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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

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

                            For the fiscal year ended
                                December 31, 2006

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

                             Commission File Number
                                     0-50186

                           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.)

              1065 Avenue of the Americas, 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
                     ---------------------------------------
                     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 [ ] No [X]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
                                 Yes [ ] No [X]

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

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

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

Large accelerated filer [ ]   Accelerated filer [ ]   Non-accelerated filer [X]

Indicate by check mark whether the registrant is a shell Company (as defined in
Rule 12b-2 of the Exchange Act)
                                 Yes [ ] No [X]

As of March 28, 2007 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, 2006
based upon the value of the last sales price of these shares as quoted on the
OTC Bulletin Board, was approximately $2,541,123.

                    DOCUMENTS INCORPORATED BY REFERENCE: None

<PAGE>

                 INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH
                     THE SECURITIES AND EXCHANGE COMMISSION
                          YEAR ENDED DECEMBER 31, 2006

                               ITEMS IN FORM 10-K
                               ------------------



                                                                            Page


PART I

ITEM 1.   BUSINESS........................................................     1
ITEM 1A.  RISK FACTORS....................................................     5
ITEM 1B.  UNRESOLVED STAFF COMMENTS.......................................    11
ITEM 2.   PROPERTIES......................................................    11
ITEM 3.   LEGAL PROCEEDINGS...............................................    11
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............    12


PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
          MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES...............    13
ITEM 6.   SELECTED FINANCIAL DATA.........................................    14
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS.......................................    15
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 .......................................    60
ITEM 9A.  CONTROLS AND PROCEDURES.........................................    60
ITEM 9B.  OTHER INFORMATION ..............................................    61

PART III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE..........    62
ITEM 11.  EXECUTIVE COMPENSATION..........................................    65
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
          AND RELATED STOCKHOLDER MATTERS.................................    74
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
          DIRECTOR INDEPENDENCE...........................................    75
ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES..........................    77
ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES......................    79

<PAGE>

                                     PART I

This 2006 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") was incorporated in 1964
as Pantepec International, Inc. under the laws of the Islands of Bermuda and was
reorganized in 1967 under the laws of the State of Delaware. In 1995, Pantepec
International, Inc. changed its name to Levcor International, Inc.

In 2003, the Company acquired by merger Carlyle Industries, Inc. ("Carlyle").
This acquisition formed the basis of the Company's craft business, which
constitutes all of its current operations.

Discontinued Textile Operations

In 1995, the Company acquired a woven fabric converting business and in 1999,
the Company purchased a knit fabric and processing business. These acquisitions
formed the basis of the Company's historic Textile business.

In 2003, the Company took steps to transition the focus of its Textile division
from fabric converting to contract garment manufacturing, which the Company
believed offered greater potential for growth. In this regard, in 2004, the
Company's Textile division began providing contract garment manufacturing
services for a major customer. During 2004 and 2005, the Textile division
continued to focus on garment manufacturing.

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,

                                     - 1 -
<PAGE>

Textile segment operations for the current and prior comparative periods have
been presented as discontinued operations.

The decision to exit the Textile business was made after a full review and
analysis of the Textile business and the Company's strategic alternatives. The
decision was based on a variety of factors, including, (i) that the Company's
contract garment manufacturing and other textile business has incurred operating
losses resulting from lower than planned business volume from our major
customers and has been unable to grow its customer base, (ii) that the business
has incurred sales decreases (iii) a decrease in margins due to an increase in
raw material costs that were unable to be passed to customers, and (iv) the long
production lead times and the related working capital requirements of the
business which contributed to interest costs that exceeded the segment's
operating profits. The Company had determined that the future net revenues and
gross profits in the Textile business would continue to deteriorate and as a
result the Company concluded that a withdrawal from the business was the
appropriate course of action at that time.

During 2006, the Company disposed of substantially all remaining Textile segment
inventory. As of December 31, 2006 the Company had $15,000 of Textile segment
inventory remaining. The Company estimates no additional exit costs associated
with exiting the textile business.

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

In addition, in 2005, the Company provided a full valuation allowance totaling
$6.0 million against the deferred tax assets as of December 31, 2005 as a result
of the Company's historical losses. This valuation allowance adjustment was
reflected partially in the Company's 2005 income tax provision of $3.1 million
and that portion of the deferred tax asset valuation reserve related to the
Company's pension plan totaling $1.6 million is reflected in other accumulated
comprehensive losses.

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

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                      -------------------------------------
                                                         2006         2005          2004
                                                      ----------   ----------    ----------
<S>                                                   <C>          <C>           <C>
     Sales                                            $    2,393   $    8,184    $   10,632
     Cost of sales                                         1,934        8,685         8,525
                                                      ----------   ----------    ----------
     Gross profit                                            459         (501)        2,107
     Selling, general and administrative
         expense                                             269        1,628         2,036
     Goodwill and trademark impairment                        --        3,009            --
     Interest expense                                        177          311           176
     Income tax (benefit)                                     --           --           (35)
                                                      ----------   ----------    ----------
     Results of discontinued operations, net of tax   $       13   $   (5,449)   $      (70)
                                                      ==========   ==========    ==========
</TABLE>

                                     - 2 -
<PAGE>

The Textile business' assets and liabilities as included in the Company's
consolidated balance sheets are as follows (dollars in thousands):

                                                          December 31,
                                                    -----------------------
                                                       2006         2005
                                                    ----------   ----------

     Cash                                           $       --   $        4
     Inventories                                            15        1,198
     Other current assets                                   --            1
                                                    ----------   ----------
     Total current assets                                   15        1,203
     Property, plant and equipment, net                     --           25
     Other assets                                           --            6
                                                    ----------   ----------
            Total assets                            $       15   $    1,234
                                                    ==========   ==========

     Accounts payable                               $       --   $      373
     Due to factor                                          --          775
     Current maturities of stockholder loan                 --          850
     Other current liabilities                              --          239
                                                    ----------   ----------
            Total current liabilities                       --        2,237
        Long term debt                                      --        3,000
        Stockholder loans less current maturities           --        1,500
        Accrued interest, stockholder loans                 --          454
                                                    ----------   ----------
            Total liabilities                       $       --   $    7,191
                                                    ==========   ==========


Effective June 30, 2006, the short and long term debt of the Textile segment
became short and long term debt of the Company's continuing operations and as
such, interest expense related to this debt in future periods will be classified
as part of our continuing operations.

Craft Business
--------------

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:

     o    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

     o    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 (R), Le Chic (R), Streamline (R), Favorite
Findings (R), Crafter's Images (R), and Button Fashion (R) registered trademarks
and the Le Bouton, La Petite, Classic, Boutique Elegant and Mill Mountain brand
names. The Company also produces and distributes a private-label button line for
one of the nation's best-known retailers.

                                     - 3 -
<PAGE>

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
primarily to individual stores with a smaller percentage 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 three customers (Wal-Mart, a mass
merchandiser and Jo-Ann Stores and Hancock Fabrics ("Hancock"), each a specialty
chain,) represented approximately 49%, 23% and 8% respectively, in 2006, 46%,
25% and 8%, respectively, in 2005, and 49%, 23% and 9%, respectively, in 2004 of
the Company's net sales. These customers also represented approximately 63% and
80% of the Company's outstanding accounts receivable as of December 31, 2006,
and 2005, 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 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 as of the date of the filing. In addition, the Company also
anticipates that an additional allowance will be required against 2007
pre-bankruptcy sales and that going forward, 2007 will result in lower sales to
Hancock Fabrics as compared to 2006 due to the reduced store count.

                                     - 4 -
<PAGE>

The Company's largest customer, Wal-Mart has begun opening new stores with no
cut fabric and a reduced craft department. The Company anticipates a reduction
in sales to Wal-Mart in 2007 as a result of the new store lay-outs.

In direct response to these factors, the Company has taken steps to reduce its
headcount during the first quarter of 2007.

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.

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, 2006 or 2005.

Employees

The Company currently employs 118 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 going
concern basis which contemplates the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business. In 2005 the
Company incurred a net loss attributable to common stockholders of $8.3 million
(of which $6.1 million was represented by non-cash charges reflecting impairment
of Textile segment assets) contributing to a stockholders deficit which totaled
$9.6 million at December 31, 2006. 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, obtain financing to
meet the Company sponsored defined benefit pension funding obligations currently
estimated to be $1.8 million in 2007 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
the event the parent corporation is determined to be responsible for these
claimed liabilities and the redemption of preferred stock due in 2007 and

                                     - 5 -
<PAGE>

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 pension and 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 16, 2007 and March
15, 2006 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.

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
$1.1 million as of December 31, 2006. 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 2, 2009 by providing short-term
loans to the Company up to a maximum of $3 million. There is currently $1.5
million of borrowing available from Mr. Levinson. If we (1) do not substantially
achieve our overall projected revenue levels for 2007, (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 -
<PAGE>

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
and has provided them with operating forecasts for 2007. 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 the likelihood of the
lenders accelerating the payment of any of the obligations under the Company's
facility during the next twelve months is not likely.

Failing to substantially achieve our projected revenue levels for 2007 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.

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 2006, 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 2007 focuses on lowering fixed and variable expenses. 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 with its defined benefit plan at
December 31, 2006 was $20.5 million. The Plan's portfolio of investments totaled
$18.4 million. The current actuarial estimate is that a contribution with
respect to the 2006 Plan year in the amount of $990,482 will be required by
September 15, 2007 and quarterly contributions with respect to the 2007 Plan
year totaling $800,514 will also be required during 2007, based on current
legislated discount rates and other actuarial assumptions. The Company has filed
a deferral application with the IRS seeking to defer $720,000 of the September
15, 2007 payment to later years. There can be no assurance that the Company will
be granted a deferral in which case the Company will be required to obtain
additional financing to allow it to make the payment. There can be no assurance
the Company will be able to obtain such additional financing.

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

The Company's Series A preferred stock is subject to mandatory redemption, in
three equal annual installments on June 15, 2007, June 15, 2008 and June 15,
2009, 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. This represents 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

                                     - 7 -
<PAGE>

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:

     o    the volume and timing of customer orders received;

     o    the timing and magnitude of customers' marketing campaigns;

     o    the loss or addition of a major customer;

     o    the availability and pricing of materials for our products;

     o    the increased expenses incurred in connection with the introduction of
          new products;

     o    currency fluctuations;

     o    delays caused by third parties; and

     o    changes in our product mix.

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.

                                     - 8 -
<PAGE>

The Company's largest three customers (Wal-Mart, a mass merchandiser and Jo-Ann
Stores and Hancock Fabrics, specialty chains,) represented approximately 49%,
23% and 8%, respectively, in 2006 and 46%, 25% and 8%, respectively, in 2005 and
49%, 23% and 9% respectively, in 2004 of the Company 's net sales. These
customers also represented approximately 63% and 80% of the Company's
outstanding accounts receivable as of December 31, 2006 and 2005, 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 as of the date of the filing. In addition, the Company also
anticipates that an additional allowance will be required against 2007
pre-bankruptcy sales and that going forward, 2007 will result in lower sales to
Hancock Fabrics as compared to 2006 due to the reduced store count.

The Company's largest customer, Wal-Mart has begun opening new stores with no
cut fabric and a reduced craft department. The Company anticipates a reduction
in sales to Wal-Mart in 2007 as a result of the new store lay-outs.

Based upon historical and recent results and existing relationships with
customers, the Company believes that a substantial portion of its net sales and
gross profits will continue to be derived from a small number of large
customers. Customers generally have the right to terminate their relationship
with the Company without penalty and with little or no notice. Without long-term
contracts with the majority of its customers, the Company cannot be certain that
its customers will continue to purchase its products or that it will be able to
maintain a consistent level of sales. 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.

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

                                     - 9 -
<PAGE>

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 Edward F. Cooke. 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.

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 both
management's assessment as to whether the company maintained effective internal
control over financial reporting and on the effectiveness of the company's
internal control over financial reporting.
We will be implementing a comprehensive effort to comply with Section 404 of the
Sarbanes-Oxley Act. If we are unable to complete our assessment in a timely
manner or if our independent auditors issue other than an unqualified opinion on
the design, operating effectiveness or management's assessment 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

                                     - 10 -
<PAGE>

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 1065 Avenue of the Americas -
28th floor, New York, New York 10018. The Company leases this property,
approximately 2,700 square feet, at $6,250 per month, from National Spinning,
Inc. The lease expires in August 2007. National Spinning, Inc. was also a raw
material supplier to the Company's discontinued Textile division.

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.

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 lease 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 waste, the discharge of effluents into waterways, the emissions of
substances into the air and various health and safety matters. In addition,
CERCLA and comparable state statutes generally impose joint and several
liability on present and former owners and operators, transporters and
generators for remediation of contaminated properties regardless of fault. These
parties are typically identified as "potentially responsible parties" or "PRPs."
On 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 Solvents Recovery Service of New England Superfund Site in Southington,
Connecticut (the "SRS site"). The Company settled its alleged liability in
connection with the SRS site by paying $1,626 in connection with a settlement
offered to de minimis parties at the SRS site in 1994. BCTC and CM, along with
other PRPs, committed to perform the Remedial Investigation and Feasibility
Study ("RIFS") and two Non-Time Critical Removal Actions ("NTCRA") at the SRS
site. The RIFS, and the first NTCRA (except for certain maintenance activities)

                                     - 11 -
<PAGE>

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. Assuming negotiations between EPA and the PRP Group are successful, it is
expected that payments by parties to the Consent Decree would begin in late 2007
or early 2008.

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. In addition, the PRP Group has
also received a demand from the federal NRD trustees.

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 best
current 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. Although
the reserve currently appears to be sufficient to cover these environmental
liabilities, there are uncertainties associated with environmental liabilities,
and no assurances can be given that the Company's estimate of any environmental
liability will not increase or decrease in the future. The uncertainties relate
to the difficulty of estimating the ultimate cost of any remediation that may be
undertaken, including any operating costs associated with remedial measures, the
duration of any remediation required, the amount of consultants' or attorneys'
fees that may be incurred, the administrative costs of participating in the PRP
groups, and any additional costs or requirements that may be imposed or sought
by federal, state or local agencies.

