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

                                  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 September 30, 2007

                                       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.)


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


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


Former name, former address and former fiscal year, if changed since last
report:

1065 Avenue of the Americas, New York,  New York                  10018
------------------------------------------------                ----------


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 [X]  No [ ]

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 November 13, 2007, 5,331,881 shares of Common Stock, par value $0.01 per
share, were issued and outstanding.

================================================================================
<PAGE>

                           LEVCOR INTERNATIONAL, INC.

                                      INDEX

                                                                            Page
                                                                            ----
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheets
         as of September 30, 2007 (Unaudited) and December 31, 2006...........1

         Condensed Consolidated Statements of Income (Unaudited)
         for the Three and Nine months Ended September 30, 2007 and 2006......2

         Condensed Consolidated Statements of Comprehensive Income
         (Unaudited) for the Three and Nine months Ended
         September 30, 2007 and 2006 .........................................3

         Condensed Consolidated Statements of Cash Flows (Unaudited)
         for the Nine months Ended September 30, 2007 and 2006................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..........35

Item 4.  Controls and Procedures.............................................36

PART II. OTHER INFORMATION

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

Item 1A  Risk Factors........................................................39

Item 6.  Exhibits ...........................................................41

         Signatures..........................................................42


<PAGE>
<TABLE>
<CAPTION>

                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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


                                                                           September 30,       December 31,
                                                                               2007               2006
                                                                          ---------------    ---------------
                                                                            (Unaudited)
                                                                          ---------------
<S>                                                                       <C>                <C>
ASSETS
Current Assets:
     Cash                                                                 $            41    $            69
     Accounts receivable trade, net                                                 3,657              2,946
     Inventories, net                                                               5,110              5,343
     Other current assets                                                             181                 86
                                                                          ---------------    ---------------
         Total current assets                                                       8,989              8,444

Property, Plant and Equipment, net                                                  1,759              1,917
Goodwill                                                                            2,543              2,543
Other assets                                                                          445                281
                                                                          ---------------    ---------------
         Total Assets                                                     $        13,736    $        13,185
                                                                          ===============    ===============

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
     Revolving loan and current maturities of long-term debt              $         6,064    $         4,591
     Accounts payable                                                               1,186              1,058
     Pension liabilities, current portion                                             188              1,859
     Income taxes payable                                                              44                204
     Other current liabilities                                                        588                859
                                                                          ---------------    ---------------
         Total current liabilities                                                  8,070              8,571

Long-term debt, less current maturities                                             4,047              4,155
Stockholder loans                                                                     950              1,500
Accrued interest, stockholder loans                                                   629                587
Pension liabilities, less current portion                                           1,483              1,494
Environmental liabilities                                                           1,287              1,290
Other liabilities                                                                      --                335
Mandatorily Redeemable Preferred Stock, par value $0.01 per share
     8,000,000 shares authorized:  Shares issued and outstanding:
     Series A - 4,555,007                                                           4,555              4,555
Accumulated dividends on Mandatorily Redeemable Stock                                 510                285
                                                                          ---------------    ---------------
         Total Liabilities                                                         21,531             22,772
                                                                          ---------------    ---------------
Commitments and contingencies

STOCKHOLDERS' DEFICIT
Common Stock, par value $0.01 per share
     15,000,000 shares authorized;
     Shares issued and outstanding: 5,331,881 as of
         September 30, 2007 and December 31, 2006                                      54                 54
Additional paid in capital                                                         33,235             33,231
Accumulated Deficit                                                               (39,960)           (40,213)
Accumulated Other Comprehensive Loss                                               (1,124)            (2,659)
                                                                          ---------------    ---------------
Total Stockholders' Deficit                                                        (7,795)            (9,587)
                                                                          ---------------    ---------------
Total Liabilities and Stockholders' Deficit                               $        13,736    $        13,185
                                                                          ===============    ===============
</TABLE>

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

                                       1
<PAGE>
<TABLE>
<CAPTION>

                 . LEVCOR INTERNATIONAL, INC. AND SUBSIDIARIES

             CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                      (In thousands, except per share data)

