================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

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

     For the quarterly period ended June 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 No.  0-50186
                     -------


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



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


1065 Avenue of the Americas, New York, New York             10018
-----------------------------------------------           ----------
(Address of Principal Executive Offices)                  (Zip Code)


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


                                      N/A
              ---------------------------------------------------
              Former name, former address and former fiscal year,
                         if changed since last report:


Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act 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 [ ] No [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 Exchange Act) Yes [ ] No [X]

As of August 11, 2006, 5,331,881 shares of Common Stock, par value $0.01 per
share, were issued and outstanding.

================================================================================
<PAGE>
<TABLE>
<CAPTION>

                           LEVCOR INTERNATIONAL, INC.

                                      INDEX
                                                                                                   Page
<S>                                                                                                 <C>
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheets
         as of June 30, 2006 (Unaudited) and December 31, 2005........................................1

         Condensed Consolidated Statements of Operations (Unaudited)
         for the Three and Six Months Ended June 30, 2006 and 2005....................................2

         Condensed Consolidated Statements of Comprehensive Income (Loss)
         (Unaudited) for the Three and Six Months Ended June 30, 2006 and 2005........................3

         Condensed Consolidated Statements of Cash Flows (Unaudited)
         for the Six Months Ended June 30, 2006 and 2005..............................................4

         Notes to Condensed Consolidated Financial Statements (Unaudited).............................5

Item 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations ......................................................................19

Item 3.  Quantitative and Qualitative Disclosures About Market Risk..................................36

Item 4.  Controls and Procedures.....................................................................37

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings...........................................................................38

Item 1A. Risk Factors................................................................................38

Item 5.  Other Information...........................................................................39

Item 6.  Exhibits ...................................................................................40

         Signatures..................................................................................41
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                   LEVCOR INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                  (dollars in thousands, except share amounts)

                                                                       June 30,        December 31,
                                                                         2006             2005
                                                                     ------------     ------------
                                                                     (Unaudited)        (Audited)
                                                                     ------------     ------------
<S>                                                                  <C>              <C>
ASSETS
Current Assets:
     Cash                                                            $         83     $         50
     Accounts receivable trade, net                                         2,922            2,760
     Inventories, net                                                       6,857            7,725
     Other current assets                                                     267              173
                                                                     ------------     ------------
         Total current assets                                              10,129           10,708

Property, Plant and Equipment, net                                          2,022            2,067
Goodwill                                                                    2,543            2,543
Other assets                                                                  777              751
                                                                     ------------     ------------
         Total Assets                                                $     15,471     $     16,069
                                                                     ============     ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
     Revolving loan and current maturities of long-term debt         $      4,954     $      4,203
     Due to factor                                                             95              775
     Current maturities of stockholder loan                                   850              850
     Accounts payable                                                       1,358            1,897
     Other current liabilities                                                709            1,315
                                                                     ------------     ------------
         Total current liabilities                                          7,966            9,040
                                                                     ------------     ------------
Long term debt, less current maturities                                     4,227            4,299
Stockholder loans, less current maturities                                  1,500            1,500
Accrued interest, stockholder loans                                           525              454
Pension liabilities                                                         5,591            5,677
Post retirement medical liabilities                                         1,847            1,960
Environmental liabilities                                                   1,310            1,348
Other liabilities                                                             286              179
Mandatorily Redeemable Preferred Stock, par value $0.01 per share
     8,000,000 shares authorized:  Shares issued and outstanding:
     Series A - 4,555,007                                                   4,704            4,555
                                                                     ------------     ------------
         Total Liabilities                                                 27,956           29,012
                                                                     ------------     ------------

Commitments and  Contingencies                                                 --               --

STOCKHOLDERS' DEFICIT
Common Stock, par value $0.01 per share
     15,000,000 shares authorized;
     5,331,881 shares issued and outstanding                                   54               54
Paid in Capital                                                            33,227           33,238
Accumulated Deficit                                                       (41,414)         (41,839)
Accumulated Other Comprehensive Loss                                       (4,352)          (4,332)
Unearned Compensation                                                          --              (64)
                                                                     ------------     ------------
Total Stockholders' Deficit                                               (12,485)         (12,943)
                                                                     ------------     ------------
Total Liabilities and Stockholders' Deficit                          $     15,471     $     16,069
                                                                     ============     ============
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

                                     Page 1

<PAGE>
<TABLE>
<CAPTION>

                           LEVCOR INTERNATIONAL, INC.
                                AND SUBSIDIARIES
           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                  (dollars in thousands, except per share data)

                                                                          Three Months Ended            Six Months Ended
                                                                               June 30,                     June 30,
                                                                     ---------------------------   ---------------------------
                                                                         2006           2005           2006           2005
                                                                     ------------   ------------   ------------   ------------
<S>                                                                  <C>            <C>            <C>            <C>
Net sales                                                            $      4,962   $      5,157   $     10,783   $      9,668
Cost of sales                                                               3,313          3,646          6,900          6,523
                                                                     ------------   ------------   ------------   ------------
Gross profit                                                                1,649          1,511          3,883          3,145
Selling, general and administrative expenses (including
    stock based compensation expense of $27 and $53 for
    the three and six months ended June 30, 2006, respectively,
    and $4 for the three and six months ended
    June 30, 2005)                                                          1,376          1,502          2,964          3,042
                                                                     ------------   ------------   ------------   ------------
Income before interest, preferred dividends
    and income taxes (benefit)                                                273              9            919            103
Interest expense                                                              156            121            295            220
Dividends on mandatorily redeemable preferred stock                            68             68            136            136
                                                                     ------------   ------------   ------------   ------------
Income (loss) before income taxes (benefit) and
    discontinued operations                                                    49           (180)           488           (253)
Income tax (benefit)                                                           --            (33)           (23)           (35)
                                                                     ------------   ------------   ------------   ------------
Net income (loss) from continuing operations                                   49           (147)           511           (218)
Loss from discontinued operations, net of tax                                  (9)          (230)           (86)          (383)
                                                                     ------------   ------------   ------------   ------------
Net income (loss)                                                    $         40   $       (377)  $        425   $       (601)
                                                                     ============   ============   ============   ============
Income (loss) per share:
    Basic and Diluted:
       Income (loss) from continuing operations                      $        .01   $       (.03)  $        .10   $       (.04)
       Loss from discontinued operations                                      --*           (.04)          (.02)          (.07)
                                                                     ------------   ------------   ------------   ------------
                                                                     $        .01   $       (.07)  $        .08   $       (.11)
                                                                     ============   ============   ============   ============

Weighted average common shares outstanding - basic                          5,332          5,332          5,332          5,332
Potential common stock                                                         --             --              4             --
                                                                     ------------   ------------   ------------   ------------
Weighted average common shares outstanding - diluted                        5,332          5,332          5,336          5,332
                                                                     ============   ============   ============   ============
</TABLE>

*  Less than $.005

See Notes to Condensed Consolidated Financial Statements.

                                     Page 2
<PAGE>
<TABLE>
<CAPTION>

                           LEVCOR INTERNATIONAL, INC.
                                AND SUBSIDIARIES
                             CONDENSED CONSOLIDATED
                    STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                                   (UNAUDITED)
                             (dollars in thousands)

                                                                          Three Months Ended            Six Months Ended
                                                                               June 30,                     June 30,
                                                                     ---------------------------   ---------------------------
                                                                         2006           2005           2006           2005
                                                                     ------------   ------------   ------------   ------------
<S>                                                                  <C>            <C>            <C>            <C>
Net income (loss)                                                    $         40   $       (377)  $        425   $       (601)

Other comprehensive loss:
         Foreign currency translation adjustment                              (10)            (9)           (20)           (14)
                                                                     ------------   ------------   ------------   ------------
Comprehensive income (loss)                                          $         30   $       (386)  $        405   $       (615)
                                                                     ============   ============   ============   ============
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

                                     Page 3
<PAGE>
<TABLE>
<CAPTION>

                   LEVCOR INTERNATIONAL, INC. AND SUBSIDIARIES
                             CONDENSED CONSOLIDATED
                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                             (dollars in thousands)

                                                                       Six Months Ended June 31,
                                                                     ----------------------------
                                                                         2006            2005
                                                                     ------------    ------------
<S>                                                                  <C>             <C>
Cash Flows Used in Operating Activities:
Net income (loss)                                                    $        425    $       (601)
Reconciliation of net income (loss) to net cash provided by
 (used in) operations:
      Depreciation and amortization                                           188             188
      Deferred income taxes                                                    --            (234)
      Non-cash stock based compensation                                        53               4
      Accrued interest on stockholder loans                                    71              56
      Changes in operating assets and liabilities:
        Accounts receivable trade, net                                       (162)            475
        Inventories, net                                                      811          (3,343)
        Other current assets                                                  (94)            (95)
        Other assets                                                          (66)           (131)
        Accounts payable                                                     (540)          1,400
        Other current liabilities                                            (606)           (518)
        Pension liabilities                                                   (86)            (47)
        Post retirement medical liabilities                                  (113)            (81)
        Environmental liabilities                                             (38)            (27)
        Other liabilities                                                     256            (141)
                                                                     ------------    ------------
             Net cash provided by (used in) operating activities               99          (3,095)
                                                                     ------------    ------------

Cash Flows Used In Investing Activities:
Capital expenditures                                                          (44)            (19)
Investment in other assets                                                    (22)            (33)
                                                                     ------------    ------------
             Net cash used in investing activities                            (66)            (52)
                                                                     ------------    ------------

Cash Flows From Financing Activities:
Borrowings under revolving loan                                            10,918          10,980
Repayments under revolving loan                                           (10,166)         (9,459)
Repayment of long term debt                                                   (72)            (72)
Borrowings under stockholder loan                                              --           2,500
Due to factor                                                                (680)           (829)
                                                                     ------------    ------------
             Net cash provided by financing activities                         --           3,120
                                                                     ------------    ------------

Increase (decrease) in cash                                                    33             (27)
Cash at beginning of period                                                    50              32
                                                                     ------------    ------------
Cash at end of period                                                $         83    $          5
                                                                     ============    ============
Supplemental Disclosure of Cash Flow Information:
Cash paid (refunded) during the period for:
   Interest                                                          $        402    $        296
                                                                     ============    ============
   Income taxes                                                      $         (1)   $         46
                                                                     ============    ============
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

                                     Page 4
<PAGE>

                           LEVCOR INTERNATIONAL, INC.
                          NOTES TO UNAUDITED CONDENSED
                        CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1:  UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------

Nature of Operations:
---------------------
Levcor International, Inc. & Subsidiaries (the "Company" or "Levcor" or "we")
manufactures, packages and distributes a line of buttons and other craft
products for sale in the home sewing and craft retail industry. The Company
formerly operated a textile business which is in the process of being exited and
is treated as a discontinued operation as described in Note 2. The Company sells
its products to customers primarily in the United States and also has
distribution in Canada and Europe.

