UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K

 (Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
        For the Fiscal Year ended December 30, 2006
                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
        For the transition period from ________________ to _______________

                          Commission File Number 0-599

                               THE EASTERN COMPANY
                               -------------------
             (Exact name of registrant as specified in its charter)

       Connecticut                                      06-0330020
       -----------                                      ----------
(State or other jurisdiction of                       (IRS Employer
incorporation or organization)                       Identification No.)

   112 Bridge Street, Naugatuck, Connecticut                  06770
   -----------------------------------------                  -----
   (Address of principal executive offices)                 (Zip Code)

 Registrant's telephone number, including area code:  (203) 729-2255

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

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

                            Common Stock No Par Value
                            -------------------------
                                (Title of Class)

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 (ss.229.405 of this chapter) is not contained herein, and will
not be contained,  to the best of registrant's knowledge, in definitive proxy or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]

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 Act).                                      Yes [   ]  No [X]

As of July 1, 2006, the last day of registrant's most recently  completed second
fiscal  quarter,  the  aggregate  market  value  of the  voting  stock  held  by
non-affiliates  of the  registrant was  $63,152,194  (based on the closing sales
price of the  registrant's  common  stock on the last trading date prior to that
date). Shares of the registrant's common stock held by each officer and director
and shares held in trust by the pension  plans of the Company have been excluded
in that such  persons  may be deemed to be  affiliates.  This  determination  of
affiliate  status  is not  necessarily  a  conclusive  determination  for  other
purposes.

As of February 23, 2007,  5,503,211 shares of the registrant's  common stock, no
par value per share, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the annual proxy statement dated March 19, 2007 are  incorporated by
reference into Part III.


<PAGE>

<TABLE>
<CAPTION>

                               The Eastern Company
                                    Form 10-K

                   FOR THE FISCAL YEAR ENDED DECEMBER 30, 2006

                                TABLE OF CONTENTS
                                                                                                        Page
<S>                               <C>                                                                   <C>
                                   Table of Contents                                                      2.

                                   Safe Harbor Statement                                                  3.

 PART I

 Item 1.                           Business                                                               4.

 Item 1A.                          Risk Factors                                                           7.

 Item 1B.                          Unresolved Staff Comments                                              10.

 Item 2.                           Properties                                                             10.

 Item 3.                           Legal Proceedings                                                      11.

 Item 4.                           Submission of Matters to a Vote of Security Holders                    11.

 PART II
 Item 5.                           Market for Registrant's Common Equity, Related
                                      Stockholder Matters and Issuer Purchases of Equity Securities       12.

 Item 6.                           Selected Financial Data                                                14.

 Item 7.                           Management's Discussion and Analysis of Financial
                                      Condition and Results of Operations                                 14.

 Item 7A.                          Quantitative and Qualitative Disclosures
                                      About Market Risk                                                   26.

 Item 8.                           Financial Statements and Supplementary Data                            27.

 Item 9.                           Changes in and Disagreements with Accountants on
                                      Accounting and Financial Disclosure                                 56.

 Item 9A.                          Controls and Procedures                                                56.

 Item 9B.                          Other Information                                                      56.

 PART III
 Item 10.                          Directors, Executive Officers and Corporate Governance                 56.

 Item 11.                          Executive Compensation                                                 57.

 Item 12.                          Security Ownership of Certain Beneficial Owners and Management
                                      and Related Stockholder Matters                                     57.

 Item 13.                          Certain Relationships and Related Transactions, and Director
                                      Independence                                                        57.

 Item 14.                          Principal Accounting Fees and Services                                 57.

 PART IV
 Item 15.                          Exhibits, Financial Statement Schedules                                58.

                                   Signatures                                                             61.

                                   Exhibit Index                                                          62.

</TABLE>

                                      -2-
<PAGE>


                              SAFE HARBOR STATEMENT
                          UNDER THE PRIVATE SECURITIES
                          LITIGATION REFORM ACT OF 1995

This Annual Report on Form 10-K contains  forward-looking  statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
reflect the Company's current expectations  regarding its products,  its markets
and its future financial and operating performance.  These statements,  however,
are  subject  to risks and  uncertainties  that may cause the  Company's  actual
results in future periods to differ  materially from those expected.  Such risks
and uncertainties  include, but are not limited to,  unanticipated  slowdowns in
the Company's major markets,  changing customer preferences,  lack of success of
new products,  loss of customers,  competition,  increased raw material  prices,
problems  associated  with  foreign  sourcing of parts and  products,  worldwide
conditions  and  foreign  currency  fluctuations  that  may  affect  results  of
operations,  and other  factors  discussed  from  time to time in the  Company's
filings  with  the  Securities  and  Exchange  Commission.  The  Company  is not
obligated  to update  or  revise  the  aforementioned  statements  for those new
developments.

                                      -3-
<PAGE>

                                     PART I

ITEM 1     BUSINESS

(a)  General Development of Business
     -------------------------------

The Eastern Company (the "Company") was incorporated under the laws of the State
of  Connecticut in October,  1912,  succeeding a  co-partnership  established in
October, 1858.

The business of the Company is the manufacture and sale of industrial  hardware,
security  products  and  metal  products  from  four  U.S.  operations  and  six
wholly-owned   foreign   subsidiaries.   The  Company  maintains  nine  physical
locations.

RECENT DEVELOPMENTS

During the third quarter of 2006,  the Company  received  orders from a military
contractor  for  component  parts used in  retro-fitting  Humvees as part of the
military's  up-armor  program  to provide  additional  troop  protection.  These
component  parts  began to be shipped in  September  2006 and are  scheduled  to
continue to be shipped into the early part of the second  quarter of 2007.  This
program  will  result  in  approximately  $31  million  in total  sales  for the
Industrial Hardware segment of the Company during the period from September 2006
to April 2007.

Effective  November  8, 2006,  the  Company  acquired  certain  assets of Summit
Manufacturing, Inc. ("Summit"), which was integrated into the Company's Security
Products  segment.  Summit  designs  and  manufactures  appliance  hardware  and
accessories,  including,  but not  limited  to,  oven  door  latches,  oven door
switches and smoke eliminators and provides subcontract  assembly services.  The
cost of the Summit acquisition was $546,000,  inclusive of transaction costs and
outstanding  debt paid at closing,  plus the  assumption  of $369,000 in current
liabilities.

Effective  September 25, 2006, the Company acquired certain assets of Royal Lock
Corporation  ("Royal"),  which was also integrated  into the Company's  Security
Products  segment.  Royal is a supplier of cam locks,  switch  locks,  padlocks,
latches, handles and specialty hardware parts. The cost of the Royal acquisition
was $6,991,000,  inclusive of transaction costs, plus the assumption of $775,000
in current liabilities.

Both of the above  acquisitions  have  been  accounted  for  using the  purchase
method.  The  acquired  businesses  are included in the  consolidated  operating
results of the Company from the date of acquisition.  Neither the actual results
nor the pro forma  effects of these  acquisitions  are material to the Company's
financial statements.

In October 2006,  the Company's  common stock was split  3-for-2.  The effect of
this stock split is reflected in all applicable share data and per share data in
this Annual Report on Form 10-K.

(b)  Financial Information about Industry Segments
     ---------------------------------------------

Financial  information  about  industry  segments  is included in Note 12 to the
Company's financial statements, included at Item 8 of this Annual Report on Form
10-K.

(c)  Narrative Description of Business
     ---------------------------------

The Company operates in three business segments:  Industrial Hardware,  Security
Products and Metal Products.

Industrial Hardware

The Industrial  Hardware  segment consists of Eberhard  Manufacturing,  Eberhard
Hardware  Manufacturing Ltd., Canadian Commercial Vehicles Corporation,  Eastern
Industrial Ltd. and Sesamee Mexicana, S.A. de C.V. The units design, manufacture
and  market  a  diverse  product  line  of  industrial  and  vehicular  hardware
throughout  North  America.  The  segment's  locks,  latches,  hinges,  handles,
lightweight  honeycomb composite structures and related hardware can be found on
tractor-trailer   trucks,   moving  vans,  off-road   construction  and  farming
equipment, school buses, military vehicles and recreational boats. They are also
used on pickup trucks,  sport utility vehicles and fire and rescue vehicles.  In
addition,  the segment  manufactures  a wide  selection of  fasteners  and other
closure  devices  used to secure  access  doors on various  types of  industrial
equipment such as metal cabinets, machinery housings and electronic instruments.
Eastern Industrial expands the range of offerings of this segment to include

                                      -4-
<PAGE>

plastic injection molding.  Typical products include passenger  restraint locks,
slam  and  draw  latches,  dead  bolt  latches,  compression  latches,  cam-type
vehicular locks, hinges, tool box locks,  light-weight sleeper boxes for Class 8
trucks and school bus door closure  hardware.  The products are sold directly to
original  equipment  manufacturers  and to  distributors  through a distribution
channel consisting of in-house salesmen and outside sales representatives. Sales
and customer service efforts are  concentrated  through in-house sales personnel
where greater representation of our diverse product lines can be promoted across
a variety of markets.

The Industrial Hardware segment sells its products to a diverse array of markets
such as the truck,  bus and  automotive  industries as well as to the industrial
equipment,  military and marine sectors. Although service, quality and price are
major criteria for servicing these markets, the continued introduction of new or
improved  product designs and the  acquisition of synergistic  product lines are
vital for maintaining and increasing market share.

Security Products

The Security Products segment,  made up of Greenwald  Industries,  Illinois Lock
Company/CCL  Security  Products/Royal  Lock,  World Lock  Company Ltd. and World
Security Industries Ltd.--is a leading  manufacturer of security products.  This
segment manufactures  electronic and mechanical locking devices,  both keyed and
keyless,  for the  computer,  electronics,  vending and gaming  industries.  The
segment  also  supplies  its  products  to the  luggage,  furniture,  laboratory
equipment and commercial laundry industries.  Greenwald manufactures and markets
coin acceptors and other coin security products used primarily in the commercial
laundry markets, as well as hardware and accessories for the appliance industry.
In  addition,  the  segment  provides  a new level of  security  for the  access
control,  municipal  parking and vending markets through the use of "smart card"
technology.

Greenwald's  products  include timers,  drop meters,  coin chutes,  money boxes,
meter cases,  smart cards,  value transfer  stations,  smart card readers,  card
management software, access control units, oven door latches, oven door switches
and smoke eliminators.  Illinois Lock Company/CCL  Security  Products/Royal Lock
sales include cabinet locks, cam locks, electric switch locks, tubular key locks
and  combination  padlocks.  Many of the  products  are  sold  under  the  names
SEARCHALERT(TM),  PRESTOSEAL(TM), DUO, X-STATIC(R), EXCALIBUR(TM),  WARLOCK(TM),
LITE  LOCK(TM),  SESAMEE(R),  BIG TAG(R),  PRESTOLOCK(R)  and  HUSKI(TM).  These
products  are sold to  original  equipment  manufacturers,  distributors,  route
operators,   and   locksmiths   via   in-house   salesmen   and  outside   sales
representatives.  Sales efforts are  concentrated  through national and regional
sales personnel where greater representation of our diverse product lines can be
promoted across a variety of markets.

The Security Products segment  continuously seeks new markets where it can offer
competitive  pricing and provide  customers with engineered  solutions for their
security needs.

Metal Products

The Metal Products segment,  based at the Company's Frazer & Jones facility,  is
the  largest  and  most  efficient  producer  of  expansion  shells  for  use in
supporting  the roofs of  underground  mines.  This  segment  also  manufactures
specialty malleable and ductile iron castings.

Typical  products  include  mine roof  support  anchors,  couplers  for railroad
braking systems,  adjustable clamps for construction and fittings for electrical
installations.  Mine roof support anchors are sold to distributors  and directly
to mines, while specialty castings are sold to original equipment manufacturers.

Although there continues to be a need for the highly engineered proprietary mine
roof support products produced by this segment of the Company, changes in mining
technology continue to decrease demand for mechanical anchoring systems. Intense
competition from foreign countries has adversely affected competing  effectively
in the contract castings market. As a result,  the Company began to phase out of
its low-margin  contract  castings  business and  concentrate on its proprietary
mine roof support  systems.  To offset declines in the demand for malleable iron
castings, the Company has invested in equipment for the production and marketing
of ductile iron castings.

                                      -5-

<PAGE>

General

Raw materials and outside services were readily  available from domestic sources
for all of the  Company's  segments  during 2006 and are  expected to be readily
available in 2007 and the foreseeable future. The Company also obtains materials
from Asian affiliated and nonaffiliated sources. The Company has not experienced
any significant  problems  obtaining material from its Asian sources in 2006 and
does not expect any such  problems in 2007.  In 2006,  the  Company  experienced
significant  price increases for zinc, brass and stainless steel, used mainly in
the Industrial  Hardware and Security Products  segments,  as well as scrap iron
used in the Metal Products segment. These higher prices had a negative impact on
gross margin in 2006,  and will  continue to  negatively  impact gross margin in
2007, if prices do not stabilize.

Patent  protection for the various  product lines within the Company is limited,
but is sufficient to protect the Company's competitive positions.  Foreign sales
and license agreements are not significant.

None of the Company's business segments are seasonal.

The Company,  across all its business  segments,  has  increased its emphasis on
sales and customer service by fulfilling the rapid delivery  requirements of our
customers.  As a result,  investments  in additional  inventories  are made on a
selective basis.

Customer lists for all business segments are broad-based  geographically  and by
markets and sales are generally not highly  concentrated  by customer.  However,
due to the military Humvee  retro-fit  contract,  one customer in the Industrial
Hardware  Segment  accounted  for  approximately  15% of total sales in 2006. No
other customers exceeded 10% or more of the Company's consolidated sales for the
year ended December 30, 2006.  Following the completion of the Humvee  retro-fit
contract in April 2007, if  additional  military  orders are not  received,  the
Company anticipates sales in the second quarter of 2007 would be in the range of
10% - 20% above the second quarter of 2006.

The dollar  amount of the backlog of orders  received by the Company is believed
to be firm as of fiscal year ended December 30, 2006 at $37,929,000, as compared
to  $17,219,000  at December 31, 2005.  The primary  source of the increase from
2005 to 2006 are orders related to the military Humvee retro-fit program.

The Company encounters  competition in all of its business segments. The Company
has been  successful in dealing with this  competition  by offering high quality
diversified  products with the flexibility of meeting customer needs on a timely
basis. This is accomplished by effectively using internal engineering resources,
cost  effective  manufacturing  capabilities,  expanding  product  lines through
product  development and acquisitions and maintaining  sufficient  inventory for
fast turnaround of customer orders. However, imports from Asia and Latin America
with  favorable  currency  exchange  rates  and  low  cost  labor  have  created
additional   competitive   pressures.   The  Company  currently  utilizes  three
wholly-owned subsidiaries in Asia to help offset offshore competition.

Research and  development  expenditures  in 2006 were $1,354,000 and represented
approximately  1% of gross  revenues.  In 2005 and 2004 they were $1,150,000 and
$1,167,000,  respectively.  The research costs are primarily attributable to the
Greenwald  division,  where ongoing  research,  in both the mechanical and smart
card product lines, is necessary in order to remain  competitive and to continue
to provide technologically  advanced smart card systems. Other research projects
include the development of various locks, transportation and industrial hardware
products.

The Company does not anticipate  that  compliance  with federal,  state or local
environmental  laws or regulations  will have a material effect on the Company's
capital expenditures, earnings or competitive position.

The average number of employees in 2006 was 695.

(d)  Financial Information about Geographic Areas
     --------------------------------------------

The Company includes four separate operating divisions located within the United
States,  two  wholly-owned  Canadian  subsidiaries,  one located in Tillsonburg,
Ontario,  Canada, and one in Kelowna,  British Columbia,  Canada, a wholly-owned
Taiwanese  subsidiary  located in Taipei,  Taiwan, a wholly-owned  subsidiary in
Hong Kong,  a  wholly-owned  subsidiary  in Shanghai,  China and a  wholly-owned
subsidiary in Mexico.

Individually,   the  Canadian,   Taiwanese,   Hong  Kong,  Chinese  and  Mexican
subsidiaries'  revenue and assets are not significant.  Substantially  all other
revenues are derived from customers located in the United States.

                                      -6-
<PAGE>

Financial  information  about  foreign and  domestic  operations'  revenues  and
identifiable   assets  is  included  in  Note  12  to  the  Company's  financial
statements,  included at Item 8 of this Annual Report on Form 10-K.  Information
about risks attendant to the Company's  foreign  operations is set forth at Item
1A of this Annual Report on Form 10-K.

(e)  Available Information
     ---------------------

We  make   available,   free  of  charge   through  our   Internet   website  at
http://www.easterncompany.com, our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed
or furnished  pursuant to Section 13(a) or 15(d) of the Securities  Exchange Act
of 1934, as soon as reasonably practicable after such material is electronically
filed with or furnished to the Securities and Exchange Commission. The Company's
reports  filed with,  or furnished  to, the SEC are also  available on the SEC's
website at www.sec.gov.


ITEM 1A    RISK FACTORS

In  addition  to the  other  information  contained  in this  Form  10-K and the
exhibits hereto and the Company's other filings with the SEC, the following risk
factors should be considered carefully in evaluating the Company's business. The
Company's  business,  financial  condition  or  results  of  operation  could be
materially  adversely  affected  by any of these risks or  additional  risks not
presently  known  to the  Company,  or by  risks  the  Company  currently  deems
immaterial which may also adversely affect its business, financial condition, or
results of  operations,  such as: changes in the economy,  including  changes in
inflation,   tax  rates  and  interest  rates,  risk  associated  with  possible
disruption  in the  Company's  operations  due to terrorism and other manmade or
natural  disasters,  future  regulatory  actions,  legal issues or environmental
matters,  loss of, or changes in, executive management and changes in accounting
standards which are adverse to the Company. Also, there can be no assurance that
the Company has  correctly  identified  and  appropriately  assessed all factors
affecting our business or that  information  publicly  available with respect to
these matters is complete and correct.

OUR BUSINESS IS SUBJECT TO RISKS ASSOCIATED WITH CONDUCTING BUSINESS OVERSEAS.

International operations could be adversely affected by changes in political and
economic conditions, trade protection measures,  restrictions on repatriation of
earnings,  differing  intellectual  property  rights and  changes in  regulatory
requirements  that restrict the sales of products or increase costs.  Changes in
exchange  rates  between the U.S.  dollar and other  currencies  could result in
increases or decreases  in earnings  and may  adversely  affect the value of the
Company's  assets outside the United States.  Our operations are also subject to
the  effects  of  international  trade  agreements  and  regulations.   Although
generally  these trade  agreements have positive  effects,  they can also impose
requirements  that  adversely  affect our  business,  such as setting  quotas on
product that may be imported  from a particular  country into our key markets in
North America.

Our ability to import products in a timely and cost-effective manner may also be
affected by conditions at ports or issues that otherwise  affect  transportation
and warehousing providers,  such as port and shipping capacity,  labor disputes,
severe weather or increased homeland security  requirements in the United States
or other countries.  These issues could delay importation of products or require
us to locate  alternative ports or warehousing  providers to avoid disruption to
our customers.  These alternatives may not be available on short notice or could
result in higher  transit  costs,  which  could  have an  adverse  impact on our
business, financial conditions or results of operations.

See also "ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK"
of this Form 10-K.

In addition,  the Company's  growth  strategy  involves  expanding  sales of its
products into foreign  markets.  There is no guarantee that our products will be
accepted by foreign  customers  or how long it may take to develop  sales of our
products in these foreign markets.

                                      -7-
<PAGE>

INCREASES IN THE PRICE OR REDUCED AVAILABILITY OF RAW MATERIALS.

Raw  materials  needed  to  manufacture  products  are  obtained  from  numerous
suppliers.  Under normal  market  conditions,  these raw  materials  are readily
available on the open market from a variety of producers.  However, from time to
time the prices and availability of these raw materials  fluctuate,  which could
impair the  Company's  ability to procure the  required  raw  materials  for our
operations or increase the cost of manufacturing  our products.  If the price of
raw materials increases, the Company may be unable to pass these increases on to
its customers and could  experience  reduction to its profit margins.  Also, any
decrease in the  availability  of raw materials could impair our ability to meet
production requirements in a timely manner.

INCREASED COMPETITION IN THE MARKETS THE COMPANY SERVICES COULD IMPACT REVENUES
AND EARNINGS.

Any change in  competition  may result in lost market  share or reduced  prices,
which could  result in reduced  profit  margins.  This may impair the ability to
grow or even maintain current levels of revenues and earnings. While the Company
has an extensive customer base, loss of certain customers could adversely affect
the Company's business,  financial condition or results of operations until such
business is replaced,  and no  assurances  can be made that the Company would be
able to regain or replace any lost customers.

THE COMPANY WILL BE REQUIRED TO EVALUATE ITS INTERNAL CONTROL OVER FINANCIAL
REPORTING UNDER SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002.

As of December 31, 2006, the Company is a "non-accelerated  filer" as defined in
Rule 12b-2 under the  Securities  Exchange Act of 1934, as amended.  Pursuant to
current  reporting  requirements,  the  Company  expects  to be an  "accelerated
filer",  as defined in Rule 12b-2 under the Securities  Exchange Act of 1934, as
amended,  and will be required to comply with Section 404 of the  Sarbanes-Oxley
Act of 2002  beginning  with our Annual  Report on Form 10-K for fiscal year end
2007. Section 404 will require the Company to include in its report management's
assessment of the effectiveness of the Company's internal control over financial
reporting as of the end of the fiscal period for which the Company is filing its
10-K.  This report must also include  disclosure  of any material  weaknesses in
internal  control  over  financial  reporting  that the Company has  identified.
Additionally,  the Company's independent  registered public accounting firm will
be required to issue an  attestation  report on  management's  assessment of its
internal control over financial  reporting and their evaluation of the operating
effectiveness of the Company's  internal control over financial  reporting.  The
Company's   assessment  requires  it  to  make  subjective   judgments  and  the
independent  registered  public accounting firm may not agree with the Company's
assessment.  If the Company or its independent registered public accounting firm
were unable to complete the assessments  within the period prescribed by Section
404 and thus be unable to conclude  that the  internal  control  over  financial
reporting  is  effective,  investors  could  lose  confidence  in  our  reported
financial information, which could have an adverse effect on the market price of
the Company's common stock or impact the Company's borrowing ability.

THE INABILITY TO IDENTIFY OR COMPLETE ACQUISITIONS COULD LIMIT FUTURE GROWTH.