The Company is a party to other litigation in the ordinary course of business
which is either covered by insurance or not material and which if adversely
determined would not have a material effect on the Company.

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

During 2006 no matters were submitted to stockholders for a vote.

                                     - 12 -
<PAGE>

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.

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

          2005                                     High              Low
                                                   ----              ---
          First Quarter                          $  2.27            $ 2.05
          Second Quarter                            2.07              1.10
          Third Quarter                             1.29               .85
          Fourth Quarter                            1.25               .46

Holders of Record

As of March 28, 2007 there were approximately 6,350 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 Group/Financial Services, Inc. ("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, 2006, with
respect to all of the Company's compensation plans under which Common Stock is
authorized for issuance:

<TABLE>
<CAPTION>
                                                                                             Number of securities remaining
                               Number of securities to be     Weighted-average exercise       available for future issuance
                                 issued upon exercise of        price of outstanding         under equity compensation plans
                                  outstanding options,         options, warrants and       (excluding securities reflected in
Plan Category                     warrants and rights                  rights                       the first column)
-------------                  --------------------------     -------------------------    ----------------------------------
<S>                                      <C>                           <C>                              <C>
Equity compensation plans
approved by security holders             363,300                       $ 2.96                           330,000

Equity compensation plans
not approved by security                       0                            0                                 0
                                        --------                       ------                          --------
holders*
                      Total:             363,300                       $ 2.96                           330,000
                                        ========                       ======                          ========
</TABLE>

                                     - 13 -
<PAGE>

         * 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.

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,
2006, December 31, 2005 and December 31, 2004 and the selected consolidated
balance sheet data as of December 31, 2006 and December 31, 2005 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, 2003 and December 31, 2002 and the selected consolidated
balance sheet data as of December 31, 2004, 2003 and 2002 are derived from the
Company's audited consolidated financial statements not included herein.

                                     - 14 -
<PAGE>

<TABLE>
<CAPTION>
                                                                           Years Ended December 31,
                                                      ------------------------------------------------------------------

                                                         2006          2005          2004          2003          2002
                                                      ----------    ----------    ----------    ----------    ----------
                                                                    (In thousands, except per share data)
<S>                                                   <C>           <C>           <C>           <C>           <C>
Operations Data:
Net sales                                             $   21,936    $   21,217    $   23,104    $   22,348    $   23,728
Gross profit                                               7,046         7,260         8,328         8,240         8,977
Operating income                                           1,245           990         2,049         1,715         2,637
Income taxes                                                 149         3,077           617           499           800
Income (loss) from continuing operations                   1,613        (2,855)          729           600         1,429
Income (loss) from discontinued operations                    13        (5,449)          (70)       (6,714)           --
Net income (loss)                                          1,626        (8,304)          659        (6,114)        1,429

Per Share Data:
Income (loss) from continuing operations:
     Basic                                            $      .30    $     (.54)   $      .14    $      .12    $     0.08
     Diluted                                          $      .30    $     (.54)   $      .14    $      .12    $     0.08
Income (loss) from discontinued operations:
     Basic                                            $       --    $    (1.02)   $      .01    $    (1.32)   $       --
     Diluted                                          $       --    $    (1.02)   $      .01    $    (1.32)   $       --
Net income (loss):
     Basic                                            $      .30    $    (1.56)   $      .12    $    (1.20)   $     0.08
     Diluted                                          $      .30    $    (1.56)   $      .12    $    (1.20)   $     0.08

Average shares outstanding:
Basic                                                      5,332         5,332         5,294         5,104        13,935
Diluted                                                    5,334         5,332         5,367         5,104        13,935

Cash Flow and Related Data:
Net cash provided by (used in) operating activities   $    1,485    $   (1,167)   $   (1,382)   $     (740)   $    1,266
Capital expenditures                                          50           100            96           158           247
Depreciation and amortization
   (excluding amortization of debt issuance costs)           404           392           459           470           571

Balance Sheet Data:
Cash                                                  $       69    $       50    $       32    $       44    $       71
Working capital                                             (127)        1,497         4,017         3,137         3,719
Total assets                                              13,185        16,069        24,884        23,677        18,007
Total long-term debt, net of current maturities           11,082        10,808         8,998         7,575         1,732
Total liabilities                                         22,772        29,012        28,069        27,627        18,521
Total shareholders' deficit                               (9,587)      (12,943)       (3,185)       (3,950)       (5,081)
</TABLE>

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

                                     - 15 -
<PAGE>

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 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.

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

                                     - 16 -
<PAGE>

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 segment
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 2006
and 2005 with respect to the Craft segment indicated no impairment of goodwill
as of December 31, 2006 and 2005.

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 adjust our deferred tax valuation
allowance on a quarterly basis in light of certain factors, including our
financial performance.

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, 2006,
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, 2006, 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.

Based on current estimates, the Company has an aggregate $3.3 million pension
obligation representing $2.1 million related to the Company sponsored plan and
$980,000 related to a terminated multi-employer plan and a $286,000 deferred
compensation liability payable to the former owner of an acquired business. See
Note 11 to the consolidated financial statements for estimated future
contribution requirements.

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, 2006 and
as such there was no prepaid pension as of December 31, 2006. A prepaid pension
balance of $476,000 at December 31, 2005 was included in Other Assets on the
Company's consolidated balance sheet. Decreases in the minimum pension liability
totaling $1.8 million and $136,000 have been recorded on the December 31, 2006
and 2005 balance sheets in connection with this plan and corresponding credits
to stockholders' deficit has also been recorded. The 2005 pension adjustment in
stockholders' deficit included the increase in the deferred tax assets valuation

                                     - 17 -
<PAGE>

allowance related to the pension liability of $1,601,000. These adjustments were
recognized and credited to "Accumulated Other Comprehensive Loss" in the
consolidated financial statements. The minimum pension liabilities as of
December 31, 2006 and 2005 were based on the plan's portfolio investments as of
such date which totaled $18.4 million and $17.6 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.

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 Plans

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.

                                     - 18 -
<PAGE>

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 year ended
December 31, 2006 reflect the impact of adopting FAS 123(R). In accordance with
the modified prospective transition method, the consolidated financial
statements for prior periods have not been restated to reflect, and do not
include the impact of FAS 123(R). See Note 18, "Stock Option Plan" for further
details.

Stock-based compensation expense recognized during the period is based on the
value of the portion of stock-based payment awards that is ultimately expected
to vest. Stock-based compensation expense recognized in the consolidated
statement of operations during the year ended December 31, 2006 included
compensation expense for stock-based payment awards granted prior to, but not
yet vested, as of December 31, 2005 based on the grant date fair value estimated
in accordance with the pro forma provisions of FAS 148.

The fair value of share-based payment awards is estimated at the grant date
using the Black-Scholes option valuation model. The Company's determination of
fair value of share-based payment awards on the date of grant using an
option-pricing model is affected by the Company's stock price as well as
assumptions regarding a number of highly complex and subjective variables. These
variables include, but are not limited to the Company's expected stock price
volatility over the term of the awards, and actual and projected employee stock
option exercise behaviors.

Prior to fiscal 2006, the Company had used its historical stock price
volatility, in accordance with SFAS 123, for purposes of calculating its pro
forma information.

The risk-free interest rate assumption is based upon observed interest rates
appropriate for the expected life of the Company's employee stock options.

The dividend yield assumption is based on the Company's history of not paying
dividends and the resultant future expectation of dividend payouts.

The expected life of employee stock options represents the weighted-average
period that the stock options are expected to remain outstanding and was
determined based on the contractual terms of the stock-based awards.

As the stock-based compensation expense recognized in the Company's consolidated
statement of operations for the year ended December 31, 2006 is based on awards
ultimately expected to vest, such amount has been reduced for estimated
forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. Forfeitures were estimated based on the Company's
historical experience.

Results of Operations

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.

                                     - 19 -
<PAGE>

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 net operating loss ("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 and will not be required to do so in the future except in
instances where minimum taxes are payable. 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.
During the year ended December 31, 2005 the income tax provision totaled $3.1
million.

Total assets were $13.2 million and $16.1 million, respectively, as of December
31, 2006 and 2005.

                                     - 20 -
<PAGE>

Year Ended December 31, 2005 Compared Year Ended December 31, 2004

Net sales totaled $21.2 million during the year ended December 31, 2005 as
compared to $23.1 million during the year ended December 31, 2004. The decrease
in sales totaling $1.9 million was a result of reduced holiday and seasonal
craft orders in the amount of approximately $800,000 and an increase in sales
allowances totaling approximately $360,000 and lower reorders of everyday
product during the first two quarters of the year. Overall, excluding the
effects of the increase in sales allowance, the Company experienced a 7%
reduction in unit volume and a 6% reduction in revenue dollars during the year
ended December 31, 2005 as compared to the same period in 2004. The reduction in
holiday and seasonal orders as well as everyday reorders was the result of our
retailer customers more cautious outlook with regard to inventory commitments in
2004 as compared to 2004.

Gross margin totaled $7.3 million during the year ended December 31, 2005 as
compared to $8.3 million during the same period last year. The gross margin
percent during the year ended December 31, 2005 totaled 34.2% as compared to
36.0% during the year ended December 31, 2004. The decrease in gross margin
dollars was the result of lower net sales as described above. The decrease in
gross profit percent was primarily the result of $360,000 of incremental sales
allowances related to a merchandise change at a major customer during the second
quarter.

Selling, general and administrative expenses totaled approximately $6.3 million
for the years ended December 31, 2005 and 2004.

Income before interest and income taxes for the year ended December 31, 2005
totaled $990,000 as compared to income of $2.0 million for the year ended
December 31, 2004. The decrease in income before interest and income taxes for
the year ended December 31, 2005 compared to the year ended December 31, 2004
was due to the reduction in gross profit totaling $1.1 million, as discussed
above.

Net interest expense for the year ended December 31, 2005 totaled $495,000 as
compared to net interest expense of $429,000 for the year ended December 31,
2004. The increase in interest expense as compared to the same period in 2004
was primarily the result of higher average interest rates of approximately 200
basis points in 2005 as compared to 2004 in addition to a higher level of
indebtedness during 2005.

Dividends on mandatory redeemable preferred stock totaled $273,000 in 2005 as
compared to $274,000 in 2004.

The provision for income taxes for the year ended December 31, 2005 was $3.1
million as compared to a provision of $617,000 for the year ended December 31,
2005. That portion of the Company's deferred tax asset related to NOLs expiring
in 2005 totaling $317,000 was written off as unutilized and, further, a
valuation allowance in the amount of $6.0 million was recorded against the
Company's remaining deferred tax assets, $3.1 million of which is included in
the provision for income tax for the year ended December 31, 2005 and $1.6
million of which related to the Company's defined benefit plan liability and was
recorded as an adjustment to Other Accumulated Comprehensive Loss in
stockholders' equity.

Total assets were $16.1 million and $24.9 million, respectively, as of December
31, 2005 and 2004

                                     - 21 -
<PAGE>

Going Concern
-------------

The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business. In 2005 the
Company incurred a net loss attributable to common stockholders of $8.3 million
(of which $6.1 million was represented by non-cash charges reflecting impairment
of Textile segment assets) contributing to a stockholders deficit which totaled
$9.6 million at December 31, 2006. 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, obtain financing to
meet the Company sponsored defined benefit pension funding obligations currently
estimated to be $1.8 million in 2007 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
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 pension and 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 16, 2007 and March
15, 2006 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 current year has produced a positive cash flow, and reflects an ongoing
orderly liquidation of the textile segment inventory. In addition, on July 26,
2006, the Company's $3 million Promissory Note (the "Note") in favor of J. P.
Morgan Chase Bank, N.A. was amended to extend the maturity date of the Note to
January 1, 2008 from April 30, 2007. Also on July 26, 2006 the Company's credit
facility (the "Facility") with CIT Group/Financial Services, Inc. was amended to
increase the advance percentage against the value of Eligible Inventory (as
defined under the Facility) to 40% (from 20%) of Eligible Inventory (a dollar
increase of approximately $1.1 million in borrowing availability at current
inventory levels) with respect to the revolving credit portion of the Facility.
Total borrowing availability under the entire Facility remains at $7.5 million.
In addition, the guaranty of the Facility by Robert A. Levinson, the Company's
Chief Executive Officer and principal shareholder, was removed and the

                                     - 22 -
<PAGE>

applicable interest rate was changed to the Chase Rate on the first $2.5 million
of average net balances owed, and the Chase Rate plus .50% per annum on average
net balances owed in excess of $2.5 million, but in either case not less than 5%
per annum. However, there can be no assurance that the Company will not require
additional financing, due to historical losses, debt service requirements or
other factors to meet its liquidity needs, including its obligation to make $1.8
million of pension plan contributions in 2007. There can be no assurance the
Company will be able to obtain such additional financing if needed, in which
case the Company's operations would be materially adversely affected and it
could be forced to cease operations.

Losses sustained in prior years may 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 2, 2009 by
providing short-term loans to the Company up to a maximum of $3 million. As of
December 31, 2006, there was $1.5 million of borrowing available from Mr.
Levinson under this agreement. If we (1) do not substantially achieve our
overall projected revenue levels for 2007, (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.

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
the likelihood of the lenders accelerating the payment of any of the obligations
under the Company's facility during the next twelve months is unlikely.

Failing to substantially achieve our projected cash flow levels for 2007 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, 2006, the Company's principal sources of liquidity included cash
of $69,000 and trade accounts receivable of $3.0 million. There was
approximately $1.1 million of unused borrowing capacity available under the

                                     - 23 -
<PAGE>

Company's credit facility with CIT as of December 31, 2006. The Company also had
an additional $1.5 million of borrowing available from Mr. Levinson who has
agreed to fund up to $3 million of temporary advances to the Company.

The following discussion regarding the Company's cash flows for the years ended
December 31, 2006, 2005 and 2004 is inclusive of both continuing and
discontinued operating activities.