The accompanying unaudited condensed consolidated financial statements have been
prepared in compliance with Rule 10-01 of regulation S-X and accounting
principles generally accepted in the United States of America ("GAAP"), as
applicable to interim financial information and following other requirements of
the Securities and Exchange Commission ("SEC") for interim reporting.
Accordingly, the unaudited condensed consolidated financial statements do not
include all of the information and footnotes normally required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all normal and recurring
adjustments and accruals considered necessary for a fair presentation have been
included. The interim results are not necessarily indicative of the results for
a full year and do not contain information included in the Company's annual
consolidated financial statements and notes for the year ended December 31,
2005. The consolidated balance sheet as of December 31, 2005 was derived from
audited financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America. It is
suggested that these condensed consolidated financial statements be used in
conjunction with the financial statements and notes thereto included in the
Company's latest annual report on Form 10-K.

The condensed consolidated balance sheets as of June 30, 2006 (unaudited) and
December 31, 2005 (audited) and the unaudited condensed consolidated statements
of operations, comprehensive income (loss) and cash flows for the six months
ended June 30, 2006 and 2005 include the accounts of the Company and
subsidiaries.

NOTE 2:  DISCONTINUED OPERATIONS
--------------------------------

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

The decision to exit the Textile business was made after a full review and
analysis of the Textile business and the Company's strategic alternatives. The
decision was based on a variety of factors, including, (i) that the Company's
contract garment manufacturing and other textile business has incurred operating

                                     Page 5
<PAGE>

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

During the first six months of 2006, the Company has been disposing of Textile
segment inventory. The Company will continue to transact sales of Textile
segment inventory until such inventory is fully disposed of. As of June 30, 2006
the Company had $35,000 of net Textile segment inventory remaining. The Company
estimates exit costs associated with exiting the garment manufacturing and
remaining Textile business not to be material.

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

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

                                                      Three Months Ended             Six Months Ended
                                                           June 30,                      June 30,
                                                 ---------------------------   ---------------------------
                                                     2006           2005           2006          2005
                                                 ------------   ------------   ------------   ------------
<S>                                              <C>            <C>            <C>            <C>
Sales                                            $        478   $        776   $      2,346   $      2,373
Cost of sales                                             290            650          1,986          1,995
                                                 ------------   ------------   ------------   ------------
Gross profit                                              188            126            360            378
Selling, general and administrative expenses              112            418            269            851
Interest expense                                           85             75            177            138
Income tax (benefit)                                       --           (137)            --           (228)
                                                 ------------   ------------   ------------   ------------
Results of discontinued operations,
    net of tax                                   $         (9)  $       (230)  $        (86)  $       (383)
                                                 ============   ============   ============   ============
</TABLE>


                                     Page 6
<PAGE>

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

                                                   June 30,     December 31,
                                                     2006           2005
                                                 ------------   ------------
    Cash                                         $         --   $          4
    Accounts receivable, net                              170             --
    Inventories, net                                       35          1,198
    Intercompany receivable                               500            501
    Other current assets                                   --              1
                                                 ------------   ------------
        Total current assets                              705          1,704
    Property, plant and equipment, net                     --             25
    Other assets                                           --              6
                                                 ------------   ------------
        Total assets                             $        705   $      1,735
                                                 ============   ============

    Accounts payable                             $        194   $        373
    Due to factor                                          95            775
    Current maturities of stockholder loan                850            850
    Other current liabilities                              32            239
                                                 ------------   ------------
        Total current liabilities                       1,171          2,237
    Long term debt                                      3,000          3,000
    Stockholder loans less current maturities           1,500          1,500
    Accrued interest, stockholder loans                   525            454
                                                 ------------   ------------
        Total liabilities                        $      6,196   $      7,191
                                                 ============   ============


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

NOTE 3:  GOING CONCERN
----------------------

The accompanying unaudited condensed consolidated financial statements have been
prepared on a basis which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of business. In
2005 the Company incurred a net loss attributable to common stockholders of $8.3
million (of which $6.1 million was represented by non cash charges reflecting
impairment of Textile segment assets) resulting in a stockholders deficit which
totaled $12.5 million at June 30, 2006, which amount was inclusive of paid in
capital of $33.2 million and accumulated deficit of $41.4 million. The Company's
ability to continue as a going concern is dependent upon its ability to execute
management's plans to continue to be profitable, generate positive cash flow
from operations, obtain financing to meet pension fund obligations, the
redemption of preferred stock due in 2007 and thereafter and to continue to have
access to existing financing to meet obligations and repay liabilities arising
from normal business operations when they come due. Although management
continues to pursue these plans and believes it will be successful, there is no
assurance that the Company will be successful in generating such profitable
operations or maintaining such access to existing financing and obtaining
financing for such pension obligations on terms acceptable to the Company. The
outcome of these matters, including the Company's ability to fund its pension
obligations cannot be predicted with any certainty at this time. These factors,
as well as the Company's historical losses from operations and negative cash
flows raise substantial doubt about the Company's ability to continue as a going
concern. Management plans to derive its capital needs through cash generated

                                     Page 7
<PAGE>

from operations, advances under its facilities with CIT and stockholder loans.
These condensed consolidated financial statements do not include any adjustments
to the amounts and classification of assets and liabilities that may be
necessary should the Company be unable to continue as a going concern.

NOTE 4:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------

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

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

Cash and Cash Equivalents:
-------------------------
The Company considers all highly liquid investments with a maturity of six
months or less when purchased to be cash equivalents. The Company did not have
any cash equivalents at June 30, 2006 and December 31, 2005.

Property, Plant and Equipment:
-----------------------------
Property, plant and equipment is stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed principally by the
straight-line method for each class of depreciable and amortizable asset based
on their estimated useful lives. Buildings and improvements, machinery and
equipment, and furniture and fixtures are generally depreciated over periods of
20-35, 3-25 and 5-10 years, respectively. Leasehold improvements are amortized
over the shorter of the lease or its estimated useful life.

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

Accounts Receivable:
-------------------
Accounts receivable are stated at the net realizable value. An allowance for
doubtful accounts is recorded based on a combination of historical experience,
aging analysis and information on specific accounts. Accounts balances are
written off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. The allowance for
doubtful accounts was $58,000 at June 30, 2006 and $50,000 at December 31, 2005.

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

                                     Page 8
<PAGE>

Long-Lived Assets:
-----------------
The Company evaluates the carrying value of long-lived assets whenever events or
changes in circumstances indicate the carrying value of an asset may not be
recoverable. When factors indicate the asset may not be recoverable, the Company
compares the related undiscounted future net cash flows to the carrying value of
the asset to determine if impairment exists. If the expected future net cash
flows are less than the carrying value, the asset is written down to its
estimated fair value. When assets are removed from operations and held for sale,
the impairment loss is estimated as the excess of the carrying value of the
assets over their fair value. No such impairments of long-lived assets were
recorded for the six-month periods ended June 30, 2006 and 2005.

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

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

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

The Company has significant deferred tax assets, resulting from net operating
loss carryforwards and deductible temporary differences. As of June 30, 2006 and
December 31, 2005, the Company has provided a full valuation allowance against
our deferred tax assets. Management weighs the positive and negative evidence to
determine if it is more likely than not that some or all of the deferred tax
assets will be realized. Forming a conclusion that a valuation allowance is not
needed is difficult when there is negative evidence such as cumulative losses in
past years. The Company will continue to maintain a full valuation allowance on
our tax benefits until profitability has been sustained over a time period and
in amounts that are sufficient to support a conclusion that it is more likely
than not that a portion or all of the deferred tax assets will be realized. A
decrease in our valuation allowance would result in an immediate material income
tax benefit, an increase in total assets and stockholder's equity, and could
have a significant impact on earnings in future periods.

                                     Page 9
<PAGE>

An income tax benefit of $23,000 was recorded during the first quarter of 2006
and was the result of a refund of state income taxes during the period. Because
of the Company's net operating loss carryforward, the company is not required to
record a provision for income taxes related to its pretax income except in
instances where minimum taxes are payable. Income tax benefits of $33,000 and
$35,000 were recorded during the three and six months ended June 30, 2005,
respectively, as a result of the pretax losses during those periods.

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

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

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

Fair Value of Financial Instruments:
-----------------------------------
The Company's financial instruments are comprised of revolving debt, long-term
debt, loans payable to stockholder, Robert A. Levinson, and Series A Mandatory
Redeemable Preferred Stock at June 30, 2006 and December 31, 2005. The fair
values of the revolving debt, long-term debt and loans payable to Robert A.
Levinson approximate the carrying values because these obligations had
market-based interest rates.

Revenue Recognition:
-------------------
Revenue is recognized when goods are shipped to customers. Shipment is made by
UPS or common carrier. Deliveries generally take place within three days of
shipment. Standard terms for shipments are F.O.B. shipping point, at which time

                                    Page 10
<PAGE>

the Company has completed all performance obligations to consummate the sale. In
some circumstances, shipments are made F.O.B. destination, in which case the
Company insures the sales value of most shipments.

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

Advertising:
-----------
The Company expenses the cost of advertising at the time the cost is incurred.
Advertising expense totaled approximately $10,000 and $27,000 during the three
and six-month periods ended June 30, 2006. In 2005, advertising expense totaled
approximately $28,000 and $84,000 during the three and six-month periods ended
June 30, 2005, respectively.

