assumed that
  obligation under the purchase and sale agreement with the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The issues
  referred to 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 the participation of any of them as part of a PRP Group.
  The accrual the Company has established for these and other environmental
  liabilities, in the amount of $1.3 million, represents the Companys estimate
  of the costs of addressing all identified environmental situations, 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 the EPA and by the PRP
  Groups in which the Company or its subsidiaries are participating. To the
  extent that this accrual relates to the SRS site, it is based on an initial
  review of the total potential liability of the PRP Group in connection with
  that site.  Although the accrual
  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 costs or requirements
  that may be imposed or sought by federal, state or local agencies.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Legal Proceedings.The
  Company is a party to various other environmental claims, legal proceedings
  and administrative actions, all arising from the ordinary course of business.
  Although it is impossible to predict the outcome of any such claims or legal
  proceedings, the Company believes any liability that may finally be
  determined should not have a material effect on its consolidated financial
  position, results of operations or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

- 60 -

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|    |                                                                                            
|--- | -------------------------------------------------------------------------------------------
|19- | UNAUDITED QUARTERLY RESULTS OF
  OPERATIONS: (IN THOUSANDS,    EXCEPT
  FOR PER SHARE DATA)

|                                                                               |  |                     |       |                      |   |                 |  |                  |       |   |   |       | 
|------------------------------------------------------------------------------ |  | ------------------- | ----- | -------------------- | - | --------------- |  | ---------------- | ----- | - | - | ----- | 
|Quarter Ended                                                                  |  | December 31,
  2007 |       | September 30,
  2007 |   | June 30,
  2007 |  | March 31,
  2007 |      
|                                                                               |  |                     |       |                      |   |                 |  |                  |      
|Net sales                                                                      |  | $                   | 4,834 |                      | $ | 5,093           |  | $                | 4,193 |   | $ | 5,265 | 
|Cost of sales                                                                  |  |                     | 3,453 |                      |   | 3,508           |  |                  | 2,875 |   |   | 3,484 | 
|                                                                               |  |                     |       |                      |   |                 |  |                  |       |   |   |       | 
|Gross profit                                                                   |  | $                   | 1,381 |                      | $ | 1,585           |  | $                | 1,318 |   | $ | 1,781 | 
|                                                                               |  |                     |       |                      |   |                 |  |                  |       |   |   |       | 
|                                                                               |  |                     |       |                      |   |                 |  |                  |       |   |   |       | 
|Income (loss) from continuing operations                                       |  | $                   | (128  | )                    | $ | 169             |  | $                | (46   | ) | $ | 108   | 
|                                                                               |  |                     |       |                      |   |                 |  |                  |       |   |   |       | 
|Net income (loss)                                                              |  | $                   | (128  | )                    | $ | 169             |  | $                | (38   | ) | $ | 122   | 
|                                                                               |  |                     |       |                      |   |                 |  |                  |       |   |   |       | 
|Income (loss) from continuing operations per
  common share, basic and diluted |  | $                   | (.02  | )                    | $ | . 03            |  | $                | (.01  | ) | $ | .02   | 
|                                                                               |  |                     |       |                      |   |                 |  |                  |       |   |   |       | 
|                                                                               |  |                     |       |                      |   |                 |  |                  |       |   |   |       | 
|Net income per common share, basic and diluted                                 |  | $                   | (.02  | )                    | $ | .03             |  | $                | (.01  | ) | $ | .02   | 
|                                                                               |  |                     |       |                      |   |                 |  |                  |       |   |   |       | 

|                                                                               |  |                     |       |                      |   |                 |  |                  |       |  |   |       | 
|------------------------------------------------------------------------------ |  | ------------------- | ----- | -------------------- | - | --------------- |  | ---------------- | ----- |  | - | ----- | 
|Quarter Ended                                                                  |  | December 31,
  2006 |       | September 30,
  2006 |   | June 30,
  2006 |  | March 31,
  2006 |      
|                                                                               |  |                     |       |                      |   |                 |  |                  |      
|Net sales                                                                      |  | $                   | 5,560 |                      | $ | 5,593           |  | $                | 4,962 |  | $ | 5,821 | 
|Cost of sales                                                                  |  |                     | 4,065 |                      |   | 3,925           |  |                  | 3,313 |  |   | 3,587 | 
|                                                                               |  |                     |       |                      |   |                 |  |                  |       |  |   |       | 
|Gross profit                                                                   |  | $                   | 1,495 |                      | $ | 1,668           |  | $                | 1,649 |  | $ | 2,234 | 
|                                                                               |  |                     |       |                      |   |                 |  |                  |       |  |   |       | 
|                                                                               |  |                     |       |                      |   |                 |  |                  |       |  |   |       | 
|Income (loss) from continuing operations                                       |  | $                   | (130  | )                    | $ | 1,232           |  | $                | 49    |  | $ | 462   | 
|                                                                               |  |                     |       |                      |   |                 |  |                  |       |  |   |       | 
|Net income (loss)                                                              |  | $                   | (42   | )                    | $ | 1,243           |  | $                | 40    |  | $ | 385   | 
|                                                                               |  |                     |       |                      |   |                 |  |                  |       |  |   |       | 
|                                                                               |  |                     |       |                      |   |                 |  |                  |       |  |   |       | 
|Income (loss) from continuing operations per
  common share, basic and diluted |  | $                   | (.02  | )                    | $ | .23             |  | $                | .01   |  | $ | .09   | 
|                                                                               |  |                     |       |                      |   |                 |  |                  |       |  |   |       | 
|                                                                               |  |                     |       |                      |   |                 |  |                  |       |  |   |       | 
|Net income (loss) per common share, basic and
  diluted                        |  | $                   | (.01  | )                    | $ | .23             |  | $                | .01   |  | $ | .08   | 
|                                                                               |  |                     |       |                      |   |                 |  |                  |       |  |   |       | 

|                                                                               |  |                     |        |                      |   |                 |   |                  |       |   |   |       |  
|------------------------------------------------------------------------------ |  | ------------------- | ------ | -------------------- | - | --------------- | - | ---------------- | ----- | - | - | ----- | -
|Quarter
  Ended                                                                |  | December 31,
  2005 |        | September 30,
  2005 |   | June 30,
  2005 |   | March 31,
  2005 |      
|                                                                               |  |                     |        |                      |   |                 |   |                  |      
|Net sales                                                                      |  | $                   | 5,453  |                      | $ | 6,096           |   | $                | 5,157 |   | $ | 4,511 |  
|Cost of sales                                                                  |  |                     | 3,512  |                      |   | 3,922           |   |                  | 3,646 |   |   | 2,877 |  
|                                                                               |  |                     |        |                      |   |                 |   |                  |       |   |   |       |  
|Gross profit                                                                   |  | $                   | 1,941  |                      | $ | 2,174           |   | $                | 1,511 |   | $ | 1,634 |  
|                                                                               |  |                     |        |                      |   |                 |   |                  |       |   |   |       |  
|                                                                               |  |                     |        |                      |   |                 |   |                  |       |   |   |       |  
|Income (loss) from continuing operations                                       |  | $                   | (3,301 | )                    | $ | 436             |   | $                | (10   | ) | $ | 20    |  
|                                                                               |  |                     |        |                      |   |                 |   |                  |       |   |   |       |  
|Net loss                                                                       |  | $                   | (4,428 | )                    | $ | (3,275          | ) | $                | (377  | ) | $ | (224  | )
|                                                                               |  |                     |        |                      |   |                 |   |                  |       |   |   |       |  
|Income (loss) from continuing operations per
  common share, basic and diluted |  | $                   | (.62   | )                    | $ | .08             |   | $                | *     |   | $ | *     |  
|                                                                               |  |                     |        |                      |   |                 |   |                  |       |   |   |       |  
|                                                                               |  |                     |        |                      |   |                 |   |                  |       |   |   |       |  
|Net loss per common share, basic and diluted                                   |  | $                   | (.83   | )                    | $ | (.61            | ) | $                | (.07  | ) | $ | (.04  | )
|                                                                               |  |                     |        |                      |   |                 |   |                  |       |   |   |       |  

*     Less than $.005

- 61 -

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|            |                                                                      
|----------- | ---------------------------------------------------------------------
|Item 9.     | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON FINANCIAL DISCLOSURE
|            |                                                                      
|None        |                                                                      
|            |                                                                      
|Item 9A(T). | CONTROLS AND PROCEDURES                                              

|    |                                                    
|--- | ---------------------------------------------------
|(a) | Evaluation
  of disclosure controls and procedures.

Our
  management, with the participation of our chief executive officer and chief
  financial officer, evaluated the effectiveness of our disclosure controls and
  procedures as of December 31, 2007. The term disclosure controls and
  procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
  and Exchange Act of 1934, means controls and other procedures of a company
  that are designed to ensure that information required to be disclosed by a company
  in the reports that it files or submits under the Exchange Act is recorded,
  processed, summarized, and reported, within the time periods specified in the
  SECs rules and forms. Disclosure controls and procedures include, without
  limitation, controls and procedures designed to ensure that information
  required to be disclosed by a company in the reports that it files and
  submits under the Exchange Act is accumulated and communicated to the
  companys management, including its principal executive and principal
  financial officers, as appropriate to allow timely decisions regarding
  required disclosure. Based on the evaluation of our disclosure controls and
  procedures as of December 31, 2007, our chief executive officer and chief
  financial officer concluded that, as of such date, our disclosure controls
  and procedures were effective.

The Audit
  Committee of the Board of Directors, which is composed solely of independent
  directors, meets regularly with our independent registered public accounting
  firm, Friedman LLP and representatives of management to review accounting,
  financial reporting, internal control and audit matters, as well as the
  nature and extent of the audit effort. The Audit Committee is responsible for
  the engagement of the independent auditors. The independent auditors have
  free access to the Audit Committee.