As part of its growth strategy,  the Company continues to pursue acquisitions of
complementary  products or businesses.  The ability to grow through acquisitions
depends  upon  the  Company's  ability  to  identify,  negotiate,  complete  and
integrate suitable acquisitions.  The Company makes certain assumptions based on
the information provided by potential  acquisition  candidates and also conducts
due  diligence  to ensure the  information  provided  is  accurate  and based on
reasonable assumptions, but the Company may be unable to realize the anticipated
benefits from an  acquisition  or predict  accurately  how an  acquisition  will
ultimately affect the business, financial condition or results of operations.

DEMAND  FOR  NEW  PRODUCTS  AND THE  INABILITY  TO  DEVELOP  AND  INTRODUCE  NEW
COMPETITIVE  PRODUCTS AT FAVORABLE  PROFIT  MARGINS COULD  ADVERSELY  AFFECT THE
COMPANY'S  PERFORMANCE AND PROSPECTS FOR FUTURE GROWTH AND THE COMPANY WOULD NOT
BE POSITIONED TO MAINTAIN CURRENT LEVELS OF REVENUES AND EARNINGS.

The uncertainties  associated with developing and introducing new products, such
as the market demands and the costs of development  and  production,  may impede
the  successful  development  and  introduction  of new  products  successfully.
Acceptance  of the new products may not meet sales  expectations  due to several
factors,  such as the Company's  failure to accurately  predict market demand or
its inability to resolve technical issues in a timely and cost-effective manner.
Additionally,  the  inability  to develop new  products on a timely  basis could
result in the loss of business to  competitors.

                                      -8-
<PAGE>

THE COMPANY COULD BE SUBJECT TO LITIGATION WHICH COULD HAVE A MATERIAL IMPACT ON
THE COMPANY'S BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS.

From time to time,  the  Company's  operations  are  parties  to or  targets  of
lawsuits, claims,  investigations and proceedings,  including product liability,
personal  injury,  patent  and  intellectual  property,  commercial,   contract,
environmental  and  employment  matters,  which are  defended and settled in the
ordinary course of business.  While the Company is unable to predict the outcome
of any of these matters,  it does not believe,  based upon  currently  available
information,  that the  resolution  of any  pending  matter will have a material
adverse  effect on its business,  financial  condition or results of operations.
See "ITEM 3 - LEGAL  PROCEEDINGS"  in this Form 10-K for a discussion of current
litigation.

THE COMPANY COULD BE SUBJECT TO ADDITIONAL TAX LIABILITIES.

The Company is subject to income tax laws in the United  States,  its states and
municipalities and those of other foreign jurisdictions in which the Company has
business  operations.  These laws are complex and subject to  interpretations by
the taxpayer  and the  relevant  governmental  taxing  authorities.  Significant
judgment and  interpretation is required in determining the Company's  worldwide
provision for income  taxes.  In the ordinary  course of business,  transactions
arise where the ultimate tax determination is uncertain. Although we believe the
Company's tax estimates are reasonable,  the final outcome of tax audits and any
related litigation could be materially different from that which is reflected in
historical  income tax provisions  and accruals.  Based on the status of a given
tax audit or related  litigation,  a material effect on our income tax provision
or net  income  may  result  during  the  period  or  periods  from the  initial
recognition  of a  particular  matter in our reported  financial  results to the
final  closure of that tax audit or settlement  of related  litigation  when the
ultimate tax and related cash flow is known with certainty.

THE COMPANY'S GOODWILL OR INDEFINITE-LIVED INTANGIBLE ASSETS MAY BECOME IMPAIRED
WHICH COULD REQUIRE A SIGNIFICANT CHARGE TO EARNINGS TO BE RECOGNIZED.

Under accounting  principles  generally accepted in the United States,  goodwill
and  indefinite-lived  intangible  assets are not amortized but are reviewed for
impairment at least annually. Numerous assumptions are used in the evaluation of
impairment and there is no guarantee that the Company's  independent  registered
public  accounting  firm would  reach the same  conclusion  as the Company or an
independent  valuation  firm,  which  could  result  in a  disagreement  between
management  and  the  independent  registered  public  accounting  firm.  Future
operating  results used in the assumptions,  such as sales or profit  forecasts,
may not  materialize  and the Company  could be required to record a significant
charge to earnings in the  financial  statements  during the period in which any
impairment is determined,  resulting in an unfavorable  impact on our results of
operations.

THE COMPANY MAY NEED ADDITIONAL CAPITAL IN THE FUTURE, AND IT MAY NOT BE
AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL.

From time-to-time,  the Company has historically  relied on outside financing to
fund expanded  operations,  capital expenditure  programs and acquisitions.  The
Company  may  require  additional  capital in the future to fund  operations  or
strategic opportunities. The Company cannot be assured that additional financing
will be  available  on favorable  terms,  or at all. In  addition,  the terms of
available  financing may place limits on the  Company's  financial and operating
flexibility.  If the  Company  is  unable to obtain  sufficient  capital  in the
future,  the  Company  may  not be  able  to  expand  or  acquire  complementary
businesses  and may not be able to continue to develop new products or otherwise
respond to changing business conditions or competitive pressures.

THE  COMPANY'S  STOCK PRICE IS HIGHLY  VOLATILE  DUE TO LOW FLOAT,  WHICH IS THE
NUMBER  OF  SHARES  OF THE  COMPANY'S  COMMON  STOCK  THAT ARE  OUTSTANDING  AND
AVAILABLE FOR TRADING BY THE PUBLIC.

The  Company's  stock  price may  change  dramatically  when  buyers  seeking to
purchase shares of the Company's common stock exceed the shares available on the
market or when there are no buyers to purchase  shares of the  Company's  common
stock when shareholders are trying to sell their shares.

                                      -9-
<PAGE>

THE COMPANY MAY NOT BE ABLE TO REACH ACCEPTABLE TERMS FOR CONTRACTS NEGOTIATED
WITH ITS LABOR UNIONS AND BE SUBJECT TO WORK STOPPAGES OR DISRUPTION OF
PRODUCTION.

During 2007, union contracts covering 32% of the total workforce of the Company
will expire. The Company has been successful in negotiating new contracts over
the years, but cannot guarantee that will continue. Failure to negotiate new
union contracts could result in disruption of production, inability to deliver
product or a number of unforeseen circumstances, any of which could have an
unfavorable material impact on the Company's results of operations or financial
statements.


ITEM 1B    UNRESOLVED STAFF COMMENTS

None.


ITEM 2     PROPERTIES

The corporate  office of the Company is located in Naugatuck,  Connecticut  in a
two-story 8,000 square foot administrative building on 3.2 acres of land.

All of the Company's  properties are owned or leased and are adequate to satisfy
current  requirements.  All of the  Registrant's  properties  have the necessary
flexibility to cover any long-term expansion requirements.

THE INDUSTRIAL HARDWARE GROUP INCLUDES THE FOLLOWING:

The Eberhard Manufacturing Division in Strongsville, Ohio owns 9.6 acres of land
and a building  containing  138,000 square feet,  located in an industrial park.
The building is steel frame, one-story, having curtain walls of brick, glass and
insulated  steel panel.  The building has two high bays, one of which houses two
units of automated  warehousing.  The Company has rented  additional space in an
adjacent  building  to  fulfill  space  requirements  for the  current  military
contracts.

The Eberhard Hardware Manufacturing, Ltd., a wholly-owned Canadian subsidiary in
Tillsonburg,  Ontario,  owns 4.4 acres of land and a building  containing 31,000
square feet in an  industrial  park.  The  building is steel  frame,  one-story,
having  curtain  walls  of  brick,  glass  and  insulated  steel  panel.  It  is
particularly  suited for light  fabrication,  assembly  and  warehousing  and is
adequate for long-term expansion requirements.

The Canadian  Commercial  Vehicles  Corporation,  a  wholly-owned  subsidiary in
Kelowna,  British Columbia,  leases 46,500 square feet of building space located
in an industrial  park.  The building is made from brick and concrete,  contains
approximately  5,400  square  feet of office  space on two  levels  and houses a
modern paint booth for finishing our products. The building is protected by a F1
rated fire  suppression  system and alarmed for fire and  security.  The current
lease is renewable annually on January 1st.

The Eastern Industrial Ltd., a wholly-owned subsidiary in Shanghai, China leases
brick and  concrete  buildings  containing  approximately  45,600  square  feet,
located in both industrial and commercial areas. A five-year lease was signed in
2003, which expires on September 8, 2008 and is renewable.

The Sesamee  Mexicana  subsidiary  moved into a new facility  during 2006 and is
leasing 18,000 square feet located in an industrial park in Lerma,  Mexico on an
open-end  basis.  The  building is steel  framed with  concrete  block and glass
curtain walls.


                                      -10-
<PAGE>

THE SECURITY PRODUCTS GROUP INCLUDES THE FOLLOWING:

The Greenwald Industries Division in Chester, Connecticut owns 26 acres of land
and a building containing 120,000 square feet. The building is steel frame, one
story, having brick over concrete blocks.

The Illinois Lock Company/CCL  Security  Products/Royal Lock Division occupies a
building  containing 44,000 square feet in Wheeling,  Illinois.  The building is
brick and located in an industrial park. In December 2006, the Company purchased
this building and land for $2.2 million.  This facility had been leased prior to
December 2006. The Company is also leasing  approximately  10,000 square feet of
warehouse  space occupied by Royal Lock during the transition  into our existing
facility.

The World Lock Co. Ltd.  subsidiary  leases 5,285 square feet located in Taipei,
Taiwan.  The building is made from brick and concrete and is protected by a fire
alarm and sprinklers.

THE METAL PRODUCTS GROUP CONSISTS OF:

The Frazer and Jones Division in Solvay, New York, which owns 17.9 acres of land
and buildings  containing 205,000 square feet constructed for foundry use. These
facilities are well adapted to handle the division's  current and future casting
requirements.

All owned properties are free and clear of any encumbrances.


ITEM 3     LEGAL PROCEEDINGS

The Company was a party to a patent infringement suit filed on December 23, 2002
in the U.S. District Court for the Eastern District of Texas, Marshall Division,
Civil Action Number  2-03-CV005-TJW.  Imonex  Services,  Inc. (the  "Plaintiff")
alleged the Company infringed on two of its patents. The Plaintiff was seeking a
permanent  injunction against the Company's direct and inducing  infringement of
its patents.  The Plaintiff was also seeking an  unspecified  amount of damages,
treble damages for willful infringement,  interest on the damages, reimbursement
of legal  expenses  and other such  relief as the court  deemed just and proper.
Although  management  determined  that the suit was without  merit,  the Company
agreed to a mediated  settlement of $400,000,  which was recorded as a charge to
earnings  in the second  quarter of 2004.  In addition  to the  settlement,  the
Company incurred  approximately  $115,000 of legal expenses in 2003 and $398,000
of legal  expenses in 2004 relating to this suit.  The legal  expenses  combined
with the settlement resulted in charges to earnings,  net of taxes, of $484,000,
or $0.09 per diluted share, in 2004.

There are no other legal  proceedings,  other than ordinary  routine  litigation
incidental to the Company's business,  to which either the Company or any of its
subsidiaries is a party or to which any of their property is the subject.


ITEM 4     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter ended December 30, 2006.




                                      -11-
<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 American  Stock  Exchange  (ticker
symbol EML).  The  approximate  number of record  holders of the Company  common
stock on December 30, 2006 was 595.

High and low stock prices and dividends for the last two years were:
<TABLE>
<CAPTION>

                          2006                                                           2005
  ---------------------------------------------------           ---------------------------------------------------
                        Market Price                                                   Market Price
  Quarter           High         Low         Dividend           Quarter            High          Low       Dividend
  ---------------------------------------------------           ---------------------------------------------------
<S>                <C>          <C>            <C>             <C>               <C>            <C>           <C>
  First             $14.67       $12.50         $.07            First             $15.97         $12.87        $.07
  Second             15.10        13.27          .08            Second             15.70          13.33         .07
  Third              18.83        13.70          .08            Third              17.50          14.17         .07
  Fourth             19.40        16.20          .08            Fourth             15.63          12.97         .07
</TABLE>

The Company increased the dividend rate by 9% in the second quarter of 2006. The
Company  expects  to  continue  its  policy of paying  regular  cash  dividends,
although there is no assurance as to future dividends because they are dependent
on future earnings, capital requirements,  and financial conditions. The payment
of dividends is subject to the  restrictions  of the Company's loan agreement if
such  payment  would  result in an event of default.  See Item 7 -  Management's
Discussion and Analysis of Financial  Condition and Results of  Operations,  and
Note 5 to the Company's  financial  statements included at Item 8 of this Annual
Report on Form 10-K.

The following table sets forth information  regarding securities  authorized for
issuance under the Company's equity  compensation plans as of December 30, 2006,
including the Company's 1989, 1995, 1997 and 2000 plans.

<TABLE>
<CAPTION>

                                                 Equity Compensation Plan Information
-----------------------------------------------------------------------------------------------------------------------------------
                                         Number of securities                                        Number of securities remaining
                                          to be issued upon                                          available for future issuance
                                             exercise of            Weighted-average exercise       under equity compensation plans
                                        outstanding options,           price of outstanding         (excluding securities reflected
Plan category                           warrants and rights       options, warrants and rights                in column (a))
                                        --------------------      ----------------------------      -------------------------------
                                                 (a)                          (b)                                 (c)
<S>                                          <C>                            <C>                              <C>
Equity compensation plans
  approved by security holders                  629,250(1)                   $9.77                            367,500(2)
Equity compensation plans not
   approved by security holders                 373,500(3)                    8.32                             78,750(4)
                                              ---------                      -----                            -------
Total                                         1,002,750                      $9.23                            446,250
                                              =========                      =====                            =======
<FN>

     (1) Includes options outstanding under the 1989, 1995 and 2000 plans.
     (2) Includes shares available for future issuance under the 2000 plan.
     (3) Includes options outstanding under the 1997 plan.
     (4) Includes shares available for future issuance under the 1997 plan.
</FN>
</TABLE>

On September  17, 1997 the  Compensation  Committee of the Board of Directors of
the Company  adopted The Eastern  Company 1997 Directors  Stock Option Plan (the
"1997 Plan") which by its terms will expire either on September 16, 2007 or upon
any earlier  termination  date  established by the Board of Directors.  The 1997
Plan  authorizes the grant of  non-qualified  stock options to the  non-employee
directors of the Company to purchase shares of common stock.  The exercise price
of any options granted under the 1997 Plan is set by the Compensation Committee.
However,  all  options  granted  to date  under the 1997 Plan have  required  an
exercise  price equal to 100% of the fair  market  value of the shares of common
stock of the Company on the date of grant.  On December 15,  1999,  the Board of
Directors  approved an increase  in the total  number of shares of common  stock
which may be  issued  under  options  granted  under the 1997 Plan from  337,500
shares to 487,500 shares.

                                      -12-
<PAGE>

Each director who is not an employee of the Company ("Outside Director") is paid
a director's fee for his services at the annual rate of $24,600. All annual fees
paid to  non-employee  members of the Board of Directors of the Company are paid
in common stock of the Company or cash,  in  accordance  with the  Directors Fee
Program adopted by the  shareholders on March 26, 1997 and amended on January 5,
2004. The directors  make an annual  election,  within a reasonable  time before
their first quarterly payment,  to receive their fees in the form of cash, stock
or a combination thereof. The election remains in force for one year.

There were no issuer  purchases of equity  securities in 2006.  The Company does
not have any share repurchase plans or programs.

STOCK PERFORMANCE GRAPH

The following graph sets forth the Company's cumulative total shareholder return
based upon an initial $100  investment  made on December  31, 2001 (i.e.,  stock
appreciation  plus dividends  during the past five fiscal years) compared to the
Wilshire  5000  Index  and the  S&P  Industrial  Machinery  Index.

The Company manufactures and markets a broad range of locks, latches,  fasteners
and other security  hardware that meets the diverse security and safety needs of
industrial  and  commercial  customers.  Consequently,  while the S&P Industrial
Machinery  Index being used for  comparison  is the standard  index most closely
related to the Company, it does not completely  represent the Company's products
or market  applications.  The  Wilshire  5000 is a market index made up of 5,000
publicly-traded   companies,   including  those  having  both  large  and  small
capitalization.

               [CHART OF CUMULATIVE TOTAL RETURN APPEARS HERE]

<TABLE>
<CAPTION>

                                Dec-01     Dec-02    Dec-03    Dec-04    Dec-05    Dec-06

<S>                               <C>       <C>       <C>       <C>       <C>       <C>
  Eastern Co.                     $100      $ 95      $139      $183      $182      $277
  Wilshire 5000                   $100      $ 79      $104      $117      $125      $144
  S&P (C) Industrial Machinery    $100      $ 99      $137      $162      $159      $181

 </TABLE>


 Copyright (C) 2007, Standard & Poor's, a division of The McGraw-Hill Companies,
 Inc.  All rights reserved.

                                      -13-

<PAGE>

ITEM 6     SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>

                                                              2006           2005          2004          2003           2002
                                                            -----------------------------------------------------------------
INCOME STATEMENT ITEMS (in thousands)
<S>                                                      <C>           <C>           <C>            <C>           <C>
Net sales                                                   $138,465      $109,107      $100,130       $ 88,307      $ 81,337
Cost of products sold                                        103,882        84,375        74,999         66,719        60,637
Depreciation and amortization                                  3,746         3,460         3,461          3,619         3,565
Interest expense                                               1,098         1,014         1,044          1,303         1,716
Income before income taxes                                    14,846         7,020         6,829          5,390         4,734
Income taxes                                                   5,187         2,653         2,071          2,028         1,442
Net income                                                     9,659         4,367         4,758          3,362         3,292
Dividends                                                      1,715         1,600         1,596          1,593         1,598

BALANCE SHEET ITEMS (in thousands)
Inventories                                                 $ 28,043      $ 20,768      $ 20,478       $ 16,927      $ 16,345
Working capital                                               35,546        31,223        26,692         24,894        25,600
Property, plant and equipment, net                            25,816        22,397        23,907         24,930        25,050
Total assets                                                 103,485        81,622        78,072         74,617        76,133
Shareholders' equity                                          54,391        46,172        43,817         40,508        37,903
Capital expenditures                                           6,722         1,750         2,062          2,763         1,560
Long-term obligations, less current portion                   17,507        12,384        11,805         15,815        18,921

PER SHARE DATA
Net income per share
   Basic                                                    $   1.76      $    .80      $    .87       $    .62      $    .60
   Diluted                                                      1.67           .75           .85            .61           .60
Dividends                                                        .31           .29           .29            .29           .29
Shareholders' equity (Basic)                                    9.94          8.47          8.05           7.46          6.96

Average shares outstanding: Basic                          5,474,137     5,455,073     5,441,312      5,430,890     5,446,917
                            Diluted                        5,768,108     5,828,837     5,618,552      5,488,448     5,521,626
</TABLE>

The information in the table above reflects a 3-for-2 stock split effective
October 2006.



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

Summary

Net sales for 2006  increased 27% to $138.5 million from $109.1 million in 2005.
Net income increased 121% to $9.7 million, or $1.67 per diluted share, from $4.4
million,  or $0.75 per  diluted  share in 2005.  Net sales and net  income  were
favorably impacted by shipments of approximately $19 million from the Industrial
Hardware  segment to fulfill  orders  received in September 2006 to produce door
latching  components  for a  military  project  to  up-armor  existing  Humvees.
Shipments  toward  fulfillment of that military project are expected to continue
through April of 2007. Net sales in the Industrial  Hardware  segment  increased
approximately  40% in 2006. Sales increased in the Security  Products segment by
13%,  resulting  from  the  combined  acquisitions  of  Royal  Lock  and  Summit
Manufacturing  which  contributed  5% of the increases and increases in existing
operations of 8%. The Metal  Products  segment also  experienced  an increase in
sales of 19%,  resulting from increased  shipments of both malleable and ductile
iron products.


                                      -14-
<PAGE>

The following  table shows,  for the fourth  quarter of 2006 and 2005,  selected
line items from the  consolidated  statements  of income as a percentage  of net
sales, by segment.
<TABLE>
<CAPTION>
                                                                     2006 Fourth Quarter
                                                      -----------------------------------------------------
                                                      Industrial      Security        Metal
                                                       Hardware       Products       Products        Total
                                                      -----------------------------------------------------
<S>                                                     <C>           <C>            <C>             <C>
       Net sales                                         100.0%        100.0%         100.0%          100.0%
       Cost of products sold                              63.4%         76.0%         103.3%           69.8%
       Gross margin                                       36.6%         24.0%          -3.3%           30.2%

       Selling and administrative expense                  9.3%         16.7%           8.8%           11.3%
       Operating profit                                   27.3%          7.3%         -12.1%           18.9%
</TABLE>

<TABLE>
<CAPTION>
                                                                     2005 Fourth Quarter
                                                      -----------------------------------------------------
                                                      Industrial      Security        Metal
                                                       Hardware       Products       Products        Total
                                                      -----------------------------------------------------
<S>                                                     <C>            <C>           <C>             <C>
       Net sales                                         100.0%         100.0%        100.0%          100.0%
       Cost of products sold                              75.1%          72.6%         96.9%           76.2%
       Gross margin                                       24.9%          27.4%          3.1%           23.8%

       Selling and administrative expense                 14.6%          17.6%          9.6%           15.3%
       Operating profit                                   10.3%           9.8%         -6.5%            8.5%
</TABLE>


The following  table shows the amount of change from the fourth  quarter of 2005
to the fourth  quarter of 2006 in sales,  cost of products  sold,  gross margin,
selling and administrative expenses and operating profit, by segment (dollars in
thousands):
<TABLE>
<CAPTION>

                                        Industrial         Security             Metal
                                         Hardware          Products           Products            Total
                                       ------------------------------------------------------------------
<S>                                    <C>              <C>                 <C>               <C>
        Net sales                       $  18,189        $   2,598           $      729        $  21,516
                Volume                      -6.0%            19.3%                19.2%             6.8%
                Prices                       0.0%            -0.4%                 0.6%            -0.1%
                New Products               136.2%             3.8%                 6.1%            69.6%
                                           -----             ----                 ----           ------
                                           130.2%            22.7%                25.9%            76.3%

       Cost of products sold            $   9,909        $   2,366           $      932        $  13,207
                                            94.5%            28.5%                34.2%            61.4%

       Gross margin                     $   8,280        $     232           $     (203)       $   8,309
                                           237.8%             7.4%              -234.4%           123.9%

       Selling and administrative
       expenses                         $     947        $     333           $       42        $   1,322
                                            46.5%            16.5%                15.7%            30.6%

       Operating profit                 $   7,333        $    (101)          $     (245)       $   6,987
                                           507.3%            -9.0%              -134.3%           293.3%
</TABLE>

Net sales in the fourth  quarter of 2006  increased  76% to $49.7  million  from
$28.2 million a year earlier.  Net income for the quarter increased 335% to $5.6
million  (or $.96 per  diluted  share)  from $1.3  million  (or $.23 per diluted
share) a year earlier.