Income (Loss) Per Common Share:
------------------------------
Basic income (loss) per share is computed by dividing income (loss) available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted income (loss) per share reflects the potential increase
in outstanding shares that could result from exercising in-the-money stock
options. The shares issuable upon the exercise of in-the-money stock options
were not included in the computation of loss per common share, for the three and
six months ended June 30, 2005 as the effect would be anti-dilutive.
Accordingly, the 2005 diluted loss per share is the same as the basic loss per
share.

At June 30, 2005, the Company had 81,200 options outstanding that could
potentially dilute basic loss per share in the future but were not included in
the calculation of diluted loss per share because this inclusion would have been
anti-dilutive.

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

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

Significant Accounting Policy Updates

Stock-Based Compensation Plans:
------------------------------

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

                                    Page 11
<PAGE>

Issued to Employees," and generally requires that such transactions be accounted
for using a fair-value-based method and recognized as expenses in our condensed
consolidated statement of operations.

We adopted FAS 123(R) using the modified prospective transition method which
requires the application of the accounting standard as of January 1, 2006. Our
condensed consolidated financial statements as of and for the three and six
months ended June 30, 2006 reflect the impact of adopting FAS 123(R). In
accordance with the modified prospective transition method, the condensed
consolidated financial statements for prior periods have not been restated to
reflect, and do not include the impact of FAS 123(R). See Note 10 "Common Stock
and Stock Options" for further details.

Stock-based compensation expense recognized during the period is based on the
value of the portion of stock-based payment awards that is ultimately expected
to vest. Stock-based compensation expense recognized in the condensed
consolidated statement of operations during the three and six months ended June
30, 2006 included compensation expense for stock-based payment awards granted
prior to, but not yet vested, as of December 31, 2005 based on the grant date
fair value estimated in accordance with the pro forma provisions of FAS 148.

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

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

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

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

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

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

                                    Page 12
<PAGE>

Recently Issued Accounting Pronouncements:
-----------------------------------------
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an
Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in a company's financial
statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN
48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We are currently reviewing this new standard
to determine its effects, if any, on our consolidated results of operations and
financial position.

NOTE 5:  INVENTORIES
--------------------

The components of inventories, net of reserves, are as follows (dollars in
thousands):
                                                   June 30,       December 31,
                                                     2006             2005
                                                 ------------     ------------
    Raw materials                                $      2,902     $      4,245
    Work in progress                                      121              245
    Finished goods                                      3,834            3,235
                                                 ------------     ------------
                                                 $      6,857     $      7,725
                                                 ============     ============

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

NOTE 6:  PROPERTY, PLANT AND EQUIPMENT
--------------------------------------

The components of Property, Plant and Equipment are as follows (dollars in
thousands):

                                                   June 30,       December 31,
                                                     2006             2005
                                                 ------------     ------------
    Land and improvements                        $         78     $         76
    Buildings and improvements                          2,484            2,466
    Machinery and equipment                             2,204            2,101
                                                 ------------     ------------
                                                        4,766            4,643
    Less: Accumulated depreciation
       and amortization                                (2,744)          (2,576)
                                                 ------------     ------------
                                                 $      2,022     $      2,067
                                                 ============     ============

Depreciation and amortization expense was $97,000 and $188,000 for the three and
six months ended June 30, 2006, respectively and $92,000 and $188,000 for the
three and six months ended June 30, 2005, respectively.

NOTE 7:  SHORT TERM AND LONG TERM DEBT
--------------------------------------

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

At June 30, 2006, the Company's credit facility with CIT (the "CIT Facility")
provided for maximum aggregate borrowings of up to $7.5 million in the form of
revolving credit, letters of credit and term loans. The CIT Facility is
comprised of separate financing agreements with the Company and its wholly-owned

                                    Page 13
<PAGE>

subsidiary, Blumenthal Lansing Company, LLC ("Blumenthal"). There was no unused
availability under the Company's credit facility with CIT as of June 30, 2006.

The CIT Facility provides for (i) a term loan to the Company (the "Term Loan")
in the initial amount of $2.0 million, $1.4 million of which was outstanding at
June 30, 2006, (ii) revolving credit advances to the Company, $1.0 million of
which was outstanding at June 30, 2006 and (iii) revolving credit advances to
Blumenthal based upon eligible accounts receivable and inventory, $3,791,000 of
which was outstanding at June 30, 2006, and a Letter of Credit facility with a
limit of $500,000, of which there was none outstanding at June 30, 2006. The
Term Loan amortizes $12,000 per month followed by a final installment payment of
$1.2 million due on January 1, 2008. The revolving credit advances are also due
on January 1, 2008. CIT may terminate the Credit facility upon 60 days written
notice. At June 30, 2006, all amounts outstanding under the CIT Facility bear
interest at 8.75% (the Chase Bank N.A. prime rate plus 0.5%) with a minimum rate
of 5.0%.

In connection with the CIT Facility, the Company and its subsidiary have made
cross corporate guarantees and have issued first priority liens covering
substantially all of the assets of the Company and its subsidiary. The
guarantees are full and unconditional. The non-guarantor subsidiary is
immaterial and the Company's financial statements are representative of the
combined guarantors of which the guarantor subsidiary is 100% owned. In
addition, Mr. Robert A. Levinson, a stockholder, officer and director of the
Company, provided certain collateral against advances provided under the CIT
Facility, which now only apply to the term loan portion of the facility pursuant
to the July 26, 2006 amendment.

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

On July 26, 2006, the CIT Facility was amended to increase the advance
percentage against the value of Eligible Inventory (as defined in the agreement)
to 40% (from 20%) of Eligible Inventory (a dollar increase of approximately $1.1
million in borrowing availability at current inventory levels) with respect to
the revolving credit portion of the CIT Facility. Total borrowing availability
under the entire CIT Facility remains at $7.5 million. In addition, the guaranty
of the CIT Facility of Robert Levinson, the Company's Chief Executive Officer
and principal shareholder, was terminated other than with respect to the term
loan portion, and the applicable interest rate was changed to the Chase Rate on
the first $2,500,000 of average net balances owed, and the Chase Rate plus .50%
per annum on average net balances owed in excess of $2,500,000, but in either
case not less than 5% per annum.

In connection with the Company's discontinued Textile operations, during the six
months ended June 30, 2006, pursuant to a factoring agreement between CIT and
the Company, CIT purchased the Textile segment's eligible trade accounts

                                    Page 14
<PAGE>

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

The promissory note payable to JPMorgan Chase Bank, N.A. in the amount of $3.0
million is dated May 2, 2002 and had a maturity date of April 30, 2007, as
amended. The note bears interest at a fixed rate per annum equal to the Adjusted
LIBOR applicable to such note plus 0.75% (a "Eurodollar Loan"). The interest
rate on the note at June 30, 2006 was 6.36%. In addition, Robert A. Levinson, a
stockholder, officer and director of the Company, has provided certain
additional collateral guaranteeing the note. On July 26, 2006, the maturity date
of the JPMorgan Chase Bank note was extended to January 1, 2008.

Mr. Robert A. Levinson, a stockholder, has agreed to personally support the
Company's cash requirements to enable it to fulfill its obligations through
January 1, 2008, to the extent necessary, up to a maximum amount of $3.0
million. The Company believes its reliance on such commitment is reasonable and
that Mr. Levinson has sufficient liquidity and net worth to honor such
commitment. The Company believes that Mr. Levinson's written commitment provides
the Company with the legal right to request and receive such advances. In the
event that Mr. Levinson did not honor such commitment, the Company would have
the right to sue Mr. Levinson for breach of his agreement. Mr. Levinson
reaffirmed this undertaking in writing on March 21, 2006.

Mr. Levinson has provided loans of $2,350,000 to the Company as of June 30,
2006. During 2005, he made short term advances of approximately $2.5 million of
which $1.850 million was outstanding at December 31, 2005 and June 30, 2006. Mr.
Levinson has agreed not to seek repayment of $1.0 million of these 2005 advances
before January 1, 2008 and, as such, $1.0 million of these advances are
classified as non-current on the Company's June 30, 2006 and December 31, 2005
condensed consolidated balance sheets. He has also pledged collateral in support
of certain Company obligations. Accrued interest on Mr. Levinson's loans are
classified as non-current liabilities on the Company's balance sheet and totaled
$525,000 and $454,000, respectively, at June 30, 2006 and December 31, 2005.

As of June 30, 2006, the Company was in compliance with all debt covenants, as
defined in the agreements.

Future maturities of long-term debt during each of the next five years ending
June 30 and thereafter were as follows (in thousands):

                        2007                $        994
                        2008                       5,727
                        Thereafter                    --
                                            ------------
                                            $      6,721
                                            ============

                                    Page 15
<PAGE>

NOTE 8:  PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
--------------------------------------------------------

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

The benefits under the plan are determined based on formulas, which reflect the
employees' years of service and compensation during their employment period. The
projected unit credit method is used to determine pension cost. Funding
requirements for the plan are based on the unit credit method. The Company's
policy is to fund pension cost as required by ERISA. The Company anticipates
quarterly contributions to the plan in 2006 of approximately $19,000 with an
additional $1.1 million due by September 15, 2007, based on current legislated
discount rates and actuarial assumptions. Recently enacted legislation,
effective for plan years beginning December 31, 2007, may negatively affect the
funding status of the Plan for future years.

In addition to the liability of $4.3 million for this Company sponsored plan,
the Company also has an additional pension liability in the amount of $1.0
million at June 30, 2006 in connection with a terminated multi-employer plan
which requires annual payments of $142,000 through 2016. In addition, the
Company has a $304,000 deferred compensation liability payable to the former
owner of an acquired business.