<TABLE>
<CAPTION>
Cash Flow Summary:
(in thousands)
                                               2006          2005          2004
                                            ----------    ----------    ----------
<S>                                         <C>           <C>           <C>
     Net cash provided by (used in):
          Operating activities              $    1,485    $   (1,137)   $   (1,380)
          Investing activities                     (85)         (141)          (61)
          Financing activities                  (1,381)        1,296         1,429
                                            ----------    ----------    ----------
          Net increase (decrease) in cash   $       19    $       18    $      (12)
                                            ==========    ==========    ==========
</TABLE>

Net cash flow provided by operating activities totaled $1.5 million during the
year ended December 31, 2006, as compared to net cash flow used in operating
activities during 2005 totaling $1.1 million.

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 loan and accrued dividends on preferred stock, plus $642,000 of cash
provided by operating assets and liabilities.

In 2005, the components of net cash used by operating activities were $1,854,000
of net loss adjusted for non-cash items, consisting primarily of goodwill and
trademark impairment, depreciation and amortization, deferred income tax
benefit, non-cash stock based compensation and accrued interest on stockholder
loan, combined with approximately $717,000 of cash provided by operating assets
and liabilities.

Major components of the changes in operating assets and liabilities in 2006 as
compared to 2005 were inventories, accounts payable, accounts receivable and
other liabilities.

Changes in inventories provided $2.3 million in cash flow in 2006 as compared to
$83,000 in 2005. During the year ended December 31, 2006, the Company liquidated
substantially all inventory related to its discontinued textile business
contributing $1.2 million of the cash flow from inventory. In addition,
approximately $1.1 million of inventory reduction was the result of changes in
ordering volume and patterns by major customers.

Changes in accounts payable utilized $839,000 of cash flow in 2006 as compared
to providing $49,000 of cash flow in 2005. $373,000 of the reduction in accounts
payable in 2006 was the result of the payment of 2005 accounts payable balances
related to the discontinued Textile segment as discussed above.

Changes in accounts receivable used $186,000 of cash flow in 2006 as compared to
providing $841,000 of cash flow in 2005. The primary reason for the change was
increased sales in fourth quarter 2006 as compared to 2005.

                                     - 24 -
<PAGE>

Net cash used in investing activities totaled $85,000 during the year ended
December 31, 2006, as compared to $141,000 during the same period in 2005. This
decrease was primarily a result of lower capital expenditures during 2006.

Net cash used in financing activities totaled $1.4 million during the year ended
December 31, 2006 as compared to $1.3 million of cash provided by financing
activities during the year ended December 31, 2005. In 2006, cash flow from
operating activities was positive and was sufficient to fund investing
activities and reduce borrowings. In 2005, cash flow from operating activities
was negative and as a result cash of $1.3 million was provided by financing
activities in order to fund cash used in operations and cash used in investing
activities.

During the year ended December 31, 2006, the Company repaid Mr. Levinson
$850,000 against his advance. There were no additional borrowings from Mr.
Levinson during 2006. During the year ended December 31, 2005, Mr. Levinson
provided net funding of $2.5 million. The stockholder borrowings in 2005 were
primarily for the purpose of funding the operating activities of the
discontinued Textile segment.

Total borrowings during 2006 and 2005 under the CIT revolving credit facility
were $20.4 million and $21.1 million respectively; total repayments during the
periods under this facility were $20.0 million and $20.8 million, respectively.
Repayments under the Company's term loan totaled $144,000 during 2006 and 2005.
Net amounts repaid to factor totaled $775,000 and $628,000 in 2006 and 2005,
respectively.

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, 2006, 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"). There
was approximately $1.1 million of unused availability under the Company's credit
facility with CIT as of December 31, 2006.

The CIT Facility provides for (i) a term loan to the Company (the "Term Loan")
in the initial amount of $2.0 million, $1.3 million of which was outstanding at
December 31, 2006, (ii) revolving credit advances to the Company, $1.2 million
of which was outstanding at December 31, 2006 and (iii) revolving credit
advances to Blumenthal based upon eligible accounts receivable and inventory,
$3.2 million of which was outstanding at December 31, 2006, and a Letter of
Credit facility with a limit of $500,000, of which there was none outstanding at
December 31, 2006. 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. 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. At December 31, 2006, all amounts
outstanding under the CIT Facility in excess of $2.5 million bear interest at
8.75% (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
(8.25%).

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

                                     - 25 -
<PAGE>

immaterial and the Company's financial statements are representative of the
combined guarantors. 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. 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 CIT
will accelerate the payment of any of the obligations under the CIT Facility
during the next twelve months.

On July 26, 2006, the CIT Facility was amended to increase the advance
percentage against the value of Eligible Inventory (as defined in the agreement)
to 40% (from 20%) of Eligible Inventory with respect to the revolving credit
portion of the CIT Facility. Total borrowing availability under the entire CIT
Facility remains at $7.5 million. In addition, the guaranty of the CIT Facility
by Robert A. Levinson, the Company's Chief Executive Officer and principal
shareholder, was removed and the applicable interest rate was changed to the
Chase Rate on the first $2.5 million of average net balances owed, and the Chase
Rate plus .50% per annum on average net balances owed in excess of $2.5 million,
but in either case not less than 5% per annum.

In connection with the Company's discontinued Textile operations, pursuant to a
factoring agreement between CIT and the Company which matures on January 1,
2009, CIT purchased the Textile segment's eligible trade accounts receivable
without recourse and assumed substantially all credit risk with respect to such
accounts. The amounts due to the Company from CIT under the factoring agreement
earned no interest. The factoring agreement allowed the Company to obtain
advances that bear interest at 8.75% (0.5% above the Chase Bank, N.A. prime
rate). The Company pledged its Textile segment's eligible accounts receivable
and property and equipment as collateral under the factoring agreement. There
was no set limit on borrowings. The amount available for borrowing was based on
a formula consisting of 90% of eligible accounts receivable increased by side
collateral and reduced by both the current loan balance and outstanding letters
of credit.

The promissory note payable to JPMorgan Chase Bank, N.A. in the amount of $3.0
million is dated May 2, 2002 and had a maturity date of January 1, 2008, as
amended. The note bears interest at a fixed rate per annum equal to the Adjusted
LIBOR applicable to such note plus 0.75% (a "Eurodollar Loan"). The interest
rate on the note at December 31, 2006 was 6.36%. 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 2, 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

                                     - 26 -
<PAGE>

the right to sue Mr. Levinson for breach of his agreement. On March 20, 2007,
Mr. Levinson reaffirmed this undertaking in writing in a commitment letter dated
March 13, 2007.

Mr. Levinson's loan balance totaled $1.5 million to the Company as of December
31, 2006. During 2005, he made advances of approximately $2.5 million. He has
also 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 $587,000 and $454,000, respectively,
at December 31, 2006 and December 31, 2005, respectively. He has also agreed not
to demand any repayment of principal or interest currently owed until January 1,
2009. During the first quarter of 2007, the Company repaid Mr. Levinson $750,000
against his $1.5 million loan balance.

As of December 31, 2006, 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):

                              2007         $     144
                              2008             3,144
                              2009             2,511
                                           ---------
                                           $   5,799
                                           =========

The Series A Preferred Stock is subject to mandatory redemption, to the extent
the Company may lawfully do so, in three equal annual installments on June 15,
2007, 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.

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

                                     - 27 -
<PAGE>

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, 2006, unpaid preferred stock dividends totaled approximately
$285,000 and have been classified as a noncurrent liability on the Company's
balance sheet. The preferred stock is owned 98.3% 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.

A summary of the Company's December 31, 2006 contractual obligations and
commitments is as follows:

<TABLE>
<CAPTION>
                                                          Less than                              More than
                                               Total        1 year      1-3 years    3-5 years    5 years
                                             ----------   ----------   ----------   ----------   ----------
<S>                                          <C>          <C>          <C>          <C>          <C>
     CIT asset based loan                    $    4,447   $    4,447   $       --   $       --   $       --
     Term loans                                   4,299          144        4,155           --           --
     Long term debt - stockholder loan            1,500           --        1,500           --           --
     Long term debt - stockholder interest          587           --          587           --           --
     Pension liabilities                          3,353        1,859          491          252          751
     Environmental liabilities                    1,290           30          800          200          260
     Preferred stock                              4,555           --        4,555           --           --
     Preferred dividends                            285          285           --           --           --
     Operating lease obligations                    771          340          417           14           --
                                             --------------------------------------------------------------
                                             $   21,087   $    7,105   $   12,505   $      466   $    1,011
                                             ==========   ==========   ==========   ==========   ==========
</TABLE>

Interest is payable monthly at rates between 6% and 8.75% 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 -
<PAGE>

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 February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 155, "Accounting for Certain Hybrid Financial Instruments - an Amendment of
FASB Statements No. 133 and 140" ("SFAS No. 155"). SFAS No. 155 allows financial
instruments that contain an embedded derivative and that otherwise would require
bifurcation to be accounted for as a whole on a fair value basis, at the
holders' election. SFAS No. 155 also clarifies and amends certain other
provisions of SFAS No. 133 and SFAS No. 140. This statement is effective for all
financial instruments acquired or issued in fiscal years beginning after
September 15, 2006. We do not expect that the adoption of SFAS No. 155 will have
a material impact on our consolidated results of operations, financial position
or cash flows.

In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets - an Amendment of FASB Statement No. 140" ("SFAS No. 156").
SFAS No. 156 provides guidance on the accounting for servicing assets and
liabilities when an entity undertakes an obligation to service a financial asset
by entering into a servicing contract. This statement is effective for all
transactions in fiscal years beginning after September 15, 2006. We do not
expect that the adoption of SFAS No. 156 will have a material impact on our
consolidated results of operations, financial position or cash flows.

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109 ("FIN 48"). We will adopt the
provisions of FIN 48 for fiscal years beginning after December 15, 2006. The
Company does not expect FIN 48 to have a material impact on the Company's
consolidated results of operations, financial position, or cash flows.

SFAS No. 157, Fair Value Measurements ("SFAS 157"), defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosures about fair value
measurements. The Company will adopt the provisions of SFAS 157 effective
January 1, 2008. The Company does not expect SFAS 157 to have a material impact
on the Company's consolidated results of operations, financial position, or cash
flows.

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"), improves financial reporting by requiring an employer to
recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income. SFAS 158 did not have an impact on
the Company's consolidated results of operations, financial position, or cash
flows.

In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108,
"Quantifying Financial Statement Misstatements". Due to diversity in practice
among registrants, the SEC staff in No.108 expresses its views regarding the
process by which misstatements in financial statements are evaluated for
purposes of determining whether financial statement restatement is necessary.
The Company will be required to adopt SAB No.108 in fiscal 2007 but does not
believe it will have a material impact on its consolidated results of
operations, financial position, or cash flows.

                                     - 29 -
<PAGE>

On February 15, 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). Under this standard,
the Company may elect to report financial instruments and certain other items at
fair value on a contract-by-contract basis with changes in value reported in
earnings. This election is irrevocable. SFAS 159 provides an opportunity to
mitigate volatility in reported earnings that is caused by measuring hedged
assets and liabilities that were previously required to use a different
accounting method than the related hedging contracts when the complex provisions
of SFAS 133 hedge accounting are not met. SFAS 159 is effective for years
beginning after November 15, 2007. Early adoption within 120 days of the
beginning of the Company's 2007 fiscal year is permissible, provided the Company
has not yet issued interim financial statements. The Company is currently
evaluating the impact SFAS 159 will have on its consolidated results of
operations, financial position and cash flows.


OFF BALANCE SHEET ARRANGEMENTS

The Company has no off balance sheet arrangements.

SUBSEQUENT EVENTS

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 as of the date of the filing. In addition, the Company also
anticipates that an additional allowance will be required against 2007
pre-bankruptcy sales and that going forward, 2007 will result in lower sales to
Hancock Fabrics as compared to 2006 due to the reduced store count.

The Company's largest customer, Wal-Mart has begun opening new stores with no
cut fabric and a reduced craft department. The Company anticipates a reduction
in sales to Wal-Mart in 2007 as a result of the new store lay-outs.

In direct response to these factors, the Company has taken steps to reduce its
headcount during the first quarter of 2007.

Also during the first quarter of 2007, the Company repaid Mr. Levinson, a
stockholder, officer and director, $750,000 against his $1.5 million loan
balance as of December 31, 2006. The remaining principal balance totaled
$750,000 (excluding accrued interest) as of March 23, 2007.

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.

                                     - 30 -
<PAGE>

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, 2006, $2.5 million of our indebtedness with CIT was at an 8.25%
interest rate, approximately $3.2 million was at 8.75%, our $3 million
indebtedness with JPMorgan Chase was at a 6.36% interest rate (based on adjusted
LIBOR plus .75%). Our shareholder loan interest is not variable and bore 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 $87,000 during the next fiscal year.

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 2007 are expected to be from our top three accounts;
these accounts represented 63% of our trade accounts receivable at December 31,
2006. The loss of any one of our major accounts would have a material adverse
impact on our financial condition and results of operations.

                                     - 31 -
<PAGE>

Item 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                   Page
                                                                                                   ----
<S>                                                                                                 <C>
Levcor International, Inc.  Consolidated Financial Statements


Report of Independent Registered Public Accounting Firm..........................................   33

Consolidated Balance Sheets as of December 31, 2006 and 2005.....................................   34

Consolidated Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004.......   35

Consolidated Statements of Stockholders' Deficit for the Years Ended December 31, 2006, 2005
and 2004.........................................................................................   36

Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004.......   37

Notes to Consolidated Financial Statements.......................................................   38

Schedule I - Valuation and Qualifying Accounts...................................................   79
</TABLE>

                                     - 32 -
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Levcor International, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Levcor
International, Inc. and Subsidiaries as of December 31, 2006 and 2005, 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, 2006.
Our audits also included the financial statement schedule listed in the Index at
Item 15. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, such financial
statement schedule, when considered in relations to the basic consolidated
financial statements taken as a whole, present fairly in all material respects,
the information set forth thereon.

As discussed in Note 11 to the consolidated financial statements, as of December
31, 2006, the Company changed its method of accounting for pensions and other
employee benefits to adopt the provisions of Statement of Financial Accounting
Standards No. 158, "Employers' Accounting for Defined Benefit Pension and other
Post Retirement Plans".