Gross  margin  for the  fourth  quarter  of 2006  improved  124% from the fourth
quarter of 2005.  Higher sales volume which  resulted in better  utilization  of
production  capacity  mainly in the  Industrial  Hardware  segment  was the main
reason  for the  improvement.  Gross  margin  was  negatively  impacted  by cost
increases for raw materials and increased payroll and payroll related charges in
all three of our business segments.

                                      -15-
<PAGE>

Selling and  administrative  expenses for the fourth  quarter of 2006  increased
30.6%  compared  to the prior year  quarter  due to higher  payroll  and payroll
related  charges  for  all  business  segments  and  increased  amortization  of
intangibles   associated   with  the  Royal   Lock  and   Summit   Manufacturing
acquisitions.

In 2006,  the Company  continued to  experience  increased  costs related to the
required  compliance with Section 404 of the  Sarbanes-Oxley  Act. The fees paid
during 2006 for assistance with the  documentation  required by Section 404 were
approximately  $145,000,  which does not include the cost of internal personnel.
The Company has completed the documentation  phase of its process and will incur
additional  costs  in 2007 for  third  party  testing  of its  internal  control
procedures. Based on the Company's current public float and current regulations,
the Company will be required to report on its internal controls in the 2007 Form
10-K, which will be filed in March 2008. Future attestation fees, for work to be
completed by the independent registered public accounting firm, are projected to
be in the range of $230,000 - $350,000.

The Company  adopted  SFAS 123R,  Share Based  Payment  (as  Amended)  effective
January 1, 2006. SFAS 123R eliminates the alternative to use the intrinsic value
method of accounting that was provided for in SFAS 123, which generally resulted
in no compensation  expense recorded in the financial  statements related to the
issuance of equity  awards to employees  and  directors to the extent  issued at
fair  market  value.  SFAS  123R  requires  that  the  cost  resulting  from all
share-based payment transactions be recognized in the financial statements. SFAS
123R  establishes  fair value as the  measurement  objective in  accounting  for
share-based  payment   arrangements  and  requires  all  companies  to  apply  a
fair-value-based  measurement method in accounting generally for all share-based
payment transactions with employees. SFAS 123R does not require the recording of
compensation  expense  in  periods  prior to the date of  adoption.  As no stock
options  were  granted in 2006 and, as all options  granted  prior to January 1,
2006 were  fully  vested,  there was no impact  on the  current  year  financial
statements.

The Company adopted SFAS No. 151,  Inventory  Costs, an amendment of ARB No. 43,
Chapter  4,  effective  January  1, 2006.  The  amendments  made by SFAS No. 151
clarify that abnormal amounts of idle facility expense, freight, handling costs,
and wasted materials  (spoilage) should be recognized as current-period  charges
and require the allocation of fixed  production  overheads to inventory based on
the normal capacity of the production  facilities.  The adoption of SFAS No. 151
did not have a material impact on the consolidated  financial  statements of the
Company.

The Company adopted SFAS No. 154,  Accounting  Changes and Error  Corrections--a
replacement of APB Opinion No. 20 (Accounting  Changes) and FASB Statement No. 3
(Reporting  Accounting  Changes  in  Interim  Financial  Statements),  effective
January 1, 2006. SFAS No. 154 provides  guidance on accounting for and reporting
of  accounting  changes  and  error  corrections.   It  requires   retrospective
application to prior periods' financial  statements,  unless it is impracticable
to determine either the specific period effects or the cumulative  effect of the
change.  The  adoption  of SFAS No.  154 did not have a  material  impact on the
Company's consolidated financial statements.

On December  30,  2006,  the  Company  adopted the  recognition  and  disclosure
provisions 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 No.  158"),  which was issued by the FASB in September  2006.
This  standard  requires  employers to recognize the  underfunded  or overfunded
status of a defined benefit  postretirement plan as an asset or liability in its
statement of financial position and to recognize changes in the funded status in
the year in which the changes  occur  through  accumulated  other  comprehensive
income.  Additionally,  SFAS No. 158  requires  employers  to measure the funded
status of a plan as of the date of its year-end statement of financial position.
As allowed  under  SFAS 158,  the  Company  did not adopt the  measurement  date
provision in 2006. The Company will adopt the measurement date provision by 2008
as required.

In June 2006, the FASB issued  Interpretation  No. 48 ("FIN 48")  Accounting for
Uncertainty in Income Taxes an  interpretation  of FASB Statement No. 109 ("SFAS
109").  This  interpretation  clarifies the accounting for uncertainty in income
taxes  recognized in a company's  financial  statements in accordance  with SFAS
109, Accounting for Income Taxes. FIN 48 details how companies should recognize,
measure,  present,  and disclose  uncertain tax positions  that have been or are
expected to be taken. As such, financial statements will reflect expected future
tax  consequences of uncertain tax positions  presuming the taxing  authorities'
full  knowledge  of the  position  and  all  relevant  facts.  We are  currently
analyzing  the effect of FIN 48 on our  financial  statements.  The Company will
adopt FIN 48 in the first quarter of 2007.

In September  2006,  the U.S.  Securities and Exchange  Commission  staff issued
Staff Accounting Bulletin No. 108 ("SAB 108"),  Considering the Effects of Prior
Year  Misstatements  when  Quantifying  Misstatements  in Current Year Financial
Statements.  SAB 108 eliminates the diversity of practice surrounding how public
companies quantify financial statement misstatements. It establishes an approach
that requires  quantification of financial statement  misstatements based on the
effects of the misstatements on each of the company's  financial  statements and
the related financial statement  disclosures.  SAB 108 must be applied to annual

                                      -16-
<PAGE>

financial statements for their first fiscal year ending after November 15, 2006.
The  application  of SAB 108 did not have a  material  impact  on our  financial
condition or results of operations.

In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, Fair Value  Measurements  ("SFAS No. 157"). This standard clarifies the
principle  that  fair  value  should  be based on the  assumptions  that  market
participants  would use when  pricing an asset or  liability.  Additionally,  it
establishes a fair value  hierarchy that  prioritizes  the  information  used to
develop  those  assumptions.  We have not yet  determined  the  impact  that the
implementation  of SFAS No.  157  will  have on our  results  of  operations  or
financial  condition.  SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007.

Critical Accounting Policies and Estimates

The  preparation  of the  financial  statements in  accordance  with  accounting
principles  generally  accepted  in the United  States  ("U.S.  GAAP")  requires
management to make judgments,  estimates and assumptions regarding uncertainties
that affect the reported  amounts of assets and  liabilities,  the disclosure of
contingent  assets and  liabilities,  and the  reported  amounts of revenues and
expenses. Areas of uncertainty that require judgments, estimates and assumptions
include items such as the accounting for derivatives; environmental matters; the
testing of goodwill  and other  intangible  assets for  impairment;  proceeds on
assets to be sold; pensions and other postretirement  benefits; and tax matters.
Management uses historical  experience and all available information to make its
estimates and  assumptions,  but actual results will inevitably  differ from the
estimates  and  assumptions  that are used to prepare  the  Company's  financial
statements at any given time.  Despite these  inherent  limitations,  management
believes that  Management's  Discussion and Analysis of Financial  Condition and
Results of Operations and the financial statements and related footnotes provide
a meaningful and fair presentation of the Company.

Management believes that the application of these estimates and assumptions on a
consistent  basis  enables  the  Company to provide  the users of the  financial
statements with useful and reliable  information  about the Company's  operating
results and financial condition.

Allowance for Doubtful Accounts

The Company  maintains an allowance for doubtful  accounts for estimated  losses
resulting  from the inability of its customers to make  required  payments.  The
Company reviews the collectibility of its receivables on an ongoing basis taking
into account a combination of factors.  The Company reviews potential  problems,
such  as  past  due  accounts,  a  bankruptcy  filing  or  deterioration  in the
customer's financial condition,  to ensure the Company is adequately accrued for
potential  loss.  Accounts  are  considered  past due based on when  payment was
originally  due. If a customer's  situation  changes,  such as a  bankruptcy  or
creditworthiness,  or there is a change in the  current  economic  climate,  the
Company may modify its  estimate of the  allowance  for doubtful  accounts.  The
Company will write off accounts  receivable after reasonable  collection efforts
have been made and the accounts are deemed uncollectible.

Inventory Reserve

Inventories are valued at the lower of cost or market. Cost is determined by the
last-in,   first-out   ("LIFO")   method  at  the  Company's  U.S.   facilities.
Accordingly,  a LIFO valuation reserve is calculated using the dollar value link
chain method.

We review the net  realizable  value of inventory in detail on an ongoing basis,
giving consideration to deterioration,  obsolescence and other factors. Based on
these assessments, we provide for an inventory reserve in the period in which an
impairment is identified. The reserve fluctuates with market conditions,  design
cycles and other economic factors.

Goodwill and Other Intangible Assets

Intangible  assets  with  finite  useful  lives  are  amortized  generally  on a
straight-line  basis over the periods  benefited.  Goodwill and other intangible
assets with  indefinite  useful  lives are not  amortized.  Each year during the
second quarter,  the carrying value of goodwill and other intangible assets with
indefinite  useful  lives  is  tested  for  impairment.  The  Company  uses  the
discounted  cash flow method to calculate the fair value of goodwill  associated
with its reporting  units; no impairments of goodwill were deemed to exist.  The
determination  of discounted  cash flows is based on the  businesses'  strategic
plans and long-range  planning  forecasts.  The revenue growth rates included in
the plans are management's best estimates based on current and forecasted market
conditions;  profit margin  assumptions  are projected by each business based on
the current cost structures and  anticipated  cost  reductions.  There can be no
assurance that  operations  will achieve the future cash flows  reflected in the

                                      -17-
<PAGE>

projections.  If different  assumptions  were used in these  plans,  the related
discounted  cash flows used in measuring  impairment  could be different  and an
impairment of assets might need to be recorded.

Pension and Other Postretirement Benefits

The amounts  recognized  in the  consolidated  financial  statements  related to
pension  and  other  postretirement   benefits  are  determined  from  actuarial
valuations.  Inherent in these valuations are assumptions  about such factors as
expected  return on plan assets,  discount rates at which  liabilities  could be
settled,  rate of increase in future  compensation  levels,  mortality rates and
trends in health insurance costs.  These  assumptions are reviewed  annually and
updated as required.  In accordance  with U.S. GAAP,  actual results that differ
from the  assumptions  are  accumulated  and amortized  over future periods and,
therefore,  affect the expense  recognized  and  obligations  recorded in future
periods.

The discount rate used is based on  comparisons to the Moody's Aa Corporate Bond
index, as well as a hypothetical yield curve that creates a reference  portfolio
of high quality  corporate bonds whose payments mimic the plan's benefit payment
stream.  The expected long-term rate of return on assets is developed with input
from the Company's actuarial firms. Also considered is the Company's  historical
experience  with pension fund asset  performance  in  comparison  with  expected
returns.  The  long-term  rate-of-return  assumption  used for  determining  net
periodic  pension  expense for 2006 was 8.5%. The Company  reviews the long-term
rate of return each year.  Future actual  pension income and expense will depend
on future investment  performance,  changes in future discount rates and various
other factors related to the population of participants in the Company's pension
plans.

The  Company  expects  to  make  cash  contributions  to its  pension  plans  of
approximately $2.1 million in 2007.

RESULTS OF OPERATIONS

Fiscal 2006 Compared to Fiscal 2005

The  following  table  shows,  for 2006 and 2005,  selected  line items from the
consolidated statements of income as a percentage of net sales, by segment.
<TABLE>
<CAPTION>

                                                                                      2006
                                                           --------------------------------------------------------
                                                            Industrial     Security         Metal
                                                             Hardware      Products        Products         Total
                                                           --------------------------------------------------------
<S>                                                           <C>           <C>             <C>             <C>
       Net sales                                               100.0%        100.0%          100.0%          100.0%
       Cost of products sold                                    70.5%         74.2%          104.2%           75.0%
       Gross margin                                             29.5%         25.8%           -4.2%           25.0%

       Selling and administrative expense                       12.1%         16.8%            9.9%           13.6%
       Operating profit                                         17.4%          9.0%          -14.1%           11.4%
</TABLE>

<TABLE>
<CAPTION>

                                                                                      2005
                                                           --------------------------------------------------------
                                                            Industrial     Security         Metal
                                                             Hardware      Products        Products         Total
                                                           --------------------------------------------------------
<S>                                                           <C>           <C>             <C>             <C>
       Net sales                                               100.0%        100.0%          100.0%          100.0%
       Cost of products sold                                    75.6%         72.1%          107.2%           77.3%
       Gross margin                                             24.4%         27.8%           -7.2%           22.7%

       Selling and administrative expense                       14.7%         17.5%            9.8%           15.4%
       Operating profit                                          9.7%         10.3%          -17.0%            7.3%

</TABLE>



                                      -18-
<PAGE>

The following table shows the amount of change from 2005 to 2006 in sales,  cost
of  products  sold,  gross  margin,  selling  and  administrative  expenses  and
operating profit, by segment (dollars in thousands):
<TABLE>
<CAPTION>
                                            Industrial          Security            Metal
                                             Hardware           Products           Products           Total
                                           -----------------------------------------------------------------
<S>                                        <C>               <C>                  <C>            <C>
        Net sales                           $  21,590         $   5,743            $  2,025       $  29,358
                Volume                          -1.9%             11.3%               12.5%            4.9%
                Prices                           0.0%              0.0%                0.6%            0.0%
                New Products                    42.0%              1.7%                5.4%           22.0%
                                                ----              ----                ----            ----
                                                40.1%             13.0%               18.5%           26.9%

        Cost of products sold               $  12,533         $   5,181            $  1,793       $  19,507
                                                30.8%             16.2%               15.3%           23.1%

        Gross margin                        $   9,057         $     562            $    232       $   9,851
                                                68.8%              4.5%               29.7%           39.8%

        Selling and
        administrative expenses             $   1,178         $     624            $    211       $   2,013
                                                14.9%              8.0%               19.6%           12.0%


        Operating profit                    $   7,879         $     (62)           $     21       $   7,838
                                               150.6%             -1.4%                1.2%           98.5%
</TABLE>

INDUSTRIAL HARDWARE SEGMENT

Net sales in the Industrial Hardware segment were up 40.1% in 2006 from the 2005
level.  New product  introductions,  mainly the  component  parts for the Humvee
retrofit  program,  were responsible for the increase in sales for this segment.
All of the new products were internally  developed and offered to the variety of
markets we service including: military, utility truck, vehicular accessories and
recreational  vehicles.  New products included retrofit  components for military
Humvees,  a hidden  hinge used on service  truck  bodies,  a three point  handle
assembly and a star wheel rotary  assembly  for the truck  accessory  market and
pickup truck camper shell used in the  emergency  vehicle  market as well as an
assortment  of handles and latches used in many of the markets we sell to. Sales
volume of  existing  products  was up in all but two of the markets we service -
truck  trailers  and van  bodies.  Sales  at the  Company's  Mexican  subsidiary
increased 12% from 2005 primarily due to economic growth in Mexico.

Cost of products sold for the Industrial  Hardware segment  increased 30.8% from
2005 to 2006.  In addition to  manufacturing  costs  associated  with the higher
volume of sales,  the major factor  causing the increase was the higher costs of
raw materials.

Gross margin as a percentage of net sales  increased from 24.4% to 29.5%,  which
is a direct result of the significant increase in sales volume resulting in more
efficient utilization of our existing facilities.

Selling  and  administrative  expenses  increased  14.9% from 2005 levels due to
increases in payroll and payroll related charges.

SECURITY PRODUCTS SEGMENT

Net sales in the Security  Products  segment  increased 13.0% from 2005 to 2006.
Increased  sales volume of existing  products in our core lock business  coupled
with the acquisitions of Royal Lock and Summit  Manufacturing,  more than offset
declines in sales volume of our commercial  laundry  products.  Volume decreases
occurred in traditional  laundry products such as drop meters and meter cases as
well as the newer "smart card" systems. Most of the 2006 decline in "smart card"
systems was due to a retro-fit of card systems in 2005.  In addition to the oven
latch line from the Summit Manufacturing  acquisition,  new products were mainly
lock related, such as: a car carrier clamp assembly, an L-handle for a sportrack
and an electric car lock set used in the automotive  accessories  market as well
as a variety of other lock products for various markets.

Cost of products sold for the Security  Products  segment  increased  16.2% from
2005 to  2006.  Most of the  increase  in cost of  products  sold  was  directly
proportionate  to the  increase  in sales.  The major  item  that  outpaced  the

                                      -19-
<PAGE>

increased  sales  level were raw  material  costs,  which we were not able to be
recover through  increased  prices due to the competitive  nature of many of the
markets we sell to.

Gross margin  decreased from 27.8% to 25.8% as a percentage of net sales for the
Security Products segment resulting from the higher  manufacturing costs, mainly
raw materials, as well as a change in product mix.

Selling and  administrative  expenses increased 8.0% from the same period a year
ago due to higher  costs for payroll and payroll  related  charges,  advertising
expenses and  amortization of intangibles  associated  with the  acquisitions of
Royal Lock and Summit Manufacturing.

METAL PRODUCTS SEGMENT

Net sales in the Metal Products segment increased 18.5% from 2005 to 2006. Sales
of mine products increased 20% in 2006 compared to 2005, while sales of contract
casting  products  increased 16% from 2005. In 2006, sales of mine roof supports
increased  in both the U.S.  and  Canadian  markets.  Shipments  of ductile iron
castings  increased  35% to 973 tons in 2006 from 723 tons in 2005.  The Company
continued its marketing  efforts to sell mine roof anchor  products in Australia
and China. Sales of new products in 2006 included a new mine roof anchor for the
Canadian  market  and a  variety  of dome  nuts  for use in  underground  mining
applications.

Cost of  products  sold  decreased  as a  percentage  of net sales due mainly to
higher sales volume. Cost increases were experienced for raw materials,  payroll
and payroll related charges,  supplies and tools and equipment  maintenance.  In
order to improve the efficiency of producing ductile iron castings,  the Company
installed a new automatic pouring system designed  specifically for ductile iron
in July 2006. The Company  experienced  higher costs than  anticipated  with the
start-up  of  the  equipment  and  did  not  start   achieving  the  anticipated
improvement in pouring efficiency until late in the fourth quarter of 2006.

Gross margin in the Metal Products segment improved  slightly as a percentage of
net sales mainly due to higher sales volume  resulting in better  utilization of
production facilities and product mix.

Selling and  administrative  expenses in the Metal  Products  segment  increased
19.6%  from 2005 to 2006,  due to  increases  in  payroll  and  payroll  related
charges, advertising and travel expenses.

Other Items

The following table shows the amount of change from 2005 to 2006 in other items
(dollars in thousands):

                                             Total
                                            -------
             Interest expense               $    84
                                               8.2%

             Other income                   $    72
                                              92.0%

             Income taxes                   $ 2,534
                                              95.5%

Interest  expense  increased  from 2005 to 2006  primarily  due to the increased
level of debt associated with the amended Loan Agreement,  which is discussed in
Note 5 in Item 8 of this Form 10-K.

Other income  increased from 2005 to 2006 due to a gain on the  termination of a
swap agreement, which is discussed in Note 5 in Item 8 of this Form 10-K.

Income taxes - the effective tax rate decreased in 2006 to 35% from the 38% rate
in 2005.  The  decrease  is the result of a change in the mix of U.S and foreign
income,  as well as a change in the mix of U.S.  earnings  in states  with lower
income tax rates.


                                      -20-
<PAGE>


FISCAL 2005 COMPARED TO FISCAL 2004

The  following  table  shows,  for 2005 and 2004,  selected  line items from the
consolidated statements of income as a percentage of net sales, by segment.
<TABLE>
<CAPTION>

                                                                                      2005
                                                          --------------------------------------------------------
                                                            Industrial     Security         Metal
                                                             Hardware      Products        Products         Total
                                                          --------------------------------------------------------
<S>                                                           <C>           <C>             <C>             <C>
       Net sales                                               100.0%        100.0%          100.0%          100.0%
       Cost of products sold                                    75.6%         72.1%          107.2%           77.3%
       Gross margin                                             24.4%         27.8%           -7.2%           22.7%

       Selling and administrative expense                       14.7%         17.5%            9.8%           15.4%
       Operating profit                                          9.7%         10.3%          -17.0%            7.3%
</TABLE>


<TABLE>
<CAPTION>

                                                                                      2004
                                                          --------------------------------------------------------
                                                            Industrial     Security         Metal
                                                             Hardware      Products        Products         Total
                                                          --------------------------------------------------------
<S>                                                           <C>           <C>             <C>             <C>
       Net sales                                               100.0%        100.0%          100.0%          100.0%
       Cost of products sold                                    72.5%         71.5%           96.7%           74.9%
       Gross margin                                             27.5%         28.5%            3.3%           25.1%

       Selling and administrative expense                       16.8%         20.3%            8.0%           17.3%
       Operating profit                                         10.7%          8.2%           -4.7%            7.8%

</TABLE>




The following table shows the amount of change from 2004 to 2005 in sales,  cost
of  products  sold,  gross  margin,  selling  and  administrative  expenses  and
operating profit, by segment (dollars in thousands):

<TABLE>
<CAPTION>

                                            Industrial          Security           Metal
                                             Hardware           Products          Products           Total
                                          ------------------------------------------------------------------
<S>                                         <C>                <C>                 <C>              <C>
        Net sales                           $  7,853           $  1,901            $   (777)        $  8,977
                Volume                          4.3%               1.8%               -6.4%             2.0%
                Prices                          3.2%               1.1%               -0.3%             1.9%
                New Products                    9.6%               1.6%                0.1%             5.1%
                                               ----               ----                ----             ----
                                               17.1%               4.5%               -6.6%             9.0%

        Cost of products sold               $  7,352           $  1,631            $    392         $  9,375
                                               22.1%               5.4%                3.5%            12.5%


        Gross margin                        $    501           $    270            $ (1,169)        $   (398)
                                                4.0%               2.2%             -302.8%            -1.6%

        Selling and administrative
        expenses                            $    204           $   (847)           $    139         $   (504)
                                                2.6%              -9.8%               14.9%            -2.9%


        Operating profit                    $    297           $  1,117            $ (1,308)        $    106
                                                6.0%              32.2%             -238.7%             1.3%

</TABLE>



                                      -21-
<PAGE>

INDUSTRIAL HARDWARE SEGMENT

Net sales in the Industrial Hardware segment were up 17.1% in 2005 from the 2004
level. New product  introductions were responsible for over half of the increase
in sales for this segment. All of the new products were internally developed and
aimed at a variety of the markets we service including: military, utility truck,
vehicular  accessories  and  recreational  vehicles.  New  products  included  a
retro-fit kit for the military Humvee, a remote power lock kit for utility truck
bodies,  a trailer  ramp and pickup truck  camper for the  recreational  vehicle
markets and an  assortment of handles and latches used in many of the markets we
sell to. Sales volume of existing  products was up in all but two of the markets
we service - truck  accessories and van bodies.  Sales volume  increased 37% for
"sleeper boxes" for the Class 8 trailer truck market,  a product  resulting from
the Canadian  Commercial  Vehicles  acquisition in 2002.  Sales at the Company's
Mexican  subsidiary  increased 17% from 2004 primarily due to economic growth in
Mexico.  Price  increases  generally  offset higher raw material and  production
costs and did not result in an increase in gross margins.