A summary of net periodic benefit costs of the Company's defined benefit plan
and post retirement medical benefit plan for the three and six months ended June
30, 2006 and 2005, respectively, are as follows (dollars in thousands):
<TABLE>
<CAPTION>

                                                         Three Months               Six Months Ended
                                                           June 30,                     June 30,
                                                 ---------------------------   ---------------------------
    Pension Benefits                                 2006           2005           2006           2005
    ----------------                             ------------   ------------   ------------   ------------
<S>                                              <C>            <C>            <C>            <C>
    Service                                      $         --   $         --   $         --   $         --
    Interest cost                                         297            304            594            608
    Expected return on plan assets                       (334)          (342)          (668)          (684)
    Amortization of prior service cost                     --             --             --             --
    Recognized net actuarial loss                          45             46             90             92
                                                 ------------   ------------   ------------   ------------
    Net periodic benefit cost                    $          8   $          8   $         16   $         16
                                                 ============   ============   ============   ============
<CAPTION>

                                                         Three Months               Six Months Ended
                                                           June 30,                     June 30,
                                                 ---------------------------   ---------------------------
    Other Benefits                                   2006           2005           2006           2005
    --------------                               ------------   ------------   ------------   ------------
<S>                                              <C>            <C>            <C>            <C>
    Service                                      $         --   $          4   $         --   $          8
    Interest cost                                          13             14             26             28
    Expected return on plan assets                         --             --             --             --
    Amortization of prior service cost                     (4)            (4)            (8)            (8)
    Recognized net actuarial (gain)                       (20)           (26)           (40)           (52)
                                                 ------------   ------------   ------------   ------------
    Net periodic benefit (gain)                  $        (11)  $        (12)  $        (22)  $        (24)
                                                 ============   ============   ============   ============
</TABLE>

                                    Page 16
<PAGE>

For more information on the Company's pension and other post-retirement benefit
plans, refer to the consolidated financial statements and notes included in the
Company's Annual Report on Form 10-K.

NOTE 9:  MANDATORILY REDEEMABLE PREFERRED STOCK
-----------------------------------------------

The Series A Preferred Stock is subject to mandatory redemption, to the extent
the Company may lawfully do so, in three equal annual installments on June 15,
2007, June 15, 2008 and June 15, 2009, in each case, from funds legally
available therefor, at a price per share of Series A Preferred Stock equal to $1
per share, together with an amount representing accrued and unpaid dividends,
whether or not declared, to the date of redemption. Dividends on the Series A
Preferred Stock accrue at a rate of $0.06 per annum per share when, as and if
declared by the Company and are payable quarterly on March 15, June 15,
September 15 and December 15. Quarterly dividends which are not paid in full in
cash on any dividend payment date will accumulate without interest. Under the
terms of the CIT Facilities, preferred stock redemption payments are prohibited
and preferred stock dividend payments are limited to $300,000 per year.

The availability of resources to make dividend payments to the holders of Series
A Preferred Stock in the future will depend on the Company's future earnings and
cash flow. Under Delaware law, preferred dividend payments are restricted to the
Company's accumulated or current earnings and profits. Losses in 2005 and
earlier years have depleted the Company's accumulated earnings and profits and,
as such, future preferred dividend payments will be limited to future earnings
and profits. Preferred dividends which cannot be paid under Delaware law will
continue to accrue and will be added to the Preferred Stock liability account.
As of June 30, 2006, unpaid preferred stock dividends of approximately $149,000
were included in Preferred Stock. The preferred stock is owned 98.3% by Mr.
Robert A. Levinson, a stockholder, officer and director of the Company. The
mandatorily redeemable preferred stock is redeemable at $1.00 per share plus
accrued and unpaid dividends.

NOTE 10:  COMMON STOCK AND STOCK OPTIONS
----------------------------------------

We adopted FAS 123(R) using the modified prospective transition method beginning
January 1, 2006. Accordingly, during the six-month period ended June 30, 2006,
we recorded stock-based compensation expense for awards granted prior to, but
not yet vested, as of January 1, 2006, as if the fair value method required for
pro forma disclosure under FAS 123 were in effect for expense recognition
purposes, adjusted for estimated forfeitures. There were no stock-based awards
granted after January 1, 2006. However, for all future stock-based awards we
will recognize compensation expense based on the estimated grant date fair value
method using the Black-Scholes valuation model. For awards granted prior to, but
not yet vested, as of January 1, 2006, we have recognized compensation expense
using a straight-line amortization method. As FAS 123(R) requires that
stock-based compensation expense be based on awards that are ultimately expected
to vest, stock-based compensation for the six-month period ended June 30, 2006
has been reduced for estimated forfeitures. When estimating forfeitures, we
consider voluntary termination behaviors as well as trends of actual option
forfeitures. The impact on our results of operations of recording stock-based
compensation for the three and six-month periods ended June 30, 2006, were an
expense of $27,000 and $53,000, respectively which are included in general and
administrative expense.

                                    Page 17
<PAGE>

Prior to the adoption of FAS 123(R), the intrinsic value of unvested common
stock options assumed in the January 3, 2003 Carlyle acquisition were recorded
as unearned stock-based compensation. Upon the adoption of FAS 123(R) in January
2006, the unearned stock-based compensation balance of approximately $60,000 was
reclassified to additional-paid-in-capital.

Prior to the adoption of FAS No. 123(R), we provided the disclosures required
under FAS No. 123, as amended by FAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosures." Employee stock-based compensation
expense recognized under FAS 123(R) was not reflected in our results of
operations for the three and six-month periods ended June 30, 2005 for employee
stock option awards as all options were granted with an exercise price equal to
the market value of the underlying common stock on the date of grant.
Forfeitures of awards were recognized as they occurred. Previously reported
amounts have not been restated.

The pro forma information for the three and six months ended June 30, 2005 was
as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>

                                                                          Three Months    Six Months
                                                                          ------------   ------------
<S>                                                                       <C>            <C>
Net loss, as reported                                                     $       (377)  $       (601)
Add:     Amortization of stock-based compensation
         expense determined under the intrinsic value method
         (net of cancellations)                                                     --             --
Deduct:  Total stock-based compensation expense
         determined under fair value
         based method, net of tax                                                  (17)           (35)
                                                                          ------------   ------------
Pro forma net loss                                                        $       (394)  $       (636)
                                                                          ============   ============

Loss per share:
         Basic - Reported                                                 $       (.07)  $       (.11)
              Pro forma                                                   $       (.07)  $       (.12)
         Diluted - Reported                                               $       (.07)  $       (.11)
              Pro forma                                                   $       (.07)  $       (.12)

<CAPTION>

The following table summarizes the stock option transactions for the six-month
periods ended June 30 (In thousands except per share amounts):

                                                        2006                           2005
                                            ---------------------------   ---------------------------
                                                             Weighted                      Weighted
                                                             Average                       average
                                                             exercise                      exercise
                                              Options        price           Options       price
                                            ------------   ------------   ------------   ------------
<S>                                                  <C>   <C>                     <C>   <C>
Options outstanding at January 1                     411   $       2.79            445   $       2.70
Options granted                                       --             --             --             --
Options exercised                                     --             --             --             --
Options forfeited/cancelled                          (45)         (1.43)            --
                                            ------------   ------------   ------------   ------------

Options outstanding at June 30                       366   $       2.96            445   $       2.70
                                            ============   ============   ============   ============

Exercisable at June 30                               360   $       2.98            366   $       2.77
                                            ============   ============   ============   ============
</TABLE>

During the six months ended June 30, 2005, the Company issued an aggregate of
2,317 shares of common stock to a director and recorded such issuance as stock
based compensation expense. There were no such issuances in 2006.

                                    Page 18
<PAGE>

NOTE 11:  CUSTOMER AND SUPPLIER CONCENTRATIONS
----------------------------------------------

The Company's three largest customers (Wal-mart, a mass merchandiser and Jo-Ann
Stores and Hancock Fabrics, each a specialty chain) represented approximately
46%, 22% and 7%, respectively, of the Company's net sales in the three months
ended June 30, 2006 and represented approximately 50%, 21% and 7%, respectively,
of the Company's net sales in the six months ended June 30, 2006. These
customers also represented approximately 41%, 27% and 9% of the Company's net
sales during the three months ended June 30, 2005 and 44%, 21% and 9%,
respectively, of the Company's net sales in the six months ended June 30, 2005.
These customers also represented approximately 60% and 80% of the total
outstanding accounts receivable as of June 30, 2006 and December 31, 2005,
respectively. A reduction in sales to any of these customers could adversely
impact the financial condition and results of operations of the Company.

NOTE 12:  RELATED PARTY TRANSACTIONS
------------------------------------

Robert A. Levinson, a stockholder, officer and director, had outstanding loans
of $2,350,000 to the Company as of June 30, 2006. The Company also had $525,000
of accrued interest payable to Mr. Levinson with respect to such loans as of
June 30, 2006. He has also pledged collateral in support of certain Company
obligations. See Note 7 for a description of these transactions.

In addition to being a director of the Company, Edward H. Cohen serves as
counsel to Katten Muchin Rosenman LLP, legal counsel to the Company. During the
three and six months ended June 30, 2006, fees for services provided to the
Company by Katten Muchin Rosenman LLP totaled approximately $67,000 and
$171,000, respectively and fees for the three and six months ended June 30, 2005
totaled $68,000 and $90,000 respectively. Mr. Cohen does not share in the fees
that the Company pays to such law firm and his compensation is not based on such
fees.

NOTE 13:  COMMITMENTS AND CONTINGENCIES
---------------------------------------

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

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

Forward-Looking Statements

Introduction

This 2006 Report on Form 10-Q contains statements which constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Those statements include statements regarding the intent and belief
or current expectations of the Company and its management team. Prospective

                                    Page 19
<PAGE>

investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the forward-looking
statements. Such risks and uncertainties include, among other things, the
Company's ability to continue to operate as a going concern, the Company's
lenders continuing to support the Company, the Company's ability to secure
additional financing to meet future capital needs, the timing and amount of
required defined benefit plan contributions, the Company's ability to generate
increased revenues from its Craft division, reliance on short term advances from
a significant stockholder, the Company's ability to generate free cash flow or
obtain additional financing in excess of its debt service and other current
obligations in order to support and grow its Craft business, reliance on a
limited number of significant customers, future revenue opportunities, inventory
risk, growth of the Company's Craft business in Europe and North America, the
expansion and future growth of the Company's customer base and strategic and
distribution relationships, future capital, marketing and sales force needs, the
Company's ability to manage expenses and maintain margins, the possible
acquisition of complementary products and businesses, and other risks and
uncertainties that may be detailed herein, and from time-to-time, in the
Company's other reports filed with the Securities and Exchange Commission. The
Company undertakes no obligation to publicly update any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.

Overview

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

In 1995 and 1999, the Company acquired various fabric businesses. These
acquisitions formed the basis of the Company's Textile business.

In 2003, the Company acquired by merger Carlyle Industries, Inc. ("Carlyle").
This acquisition formed the basis of the Company's Craft business.