- 62 -

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|    |                                                       
|--- | ------------------------------------------------------
|(b) | Managements
  Responsibility for Financial Statements

Our
  management is responsible for the integrity and objectivity of all
  information presented in this report. The consolidated financial statements
  were prepared in conformity with accounting principles generally accepted in
  the United States of America and include amounts based on managements best
  estimates and judgments. Management believes the consolidated financial
  statements fairly reflect the form and substance of transactions and that the
  financial statements fairly represent the Companys consolidated financial
  position and results of operations for the periods and as of the dates stated
  therein.

|    |                                                                       
|--- | ----------------------------------------------------------------------
|(c) | Managements
  Assessment of Internal Control Over Financial Reporting

Our
  management is responsible for establishing and maintaining adequate internal
  control over financial reporting as defined by Rules 13a15(f) and
  15(d)-15(f) under the Securities and Exchange Act of 1934. This system is
  designed to provide reasonable assurance regarding the reliability of
  financial reporting and the preparation of financial statements for external
  purposes in accordance with accounting principals generally accepted accounting
  principles.

Our internal
  control over financial reporting includes those policies and procedures that:
  (1) pertain to the maintenance of records that, in reasonable detail,
  accurately and fairly reflect the transactions and dispositions of the assets
  of the Company; (2) provide reasonable assurance that transactions are
  recorded as necessary to permit preparation of financial statements in
  accordance with generally accepted accounting principles, and that receipts
  and expenditures of the Company are being made only in accordance with
  authorizations of management and directors of the Company; and (3) provide
  reasonable assurance regarding prevention or timely detection of unauthorized
  acquisition, use or disposition of the Companys assets that could have a
  material effect on the financial statements.

Because of
  its inherent limitations, a system of internal control over financial
  reporting can only provide reasonable assurance and may not prevent or detect
  misstatements. Further, because of changes in conditions, effectiveness of
  internal control over financial reporting may vary over time.

With the
  participation of our Chief Executive Officer and Chief Financial Officer,
  management conducted an evaluation of the effectiveness of the system of
  internal control over financial reporting based on the framework in Internal
  Control-Integrated Framework, published by the Committee of Sponsoring
  Organizations of the Treadway Commission (COSO). Based on this evaluation,
  management determined that the Companys system of internal control over
  financial reporting was effective as of December 31, 2007.

|    |                                                          
|--- | ---------------------------------------------------------
|(d) | Report of
  Independent Registered Public Accounting Firm

This annual
  report does not include an attestation report of the Companys registered
  public accounting firm regarding internal control over financial reporting.
Temporary rules of the
  Securities and Exchange Commission permit the Company to provide only
  managements report in this annual report.

- 63 -

---



|         |                  
|-------- | -----------------
|Item 9B. | OTHER INFORMATION
|         |                  
|None.    |                  

- 64 -

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PART III

|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers

The following
table sets forth the names of the directors and executive officers of the
Company, their ages, and their current positions with the Company:

|                     |  |     |  |                                                                |  |                              
|-------------------- |  | --- |  | -------------------------------------------------------------- |  | -----------------------------
|Name                 |  | Age |  | Title                                                          |  | Year Became Director/ Officer
|                     |  |     |  |                                                                |  |                              
|Robert A.
  Levinson |  | 82  |  | Chairman of
  the Board, President and Chief Executive Officer |  | June 1989                    
|                     |  |     |  |                                                                |  |                              
|Pramila D.
  Shaheed |  | 54  |  | Chief
  Financial Officer and Secretary                        |  | May 2007                     
|Giandomenico
  Picco |  | 60  |  | Director                                                       |  | January 2003                 
|John
  McConnaughy   |  | 78  |  | Director                                                       |  | June 1989                    

Each director
is elected to serve on the Board of Directors of the Company until the next
annual meeting of stockholders and until their successors shall be duly elected
and qualified.  The term of the current
directors expires at the next annual meeting of stockholders.

Mr. Levinson
has been Chairman of the Board and President of the Company, and its Chief
Executive Officer, since June 1989.
From June 1989 to January 2003, he also served as Secretary and
Principal Financial Officer of the Company.
Mr. Levinson served as Chairman of the Board, President and Chief
Executive Officer of Carlyle Industries, Inc. (Carlyle), which the Company
acquired by merger in 2003, from May 1998 to January 2003.  From 1979 until May 1, 1995, Mr. Levinson
was Chairman of the Board of Andrex Industries Corp., a company engaged in
textile manufacturing and processing.
Mr. Levinson is a member of the Board of the National Committee on U.S.
China Relations and the World Policy Institute at New School University.

Ms. Shaheed
has been the Chief Financial Officer and Secretary of the Company since May
2007. Prior to then, Ms. Shaheed began her affiliation with the Company in
September 2000 as Controller of Westwater Industries, Inc., a subsidiary of
Carlyle. In May 2004, Ms. Shaheed became the Corporate Controller of the
Company.

Mr. Picco has
been a director of the Company since January 6, 2003.  Mr. Picco served as a director of Carlyle from May 2000 until
January 2003.  Since 1994, Mr. Picco has
served as Chief Executive Officer of GDP Associates, Inc., a consulting company
to industrial corporations.  Mr. Picco
currently serves as President of the Non-Governmental Peace Strategies Project,
a Geneva, Switzerland non-profit institute aimed at devising new vehicles for
the private sector to support peace efforts.

- 65 -

---



Mr.
McConnaughy has been a director of the Company since June 1989.  He is Chairman and Chief Executive Officer
of JEMC Corporation, a company engaged in exploring investment
opportunities.  From 1981 until his
retirement in 1992, Mr. McConnaughy was Chairman of the Board and Chief
Executive Officer of GEO International Corporation, a company engaged in
screen-printing and oil services.  From
1985 until his retirement in 1992, Mr. McConnaughy also served as President of
GEO International Corporation.  Mr.
McConnaughy is Chairman of the Board of the Excellence Group, LLC, which filed
a petition for bankruptcy under Chapter 11 of the Bankruptcy Code on January
13, 1999.  The Excellence Groups
subsidiaries produced labels for a variety of customers.  Mr. McConnaughy serves as a director of Wave
Systems Corp., Consumer Portfolio Services, Inc., Overhill Farms, Inc. and
Arrow Resources Development, Inc.

Officers serve
at the discretion of the Board of Directors.
There are no arrangements or
understandings pursuant to which any person has been elected as a
director or executive officer of the Company.
There is no family relationship among any directors or executive
officers of the Company.

Committees of the Board of Directors

On January 6,
2003, the Company established an Audit Committee, Compensation Committee and
Corporate Governance Committee of its Board of Directors.

The Audit
Committee currently consists of Messrs. McConnaughy and Picco and each member
meets the independence requirements of NASDAQ and the Securities Exchange Act
of 1934 (the Exchange Act).  In
addition, prior to Joseph DiMartinos resignation from the Board of Directors
effective November 30, 2006, Mr. DiMartino also served as a member of the Audit
Committee.  Pursuant to the Companys
Audit Committee Charter, the Audit Committee shall be comprised of three members.  Mr. DiMartino has not yet been replaced and
the Board of Directors is in the process of determining how and when to fill
the vacancy.

The Audit
Committees function is to provide assistance to the Board of Directors in
fulfilling the Boards oversight functions relating to the quality and integrity
of the Companys financial reports, monitoring the Companys financial
reporting process and internal control system, and performing such other
activities consistent with its charter and the Companys By-laws as the
Committee or the Board of Directors deems appropriate.  The Audit Committee is directly responsible
for the appointment, compensation and oversight of the work of the outside
auditors (including resolution of disagreements between management of the
Company and the outside auditors regarding financial reporting) for the purpose
of preparing or issuing an audit report or related work.

The Audit
Committee must pre-approve all audit and non-audit services to be provided to
the Company by its outside auditors.
The Committee carries out all functions required by NASDAQ, the SEC and
the federal securities laws. During fiscal year 2007, the Audit Committee held
four  meetings.  The Audit Committee does not include an
audit committee financial expert as defined in the SECs Regulation S-B, Item
401(e)(2) because the Board of Directors believes that the members of the Audit
Committee are collectively capable of analyzing and evaluating the Companys
financial statements.  In addition, the
Board believes that retaining an independent director who would qualify as an
audit committee financial expert would be overly costly and burdensome and is
not warranted at this time. A copy of the Audit Committee charter as adopted by
the Board of Directors was filed as Exhibit 99.1 to the Companys 10-KSB/A filed
on April 29, 2004.

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Messrs.
McConnaughy and Picco currently serve on the Compensation Committee and each
member meets the independence requirements of NASDAQ and the Exchange Act. In
addition, prior to Joseph DiMartinos resignation from the Board of Directors
effective November 30, 2006, Mr. DiMartino also served as a member of the
Compensation Committee.  The purpose of
the Compensation Committee is to oversee the responsibilities relating to
compensation of the Companys executives and produce an annual report on
executive compensation for inclusion in the Companys proxy statement.  Since its formation, the Compensation
Committee has administered the Companys 2002 Stock Option Plan, the Carlyle
1994 Incentive Program, as amended and the Companys 1992 Stock Option Plan, as
amended.  During fiscal year 2007, the
Compensation Committee held  two
meetings.  A copy of the Compensation
Committee charter as adopted by the Board of Directors was filed as exhibit
99.3 to the Companys 10-K filed on March 30, 2007.

Mr.
McConnaughy currently serves on the Corporate Governance Committee and meets
the independence requirements of NASDAQ and the Exchange Act.  In addition, prior to Mr. Cohens
resignation from the Board of Directors effective December 31, 2007, Mr. Cohen
also served as a member of the Corporate Governance Committee.  In addition, prior to Joseph DiMartinos
resignation from the Board of Directors effective November 30, 2006, Mr.
DiMartino also served as a member of the Corporate Governance Committee.  The Governance Committee is responsible for
identifying and recommending to the Board of Directors individuals qualified to
become Board and Committee members; maintaining that a majority of the Board of
Directors members are independent and that all the members of the Audit,
Compensation and Governance Committees are independent; developing and
recommending to the Board of Directors a set of corporate governance principles
applicable to the Company; and addressing corporate governance issues for the
Board.  During fiscal year 2007 the
Corporate Governance Committee held one meeting. A copy of the Corporate
Governance Committee charter as adopted by the Board of Directors was filed as
Exhibit 99.2 to the Companys 10-KSB/A filed on April 29, 2004.