Cost of products sold for the Industrial  Hardware segment  increased 22.1% from
2004 to 2005.  In addition to  manufacturing  costs  associated  with the higher
volume of sales, higher costs were experienced in utilities,  raw materials, and
expediting the  introduction  of new products,  all of which  contributed to the
increase.

Gross margin as a percentage of net sales  decreased  from 27.5% to 24.4% due to
the higher  manufacturing  costs,  price  reductions in select  product lines to
remain competitive and a change in product mix.

Selling  and  administrative  expenses  increased  2.6% from 2004  levels due to
increases  in  payroll  and  payroll  related  charges,  advertising  and travel
expenses.


SECURITY PRODUCTS SEGMENT

Net sales in the Security  Products  segment  increased  4.5% from 2004 to 2005.
Increased  sales  volume of  existing  products  was  primarily  related  to the
commercial laundry industry.  Volume increases occurred in traditional  products
such as drop meters and meter cases as well as the newer "smart  card"  systems.
New products were mainly lock related,  such as: a toolbox push button lock, car
carrier  clamp  assembly,  electric  car  lock  set,  and  brackets  used in the
automotive  accessories  market as well as a variety of other  items for various
markets.  Price  increases  generally  offset higher raw material and production
costs and did not result in an increase in gross margins.

Cost of products sold for the Security Products segment increased 5.4% from 2004
to  2005.   Most  of  the  increase  in  cost  of  products  sold  was  directly
proportionate  to the  increase  in sales.  Several  items  which  outpaced  the
increased  sales  level  included  payroll,  freight on sales due to higher fuel
costs and utilities, which contributed to the increase in cost of products sold.

Gross margin  decreased from 28.5% to 27.8% as a percentage of net sales for the
Security  Products  segment  resulting  from the higher sales  volume  offset by
higher  manufacturing  costs, price reductions in select product lines to remain
competitive and a change in product mix.

Selling and  administrative  expenses decreased 9.8% from the same period a year
ago due to fees and costs incurred in 2004 for defending  against and settlement
of a patent infringement suit.


METAL PRODUCTS SEGMENT

Net sales in the Metal Products  segment were down 6.6% from 2004 to 2005. Sales
of mine  products were  comparable  for both years.  Although  sales of contract
casting products  declined 19% in 2005,  shipments of ductile iron castings more
than  doubled  from 324 tons in 2004 to 723 tons in 2005.  In 2005,  the Company
added a  salesman  in  Canada to focus on the  Canadian  mining  business  which
resulted in increased  business in 2006. We also expanded our marketing  efforts
for our mine roof anchor  products into Australia and China.  Late in the second
quarter of 2005,  we completed  our testing at a technology  and  authentication
meeting in Changzhi, China which was sponsored by the China University of Mining
and Technology.  The China mining  association  approved our products for use in
the China  mining  industry,  stating  that our  products  represented  superior
technology.
                                      -22-
<PAGE>

Cost of products  sold  increased as a percentage of net sales mainly due to the
fixed costs associated with the Metal Products  segment.  While costs related to
volume declined, such as payroll and payroll related charges, supplies and tools
and maintenance and repairs,  increases were  experienced in insurance costs and
utilities.  Rates for both natural gas and  electricity  increased  47% and 14%,
respectively. The division also was negatively impacted by the higher labor cost
of manually  pouring ductile iron. As part of the Company's longer term strategy
of  reducing  the  dependence  on  only  pouring  malleable  iron,  the  Company
determined that it can also produce  quality ductile iron castings.  In order to
improve the efficiency of producing ductile iron castings, the Company installed
a new automatic pouring system designed specifically for ductile iron in July of
2006.

Gross margin in the Metal  Products  segment  decreased  as a percentage  of net
sales mainly due to lower sales  volume,  producing  ductile iron castings and a
change in product mix.

Selling and  administrative  expenses in the Metal  Products  segment  increased
14.9% from 2004 to 2005,  primarily  due to the  addition of sales  personnel in
Canada and increased travel expenses  associated with testing and marketing mine
roof anchors in China.


Other Items

The following table shows the amount of change from 2004 to 2005 in other items
(dollars in thousands):

                                             Total
                                            -------
             Interest expense               $   (30)
                                              -2.9%

             Other income                   $    55
                                             240.8%

             Income taxes                   $   582
                                              28.1%

Interest  expense  decreased from 2004 to 2005 primarily due to the new interest
rate  swap  contract  associated  with  the  amended  Loan  Agreement,  which is
discussed in Note 4 in Item 8 of the 2005 Form 10-K.  This swap  contract  fixed
the rate at 4.61% compared to the old swap contract rate of 9.095%.

Other  income  increased  from 2004 to 2005 due to higher  cash  balances in the
Company cash management program which resulted in higher interest income.

Income taxes increased from 2004 to 2005 due to a higher effective tax rate, 38%
in 2005  versus  30% in 2004,  resulting  primarily  from a change in the mix of
taxable  earnings in foreign  jurisdictions  with higher effective tax rates and
the imposition of higher state tax rates.


LIQUIDITY AND SOURCES OF CAPITAL

The Company's  financial  position  remained strong throughout 2006. The primary
source of the Company's cash is earnings from operating  activities adjusted for
cash  generated  from or used for net  working  capital.  The  most  significant
recurring  non-cash items included in income are  depreciation  and amortization
expense.  Changes in working  capital  fluctuate  with the changes in  operating
activities.  As sales increase, there generally is an increased need for working
capital.   Since  increases  in  working  capital  reduce  the  Company's  cash,
management attempts to keep the Company's investment in net working capital at a
reasonable level by closely monitoring  inventory levels (by matching production
to expected  market  demand),  keeping  tight  control  over the  collection  of
receivables, and optimizing payment terms on its trade and other payables.

                                      -23-
<PAGE>


The Company is dependent on the continued demand for its products and subsequent
collection of accounts receivable from its customers. The Company serves a broad
base of customers and industries  with a variety of products.  As a result,  any
fluctuations  in demand or payment from a particular  industry or customer  will
not have a material impact on the Company's sales and collection of receivables.
Management  expects that the Company's  foreseeable  cash needs for  operations,
capital expenditures, debt service and dividend payments will continue to be met
by the Company's operating cash flows and existing credit facility.
<TABLE>
<CAPTION>
                                                          2006          2005          2004
                                                         ----------------------------------
<S>                                                      <C>           <C>           <C>
        Current ratio                                      2.5           3.3           2.9
        Average days' sales in accounts receivable          46            48            47
        Inventory turnover                                 3.7           4.1           3.7
        Ratio of working capital to sales                 25.7%         28.6%         26.7%
        Total debt to shareholders' equity                37.9%         34.2%         36.1%
</TABLE>

At December 30, 2006,  December 31, 2005,  and January 1, 2005,  the Company had
cash and cash  equivalents  of $3.1  million,  $6.3  million  and $4.4  million,
respectively,  and working  capital of $35.5  million,  $31.2  million and $26.7
million, respectively.

Net cash provided by operating  activities  was $7.9 million in 2006 compared to
$5.2 million in 2005 and $4.9 million in 2004.  The $2.7 million  increase  from
2005 to 2006 is  primarily  the result of the  increase in earnings in 2006,  as
well as changes in the components of working capital.  The $0.3 million increase
from 2004 to 2005  related  primarily  to changes in the  components  of working
capital.  During 2006,  working capital used $5.6 million in cash as a result of
increased sales activity, primarily in the 4th quarter of the year. Increases in
accounts  receivable  and  inventory  accounted  for $14.4 million of cash usage
while  increases in accounts  payable,  accrued  compensation  and other accrued
expenses  provided  $8.9  million in cash.  In 2005,  working  capital used $2.7
million in cash as a result of increased  sales  activity.  Accounts  receivable
accounted  for most of the  increase,  rising  $2.2  million.  In 2004,  working
capital used  approximately  $3.6 million in cash as a result of increased sales
activity.  Included in this amount were a $3.3 million  increase in  inventories
and a $1.6  million  increase  in  accounts  receivable,  offset  by a  $500,000
increase in accounts payable and an $800,000 increase in accrued compensation.

During 2006, 2005 and 2004 the Company used $14.2, $1.7 and $2.0 million of cash
in  investing  activities,  respectively.  In 2006,  the Company  made two small
acquisitions  which used  approximately $7.5 million in cash. The remaining $6.7
million in 2006 and  virtually  all of the amounts for 2005 and 2004  related to
the  purchase of fixed  assets.  Significant  purchases  in 2006  included  $2.2
million of land and building for one of the Company's  Security Products Segment
manufacturing  facilities,  approximately  $600,000 in new  equipment  purchases
related to a significant  contract received by the Industrial  Hardware Segment,
and approximately  $570,000 for an automatic pouring system for ductile iron for
the Metal Products Segment. The Company expects capital expenditures for 2007 to
be approximately $4.5 million to $5.5 million.

Net cash  provided by financing  activities in 2006 totaled  approximately  $3.2
million.  This was the result of the Company's  restructuring of its outstanding
debt in order to provide  cash for the  business  and fixed  asset  acquisitions
previously  described above. See additional  details  concerning debt below. Net
cash used by financing  activities totaled $1.6 million and $3.4 million in 2005
and 2004,  respectively.  During 2005, the Company  borrowed an additional  $3.0
million on its revolving credit facility to cover short-term cash  requirements.
Principal  payments of long-term  debt amounted to $3.0 million and $2.0 million
in 2005 and 2004, respectively.

The  Company  leases  certain  equipment  and  buildings  under  cancelable  and
non-cancelable  operating leases expiring at various dates up to 10 years.  Rent
expense amounted to approximately $945,000,  $826,000 and $642,000 in 2006, 2005
and 2004, respectively.

On September 22, 2006, the Company  amended the unsecured loan agreement  ("Loan
Agreement"),  which includes a term portion and a revolving credit portion, with
its lender, Bank of America,  N.A. The amendment  restructures and increases the
balance  of the term  portion  of the loan into a new seven (7) year loan in the
amount of  $20,000,000.  The  restructured  term portion is payable in quarterly
payments of $714,286  beginning January 2, 2007. The proceeds were used to repay
in full the outstanding balance of its existing term loan, $12,625,000,  and for
the acquisition of Royal Lock.

In  addition,  the Company  increased  the maximum  amount  available  under the
revolving credit portion from $7,500,000 to $12,000,000 and renewed and extended
the maturity date to September  22, 2009.  The  revolving  credit  portion has a
variable quarterly commitment fee ranging from 0.10% to 0.25% based on operating
results.  As of December  30,  2006,  the  quarterly  fee is 0.15% on the unused
portion.

                                      -24-
<PAGE>

The interest  rates on the term and the  revolving  credit  portions of the Loan
Agreement  vary.  The  interest  rates may vary  based on the LIBOR  rate plus a
margin  spread  of 1.0% to 1.65% for the term  portion  and 1.0% to 1.6% for the
revolving credit portion.  The margin rate spread is based on operating  results
calculated on a rolling-four-quarter basis. The Company may also borrow funds at
the lender's  prime rate.  On December 30, 2006,  the interest  rate on the term
portion of the Loan Agreement was 6.62%.

Also on  September  22, 2006,  the Company  terminated  its  interest  rate swap
contract with the lender.  At the time of  termination,  the notional amount was
$9,468,750,  which was equal to 75% of the outstanding  balance of the term loan
on that date. As a result of the  termination,  the Company  received $73,100 of
cash which was included in other income. The Company had originally entered into
the interest rate swap contract with an original  notional amount of $11,793,750
which was equal to 75% of the outstanding balance of the term loan on August 11,
2005.  The  notional  amount  began to decrease on a quarterly  basis  beginning
October 3, 2005 following the principal  repayment  schedule of the term portion
of the Loan  Agreement.  The Company had a fixed  interest  rate of 4.61% on the
swap  contract  and paid the  difference  between  the fixed rate and LIBOR when
LIBOR was below 4.61% and received interest when the LIBOR rate exceeded 4.61%.

On November 2, 2006,  the Company  entered into an interest  rate swap  contract
with the lender with an original notional amount of $20,000,000 (notional amount
$20,000,000  on December 30, 2006),  which was equal to 100% of the  outstanding
balance of the term loan on that date.  The notional  amount will  decrease on a
quarterly  basis  beginning  January 2, 2007  following the principal  repayment
schedule of the term loan. The Company has a fixed interest rate of 5.25% on the
swap contract and will pay the difference  between the fixed rate and LIBOR when
LIBOR is below  5.25% and will  receive  interest  when the LIBOR  rate  exceeds
5.25%.

On  August 1,  2005,  the  Company  had also  amended  the Loan  Agreement.  The
amendment  renewed and extended the maturity of the  revolving  credit loan from
July 1, 2005 to  August 1, 2007 and  restructured  and  increased  the  existing
balance  of the term  loan into a new five (5) year term  loan.  The  additional
$4,000,000  proceeds from the term loan were used to pay down the balance on the
revolving credit agreement at that time.

Previously,  the Company maintained an interest rate swap contract, as required,
with the lender for an original notional amount of $15,000,000  (notional amount
$6,600,000  on January 1,  2005),  which was  reduced  on a  quarterly  basis in
accordance with the principal repayment schedule of the term portion of the Loan
Agreement.  The interest rate on the swap contract was at a fixed rate of 9.095%
and expired on July 1, 2005.

The Company's loan covenants  restrict it from incurring any indebtedness  (from
any  person  other than the  lender)  that  exceeds  the  aggregate  sum of $1.5
million,  or that exceeds $1.0  million in any single  transaction,  without the
express  consent  of the  lender  or  until  the  full  payment  of the  current
obligation  has been made.  The loan  covenants  also  prohibit the Company from
paying any  dividends in the event the payment  would result in a default  under
the terms of the Loan Agreement.

Tabular Disclosure of Contractual Obligations

The Company's known contractual obligations as of December 30, 2006, are shown
below:
<TABLE>
<CAPTION>
                                                                                        Payment due by period
                                                                            Less than                               More than 5
         Contractual Obligations (in thousands)                 Total        1 Year      1-3 Years    3-5 Years        Years
                                                               -------      --------     ---------    ---------       -------
<S>                                                          <C>           <C>           <C>          <C>           <C>
         Long-term debt obligations                           $ 20,000      $  2,857      $  5,714     $  5,714      $  5,715
         Estimated interest on long-term debt
               and capital lease obligations                     4,531         1,300         1,856        1,049           326
         Capital lease obligations                                 619           255           364           -             -

         Operating lease obligations                             1,762           595         1,060          107            -

         Estimated contributions to pension plans                5,324         2,102         2,721          259           242
         Estimated postretirement benefits
               other than pensions                               1,221           165           323          325           408

                                                              --------      --------      --------     --------      --------
         Total                                                $ 33,457      $  7,274      $ 12,038     $  7,454      $  6,691
                                                              ========      ========      ========     ========      ========
</TABLE>

The amounts  shown in the above  table for  estimated  contributions  to pension
plans and estimated postretirement benefits other than pensions are based on the
assumptions in Note 10 to the consolidated  financial  statements as well as the
assumption that participant counts will remain stable.



                                      -25-
<PAGE>

The Company does not have any non-cancelable open purchase orders.

At December 30, 2006, the Company  maintained a stand-by letter of credit in the
amount  of  $559,000  related  to one of its  capital  leases.  This  amount  is
declining  on a monthly  basis as payments on the lease are made.  The  stand-by
letter of credit  reserves  that  amount  from the  Company's  revolving  credit
agreement under terms of the capital lease agreement.


ITEM 7A    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's foreign manufacturing  facilities account for approximately 20% of
total sales and 14% of total assets.  Its U.S.  operations  buy from and sell to
these foreign affiliates, and also make limited sales (approximately 7% of total
sales) to nonaffiliated foreign customers. This trade activity could be affected
by fluctuations in foreign currency exchange or by weak economic conditions. The
Company's  currency  exposure is  concentrated in the Canadian  dollar,  Mexican
peso,  New  Taiwan  dollar,  Chinese  RMB and Hong Kong  dollar.  Because of the
Company's  limited exposure to any single foreign market,  any exchange gains or
losses have not been material and are not expected to be material in the future.
Had the exchange  rate as of December 30, 2006 for all of the listed  currencies
changed by 1%, the total change in reported  earnings  would have been less than
$20,000.  As a result,  the Company  does not  attempt to  mitigate  its foreign
currency  exposure  through the  acquisition  of any  speculative  or  leveraged
financial instruments.  In 2006, a 10% increase/decrease in exchange rates would
have resulted in a translation  increase/decrease to sales of approximately $2.6
million, and to equity of approximately $1.6 million.

The Company is exposed to interest rate risk with respect to its unsecured  Loan
Agreement,  which  provides for  interest  based on LIBOR plus a spread of up to
1.65%.  The spread is  determined  by a comparison  of the  Company's  operating
performance with agreed-upon financial targets.  Since the Company's performance
depends to a large extent on the overall economy,  the interest rate paid by the
Company  under its Loan  Agreement  is  closely  linked to the trend in the U.S.
economy. The current interest rate spread is 1.25% on both the term loan portion
and the revolving  credit line portion of the Loan  Agreement.  Changes in LIBOR
rates will also affect the Company's  interest expense.  To hedge against future
LIBOR rate increases,  the Company has an interest rate swap contract on 100% of
the term loan principal  amount under the Loan  Agreement.  The interest rate on
the swap contract is 5.25% and the swap contract  expires on September 22, 2013.
The  notional  amount of the swap  contract is reduced on a  quarterly  basis in
accordance  with the  principal  repayment  schedule for the term portion of the
Loan Agreement. The notional amount of the swap contract was $20.0 million as of
December 30, 2006. Therefore,  the term debt is not subject to the volatility of
short-term  interest rates because the entire amount of debt is hedged under the
swap contract.

                                      -26-
<PAGE>



ITEM 8     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Eastern Company

Consolidated Balance Sheets
<TABLE>
<CAPTION>

                                                                                December 30           December 31
                                                                                   2006                  2005
                                                                                -----------           -----------
<S>                                                                           <C>                   <C>
ASSETS
Current Assets
    Cash and cash equivalents                                                  $   3,101,458         $   6,345,947
    Accounts receivable, less allowances of $319,000 in 2006 and
       $295,000 in 2005                                                           24,859,152            14,825,014

    Inventories:
       Raw materials and component parts                                           8,008,603             9,917,792
       Work in process                                                             6,366,354             4,681,623
       Finished goods                                                             13,667,609             6,168,334
                                                                               -------------         -------------
                                                                                  28,042,566            20,767,749

    Prepaid expenses and other assets                                              2,391,425             2,391,125
    Deferred income taxes                                                            931,641               715,321
                                                                               -------------         -------------
Total Current Assets                                                              59,326,242            45,045,156

Property, Plant and Equipment
    Land                                                                           1,102,628               702,633
    Buildings                                                                     13,687,524            11,802,519
    Machinery and equipment                                                       32,068,499            29,963,621
    Accumulated depreciation                                                     (21,042,934)          (20,072,087)
                                                                               -------------         -------------
                                                                                  25,815,717            22,396,686

Other Assets
    Goodwill                                                                      13,742,160            10,641,532
    Trademarks                                                                       117,959               103,498
    Patents, technology and other intangibles net of accumulated
       amortization                                                                4,216,508             1,946,502
    Interest rate swap asset                                                              -                 32,081
    Intangible pension asset                                                              -                732,554
    Prepaid pension cost                                                             266,358               723,826
                                                                               -------------         -------------
                                                                                  18,342,985            14,179,993
                                                                               -------------         -------------
                                                                               $ 103,484,944         $  81,621,835
                                                                               =============         =============
</TABLE>


                                      -27-
<PAGE>


Consolidated Balance Sheets
<TABLE>
<CAPTION>

                                                                                December 30           December 31
                                                                                   2006                  2005
                                                                                -----------           -----------
<S>                                                                           <C>                   <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
    Accounts payable                                                           $  13,170,491         $  5,599,260
    Accrued compensation                                                           3,098,525            1,527,640
    Other accrued expenses                                                         4,399,358            3,275,159
    Current portion of long-term debt                                              3,111,908            3,420,523
                                                                               -------------         ------------
Total Current Liabilities                                                         23,780,282           13,822,582

Deferred income taxes                                                              1,123,537              895,019
Long-term debt, less current portion                                              17,506,802           12,384,338
Accrued postretirement benefits                                                    1,221,156            2,078,056
Accrued pension cost                                                               5,323,550            6,270,075
Interest rate swap obligation                                                        138,412                   -

Shareholders' Equity
    Voting Preferred Stock, no par value:
       Authorized and unissued: 1,000,000 shares
    Nonvoting Preferred Stock, no par value:
       Authorized and unissued: 1,000,000 shares
    Common Stock, no par value:
       Authorized: 25,000,000 shares
       Issued: 8,012,550 shares in 2006 and 7,992,626 shares in 2005              17,974,115           17,694,851
    Treasury Stock: 2,533,089 shares in 2006 and 2005                            (16,655,041)         (16,655,041)
    Retained earnings                                                             58,279,371           50,335,658

    Accumulated other comprehensive income (loss):
       Foreign currency translation                                                  756,452              818,566
       Unrecognized net pension and postretirement benefit costs, net
          of taxes                                                                (5,875,261)                  -
       Additional minimum pension liability, net of taxes                                 -            (6,042,553)
       Derivative financial instruments, net of taxes                                (88,431)              20,284
                                                                               -------------         ------------
                                                                                  (5,207,240)          (5,203,703)
                                                                               -------------         ------------
Total Shareholders' Equity                                                        54,391,205           46,171,765
                                                                               -------------         ------------
                                                                               $ 103,484,944         $ 81,621,835
                                                                               =============         ============
</TABLE>


See accompanying notes.