As discussed in Note 18 to the consolidated financial statements, the Company's
changed its method of accounting for stock-based compensation to adopt, the
provisions of Statement of Financial Accounting Standards No. 123 (R),
"Share-Based Payment", effective January 1, 2006.

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.


Friedman LLP

New York, New York
March 16, 2007, except for Note 20, after which the date is March 21, 2007.

                                     - 33 -
<PAGE>

<TABLE>
<CAPTION>
                                LEVCOR INTERNATIONAL, INC. AND SUBSIDIARIES
                                        CONSOLIDATED BALANCE SHEETS
                                   (In thousands, except share amounts)

ASSETS
Current Assets:                                                     December 31, 2006    December 31, 2005
                                                                    -----------------    -----------------
<S>                                                                 <C>                  <C>
     Cash                                                           $              69    $              50
     Accounts receivable trade, net                                             2,946                2,760
     Inventories, net                                                           5,343                7,725
     Other current assets                                                          86                  173
                                                                    -----------------    -----------------
         Total current assets                                                   8,444               10,708

Property, Plant and Equipment, net                                              1,917                2,067
Goodwill                                                                        2,543                2,543
Other assets                                                                      281                  751
                                                                    -----------------    -----------------
         Total Assets                                               $          13,185    $          16,069
                                                                    =================    =================

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
     Revolving loan and current maturities of long-term debt        $           4,591    $           4,203
     Due to factor                                                                 --                  775
     Current maturities of stockholder loan                                        --                  850
     Accounts payable                                                           1,058                1,897
     Pension liabilities, current portion                                       1,859                  171
     Income taxes payable                                                         204                   29
     Other current liabilities                                                    859                1,286
                                                                    -----------------    -----------------
         Total current liabilities                                              8,571                9,211
                                                                    -----------------    -----------------
Long term debt, less current maturities                                         4,155                4,299
Stockholder loan, less current maturities                                       1,500                1,500
Accrued interest, stockholder loans                                               587                  454
Pension liabilities, less current portion                                       1,494                5,506
Post retirement medical liabilities                                                --                1,960
Environmental liabilities                                                       1,290                1,348
Other liabilities                                                                 335                  179
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                             285                   --
                                                                    -----------------    -----------------

         Total Liabilities                                                     22,772               29,012
                                                                    -----------------    -----------------



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, 2006 and 2005                                                54                   54
Additional paid in capital                                                     33,231               33,238
Accumulated Deficit                                                           (40,213)             (41,839)
Accumulated Other Comprehensive Loss                                           (2,659)              (4,332)
Unearned Compensation                                                              --                  (64)
                                                                    -----------------    -----------------
Total Stockholders' Deficit                                                    (9,587)             (12,943)
                                                                    -----------------    -----------------
Total Liabilities and Stockholders' Deficit                         $          13,185    $          16,069
                                                                    =================    =================
</TABLE>

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

                                     - 34 -
<PAGE>

<TABLE>
<CAPTION>
                                         LEVCOR INTERNATIONAL, INC.
                                              AND SUBSIDIARIES
                                   CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (In thousands, except per share data)

                                                                             Years Ended December 31,
                                                                      -------------------------------------
                                                                         2006         2005          2004
                                                                      ----------   ----------    ----------
<S>                                                                   <C>          <C>           <C>
Net sales                                                             $   21,936   $   21,217    $   23,104
Cost of sales                                                             14,890       13,957        14,776
                                                                      ----------   ----------    ----------
Gross profit                                                               7,046        7,260         8,328
Selling, general and administrative expenses (including stock based
         compensation expense of $57, $4, and $31 for the years
         ended December 31, 2006, 2005 and 2004, respectively)             5,801        6,270         6,279
                                                                      ----------   ----------    ----------
Income from continuing operations before gain on
         termination of post retirement  benefit plan, interest
         and income tax                                                    1,245          990         2,049
Gain on termination of post retirement benefit plan                        1,662           --            --
                                                                      ----------   ----------    ----------
Income from continuing operations before interest
         and income tax                                                    2,907          990         2,049
Interest expense                                                             872          495           429
Dividends on mandatorily redeemable preferred stock                          273          273           274
                                                                      ----------   ----------    ----------
Income from continuing operations before income taxes                      1,762          222         1,346
Income tax                                                                   149        3,077           617
                                                                      ----------   ----------    ----------
Income (loss) from continuing operations                                   1,613       (2,855)          729
Income (loss) from discontinued operations, net of tax                        13       (5,449)          (70)
                                                                      ----------   ----------    ----------
Net income (loss)                                                     $    1,626   $   (8,304)   $      659
                                                                      ==========   ==========    ==========

Income (loss) per share:
         Basic:
              Income (loss) from continuing operations                $      .30   $     (.54)   $      .14
              Loss from discontinued operations                               --        (1.02)         (.01)
                                                                      ----------   ----------    ----------
              Net income (loss)                                       $      .30   $    (1.56)   $      .13
                                                                      ==========   ==========    ==========
         Diluted:
              Income (loss) from continuing operations                $      .30   $     (.54)   $      .14
              Loss from discontinued operations                               --        (1.02)         (.01)
                                                                      ----------   ----------    ----------
              Net income (loss)                                       $      .30   $    (1.56)   $      .13
                                                                      ==========   ==========    ==========

Weighted average shares outstanding - basic                                5,332        5,332         5,294
Potential common stock                                                         2           --            73
                                                                      ----------   ----------    ----------
Weighted average shares outstanding - diluted                              5,334        5,332         5,367
                                                                      ==========   ==========    ==========
</TABLE>

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

                                     - 35 -
<PAGE>

<TABLE>
<CAPTION>
                                                     LEVCOR INTERNATIONAL, INC.
                                          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                                (In thousands except share amounts)

                                     Compre-                          Accum.Other
                                     hensive               Additional   Compre-       Common Stock       Treasury Stock
                                     Income    Accumulated   Paid in    hensive   ------------------  -----------------   Unearned
                            Total    (Loss)      Deficit     Capital    Losses     Amount   Shares     Amount   Shares  Compensation
                          --------   --------   ---------   --------   --------   -------  ---------  -------- --------  ---------
<S>                       <C>        <C>        <C>         <C>        <C>        <C>        <C>       <C>      <C>      <C>
January 1, 2004           $ (3,950)             $ (34,194)  $ 33,246   $ (2,881)  $    52  5,157,289   $   (77) (57,600) $     (96)
                          ========              =========   ========   ========   =======  =========   =======  =======  =========

Treasury stock acquired
 in relation to stock
 option exercise                --                               144                    1    170,000      (145) (45,274)
Common stock issued             36                                35                    1     36,000
Retirement of treasury
 stock                          --                              (222)                        (45,274)      222  102,874
Stock-based compensation        31                                31                          11,549
Net income                     659        659         659
Foreign translation
 adjustment                      2          2                                 2
Amortization unearned
 compensation                   16         16                                                                                   16
Pension adjustment              21         21                                21
                                     --------
Total comprehensive
  income                             $    698
                                     ========

                          --------              ---------   --------   --------   -------  ---------   -------  -------  ---------
December 31, 2004         $ (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
  income                             $ (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   $    --       --  $      --
                          ========              =========   ========   ========   =======  =========   =======  =======  =========
</TABLE>

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

                                     - 36 -
<PAGE>

<TABLE>
<CAPTION>
                                 LEVCOR INTERNATIONAL, INC. AND SUBSIDIARIES
                                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                           (Dollars in thousands)

                                                                              Years Ended December 31,
                                                                      --------------------------------------
                                                                         2006          2005          2004
                                                                      ----------    ----------    ----------
<S>                                                                   <C>           <C>           <C>
Cash Flows Provided By (Used In) Operating Activities:
Net income (loss)                                                     $    1,626    $   (8,304)   $      659
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 segment                     --         3,009            --
     Depreciation and amortization                                           404           392           459
     Deferred income taxes                                                    --         2,908           490
     Non-cash stock based compensation                                        57             4            31
     Accrued interest on stockholder loans                                   133           137             2
     Accrued dividends on mandatorily redeemable preferred stock             285            --            --
     Gain on sale of investment                                               --            --          (102)
     Changes in operating assets and liabilities:
         Accounts receivable trade, net                                     (186)          841          (826)
         Inventories, net                                                  2,261            83        (1,204)
         Other current assets                                                 87            41            17
         Other assets                                                        (83)          105            12
         Income taxes payable                                                175           (44)            7
         Accounts payable                                                   (839)           49            21
         Other current liabilities                                          (514)          140          (567)
         Pension liabilities                                                (146)          (94)         (126)
         Post retirement medical liabilities                                (211)         (194)         (232)
         Environmental liabilities                                           (58)          (40)           (8)
         Other liabilities                                                   156          (170)          (13)
                                                                      ----------    ----------    ----------
              Net cash provided by (used in) operating activities          1,485        (1,137)       (1,380)
                                                                      ----------    ----------    ----------

Cash Flows Used In Investing Activities:
     Capital expenditures                                                    (50)         (100)          (96)
     Investment in other assets                                              (35)          (41)          (67)
     Proceeds from sale of investment                                         --            --           102
                                                                      ----------    ----------    ----------
         Net cash used in investing activities                               (85)         (141)          (61)
                                                                      ----------    ----------    ----------

Cash Flows Provided By (Used In) Financing Activities:
     Borrowings under revolving loan                                      20,383        21,055        23,337
     Repayments under revolving loan                                     (19,995)      (20,838)      (22,358)
     Repayment of long - term debt                                          (144)         (144)         (144)
     Borrowings under stockholder loan                                        --         2,501         2,080
     Repayments under stockholder loan                                      (850)         (650)       (2,080)
     Due to factor                                                          (775)         (628)          558
     Proceeds from exercise of stock options                                  --            --            36
                                                                      ----------    ----------    ----------
         Net cash provided by (used in) financing activities              (1,381)        1,296         1,429
                                                                      ----------    ----------    ----------

Increase (decrease)  in cash                                                  19            18           (12)
Cash at beginning of year                                                     50            32            44
                                                                      ----------    ----------    ----------
Cash at end of year                                                   $       69    $       50    $       32
                                                                      ==========    ==========    ==========

Supplemental Disclosure of Cash Flow Information:
Cash paid (refunded) during the period for:
     Interest                                                         $      809    $      653    $      594
                                                                      ==========    ==========    ==========
     Income taxes                                                     $      (26)   $       17    $       69
                                                                      ==========    ==========    ==========

Non-cash transactions:
     Stock issued on option exercise                                  $       --    $       --    $      145
                                                                      ==========    ==========    ==========
     Treasury stock acquired in relation to stock option exercise $           --    $       --    $      145
                                                                      ==========    ==========    ==========
     Retirement of treasury stock                                     $       --    $       --    $      222
                                                                      ==========    ==========    ==========
</TABLE>

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

                                     - 37 -
<PAGE>

                   LEVCOR INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006

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 in the process of being exited and 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, 2006, 2005 and 2004.

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 $106,000 at December 31, 2006 and $50,000 at December 31,
2005.

                                     - 38 -
<PAGE>

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 year ended December 31, 2006. During the year ended December
31, 2005, the Company determined that Goodwill and Trademark amounts related to
the Textile business were fully impaired and such amounts were written off in
2005.

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, 2006
and 2005, 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
our tax benefits until profitability has been sustained over a time period and

                                     - 39 -
<PAGE>

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 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. An income tax benefit of
approximately $51,000 was recorded during 2006 as the result of refunds of
federal and state income taxes during the period. A state income tax provision
of $200,000 and an interest accrual of $100,000 were 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. Income tax expense of $3.1 million was recorded during
2005, representing the establishment of a valuation allowance against the
deferred tax asset.

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, 2006 and 2005. The fair values of the
revolving debt, long-term debt and loans payable to Robert A. Levinson
approximate the carrying values because these obligations had market-based
interest rates.

                                     - 40 -
<PAGE>

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 $50,000, $133,000 and $189,000 during
the years ended December 31, 2006, 2005 and 2004, 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 Plans:
------------------------------
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 -
<PAGE>

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 year ended December 31, 2006
reflect the impact of adopting FAS 123(R). In accordance with the modified
prospective transition method, the consolidated financial statements for prior
periods have not been restated to reflect, and do not include the impact of FAS
123(R). See Note 18, "Stock Option Plan" for further details.

Stock-based compensation expense recognized during the period is based on the
value of the portion of stock-based payment awards that is ultimately expected
to vest. Stock-based compensation expense recognized in the consolidated
statement of operations during the year ended December 31, 2006 included
compensation expense for stock-based payment awards granted prior to, but not
yet vested, as of December 31, 2005 based on the grant date fair value estimated
in accordance with the pro forma provisions of FAS 148.

The fair value of share-based payment awards is estimated at the grant date
using the Black-Scholes option valuation model. The Company's determination of
fair value of share-based payment awards on the date of grant using an
option-pricing model is affected by the Company's stock price as well as
assumptions regarding a number of highly complex and subjective variables. These
variables include, but are not limited to the Company's expected stock price
volatility over the term of the awards, and actual and projected employee stock
option exercise behaviors.

 Prior to fiscal 2006, the Company had used its historical stock price
volatility, in accordance with SFAS 123, for purposes of calculating its pro
forma information.

The risk-free interest rate assumption is based upon observed interest rates
appropriate for the expected life of the Company's employee stock options.

The dividend yield assumption is based on the Company's history of not paying
dividends and the resultant future expectation of dividend payouts.

The expected life of employee stock options represents the weighted-average
period that the stock options are expected to remain outstanding and was
determined based on the contractual terms of the stock-based awards.

As the stock-based compensation expense recognized in the consolidated statement
of operations for the year ended December 31, 2006 is based on awards ultimately
expected to vest, such amount has been reduced for estimated forfeitures. SFAS
123(R) requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. Forfeitures were estimated based on the Company's historical
experience.

Reclassifications:
-----------------
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.