Discontinued Operations

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

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

                                    Page 20
<PAGE>

gross profits in the Textile business would continue to deteriorate and as a
result the Company concluded that a withdrawal from the business was the
appropriate course of action at that time.

During the first six months of 2006, the Company has been disposing of Textile
segment inventory. The Company will continue to transact sales of Textile
segment inventory until such inventory is fully disposed of. As of June 30, 2006
the Company had $35,000 of net Textile segment inventory remaining. The Company
estimates exit costs associated with exiting the garment manufacturing and
remaining textile business not to be material.

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

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

                                                     Three Months Ended              Six Months Ended
                                                           June 30,                      June 30,
                                                 ---------------------------   ---------------------------
                                                     2006           2005           2006           2005
                                                 ------------   ------------   ------------   ------------
<S>                                              <C>            <C>            <C>            <C>
    Sales                                        $        478   $        776   $      2,346   $      2,373
    Cost of sales                                         290            650          1,986          1,995
                                                 ------------   ------------   ------------   ------------
    Gross profit                                          188            126            360            378
    Selling, general and administrative
        expense                                           112            418            269            851
    Interest expense                                       85             75            177            138
    Income tax (benefit)                                   --           (137)            --           (228)
                                                 ------------   ------------   ------------   ------------
    Results of discontinued operations,
        net of tax                               $         (9)  $       (230)  $        (86)  $       (383)
                                                 ============   ============   ============   ============

<CAPTION>

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

                                                   June 30,                    December 31,
                                                     2006                          2005
                                                 ------------                  ------------
<S>                                              <C>                           <C>
    Cash                                         $         --                  $          4
    Accounts receivable, net                              170                            --
    Inventories, net                                       35                         1,198
    Intercompany receivable                               500                           501
    Other current assets                                   --                             1
                                                 ------------                  ------------
        Total current assets                              705                         1,704
    Property, plant and equipment, net                     --                            25
    Other assets                                           --                             6
                                                 ------------                  ------------
        Total assets                             $        705                  $      1,735
                                                 ============                  ============

    Accounts payable                             $        194                  $        373
    Due to factor                                          95                           775
    Current maturities of stockholder loan                850                           850
    Other current liabilities                              32                           239
                                                 ------------                  ------------
        Total current liabilities                       1,171                         2,237
    Long term debt                                      3,000                         3,000
    Stockholder loans less current maturities           1,500                         1,500
    Accrued interest, stockholder loans                   525                           454
                                                 ------------                  ------------
        Total liabilities                        $      6,196                  $      7,191
                                                 ============                  ============
</TABLE>

                                    Page 21
<PAGE>

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

Operating Activities

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

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

         o        expanding its craft distribution product offerings, business
                  and customer base within retail and wholesale markets,
                  including an expansion into international markets, primarily
                  in Canada and Europe; and

         o        acquiring new lines of business within the Craft industry
                  through acquisition.

The Company manufactures, packages and distributes buttons, embellishments,
craft products and complimentary product lines, including appliques, craft kits
and fashion and jewelry accessories. These products are marketed to the home
sewing and craft customers. The Company's products are sold to mass
merchandisers, specialty chains and independent retailers and wholesalers.
Products are sold under the La Mode (R), Le Chic (R), Streamline (R), Favorite
Findings (R), Crafter's Images (R), and Button Fashion (R) registered trademarks
and the Le Bouton, La Petite, Classic, Boutique, Elegant and Mill Mountain brand
names. The Company also produces and distributes a private-label button line for
one of the nation's best-known retailers.

The button products are sold primarily for use in the home sewing market where
buttons are used for garment manufacturing, replacement and the upgrading and/or
restyling of ready-to-wear clothing. More modest button usage is found in craft
projects, home decorating and garment manufacturing. The domestic market is
concentrated and is served by national and regional fabric specialty chains,
mass merchandisers, independent fabric stores, notions wholesalers and craft
stores and chains.

All imported and domestically purchased products for sale in the North American
market are shipped to the Company's Lansing, Iowa facility for packaging and
distribution to customers. As thousands of button styles are received in bulk,
computerized card printing systems enable the Company's wholly-owned subsidiary,
Blumenthal Lansing Company, LLC ("Blumenthal") to economically imprint millions
of button cards with such necessary data as style number, price, number of
buttons, bar code, country of origin and care instructions. The Company also
blister-packages and shrink-wraps some products. Domestic shipments are made
primarily to individual stores with a smaller percentage to warehouse locations.
The European business is primarily serviced by third party distributors from the
Company's button manufacturing and distribution facility in Veendam, the
Netherlands.

The Company's accounts include fabric and craft specialty chains, mass
merchandisers carrying buttons and crafts, distributors and many independent
stores. Mass merchandisers and specialty chain customers are characterized by
the need for sophisticated electronic support, rapid turn-around of merchandise
and direct-to-store service to customers with hundreds to thousands of locations

                                    Page 22
<PAGE>

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

The Company believes that its craft business depends on trends within the craft
market including the more mature home-sewing market. The retail customer base
for buttons has changed substantially over the past two decades as department
stores and small independent fabric stores have been replaced by mass
merchandisers and specialty retail chains which have continued to consolidate.
In response to this trend, the Company has broadened its lines to include
embellishments, novelty buttons and products used in the craft industry which
are not viewed by management as mature markets. In addition, the Company has
sought to expand its markets beyond the traditional U.S. retail outlets by
expansion into the major European countries.

The Company's three largest customers (Wal-mart, a mass merchandiser and Jo-Ann
Stores and Hancock Fabrics, each a specialty chain) represented approximately
46%, 22% and 7%, respectively, of the Company's net sales in the three months
ended June 30, 2006 and represented approximately 50%, 21% and 7%, respectively,
of the Company's net sales in the six months ended June 30, 2006. These
customers also represented approximately 41%, 27% and 9% of the Company's net
sales during the three months ended June 30, 2005 and 44%, 21% and 9%,
respectively, of the Company's net sales in the six months ended June 30, 2005.
These customers also represented approximately 60% and 80% of the total
outstanding accounts receivable as of June 30, 2006 and December 31, 2005,
respectively. A reduction in sales to any of these customers could adversely
impact the financial condition and results of operations of the Company.

Critical Accounting Policies and Estimates

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

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

We consider our policies for revenue recognition to be critical due to the
continuously evolving standards and industry practice related to revenue
recognition, changes to which could materially impact the way we report
revenues. Accounting polices related to: allowance for doubtful accounts,
inventories, impairment of long-lived assets, deferred taxes, pension
liabilities and loss contingencies are also considered to be critical as these
policies involve considerable subjective judgment and estimation by management.
Critical accounting policies, and our procedures related to these policies, are
described in detail below. Also, see Note 4 -- Summary of Significant Accounting
Policies.

                                    Page 23
<PAGE>

Allowance for Doubtful Accounts

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

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

Inventories

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

Impairment of Long-Lived Assets

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

                                    Page 24
<PAGE>

Deferred Taxes

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

Pension Liabilities

The determination of pension obligations and the related pension expense or
credits to operations involves significant estimates. The most significant
estimates are the discount rate used to calculate the actuarial present value of
benefit obligations and the expected long-term rate of return on assets used in
calculating the pension charges or credits for the year. The Company uses
discount rates based on yields of highly rated fixed income debt securities at
the end of the year. At June 30, 2006, the weighted average discount rate for
the plan was 5.75%. The Company uses an expected long-term rate of return on
assets that is based on both past performance of the plan's assets and estimated
future performance of the assets. At June 30, 2006, the expected long-term rate
of return used was 8%. Due to the nature of the plan's assets and the volatility
of debt and equity markets, results may vary significantly from year to year.
Based on current estimates, the Company has an aggregate $5.3 million pension
obligation, $1.1 million of which is due by September 15, 2007. See note 8 to
the unaudited condensed consolidated financial statements.

Loss Contingencies

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

                                    Page 25
<PAGE>

Revenue Recognition

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

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


Results of Operations

The following presents the results of the Company's continuing operations in the
Craft business and does not reflect the remaining or historical activity of its
discontinued Textile operations. See Note 2 of the Notes to Financial statements
and "Overview" and "Discontinued Operations" above.


Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005

Net sales totaled $5.0 million during the second quarter of 2006 as compared
with $5.2 million during the second quarter of 2005. During the second quarter
of 2006 our dollar volume declined approximately 3.8% while our unit volume
showed a 10.1% reduction as major customers continued to be cautious regarding
inventory levels.

Gross profit totaled $1.6 million during the second quarter of 2006 as compared
to $1.5 million during the second quarter of 2005. The gross margin percent
during the second quarter of 2006 was 33.2% as compared to 29.3% during the
second quarter of 2005. In 2005 variable cost of sales included costs associated
with a modular changeover for one of our major customers. There was no similar
changeover for this customer in the second quarter of 2006 resulting in lower
variable cost of goods sold and an improved gross profit as compared to the
second quarter of 2005.

Selling, general and administrative expenses totaled $1.4 million during the
second quarter of 2006 as compared to $1.5 million during the second quarter of
2005. Selling, general and administrative expenses decreased by $126,000 during
the second quarter of 2006 as compared to the same period in 2005 as a result of
reduced compensation and advertising expense.

Income before interest expense, preferred dividends and income taxes totaled
$273,000 during the second quarter of 2006 as compared to $9,000 during the
second quarter of 2005. The increase in income before interest expense,
preferred dividends and income taxes was the result of the increased gross
profit combined with the reduced selling, general and administrative expenses
all as described above.

                                    Page 26
<PAGE>

Net interest expense during the second quarter of 2006 totaled $156,000 as
compared to $121,000 during the second quarter of 2005. The increase in interest
expense during the second quarter of 2006 was the result of an increase in
average interest rates in effect during 2006. The weighted average interest rate
on debt outstanding during the second quarter of 2006 was 7.14% as compared to
5.77% during the second quarter of 2005. Also contributing to the increase in
interest expense in 2006 was an increase in outstanding debt. The average
outstanding debt during the second quarter of 2006 totaled $12.0 million as
compared to $11.2 million during the second quarter of 2005.