                                      -28-

<PAGE>


Consolidated Statements of Income
<TABLE>
<CAPTION>

                                                                                   Year ended
                                                            -----------------------------------------------------
                                                             December 30          December 31           January 1
                                                                 2006                2005                 2005
                                                            -------------        -------------         -----------
<S>                                                       <C>                 <C>                  <C>
Net sales                                                  $   138,465,411     $   109,107,290      $  100,130,158
Cost of products sold                                         (103,881,660)        (84,374,501)        (74,999,119)
                                                           ---------------     ---------------      --------------
Gross margin                                                    34,583,751          24,732,789          25,131,039

Selling and administrative expenses                            (18,789,514)        (16,776,253)        (17,280,348)
                                                           ---------------     ---------------      --------------
Operating profit                                                15,794,237           7,956,536           7,850,691

Interest expense                                                (1,097,640)         (1,014,052)         (1,044,490)
Other income                                                       149,451              77,823              22,838
                                                           ---------------     ---------------      --------------
Income before income taxes                                      14,846,048           7,020,307           6,829,039

Income taxes                                                     5,187,300           2,653,120           2,071,338
                                                           ---------------     ---------------      --------------
Net income                                                 $     9,658,748     $     4,367,187      $    4,757,701
                                                           ===============     ===============      ==============

Earnings per Share:
    Basic                                                           $ 1.76              $  .80              $  .87
                                                           ===============     ===============      ==============

    Diluted                                                         $ 1.67              $  .75              $  .85
                                                           ===============     ===============      ==============

See accompanying notes.
</TABLE>


Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>

                                                                                     Year ended
                                                              ------------------------------------------------------
                                                               December 30          December 31           January 1
                                                                   2006                2005                 2005
                                                              -------------        -------------         -----------
<S>                                                        <C>                <C>                   <C>
Net income                                                  $     9,658,748    $      4,367,187      $     4,757,701
Other comprehensive income/(loss) -
    Change in foreign currency translation                          (62,114)            354,762              630,099
    Change in fair value of derivative financial
       instruments, net of income taxes (benefit)
       of ($35,301) in 2006, $75,797 in 2005 and
       $168,000 in 2004                                             (62,092)            116,701              251,638
    Reclassification adjustment for termination of
       derivative financial instrument, net of
       income tax benefit of $26,477                                (46,623)                 -                    -
    Change in additional minimum pension liability
       net of income taxes (benefit) of $927,837 in
       2006, ($584,440) in 2005 and ($227,839) in
       2004                                                       1,466,438            (994,753)            (997,914)
    Effect on net pension and postretirement
       benefit costs related to the adoption of FAS
       158, net of income tax benefit of $734,263
       in 2006                                                   (1,299,146)                 -                    -
                                                            ---------------    ----------------      ---------------
                                                                     (3,537)           (523,290)            (116,177)
                                                            ---------------    ----------------      ---------------
Comprehensive income                                        $     9,655,211    $      3,843,897      $     4,641,524
                                                            ===============    ================      ===============

See accompanying notes.
</TABLE>

                                      -29-
<PAGE>



Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>

                                                        Common         Common         Treasury         Treasury          Retained
                                                        Shares          Stock          Shares           Stock            Earnings
                                                        ------         ------         --------         --------          --------
<S>                                                  <C>           <C>              <C>             <C>                <C>
Balances at January 3, 2004                           7,944,572     $17,177,797      (2,520,513)     $(16,512,848)      $44,406,855

Net income                                                                                                                4,757,701
Cash dividends declared, $.29 per share                                                                                  (1,595,985)
Purchase of Common Stock for treasury                                                   (12,576)         (142,193)
Issuance of Common Stock upon the exercise of
    stock options                                        33,750         324,800
Issuance of Common Stock for directors' fees              7,068          80,964
                                                      ---------     -----------       ---------      ------------       ------------
Balances at January 1, 2005                           7,985,390      17,583,561      (2,533,089)      (16,655,041)       47,568,571

Net income                                                                                                                4,367,187
Cash dividends declared, $.29 per share                                                                                  (1,600,100)
Tax benefit from disqualifying disposition of
    incentive stock options                                               6,403
Issuance of Common Stock for directors' fees              7,236         104,887
                                                      ---------     -----------       ---------      ------------       ------------
Balances at December 31, 2005                         7,992,626      17,694,851      (2,533,089)      (16,655,041)       50,335,658

Net income                                                                                                                9,658,748
Cash dividends declared, $.31 per share                                                                                  (1,715,035)
Issuance of Common Stock upon the exercise of
    stock options                                        15,000         203,700
Cash payment for fractional shares resulting from
    3-for-2 stock split effective October 2006              (94)         (1,633)
Issuance of Common Stock for directors' fees              5,018          77,197
                                                      ---------     -----------       ---------      ------------       ------------
Balances at December 30, 2006                         8,012,550     $17,974,115      (2,533,089)     $(16,655,041)      $58,279,371
                                                      =========     ===========      ==========      ============       ===========


See accompanying notes.
</TABLE>

                                      -30-
<PAGE>


Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

                                                                                     Year ended
                                                                -----------------------------------------------------
                                                                 December 30          December 31          January 1
                                                                    2006                  2005                2005
                                                                -------------        ------------         -----------
<S>                                                           <C>                  <C>                 <C>
Operating Activities
Net income                                                     $   9,658,748        $   4,367,187       $   4,757,701
Adjustments to reconcile net income to net cash
    provided by operating activities:
       Depreciation and amortization                               3,745,693            3,459,747           3,461,411
       Loss on sale of equipment and other assets                      2,574                3,314              67,620
       Provision for doubtful accounts                                58,424                6,433             112,222
       Deferred income taxes                                        (119,413)             (27,293)             (8,092)
       Issuance of Common Stock for directors' fees                   77,197              104,887              80,964
       Changes in operating assets and liabilities:
          Accounts receivable                                     (8,844,177)          (2,155,923)         (1,639,624)
          Inventories                                             (5,601,588)             (88,147)         (3,299,948)
          Prepaid expenses and other                                   4,413             (147,867)           (634,445)
          Prepaid pension cost                                        97,106             (428,959)            581,724
          Other assets                                              (142,673)            (218,801)           (105,674)
          Accounts payable                                         6,516,275              524,078             495,218
          Accrued compensation                                     1,313,076             (800,582)            790,492
          Other accrued expenses                                   1,097,299              600,331             194,244
                                                               -------------        -------------       -------------
Net cash provided by operating activities                          7,862,954            5,198,405           4,853,813

Investing Activities
Purchases of property, plant and equipment                        (6,721,581)          (1,750,252)         (2,062,313)
Proceeds from sale of equipment and other assets                      19,374                  750              13,367
Business acquisitions                                             (7,536,916)                  -                   -
                                                               -------------        -------------       -------------
Net cash used in investing activities                            (14,239,123)          (1,749,502)         (2,048,946)

Financing Activities
Principal payments on long-term debt                             (15,255,099)          (3,009,811)         (2,007,357)
Proceeds from issuance of long-term debt                          20,000,000                   -                   -
Proceeds from revolving credit loan                                       -             3,000,000                  -
Proceeds from sales of Common Stock                                  203,700                   -              324,800
Tax benefit from disqualifying disposition of incentive
    stock options                                                         -                 6,403                  -
Purchases of Common Stock for treasury                                    -                    -             (142,193)
Cash payment for fractional shares resulting from
    3-for-2 stock split                                               (1,633)                  -                   -
Dividends paid                                                    (1,715,035)          (1,600,100)         (1,595,985)
                                                               -------------        -------------       -------------
Net cash provided by (used in) financing activities                3,231,933           (1,603,508)         (3,420,735)
Effect of exchange rate changes on cash                             (100,253)              80,046             139,558
                                                               -------------        -------------       -------------
Net change in cash and cash equivalents                           (3,244,489)           1,925,441            (476,310)

Cash and cash equivalents at beginning of year                     6,345,947            4,420,506           4,896,816
                                                               -------------        -------------       -------------
Cash and cash equivalents at end of year                       $   3,101,458        $   6,345,947       $   4,420,506
                                                               =============        =============       =============

See accompanying notes.
</TABLE>

                                      -31-
<PAGE>

The Eastern Company

Notes to Consolidated Financial Statements


1. OPERATIONS

The operations of The Eastern Company (the "Company")  consist of three business
segments:  industrial  hardware,  security  products,  and metal  products.  The
industrial  hardware  segment  produces  latching  devices for use on industrial
equipment and  instrumentation  as well as a broad line of proprietary  hardware
designed  for truck  bodies and other  vehicular  type  equipment.  The security
products segment manufactures and markets a broad range of locks for traditional
general  purpose  security  applications  as well as specialized  locks for soft
luggage,  coin-operated vending and gaming equipment,  and electric and computer
peripheral components. This segment also manufactures and markets coin acceptors
and metering systems to secure cash used in the commercial  laundry industry and
produces cashless payment systems utilizing advanced smart card technology.  The
metal products segment produces  anchoring  devices used in supporting the roofs
of underground coal mines and specialty products,  which serve the construction,
automotive and electrical industries.

Sales are made to customers primarily in North America.


2. ACCOUNTING POLICIES

Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States  requires  management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements,  as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Fiscal Year

The Company's year ends on the Saturday nearest to December 31.

Principles of Consolidation

The consolidated  financial  statements  include the accounts of the Company and
its subsidiaries,  all of which are wholly-owned.  All intercompany accounts and
transactions  are  eliminated.  Effective  beginning  in  2004,  all  locations,
including  subsidiaries in Asia and Mexico, are consolidated as of the Company's
fiscal year end.  The Company had  historically  consolidated  its  subsidiaries
located in Asia and Mexico as of November  30,  which  resulted in a  thirteenth
period being included in the 2004 year end  consolidation.  The inclusion of the
additional  period increased  revenue by less than 0.5% and increased net income
approximately 3% for 2004.

Cash Equivalents and Concentrations of Credit Risk

Highly liquid investments  purchased with a maturity of three months or less are
considered  cash  equivalents.  The Company  has  deposits  that exceed  amounts
insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000,  but
the Company does not consider  this a significant  concentration  of credit risk
based on the strength of the financial institution.




                                      -32-


<PAGE>


The Eastern Company

Notes to Consolidated Financial Statements (continued)


2. ACCOUNTING POLICIES (continued)

Foreign Currency Translation

For foreign  operations,  balance sheet  accounts are  translated at the current
year-end exchange rate; income statement  accounts are translated at the average
exchange rate for the year. Resulting translation  adjustments are made directly
to  a  separate   component  of  shareholders'   equity  -  "Accumulated   other
comprehensive  income (loss) - Foreign currency  translation".  Foreign currency
exchange transaction gains and losses are not material in any year.

Recognition of Revenue and Accounts Receivable

Revenue and accounts  receivable are recognized when  persuasive  evidence of an
arrangement exists, the price is fixed and determinable,  delivery has occurred,
and there is a reasonable  assurance of  collection of the sales  proceeds.  The
Company  obtains  written  purchase  authorizations  from  its  customers  for a
specified amount of product at a specified price and delivery occurs at the time
of  shipment.  Credit is  extended  based on an  evaluation  of each  customer's
financial  condition;  collateral  is  not  required.  Accounts  receivable  are
recorded net of applicable allowances.  At year end 2006, one customer accounted
for approximately 29% of total accounts receivable.


Allowance for Doubtful Accounts

The Company  maintains an allowance for doubtful  accounts for estimated  losses
resulting  from the inability of its customers to make  required  payments.  The
Company reviews the collectibility of its receivables on an ongoing basis taking
into account a combination of factors.  The Company reviews potential  problems,
such  as  past  due  accounts,  a  bankruptcy  filing  or  deterioration  in the
customer's financial condition,  to ensure the Company is adequately accrued for
potential  loss.  Accounts  are  considered  past due based on when  payment was
originally  due. If a customer's  situation  changes,  such as a  bankruptcy  or
creditworthiness,  or there is a change in the  current  economic  climate,  the
Company may modify its  estimate of the  allowance  for doubtful  accounts.  The
Company will write off accounts  receivable after reasonable  collection efforts
have been made and the accounts are deemed uncollectible.

Inventories

Inventories are valued at the lower of cost or market. Cost is determined by the
last-in,  first-out (LIFO) method in the U.S.  ($22,200,222 for U.S. inventories
at  December  30,  2006)  and by  the  first-in,  first-out  (FIFO)  method  for
inventories  outside the U.S.  ($5,842,344 for  inventories  outside the U.S. at
December  30,  2006).   Current  cost  exceeds  the  LIFO   carrying   value  by
approximately  $4,665,000  at December 30, 2006 and  $4,033,000  at December 31,
2005. There was no material LIFO quantity liquidation in 2006, 2005 or 2004.

Property, Plant and Equipment and Related Depreciation

Property,  plant and equipment  (including  equipment  under capital  lease) are
stated  at  cost.  Depreciation  ($3,443,351  in  2006,  $3,322,891  in 2005 and
$3,131,483 in 2004) is computed  generally using the straight-line  method based
on the  following  estimated  useful  lives of the assets:  Buildings 10 to 39.5
years; Machinery and equipment 3 to 10 years.






                                      -33-

<PAGE>


The Eastern Company

Notes to Consolidated Financial Statements (continued)


2. ACCOUNTING POLICIES (continued)

Goodwill, Intangibles and Impairment of Long-Lived Assets

Patents are recorded at cost and are amortized  using the  straight-line  method
over the lives of the patents.  Technology and licenses are recorded at cost and
are generally  amortized on a straight-line basis over periods ranging from 5 to
17 years.  Non-compete agreements and customer relationships are being amortized
using the straight-line method over a period of 5 years. Amortization expense in
2006,  2005 and 2004 was $302,342,  $136,856 and $329,927,  respectively.  Total
amortization  expense  for each of the next  five  years is  estimated  to be as
follows: 2007 - $644,000; 2008 - $637,000; 2009 - $636,000; 2010 - $630,000; and
2011 - $536,000.  Trademarks  are not  amortized as their lives are deemed to be
indefinite.

The gross carrying amount and accumulated amortization of amortizable intangible
assets:
<TABLE>
<CAPTION>
                                        Industrial          Security              Metal                           Weighted-Average
                                         Hardware           Products            Products                           Amortization
                                          Segment            Segment             Segment            Total          Period (Years)
                                          -------            -------             -------            -----          --------------
<S>                                   <C>                <C>                 <C>                 <C>                     <C>
          2006 Gross Amount:
   Patents and developed               $  2,411,468       $  1,005,390        $    82,747         $  3,499,605            16.1
        technology
   Customer relationships                        -           1,921,811                 -             1,921,811             5.0
   Non-compete agreements                        -              90,735                 -                90,735             5.0
   Other                                         -               3,941                 -                 3,941              -
                                       ------------       ------------        -----------         ------------            ----
   Total Gross Intangibles             $  2,411,468       $  3,021,877        $    82,747         $  5,516,092            11.5
                                       ============       ============        ===========         ============            ====

   2006 Accumulated
        Amortization:
   Patents and developed               $    902,854       $    192,250        $    62,553         $  1,151,657
        technology
   Customer relationships                        -              93,133                 -                93,133
   Non-compete agreements                        -              48,794                 -                48,794
                                       ------------       ------------        -----------         ------------
   Total Gross Amortization            $    902,854       $    334,177        $    62,553         $  1,299,584
                                       ============       ============        ===========         ============

                                       ------------       ------------        -----------         ------------
   Net 2006 per Balance Sheet          $  1,508,614       $  2,687,700        $    20,194         $  4,216,508
                                       ============       ============        ===========         ============


          2005 Gross Amount:
   Patents and developed               $  2,602,120       $    467,201        $    82,747         $  3,152,068            16.4
        technology
   Non-compete agreements                        -              50,735                 -                50,735             5.0
   Other                                         -               3,941                 -                 3,941              -
                                       ------------       ------------        -----------         ------------            ----
   Total Gross Intangibles             $  2,602,120       $    521,877        $    82,747         $  3,206,744            16.2
                                       ============       ============        ===========         ============            ====

   2005 Accumulated
        Amortization:
   Patents and  developed              $  1,021,206       $    143,362        $    57,604         $  1,222,172
        technology
   Non-compete agreements                        -              38,070                 -                38,070
                                       ------------       ------------        -----------         ------------
   Total Gross Amortization            $  1,021,206       $    181,432        $    57,604         $  1,260,242
                                       ============       ============        ===========         ============

                                       ------------       ------------        -----------         ------------
   Net 2005 per Balance Sheet          $  1,580,914       $    340,445        $    25,143         $  1,946,502
                                       ============       ============        ===========         ============
</TABLE>

                                      -34-
<PAGE>

The Eastern Company

Notes to Consolidated Financial Statements (continued)


2. ACCOUNTING POLICIES (continued)

In the event that facts and circumstances indicate that the carrying value of
long-lived assets, including definite life intangible assets, may be impaired,
an evaluation is performed to determine if a write-down is required. No events
or changes in circumstances have occurred to indicate that the carrying amount
of such long-lived assets held and used may not be recovered.

The Company performs an annual impairment test of its goodwill and trademarks
during the second quarter of each year. Goodwill and trademarks were not
impaired in 2006, 2005 or 2004.

The following is a roll-forward of goodwill for 2006 and 2005:

<TABLE>
<CAPTION>
                                      Industrial          Security              Metal
                                       Hardware           Products            Products
                                        Segment            Segment             Segment              Total
                                        -------            -------             -------              -----
<S>                                 <C>                <C>                     <C>             <C>
           2006
   Beginning balance                 $ 1,909,126        $  8,732,406            $  -            $ 10,641,532
   Acquisition of Royal Lock                  -            3,101,410               -               3,101,410
   Foreign exchange                         (782)                 -                -                    (782)
                                     ----------         ------------            -----           ------------
   Ending balance                    $ 1,908,344        $ 11,833,816            $  -            $ 13,742,160
                                     ===========        ============            =====           ============


          2005
   Beginning balance                 $ 1,871,880        $  8,732,406            $  -            $ 10,604,286
   Foreign exchange                       37,246                  -                -                  37,246
                                     ----------         ------------            -----           ------------
   Ending balance                    $ 1,909,126        $  8,732,406            $  -            $ 10,641,532
                                     ===========        ============            =====           ============
</TABLE>

The  goodwill  for Royal Lock will be  amortized  over a 15 year  period for tax
purposes.

Cost of Products Sold

The  Company  includes  the cost of  inventory  sold and  related  costs for the
acquisition  and  distribution  of its product in cost of products  sold.  These
costs include inbound freight  charges,  receiving,  inspection,  purchasing and
warehousing related costs.

Selling and Administrative Expenses

All advertising,  selling,  general consulting,  executive salaries,  regulatory
compliance,  audit,  legal and  professional  fees are  included  in selling and
administrative expenses.

Product Development Costs

Product  development costs,  charged to expense as incurred,  were $1,354,224 in
2006, $1,150,378 in 2005 and $1,166,747 in 2004.

Advertising Costs

The Company  expenses  advertising  costs as  incurred.  Advertising  costs were
$525,632 in 2006, $606,330 in 2005 and $447,778 in 2004.


                                      -35-
<PAGE>

The Eastern Company

Notes to Consolidated Financial Statements (continued)


2. ACCOUNTING POLICIES (continued)

Income Taxes

The Company and its U.S.  subsidiaries  file a  consolidated  federal income tax
return.

Deferred tax assets and liabilities are determined based on differences  between
financial  reporting  and tax bases of assets and  liabilities  and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.

Stock Split and Earnings Per Share

On September 28, 2006, the Company announced a three-for-two  stock split of the
Company's  common  shares.  The  record  date was  October  10,  2006,  with the
additional shares being issued on October 17, 2006. Fractional shares created as
a result of this split were paid by cash. In connection  therewith the Company's
Common Stock purchase rights (see Note 6) have also been adjusted to reflect the
stock split. The effect of this stock split has been applied  retroactively  and
all applicable  share data and per share data in these financial  statements and
notes to financial statements have been restated.

The denominators used in the earnings per share computations follow:
<TABLE>
<CAPTION>

                                                     2006            2005              2004
                                                     ----            ----              ----
<S>                                               <C>             <C>               <C>
Basic:
Weighted average shares outstanding                5,474,137       5,455,073         5,441,312
                                                   =========       =========         =========


Diluted:
Weighted average shares outstanding                5,474,137       5,455,073         5,441,312
Dilutive stock options                               293,971         373,764           177,240
                                                   ---------       ---------         ---------

Denominator for diluted earnings per share         5,768,108       5,828,837         5,618,552
                                                   =========       =========         =========

</TABLE>


The Company has  excluded the effect of 104,250  stock  options in 2004 from the
above dilutive stock options,  as their inclusion would be anti-dilutive.  There
were no anti-dilutive stock options in 2006 or 2005.

Derivatives

The Company  maintains an interest  rate swap  agreement to minimize the risk of
fluctuations  of interest  rates on the Company's  variable rate term debt.  The
agreement involves the exchange of amounts based on the London Interbank Offered
Rate  ("LIBOR") for amounts based on a fixed  interest rate over the life of the
agreement,  without an exchange of the  notional  amount upon which the payments
are based.

The Company's interest rate swap agreement, which is accounted for as a cashflow
hedge, is considered "effective" through use of the short-cut method, as defined
under  Financial   Accounting   Standards  Board  ("FASB")  Statement  No.  133,
Accounting for Derivative Instruments and Hedging Activities,  and, as a result,
changes  in the  fair  value  of the  derivative  are  recorded  as an  asset or
liability  with the offset amount  recorded to accumulated  other  comprehensive
income (loss) in shareholders' equity.





                                      -36-
<PAGE>

The Eastern Company

Notes to Consolidated Financial Statements (continued)


2. ACCOUNTING POLICIES (continued)

Stock Based Compensation

In December 2004, the FASB issued Statement of Financial  Standards ("SFAS") No.
123R, Share Based Payment (as amended).  SFAS 123R eliminates the alternative to
use the intrinsic  value method of accounting that was provided for in SFAS 123,
which generally  resulted in no compensation  expense  recorded in the financial
statements  related to the issuance of equity  awards to employees and directors
to the extent  issued at fair market  value.  SFAS 123R  requires  that the cost
resulting  from  all  share-based  payment  transactions  be  recognized  in the
financial  statements.  SFAS  123R  establishes  fair  value as the  measurement
objective in accounting for share-based  payment  arrangements  and requires all
companies to apply a fair-value-based measurement method in accounting generally
for all share-based  payment  transactions  with  employees.  SFAS 123R does not
require the  recording of  compensation  expense in periods prior to the date of
adoption.