                                                                    Three Months Ended                Nine Months Ended
                                                                        September 30,                   September 30,
                                                                ----------------------------    ----------------------------
                                                                    2007            2006            2007            2006
                                                                ------------    ------------    ------------    ------------
<S>                                                             <C>             <C>             <C>             <C>
Net sales                                                       $      5,093    $      5,593    $     14,551    $     16,376
Cost of sales                                                          3,508           3,925           9,867          10,825
                                                                ------------    ------------    ------------    ------------
Gross profit                                                           1,585           1,668           4,684           5,551
Selling, general and administrative expenses                           1,094           1,500           3,582           4,464
                                                                ------------    ------------    ------------    ------------
Income from continuing operations before gain on termination
   of post retirement plan, interest, preferred dividends
   and income tax expense (benefit)                                      491             168           1,102           1,087
Gain on termination of post retirement benefit plan                       --           1,662              --           1,662
                                                                ------------    ------------    ------------    ------------
Income from continuing operations before interest, preferred
   dividends and income tax expense (benefit)                            491           1,830           1,102           2,749
Interest expense                                                         242             330             653             625
Dividends on mandatorily redeemable preferred stock                       86              68             224             204
                                                                ------------    ------------    ------------    ------------
Income from continuing operations before income tax
   expense (benefit) and discontinued operations                         163           1,432             225           1,920
Income tax expense (benefit)                                              (6)            200              (6)            177
                                                                ------------    ------------    ------------    ------------
Net income from continuing operations                                    169           1,232             231           1,743
Income (loss) from discontinued operations, net of tax                    --              11              22             (75)
                                                                ------------    ------------    ------------    ------------
Net income                                                      $        169    $      1,243    $        253    $      1,668
                                                                ============    ============    ============    ============
Income (loss) per share:
   Basic and Diluted:
     Income from continuing operations                          $        .03    $        .23    $        .05    $        .33
     Income (loss) from discontinued operations                          --*             --*             --*            (.01)
                                                                ------------    ------------    ------------    ------------
     Net income                                                 $        .03    $        .23    $        .05    $        .32
                                                                ============    ============    ============    ============


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

*  Less than $.005

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

                                       2
<PAGE>
<TABLE>
<CAPTION>

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

                                                                    Three Months Ended                Nine Months Ended
                                                                        September 30,                   September 30,
                                                                ----------------------------    ----------------------------
                                                                    2007            2006            2007            2006
                                                                ------------    ------------    ------------    ------------
<S>                                                             <C>             <C>             <C>             <C>
Net income                                                      $        169    $      1,243    $        253    $      1,668
Other comprehensive income (loss):
         Foreign currency translation adjustment                          58               1             421             (19)
         Pension Adjustment                                            1,114              --           1,114              --
                                                                ------------    ------------    ------------    ------------
Comprehensive income                                            $      1,341    $      1,244    $      1,788    $      1,649
                                                                ============    ============    ============    ============
</TABLE>


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

                                       3
<PAGE>
<TABLE>
<CAPTION>

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

                                                                          Nine Months Ended
                                                                             September 30,
                                                                     ----------------------------
                                                                         2007            2006
                                                                     ------------    ------------
<S>                                                                  <C>             <C>
Cash Flows From Operating Activities:
Net income                                                           $        253    $      1,668
Reconciliation of net income to net cash provided by
   (used in) operations:
     Non-cash gain on post retirement medical plan termination                 --          (1,662)
     Depreciation and amortization                                            298             296
     Non-cash stock-based compensation                                          4              54
     Accrued interest on stockholder loans                                     42             106
     Accrued dividends on mandatorily redeemable preferred stock              224             217
     Changes in operating assets and liabilities:
       Accounts receivable trade, net                                        (711)           (346)
       Inventories, net                                                       311           1,421
       Other current assets                                                   (94)             51
       Other assets                                                          (238)            (61)
       Accounts payable                                                       128            (893)
       Income taxes payable                                                  (160)            176
       Other current liabilities                                             (271)           (477)
       Pension liabilities                                                   (568)           (131)
       Environmental liabilities                                               (3)            (40)
       Other liabilities                                                       --              97
                                                                     ------------    ------------
         Net cash provided by  (used in) operating activities                (785)            476
                                                                     ------------    ------------
Cash Flows From Investing Activities:
Capital expenditures                                                          (23)            (50)
Investment in other assets                                                    (35)            (35)
                                                                     ------------    ------------
         Net cash used in investing activities                                (58)            (85)
                                                                     ------------    ------------
Cash Flows From Financing Activities:
Borrowings under revolving loan                                            13,896          15,770
Repayments of  revolving loan                                             (12,423)        (14,884)
Repayment of long - term debt                                                (108)           (108)
Borrowings under stockholder loans                                            850              --
Repayments of stockholder loans                                            (1,400)           (350)
Due to factor                                                                  --            (797)
                                                                     ------------    ------------
         Net cash provided by (used in) financing activities                  815            (369)
                                                                     ------------    ------------