Preferred dividend expense totaled $68,000 during the second quarters of 2006
and 2005. The preferred dividends were accrued during the second quarter of 2006
but were not paid in cash. In 2005, the preferred dividends were paid in cash.

In 2006, because of the Company's net operating loss carryforward and the full
valuation allowance against its deferred tax asset, the Company was not required
to record a provision for income taxes related to its pretax income except in
instances where minimum taxes are payable. An income tax benefit of $33,000 was
recorded during the second quarter of 2005 as a result of the pretax loss during
the quarter in 2005.


Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Net sales totaled $10.8 million during the six months ended June 30, 2006 and
totaled $9.7 million during the comparable period in 2005. Shipments during the
six months ended June 30, 2006 increased 2.4% in unit volume and experienced an
11.3% increase in dollar volume as compared to the six months ended June 30,
2005.

The increase in 2006 sales was primarily the result of the timing of an annual
modular changeover for a major customer. In 2006, the annual modular changeover
for this customer occurred during the first quarter and in 2005 it occurred
during the third quarter.

Gross profit totaled $3.9 million during the six months ended June 30, 2006 as
compared to $3.1 million during the six month period in 2005. The gross margin
percent during the year to date period in 2006 was 36.0% as compared to 32.5%
during the year to date period in 2005. The increase in gross profit dollars was
the result of the increase in sales volume as discussed above. The increase in
the gross margin percent in 2006 over 2005 was primarily the result of improved
leverage of our fixed cost of sales during the year to date period in 2006 as
compared to the year to date period in 2005.

Selling, general and administrative expenses totaled $3.0 million during the six
months ended June 30, 2006 and 2005. Selling, general and administrative
expenses were lower by $78,000 during the 2006 year to date period as compared
to the same period in 2005 as a result of reduced compensation and advertising
expense.

Income before interest expense, preferred dividends and income taxes totaled
$919,000 during the six months ended June 30, 2006 as compared to $103,000
during the comparable period last year. The increase in income before interest
expense, preferred dividends and income taxes was the result of the increased
gross profit combined with the reduced selling, general and administrative
expenses all as described above.

                                    Page 27
<PAGE>

Net interest expense during the six months ended June 30, 2006 totaled $295,000
as compared to $220,000 during the year to date period in 2005. The increase in
interest expense during 2006 was the result of an increase in average interest
rates in effect during 2006. The weighted average interest rate on debt
outstanding during the six months ended June 30, 2006 was 6.99% as compared to
5.43% during the comparable period in 2005. Also contributing to the increase in
interest expense in 2006 was an increase in outstanding debt. The average
outstanding debt during the six months ended June 30, 2006 was $11.7 million as
compared to $11.1 million during the first six months of 2005.

Preferred dividend expense totaled $136,000 during the six months ended June 30,
2006 and 2005. The preferred dividends were accrued during 2006 but were not
paid in cash. In 2005, the preferred dividends were paid in cash.

An income tax benefit of $23,000 was recorded during 2006 and was the result of
a refund of state income taxes during the period. In 2006, because of the
Company's net operating loss carryforward and full valuation allowance against
its deferred tax asset, the company was not required to record a provision for
income taxes related to its pretax income except in instances where minimum
taxes are payable. An income tax benefit of $35,000 was recorded during the
period ended June 30, 2005 as a result of the pretax loss during the period in
2005.

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

We have prepared our unaudited condensed consolidated financial statements on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of business.
The condensed consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts of liabilities that might be necessary should we be unable to continue
in existence.

Our historical losses in the Textile division and resulting negative cash flows
raise substantial doubt about our ability to continue as a going concern. These
circumstances caused our independent registered public accounting firm to
include an explanatory paragraph in their report dated March 15, 2006, regarding
their concerns about our ability to continue as a going concern. Substantial
doubt about our ability to continue as a going concern may create negative
reactions to the price of the common shares of our stock and we may have a more
difficult time obtaining financing.


Liquidity and Capital Resources

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

The current year has produced a number of favorable financial results, including
operating profits, positive cash flow, an ongoing orderly liquidation of the
textile segment inventory and an improved working capital position. In addition,
on July 26, 2006, the Company's $3 million Promissory Note (the "Note") in favor

                                    Page 28
<PAGE>

of J. P. Morgan Chase Bank, N.A. was amended to extend the maturity date of the
Note to January 1, 2008 from April 30, 2007. Also on July 26, 2006 the Company's
credit facility (the "Facility") with CIT Group/Financial Services, Inc. was
amended to increase the advance percentage against the value of Eligible
Inventory (as defined under the Facility) to 40% (from 20%) of Eligible
Inventory (a dollar increase of approximately $1.1 million in borrowing
availability at current inventory levels) with respect to the revolving credit
portion of the Facility. Total borrowing availability under the entire Facility
remains at $7.5 million. In addition, the guaranty of the Facility of Robert
Levinson, the Company's Chief Executive Officer and principal shareholder, was
terminated other than with respect to the term loan portion and the applicable
interest rate was changed to the Chase Rate on the first $2,500,000 of average
net balances owed, and the Chase Rate plus .50% per annum on average net
balances owed in excess of $2,500,000, but in either case not less than 5% per
annum. However, there can be no assurance that the Company will not require
additional financing, due to historical losses, debt service requirements or
other factors to meet its liquidity needs, including its obligation to make a
$1.1 million pension plan contribution by September 2007 and the redemption of
preferred stock due in 2007. There can be no assurance the Company will be able
to obtain such additional financing if needed, in which case the Company's
operations would be materially adversely affected and it could be forced to
cease operations.

Losses sustained in prior years may have materially adversely affected the
Company's long-term liquidity. While the Company has taken recent steps to
improve its long term liquidity outlook, the Company still has limited
availability under its existing credit facilities, and there can be no assurance
the Company will not require additional financing to support its operations,
that the Company will be able to obtain any needed additional financing, or that
it can obtain additional financing on favorable terms. Robert A. Levinson, the
Company's Chairman and principal stockholder, has agreed to continue to
personally support the Company's cash requirements through January 1, 2008 by
providing short-term loans to the Company up to a maximum of $3 million. There
is currently $1 million of borrowing available from Mr. Levinson under this
agreement. If we (1) do not substantially achieve our overall projected revenue
levels for 2006, (2) fail to operate within our projected expense levels as
reflected in our business operating plans, or (3) do not receive the ongoing
support of our lenders, then we will be unable to meet our cash and operating
requirements for the next twelve months, which would in turn require us to seek
additional financing to fund operations and/or implement additional expense
reductions. Levcor has implemented several actions to reduce losses and improve
cash flow, including exiting the textile business, reduction of headcount,
elimination of non-profitable product lines and reductions in other general and
administrative costs. However, there can be no assurance that Mr. Levinson will
continue to personally support the Company's cash requirements, that such
support from Mr. Levinson, together with the support of the Company's commercial
lenders, will be sufficient to address the Company's liquidity needs and cash
requirements or that the actions taken by management will be sufficient to allow
the Company to generate net income from continuing operations.

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

                                    Page 29
<PAGE>

Failing to substantially achieve our projected cash flow levels for 2006 may
also result in a default under our credit agreement with our lenders. If a
default were to occur and is not timely cured by us or waived by our lenders, or
if this were to happen and our debt could not be refinanced or restructured, our
lenders could pursue remedies, including: (1) penalty rates of interest; (2)
demand for immediate repayment of the debt; and/or (3) the foreclosure on any of
our assets securing the debt. If this were to happen and we were liquidated or
reorganized after payment to our creditors, there would likely be insufficient
assets remaining for any distribution to our stockholders.

At June 30, 2006, the Company's principal sources of liquidity included cash of
$83,000 and trade accounts receivable of $2.9 million. There was no unused
borrowing capacity available under the Company's credit facility with CIT as of
June 30, 2006. However, as discussed above the CIT Facility was amended in July
2006 to increase the advance percentage against the value of Eligible Inventory
to 40% (from 20%) of Eligible Inventory (a dollar increase of approximately $1.1
million in borrowing availability at current inventory levels) with respect to
the revolving credit portion of the facility; total borrowing availability under
the entire Facility remains at $7.5 million. The Company also had an additional
$1 million of borrowing available from Mr. Levinson who has agreed to fund up to
$3 million of temporary advances to the Company.

The following discussion regarding the Company's cash flows for the six months
ended June 30, 2006 and 2005 is inclusive of both continuing and discontinued
operating activities.

Cash Flow Summary:
(in thousands)
                                                     2006           2005
                                                 ------------   ------------
    Net cash provided by (used in):
             Operating activities                $         99   $     (3,095)
             Investing activities                         (66)           (52)
             Financing activities                          --          3,120
                                                 ------------   ------------
             Net increase (decrease) in cash     $         33   $        (27)
                                                 ============   ============

Net cash flow provided by operating activities totaled $99,000 during the six
months ended June 30, 2006, as compared to net cash flow used in operating
activities during the same period last year totaling $3.1 million.

In 2006, the components of net cash provided by operating activities were
$737,000 of cash provided by net income adjusted for noncash items, consisting
primarily of depreciation, noncash stock based compensation and accrued interest
on stockholder loan, offset by $638,000 of cash used by operating assets and
liabilities.

In 2005, the components of net cash used by operating activities were $587,000
of net loss adjusted for noncash items, consisting primarily of depreciation,
deferred income tax benefit, noncash stock based compensation and accrued
interest on stockholder loan, combined with approximately $2.5 million of cash
used by operating assets and liabilities.

                                    Page 30
<PAGE>

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

Changes in inventories provided $811,000 in cash flow in 2006 and used $3.3
million of cash flow in 2005. During the six months ended June 30, 2006, the
Company has been liquidating inventory related to its discontinued textile
business thus creating a positive cash flow related to inventory. During the six
months ended June 30, 2005, the Company had increased its discontinued Textile
segment inventory in order to accommodate seasonal orders which shipped
primarily during the summer months, thereby creating a negative cash flow
related to inventory during the six month ended June 30, 2005.

Changes in accounts payable utilized $540,000 of cash flow in 2006 as compared
to providing $1.4 million of cash flow in the six months ended June 30, 2005.
The reduction in accounts payable in 2006 was directly related to the changes in
inventory in the discontinued Textile segment as discussed above.