On January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS 123R  using the  modified  prospective  method.  As no stock  options  were
granted in 2006 and, as all options  granted prior to January 1, 2006 were fully
vested, there was no impact on the current year financial statements.

Prior to the adoption of SFAS 123R,  the Company  accounted for stock options in
accordance  with  Accounting   Principles  Board  Opinion  No.  25  ("APB  25"),
Accounting  for Stock  Issued to  Employees.  Under APB 25 because the  exercise
price of stock options  equaled the market price of the underlying  stock on the
date of grant, no compensation expense was recognized.

The fair value of stock  options  was  estimated  at the date of grant using the
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions for 2004 (2006 and 2005 are not applicable  (N/A) because no options
were granted during either year):

                                             2006         2005         2004
                                             ------------------------------
       Risk free interest rate                N/A           N/A         3.48%
       Expected volatility                    N/A           N/A         0.295
       Expected option life                   N/A           N/A        5 years
       Weighted-average dividend yield        N/A           N/A         2.2%

The weighted average fair market value of the shares granted under options was
$13.58 in 2004. The weighted average fair value of options, estimated using the
Black-Scholes option pricing model based on the assumptions in the above table,
was $3.43 in 2004.












                                      -37-

<PAGE>


The Eastern Company

Notes to Consolidated Financial Statements (continued)


2. ACCOUNTING POLICIES (continued)

Stock Based Compensation (continued)

Had the Company used the fair value based accounting method for share-based
compensation expense in 2005 and 2004, the Company's consolidated pro forma
information regarding net income and earnings per share would have been as
follows:

                                                          (in thousands, except
                                                            per share amounts)
                                                          ---------------------
                                                           2005          2004
                                                          ------        ------
      Net income, as reported                             $4,367        $4,758
      Deduct: Total stock-based employee
         compensation expense determined under
         fair value-based method, net of related tax
         effects                                               2           311
                                                          ------        ------
      Pro forma net income                                $4,365        $4,447
                                                          ======        ======

      Earnings per share:
      Basic - as reported                                  $0.80         $0.87
      Basic - pro forma                                    $0.80         $0.82

      Diluted - as reported                                $0.75         $0.85
      Diluted - pro forma                                  $0.75         $0.79


For the  purposes  of pro forma  disclosures,  the  estimated  fair value of the
options is amortized to expense over the stock  options'  vesting period ranging
from 1 to 5 years.  The pro forma effect on net income and related  earnings per
share may not be  representative  of future  years'  impact  since the terms and
conditions of new grants may vary from the current terms.


3. BUSINESS ACQUISITIONS

Effective  November  8,  2006 the  Company  acquired  certain  assets  of Summit
Manufacturing,   Inc.  ("Summit")  including  accounts  receivable,   inventory,
fixtures and equipment,  intellectual  property  rights and all rights  existing
under  all  sales and  purchase  agreements.  Summit  designs  and  manufactures
appliance  hardware and  accessories,  including,  but not limited to, oven door
latches,  oven door switches and smoke  eliminators  and engaging in subcontract
assembly services,  including, but not limited to, subcontract assembly services
for products  known as "Mosquito  Magnets".  Its products  will be sold into the
appliance  industry  and is included  in the  Security  Products  segment of the
Company from the date of acquisition.  The cost of the acquisition was $546,000,
inclusive of transaction costs and debt paid at closing,  plus the assumption of
$369,000 in current liabilities.

Effective  September 25, 2006 the Company  acquired certain assets of Royal Lock
Corporation  ("Royal") including accounts  receivable,  inventories,  furniture,
fixtures and equipment,  intellectual  property rights and rights existing under
all sales and  purchase  agreements.  Royal is a supplier  of cam locks,  switch
locks, padlocks, latches, handles and specialty hardware parts. Its products are
sold to  numerous  OEM's  in  several  market  segments,  including  automotive,
recreational  vehicles and furniture as well as electronics and fabricated metal
parts  producers.  Royal is included  in the  Security  Products  segment of the
Company from the date of the  acquisition.  The cost of the acquisition of Royal
was $6,991,000,  inclusive of transaction costs, plus the assumption of $775,000
in current liabilities.

                                      -38-
<PAGE>

The Eastern Company

Notes to Consolidated Financial Statements (continued)


3. BUSINESS ACQUISITIONS (continued)

Both of the above  acquisitions  have  been  accounted  for  using the  purchase
method.  The  acquired  businesses  are included in the  consolidated  operating
results of the Company from the date of  acquisition.  The excess of the cost of
Royal Lock over the fair market value of the net assets  acquired of  $3,101,410
has been recorded as goodwill.  There was no goodwill attributable to the Summit
Manufacturing acquisition.

In connection with the above  acquisitions,  the Company  recorded the following
intangible assets:
<TABLE>
<CAPTION>

                                                                       Weighted-average Amortization
     Asset Class/Description                             Amount              Period in Years
     -----------------------------------------------------------------------------------------------
<S>                                                <C>                            <C>
         Patents, technology, and licenses
         Customer relationships                      $  1,921,811                   5.0
         Patents and developed technology                 473,828                  12.9
         Non-compete agreements                            40,000                   5.0
                                                     ------------
                                                     $  2,435,639                   6.5
                                                     ============
</TABLE>

There is no anticipated residual value relating to these intangible assets.

Neither  the actual  results  nor the pro forma  effects of the  acquisition  of
Summit  and Royal,  individually  or in total,  are  material  to the  Company's
financial statements.


4. CONTINGENCIES

The  Company is party to various  legal  proceedings  and claims  related to its
normal  business  operations.  In the  opinion of  management,  the  Company has
substantial and  meritorious  defenses for these claims and proceedings in which
it is a  defendant,  and believes  these  matters  will be  ultimately  resolved
without a  material  adverse  effect  on the  consolidated  financial  position,
results of operations or liquidity of the Company.  The aggregate  provision for
losses related to  contingencies  arising in the ordinary course of business was
not material to operating results for any year presented.

Approximately  36% of  the  total  workforce  is  subject  to  negotiated  union
contracts  and 32% of the total  workforce is covered by such  agreements  which
expire during 2007.


5. DEBT

On September 22, 2006, the Company  amended the unsecured loan agreement  ("Loan
Agreement"),  which includes a term portion and a revolving credit portion, with
its lender, Bank of America,  N.A. The amendment  restructures and increases the
balance  of the term  portion  of the loan into a new seven (7) year loan in the
amount of  $20,000,000.  The  restructured  term portion is payable in quarterly
payments of $714,286  beginning January 2, 2007. The proceeds were used to repay
in full the outstanding balance of its existing term loan, $12,625,000,  and for
the acquisition of Royal Lock.

In  addition,  the Company  increased  the maximum  amount  available  under the
revolving credit portion from $7,500,000 to $12,000,000 and renewed and extended
the maturity date to September  22, 2009.  The  revolving  credit  portion has a
variable quarterly commitment fee ranging from 0.10% to 0.25% based on operating
results.  As of December  30,  2006,  the  quarterly  fee is 0.15% on the unused
portion.

                                      -39-

<PAGE>

The Eastern Company

Notes to Consolidated Financial Statements (continued)


5. DEBT (continued)

The interest  rates on the term and the  revolving  credit  portions of the Loan
Agreement  vary.  The  interest  rates may vary  based on the LIBOR  rate plus a
margin  spread  of 1.0% to 1.65% for the term  portion  and 1.0% to 1.6% for the
revolving credit portion.  The margin rate spread is based on operating  results
calculated on a rolling-four-quarter basis. The Company may also borrow funds at
the lender's  prime rate.  On December 30, 2006,  the interest  rate on the term
portion of the Loan Agreement was 6.62%.

Also on  September  22, 2006,  the Company  terminated  its  interest  rate swap
contract with the lender.  At the time of  termination,  the notional amount was
$9,468,750,  which was equal to 75% of the outstanding  balance of the term loan
on that date. As a result of the  termination,  the Company  received $73,100 of
cash which was included in other income. The Company had originally entered into
the interest rate swap contract with an original  notional amount of $11,793,750
which was equal to 75% of the outstanding balance of the term loan on August 11,
2005.  The  notional  amount  began to decrease on a quarterly  basis  beginning
October 3, 2005 following the principal  repayment  schedule of the term portion
of the Loan  Agreement.  The Company had a fixed  interest  rate of 4.61% on the
swap  contract  and paid the  difference  between  the fixed rate and LIBOR when
LIBOR was below 4.61% and received interest when the LIBOR rate exceeded 4.61%.

On November 2, 2006,  the Company  entered into an interest  rate swap  contract
with the lender with an original notional amount of $20,000,000 (notional amount
$20,000,000  on December 30, 2006),  which was equal to 100% of the  outstanding
balance of the term loan on that date.  The notional  amount will  decrease on a
quarterly  basis  beginning  January 2, 2007  following the principal  repayment
schedule of the term loan. The Company has a fixed interest rate of 5.25% on the
swap contract and will pay the difference  between the fixed rate and LIBOR when
LIBOR is below  5.25% and will  receive  interest  when the LIBOR  rate  exceeds
5.25%.

On March 8, 2006,  the Company  signed a capital  lease in the amount of $68,948
with Citicorp  Vendor Finance for the purchase of new lighting  equipment at its
Greenwald facility in Chester,  Connecticut.  The lease has a three year term at
0% interest rate. Payments under the lease are $1,915 per month. The Company was
required to make the initial payment in March 2006, but was not required to make
another payment until the installation of the equipment was completed in October
2006.

On  August 1,  2005,  the  Company  had also  amended  the Loan  Agreement.  The
amendment  renewed and extended the maturity of the  revolving  credit loan from
July 1, 2005 to  August 1, 2007 and  restructured  and  increased  the  existing
balance  of the term  loan into a new five (5) year term  loan.  The  additional
$4,000,000  proceeds from the term loan were used to pay down the balance on the
revolving credit agreement.

Previously,  the Company maintained an interest rate swap contract, as required,
with the lender for an original notional amount of $15,000,000  (notional amount
$6,600,000  on January 1,  2005),  which was  reduced  on a  quarterly  basis in
accordance with the principal repayment schedule of the term portion of the Loan
Agreement.  The interest rate on the swap contract was at a fixed rate of 9.095%
and expired on July 1, 2005.









                                      -40-

<PAGE>


The Eastern Company

Notes to Consolidated Financial Statements (continued)


5. DEBT (continued)

Debt consists of:
<TABLE>
<CAPTION>
                                                                                 2006               2005
                                                                             ------------------------------
<S>                                                                         <C>               <C>
    Term loan                                                                $ 20,000,000      $ 15,025,000
    Revolving credit loan                                                              -                 -
    Capital lease obligation with interest at 4.99% and payable in
        monthly installments of $21,203 through April 2009                        559,338           779,861
    Capital lease obligation with interest at 0% and payable in
        monthly installments of $1,915 through September 2009                      59,372                -
                                                                             ------------      ------------
                                                                               20,618,710        15,804,861
    Less current portion                                                        3,111,908         3,420,523
                                                                             ------------      ------------
                                                                             $ 17,506,802      $ 12,384,338
                                                                             ============      ============
</TABLE>

The Company paid interest of $903,759 in 2006,  $929,756 in 2005 and  $1,002,955
in 2004.

Collectively,  under the  covenants  of the Loan  Agreement  and  capital  lease
obligation,  the Company is required to maintain specified  financial ratios and
amounts. In addition,  the Company is restricted to, among other things, capital
leases, purchases or redemptions of its capital stock, mergers and divestitures,
and new borrowing.

As of December 30, 2006,  scheduled  annual  principal  maturities  of long-term
debt,  including  capital  lease  obligations,  for each of the next five  years
follow:

                     2007                  $ 3,111,908
                     2008                    3,123,742
                     2009                    2,954,488
                     2010                    2,857,143
                     2011                    2,857,143
                     Thereafter              5,714,286
                                           -----------
                                           $20,618,710
                                           ===========

At December 30, 2006 and December 31, 2005, building improvements and equipment,
with a cost of approximately $2,069,000, were recorded under capital leases with
accumulated  amortization of approximately $751,000 and $640,000,  respectively.
One  capital  lease is secured by the  equipment  under the lease and a $559,000
letter of credit.















                                      -41-

<PAGE>

The Eastern Company

Notes to Consolidated Financial Statements (continued)


6. STOCK RIGHTS

The Company has a stock rights plan. At December 30, 2006,  there were 5,479,461
stock rights outstanding under the plan. Each right may be exercised to purchase
one share of the Company's common stock at an exercise price of $53.33,  subject
to adjustment to prevent dilution.

The rights  generally  become  exercisable ten days after an individual or group
acquires 10% of the Company's  outstanding common stock or after commencement or
announcement  of an offer for 10% or more of the  Company's  common  stock.  The
stock rights, which do not have voting privileges,  expire on July 22, 2008, and
may be redeemed by the Company at a price of $0.0045 per right at any time prior
to their expiration.  In the event that the Company were acquired in a merger or
other business  combination  transaction,  provision  shall be made so that each
holder of a right shall have the right to receive,  upon exercise thereof at the
then  current  exercise  price,  that  number of  shares of common  stock of the
surviving  company  which at the time of such  transaction  would  have a market
value of two times the exercise price of the right.


7. STOCK OPTIONS AND AWARDS

Stock Options

The  Company has stock  option  plans for  officers,  other key  employees,  and
non-employee  directors:  the 1989,  1995, 1997 and 2000 plans.  Options granted
under the 1989 plan and incentive  stock options granted under the 1995 and 2000
plans must have  exercise  prices that are not less than 100% of the fair market
value of the stock on the dates the options are granted. Restricted stock awards
may  also be  granted  to  participants  under  the 1995  and  2000  plans  with
restrictions  determined by the Compensation Committee of the Company's Board of
Directors.  Under the 1995,  1997,  and 2000 plans,  nonqualified  stock options
granted to participants will have exercise prices determined by the Compensation
Committee of the Company's  Board of Directors.  No options were granted in 2006
or 2005.  All options  granted in 2004 were  granted at prices equal to the fair
market value of the stock on the dates granted.  No restricted stock was granted
in 2006, 2005 or 2004.

As of December 30, 2006,  there were 446,250  shares  available for future grant
under the above noted plans: 2000 - 367,500 shares; 1997 - 78,750; 1995 and 1989
- no shares  available for grant. As of December 30, 2006,  there were 1,449,000
shares of common stock reserved under all option plans for future issuance.

Information  with respect to the  Company's  stock  option  plans is  summarized
below:

                                                             Weighted Average
                                                Shares       Exercise Price
                                               --------     -----------------
 Outstanding at January 3, 2004                 981,000         $  8.944
 Granted                                         85,500           13.580
 Cancelled                                      (15,000)           9.876
 Exercised                                      (33,750)           9.624
                                              ---------         --------
 Outstanding at January 1, 2005               1,017,750            9.297
 No activity in 2005                                 -                -
                                              ---------         --------
 Outstanding at December 31, 2005             1,017,750            9.297
 Exercised                                      (15,000)          13.580
                                              ---------         --------
 Outstanding at December 30, 2006             1,002,750         $  9.233
                                              =========         ========


                                      -42-
<PAGE>

The Eastern Company

Notes to Consolidated Financial Statements (continued)


7. STOCK OPTIONS AND AWARDS (continued)
<TABLE>
<CAPTION>

                                  Options Outstanding and Exercisable
          ---------------------------------------------------------------------------------

                                                           Weighted
                                                            Average
                                                           Remaining
          Range of Exercise       Outstanding as of       Contractual      Weighted Average
          Prices                  December 30, 2006          Life          Exercise Price
          ---------------------------------------------------------------------------------
         <S>                        <C>                    <C>                <C>
          $  6.61 - $ 7.95             287,250               0.8               $  6.960
          $  9.33 - $10.20             626,250               3.1                  9.694
          $ 12.33 - $13.58              89,250               6.8                 13.317
                                     ---------
                                     1,002,750               2.7                  9.233
                                     =========
</TABLE>

At December 30, 2006, outstanding and exercisable options had an intrinsic value
of $10,234,785 with a weighted average remaining contractual life of 2.7 years.

The total intrinsic value of stock options exercised in 2006 was $7,350.


8. INCOME TAXES

Deferred income taxes are provided on temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and those for
income tax reporting purposes.  Deferred income tax liabilities  (assets) relate
to:
<TABLE>
<CAPTION>

                                                                2006              2005               2004
                                                           --------------------------------------------------
<S>                                                       <C>               <C>                <C>
    Property, plant and equipment                          $  3,311,478      $  3,363,679       $  3,521,617
    Interest rate swap asset                                         -             11,797                 -
    Other                                                       335,273           195,034            338,085
                                                           ------------      ------------       ------------
    Total deferred income tax liabilities                     3,646,751         3,570,510          3,859,702

    Other postretirement benefits                              (440,984)         (764,143)          (816,273)
    Inventories                                                (867,042)         (562,881)          (721,309)
    Allowance for doubtful accounts                             (87,484)          (89,668)          (106,106)
    Accrued compensation                                       (301,232)         (236,776)          (201,280)
    Interest rate swap obligation                               (49,983)               -             (58,949)
    Pensions                                                 (1,160,893)       (1,156,476)          (724,363)
    Tax credits                                                (375,439)         (362,143)          (234,827)
    Other                                                      (171,797)         (218,725)          (283,961)
                                                           ------------      ------------       ------------
    Total deferred income tax assets                         (3,454,854)       (3,390,812)        (3,147,068)
                                                           ------------      ------------       ------------
        Net deferred income tax liabilities                $    191,897      $    179,698       $    712,634
                                                           ============      ============       ============

Income before income taxes consists of:
                                                                2006              2005               2004
                                                           --------------------------------------------------
    Domestic                                               $ 11,954,924      $   4,266,725      $  3,512,795
    Foreign                                                   2,891,124          2,753,582         3,316,244
                                                           ------------      -------------      ------------
                                                           $ 14,846,048      $   7,020,307      $  6,829,039
                                                           ============      =============      ============

</TABLE>



                                      -43-
<PAGE>

The Eastern Company

Notes to Consolidated Financial Statements (continued)


8. INCOME TAXES (continued)

The provision for income taxes follows:

                                    2006              2005               2004
                               ------------------------------------------------
    Current:
        Federal                $  3,741,551      $  1,505,934      $    905,843
        Foreign                   1,030,902           902,145         1,025,183
        State                       534,260           272,334           148,404
    Deferred:
        Federal                      (6,460)          (39,294)           21,428
        Foreign                          -                 -                 -
        State                      (112,953)           12,001           (29,520)
                               ------------      ------------      ------------
                               $  5,187,300      $  2,653,120      $  2,071,338
                               ============      ============      ============

A reconciliation of income taxes computed using the U.S. federal statutory rate
to that reflected in operations follows:
<TABLE>
<CAPTION>

                                                          2006                        2005                        2004
                                                  -------------------------------------------------------------------------------
                                                    Amount       Percent        Amount       Percent        Amount       Percent
                                                  -------------------------------------------------------------------------------
<S>                                             <C>               <C>      <C>                <C>      <C>                <C>
Income taxes using U.S. federal statutory
    rate                                         $ 5,047,655       34%      $ 2,387,578         34%     $ 2,321,873        34%
State income taxes, net of federal benefit           277,999        2           187,661          3           78,463         1
Impact of foreign subsidiaries on effective
    tax rate                                          63,536        -           127,634          2         (242,163)       (4)
Other--net                                          (201,890)      (1)          (49,753)        (1)         (86,835)       (1)
                                                 -----------       ---      -----------         ---     -----------        ---
                                                 $ 5,187,300       35%      $ 2,653,120         38%     $ 2,071,338        30%
                                                 ===========       ===      ===========         ===     ===========        ===
</TABLE>

Total  income  taxes  paid  were  $4,358,944  in  2006,  $2,105,690  in 2005 and
$1,445,099 in 2004.

The Company's future effective tax rates could be adversely affected by earnings
being lower than anticipated in countries where statutory rates are lower.

The Company has foreign tax credit  carryforwards  of $375,439  which  expire in
varying  amounts  through 2013.  Available  and prudent tax planning  strategies
support this deferred tax asset at December 30, 2006.

United States income taxes have been provided on the  undistributed  earnings of
foreign  subsidiaries  ($12,353,999  at December 30, 2006) only where  necessary
because such  earnings  are intended to be  reinvested  abroad  indefinitely  or
repatriated only when substantially free of such taxes.

During  2005,  a former  employee  sold  shares of Company  stock,  which he had
acquired  through the exercise of stock  options in late 2004,  that resulted in
the  disqualification  of those  incentive  stock  options.  As a result  of the
disqualification, the Company received a tax benefit of $6,403 in 2005.








                                      -44-


<PAGE>

The Eastern Company

Notes to Consolidated Financial Statements (continued)


9. LEASES

The Company  leases  certain  equipment  and  buildings  under  operating  lease
arrangements.  Most  leases  are  for a  fixed  term  and  for a  fixed  amount;
additionally,  the Company leases certain  buildings under operating leases on a
month-to-month  basis.  The  Company is not a party to any leases that have step
rent provisions,  escalation  clauses,  capital  improvement  funding or payment
increases based on any index or rate.

Future minimum  payments under  non-cancelable  operating leases with initial or
remaining terms in excess of one year during each of the next five years follow:

                     2007                $   594,547
                     2008                    553,032
                     2009                    506,797
                     2010                    101,289
                     2011                      5,689
                                         -----------
                                         $ 1,761,354
                                         ===========

Rent expense for all operating leases was $944,610 in 2006, $826,396 in 2005 and
$642,000  in  2004.  The  Company   expects   future  rent  expense,   including
non-cancelable  operating  leases,  leases  that are  expected to be renewed and
buildings leased on a  month-to-month  basis, for each of the next five years to
be in the range of $750,000 to $850,000.


10. RETIREMENT BENEFIT PLANS

The Company has  non-contributory  defined  benefit  pension plans covering most
U.S. employees. Plan benefits are generally based upon age at retirement,  years
of service and, for its salaried  plan, the level of  compensation.  The Company
also sponsors unfunded nonqualified  supplemental  retirement plans that provide
certain current and former officers with benefits in excess of limits imposed by
federal tax law. The  measurement  date for the  obligations  disclosed below is
September 30 of each year.