Recently Issued Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 155, "Accounting for Certain Hybrid Financial Instruments - an Amendment of
FASB Statements No. 133 and 140" ("SFAS No. 155"). SFAS No. 155 allows financial
instruments that contain an embedded derivative and that otherwise would require
bifurcation to be accounted for as a whole on a fair value basis, at the

                                     - 42 -
<PAGE>

holders' election. SFAS No. 155 also clarifies and amends certain other
provisions of SFAS No. 133 and SFAS No. 140. This statement is effective for all
financial instruments acquired or issued in fiscal years beginning after
September 15, 2006. We do not expect that the adoption of SFAS No. 155 will have
a material impact on our consolidated results of operations, financial position
or cash flows.

In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets - an Amendment of FASB Statement No. 140" ("SFAS No. 156").
SFAS No. 156 provides guidance on the accounting for servicing assets and
liabilities when an entity undertakes an obligation to service a financial asset
by entering into a servicing contract. This statement is effective for all
transactions in fiscal years beginning after September 15, 2006. We do not
expect that the adoption of SFAS No. 156 will have a material impact on our
consolidated results of operations, financial position or cash flows.

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109 ("FIN 48"). We will adopt the
provisions of FIN 48 for fiscal years beginning after December 15, 2006. The
Company does not expect FIN 48 to have a material impact on the Company's
consolidated results of operations, financial position, or cash flows.

SFAS No. 157, Fair Value Measurements ("SFAS 157"), defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosures about fair value
measurements. The Company will adopt the provisions of SFAS 157 effective
January 1, 2008. The Company does not expect SFAS 157 to have a material impact
on the Company's consolidated results of operations, financial position, or cash
flows.

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"), improves financial reporting by requiring an employer to
recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income. SFAS 158 did not have an impact on
the Company's consolidated results of operations, financial position, or cash
flows.

In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108,
"Quantifying Financial Statement Misstatements". Due to diversity in practice
among registrants, the SEC staff in No.108 expresses its views regarding the
process by which misstatements in financial statements are evaluated for
purposes of determining whether financial statement restatement is necessary.
The Company will be required to adopt SAB No.108 in fiscal 2007 but does not
believe it will have a material impact on its consolidated results of
operations, financial position, or cash flows.

On February 15, 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). Under this standard,
the Company may elect to report financial instruments and certain other items at
fair value on a contract-by-contract basis with changes in value reported in
earnings. This election is irrevocable. SFAS 159 provides an opportunity to
mitigate volatility in reported earnings that is caused by measuring hedged
assets and liabilities that were previously required to use a different
accounting method than the related hedging contracts when the complex provisions
of SFAS 133 hedge accounting are not met. SFAS 159 is effective for years
beginning after November 15, 2007. Early adoption within 120 days of the
beginning of the Company's 2007 fiscal year is permissible, provided the Company
has not yet issued interim financial statements. The Company is currently
evaluating the impact SFAS 159 will have on its consolidated results of
operations, financial position and cash flows.

                                     - 43 -
<PAGE>

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. In 2005 the Company incurred a
net loss attributable to common stockholders of $8.3 million (of which $6.1
million was represented by non-cash charges reflecting impairment of Textile
business assets) contributing to a stockholders deficit which totaled $9.6
million at December 31, 2006. 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, obtain financing to
meet the Company sponsored defined benefit pension funding obligations currently
estimated to be $1.8 million in 2007 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 (see
Note 19) in the event the parent corporation is determined to be responsible for
these claimed liabilities and the redemption of preferred stock (see Note 16)
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 pension and
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.

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 segment operations for the current and prior comparative periods
have been presented as discontinued operations.

The decision to exit the Textile business was made after a full review and
analysis of the Textile business and the Company's strategic alternatives. The
decision was based on a variety of factors, including, (i) that the Company's
contract garment manufacturing and other textile business has incurred operating
losses resulting from lower than planned business volume from our major
customers and has been unable to grow its customer base, (ii) that the business
had incurred sales decreases, (iii) a decrease in margins due to an increase in
raw material costs that were unable to be passed to customers, and (iv) the long
production lead times and the related working capital requirements of the
business which contributed to interest costs that exceeded the segment's
operating profits. The Company had determined that the future net revenues and
gross profits in the Textile business would continue to deteriorate and as a
result the Company concluded that a withdrawal from the business was the
appropriate course of action at that time.

During 2006, the Company disposed of substantially all significant Textile
business inventory. As of December 31, 2006 there remained approximately $15,000
of Textile business inventory. The Company does not expect to incur any
additional exit costs.

                                     - 44 -
<PAGE>

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

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

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                       -------------------------------------
                                                          2006         2005          2004
                                                       ----------   ----------    ----------
<S>                                                    <C>          <C>           <C>
     Sales                                             $    2,393   $    8,184    $   10,632
     Cost of sales                                          1,934        8,685         8,525
                                                       ----------   ----------    ----------
     Gross profit                                             459         (501)        2,107
     Selling, general and administrative expenses             269        1,628         2,036
     Goodwill and trademark impairment                         --        3,009            --
     Interest expense                                         177          311           176
     Income tax (benefit)                                      --           --           (35)
                                                       ----------   ----------    ----------
     Results of discontinued operations,  net of tax   $       13   $   (5,449)   $      (70)
                                                       ==========   ==========    ==========
</TABLE>

The Textile segment's assets and liabilities as included in the Company's
Consolidated Balance Sheets are as follows (dollars in thousands):

                                                 Year Ended December 31,
                                                 -----------------------
                                                    2006         2005
                                                 ----------   ----------

     Cash                                        $       --   $        4
     Inventories, net                                    15        1,198
     Other current assets                                --            1
                                                 ----------   ----------
                  Total current assets                   15        1,203
     Property, plant and equipment, net                  --           25
     Other assets                                        --            6
                                                 ----------   ----------
                  Total assets                   $       15   $    1,234
                                                 ==========   ==========

     Accounts payable                            $       --   $      373
     Due to factor                                       --          775
     Current maturities of stockholder loan              --          850
     Other current liabilities                           --          239
                                                 ----------   ----------
                  Total current liabilities              --        2,237
                                                 ----------   ----------
     Long term debt                                      --        3,000
     Stockholder loans less current maturities           --        1,500
     Accrued interest stockholder loan                   --          454
                                                 ----------   ----------
                  Total liabilities              $       --   $    7,191
                                                 ==========   ==========


Effective June 30, 2006, the short and long term debt of the Textile segment
became short and long term debt of the Company's continuing operations and, as
such, interest expense related to this debt in future periods will be classified
as part of continuing operations.

                                     - 45 -
<PAGE>

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 continued to have
approximately $87,000 included in other current liabilities related to payments
expected to be made under the plan during the run off period in 2007 for 2006
claims. (See Note 11) Because the Company's deferred tax asset is fully
reserved, there was no corresponding income tax provision with respect to this
gain.

5-       INVENTORIES

The components of inventories as of December 31, 2006 and 2005, net of reserves
are as follows (dollars in thousands):
                                            2006         2005
                                         ----------   ----------
            Raw materials                $    2,614   $    4,245
            Work in progress                     87          245
            Finished goods                    2,642        3,235
                                         ----------   ----------
                                         $    5,343   $    7,725
                                         ==========   ==========

At December 31, 2006 and 2005 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 (dollars in thousands):
<TABLE>
<CAPTION>
                                                                 2006          2005
                                                              ----------    ----------
<S>                                                           <C>           <C>
            Land and improvements                             $       79    $       76
            Buildings and improvements                             2,491         2,466
            Machinery and equipment                                2,248         2,101
                                                              ----------    ----------
                                                                   4,818         4,643
            Less: Accumulated depreciation and amortization       (2,901)       (2,576)
                                                              ----------    ----------
                                                              $    1,917    $    2,067
                                                              ==========    ==========
</TABLE>

Depreciation and amortization expense for the years ended December 31, 2006,
2005 and 2004 totaled approximately $404,000, $392,000 and $459,000,
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"). Availability under the Company's
credit facility with CIT as of December 31, 2006 totaled $1.1 million.

                                     - 46 -
<PAGE>

The CIT Facility provides for (i) a term loan to the Company (the "Term Loan")
in the initial amount of $2.0 million, $1.3 million of which was outstanding at
December 31, 2006, (ii) revolving credit advances to the Company, $1.2 million
of which was outstanding at December 31, 2006 and (iii) revolving credit
advances to Blumenthal based upon eligible accounts receivable and inventory,
$3.2 million of which was outstanding at December 31, 2006, and a Letter of
Credit facility with a limit of $500,000, of which there was none outstanding at
December 31, 2006. 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 also due on January 1, 2009. CIT may terminate the Credit facility
upon 60 days written notice. $2.5 million of the amounts outstanding under the
CIT Facility bear interest at Chase Bank N.A. prime rate (8.25%) and amounts in
excess of $2.5 million bear interest at the Chase Bank N.A. prime rate plus 0.5%
(8.75%) 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. 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 the likelihood of
CIT accelerating the payment of any of the obligations under the CIT Facility
during the next twelve months is remote.

On July 26, 2006, the CIT Facility was amended to increase the advance
percentage against the value of Eligible Inventory (as defined in the agreement)
to 40% (from 20%) of Eligible Inventory with respect to the revolving credit
portion of the CIT Facility. Total borrowing availability under the entire CIT
Facility remains at $7.5 million. In addition, the guaranty of the CIT Facility
by Robert A. Levinson, the Company's Chief Executive Officer and principal
shareholder, was removed and the applicable interest rate was changed to the
Chase Rate on the first $2.5 million of average net balances owed, and the Chase
Rate plus .50% per annum on average net balances owed in excess of $2.5 million,
but in either case not less than 5% per annum.

In connection with the Company's discontinued Textile operations, pursuant to a
factoring agreement between CIT and the Company which matures on January 1,
2009, CIT purchased the Textile segment's eligible trade accounts receivable
without recourse and assumed substantially all credit risk with respect to such
accounts. The amounts due to the Company from CIT under the factoring agreement
earned no interest. The factoring agreement allowed the Company to obtain
advances that bear interest at 8.75% (0.5% above the Chase Bank, N.A. prime
rate). The Company pledged its Textile segment's eligible accounts receivable
and property and equipment as collateral under the factoring agreement. There

                                     - 47 -
<PAGE>

was no set limit on borrowings. The amount available for borrowing was based on
a formula consisting of 90% of eligible accounts receivable increased by side
collateral and reduced by both the current loan balance and outstanding letters
of credit.

The promissory note payable to JPMorgan in the amount of $3.0 million is dated
May 2, 2002 and has a maturity date of January 1, 2008, as amended. The note
bears interest at a fixed rate per annum equal to the Adjusted LIBO Rate
applicable to such note plus 0.75% (a "Eurodollar Loan"). The interest rate on
the note at December 31, 2006 was 6.36%. 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 2, 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. On March 20, 2007,
Mr. Levinson reaffirmed this undertaking in writing in a commitment letter dated
March 13, 2007.

The Company had outstanding loans payable to Mr. Levinson totaling $1,500,000
and $2,350,000 as of December 31, 2006 and 2005, 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 $587,000 and $454,000,
respectively, at December 31, 2006 and 2005. He has also agreed not to demand
any repayment of principal or interest currently owed until January 1, 2009.
(See Note 14)

During the year ended December 31, 2006, 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):

                       2007            $      144
                       2008                 3,144
                       2009                 2,511
                                       ----------
                                       $    5,799
                                       ==========

8-       OTHER CURRENT LIABILITIES

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

                                                          2006         2005
                                                       ----------   ----------
            Salaries, bonuses and other compensation   $      339   $      660
            Post retirement medical liability                  86           --
            Other                                             434          762
                                                       ----------   ----------
                                                       $      859   $    1,422
                                                       ==========   ==========

                                     - 48 -
<PAGE>

9-       LEASE TERMINATION CHARGE

Effective November 30, 2004, the lease (the "Original Lease") between the
Company, as lessee, and SIK Associates, as landlord, was terminated by agreement
of the parties. The Original Lease covered the Company's principal offices
located at 462 Seventh Avenue, New York, New York 10018, for approximately 6,500
square feet, at a cost of approximately $16,000 per month. The Original Lease
was to expire on January 31, 2007. In connection with the termination of the
Original Lease, the Company recorded a charge of approximately $71,000 during
the fourth quarter of 2004.

10-      LEASE PAYMENTS

The following is a schedule of future minimum lease payments under
non-cancelable operating leases at December 31, 2006 (dollars in thousands):


                           2007             $     340
                           2008                   271
                           2009                   123
                           2010                    23
                           2011                    14
                                            ---------
                                            $     771
                                            =========

Rental expense for premises leased by the Company under operating leases totaled
$271,000, $208,000, and $235,000 during the years ended December 31, 2006, 2005
and 2004, respectively.

11-      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.

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 2006
plan year, the Company has made quarterly contributions to the plan in 2006 of
$19,205 with an additional $990,482 due on September 15, 2007, based on current
legislated discount rates and actuarial assumptions. In addition, the Company
anticipates contributions with respect to the 2007 Plan year totaling $800,514
based on actuarial assumptions in effect as of December 31, 2006.

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.

                                     - 49 -
<PAGE>

In addition to the liability of $2.1 million for this Company sponsored plan,
the Company also has an additional pension liability in the amount of $980
thousand at December 31, 2006 in connection with a terminated multi-employer
plan which requires annual payments of $142,000 inclusive of principal and
interest through 2016. In addition, the Company has a $286,000 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, 2006 and as
such there was no prepaid pension as of December 31, 2006. A prepaid pension
balance of $476,000 at December 31, 2005 was included in Other Assets on the
Company's consolidated balance sheet. Decreases in the minimum pension liability
totaling $1.8 million and $136,000 have been recorded on the December 31, 2006
and 2005 balance sheets in connection with this plan and corresponding credits
to stockholders' deficit has also been recorded. 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, 2006 and 2005 were based on the
plan's portfolio investments as of such date which totaled $18.4 million and
$17.6 million, respectively, and the actuarially determined accumulated benefit
obligation.