Changes to Nominating Procedures

There were no
material changes to the procedures by which the Companys stockholders may
recommend nominees to the Board of Directors since the adoption of such
procedures as disclosed in the Companys 2003 Annual Report on Form 10-KSB.

Stockholder Communications

Any
stockholder or other interested party who desires to communicate with the
Companys Chairman of the Board of Directors or any of the other members of the
Board of Directors may do so by writing to: Robert A. Levinson, Levcor
International, Inc., 110 West 40th Street, New York, New York 10018.
Communications may be addressed to the Chairman of the Board, an individual
director, a Board Committee member, the non-management directors or the full
Board. Communications received by the Chairman of the Board will then be
distributed to the appropriate directors unless the Chairman determines that
the information submitted constitutes spam, pornographic material and/or
communications offering to buy or sell products or services.

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Section 16(a) Beneficial Ownership Reporting
Compliance

Section 16(a)
of the Exchange Act, as amended, requires the Companys executive officers,
directors and persons who beneficially own greater than 10% of a registered
class of the Companys equity securities to file certain reports (Section 16
Reports) with the SEC with respect to ownership and changes in ownership of
the Companys common stock, par value $0.01 per share (Common Stock) and
other equity securities of the Company.
Based solely on the Companys review of the Section 16 Reports furnished
to the Company, all Section 16(a) requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with during the
fiscal year ended December 31, 2007 except that Statements of Changes in
Beneficial Ownership with respect to the purchase of Common Stock on December
21, 2007 was filed by Robert A. Levinson eight days late.

Code of Ethics

The Company
has adopted a Code of Ethics for its Principal Executive Officer and its Senior
Financial Officers.  A copy of the Code
of Ethics was filed as Exhibit 14 to the Companys 2003 Annual Report on Form
10-KSB/A on April 29, 2004. Requests for a copy of the code of ethics should be
sent in writing to Levcor International, Inc., 110 West 40th Street,
New York, New York 10018.

|         |                       
|-------- | ----------------------
|Item 11. | EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND
ANALYSIS

The Compensation Committee subject to the approval by the Board of
Directors, provides a compensation package to the executive officers through a
combination of cash payments principally in the form of salary and bonus under
a management incentive plan, as well as non-cash compensation including a stock
option plan, employee benefit plans and other retirement benefit plans.  The objective of the Companys compensation
program is to reward performance, be competitive to the extent possible within
the industry and provide compensation that is reasonable and consistent with the
Companys size while ensuring the individuals total compensation is aligned
with stockholder interests.

Base
Salary

The Base Salary for each named executive officer is determined based
upon experience, total responsibility and industry standards, as well as our
ability to match pay.

Management
Incentive Plans

The Company has a  Management
Incentive Plan (the  MIP) which  was adopted by the Board of Directors..  The
MIP is a performance-based bonus plan whereby management earn cash
awards if targets are reached in the areas of (i) return of total capital, (ii)
sales growth and (iii) individual objectives. Return on Capital (ROTC) is
earnings divided by average capital where earnings equals income from
continuing operations plus interest expense less any tax benefit; average
capital equals the beginning net assets plus ending net assets divided by
two.  In this formula, net assets equal
total assets minus current liabilities plus current maturities of long-term
debt.  The basic philosophy behind the
structure of the plan is to incent a minimum level of performance as
represented by the threshold ROTC amount necessary before any awards are
allocated under the plan.  At this
minimum level a percentage of the ROTC and sales award is allocated.  Payments under the 2007 MIP are predicated
on a ROTC attainment of at least 80% of budget.  For the amount of the award based solely on ROTC as well as the
amount based solely on sales, 100% of the target award is allocated at a
performance level of 100%.  At a
performance level greater than 100%, the rate of increase in the amount of the
ROTC and sales based components increase 3% for every 1% increase in the ROTC
or sales as applicable.  Each
participant under the plan is assigned a target award percentage of their base
salary, based on their level in the organization.  Their award is then allocated (upon approval by the Board of
Directors) to a specific component including a corporate/divisional ROTC
component, a corporate/divisional sales component and an individual objectives
component based on their impact on ROTC and sales.

- 68 -

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Sales Component:  If the sales
performance is less than 80%, no amount is earned under this component of the
plan, otherwise, this component will generate an award equivalent to 25% of the
targeted amount at the 80% minimum performance level.  This amount will increase at a linear rate such that the payout
is 100% of the target at a 100% performance level.  The payout will continue to increase at a 3 for 1 rate for
performance levels greater than 100%

Individual Objectives Component:
Attainment of individual objectives, which are approved by the Board of
Directors in advance are reviewed at year-end.
The individual object component is allocated to the extent that
objectives are met.

Mid-year Terminations:  For
terminations occurring during the year, no bonus amount will be payable unless
specifically approved by the Board of Directors.

Other mid-year changes:  In the
case of a job change which occurs during the year, the target percentage will
be applied to the plan salary for the period of time the employee participated
in the plan for each job.  In the case
of an acquisition, the original approved ROTC and Sales targets may be adjusted
by the amount of the acquired companys budged ROTC and sales amounts as
determined by the Board of Directors.
The adjustments will only include the amounts for the part of the year
which follows the acquisition.  In the
case of a divestiture or sale of a business, the Board of Directors will
determine if any awards will be paid.
The calculation would be determined on the pro-rated attainment of
budgeted ROTC and sales objectives for the ROTC and Sales bases components
respectively, and the actual achievement of individual objectives.   All of the preceding components would be on
a pro-rated basis based on the actual number of days of plan
participation.  Any gain or loss on the
divestiture or sale itself would not be included in the divisional
calculations.

The Committee approved $111,000 in bonuses which were awarded in
December of 2007 under the criteria set forth above and by reviewing bonuses distributed in prior years. The Company uses
its MIP to incentivize its eligible employees on an annual basis. However,
because of the Companys financial position, no awards were payable under
the  Management Incentive Plan for the
fiscal year 2007, other than the $111,000 as mentioned above.

Stock Option
Plans

On December 8, 1992, the Board of Directors adopted a Stock Option
Plan.  The Stock Option Plan, as
amended, authorized the Company to grant options to purchase an aggregate of
500,000 shares of Common Stock to induce employees and directors to remain in
the employ or service of the Company and to attract new employees.  The Stock Option Plan terminated in December
2002 and options to purchase all of the shares available under the Stock Option
Plan have heretofore been granted.

On December 31, 2002, the stockholders of the Company adopted the 2002
Stock Option Plan (2002 Plan).  Under
the 2002 Plan, options are granted to employees, officers and non-employee
directors.  The purpose of the 2002 Plan
is to induce key personnel, including employees, officers, directors and
independent contractors, to remain in the employ or service of the Company, to
attract new individuals to enter into employment or service with the Company
and to increase such persons stock ownership in the Company.  The 2002 Plan is administered by the
Companys Compensation Committee.

- 69 -

---



Grants under the 2002 Stock Option Plan 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.
Under the 2002 Plan, options are granted at prices equal to the fair market
value at the date of grant, are not exercisable until the first anniversary of
the date of grant and do not become fully exercisable until the third
anniversary of the date of grant. The options generally remain exercisable
during employment until the tenth anniversary of the date of grant. This 2002
Plan is a form of the Companys long term compensation whereby eligible
employees who receive options under the plan are incented side by side with the
Companys stockholders to create long-term value for the Company.

In the event that an optionee leaves the employ or service or ceases to
serve as a director of Levcor or its subsidiaries by reason of retirement on or
after his or her 65th birthday, death or disability, each option granted to him
or her shall immediately become exercisable and will terminate upon the earlier
to occur of the expiration of three months from the date of such retirement or
the date of termination specified in such option. In the event that an optionee
leaves the employ or service or ceases to serve as a director of Levcor or
subsidiaries for any reason other than death, retirement or disability, each
option granted to him or her generally will, to the extent exercisable on the
date of his or her termination, terminate on the earlier to occur of the
expiration of 30 days after the date of such optionees termination and the
date of termination specified in such option. In the event that an optionee
leaves the employ or service or ceases to serve as a director of Levcor or its
subsidiaries by reason of his or her termination for cause, each option
granted to him or her will terminate immediately. If the fair market value of
the common stock declines below the option price of any option, the
Compensation Committee (with the prior approval of the board of directors) may
adjust, reduce, or cancel and regrant such option or take any similar action it
deems to be for the benefit of the optionee in light of such declining
value.

The number of shares available for grant under the 2002 Stock Option
Plan and covered by each option granted thereunder will be adjusted in the
event of a stock dividend, reorganization, recapitalization, stock split-up,
combination of shares, sale of assets, merger or consolidation in which Levcor
is the surviving corporation or, as may be determined by the Committee, in the
event of any other change affecting the number or kind of Levcors outstanding
common stock. Except in the case of the assumed Carlyle options, in the event
of the dissolution or liquidation of Levcor, or a merger, reorganization or
consolidation in which Levcor is not the surviving corporation, each outstanding
but unexercised option will terminate. In the event of a change of control of
Levcor, all options granted which have not yet expired shall immediately become
exercisable in full.  In the event of a
possible or actual reorganization or change in control, certain executives will
be able to get immediate value for their options.

On January 6, 2003, the Company
completed its acquisition of Carlyle. In connection with the merger, the
Company assumed Carlyles outstanding stock options.  As set forth in the merger agreement, each five shares of Carlyle
common stock was cancelled and converted into the right to receive one share of
common stock of the Company.  Therefore,
the 1,100,000 shares of Carlyle common stock authorized to be issued for
outstanding stock options were converted into 220,000 shares of common stock of
the Company.