The Company also provides  health care and life  insurance for retired  salaried
employees in the United States who meet specific eligibility requirements.

On December  30,  2006,  the  Company  adopted the  recognition  and  disclosure
provisions 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 No.  158"),  which was issued by the FASB in September  2006.
This  standard  requires  employers to recognize the  underfunded  or overfunded
status of a defined benefit  postretirement plan as an asset or liability in its
statement of financial position and to recognize changes in the funded status in
the year in which the changes  occur  through  accumulated  other  comprehensive
income.  Additionally,  SFAS No. 158  requires  employers  to measure the funded
status of a plan as of the date of its year-end statement of financial position.
As allowed  under  SFAS 158,  the  Company  did not adopt the  measurement  date
provision in 2006. The Company will adopt the measurement date provision by 2008
as required.







                                      -45-

<PAGE>

The Eastern Company

Notes to Consolidated Financial Statements (continued)


10. RETIREMENT BENEFIT PLANS (continued)

Incremental effect of applying FASB Statement No. 158 on individual line items
in the balance sheet as of December 30, 2006 follow:
<TABLE>
<CAPTION>
                                                                Before                                       After
                                                             Application                                 Application of
                                                            of Statement 158         Adjustments          Statement 158
                                                           -------------------------------------------------------------
<S>                                                        <C>                    <C>                    <C>
Intangible pension asset                                    $     655,077          $    (655,077)         $          -
Prepaid pension cost                                              766,034               (499,676)               266,358

Deferred income tax liabilities                                  (389,274)              (734,263)            (1,123,537)
Accrued postretirement benefits                                (2,014,820)               793,664             (1,221,156)
Accrued pension cost                                           (3,651,230)            (1,672,320)            (5,323,550)

Unrecognized net pension and postretirement benefit
     costs, net of tax                                                 -              (5,875,261)            (5,875,261)
Additional minimum pension liability, net of tax               (4,576,115)             4,576,115                     -
Total Shareholders' Equity                                     55,690,351             (1,299,146)            54,391,205

</TABLE>

Components of the net periodic benefit cost of the Company's pension benefit
plans were as follows:
<TABLE>
<CAPTION>

                                                              2006                2005               2004
                                                       ------------------------------------------------------
<S>                                                    <C>                 <C>                 <C>
Service cost                                            $  1,560,654        $  1,382,535        $  1,198,318
Interest cost                                              2,335,814           2,226,422           2,299,608
Expected return on plan assets                            (3,113,089)         (3,127,392)         (2,567,814)
Amortization of prior service cost                           152,250             196,981             196,980
Amortization of the transition obligation                    (34,607)           (180,444)           (204,391)
Amortization of the net (gain) loss                          602,381             782,208             313,206
                                                        ------------        ------------        ------------
Net periodic benefit cost                               $  1,503,403        $  1,280,310        $  1,235,907
                                                        ============        ============        ============
</TABLE>


Assumptions used to determine net periodic benefit cost for the Company's
pension benefit plans for the fiscal year indicated were as follows:
<TABLE>
<CAPTION>

                                                              2006                2005               2004
                                                       ------------------------------------------------------
<S>                                                            <C>                <C>                <C>
Discount rate                                                    5.5%               6.0%               6.5%
Expected return on plan assets                                   8.5%               8.5%               8.5%
Rate of compensation increase                                    4.25%              4.25%              4.25%

</TABLE>

Components of the net periodic benefit cost of the Company's postretirement
benefit plan were as follows:
<TABLE>
<CAPTION>

                                                              2006                2005               2004
                                                       ------------------------------------------------------
<S>                                                    <C>                 <C>                 <C>
Service cost                                            $    105,073        $     86,714        $    75,488
Interest cost                                                123,000             118,407            123,456
Expected return on plan assets                               (84,453)            (79,188)           (73,515)
Amortization of prior service cost                           (40,758)            (37,694)           (39,905)
Amortization of the net (gain) loss                            4,582             (39,905)           (45,904)
                                                        ------------        ------------        -----------
Net periodic benefit cost                               $    107,444        $     48,334        $    39,620
                                                        ============        ============        ===========
</TABLE>


                                      -46-
<PAGE>

The Eastern Company

Notes to Consolidated Financial Statements (continued)


10. RETIREMENT BENEFIT PLANS (continued)

Assumptions used to determine net periodic benefit cost for the Company's
postretirement plan for the fiscal year indicated were as follows:

                                          2006          2005            2004
                                      ----------------------------------------
Discount rate                             5.5%          6.0%            6.5%
Expected return on plan assets            8.5%          8.5%            8.5%


As of the measurement date, the status of the Company's pension benefit plans
and postretirement benefit plan was as follows:
<TABLE>
<CAPTION>

                                                               Pension Benefit                    Postretirement Benefit
                                                      ------------------------------------------------------------------------
                                                           2006               2005                2006               2005
                                                      ------------------------------------------------------------------------
<S>                                                  <C>                 <C>                <C>                 <C>
Benefit obligation at beginning of year               $  43,992,192       $  38,585,446      $   1,964,984       $   2,061,628
   Change due to availability of final actual
     assets and census data                                      -                   -             363,616                   -
   Plan amendment                                            74,773                  -                  -             (296,068)
   Service cost                                           1,560,654           1,382,534            105,073              86,714
   Interest cost                                          2,335,814           2,226,422            123,000             118,407
   Actuarial (gain)/loss                                 (1,320,458)          4,124,907            (80,070)            170,663
   Benefits paid                                         (2,255,541)         (2,327,117)          (184,456)           (176,360)
                                                      -------------       -------------      -------------       -------------
Benefit obligation at end of year                     $  44,387,434       $  43,992,192      $   2,292,147       $   1,964,984
                                                      =============       =============      =============       =============


                                                               Pension Benefit                    Postretirement Benefit
                                                      ------------------------------------------------------------------------
                                                           2006               2005                2006               2005
                                                      ------------------------------------------------------------------------
Fair value of plan assets at beginning of year        $  36,386,203       $  32,785,580      $   1,017,679       $     944,623
   Change due to availability of final actual
     assets and census data                                      -                   -             (17,365)            (19,871)
   Actual return on plan assets                           3,506,876           4,213,460             84,453              79,188
   Employer contributions                                 1,692,704           1,714,280            170,680             190,099
   Benefits paid                                         (2,255,541)         (2,327,117)          (184,456)           (176,360)
                                                      -------------       -------------      -------------       -------------
Fair value of plan assets at end of year              $  39,330,242       $  36,386,203      $   1,070,991       $   1,017,679
                                                      =============       =============      =============       =============


                                                              Pension Benefits                    Postretirement Benefits
                                                      ------------------------------------------------------------------------
       Reconciliation of Funded Status:                    2006               2005                2006               2005
                                                      ------------------------------------------------------------------------
Under-funded status                                   $  (5,057,192)      $  (7,605,989)     $  (1,221,156)      $    (947,305)
Unrecognized prior service cost                                  -              732,554                 -             (554,550)
Unrecognized net actuarial loss (gain)                           -           11,662,961                 -             (576,201)
Unrecognized net asset at transition                             -              (46,454)                -                   -
                                                      --------------      -------------      -------------       -------------
Net amount recognized in the balance sheet            $  (5,057,192)      $   4,743,072      $  (1,221,156)      $  (2,078,056)
                                                      ==============      =============      =============       =============
</TABLE>





                                      -47-

<PAGE>


The Eastern Company

Notes to Consolidated Financial Statements (continued)


10. RETIREMENT BENEFIT PLANS (continued)
<TABLE>
<CAPTION>

                                                                   Pension Benefit                    Postretirement Benefit
                                                      ------------------------------------------------------------------------
                                                           2006               2005                2006               2005
                                                      ------------------------------------------------------------------------
<S>                                                  <C>                 <C>                <C>                 <C>
Prepaid benefit cost                                  $      266,358      $     723,826      $          -        $          -
Accrued benefit liability                                 (5,323,550)        (6,270,075)        (1,221,156)         (2,078,056)
Intangible asset                                                  -             732,554                 -                   -
Accumulated other comprehensive loss                              -           9,556,767                 -                   -
                                                      --------------      -------------      -------------       -------------
Net amount recognized in the balance sheet            $   (5,057,192)     $   4,743,072      $  (1,221,156)      $  (2,078,056)
                                                      ==============      =============      =============       =============
</TABLE>


Amounts recognized in accumulated other comprehensive income consist of:
<TABLE>
<CAPTION>

                                                                Pension Benefit                    Postretirement Benefit
                                                      ------------------------------------------------------------------------
                                                           2006               2005                2006               2005
                                                      ------------------------------------------------------------------------
<S>                                                  <C>                 <C>                <C>                 <C>
Net (loss) gain                                       $   (9,346,335)     $          -       $     278,702       $          -
Prior service (cost) credit                                 (655,077)                -             514,962                  -
Transition asset                                              11,847
Additional minimum pension liability                              -          (9,556,767)                -                   -
                                                      ---------------     -------------      -------------       -------------
                                                      $   (9,989,565)     $  (9,556,767)     $     793,664       $          -
                                                      ===============     =============      =============       =============
</TABLE>

In 2007, the net periodic pension benefit cost will include $357,064 of net loss
and $81,791 of prior service cost and the net periodic post retirement benefit
cost will include $19,050 of net gain and $23,886 of prior service credit.

Assumptions used to determine the projected benefit obligations for the
Company's pension benefit plans and postretirement benefit plan for the fiscal
year indicated were as follows:
                                            2006            2005
                                            --------------------
Discount rate                               5.8%            5.5%
Expected return on plan assets              8.5%            8.5%
Rate of compensation increase               4.25%           4.25%

In 2006 and 2005,  the  accumulated  benefit  obligation  for all  qualified and
nonqualified  defined  benefit  pension plans was  $42,124,458  and  $42,047,559
respectively.

Information  for  the  under-funded  pension  plans  with  a  projected  benefit
obligation and an accumulated benefit obligation in excess of plan assets
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------
                                                             2006               2005
-----------------------------------------------------------------------------------------
<S>                                                     <C>                <C>
Number of plans                                                 5                  5
Projected benefit obligation                             $  38,084,799      $  38,033,899
Accumulated benefit obligation                              37,084,799         37,010,899
Fair value of plan assets                                   33,454,176         30,763,467
Net amount recognized in accrued benefit liability          (5,323,550)        (6,270,075)
</TABLE>

Estimated  future  benefit  payments are $2.5  million in 2007,  $2.6 million in
2008,  $2.6 million in 2009,  $2.7  million in 2010,  $2.8 million in 2011 and a
total of $15.1 million from 2012 through 2016.

                                      -48-
<PAGE>

The Eastern Company

Notes to Consolidated Financial Statements (continued)


10. RETIREMENT BENEFIT PLANS (continued)

The Company expects to make cash contributions to its pension plans of
approximately $2.1 million in 2007.

The percentage of each asset category of the total assets held by the plans
follows:
<TABLE>
<CAPTION>
                                                                    Allocation
                                                                    Parameters        2006        2005
                                                                    -----------------------------------
<S>                                                                 <C>              <C>         <C>
   Equity securities                                                 30 - 70%          59%         57%
   Fixed income                                                      30 - 60%          26          30
   Cash and cash equivalents                                          0 - 10%          12          10
   Cash surrender  value of life  insurance  policies for
       the Salaried Retirement Plan                                                     3           3
                                                                                      ----        ----
   Total                                                                              100%        100%
                                                                                      ====        ====
</TABLE>

The Company utilizes a diversified,  strategic allocation to generate investment
returns  that will meet the  objectives  set forth in the  Company's  investment
policy,  while  keeping  periods of  negative  returns to a minimum.  Studies of
assets and liabilities  that incorporate  specific plan  objectives,  as well as
assumptions   regarding  long-term  capital  market  returns  and  volatilities,
generate the specific asset allocations for the trusts.  The long-term nature of
the trusts make them well-suited to bear the risk of added volatility associated
with equity  securities  and,  accordingly,  the asset  allocations of the trust
reflect a higher allocation to equities as compared to fixed-income  securities.
Non-U.S.  securities  are used to diversify  some of the  volatility of the U.S.
equity market while  providing  comparable  long-term  returns.  The  investment
guidelines  set  forth in the  Company's  investment  policy  limit or  prohibit
exposure to investments in more volatile sectors.

In selecting the expected rate of return on plan assets,  the Company  considers
historical returns for the types of investments that its plans hold.

The plans' assets include  440,061 shares and 494,811 shares of the common stock
of the Company  having a market value of $8,554,786  and  $6,439,140 at December
30, 2006 and December 31, 2005,  respectively.  The plans sold 54,750 and 81,100
shares of common stock of the Company during 2006 and 2005, respectively. During
the first quarter of 2007, the plans sold an additional  82,700 shares of common
stock of the Company as of February 23, 2007. Dividends received during 2006 and
2005 on the common stock of the Company were $150,661 and $153,065 respectively.

For measurement  purposes relating to the postretirement  benefit plan, the life
insurance  cost  trend  rate  is  1%.  The  health  care  cost  trend  rate  for
participants  retiring after January 1, 1991 is nil; no increase in that rate is
expected because of caps placed on benefits.  The health care cost trend rate is
expected to remain at 4.5% for participants after the year 2000.

A one-percentage-point change in assumed health care cost trend rates would have
the following effects on the postretirement benefit plan:
<TABLE>
<CAPTION>
                                                                        1-Percentage Point
                                                                  Increase             Decrease
                                                                  -----------------------------
<S>                                                              <C>                <C>
Effect on total of service and interest cost components           $  20,741          $   (8,049)

Effect on postretirement benefit obligation                       $ 327,657          $ (161,393)

</TABLE>

On  December  8,  2003,  the  "Medicare   Prescription   Drug   Improvement  and
Modernization Act of 2003" (the "Act") was signed into law. The Act introduces a
prescription  drug  benefit  under  Medicare  as well as a  federal  subsidy  to
sponsors of retiree  health care benefit plans that provide a benefit that is at
least "actuarially equivalent" to Medicare Part D.

                                      -49-
<PAGE>

The Eastern Company

Notes to Consolidated Financial Statements (continued)


10. RETIREMENT BENEFIT PLANS (continued)

The Company's actuary has estimated the impact of the Medicare Prescription Drug
Improvement and  Modernization Act of 2003, which resulted in a reduction in the
December 31, 2004  accumulated  postretirement  benefit  obligation  ("APBO") by
$52,668. This reduction has been reflected as an actuarial experience gain as of
December 31, 2004, and the December 31, 2004 APBO has been reduced accordingly.

Effective  January 1, 2006,  the  retirement  health benefit plan was amended to
exclude prescription drug coverage. This amendment resulted in a decrease in the
benefit obligation as of December 31, 2005 of $296,068.

U.S.   salaried   employees  and  most  employees  of  the  Company's   Canadian
subsidiaries are covered by defined contribution plans.

The Company has a contributory savings plan under Section 401(k) of the Internal
Revenue Code  covering  substantially  all U.S.  non-union  employees.  The plan
allows  participants  to make  voluntary  contributions  of up to 100% of  their
annual  compensation  on a pretax basis,  subject to IRS  limitations.  The plan
provides for  contributions  by the Company at its discretion.  The Company made
contributions of $169,675 in 2006, $162,668 in 2005 and $146,002 in 2004.


11. FINANCIAL INSTRUMENTS

The  carrying  amounts  of  financial  instruments  (cash and cash  equivalents,
accounts  receivable,  accounts payable,  the interest rate swap agreement,  and
debt) as of December 30, 2006 and December  31,  2005,  approximate  fair value.
Fair value was based on expected cash flows and current market conditions.


12. REPORTABLE SEGMENTS

The accounting  policies of the segments are the same as those described in Note
2. Operating profit is total revenue less operating expenses, excluding interest
and miscellaneous non-operating income and expenses. Intersegment revenue, which
is eliminated, is recorded on the same basis as sales to unaffiliated customers.
Identifiable  assets by reportable segment consist of those directly  identified
with the segment's operations.

During 2006, one customer  accounted for approximately 27% of the revenue of the
Industrial  Hardware segment and  approximately  15% of total revenue.  No other
customers exceeded 10% of total revenue in 2006, 2005 or 2004.
<TABLE>
<CAPTION>

                                                  2006               2005               2004
                                            -----------------------------------------------------
<S>                                         <C>                 <C>                 <C>
Revenue:
   Sales to unaffiliated customers:
     Industrial Hardware                    $  75,436,663       $  53,846,834       $  45,993,489
     Security Products                         50,067,145          44,323,782          42,422,863
     Metal Products                            12,961,603          10,936,674          11,713,806
                                            -------------       -------------       -------------
                                            $ 138,465,411       $ 109,107,290       $ 100,130,158
                                            =============       =============       =============

Intersegment Revenue:
     Industrial Hardware                    $     741,201       $     403,081       $     210,445
     Security Products                          3,573,382           2,548,533           2,619,746
     Metal Products                               227,667               5,926                  -
                                            -------------       -------------       -------------
                                            $   4,542,250       $   2,957,540       $   2,830,191
                                            =============       =============       =============

</TABLE>

                                      -50-
<PAGE>


The Eastern Company

Notes to Consolidated Financial Statements (continued)


12. REPORTABLE SEGMENTS (continued)
<TABLE>
<CAPTION>
                                                                2006                2005                2004
<S>                                                              <C>                 <C>                 <C>
Income Before Income Taxes:
     Industrial Hardware                                     $  13,108,681       $   5,230,136       $   4,933,313
     Security Products                                           4,520,233           4,582,567           3,465,408
     Metal Products                                             (1,834,677)         (1,856,167)           (548,030)
                                                             -------------       -------------       -------------
         Operating Profit                                       15,794,237           7,956,536           7,850,691
     Interest expense                                           (1,097,640)         (1,014,052)         (1,044,490)
     Other income                                                  149,451              77,823              22,838
                                                             -------------       -------------       -------------
                                                             $  14,846,048       $   7,020,307       $   6,829,039
                                                             =============       =============       =============

 Geographic Information:
   Net Sales:
     United States                                           $ 110,379,622       $  83,541,509       $  78,119,489
     Foreign                                                    28,085,789          25,565,781          22,010,669
                                                             -------------       -------------       -------------
                                                             $ 138,465,411       $ 109,107,290       $ 100,130,158
                                                             =============       =============       =============


Foreign sales are primarily to customers in North America.

Identifiable Assets:
     United States                                           $  88,505,118       $  66,136,432       $  63,248,575
     Foreign                                                    14,979,826          15,485,403          14,823,190
                                                             -------------       -------------       -------------
                                                             $ 103,484,944       $  81,621,835       $  78,071,765
                                                             =============       =============       =============

     Industrial Hardware                                     $  41,620,127       $  29,728,833       $  28,573,163
     Security Products                                          38,340,163          34,018,271          32,664,197
     Metal Products                                             14,627,858          11,471,545          11,703,155
                                                             -------------       -------------       -------------
                                                                94,588,148          75,218,649          72,940,515
     General corporate                                           8,896,796           6,403,186           5,131,250
                                                             -------------       -------------       -------------
                                                             $ 103,484,944       $  81,621,835       $  78,071,765
                                                             =============       =============       =============

Depreciation and Amortization:
     Industrial Hardware                                     $   1,599,906       $   1,283,491       $   1,311,921
     Security Products                                           1,204,981           1,087,645             972,132
     Metal Products                                                941,806           1,088,611           1,177,358
                                                             -------------       -------------       -------------
                                                             $   3,745,693       $   3,459,747       $   3,461,411
                                                             =============       =============       =============

Capital Expenditures:
     Industrial Hardware                                     $   2,900,529       $   1,015,368       $   1,037,417
     Security Products                                           2,698,141             475,206             782,360
     Metal Products                                              1,116,857             215,962             206,443
                                                             -------------       -------------       -------------
                                                                 6,715,527           1,706,536           2,026,220
     Currency translation adjustment                                  (355)              2,646             (13,098)
     General corporate                                               6,409              41,070              49,191
                                                             -------------       -------------       -------------
                                                             $   6,721,581       $   1,750,252       $   2,062,313
                                                             =============       =============       =============

</TABLE>
                                      -51-
<PAGE>

The Eastern Company

Notes to Consolidated Financial Statements (continued)


13. RECENT ACCOUNTING PRONOUNCEMENTS

The Company adopted SFAS No. 151,  Inventory  Costs, an amendment of ARB No. 43,
Chapter  4,  effective  January  1, 2006.  The  amendments  made by SFAS No. 151
clarify that abnormal amounts of idle facility expense, freight, handling costs,
and wasted materials  (spoilage) should be recognized as current-period  charges
and require the allocation of fixed  production  overheads to inventory based on
the normal capacity of the production  facilities.  The adoption of SFAS No. 151
did not have a material impact on the consolidated  financial  statements of the
Company.

The Company adopted SFAS No. 154,  Accounting  Changes and Error  Corrections-a
replacement of APB Opinion No. 20 (Accounting  Changes) and FASB Statement No. 3
(Reporting  Accounting  Changes  in  Interim  Financial  Statements),  effective
January 1, 2006. SFAS No. 154 provides  guidance on accounting for and reporting
of  accounting  changes  and  error  corrections.   It  requires   retrospective
application to prior periods' financial  statements,  unless it is impracticable
to determine either the specific period effects or the cumulative  effect of the
change.  The  adoption  of SFAS No.  154 did not have a  material  impact on the
Company's consolidated financial statements.

In June 2006, the FASB issued  Interpretation  No. 48 ("FIN 48")  Accounting for
Uncertainty in Income Taxes an  interpretation  of FASB Statement No. 109 ("SFAS
109").  This  interpretation  clarifies the accounting for uncertainty in income
taxes  recognized in a company's  financial  statements in accordance  with SFAS
109, Accounting for Income Taxes. FIN 48 details how companies should recognize,
measure,  present,  and disclose  uncertain tax positions  that have been or are
expected to be taken. As such, financial statements will reflect expected future
tax  consequences of uncertain tax positions  presuming the taxing  authorities'
full  knowledge  of the  position  and  all  relevant  facts.  We are  currently
analyzing  the effect of FIN 48 on our  financial  statements.  The Company will
adopt FIN 48 in the first quarter of 2007.