Changes in accounts receivable used $162,000 of cash flow in 2006 as compared to
providing $475,000 of cash flow in 2005. The primary reason for the decrease in
cash flow from accounts receivable was the $1.1 million increase in sales during
the six months ended June 30, 2006 as compared to 2005

Net cash flow used in investing activities totaled $66,000 during the six months
ended June 30, 2006, as compared to $52,000 during the same period in 2005. This
increase was primarily a result of higher capital expenditures during 2006.

Net cash provided by financing activities totaled none during the six months
ended June 30, 2006 as compared to $3.1 million during the same period last
year. In 2006, cash flow from operating activities was sufficient to fund
operating and investing activities and as a result, there was no cash required
from financing activities. In 2005, cash of $3.1 million was provided by
financing activities to fund cash used in operations and cash used in investing
activities.

Included in net cash provided by financing activities in 2005 were net proceeds
from stockholder loans of $2.5 million. There were no such proceeds during 2006.
The stockholder borrowings in 2005 were primarily the result of funding of the
operating activities of the discontinued Textile segment. In 2006 those
activities produced positive cash flow as the result of the winding down of the
discontinued textile business and, consequently, additional stockholder
borrowings were not required.

Total borrowings during the first six months of 2006 and 2005 under the CIT
revolving credit facility were $10.9 million and $11.0 million respectively;
total repayments during the periods under this facility were $10.2 million and
$9.5 million, respectively. Repayments under the Company's term loan totaled
$72,000 during the six months ended June 30, 2006 and 2005. Net amount repaid to
factor during the year to date period totaled $680,000 and $829,000 in 2006 and
2005 respectively.

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

                                    Page 31
<PAGE>

At June 30, 2006, the Company's credit facility with CIT (the "CIT Facility")
provided for maximum aggregate borrowings of up to $7.5 million in the form of
revolving credit, letters of credit and term loans. The CIT Facility is
comprised of separate financing agreements with the Company and its wholly-owned
subsidiary, Blumenthal Lansing Company, LLC ("Blumenthal"). There was no unused
availability under the Company's credit facility with CIT as of June 30, 2006.

The CIT Facility provides for (i) a term loan to the Company (the "Term Loan")
in the initial amount of $2.0 million, $1.4 million of which was outstanding at
June 30, 2006, (ii) revolving credit advances to the Company, $1.0 million of
which was outstanding at June 30, 2006 and (iii) revolving credit advances to
Blumenthal based upon eligible accounts receivable and inventory, $3,791,000 of
which was outstanding at June 30, 2006, and a Letter of Credit facility with a
limit of $500,000, of which there was none outstanding at June 30, 2006. The
Term Loan amortizes $12,000 per month followed by a final installment payment of
$1.2 million due on January 1, 2008. The revolving credit advances are also due
on January 1, 2008. CIT may terminate the Credit facility upon 60 days written
notice. At June 30, 2006, all amounts outstanding under the CIT Facility bear
interest at 8.75% (the Chase Bank N.A. prime rate plus 0.5%) with a minimum rate
of 5.0%.

In connection with the CIT Facility, the Company and its subsidiary have made
cross corporate guarantees and have issued first priority liens covering
substantially all of the assets of the Company and its subsidiary. The
guarantees are full and unconditional. The non-guarantor subsidiary is
immaterial and the Company's financial statements are representative of the
combined guarantors of which the guarantor subsidiary is 100% owned. In
addition, Mr. Robert A. Levinson, a stockholder, officer and director of the
Company, provided certain collateral against advances provided under the CIT
Facility, which now only apply to the term loan portion of the facility pursuant
to the July 26, 2006 amendment.

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

                                    Page 32
<PAGE>

In connection with the Company's discontinued Textile operations, during the six
months ended June 30, 2006, pursuant to a factoring agreement between CIT and
the Company, CIT purchased the Textile segment's eligible trade accounts
receivable without recourse and assumed substantially all credit risk with
respect to such accounts. The amounts due to the Company from CIT under the
factoring agreement earned no interest. The factoring agreement allows the
Company to obtain advances that bear interest at 8.75% (0.5% above the Chase
Bank, N.A. prime rate). The Company pledged its Textile segment's eligible
accounts receivable and property and equipment as collateral under the factoring
agreement. There is no set limit on borrowings. The amount available for
borrowing is based on a formula consisting of 90% of eligible accounts
receivable increased by side collateral and reduced by both the current loan
balance and outstanding letters of credit.

The promissory note payable to JPMorgan Chase Bank, N.A. in the amount of $3.0
million is dated May 2, 2002 and had a maturity date of April 30, 2007, as
amended. The note bears interest at a fixed rate per annum equal to the Adjusted
LIBOR applicable to such note plus 0.75% (a "Eurodollar Loan"). The interest
rate on the note at June 30, 2006 was 6.36%. In addition, Robert A. Levinson, a
stockholder, officer and director of the Company, has provided certain
additional collateral guaranteeing the note. On July 26, 2006 the maturity date
of the JPMorgan Chase Bank note was extended to January 1, 2008.

Mr. Robert A. Levinson, a stockholder, has agreed to personally support the
Company's cash requirements to enable it to fulfill its obligations through
January 1, 2008, to the extent necessary, up to a maximum amount of $3.0
million. The Company believes its reliance on such commitment is reasonable and
that Mr. Levinson has sufficient liquidity and net worth to honor such
commitment. The Company believes that Mr. Levinson's written commitment provides
the Company with the legal right to request and receive such advances. In the
event that Mr. Levinson did not honor such commitment, the Company would have
the right to sue Mr. Levinson for breach of his agreement. Mr. Levinson
reaffirmed this undertaking in writing on March 21, 2006.

Mr. Levinson has provided loans of $2,350,000 to the Company as of June 30,
2006. During 2005, he made short term advances of approximately $2.5 million of
which $1.850 million was outstanding at December 31, 2005 and June 30, 2006. Mr.
Levinson has agreed not to seek repayment of $1.0 million of these 2005 advances
before January 1, 2008 and, as such, $1.0 million of these advances are
classified as non-current on the Company's June 30, 2006 and December 31, 2005
condensed consolidated balance sheets. He has also pledged collateral in support
of certain Company obligations. Accrued interest on Mr. Levinson's loans are
classified as non-current liabilities on the Company's balance sheet and totaled
$525,000 and $454,000, respectively, at June 30, 2006 and December 31, 2005.

As of June 30, 2006, the Company was in compliance with all debt covenants, as
defined in the agreements.

Future maturities of long-term debt during each of the next five years ending
June 30 and thereafter were as follows (in thousands):

                             2007                $        994
                             2008                       5,727
                             Thereafter                    --
                                                 ------------
                                                 $      6,721
                                                 ============

                                    Page 33
<PAGE>

The Series A Preferred Stock is subject to mandatory redemption, to the extent
the Company may lawfully do so, in three equal annual installments on June 15,
2007, June 15, 2008 and June 15, 2009, in each case, from funds legally
available therefor, at a price per share of Series A Preferred Stock equal to $1
per share, together with an amount representing accrued and unpaid dividends,
whether or not declared, to the date of redemption. Dividends on the Series A
Preferred Stock accrue at a rate of $0.06 per annum per share when, as and if
declared by the Company and are payable quarterly on March 15, June 15,
September 15 and December 15. Quarterly dividends which are not paid in full in
cash on any dividend payment date will accumulate without interest. Under the
terms of the CIT Facilities, preferred stock redemption payments are prohibited
and preferred stock dividend payments are limited to $300,000 per year.

The availability of resources to make dividend payments to the holders of Series
A Preferred Stock in the future will depend on the Company's future earnings and
cash flow. Under Delaware law, preferred dividend payments are restricted to the
Company's accumulated or current earnings and profits. Losses in 2005 and
earlier years have depleted the Company's accumulated earnings and profits and,
as such, future preferred dividend payments will be limited to future earnings
and profits. In this regard, the Company was unable to pay the March 15, 2006
Preferred Stock dividend. Preferred dividends which cannot be paid under
Delaware law will continue to accrue and will be added to the Preferred Stock
liability account. As of June 30, 2006, unpaid preferred dividends of
approximately $149,000 were included in Preferred Stock. The preferred stock is
owned 98.3% by Robert A. Levinson, a stockholder, officer and director of the
Company. The mandatorily redeemable preferred stock is redeemable at $1.00 per
share plus accrued and unpaid dividends.

Impact of Inflation

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

Seasonality and New Product Lines

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

The sale of the Company's products can be subject to substantial cyclical
fluctuation. Sales may decline in periods of recession or uncertainty regarding
future economic prospects that affect consumer spending, particularly on
discretionary items. This cyclicality and any related fluctuation in consumer

                                    Page 34
<PAGE>

demand could have a material adverse effect on the Company's results of
operations and financial condition.

Significant  Accounting Policy Updates

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

We adopted FAS 123(R) using the modified prospective transition method which
requires the application of the accounting standard as of January 1, 2006. Our
condensed consolidated financial statements as of and for the three and six
months ended June 30, 2006 reflect the impact of adopting FAS 123(R). In
accordance with the modified prospective transition method, the condensed
consolidated financial statements for prior periods have not been restated to
reflect, and do not include the impact of FAS 123(R). See Note 10 "Common Stock
and Stock Options" for further details.

Stock-based compensation expense recognized during the period is based on the
value of the portion of stock-based payment awards that is ultimately expected
to vest. Stock-based compensation expense recognized in the condensed
consolidated statement of operations during the three and six months ended June
30, 2006 included compensation expense for stock-based payment awards granted
prior to, but not yet vested, as of December 31, 2005 based on the grant date
fair value estimated in accordance with the pro forma provisions of FAS 148.