Under the Carlyle 1994 Incentive
Program, as amended, options are granted at prices equal to the fair market
value at the date of grant and the options generally remain exercisable during
employment until the tenth anniversary of the date of grant.  The Carlyle 1994 Incentive Program
terminated in December 2004 and options to purchase all of the shares available
under the Program have heretofore been granted.

- 70 -

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Compensation of
Directors

In recognition of the service as a Board member, each director of the
Company who is not an employee of the Company receives an annual directors fee
of $15,000, plus $1,000 for each Board meeting attended by such director and
$250 for each Board committee meeting which is not held on the same day as a
Board meeting.  The fees are payable in
cash or Common Stock, at the election of the director.

Employment
Agreements

The Company has an employment agreement with Robert A. Levinson,
President and Chief Executive Officer.  Mr. Levinsons employment agreement with Carlyle,
which by operation of law is now an obligation of the Company, commenced on
January 1, 1999, continuing for a period of one year (the Term of
Employment).  The Employment Agreement
allows for the Term of Employment to be renewed annually automatically
thereafter, unless Mr. Levinson or the Company gives not less than thirty days
written notice to the other.  No such
notice has been given.  In addition, the
Employment Agreement currently provides for a base salary of $200,000 per year
(subject to increases as may be approved by the Board from time to time).  If Mr. Levinsons employment is terminated
without cause, Mr. Levinson would be entitled to receive the Base Salary for a
period equal to the remainder of the Term of Employment.  Further, in the event of a change in control
of the Company, Mr. Levinson would be entitled to a lump sum severance payment
generally equal to 2.99 times his average annual compensation for the five calendar
years preceding the calendar year during which a change in control
occurred.  Mr. Levinson agreed to waive
such provision in connection with the merger with Carlyle.

The Company believes that continuing the
employment agreement that was inherited through the Carlyle Merger helps insure
the continuity of management.  With such
an employment agreement in place, the Company believes that there is more
stability with its senior executive which allows for more efficient operation
of the Company and creates additional value for the Company and its
stockholders.

Employee
Benefit Plans

The Companys eligible employees may participate in a Company-sponsored
401(k) benefit plan.  This Plan covers
substantially all employees and permits employees to defer up to 15% of their
salary up to statutory maximums.  As of
January 1, 2007, the matching contribution has been suspended. For 2006 and
prior years, the plan also provided for matching contributions by the Company
of up to 75% of the first 2% of salary deferral and 50% of the next 2% of
salary deferral.  Total Company matching
contributions for the years ended December 31, 2007, 2006 and 2005 were $0,
$87,000 and $102,000, respectively.  As
of December 31, 2007 there were 79 active employees participating in the plan.  As with other elements of compensation, the
Company strives to provide competitive benefits to attract quality employees
and executives and as is the case with the Companys overall compensation
objectives; these employee benefits are consistent with the Companys
compensation goals providing compensation that is reasonable and consistent
with the Companys size and practice, as well as the Companys ability to match
pay, while collectively ensuring the individuals total compensation is aligned
with stockholder interests.

- 71 -

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Pension and
Other Post-Retirement Benefit Plans

The Company sponsored defined benefit plan was frozen as of December
31, 1994, and no new employees have been eligible to join the plan since that
date.  Prior to December 31, 1994, the
plan covered substantially all employees.
The employees covered under the plan do not receive any additional
accruals for service rendered after December 31, 1994.  Plan assets consist principally of common
stocks, U.S. Government obligations, and mutual funds.

The benefits under the 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.  With
respect to the 2007 plan year, the Company has made contributions to the plan
in 2007 of $52,000 with an additional approximately $72,000 due in 2008, based
on current legislated discount rates and actuarial assumptions. In addition,
the Company anticipates contributions with respect to the 2008 plan year
totaling $93,000 during the year ending December 31, 2008, based on actuarial assumptions in effect as of December 31,
2007.

Executive
Compensation As a Whole.

In summary, the Company has developed its various elements of
compensation for its executives with the view that each element complements the
rest of the elements of the compensation program and, most importantly,
provides a total program that will allow the Company to attain the objectives
discussed above.

- 72 -

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SUMMARY COMPENSATION
TABLE2007

Named Officer Compensation.The
following table sets forth the information about the compensation received by
(i) the Companys Chief Executive Officer (CEO) and (ii) the Companys Chief
Financial Officer (CFO) (collectively the Named Executive Officers) in
accordance with SEC regulations during fiscal years 2007 and 2006 for services
rendered in all capacities to the Company.

Certain tables
or columns have been omitted if there was no compensation awarded to, earned
by, or paid to any of the named executive officers or directors required to be
reported in that table or column in any fiscal year covered by the table

|                                                                                      |  |      |          |              |         |               |  |                       |         |                        |  |                                                     |  |                                                                                      |  |                               |  |           |  |  |        |  |   |        |     |         |               | 
|------------------------------------------------------------------------------------- |  | ---- | -------- | ------------ | ------- | ------------- |  | --------------------- | ------- | ---------------------- |  | --------------------------------------------------- |  | ------------------------------------------------------------------------------------ |  | ----------------------------- |  | --------- |  |  | ------ |  | - | ------ | --- | ------- | ------------- | 
|Name and
  Principal
  Position                                                       |  | Year |          | Salary
  ($) |         | Bonus
  ($)   |  | Stock 
  Awards
  ($) |         | Option 
  Awards
  ($) |  | Non-Equity 
  Incentive Plan 
  Compen-sation
  ($) |  | Change in 
  Pension Value
  and Nonquali-
  fied Deferred
  Compensation
  Earnings |  | All Other 
  Compensation ($) |  | Total ($) | 
|(a)                                                                                   |  | (b)  |          | (c)          |         | (d)           |  | (e)                   |         | (f)                    |  | (g)                                                 |  | (h)                                                                                  |  | (i)                           |  | (j)       | 
|                                                                                     
|Robert A. Levinson Chairman of the Board, Chief
  Executive Officer                   |  |      | 2007     |              |         | 200,000       |  |                       |        |                        |  |                                                     |  |                                                                                      |  |                               |  |           |  |  |        |  |   |       | (1) |         | 200,000       | 
|                                                                                      |  | 2006 |          |              | 200,000 |               |  | 61,306                |         |                        |  |                                                     |  |                                                                                      |  |                               |  |           |  |  |        |  |  | (1)    |     | 261,306 |              
|                                                                                      |  |      |          |              |         |               |  |                       |         |                        |  |                                                     |  |                                                                                      |  |                               |  |           |  |  |        |  |   |        |     |         |              
|                                                                                     
|Edward F. Cooke
  Chief Financial Officer, Vice President, Secretary and Treasurer(3) |  |      | 20072006 |              |         | 72,917175,000 |  |                       | 53,643 |                        |  |                                                     |  |                                                                                      |  |                               |  |           |  |  | 16,757 |  |   | 3,801 | (2) |         | 89,674232,444 | 
|                                                                                      |  |      |          |              |         |               |  |                       |         |                        |  |                                                     |  |                                                                                      |  |                               |  |           |  |  |        |  |   |        |     |         |              
|                                                                                     
|Pramila D. Shaheed Chief Financial Officer and
  Secretary(4)                         |  |      | 2007     |              |         | 117,437       |  |                       | 25,000  |                        |  |                                                     |  |                                                                                      |  |                               |  |           |  |  |        |  |   |       |     |         | 142,437       | 

|    |                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------
|(1) | In 2007 and 2006, dividends
  totaling $291,511 and $268,769, respectively, were not
  paid in cash but were accrued.
|    |                                                                                                                      
|(2) | This amount reflects the
  matching contributions to the Companys 401(k) Plan paid by the Company.                  
|    |                                                                                                                      
|(3) | Mr. Cooke resigned as our Chief Financial Officer on May 14, 2007.                                                   
|    |                                                                                                                      
|(4) | Ms. Shaheed became the Chief Financial Officer of the Company on May 14, 2007.                                       

The cash
components of the Companys executive compensation consist of a base salary and
an opportunity to earn an annual cash bonus pursuant to the Management
Incentive Plan. See Compensation Discussion & Analysis-Base Salary &
Management Incentive Plans.

The Company
did not issue any stock options to the Named Executive Officers in 2007.

- 73 -

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OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END

|                   |  |                                                                                 |        |                                                                               |  |                                                                                                                  |  |                                 |   |                          |  |                                                                     |  |                                                                             |          |                                                                                                                       |  |                                                                                                                                       |  |  |   |  |  |   |  |  |   | 
|------------------ |  | ------------------------------------------------------------------------------- | ------ | ----------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | - | ------------------------ |  | ------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | -------- | --------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  |  | - |  |  | - |  |  | - | 
|                   |  | Option Awards                                                                   |        | Stock Awards                                                                  | 
|                   |  |                                                                                 |        |                                                                               | 
|Name               |  | Number of
  Securities
  Underlying
  Unexercised
  Options
  (#)
  Exercisable |        | Number of
  Securities
  Underlying Unexercised Options
  (#)
  Unexercisable |  | Equity
  Incentive Plan
  Awards:
  Number of
  Securities
  Underlying
  Unexercised
  Unearned
  Options
  (#) |  | Option
  Exercise
  Price
  ($) |   | Option
  Expiration Date |  | Number of
  Shares or Units
  of Stock That
  Have Not
  Vested (#) |  | Market Value
  of Shares or
  Units of Stock
  That Have Not
  Vested
  ($) |          | Equity Incentive
  Plan Awards:
  Number of
  Unearned Shares,
  Units or Other
  Rights That Have
  Not Vested
  (#) |  | Equity Incentive
  Plan Awards:
  Market or Payout
  Value of Unearned
  Shares, Units or
  Other Rights That
  Have Not Vested
  ($) | 
|(a)                |  | (b)                                                                             |        | (c)                                                                           |  | (d)                                                                                                              |  | (e)                             |   | (f)                      |  | (g)                                                                 |  | (h)                                                                         |          | (i)                                                                                                                   |  | (j)                                                                                                                                   | 
|                  
|Robert A. Levinson |  |                                                                                 | 35,000 |                                                                               |  | 0                                                                                                                |  |                                 | 0 |                          |  | 2.50                                                                |  |                                                                             | 12/29/09 |                                                                                                                       |  | 0                                                                                                                                     |  |  | 0 |  |  | 0 |  |  | 0 | 
|                  
|Pramila D. Shaheed |  |                                                                                 | 10,000 |                                                                               |  | 0                                                                                                                |  |                                 | 0 |                          |  | 1.83                                                                |  |                                                                             | 06/01/14 |                                                                                                                       |  | 0                                                                                                                                     |  |  | 0 |  |  | 0 |  |  | 0 | 