                                     - 50 -
<PAGE>

<TABLE>
<CAPTION>
                                                                 Pension Plan                  Other Post-
                                                                                         Retirement Benefit Plan
                                                           Years Ended December 31,      Years Ended December 31,
                                                           -------------------------     ------------------------
         Dollars in thousands:                                2006           2005           2006           2005
                                                           ----------     ----------     ----------    ----------
<S>                                                        <C>            <C>            <C>           <C>
         Change in benefit obligation
         Benefit obligation at beginning of year           $   21,387     $   21,988     $      979    $    1,099
         Service cost                                              --             --             --            16
         Interest costs                                         1,186          1,216             --            57
         Actuarial (gain) loss                                   (236)            57             --           (47)
         Effect of plan termination                                --             --           (721)           --
         Benefits paid                                         (1,832)        (1,874)          (171)         (146)
                                                           ----------     ----------     ----------    ----------
         Benefit obligation at end of year                 $   20,505     $   21,387     $       87    $      979
                                                           ==========     ==========     ==========    ==========

         Change in plan assets:
         Fair value of plan assets at beginning of year    $   17,550     $   17,998     $       --    $       --
         Actual return on plan assets                           2,623          1,374             --            --
         Employer contribution                                     77             52             --            --
         Benefits paid                                         (1,832)        (1,874)            --            --
                                                           ----------     ----------     ----------    ----------
         Fair value of plan assets at end of year          $   18,418     $   17,550     $       --    $       --
                                                           ==========     ==========     ==========    ==========

         Funded status                                     $   (2,087)    $   (3,837)    $      (87)   $     (979)
                                                           ==========    ==========
         Unrecognized net actuarial gain/loss                                                    --          (910)
         Unrecognized prior service cost                                                         --           (71)
                                                                                         ----------    ----------
         Accrued benefit cost                                                            $      (87)   $   (1,960)
                                                                                         ==========    ==========

         Weighted average assumptions as of December 31:
         Discount rate                                           5.75%          5.75%           N/A          5.75%
         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:
         Service                                           $       --     $       --     $       --    $       16
         Interest cost                                          1,186          1,216             --            57
         Expected return on plan assets                        (1,335)        (1,368)            --            --
         Amortization of prior service cost                        --             --             --           (14)
         Recognized net actuarial loss (gain)                     179            186            (39)         (107)
                                                           ----------     ----------     ----------    ----------
         Net periodic benefit cost (gain)                  $       30     $       34     $      (39)   $      (48)
                                                           ==========     ==========     ==========    ==========

The Company's accumulated benefit obligation under its defined benefit plan at
December 31, 2006 and 2005 was $20,505,000 and $21,387,000, respectively.

The Company's defined benefit plan asset target allocation for 2007, the actual
allocation as of December 31, 2006 and 2005, and the expected long-term rates of
return by asset category for 2006 are as follows:
<CAPTION>
                                                                                  Weighted Average
                                                       Percentage of Plan        Expected Long-term
                                Target Allocation    Asset as of December 31,     Rates of Return
         Asset Category               2007               2006      2005
         -------------------------------------------------------------------------------------------
<S>                                  <C>                  <C>       <C>                    <C>
         Equity securities           40-90%                86%       82%                   9.5%
         Debt securities              5-16%                14%       18%                   4.5%
         Other                        0-10%                 0%        0%                    --
                                                       ------    ------                 ------
            Total                                         100%      100%                   8.0%
                                                       ======    ======                 ======
</TABLE>

                                     - 51 -
<PAGE>

12-      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. For 2007, the Company's matching contribution has been suspended.
Total Company matching contributions for the years ended December 31, 2006, 2005
and 2004 were $87,000, $102,000 and $105,000, respectively. As of December 31,
2006 there were 102 active employees participating in the plan.

13-      CUSTOMER CONCENTRATIONS

The Company's customer base has been and continues to be highly concentrated.
The Company's largest three customers (Wal-Mart, a mass merchandiser and Jo-Ann
Stores and Hancock Fabrics, each a specialty chain) represented approximately
49%, 23% and 8%, respectively, in 2006 and 46%, 25% and 8%, respectively, in
2005 and 49%, 23% and 9%, respectively, during 2004 of the Company's net sales.
These customers also represented approximately 63% and 80% of the total
outstanding accounts receivable as of December 31, 2006 and 2005, respectively.
A reduction in sales to any of these customers could adversely impact the
financial condition and results of operations of the Company (See Note 20).

14-      RELATED PARTY TRANSACTIONS

Robert A. Levinson, a stockholder, officer and director had outstanding loans of
$1.5 million and $2.4 million as of December 31, 2006 and 2005, respectively.
The Company also had $587,000 and $454,000 of accrued interest payable to Mr.
Levinson with respect to such loans as of December 31, 2006 and 2005,
respectively. During 2005, Mr. Levinson made advances of approximately $2.5
million of which $1.850 million was outstanding at December 31, 2005 and
$850,000 of this amount was repaid to Mr. Levinson during 2006. 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, 2006, 2005 and 2004, fees for services provided to the
Company by Katten Muchin Rosenman LLP totaled approximately $266,000, $177,000
and $171,000, 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.

 15-     INCOME TAXES

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

                                      2006          2005          2004
                                   ----------    ----------    ----------
         United States             $    1,900    $      318    $    1,575
         Foreign                         (138)          (96)         (229)
                                   ----------    ----------    ----------
                                   $    1,762    $      222    $    1,346
                                   ==========    ==========    ==========

                                     - 52 -
<PAGE>

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

<TABLE>
<CAPTION>
                                                           Years Ended December 31,
                                                  --------------------------------------
                                                     2006          2005          2004
                                                  ----------    ----------    ----------
<S>                                               <C>           <C>           <C>
         Current provision (benefit):
           Federal                                $       (8)   $       (4)   $       --
           State                                         157           (25)          127
                                                  ----------    ----------    ----------
                                                         149           (29)          127
                                                  ----------    ----------    ----------
         Deferred provision (benefit):
           Federal                                        --         2,640           416
           State                                          --           466            74
                                                  ----------    ----------    ----------
                                                          --         3,106           490
                                                  ----------    ----------    ----------
         Income tax provision as per
           Consolidated Statement of Operations   $      149    $    3,077    $      617
         Deferred provision (benefit)
           - Tax effect of income (loss) from
                discontinued operations                   --            --           (35)
           -Tax effect of other comprehensive
                loss                                      --         1,601            14
                                                  ----------    ----------    ----------
         Total provision                          $      149    $    4,678    $      596
                                                  ==========    ==========    ==========
</TABLE>

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

                                                       Years Ended December 31,
                                                       ------------------------
                                                          2006          2005
                                                       ----------    ----------
Deferred tax assets:
Book value of fixed assets over tax basis              $     (508)   $     (494)
Pension liabilities                                         1,341         2,080
Other post-retirement benefit liability                        35           784
Environmental accruals                                        516           539
Operating and capital loss carryforwards                    2,704         2,570
Other, net                                                    257           495
                                                       ----------    ----------
Deferred tax asset                                          4,345         5,974
Valuation allowance                                        (4,345)       (5,974)
                                                       ----------    ----------
Deferred tax asset, net                                $       --    $       --
                                                       ==========    ==========

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

<TABLE>
<CAPTION>
                                                           Years Ended December 31,
                                                     ----------------------------------
                                                       2006         2005         2004
                                                     --------     --------     --------
<S>                                                     <C>        <C>            <C>
Tax provision (benefit) at statutory federal rate        34.0%        34.0%        34.0%
State income taxes, net                                   6.0%         5.9%         6.0%
Permanent items                                           6.2%        49.1%         8.1%
Change in valuation allowance                           (92.2)%    1,948.6%       (19.3)%
Over (under) accrual in prior year                        8.5%       (11.7)%        0.0%
Non-includable (income) expense                          46.0%      (640.1)%       17.0%
                                                     --------     --------     --------
Effective tax                                             8.5%     1,385.8%        45.8%
                                                     ========     ========     ========
</TABLE>

The Company had a net operating loss carryforward of approximately $6,760,000
expiring through 2026.

                                     - 53 -
<PAGE>

16-      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 on June 15,
2007, 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.

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, 2006, unpaid preferred stock dividends totaled approximately
$285,000 and have been classified as a noncurrent liability on the Company's
balance sheet. The preferred stock is owned 98.3% 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.

17-      COMMON STOCK AND INCOME (LOSS) PER COMMON SHARE

During the years ended December 31, 2005 and 2004, the Company issued an
aggregate of 2,317 and 11,549 shares, respectively, of common stock to a
Director in lieu of cash for Director fees and recorded such issuances as stock
based compensation expense. There was no such issuance in 2006.

In addition, during the year ended December 31, 2004, in connection with a stock
option exercise by Robert A. Levinson, a stockholder, officer and director of
the Company, the Company issued 170,000 shares of common stock and accepted
45,274 shares of common stock previously held by the optionee as payment of the
option exercise price. The common shares tendered were recorded as treasury
stock. All 102,874 shares of treasury stock were retired as of March 31, 2004.

                                     - 54 -
<PAGE>

The Company also issued 36,000 shares of common stock in connection with the
exercise of employee stock options during the year ended December 31, 2004.

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 and 2004 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, 2006, 2005 and 2004 (dollars in thousands, except per share
amounts):
<TABLE>
<CAPTION>
                                                                     Weighted     Income
                                                         Income       Average     (Loss)
                                                         (Loss)       Shares     Per Share
                                                        ---------    ---------   ---------
<S>                                                     <C>          <C>         <C>
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                  $  (8,304)   5,331,881   $   (1.56)
                                                        =========    =========   =========
            to common stockholders

Year ended December 31, 2004:
     Basic income applicable to common stockholders     $     659    5,294,544   $     .12
     Effect of dilutive options                                --       72,770          --
                                                        ---------    ---------   ---------
     Diluted income applicable to common stockholders   $     659    5,367,314   $     .12
                                                        =========    =========   =========
</TABLE>

18-      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. There were no stock-based awards granted
after January 1, 2006. However, for all future stock-based awards we will
recognize compensation expense based on the estimated grant date fair value
method using the Black-Scholes valuation model. 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. As FAS 123(R) requires that
stock-based compensation expense be based on awards that are ultimately expected
to vest, stock-based compensation for the year ended December 31, 2006 has been
reduced for estimated forfeitures. When estimating forfeitures, we consider
voluntary termination behaviors as well as trends of actual option forfeitures.
The impact on our results of operations of recording stock-based compensation
for the year ended December 31, 2006, was an expense of $57,000 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.

                                     - 55 -
<PAGE>

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 years ended December 31, 2005 and 2004 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.

The pro forma information for years ended December 31, 2005 and 2004 were as
follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                   2005          2004
                                                                ----------    ----------
<S>                                                             <C>           <C>
Net income (loss), as reported                                  $   (8,304)   $      659
Add: Amortization of stock-based compensation
     expense determined under the intrinsic value method
     (net of cancellations)                                             --            --
Deduct:  Total stock-based compensation expense
         determined under fair value based method, net of tax         (106)          (68)
                                                                ----------    ----------
Pro forma net income (loss)                                     $   (8,410)   $      591
                                                                ==========    ==========
Income (loss ) per share:
         Basic   - Reported                                     $    (1.56)   $      .12
                   Pro forma                                    $    (1.58)   $      .11
         Diluted - Reported                                     $    (1.56)   $      .12
                   Pro forma                                    $    (1.58)   $      .11
</TABLE>

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, 2006 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.

In addition, there were 262,400 options outstanding under a previous Levcor
stock option plan which has terminated, at a weighted average exercise price of
$.81 per option as of December 31, 2002. Also, in connection with the Levcor and
Carlyle merger, 220,000 options which were outstanding at December 31, 2002 were
assumed by Levcor and became fully vested.

During 2006 and 2005, there were no options exercised. 206,000 shares under the
previous Levcor and Carlyle plans were exercised during 2004. There remain
143,300 options outstanding under these previous plans as of December 31, 2006
at an average exercise price of $3.83 per share.

                                     - 56 -
<PAGE>

A summary of the status of outstanding grants and weighted average exercise
prices at December 31, 2006, 2005 and 2004 and changes during the years then
ended is presented in the table and narrative below (shares in thousands):

<TABLE>
<CAPTION>
                                              2006                    2005                    2004
                                      --------------------    --------------------    --------------------
                                       Shares      Price       Shares      Price       Shares      Price
                                      --------    --------    --------    --------    --------    --------
<S>                                   <C>         <C>         <C>         <C>         <C>         <C>
   Beginning of year                       411    $   2.79         445    $   2.70         661    $   3.05
   Granted                                  --          --          --          --          20        1.83
   Exercised                                --          --          --          --        (206)       (.88)
   Forfeited                               (48)      (1.50)        (32)       (.73)        (18)      (4.17)
   Expired                                  --          --          (2)     (15.63)        (12)     (50.00)
                                      --------    --------    --------    --------    --------    --------
   End of year                             363    $   2.96         411    $   2.79         445    $   2.70
                                      ========    ========    ========    ========    ========    ========
   Shares exercisable at year-end          360                     331                     292
                                       =======                =======                 =======
   Weighted average exercise
     price of exercisable options     $   2.97                $   2.90                $   2.87
                                       =======                =======                 =======

There were no options issued in 2006 or 2005. In 2004, the Company issued 20,000
options with an estimated fair value of $21,000.