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

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

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

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

                                    Page 35
<PAGE>

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

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


Recently Issued Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes--an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements in accordance with SFAS No. 109, "Accounting for
Income Taxes." FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 is effective for
fiscal years beginning after December 15, 2006. We are currently reviewing this
new standard to determine its effects, if any, on our consolidated results of
operations or financial position.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

Our short term and long-term third party debt bears interest at floating rates,
and accordingly we are sensitive to changes in prevailing interest rates. At
June 30, 2006, our indebtedness with CIT was at 8.75% interest rate (based on
the Chase Bank N.A. prime rate plus .5%). Effective July 26, 2006, the
applicable rate is the Chase Bank, N.A. prime rate on the first $2.5 million of
outstanding borrowing plus .05% on outstanding in excess of $2.5 million but in
either case not less than 5% per annum. Our Textile operation's factoring
arrangement with CIT was also at 8.75% (based on Chase Bank N.A. prime rate plus
..5%), our indebtedness with JP Morgan Chase was at a 6.36% interest rate (based
on adjusted LIBOR plus .75%). Our shareholder loan interest is not variable and
bore a 6% interest rate. A 1% increase or decrease in market interest rates that
affect our borrowing arrangements would have a material impact on earnings and
cash flow of approximately $93,000 during the next fiscal year.

                                    Page 36
<PAGE>

Foreign Currency Exchange Rates

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

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

Customer Concentration

Our sales are concentrated with major retail chains and as such, approximately
70-80% of our sales in 2006 are expected to be from our top three accounts;
these accounts represented 60% of our trade accounts receivable at June 30,
2006. The loss of any one of our major accounts would have a material adverse
impact on our financial condition and results of operations.


ITEM 4.  CONTROLS AND PROCEDURES

The Company's management is responsible for establishing and maintaining a
system of disclosure controls and procedures (as defined in Rule 13a-15 and
15d-15 under the Securities Exchange Act of 1934 (the "Exchange Act") designed
to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by an issuer in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the
issuer's management, including its principal executive officer or officers and
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.

In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried out
an evaluation, with the participation of the Chief Executive Officer and Chief
Financial Officer of the Company, of the effectiveness of the Company's
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective, as of the end of the period covered by this report,
to ensure that information required to be disclosed in the Company's reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.

In designing and evaluating the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act), management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurances of achieving the desired
control objectives, as ours are designed to do, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. We believe that our disclosure controls and
procedures provide such reasonable assurance.

                                    Page 37
<PAGE>

No change occurred in the Company's internal controls concerning financial
reporting during the second quarter of the fiscal year ended December 31, 2006
that has materially affected, or is reasonably likely to materially affect, the
Company's internal controls over financial reporting.


                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

ITEM 1A  RISK FACTORS

There have been no material changes to our Risk Factors from those presented in
our 2005 Form 10-K, except for certain updating changes to the Risk Factors
"Going Concern," "Pension Funding" and "A Substantial Portion Of The Company's
Revenues And Gross Profits Is Derived From A Small Number Of Large Customers And
The Loss Of Any Of These Customers Could Substantially Reduce Our Revenues," as
presented below.


Going Concern

We have prepared our unaudited condensed consolidated financial statements on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of business.
The condensed consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts of liabilities that might be necessary should we be unable to continue
in existence.

Our historical losses in the Textile division and resulting negative cash flows
raise substantial doubt about our ability to continue as a going concern. These
circumstances caused our independent registered public accounting firm to
include an explanatory paragraph in their report dated March 15, 2006, regarding
their concerns about our ability to continue as a going concern. Substantial
doubt about our ability to continue as a going concern may create negative
reactions to the price of the common shares of our stock and we may have a more
difficult time obtaining financing.


Pension Funding

The Company's projected benefit obligation with its defined benefit plan at June
30, 2006 was $21.5 million. The fair market value of Plan assets was $17.9
million at June 30, 2006. The current actuarial estimate is that a contribution

                                    Page 38
<PAGE>

with respect to the 2006 Plan Year in the approximate amount of $1.1 million
will be required by September 15, 2007. The Company is investigating available
alternatives to making such contributions. There can be no assurance that the
Company will not be required to make this contribution, in which case the
Company will be required to obtain additional financing to allow it to make
these contributions. There can be no assurance the Company will be able to
obtain such additional financing. Moreover, recently enacted legislation,
effective for plan years beginning after December 31, 2007, may negatively
affect the funding status of the Plan for future years.

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

The Company's customer base has been and continues to be highly concentrated.
The Company's three largest customers (Wal-mart, a mass merchandiser and Jo-Ann
Stores and Hancock Fabrics, each a specialty chain) represented approximately
46%, 22% and 7%, respectively, of the Company's net sales in the three months
ended June 30, 2006 and represented approximately 50%, 21% and 7% respectively,
of the Company's net sales in the six months ended June 30, 2006. These
customers also represented approximately 41%, 27% and 9% of the Company's net
sales during the three months ended June 30, 2005 and 44%, 21% and 9%,
respectively, of the Company's net sales in the six months ended June 30, 2005.
These customers also represented approximately 60% and 80% of the total
outstanding accounts receivable as of June 30, 2006 and December 31, 2005,
respectively.

Based upon historical and recent results and existing relationships with
customers, the Company believes that a substantial portion of its net sales and
gross profits will continue to be derived from a small number of large
customers. Customers generally have the right to terminate their relationship
with the Company without penalty and with little or no notice. Without long-term
contracts with the majority of its customers, the Company cannot be certain that
its customers will continue to purchase its products or that it will be able to
maintain a consistent level of sales. A decision by any of our major customers,
whether motivated by competitive conditions, financial difficulties or
otherwise, to decrease significantly the amount of merchandise purchased from
us, or to change their manner of doing business with us, could substantially
reduce our revenues and have a material adverse effect on our financial
condition and results of operations. There can be no assurance that the
Company's largest customers will continue to place orders with the Company or
that orders by such customers will continue at their previous levels.


ITEM 5.  OTHER INFORMATION; COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES

On May 11, 2006, Management determined to exit its remaining Textile business
completely. The Company intends to continue to sell off its inventories
associated with the contract garment manufacturing business and remaining
textile business and anticipates that its exit from the textile segment will be
substantially completed in 2006. The Company intends to focus its efforts and
resources on its Craft business.

The decision to exit the Textile business was made after a full review and
analysis of this business and the Company's strategic alternatives. The decision
was based on a variety of factors, including, (i) that the Company's contract
garment manufacturing and other textile business has incurred operating losses
resulting from lower than planned business volume from our major customers and
has been unable to grow its customer base, (ii) that the business has incurred
sales decreases (iii) a decrease in margins due to an increase in raw material

                                    Page 39
<PAGE>

costs that were unable to be passed to customers, and (iv) the long production
lead times and the related working capital requirements of the business which
contributed to interest costs that exceeded the segment's operating profits. The
Company had determined that the future net revenues and gross profits in the
Textile business would continue to deteriorate, and the Company concluded that a
withdrawal from the business was the appropriate course of action.

As a result of exiting this business, the Company's revenue in 2006 is expected
to be significantly lower than in 2005. As of June 30, 2006, the Company had
$35,000 of net Textile segment inventory remaining. The Company estimates exit
costs associated with exiting the garment manufacturing and remaining textile
business not to be material.


ITEM 6.  EXHIBITS

(a)  Exhibits

 10.1    Amendment dated July 26, 2006 to the Accounts Receivable Financing
         Agreement dated January 24, 2002 between Blumenthal Lansing Company,
         LLC and the CIT Group/Commercial Services, Inc.

 10.2    Amendment dated July 26, 2006 to the Factoring Agreement dated
         September 17, 1998 between Levcor International, Inc. and the CIT
         Group/Commercial Services, Inc.

 10.3    Amendment dated July 26, 2006 to the Factoring Agreements between
         Blumenthal Lansing Company, LLC, Westwater Industries, LLC, Levcor
         International, Inc. and the CIT Group/Commercial Services, Inc.

 10.4    Endorsement No. 6 dated July 26, 2006 to the Promissory Note dated May
         3, 2002 by Levcor International, Inc. in favor of JP Morgan Chase Bank,
         N.A.

 10.5    Acknowledgment and Consent of Endorsement #6 dated July 26, 2006 to the
         Promissory Note dated May 3, 2002 by Levcor International, Inc. in
         favor of JP Morgan Chase Bank, N.A.

 31.1    Chief Executive Officer's Certificate, pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002.

 31.2    Chief Financial Officer's Certificate, pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002.

 32.1    Chief Executive Officer's Certificate, pursuant to 18 U.S.C. Section
         1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
         2002.

 32.2    Chief Financial Officer's Certificate, pursuant to 18 U.S.C. Section
         1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
         2002.

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

                                    Page 40
<PAGE>

                                   SIGNATURES
                                   ----------

 Pursuant to the requirements 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.


                                       LEVCOR INTERNATIONAL, INC.


Date: August 11, 2006                  /s/ ROBERT A. LEVINSON
      ---------------                  -----------------------------------------
                                       Robert A. Levinson
                                       Chairman of the Board, President and
                                       Chief Executive Officer


Date: August 11, 2006                  /s/ EDWARD F. COOKE
      ---------------                  -----------------------------------------
                                       Edward F. Cooke
                                       Chief Financial Officer, Vice President,
                                       Secretary and Treasurer



                                    Page 41
<PAGE>

                                 Exhibit Index
                                 -------------

 10.1    Amendment dated July 26, 2006 to the Accounts Receivable Financing
         Agreement dated January 24, 2002 between Blumenthal Lansing Company,
         LLC and the CIT Group/Commercial Services, Inc.

 10.2    Amendment dated July 26, 2006 to the Factoring Agreement dated
         September 17, 1998 between Levcor International, Inc. and the CIT
         Group/Commercial Services, Inc.

 10.3    Amendment dated July 26, 2006 to the Factoring Agreements between
         Blumenthal Lansing Company, LLC, Westwater Industries, LLC, Levcor
         International, Inc. and the CIT Group/Commercial Services, Inc.

 10.4    Endorsement No. 6 dated July 26, 2006 to the Promissory Note dated May
         3, 2002 by Levcor International, Inc. in favor of JP Morgan Chase Bank,
         N.A.

 10.5    Acknowledgment and Consent of Endorsement #6 dated July 26, 2006 to the
         Promissory Note dated May 3, 2002 by Levcor International, Inc. in
         favor of JP Morgan Chase Bank, N.A.

 31.1    Chief Executive Officer's Certificate, pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002.

 31.2    Chief Financial Officer's Certificate, pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002.

 32.1    Chief Executive Officer's Certificate, pursuant to 18 U.S.C. Section
         1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
         2002.

 32.2    Chief Financial Officer's Certificate, pursuant to 18 U.S.C. Section
         1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
         2002.


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