DIRECTOR COMPENSATION

The following
is a table summarizing the compensation for non-employee directors:

|                   |  |                                           |        |                      |  |                        |  |                                                    |       |                                                                                       |  |                               |  |             |   |  |  |   |  |  |        | 
|------------------ |  | ----------------------------------------- | ------ | -------------------- |  | ---------------------- |  | -------------------------------------------------- | ----- | ------------------------------------------------------------------------------------- |  | ----------------------------- |  | ----------- | - |  |  | - |  |  | ------ | 
|Name               |  | Fees Earned
  
  or Paid in 
  Cash
  ($) |        | Stock
  Awards
  ($) |  | Option
  Awards 
  ($) |  | Non-Equity
  Incentive 
  Plan Compensation 
  ($) |       | Change in
  Pension 
  Value and 
  Nonqualified Deferred 
  Compensation 
  Earnings |  | All Other 
  Compensation ($) |  | Total
  ($) |  
|(a)                |  | (b)                                       |        | (c)                  |  | (d)                    |  | (e)                                                |       | (f)                                                                                   |  | (g)                           |  | (h)         |  
|                   | 
|John McConnaughy   |  |                                           | 16,750 |                      |  |                       |  |                                                    |  (1) |                                                                                       |  |                              |  |             |  |  |  |  |  |  | 16,750 | 
|Giandomenico Picco |  |                                           | 16,750 |                      |  |                       |  |                                                    |  (2) |                                                                                       |  |                              |  |             |  |  |  |  |  |  | 16,750 | 
|Edward H. Cohen    |  |                                           | 16,000 |                      |  |                       |  |                                                    |  (3) |                                                                                       |  |                              |  |             |  |  |  |  |  |  | 16,000 | 

(1)As of December 31,
2007, Mr. McConnaughy has outstanding options to purchase 3,300 shares of the
Companys common stock. The options have exercise prices per share ranging from
$1.11 to $2.00 and are fully vested.

(2) As of December 31, 2007, Mr. Picco has no outstanding options to
purchase shares of the Companys common stock.

(3)As of December 31, 2007, Mr. Cohen has outstanding options to purchase
3,300 shares of the Companys common stock. The options have exercise prices
per share ranging from $1.11 to $2.00 and are fully vested. Mr. Cohen resigned
from the Board of Directors effective December 31, 2007.

- 74 -

---



Each director of the Company who is not an employee of the Company
receives an annual directors fee of $15,000 plus $1,000 for each Board meeting
attended by such director and $250 for each Board committee meeting which is
not held on the same day as a Board meeting. The fees are payable in cash or
common stock, at the election of the director. At this time each director has
elected to be paid in cash.

Compensation
Committee Interlocks and Insider Participation

There were no interlocks or other relationships
among the Companys executive officers and directors that are required to be
disclosed under applicable executive compensation disclosure requirements.

Compensation
Committee Report

The
compensation committee has reviewed and discussed the Compensation Discussion
and Analysis with management and based on the review and discussion of the
Compensation Discussion and Analysis the Compensation Committee recommended to
the Board of Directors that the Compensation Discussion and Analysis be
included in the Companys Annual Report on Form 10-K for the fiscal year 2007.

This
report is respectfully submitted by the Compensation Committee of the Board of
Directors which is comprised of John McConnaughy and Giandomenico Picco.

- 75 -

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

The
following table sets forth certain information as of March 28, 2008 regarding
the ownership of equity securities by (i) each person who is known to the
management of the Company to have been the beneficial owner of more than 5% of
the outstanding shares of the Companys equity securities, (ii) each director
and nominee for director, (iii) the Named Executive Officers and (iv) all
directors and executive officers of the Company as a group.

|                                                              |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|------------------------------------------------------------- |  | ------------------------------------------- | --------- | --------------- |  | ------------------------------------------- | - | ---------- | --------- | --- |  | ---- | -
|                                                              |  | Common Stock                                |           | Preferred Stock | 
|                                                              |  |                                             |           |                 | 
|Name and Address ofBeneficial
Owner                           |  | Amount and Nature
  of Beneficial Ownership |           | % of
Class      |  | Amount and Nature
  of Beneficial Ownership |   | % of
Class |          
|                                                              |  |                                             |           |                 |  |                                             |   |            |          
|GAMCO Investors, Inc.                                         |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|Corporate Center                                              |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|Rye, New York 10580                                           |  |                                             | 292,877   | (1)             |  | 5.49                                        | % |            |          |     |  |     |  
|                                                              |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|Robert A. Levinson                                            |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|110 West 40th Street                                          |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|New York, New York 10018                                      |  |                                             | 1,653,526 | (2)             |  | 30.80                                       | % |            | 4,529,833 | (3) |  | 99.4 | %
|                                                              |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|Roger L. and Theresa S. Hueglin                               |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|11 Blueberry Hill Road                                        |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|Wilton, Connecticut 06897                                     |  |                                             | 332,000   | (4)             |  | 6.22                                        | % |            |           |     |  |      |  
|                                                              |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|Pramila D Shaheed                                             |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|c/o Blumenthal/Lansing, LLC                                   |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|1 Palmer Terrace                                              |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|Carlstadt, New Jersey 07072                                   |  |                                             | 10,000    | (5)             |  | *                                           |   |            |          |     |  |     |  
|                                                              |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|John McConnaughy                                              |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|1011 High Ridge Road                                          |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|Stamford, Connecticut 06905                                   |  |                                             | 60,557    | (6)             |  | 1.13                                        | % |            |          |     |  |     |  
|                                                              |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|Giandomenico Picco                                            |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|c/o GDP Associates                                            |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|300 Main Street, 6th Floor                                    |  |                                             | 1,000     |                 |  | *                                           |   |            |          |     |  |     |  
|Stamford, CT 06901                                            |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|                                                              |  |                                             |           |                 |  |                                             |   |            |           |     |  |      |  
|All directors and executive officers as a
  group (4 persons) |  |                                             | 1,725,083 | (7)             |  | 32.06                                       | % |            | 4,529,833 |     |  | 99.4 | %

---

*          Less
than one percent (1%).


|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents
  shares held by GAMCO Investors, Inc. and various other entities which are
  directly or indirectly controlled by Mario J. Gabelli and for which he acts
  as chief investment officer, including registered investment companies and
  pension plans.  This information is
  based solely upon the contents of a filing on Schedule 13D/A dated January 5,
  2006, made by Mario J. Gabelli and related entities with the Securities and
  Exchange Commission.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(2) | Includes:
  (i) 557,999 shares held by Swenvest Corporation, as to which Mr. Levinson has
  sole voting and investment power; (ii) 15,000 shares held by three trusts for
  the benefit of Mr. Levinsons children, as to all of which trusts Mr.
  Levinson serves as co-trustee; and (iii) 35,000 shares subject to currently
  exercisable stock options.                                                                                                                

- 76 -

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|    |                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Includes
  4,479,485 shares of Series A Preferred Stock held by Swenvest Corporation, as
  to which Mr. Levinson has sole voting and investment power. 
|    |                                                                                                                                                        
|(4) | This
  information is based solely upon the contents of a filing on Schedule 13G/A
  dated December, 28, 2007, made by Roger L. and Theresa S. Hueglin.
|    |                                                                                                                                                        
|(5) | Represents
  10,000 shares subject to currently exercisable stock options.                                                                             
|    |                                                                                                                                                        
|(6) | Includes
  3,300 shares subject to currently exercisable stock options.                                                                                
|    |                                                                                                                                                        
|(7) | Includes
  48,300 shares subject to currently exercisable stock options.                                                                               

Equity Compensation Plan Information

The following table provides information, as
of December 31, 2007, with respect to all of the Companys compensation plans
under which Common Stock is authorized for issuance:

|                                                              |  |  |                                                                                             |  |                                                                             |      |  |                                                                                                                                                   |         | 
|------------------------------------------------------------- |  |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | 
|Plan Category                                                 |  |  | Number of
securities to be issued upon exercise of outstanding options, warrants and rights |  | Weighted-average
exercise price of outstanding options, warrants and rights |      |  | Number of
securities remaining available for future issuance under equity compensation
plans (excluding securities reflected in the first column) |        
|                                                              |  |  |                                                                                             |  |                                                                             |      |  |                                                                                                                                                   |        
|                                                              |  |  |                                                                                             |  |                                                                             |      |  |                                                                                                                                                   |         | 
|Equity compensation plans approved by
  security holders      |  |  | 82,600                                                                                      |  | $                                                                           | 2.13 |  |                                                                                                                                                   | 330,000 | 
|Equity compensation plans not approved by
  security holders* |  |  | 0                                                                                           |  |                                                                             | 0    |  |                                                                                                                                                   | 0       | 
|                                                              |  |  |                                                                                             |  |                                                                             |      |  |                                                                                                                                                   |         | 
|Total:                                                        |  |  | 82,600                                                                                      |  | $                                                                           | 2.13 |  |                                                                                                                                                   | 330,000 | 
|                                                              |  |  |                                                                                             |  |                                                                             |      |  |                                                                                                                                                   |         | 
|                                                              |  |  |                                                                                             |  |                                                                             |      |  |                                                                                                                                                   |         | 

*
Each director of the Company who is not an employee of the Company receives an
annual directors fee of $15,000, plus $1,000 for each Board meeting attended
by such director and $250 for each Board committee meeting which is not held on
the same day as a Board meeting.  The
fees are payable in cash or Common Stock, at the election of the
director.

|         |                                                                            
|-------- | ---------------------------------------------------------------------------
|Item 13. | CERTAIN RELATIONSHIPS AND RELATED
  TRANSACTIONS AND DIRECTOR INDEPENDENCE.