Summary information about the Company's stock options outstanding at December
31, 2006 is as follows:

<CAPTION>
                                   Options Outstanding                      Options Exercisable
                      ---------------------------------------------     ---------------------------
                                        Weighted                                         Weighted
                                         Average                                         Average
     Date              Number            Exercise     Contractual        Number          Exercise
    Granted           of shares           Price         Periods         of shares          Price
-----------           ---------------------------------------------     ---------------------------
<S>                    <C>             <C>                 <C>           <C>           <C>
   05/16/1997           23,056            10.00000         0.4            23,056          10.00000
   02/25/1998            4,444             6.56250         1.1             4,444           6.56250
   12/10/1998           10,000             5.00000         1.9            10,000           5.00000
   01/04/1999            1,500             2.00000         2.0             1,500           2.00000
   12/29/1999           88,000             2.50000         3.0            88,000           2.50000
   01/03/2000            2,700             1.11100         3.0             2,700           1.11100
   01/02/2001            2,400             1.25000         4.0             2,400           1.25000
   02/14/2002           11,200              .95000         5.1            11,200            .95000
   07/14/2003          200,000             2.45000         6.5           200,000           2.45000
   06/03/2004           20,000             1.83000         7.4            16,666           1.83000
                      --------         -----------         ---          --------       -----------

                       363,300         $   2.96000         5.0           359,966       $   2.97000
                      ========         ===========         ===          ========       ===========
</TABLE>

                                     - 57 -
<PAGE>

19-      COMMITMENT AND CONTINGENCIES

The Company is subject to a number of federal, state and local environmental
laws and regulations, including those concerning the treatment, storage and
disposal of waste, the discharge of effluents into waterways, the emissions of
substances into the air and various health and safety matters. In addition,
CERCLA and comparable state statutes generally impose joint and several
liability on present and former owners and operators, transporters and
generators for remediation of contaminated properties regardless of fault. These
parties are typically identified as "potentially responsible parties" or "PRPs."
On 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 Solvents Recovery Service of New England Superfund Site in Southington,
Connecticut (the "SRS site"). The Company settled its alleged liability in
connection with the SRS site by paying $1,626 in connection with a settlement
offered to de minimis parties at the SRS site in 1994. BCTC and CM, along with
other PRPs, committed to perform the Remedial Investigation and Feasibility
Study ("RIFS") and two Non-Time Critical Removal Actions ("NTCRA") at the SRS
site. The RIFS, and the first NTCRA (except for certain maintenance activities)
have been completed. BCTC and CM have been allocated approximately .04% and
1.34%, 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. Assuming negotiations between EPA and the PRP Group are successful, it is
expected that payments by parties to the Consent Decree would begin in late 2007
or early 2008.

In addition, the State of Connecticut and the Southington Water District have
sought reimbursement from the PRP Group for alleged Natural Resource Damages 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. In addition, the PRP Group has also received a
demand from the federal NRD trustees.

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 best
current 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. Although
the reserve currently appears to be sufficient to cover these environmental
liabilities, there are uncertainties associated with environmental liabilities,
and no assurances can be given that the Company's estimate of any environmental
liability will not increase or decrease in the future. The uncertainties relate
to the difficulty of estimating the ultimate cost of any remediation that may be
undertaken, including any operating costs associated with remedial measures, the
duration of any remediation required, the amount of consultants' or attorneys'

                                     - 58 -
<PAGE>

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.

20-       SUBSEQUENT EVENTS

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 as of the date of the filing. In addition, the Company also
anticipates that an additional allowance will be required against 2007
pre-bankruptcy sales and that going forward, 2007 will result in lower sales to
Hancock Fabrics as compared to 2006 due to the reduced store count.

The Company's largest customer, Wal-Mart has begun opening new stores with no
cut fabric and a reduced craft department. The Company anticipates a reduction
in sales to Wal-Mart in 2007 as a result of the new store lay-outs.

In direct response to these factors, the Company has taken steps to reduce its
headcount during the first quarter of 2007.

Also during the first quarter of 2007, the Company repaid Mr. Levinson, a
stockholder, officer and director, $750,000 against his $1.5 million loan
balance as of December 31, 2006. The remaining principal balance totaled
$750,000 (excluding accrued interest) as of March 23, 2007.

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

<TABLE>
<CAPTION>
                                                December 31,   September 30,    June 30,       March 31,
Quarter Ended                                      2006            2006           2006           2006
                                               ------------    ------------   ------------   ------------
<S>                                            <C>             <C>            <C>            <C>
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
                                               ============    ============   ============   ============
</TABLE>

                                     - 59 -
<PAGE>

<TABLE>
<CAPTION>
                                               December 31,   September 30,    June 30,        March 31,
Quarter Ended                                      2005           2005           2005            2005
                                               ------------   ------------   ------------    ------------
<S>                                            <C>            <C>            <C>             <C>
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 income (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)
                                               ============   ============   ============    ============


                                               December 31,   September 30,    June 30,        March 31,
Quarter Ended                                      2004           2004           2004            2004
                                               ------------   ------------   ------------    ------------
Net sales                                      $      5,584   $      6,173   $      5,635    $      5,712
Cost of sales                                         3,555          4,255          3,505           3,461
                                               ------------   ------------   ------------    ------------
Gross profit                                   $      2,029   $      1,918   $      2,130    $      2,251
                                               ============   ============   ============    ============

Income (loss) from continuing operations       $        287   $       (231)  $        299    $        374
                                               ============   ============   ============    ============
Net income                                     $         56   $        569   $         12    $        922
                                               ============   ============   ============    ============
Income (loss) from continuing operations
         per common share, basic and diluted   $        .05   $       (.04)  $        .06    $        .07
                                               ============   ============   ============    ============

Net income per common share,
         basic and diluted                     $        .01   $        .11   $         --    $         --
                                               ============   ============   ============    ============
</TABLE>

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

None

Item 9A.          CONTROLS AND PROCEDURES

(a)    Evaluation of disclosure controls and procedures.

 We maintain disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Security Exchange Act of 1934, as amended (the "Exchange
Act")) that are designed to ensure that information that would be required to be
disclosed in Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.

 As of December 31, 2006, we carried out an evaluation, under the supervision
and with the participation of management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
disclosure controls and procedures. Based on the foregoing, the Chief Executive
Officer and Chief Financial Officer concluded that disclosure controls and
procedures were effective as of the end of the period covered by this annual
report.

                                     - 60 -
<PAGE>

(b)    Section 404 compliance.

 Beginning with the year ending December 31, 2007, Section 404 of the
Sarbanes-Oxley Act of 2002 will require us to include management's report on our
internal control over financial reporting in our Annual Report on Form 10-K. The
internal control report must contain (1) a statement of management's
responsibility for establishing and maintaining adequate internal control over
our financial reporting, (2) a statement identifying the framework used by
management to conduct the required evaluation of the effectiveness of our
internal control over financial reporting and (3) management's assessment of the
effectiveness of our internal control over financial reporting as of the end of
our most recent fiscal year, including a statement as to whether or not our
internal control over financial reporting is effective.

In order to achieve compliance with Section 404 within the prescribed period,
management will commence a Section 404 compliance project under which management
will adopt a detailed project work plan to assess the adequacy of our internal
control over financial reporting, remediate any control deficiencies that may be
identified, validate through testing that controls are functioning as documented
and implement a continuous reporting and improvement process for internal
control over financial reporting. During the fourth quarter of fiscal year 2006,
there have been no changes in our internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

There were no changes in our internal control over financial reporting
identified in connection with the evaluation performed that occurred during the
last fiscal quarter for the year ended December 31, 2006, that materially
affected, or will reasonably likely material affect, our internal controls over
financial reporting.

Item 9B.    OTHER INFORMATION

None.

                                     - 61 -
<PAGE>

                                    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:

<TABLE>
<CAPTION>
                                                                            Year Became
         Name           Age                      Title                       Director
-------------------     ---    ------------------------------------------   ------------
<S>                      <C>   <C>                                          <C>
Robert A. Levinson       81    Chairman of the Board, President and Chief    June 1989
                               Executive Officer
Edward F. Cooke          53    Chief Financial Officer, Vice President,     January 2003
                               Secretary, Treasurer and Director
Giandomenico Picco       59    Director                                     January 2003
John McConnaughy         77    Director                                      June 1989
Edward H. Cohen          68    Director                                      June 1998
</TABLE>

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") 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.

Mr. Cooke has been Chief Financial Officer, Vice President, Secretary, Treasurer
and a director of the Company since January 6, 2003. Prior to then, Mr. Cooke
served as a director (from May 2000 to January 2003), Chief Financial Officer,
Secretary and Vice President (from February 1998 to January 2003) of Carlyle.
Since January 1, 1999, Mr. Cooke has been President and Chief Executive Officer
of Blumenthal/Lansing Company, LLC, a wholly-owned subsidiary of the Company.
Mr. Cooke was previously appointed to serve as Carlyle's Chief Financial
Officer, Secretary and Vice President in February 1997, April 1996 and May 1996,
respectively, until he resigned from such positions in September 1997.

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

                                     - 62 -
<PAGE>

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.

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.

Mr. Cohen has been a director of the Company since June 1998. Mr. Cohen serves
as Counsel to the law firm of Katten Muchin Rosenman LLP New York, New York, and
for more than the past five years, until January 31, 2002, was a Senior Partner
at its predecessor law firm, Rosenman & Colin LLP. Mr. Cohen also serves as a
director of Franklin Electronic Publishers, Inc., a designer and developer of
electronic reference products, Phillips-Van Heusen Corporation, a manufacturer
and retailer of apparel and footwear, Merrimac Industries, Inc., a designer and
producer of microwave and radio frequency components, and Gilman & Ciocia, Inc.,
a financial planning and tax preparation firm. Mr. Cohen does not share in any
fees paid by the Company to Katten Muchin Rosenman LLP.

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.

                                     - 63 -
<PAGE>

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 Securities and Exchange Commission and the
federal securities laws. During fiscal year 2006, 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.

Messrs. McConnaughy and Picco currently serve on the Compensation Committee and
each member meets the independence requirements of NASDAQ and the Securities
Exchange Act of 1934. 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 2006, the Compensation Committee
held one meeting. A copy of the Compensation Committee charter as adopted by the
Board of Directors is filed as exhibit 99.3 to the Company's 10-K filed
herewith.

Messrs. Cohen and McConnaughy currently serve on the Corporate Governance
Committee and each member meets the independence requirements of NASDAQ and the
Securities Exchange Act of 1934. 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 2006 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 by writing to: Robert A. Levinson, Levcor
International, Inc., 1065 Avenue of the Americas, New York, New York 10018.
Communications may be addressed to the Chairman of the Board, an individual
director, a Board Committee, 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.

                                     - 64 -
<PAGE>

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), 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 Securities
and Exchange Commission 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, 2006 except that
Statements of Changes in Beneficial Ownership with respect to the purchase of
Common Stock on December 6, 2006, December 18, 2006 and December 19, 2006 were
filed by Robert A. Levinson one day late, two days late and one day late,
respectively.

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.


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 shareholder 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's 2006 Management Incentive Plan (the "2006 MIP") was adopted by the
Board of Directors on March 15, 2006. The 2006 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

                                     - 65 -
<PAGE>

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 2006 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.

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.

All awards payable under the 2006 Management Incentive Plan are subject to the
approval of the Compensation Committee of the Board of Directors. Awards
aggregating $519,863 were allocated under the 2006 Management Incentive Plan.
However, because of the Company's financial position, the Committee approved
$277,666 in awards under this plan with respect to the year 2006. The Company
uses its MIP to incentivize its eligible employees on an annual basis. For
achieving annual profit and operational goals the 2006 MIP is considered
short-term compensation.

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

                                     - 66 -
<PAGE>

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.

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 shareholders 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

                                     - 67 -
<PAGE>

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.

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 employment agreements with the Robert A. Levinson and Edward F.
Cooke. 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.

Mr. Cooke's employment agreement with Carlyle, which by operation of law is now
an obligation of the Company, commenced in March 1998 and sets forth the terms
under which Mr. Cooke's employment with the Company may be terminated. Pursuant
to such agreement, if within one year after a change in control of the Company
Mr. Cooke's employment is terminated for any reason, the Company shall pay Mr.
Cooke an amount equal to one year of his base salary then in effect.

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

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. 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. For 2007, the matching contribution has been suspended. Total Company
matching contributions for the years ended December 31, 2006, 2005 and 2004 were
$87000, $102,000 and $105,000, respectively. As of December 31, 2006 there were

                                     - 68 -
<PAGE>

102 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 shareholder interests.

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 2006
plan year, the Company has made quarterly contributions to the plan in 2006 of
$19,205 with an additional $990,482 due on September 15, 2007, based on current
legislated discount rates and actuarial assumptions. In addition, the Company
anticipates contributions with respect to the 2007 Plan year totaling $800,514
based on actuarial assumptions in effect as of December 31, 2006.

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.

                                     - 69 -
<PAGE>

                           SUMMARY COMPENSATION TABLE
                                      2006

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
2006, 2005 and 2004 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

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
    Name and      Year        Salary     Bonus    Stock      Option      Non-Equity       Change in        All Other    Total ($)
   Principal                    ($)       ($)     Awards     Awards       Incentive     Pension Value    Compensation
    Position                                       ($)         ($)       Plan Compen-   and Nonquali         ($)
                                                                           sation      -fied Deferred
                                                                             ($)        Compensation
                                                                                          Earnings
      (a)          (b)         (c)        (d)       (e)        (f)           (g)            (h)              (i)           (j)
----------------------------------------------------------------------------------------------------------------------------------
<S>               <C>        <C>        <C>                                                               <C>            <C>
Robert A.         2006       200,000    61,306                                                                 -- (1)    261,306
Levinson          2005       237,500    97,029                                                            268,769 (2)    603,298
Chairman of the   2004       237,500    93,742                                                            268,769 (2)    600,011
Board, Chief
Executive
Officer
----------------------------------------------------------------------------------------------------------------------------------
Edward F. Cooke   2006       175,000    53,643                                                              3,801 (3)    232,444
Chief Financial   2005       150,000    72,771                                                              3,799 (3)    226,570
Officer, Vice     2004       150,000    70,409                                                              3,800 (3)    224,209
President,
Secretary and
Treasurer
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)  In 2006, dividends totaling $268,769 were not paid in cash but were
     accrued.
(2)  This amount reflects the aggregate dividend payments made to Mr. Levinson
     as holder of 98.3% of the Company's Series A Preferred Stock, which are
     payable on a quarterly basis.
(3)  This amount reflects the matching contributions to the Company's 401(k)
     Plan paid by the Company.

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 2006
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
2006.