In September  2006,  the U.S.  Securities and Exchange  Commission  staff issued
Staff Accounting Bulletin No. 108 ("SAB 108"),  Considering the Effects of Prior
Year  Misstatements  when  Quantifying  Misstatements  in Current Year Financial
Statements.  SAB 108 eliminates the diversity of practice surrounding how public
companies quantify financial statement misstatements. It establishes an approach
that requires  quantification of financial statement  misstatements based on the
effects of the misstatements on each of the company's  financial  statements and
the related financial statement  disclosures.  SAB 108 must be applied to annual
financial statements for their first fiscal year ending after November 15, 2006.
The  application  of SAB 108 did not have a  material  impact  on our  financial
condition or results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements  ("SFAS
No. 157"). This standard clarifies the principle that fair value should be based
on the assumptions that market  participants  would use when pricing an asset or
liability.  Additionally, it establishes a fair value hierarchy that prioritizes
the information  used to develop those  assumptions.  We have not yet determined
the impact that the  implementation  of SFAS No. 157 will have on our results of
operations  or  financial  condition.  SFAS No. 157 is effective  for  financial
statements issued for fiscal years beginning after November 15, 2007.









                                      -52-

<PAGE>

The Eastern Company

Notes to Consolidated Financial Statements (continued)


14. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Selected quarterly financial information (unaudited) follows:
<TABLE>
<CAPTION>

                                                                               2006
                                     ---------------------------------------------------------------------------------------------
                                        First               Second               Third               Fourth              Year
                                     ---------------------------------------------------------------------------------------------
<S>                                 <C>                  <C>                  <C>                  <C>               <C>
Net sales                            $27,860,183          $29,669,159          $31,206,388          $49,729,681       $138,465,411
Gross margin                           6,483,744            6,475,001            6,611,723           15,013,283         34,583,751
Selling and administrative
     expenses                          4,461,468            4,261,200            4,422,616            5,644,230         18,789,514
Net income                             1,143,765            1,212,557            1,667,167            5,635,259          9,658,748

Net income per share:
    Basic                                   $.21                 $.22                 $.30                $1.03              $1.76
    Diluted                                 $.20                 $.21                 $.29 *              $ .96              $1.67


Weighted average shares
    outstanding:
    Basic                              5,464,691            5,476,055            5,477,302            5,478,592          5,474,137
    Diluted                            5,711,137  *         5,740,326 *          5,766,147 *          5,854,147          5,768,108

* Restated to reflect tax benefit which would result from the exercise of
nonqualified stock options.

</TABLE>

<TABLE>
<CAPTION>

                                                                                2005
                                     -----------------------------------------------------------------------------------------------
                                          First                Second               Third              Fourth              Year
                                     -----------------------------------------------------------------------------------------------
<S>                                 <C>                  <C>                  <C>                  <C>               <C>
Net sales                            $26,267,584          $27,421,294          $27,204,815          $28,213,597       $109,107,290
Gross margin                           5,469,894            6,452,132            6,106,425            6,704,338         24,732,789
Selling and administrative
     expenses                          4,053,994            4,493,691            3,906,529            4,322,039         16,776,253
Net income                               730,582            1,083,389            1,256,367            1,296,849          4,367,187

Net income per share:
    Basic                                   $.13                 $.20                 $.23                 $.24               $.80
    Diluted                                 $.13                 $.19                 $.21                 $.23               $.75

Weighted average shares
    outstanding:
    Basic                              5,452,487            5,454,150            5,455,973            5,457,690          5,455,073
    Diluted                            5,801,120            5,827,589            5,892,311            5,794,337          5,828,837

</TABLE>


                                      -53-
<PAGE>

REPORT OF UHY LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors
The Eastern Company


We have  audited the  accompanying  consolidated  balance  sheets of The Eastern
Company  (the  Company) as of December  30, 2006 and  December  31, 2005 and the
related consolidated statements of income,  comprehensive income,  shareholders'
equity,  and cash flows for the years then ended.  Our audit also  included  the
financial  statement  schedule  listed  in the  Index  at Item  15(a)(2).  These
financial  statements  and  schedule  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements and 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.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial  position of the Company at
December  30, 2006 and  December  31, 2005 and the  consolidated  results of its
operations  and its cash  flows  for the years  then  ended in  conformity  with
accounting principles generally accepted in the United States of America.  Also,
in our opinion,  the related financial  statement  schedule,  when considered in
relation to the basic financial statements taken as a whole,  presents fairly in
material respects the information set forth therein.

As discussed in Note 10 to the consolidated  financial  statements,  the Company
changed its method of  accounting  for its pension  and  postretirement  benefit
plans as of December 30, 2006.

/s/ UHY LLP

Hartford, Connecticut
March 9, 2007

                                      -54-

<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors
The Eastern Company


We  have   audited  the   accompanying   consolidated   statements   of  income,
comprehensive  income,  shareholders'  equity,  and cash  flows  of The  Eastern
Company  for the year  ended  January  1,  2005.  Our audit  also  included  the
financial  statement  schedule  listed  in the  Index  at Item  15(a)(2).  These
financial  statements  and  schedule  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements and schedule based on our audit.

We conducted  our audit 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.  We were not engaged to perform an
audit of the Company's  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, and
evaluating the overall  financial  statement  presentation.  We believe that our
audit provides a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated results of operations and cash flows of
The Eastern  Company for the year ended January 1, 2005, in conformity with U.S.
generally  accepted  accounting  principles.  Also, in our opinion,  the related
financial statement schedule, when considered in relation to the basic financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.


                                                         /s/ Ernst & Young LLP
Hartford, Connecticut
February 8, 2005
















                                      -55-





<PAGE>


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

For  information  regarding the change in the Company's  independent  registered
public accounting firm, see the Form 8-K filed on July 18, 2005.


ITEM 9A    CONTROLS AND PROCEDURES

As of the end of the fiscal year ended  December 30, 2006,  the Company  carried
out an  evaluation,  under the  supervision  and with the  participation  of the
Company's  management,  including  the Chief  Executive  Officer (the "CEO") and
Chief  Financial  Officer (the "CFO"),  of the  effectiveness  of the design and
operation  of the  Company's  disclosure  controls  and  procedures  pursuant to
Exchange  Act Rule  240.13a-15.  Based  upon  that  evaluation,  the CEO and CFO
concluded  that the Company's  current  disclosure  controls and  procedures are
effective  in timely  alerting  them to  material  information  relating  to the
Company and its subsidiaries  required to be included in the Company's  periodic
SEC filings. There were no significant changes in the Company's internal control
over  financial  reporting  during  the  period  covered  by  this  report  that
materially  affected,  or  are  reasonably  likely  to  materially  affect,  the
Company's internal control over financial reporting.

The Company  believes  that a controls  system,  no matter how well designed and
operated,  cannot provide absolute assurance that the objectives of the controls
system are met, and no  evaluation  of controls can provide  absolute  assurance
that all control  issues and instances of fraud,  if any,  within a company have
been detected.  The Company's disclosure controls and procedures are designed to
provide reasonable assurance of achieving their objectives,  and the CEO and CFO
have  concluded  that  these  controls  and  procedures  are  effective  at  the
"reasonable assurance" level.


ITEM 9B    OTHER INFORMATION

None.


                                    PART III

ITEM 10    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The  Registrant's  definitive proxy statement  ("Proxy  Statement") for the 2007
Annual Meeting of Shareholders which is incorporated herein by reference will be
filed  with the SEC  pursuant  to  Regulation  14A not later than 120 days after
December 30, 2006.

The information concerning directors is incorporated herein by reference to our
Proxy Statement under the caption "Item No. 1 - Election of Director".

The  information  concerning our executive  officers is  incorporated  herein by
reference to our Proxy Statement under the captions "Compensation Discussion and
Analysis" and "Executive Compensation". The Registrant's only Executive Officers
are Leonard F. Leganza,  Chairman,  President and Chief Executive  Officer,  and
John L. Sullivan III, Vice President and Chief Financial Officer.

The  information  concerning  our  Audit  Committee  is  incorporated  herein by
reference to our Proxy Statement under the captions "Audit  Committee  Financial
Expert", "Report of the Audit Committee", "Committees of the Board of Directors"
and "Exhibit  `A' - The Eastern  Company  Audit  Committee  Charter".  The Audit
Committee   Charter   is   also   available   on  the   Company's   website   at
http://www.easterncompany.com by clicking on Corporate Governance.

The  information  concerning  compliance  with Section  16(a) of the  Securities
Exchange Act is  incorporated  herein by reference to our Proxy  Statement under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance".

The  Company's  Board of  Directors  has adopted a Code of Business  Conduct and
Ethics that applies to our Chief Executive  Officer,  Chief  Financial  Officer,
Chief Accounting  Officer and the Company's other financial  professionals.  The
Code of Business  Conduct and Ethics is  available on the  Company's  website at
http://www.easterncompany.com by clicking on Corporate Governance.

                                      -56-
<PAGE>

ITEM 11    EXECUTIVE COMPENSATION

Information  concerning  director and  executive  compensation  is  incorporated
herein by reference  to portions of the  Company's  Proxy  Statement to be filed
with the SEC pursuant to Regulation  14A not later than 120 days after  December
30, 2006, under the captions "Director  Compensation",  "Compensation Discussion
and  Analysis",   "Compensation   Committee  Report",   "Compensation  Committee
Interlocks  and  Insider  Participation",   "Executive   Compensation",   "Stock
Options",  "Outstanding  Equity Awards at Fiscal Year End" and  "Termination  of
Employment and Change in Control  Arrangements".  The Compensation  Committee of
the Board of Directors operates under the Compensation  Committee Charter, which
can be  found  on the  Company's  website  at  http://www.easterncompany.com  by
clicking on Corporate Governance. .


ITEM 12    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
           RELATED STOCKHOLDER MATTERS

Security ownership of certain beneficial owners and management:

(a)  Information  concerning  security ownership of certain beneficial owners is
     incorporated  herein by reference  to the Proxy  Statement to be filed with
     the SEC pursuant to Regulation  14A not later than 120 days after  December
     30,  2006,  under the caption  "Security  Ownership  of Certain  Beneficial
     Shareholders".

(b)  Information  concerning  security  ownership of management is  incorporated
     herein  by  reference  to the  Proxy  Statement  to be  filed  with the SEC
     pursuant to Regulation 14A not later than 120 days after December 30, 2006,
     under the captions "Item No. 1 - Election of Director", "Security Ownership
     of  Certain  Beneficial  Shareholders",  "Executive  Compensation",  "Stock
     Options" and "Outstanding  Equity Awards at Fiscal Year-End".  See also the
     equity  compensation  plan  information  in Item 5 of this Annual Report on
     Form 10-K.

(c)  Changes in Control

      None.

Related stockholder matters:

The information required by Item 201(d) of Regulation S-K is included in Item 5
of this Annual Report on Form 10-K.


ITEM 13    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
           INDEPENDENCE

Information   regarding  certain   relationships  and  related  transactions  is
incorporated herein by reference to our Proxy Statement to be filed with the SEC
pursuant to Regulation 14A not later than 120 days after December 30, 2006 under
the caption "Policies and Procedures Concerning Related Persons Transactions".

Information  regarding director independence is incorporated herein by reference
to our Proxy  Statement to be filed with the SEC pursuant to Regulation  14A not
later than 120 days after  December  30,  2006 under the  captions  "Item No.1 -
Election of Director" and "Committees of the Board of Directors".


ITEM 14    PRINCIPAL ACCOUNTING FEES AND SERVICES

Information  concerning  principal accountant fees and services are incorporated
herein by reference to our Proxy  Statement to be filed with the SEC pursuant to
Regulation 14A not later than 120 days after December 30, 2006 under the caption
"Item No. 3 - Appointment of the Independent Registered Public Accounting Firm".


                                      -57-
<PAGE>



                                     PART IV

ITEM 15    EXHIBITS, FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>

<S>                                                                                                                 <C>
     (a)  Documents filed as part of this report:

          (1)  Financial statements                                                                                  Page

                     Consolidated Balance Sheets - December 30, 2006 and December 31, 2005............................27.

                     Consolidated Statements of Income -- Fiscal years ended December 30, 2006,
                     December 31, 2005 and January 1, 2005............................................................29.

                     Consolidated Statements of Comprehensive Income -- Fiscal years ended
                     December 30, 2006, December 31, 2005, and January 1, 2005........................................29.

                     Consolidated Statements of Shareholders' Equity -- Fiscal years ended
                     December 30, 2006, December 31, 2005 and January 1, 2005.........................................30.

                     Consolidated Statements of Cash Flows--Fiscal years ended December 30, 2006,
                     December 31, 2005, and January 1, 2005...........................................................31.

                     Notes to Consolidated Financial Statements.......................................................32.

                     Report of UHY LLP, Independent Registered Public Accounting Firm.................................54.

                     Report of Ernst & Young LLP, Independent Registered Public Accounting Firm.......................55.

          (2)  Financial Statement Schedule
                     Schedule II -- Valuation and qualifying accounts.................................................60.
</TABLE>

               Schedules  other than that listed above have been omitted because
               the required information is contained in the financial statements
               and notes thereto,  or because such schedules are not required or
               applicable.

          (3)  Exhibits
                 Exhibits are as set forth in the "Exhibit Index" which appears
                 on pages 62 through 63.

     (b)  Exhibits Required by Item 601 of Regulation S-K

               Exhibits are as set forth in the "Exhibit Index" which appears on
               pages 62 through 63. Also refer to the following Form 8-K's filed
               by the Company.

               Form 8-K filed on April 26, 2006 setting  forth the press release
               reporting the  Company's  earnings for the quarter ended April 1,
               2006.

               From 8-K filed on April 26, 2006 setting  forth the press release
               reporting a 9% increase in the quarterly dividend.

               Form 8-K filed on July 26, 2006 setting  forth the press  release
               reporting  the  Company's  earnings for the quarter ended July 1,
               2006.

               Form 8-K filed on September 6, 2006 setting  forth  reporting the
               Company's   receipt  of  purchase   orders  for  latching  system
               components approximating $15.5 million.

               Form 8-K filed on  September  25,  2006  setting  forth the press
               release  reporting  the  Company's   acquisition  of  Royal  Lock
               Corporation and amended loan agreement.

               Form 8-K filed on September 27, 2006 setting forth  reporting the
               Company's  receipt of  additional  purchase  orders for  latching
               system  components  increasing  original  order to  approximately
               $31.5 million.

                                      -58-
<PAGE>

               Form 8-K filed on  September  28,  2006  setting  forth a 3-for-2
               stock split of the Company's common stock.

               Form 8-K  filed on  October  25,  2006  setting  forth  the press
               release  reporting the  Company's  earnings for the quarter ended
               September 30, 2006.

               Form 8-K filed on November 8, 2006  setting  forth the  Company's
               purchase of the assets of Summit Manufacturing, Inc.

               Form 8-K filed on December 14, 2006 setting forth the appointment
               of principal officers.

               Form  8-K  filed  on  December  18,  2006  setting  forth a sales
               estimate for 2006.

               Form 8-K  filed on  February  7,  2007  setting  forth  the press
               release  reporting  the  Company's  earnings  for the quarter and
               fiscal year ended December 30, 2006.

               Form  8-K  filed on  February  7,  2007  setting  forth  the 2007
               Executive Incentive Program.

     (c)  None.



                                      -59-

<PAGE>


                      The Eastern Company and Subsidiaries

                 Schedule II - Valuation and Qualifying accounts
<TABLE>
<CAPTION>


COL. A                                COL. B                 COL. C                                   COL. D         COL. E
-----------------------------------------------------------------------------------------------------------------------------------
                                                             ADDITIONS
                                                             -------------------------------------
                                                             (1)                (2)
                                      Balance at Beginning   Charged to Costs   Charged to Other      Deductions -   Balance at End
Description                           of  Period             and Expenses       Accounts-Describe     Describe       of Period
----------------------------------    -------------------    ----------------   ------------------    ------------   --------------
<S>                                        <C>                   <C>             <C>                    <C>             <C>
Fiscal year ended December 30, 2006:
 Deducted from asset accounts:
  Allowance for doubtful accounts          $295,000              $ 58,424               -             $34,424  (a)    $319,000
                                           ========              ========                             =======         ========


Fiscal year ended December 31, 2005:
 Deducted from asset accounts:
  Allowance for doubtful accounts          $332,000              $  6,433               -             $43,433  (a)    $295,000
                                           ========              ========                             =======         ========


Fiscal year ended January 1, 2005:
 Deducted from asset accounts:
  Allowance for doubtful accounts          $302,000              $112,222               -             $82,222  (a)    $332,000
                                           ========              ========                             =======         ========


<FN>

  (a) Uncollectible accounts written off, net of recoveries.

</FN>
</TABLE>

                                      -60-
<PAGE>


SIGNATURES

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

Dated: March 19, 2007                THE EASTERN COMPANY
       --------------

                                      By /s/ John L. Sullivan III
                                      ---------------------------
                                      John L. Sullivan III
                                      Vice President and Chief Financial Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


 /s/ Leonard F. Leganza                                       March 19, 2007
 ------------------------
 Leonard F. Leganza
 Chairman, President
 and Chief Executive Officer

 /s/ John L. Sullivan III                                     March 19, 2007
 ------------------------
 John L. Sullivan III
 Vice President and Chief Financial Officer

 /s/ Kenneth R. Sapack                                        March 19, 2007
 ------------------------
 Kenneth R. Sapack
 Chief Accounting Officer

 /s/ John W. Everets                                          March 19, 2007
 ------------------------
 John W. Everets
 Director

 /s/ Charles W. Henry                                         March 19, 2007
 ------------------------
 Charles W. Henry
 Director

 /s/ David C. Robinson                                        March 19, 2007
 ------------------------
 David C. Robinson
 Director

 /s/ Donald S. Tuttle III                                     March 19, 2007
 ------------------------
 Donald S. Tuttle III
 Director

                                      -61-
<PAGE>


EXHIBIT INDEX


 (3)      Restated  Certificate  of  Incorporation  dated  August  14,  1991  is
          incorporated  by reference to the  Registrant's  Annual Report on Form
          10-K for the fiscal year ended December 28, 1991 and the  Registrant's
          Form 8-K filed on February 13, 1991. Amended and restated bylaws dated
          July 29, 1996 is  incorporated by reference to the  Registrant's  Form
          8-K filed on July 29, 1996.

 (4)      Rights  Agreement  entered into between the  Registrant and BankBoston
          N.A. dated as of August 6, 1998 and Letter to all  shareholders of the
          Registrant, dated July 22, 1998 together with Press Release dated July
          22,  1998  describing  the  Registrant's  redemption  of  shareholders
          Purchase  Rights  dated  September  16, 1991 and the issuance of a new
          Purchase Rights dividend distribution are incorporated by reference to
          the Registrant's Form 8-K filed on August 6, 1998.

 (10)(a)  Amendment to the Deferred  Compensation  Agreement  with Russell G.
          McMillen   dated  May  1,  1988  is   incorporated   by  reference  to
          Registrant's  Annual  Report on Form 10-K for the  fiscal  year  ended
          December 31, 1988. The Deferred Compensation Agreement with Russell G.
          McMillen  dated  October  28,  1980 and  amended on March 27,  1986 is
          incorporated  by reference to the  Registrant's  Annual Report on Form
          10-K for the fiscal year ended January 3, 1987.

     (b)  The Eastern  Company 1995 Executive  Stock Incentive Plan effective as
          of April 26, 1995  incorporated by reference to the Registrant's  Form
          S-8 filed on February 7, 1997.

     (c)  The Eastern Company  Directors Fee Program  effective as of October 1,
          1996  incorporated by reference to the Registrant's  Form S-8 filed on
          February 7, 1997, as amended by Amendment No.1 and Amendment No. 2 are
          incorporated by reference to the Registrant's Form 10-K filed on March
          29, 2000 and  Amendment  No. 3 is  incorporated  by  reference  to the
          Registrant's Form 10-K filed on March 22, 2004.

     (d)  The Eastern  Company 1997 Directors  Stock Option Plan effective as of
          September 17, 1997  incorporated by reference to the Registrant's Form
          S-8 filed on May 3, 2004.

     (e)  Supplemental  Retirement  Plan dated September 9, 1998 with Leonard F.
          Leganza is incorporated by reference to the Registrant's Annual Report
          on Form 10-K for the fiscal year ended January 2, 1999.

     (f)  The Eastern Company 2000 Executive Stock Incentive Plan effective July
          2000 is incorporated by reference to the Registrant's Annual Report on
          Form 10-K for the fiscal year ended December 30, 2000.

     (g)  Employment  Agreement  dated February 22, 2005 with Leonard F. Leganza
          is  incorporated  by reference to the  Registrant's  Current Report on
          Form 8-K dated February 22, 2005.

     (h)  The Eastern Company 2007 Executive  Incentive  Program is incorporated
          by  reference  to the  Registrant's  Current  Report on Form 8-K dated
          February 7, 2007.

 (14)     The Eastern Company Code of Business  Conduct and Ethics  incorporated
          by reference.  The Eastern Company Code of Business Conduct and Ethics
          is  available  free of charge on the  Company's  Internet  website  at
          http://www.easterncompany.com  under the  section  labeled  "Corporate
          Governance".


                                      -62-
<PAGE>



 (16)     Letter  from  Ernst  &  Young,  LLP  regarding  Change  in  Certifying
          Accountant  is   incorporated  by  reference  to  Exhibit  16  to  the
          Registrant's Current Report on Form 8-K dated July 18, 2005.

 (21)     List of subsidiaries as follows:

               Eberhard  Hardware  Mfg.  Ltd., a private  corporation  organized
               under the laws of the Province of Ontario, Canada.

               Canadian Commercial Vehicles  Corporation,  a private corporation
               organized  under the laws of the  Province  of British  Columbia,
               Canada.

               Eastern  Industrial Ltd., a private  corporation  organized under
               the laws of the Peoples Republic of China.

               World Lock Co. Ltd., a private  corporation  organized  under the
               laws of Taiwan (The Republic of China).

               Sesamee Mexicana,  Subsidiary,  a private  corporation  organized
               under the laws of Mexico.

               World  Security   Industries  Co.  Ltd.,  a  private  corporation
               organized under the laws of Hong Kong.

 (23)     Consents of independent  registered  public  accounting firms attached
          hereto on page 64.

 (31)     Certifications  required by Rule 13a-14(a) of the Securities  Exchange
          Act of 1934,  as  amended,  as adopted  pursuant to Section 302 of the
          Sarbanes-Oxley Act of 2002.

 (32)     Certifications  pursuant to Rule  13a-14(b) and 18 USC 1350 as adopted
          pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 (99)     Letter to our shareholders  from the Annual Report 2007 is attached on
          page 68.








                                      -63-