On January 6,
2003, the Company completed its acquisition of Carlyle.  In the merger each five shares of Carlyle
common stock were converted into one share of Common Stock and each share of
Carlyle Series B preferred stock was converted into one share of the Companys
Series A Preferred Stock, par value $0.01 per share.  In addition, the Company assumed Carlyle stock options which
became options to purchase approximately 220,000 shares of Common Stock.  The merger was accounted for as a reverse
acquisition.  The purchase price,
exclusive of assumed liabilities, was valued at approximately $6.8
million.  Liabilities of approximately
$5.7 million were also assumed.

The merger
agreement provided that Mr. Levinson continue to serve as Chairman of the
Board, President and Chief Executive Officer of the Company and all three
members of the Board of Directors of the Company prior to the merger continue
to serve as directors after the merger.
The merger agreement also provided that Mr. Cooke, the then current
Chief Financial Officer and Vice President of Carlyle, become Vice President,
Chief Financial Officer, Treasurer and Secretary of the Company and that Mr.
Cooke and Mr. Picco, each of whom was a director of Carlyle, serve as directors
of the Company.

- 77 -

---



The merger
agreement also provided that upon the completion of the merger, the Company would
indemnify and hold harmless, and pay all applicable expenses to, all past and
present directors and officers of Carlyle in all of their capacities, for acts
or omissions occurring at or prior to the completion of the merger to the same
extent they were indemnified pursuant to Carlyles certificate of incorporation
and bylaws and to the fullest extent permitted by law.

Prior to the
merger, Mr. Levinson served as the Chairman of the Board, President, Secretary
and Principal Financial Officer of the Company while also serving as the
Chairman of the Board, President and Chief Executive Officer of Carlyle.  Prior to the merger, Mr. Levinson was
entitled to exercise approximately 32% of the voting power of Common Stock and
approximately 39.9% of the voting power of the Carlyle capital stock entitled
to vote at the respective meetings.

Mr. Levinsons
employment agreement with Carlyle, which by operation of law is now an
obligation of the Company (the Employment Agreement), commenced on January 1,
1999, continuing for a period of one year (the Term of Employment).  The Employment Agreement allows for the Term
of Employment to be renewed annually automatically thereafter, unless Mr.
Levinson or the Company gives not less than thirty days written notice to the
other.  No such notice has been
given.  In addition, the Employment
Agreement currently provides for a base salary of $200,000 per year (subject to
increases as may be approved by the Board from time to time).  If Mr. Levinsons employment is terminated
without cause, Mr. Levinson would be entitled to receive the Base Salary for a
period equal to the remainder of the Term of Employment.  Further, in the event of a change in control
of the Company, Mr. Levinson would be entitled to a lump sum severance payment
generally equal to 2.99 times his average annual compensation for the five
calendar years preceding the calendar year during which a change in control
occurred.  Mr. Levinson agreed to waive
such provision in connection with the merger with Carlyle.

Mr. Cookes
employment agreement with Carlyle, which by operation of law was an obligation
of the Company, had commenced in March 1998 and set forth the terms under which
Mr. Cookes employment with the Company could have been terminated. Pursuant to
such agreement, if within one year after a change in control of the Company Mr.
Cookes employment was terminated for any reason, the Company would have paid
Mr. Cooke an amount equal to one year of his base salary then in effect.

Loans and Guarantees

As of December
31, 2007, the Company owes Mr. Levinson $350,000 and accrued interest of
$639,000.  The long-term loans, together
with the accrued interest, have been classified as a long-term obligation.  Mr. Levinson has promised not to demand
payment until January 6, 2009.  Mr.
Levinson reaffirmed this undertaking in writing in a commitment letter dated
March 24, 2008.

Additionally,
Mr. Levinson has also provided certain collateral guaranteeing the Companys
obligations under the $3.2 million loan from JPMorgan Chase Bank pursuant to a
promissory note due January 5, 2009, as amended.  The first $3.0 million of the note bears interest at a fixed rate
per annum equal to the Adjusted LIBOR rate applicable to such note plus 0.75%
(a Eurodollar Loan) and the remaining $200,000 bears interest at Chase Bank
N.A. prime rate. The interest rate on the first $3.0 million of the note at
December 31, 2007 was 6.14% and 7.25%
on the remaining balance of $200,000.
Furthermore, Mr. Levinson has provided certain collateral guaranteeing
the Companys obligations under a financing arrangement with CIT, pursuant to
which CIT has agreed to make an aggregate of $7,500,000 available to the
Company and its subsidiaries.

- 78 -

---



Director Independence

The Companys
board of directors has determined that all its non-employee directors as of
December 31, 2007 - Messrs. Picco and McConnaughy - are independent under the
independence requirements of Nasdaq and the Exchange Act, and Mr. Cohen, prior
to his resignation, was an independent director as well.

Other Relationships

The law firm
of Katten Muchin Rosenman LLP, New York, New York, of which Edward H. Cohen, a
former director of the Company, serves as Counsel, acts as counsel to the
Company.  Legal fees for services
rendered by Katten Muchin Rosenman LLP to the Company during the fiscal year
ended December 31, 2007 did not exceed 5% of the revenues of such firm for its
most recent fiscal year.  Mr. Cohen did
not share in any fees paid by the Company to Katten Muchin Rosenman LLP.  On December 20, 2007, Mr. Cohen resigned
from the Board of Directors of the Company. The resignation was effective as of
December 31, 2007.

|         |                                       
|-------- | --------------------------------------
|Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

The aggregate
fees billed or to be billed by Friedman LLP (Friedman) for each of the last
two fiscal years for professional services rendered for the audit of the
Companys annual financial statements, review of financial statements included
in the Companys quarterly reports on Form 10-Q and services that were provided
in connection with statutory and regulatory filings or engagements were
$179,000 for 2007 and $135,000 for 2006.

Audit-related Fees

The aggregate
fees billed or to be billed by Friedman for each of the last two fiscal years
for assurance and related services that were reasonably related to the
performance of the audit or review of the Companys financial statements was $0
for 2007 and 2006.

Tax Fees

The aggregate
fees billed by Friedman in each of the last two fiscal years for professional
services rendered for tax compliance and tax return preparation, were $0 for
2007 and 2006.

All Other Fees

The aggregate
fees billed by Friedman in each of the last two fiscal years for products and
services other than those reported in the three prior categories were $16,000
for 2007 and 2006, respectively.  The
nature of the services performed for these fees included audit of the Companys
pension and 401K plans.

- 79 -

---



Policy on Pre-Approval of Services Provided
by Friedman LLP

The Audit
Committee has established policies and procedures regarding pre-approval of all
services provided by the independent auditor.
The Audit Committee will annually review and pre-approve the services
that may be provided by the independent auditor without obtaining specific
pre-approval from the Audit Committee.
Unless a type of service has received general pre-approval, it requires
specific pre-approval by the Audit Committee if it is to be provided by the
independent auditor.  The Audit
Committee may delegate, subject to any rules or limitations it may deem
appropriate, to one or more designated members of the Audit Committee the
authority to grant such pre-approvals; provided, however, that the decisions of
any member to whom authority is so delegated to pre-approve an activity shall
be presented to the full Audit Committee at its next scheduled meeting.  The Audit Committee has delegated such
authority to Mr. McConnaughy, Chair of the Audit Committee.

- 80 -

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PART IV.

|         |                                           
|-------- | ------------------------------------------
|Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Schedule II

Valuation and Qualifying Accounts
December 31, 2007, 2006 and 2005(In thousands)

|                                         |  |                               |       |                                                |   |                                    |  |                     |       |                            |   |       |     |   |       | 
|---------------------------------------- |  | ----------------------------- | ----- | ---------------------------------------------- | - | ---------------------------------- |  | ------------------- | ----- | -------------------------- | - | ----- | --- | - | ----- | 
|Description                              |  | Balance
  beginning
  of year |       | Addition
  charged to
  costs and
  expenses |   | Other
  additions
  (deductions) |  | Less
  deductions |       | Balance
  at end
  of year |  
|                                        
|                                         |  |                               |       |                                                |   |                                    |  |                     |       |                            |   |       |     |   |       | 
|Year
  Ended December 31, 2007           |  |                               |       |                                                |   |                                    |  |                     |       |                            |   |       |     |   |       | 
|                                         |  |                               |       |                                                |   |                                    |  |                     |       |                            |   |       |     |   |       | 
|Allowance for doubtful
  accounts        |  | $                             | 106   |                                                | $ | 92                                 |  | $                   |      |                            | $ | 181   | (b) | $ | 17    | 
|                                         |  |                               |       |                                                |   |                                    |  |                     |       |                            |   |       |     |   |       | 
|Deferred tax asset valuation
  allowance |  | $                             | 4,345 |                                                | $ |                                   |  | $                   |      |                            | $ | 556   |     | $ | 3,789 | 
|                                         |  |                               |       |                                                |   |                                    |  |                     |       |                            |   |       |     |   |       | 
|Year
  Ended December 31, 2006           |  |                               |       |                                                |   |                                    |  |                     |       |                            |   |       |     |   |       | 
|                                         |  |                               |       |                                                |   |                                    |  |                     |       |                            |   |       |     |   |       | 
|Allowance for doubtful
  accounts        |  | $                             | 50    |                                                | $ | 89                                 |  | $                   |      |                            | $ | 33    | (b) | $ | 106   | 
|                                         |  |                               |       |                                                |   |                                    |  |                     |       |                            |   |       |     |   |       | 
|Deferred tax asset
  valuation allowance |  | $                             | 5,974 |                                                | $ |                                   |  | $                   |      |                            | $ | 1,629 |     | $ | 4,345 | 
|                                         |  |                               |       |                                                |   |                                    |  |                     |       |                            |   |       |     |   |       | 
|Year
  Ended December 31, 2005           |  |                               |       |                                                |   |                                    |  |                     |       |                            |   |       |     |   |       | 
|                                         |  |                               |       |                                                |   |                                    |  |                     |       |                            |   |       |     |   |       | 
|Allowance for doubtful
  accounts        |  | $                             | 59    |                                                | $ | 8                                  |  | $                   | (1    | )                          | $ | 16    | (b) | $ | 50    | 
|                                         |  |                               |       |                                                |   |                                    |  |                     |       |                            |   |       |     |   |       | 
|Deferred tax asset
  valuation allowance |  | $                             | 1     |                                                | $ | 4,420                              |  | $                   | 1,553 | (a)                        |   |      |     | $ | 5,974 | 

(a) Other Comprehensive Income
related to the pension adjustment.(b) Uncollectible accounts written off

All other schedules are omitted because they are not applicable,  or because the
required  information is included in the  consolidated  financial  statements or
notes thereto.