                                     - 70 -
<PAGE>

<TABLE>
<CAPTION>
                                         OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

------------------------------------------------------------------------------------------------------------------------------

                                    Option Awards                                            Stock Awards
------------------------------------------------------------------------------------------------------------------------------
   Name       Number of     Number of    Equity      Option     Option    Number of    Market       Equity         Equity
              Securities   Securities   Incentive   Exercise  Expiration  Shares or   Value of     Incentive      Incentive
              Underlying   Underlying     Plan       Price       Date     Units of    Shares or      Plan        Plan Awards:
              Unexercised  Unexercised   Awards:       ($)                  Stock     Units of      Awards:       Market or
               Options       Options    Number of                         That Have  Stock That    Number of     Payout Value
                 (#)           (#)      Securities                           Not      Have Not     Unearned       of Unearned
             Exercisable  Unexercisable Underlying                        Vested (#)   Vested       Shares,         Shares,
                                        Unexercised                                      ($)       Units or       Units or
                                         Unearned                                                   Other        Other Rights
                                         Options                                                  Rights That     That Have
                                           (#)                                                     Have Not       Not Vested
                                                                                                    Vested           ($)
                                                                                                     (#)

    (a)          (b)           (c)         (d)        (e)        (f)         (g)         (h)          (i)            (j)
------------------------------------------------------------------------------------------------------------------------------
<S>             <C>             <C>         <C>       <C>     <C>             <C>         <C>          <C>            <C>
Robert A.       35,000          0           0         2.50    12/29/09        0           0            0              0
Levinson
------------------------------------------------------------------------------------------------------------------------------
                   556          0           0        10.00     5/16/07        0           0            0              0
Edward F.        4,444                                6.56     2/25/08
Cooke           10,000                                5.00    12/10/08
                25,000                                2.50    12/29/09
               200,000                                2.45     7/14/13
------------------------------------------------------------------------------------------------------------------------------


<CAPTION>

                                           OPTION EXERCISES AND STOCK VESTED
----------------------------------------------------------------------------------------------------------------------

                                          Option Awards                                  Stock Awards
----------------------------------------------------------------------------------------------------------------------
          Name              Number of Shares             Value                 Number of                Value
                               Acquired on            Realized on         Shares Acquired on         Realized on
                                Exercise                Exercise                Vesting                Vesting
                                   (#)                    ($)                     (#)                    ($)

          (a)                      (b)                    (c)                     (d)                    (e)
----------------------------------------------------------------------------------------------------------------------
<S>                                <C>                     <C>
Robert A. Levinson                 --                      --
----------------------------------------------------------------------------------------------------------------------

Edward F. Cooke                    --                      --
----------------------------------------------------------------------------------------------------------------------


<CAPTION>

                                                   PENSION BENEFITS
----------------------------------------------------------------------------------------------------------------------
          Name                  Plan Name           Number of Years        Present Value of       Payments During
                                                    Credited Service      Accumulated Benefit           2006
                                                          (#)                     ($)                    ($)


          (a)                      (b)                    (c)                     (d)                    (e)
----------------------------------------------------------------------------------------------------------------------
<S>                                <C>                     <C>                    <C>                    <C>
Robert A. Levinson                 --                      --                     --                     --
----------------------------------------------------------------------------------------------------------------------

Edward F. Cooke                    --                      --                     --                     --
----------------------------------------------------------------------------------------------------------------------
</TABLE>

                                     - 71 -
<PAGE>

<TABLE>
<CAPTION>
                                          NONQUALIFIED DEFERRED COMPENSATION
----------------------------------------------------------------------------------------------------------------------
       Name             Executive           Registrant       Aggregate Earnings     Aggregate     Aggregate Balance
                     Contributions in    Contributions in         in 2006          Withdrawals/    at December 31,
                           2006                2006                 ($)           Distributions          2006
                           ($)                 ($)                                     ($)               ($)


          (a)              (b)                 (c)                  (d)                (e)               (f)
----------------------------------------------------------------------------------------------------------------------
<S>                         <C>                 <C>               <C>                   <C>           <C>
Robert A. Levinson          --                  --                   --                 --                --
----------------------------------------------------------------------------------------------------------------------

Edward F. Cooke             --                  --                1,570 (1)             --            15,099 (1)
----------------------------------------------------------------------------------------------------------------------

(1) This represents earnings during 2006 and the balance as of December 31, 2006
in the Belding Heminway Company, Inc. Supplemental Executive Savings Investment
Plan.

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


<CAPTION>

   --------------------------------------------------------------------------------------------------------------------
         Name          Fees     Stock Awards    Option       Non-Equity        Change in      All Other       Total
                      Earned        ($)       Awards ($)   Incentive Plan    Pension Value   Compensation      ($)
                      or Paid                               Compensation          and            ($)
                      in Cash                                    ($)         Nonqualified
                        ($)                                                    Deferred
                                                                             Compensation
                                                                               Earnings


          (a)           (b)         (c)           (d)            (e)              (f)            (g)           (h)
   --------------------------------------------------------------------------------------------------------------------
<S>                   <C>            <C>         <C>             <C>              <C>             <C>      <C>
   John McConnaughy   16,500         --          --(1)           --               --              --       16,500
   --------------------------------------------------------------------------------------------------------------------

   Giandomenico       16,750         --          --(2)           --               --              --       16,750
   Picco
   --------------------------------------------------------------------------------------------------------------------

   Edward H. Cohen    16,000         --          --(3)           --               --              --       16,000
   --------------------------------------------------------------------------------------------------------------------

   Joseph DiMartino   15,500         --          --(4)           --               --              --       15,500
   --------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) As of December 31, 2006, 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, 2006, Mr. Picco has no outstanding options to purchase
shares of the Company's common stock.

(3) As of December 31, 2006, 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.

                                     - 72 -
<PAGE>

(4) Mr. DiMartino does not have any outstanding options and has resigned from
the Board of Directors effective November 30, 2006.

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 2006.

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

                                     - 73 -
<PAGE>

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, 2006
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.

<TABLE>
<CAPTION>
                                                Common Stock                   Preferred Stock
                                          ------------------------         -----------------------

         Name and Address of          Amount and Nature      % of      Amount and Nature     % of
          Beneficial Owner              of Beneficial        Class       of Beneficial       Class
          ---------------                 Ownership          -----         Ownership         -----
                                          ---------                        ---------
<S>                                     <C>                  <C>          <C>                 <C>
GAMCO Investors, Inc.                     292,877 (1)         5.49%             --             --
Corporate Center
Rye, New York 10580

Robert A. Levinson                      1,653,726 (2)        30.81%       4,479,485 (3)       98.3%
1065 Avenue of the Americas
New York, New York 10018

Roger L. and Theresa S. Hueglin           268,850 (4)         5.04%
11 Blueberry Hill Road
Wilton, Connecticut 06897

Edward F. Cooke                           261,220 (5)         4.90%              --             --
c/o Blumenthal/Lansing, LLC
1 Palmer Terrace
Carlstadt, New Jersey 07072

John McConnaughy                           60,557 (6)         1.13%              --             --
1011 High Ridge Road
Stamford, Connecticut 06905

Giandomenico Picco                          1,000                *               --             --
c/o GDP Associates
950 Third Avenue, Suite 1800
New York, New York 10022

Edward H. Cohen                            24,822 (7)            *               --             --
c/o KMZ Rosenman
575 Madison Avenue
New York, New York 10022

All directors and executive officers    2,001,325 (8)         37.5%       4,479,485           98.3%
as a group (6 persons)
</TABLE>
------------------------------
* 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.

                                     - 74 -
<PAGE>

(2)    Includes: (i) 469,999 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.

(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 dated April 5, 2005, made by Roger L. and Theresa S.
       Hueglin.

(5)    Includes 240,000 shares subject to currently exercisable stock options.

(6)    Includes 3,300 shares subject to currently exercisable stock options.

(7)    Includes 3,300 shares subject to currently exercisable stock options
       which are held by Mr. Cohen for the benefit of his law firm, Katten
       Muchin Rosenman LLP. Mr. Cohen disclaims beneficial ownership of all
       options he holds for the benefit of Katten Muchin Rosenman LLP.

(8)    Includes 281,600 shares subject to currently exercisable stock options.



                      Equity Compensation Plan Information
The following table provides information, as of December 31, 2006, with respect
to all of the Company's compensation plans under which Common Stock is
authorized for issuance:

<TABLE>
<CAPTION>
                                                                                             Number of securities remaining
                               Number of securities to be     Weighted-average exercise       available for future issuance
                                 issued upon exercise of        price of outstanding         under equity compensation plans
                                  outstanding options,         options, warrants and       (excluding securities reflected in
Plan Category                     warrants and rights                  rights                      the first column)
-------------                     -------------------          ---------------------        ---------------------------------
<S>                                      <C>                           <C>                               <C>
Equity compensation plans
approved by security holders             411,200                       $ 2.79                            330,000

Equity compensation plans
not approved by security                       0                            0                                 0
holders*
                                        --------                       ------                          --------
                      Total:             411,200                       $ 2.79                           330,000
                                        ========                       ======                          ========
</TABLE>

         * 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.

                                     - 75 -
<PAGE>

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.

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 is now
an obligation of the Company, commenced in March 1998 and sets forth the terms
under which Mr. Cooke's employment with the Company may be terminated. Pursuant
to such agreement, if within one year after a change in control of the Company
Mr. Cooke's employment is terminated for any reason, the Company shall pay Mr.
Cooke an amount equal to one year of his base salary then in effect.

Loans and Guarantees

As of December 31, 2006, the Company owes Mr. Levinson $2.1 million, including
accrued interest of $587,000. The long-term loans which total $1.5 million,
together with the accrued interest, have been classified as a long-term
obligation because Mr. Levinson has promised not to demand payment until January
1, 2009. On March 20, 2007, Mr. Levinson reaffirmed this undertaking in writing
in a commitment letter dated March 13, 2007.

Additionally, Mr. Levinson has also provided certain collateral guaranteeing the
Company's obligations under the $3,000,000 loan from JPMorgan Chase Bank
pursuant to a promissory note due January 1, 2008 as amended. 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

                                     - 76 -
<PAGE>

an aggregate of $7,500,000 available to the Company and its subsidiaries. The
Company accrues interest of 6% per annum on outstanding loans and advances from
Mr. Levinson.

Director Independence

The Company's board of directors has determined that all its non-employee
directors as of December 31, 2006 - Messrs. Picco, McConnaughy and Cohen - are
independent under the independence requirements of Nasdaq and the Securities and
Exchange Act of 1934, and Mr. DiMartino, 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 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, 2006 did not exceed 5% of the
revenues of such firm for its most recent fiscal year. Mr. Cohen does not share
in any fees paid by the Company to Katten Muchin Rosenman LLP.


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-QSB and services that
were provided in connection with statutory and regulatory filings or engagements
were $155,000 for 2006 and $155,000 for 2005.

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
were $0 for 2006 and $10,000 for 2005.

Tax Fees

The aggregate fees billed by Friedman in each of the last two fiscal years for
professional services rendered for tax compliance, tax advice and tax planning
were $0 for 2006 and 2005.

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 and $14,000 for 2006 and 2005, respectively. The nature of the
services performed for these fees included audit of the Company's pension and
401K plans.

                                     - 77 -
<PAGE>

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.

                                     - 78 -
<PAGE>

Item 15.      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

                                   Schedule I

                        Valuation and Qualifying Accounts
                        December 31, 2006, 2005 and 2004

<TABLE>
<CAPTION>

                                          "Addition"
                          Balance          charged to         "Other"                          Balance
                         beginning         costs and         additions         "Less"          at end
  Description             of year          expenses        (deductions)      deductions        of year
-----------------------------------------------------------------------------------------------------------
<S>                    <C>              <C>               <C>               <C>              <C>
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

Year Ended
December 31,
2004

Allowance for
doubtful accounts      $        171     $        (17)     $         --      $         95 (b) $         59

Deferred tax
asset valuation
allowance              $          1     $         --      $         --      $         --     $          1
</TABLE>

     (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.

                                     - 79 -
<PAGE>

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).

                                     - 80 -
<PAGE>

  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).

                                     - 81 -
<PAGE>

  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           2006 Management Incentive Plan +-

  10.26           Amendment to Commitment letter dated March 21, 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) +

                                     - 82 -
<PAGE>

  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.

  10.37      *    Letter dated March 13, 2007 from Robert A. Levinson.

  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).

  14              Code of Ethics for Senior Financial Officers and the Principal
                  Executive Officer (incorporated herein by reference to Exhibit
                  14 to Levcor's 10-KSB/A filed on April 29, 2004)

  21         *    Subsidiaries of the Company.

                                     - 83 -
<PAGE>

  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.

 -----------------
+ Indicates that exhibit is a management contract or compensatory plan or
  arrangement.
* Indicates that exhibit is filed as an exhibit hereto.

                                     - 84 -
<PAGE>

                                   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 23, 2007                          By: /s/ ROBERT A. LEVINSON
                                                  ------------------------------
                                                  Robert A. Levinson,
                                                  Chairman of the Board,
                                                  President and Chief Executive
                                                  Officer

Date: March 23, 2007
                                              By: /s/ EDWARD F. COOKE
                                                  ------------------------------
                                                  Edward F. Cooke,
                                                  Chief Financial Officer,
                                                  Vice President, Secretary,
                                                  Treasurer and Director

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.

<TABLE>
<CAPTION>

<S>                             <C>             <C>                                   <C>
/s/ ROBERT A. LEVINSON          3/23/07         /s/ EDWARD F. COOKE                   3/23/07
---------------------------------------         ---------------------------------------------
Robert A. Levinson              Date            Edward F. Cooke                         Date
Chairman of the Board, Chief                    Chief Financial Officer,
Executive Officer and President                 Vice President, Secretary, Treasurer and
(Principal Executive Officer)                   Director
                                                (Principal Financial Officer)


/s/ EDWARD H. COHEN             3/23/07         /s/ GIANDOMENICO PICCO                3/23/07
---------------------------------------         ---------------------------------------------
Edward H. Cohen                                 Giandomenico Picco                    Date
Director                                        Director


/s/ JOHN McCONNAUGHY            3/23/07
---------------------------------------
John McConnaughy                Date
Director
</TABLE>

                                     - 85 -