- 81 -

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|                  |      |                         |                                                                                                                                                                                                                                                                                 
|----------------- | ---- | ----------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Index    
|                  |      |                        
|Exhibit 
  Number |      | Description of Document
|                  |      |                        
|                  | 2.1  |                         | Agreement
  and Plan of Merger, dated as of May 24, 2002, by and among Levcor
  International, Inc. (Levcor) and Carlyle Industries, Inc. (incorporated
  herein by reference to Amendment No. 6 to Levcors Registration Statement on
  Form S-4 filed on November 26, 2002).
|                  |      |                         |                                                                                                                                                                                                                                                                                 
|                  | 3.1  |                         | Amended and
  Restated Certificate of Incorporation filed January 7, 2003 (incorporated
  herein by reference to Amendment No. 6 to Levcors Registration Statement on
  Form S-4 filed on November 26, 2002).                                                                  
|                  |      |                         |                                                                                                                                                                                                                                                                                 
|                  | 3.2  |                         | By-Laws
  (incorporated herein by reference to Amendment No. 6 to Levcors Registration
  Statement on Form S-4 filed on November 26, 2002).                                                                                                                                    
|                  |      |                         |                                                                                                                                                                                                                                                                                 
|                  | 4.1  |                         | Specimen
  form of Levcors Common Stock certificate (incorporated herein by reference
  to Levcors Form 10-KSB filed on March 24, 1997).                                                                                                                                      
|                  |      |                         |                                                                                                                                                                                                                                                                                 
|                  | 10.1 |                         | 1992 Stock
  Option Plan (incorporated herein by reference to Levcors Form 10-K filed on
  March 30, 1993).                                                                                                                                                                   
|                  |      |                         |                                                                                                                                                                                                                                                                                 
|                  | 10.2 |                         | Factoring
  Agreement, dated September 17, 1998, between Levcor and the CIT
  Group/Commercial Services, Inc. (incorporated herein by reference to Levcors
  Form 10-QSB filed on November 16, 1998).                                                                          
|                  |      |                         |                                                                                                                                                                                                                                                                                 
|                  | 10.3 |                         | Amendment
  dated December 31, 2001 to the Factoring Agreement dated September 17, 1998
  between Levcor and the CIT Group/Commercial Services, Inc. (incorporated
  herein by reference to Levcors Form 10-KSB filed on April 1, 2002).                                       
|                  |      |                         |                                                                                                                                                                                                                                                                                 
|                  | 10.4 |                         | Guaranty
dated April 30, 2002, executed by Robert A. Levinson in favor of JPMorgan
Chase Bank (incorporated herein by reference to Levcors Form 10-QSB filed on
May 15, 2002).                                                                                                 
|                  |      |                         |                                                                                                                                                                                                                                                                                 
|                  | 10.5 |                         | Pledge
  Agreement dated April 30, 2002, executed by Robert A. Levinson in favor of
  JPMorgan Chase Bank (incorporated herein by reference to Levcors Form 10-QSB
  filed on May 15, 2002).                                                                                   
|                  |      |                         |                                                                                                                                                                                                                                                                                 
|                  | 10.6 |                         | Promissory
Note dated May 3, 2002 executed by Levcor in favor of JPMorgan Chase Bank
(incorporated herein by reference to Levcors Form 10-QSB filed on May 15,
2002).                                                                                                          
|                  |      |                         |                                                                                                                                                                                                                                                                                 
|                  | 10.7 |                         | Letter dated
February 28, 2002 from Mr. Robert A. Levinson (incorporated herein by
reference to Levcors Amendment No. 2 to Registration Statement on Form S-4
filed on October 4, 2002).                                                                                       

- 82 -

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| |       |  |                                                                                                                                                                                                                                                                    
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.8  |  | Letter dated
September 27, 2002 from Mr. Robert A. Levinson (incorporated herein by
reference to Levcors Amendment No. 2 to Registration Statement on Form S-4
filed on October 4, 2002).                                                                         
| |       |  |                                                                                                                                                                                                                                                                    
| | 10.9  |  | 2002 Stock
Option Plan (incorporated herein by reference to Amendment No. 6 to Levcors
Registration Statement on Form S-4 filed on November 26, 2002).                                                                                                           
| |       |  |                                                                                                                                                                                                                                                                    
| | 10.10 |  | Financing
Agreement dated January 24, 2002, among Carlyle and The CIT Group/Commercial
Services, Inc. (incorporated herein by reference to Exhibit 99.1 to Carlyles
Current Report on Form 8-K/A filed on March 14, 2002).                                        
| |       |  |                                                                                                                                                                                                                                                                    
| | 10.11 |  | Accounts Receivable
Financing Agreement dated January 24, 2002, among Blumenthal/Lansing Company,
and The CIT Group/Commercial Services, Inc. (incorporated herein by reference
to Exhibit 99.2 to Carlyles Current Report on Form 8-K/A filed on March 14,
2002).
| |       |  |                                                                                                                                                                                                                                                                    
| | 10.12 |  | Accounts
Receivable Financing Agreement dated January 24, 2002, among Westwater
Industries, Inc., and The CIT Group/Commercial Services, Inc. (incorporated
herein by reference to Exhibit 99.3 to Carlyles Current Report on Form 8-K/A
filed on March 14, 2002).
| |       |  |                                                                                                                                                                                                                                                                    
| | 10.13 |  | Guaranty
dated January 24, 2002, executed by Blumenthal/Lansing Company in favor of
The CIT Group/Commercial Services, Inc. (incorporated herein by reference to
Exhibit 99.4 to Carlyles Current Report on Form 8-K/A filed on March 14,
2002).                  
| |       |  |                                                                                                                                                                                                                                                                    
| | 10.14 |  | Guaranty
dated January 24, 2002, executed by Carlyle in favor of The CIT
Group/Commercial Services, Inc. (incorporated herein by reference to Exhibit
99.5 to Carlyles Current Report on Form 8-K/A filed on March 14, 2002).                                     
| |       |  |                                                                                                                                                                                                                                                                    
| | 10.15 |  | Guaranty
dated January 24, 2002, executed by Westwater Industries, Inc. in favor of
The CIT Group/Commercial Services, Inc. (incorporated herein by reference to
Exhibit 99.6 to Carlyles Current Report on Form 8-K/A filed on March 14,
2002).                  
| |       |  |                                                                                                                                                                                                                                                                    
| | 10.16 |  | Guaranty
dated January 24, 2002, executed by Button Fashion BV in favor of The CIT
Group/Commercial Services, Inc. (incorporated herein by reference to Exhibit
99.7 to Carlyles Current Report on Form 8-K/A filed on March 14, 2002).                           
| |       |  |                                                                                                                                                                                                                                                                    
| | 10.17 |  | Guaranty
dated January 24, 2002 executed by Robert Levinson in favor of The CIT
Group/Commercial Services, Inc. (incorporated herein by reference to Exhibit
99.8 to Carlyles Current Report on Form 8-K/A filed on March 14, 2002).                              
| |       |  |                                                                                                                                                                                                                                                                    
| | 10.18 |  | Inventory
Security Agreement dated January 24, 2002, among Blumenthal/Lansing Company
and The CIT Group/Commercial Services, Inc. (incorporated herein by reference
to Exhibit 99.9 to Carlyles Current Report on Form 8-K/A filed on March 14,
2002).            
| |       |  |                                                                                                                                                                                                                                                                    
| | 10.19 |  | Inventory
Security Agreement dated January 24, 2002, among Carlyle and The CIT
Group/Commercial Services, Inc. (incorporated herein by reference to Exhibit
99.11 to Carlyles Current Report on Form 8-K/A filed on March 14, 2002).                              
| |       |  |                                                                                                                                                                                                                                                                    
| | 10.20 |  | Equipment
Security Agreement dated January 24, 2002, among Blumenthal/Lansing Company
and The CIT Group/Commercial Services, Inc. (incorporated herein by reference
to Exhibit 99.12 to Carlyles current report on Form 8-K/A filed on March 14,
2002).           

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| |       |  |                                                                                                                                                                                                                                                                                                                     
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.21 |  | Equipment
Security Agreement dated January 24, 2002, among Carlyle and The CIT
Group/Commercial Services, Inc. (incorporated herein by reference to Exhibit
99.14 to Carlyles current report on Form 8-K/A filed on March 14, 2002).                                                                               
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 10.22 |  | Letter of
Credit Agreement dated January 24, 2002, among Blumenthal/Lansing Company and
The CIT Group/Commercial Services, Inc. (incorporated herein by reference to
Exhibit 99.15 to Carlyles Current Report on Form 8-K/A filed on March 14,
2002).                                                              
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 10.23 |  | Patent and
Trademark Agreement dated January 24, 2002, among Blumenthal/Lansing Company
and The CIT Group/Commercial Services, Inc. (incorporated herein by reference
to Exhibit 99.17 to Carlyles Current Report on Form 8-K/A filed on March 14,
2002).                                                          
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 10.24 |  | Patent and
Trademark Agreement dated January 24, 2002, among Westwater Industries, Inc.
and The CIT Group/Commercial Services, Inc. (incorporated herein by reference
to Exhibit 99.18 to Carlyles Current Report on Form 8-K/A filed on March 14,
2002).                                                          
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 10.25 |  | 2007
Management Incentive Plan -                                                                                                                                                                                                                                                                                   
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 10.26 |  | Amendment to
Commitment letter dated March 24, 2006 between Mr. Robert A. Levinson and
Levcor International, Inc.                                                                                                                                                                                                   
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 10.27 |  | Amendment to
CIT Financing Agreement dated March 27, 2006                                                                                                                                                                                                                                                           
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 10.28 |  | Amendment to
the CIT Factoring Agreement dated March 27, 2006                                                                                                                                                                                                                                                       
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 10.29 |  | Endorsement
#5 dated as of March 16, 2006 to the Promissory Note between Levcor
International, Inc. and JP Morgan Chase Bank dated May 3, 2002                                                                                                                                                                      
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 10.30 |  | Acknowledgment
and Consent of Endorsement #5 dated March 16, 2006 to the Promissory Note
dated May 3, 2002 between Levcor International, Inc. and JP Morgan Chase
Bank                                                                                                                                              
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 10.31 |  | Employment
Agreement dated as of March 24, 1998 between Edward F. Cooke and Carlyle Industries, Inc., incorporated
herein by reference to Exhibit 10.33 to Carlyle Industries, Inc.s 1997
Annual Report on Form 10 K filed on March 26, 1998 (SEC file number
001-03462).                                         
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 10.32 |  | Employment
Agreement dated February 22, 1999 and made effective as of January 1, 1999
between Robert A. Levinson and Carlyle Industries, Inc., incorporated herein
by reference to Exhibit 10.37 to Carlyle Industries, Inc.s 1998 Annual
Report on Form 10 K filed on March 31, 1999 (SEC file number 001-03462) 
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 10.33 |  | Belding
Heminway Company, Inc. Supplemental Executive Savings Investment Plan
dated December 21, 1995 (incorporated
herein by reference to Exhibit 10.32 to Levcors 10-KSB/A filed on May 2,
2005)                                                                                                                

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| |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.34 |  | Letter dated
January 13, 2005 from Mr. Robert A. Levinson (incorporated herein by
reference to Exhibit 10.33 to Levcors 10-KSB/A filed on May 2, 2005)                                                                                                                                                                                                                                                                                                                                
| |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 10.35 |  | Endorsement
No. 4 dated February 1, 2005 to the Promissory Note dated May 3, 2002
executed by Levcor in favor of JP Morgan Chase Bank (incorporated herein by
reference to Exhibit 10.34 to Levcors 10-KSB/A filed on May 2, 2005)                                                                                                                                                                                                                                                    
| |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 10.36 |  | Amendment
entered into on March 20, 2007 to the Financing Agreement dated January 24,
2002, between Levcor International, Inc. (Company) and CIT Group/Commercial
Services, Inc. (CIT), the Factoring Agreement between CIT and the Company
dated September 17, 1998 and the Promissory Note in the principal amount of
$2,000,000 dated January 24, 2002., (incorporated herein by reference to exhibit
10.36 to Levcors 2006 Annual Report on Form 10-K filed on March 30, 2007)
| |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 10.37 |  | Letter dated
March 13, 2007 from Robert A. Levinson (incorporated herein by reference to exhibit 10.37 to Levcors 2006 Annual Report on Form 10-K filed on March 30, 2007                                                                                                                                                                                                                                                                                                             
| |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 10.38 |  | Amendment
dated July 26, 2006 to the Accounts Receivable Financing Agreement dated
January 24, 2002 between Blumenthal Lansing Company, LLC and the CIT
Group/Commercial Services, Inc. (incorporated herein by reference to exhibit
10.1 to the Companys Form 10-Q filed on August 14, 2006).                                                                                                                                                                                        
| |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 10.39 |  | Amendment
dated July 26, 2006 to the Factoring Agreement dated September 17, 1998
between Levcor International, Inc and the CIT Group/Commercial Services, Inc.
(incorporated herein by reference to exhibit 10.2 to the Companys Form 10-Q
filed on August 14, 2006).                                                                                                                                                                                                                
| |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 10.40 |  | Amendment
dated July 26, 2006 to the Factoring Agreements between Blumenthal Lansing
Company, LLC, Westwater Industries, LLC, Levcor International, Inc. and the
CIT Group/Commercial Services, Inc. (incorporated herein by reference to
exhibit 10.3 to the Companys Form 10-Q filed on August 14, 2006).                                                                                                                                                                           
| |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 10.41 |  | Endorsement
No. 6 dated July 26, 2006 to the Promissory Note dated May 3, 2002 by Levcor
International, Inc. in favor of JPMorgan Chase Bank, N.A. (incorporated
herein by reference to exhibit 10.4 to the Companys Form 10-Q filed on
August 14, 2006).                                                                                                                                                                                                                             
| |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 10.42 |  | Acknowledgment
and Consent of Endorsement No. 6 dated July 26, 2006 to the Promissory Note
dated May 3, 2002 by Levcor International Inc. in favor of JPMorgan Chase
Bank N.A. (incorporated by reference herein by reference to exhibit 10.5 to
the Companys Form 10-Q filed on August 14, 2006).                                                                                                                                                                                    
| |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 10.43 |  | Amendment
dated May 2, 2007 to the Promissory Note in favor of J.P. Morgan Chase Bank,
N.A. dated May 3, 2002 (incorporated by reference to the Current Event Report
filed on form 8-K on May 7, 2007).                                                                                                                                                                                                                                                                                
| |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 10.44 |  | *Letter dated March 24, 2008 from Robert A. Levinson                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 10.45 |  | *Letter dated November 27, 2007 from
William M. Cimbol of J.P. Morgan Chase Bank, N.A. extending a secure line of credit.                                                                                                                                                                                                                                                                                                                                                              
| |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 10.46 |  | *Amendment
dated February 5, 2008 to the Promissory Note in favor of JP Morgan Chase Bank, N.A. dated May 3, 2002                                                                                                                                                                                                                                                                                                                                                                      

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| |      |  |   |  |                                                                                                                                                                                                     
| | ---- |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 21   |  | * |  | Subsidiaries
of the Company.                                                                                                                                                                        
| |      |  |   |  |                                                                                                                                                                                                     
| | 23   |  | * |  | Consent of
Independent Registered Public Accounting Firm.                                                                                                                                           
| |      |  |   |  |                                                                                                                                                                                                     
| | 31.1 |  | * |  | Chief
Executive Officers Certificate pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.                                                                                                    
| |      |  |   |  |                                                                                                                                                                                                     
| | 31.2 |  | * |  | Chief
Financial Officers Certificate pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.                                                                                                    
| |      |  |   |  |                                                                                                                                                                                                     
| | 32.1 |  | * |  | Chief
Executive Officers Certificate, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                    
| |      |  |   |  |                                                                                                                                                                                                     
| | 32.2 |  | * |  | Chief
Financial Officers Certificate, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                    
| |      |  |   |  |                                                                                                                                                                                                     
| | 99.1 |  |   |  | Charter for
the Audit Committee of the Board of Directors (incorporated herein by
reference to Exhibit 99.1 to Levcors 2003 Annual Report on Form 10-KSB/A
filed on April 29, 2004).               
| |      |  |   |  |                                                                                                                                                                                                     
| | 99.2 |  |   |  | Charter for
the Corporate Governance Committee of the Board of Directors (incorporated
herein by reference to Exhibit 99.2 to Levcors 2003 Annual Report on Form
10-KSB/A filed on April 29, 2004).
| |      |  |   |  |                                                                                                                                                                                                     
| | 99.3 |  |   |  | Charter for
the Compensation Committee of the Board of Directors (incorporated herein by
reference to Exhibit 99.3 to Levcors 2006 Annual Report on Form 10-K filed
on March 30, 2007).            

---

  Indicates that exhibit is a management
contract or compensatory plan or arrangement.


*  Indicates that exhibit is filed as an exhibit hereto.

- 86 -

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SIGNATURES

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

|                       |                            |                                        
|---------------------- | -------------------------- | ---------------------------------------
|                       | LEVCOR INTERNATIONAL, INC.
|Date: March 28, 2008   |                            |                                        
|                       | By:                        | /s/ ROBERT
  A.  LEVINSON              
|                       |                            |                                        
|                       |                            | Robert A.
  Levinson,                  
|                       |                            | Chairman of
  the Board,               
|                       |                            | President
  and Chief Executive Officer
|                       |                            |                                        
|Date: March
  28, 2008 |                            |                                        
|                       | By:                        | /s/ PRAMILA
  D. SHAHEED               
|                       |                            |                                        
|                       |                            | Pramila D.
  Shaheed,                  
|                       |                            | Chief
  Financial Officer and Secretary

In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.

|                                  |         |  |                                         |        
|--------------------------------- | ------- |  | --------------------------------------- | -------
|/s/ ROBERT
  A. LEVINSON          | 3/28/08 |  | /s/ PRAMILA
  D. SHAHEED                | 3/28/08
|                                  |         | 
|Robert A.
  Levinson              | Date    |  | Pramila D.
  Shaheed                    | Date   
|Chairman of
  the Board, Chief    |         |  | Chief
  Financial Officer and Secretary |        
|Executive
  Officer and President |         |  | (Principal
  Financial Officer)         |        
|(Principal
  Executive Officer)   |         |  |                                         |        
|                                  |         |  |                                         |        
|/s/JOHN
  McCONNAUGHY             | 3/28/08 |  | /s/
  GIANDOMENICO PICCO                | 3/28/08
|                                  |         | 
|John
  McConnaughy                | Date    |  | Giandomenico
  Picco                    | Date   
|Director                          |         |  | Director                                |        

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