Increase (decrease) in cash                                                   (28)             22
Cash at beginning of period                                                    69              50
                                                                     ------------    ------------
Cash at end of period                                                $         41    $         72
                                                                     ============    ============

Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
     Interest                                                        $        689    $        689
                                                                     ============    ============
     Income taxes                                                    $        154    $         --
                                                                     ============    ============
</TABLE>

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

                                       4
<PAGE>

                   LEVCOR INTERNATIONAL, INC. AND SUBSIDIARIES
                         NOTES TO CONDENSED CONSOLIDATED
                        FINANCIAL STATEMENTS (UNAUDITED)


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

Nature of Operations:
---------------------

Levcor International, Inc. and Subsidiaries (the "Company" or "Levcor" or "we")
manufacture, package and distribute a line of buttons and other craft products
for sale in the home sewing and craft retail industry. The Company formerly
operated a textile business which is treated as a discontinued operation as
described in Note 3. The Company sells its products to customers primarily in
North America 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 all the information included in the Company's
annual consolidated financial statements and notes for the year ended December
31, 2006. The consolidated balance sheet as of December 31, 2006 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 September 30, 2007 (unaudited)
and December 31, 2006 (audited) and the unaudited condensed consolidated
statements of income, comprehensive income and cash flows for the nine months
ended September 30, 2007 and 2006 include the accounts of the Company and
subsidiaries.

NOTE 2:  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.
The Company's ability to continue as a going concern is dependent upon its
ability to execute management's plans to be profitable, generate positive cash
flow from operations and to continue to have access to existing financing to
meet obligations and repay liabilities when they come due, including amounts
payable with respect to claimed environmental liabilities in connection with the
Solvents Recovery Service of New England Superfund Site (see Note 13) in the
event the parent corporation is determined to be responsible for these claimed
liabilities and the redemption of preferred stock due in 2007 and thereafter.
Although management continues to pursue these plans and believes it will be
successful, there is no assurance that the Company will be successful in

                                       5
<PAGE>

generating such profitable operations or maintaining such access to existing
financing or obtaining financing for such environmental obligations on terms
acceptable to the Company. The outcome of these matters cannot be predicted with
any certainty at this time. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management plans to satisfy
the Company's capital needs through cash generated from operations, advances
under its facilities with CIT and stockholder loans. These unaudited 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 3:  DISCONTINUED OPERATIONS
         -----------------------

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

During 2006, the Company disposed of substantially all significant Textile
business inventory and had inventory of $15,000 and no liabilities at December
31, 2006. As of September 30, 2007 the Company had no Textile business assets or
liabilities remaining. The Company does not expect to incur any additional exit
costs.

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

(dollars in thousands):
                                                                    Three Months Ended               Nine Months Ended
                                                                        September 30,                   September 30,
                                                                --------------- ------------    ----------------------------
                                                                    2007            2006            2007            2006
                                                                ------------    ------------    ------------    ------------
<S>                                                             <C>             <C>             <C>             <C>
         Sales                                                  $         --    $         47    $         39    $      2,393
         Cost of sales                                                    --              36              17           2,022
                                                                ------------    ------------    ------------    ------------
         Gross profit                                                     --              11              22             371
         Selling, general and administrative expense                      --              --              --             269
         Interest expense                                                 --              --              --             177
                                                                ------------    ------------    ------------    ------------
         Results of discontinued operations, net of tax         $         --    $         11    $         22    $        (75)
                                                                ============    ============    ============    ============
</TABLE>


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

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

Consolidation:
-------------

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

Use of Estimates:
----------------

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company to make
estimates and assumptions that affect the reported amounts of assets and

                                       6
<PAGE>

liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents:
-------------------------

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The Company did not have
any cash equivalents at September 30, 2007 and December 31, 2006.

Property, Plant and Equipment:
-----------------------------

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

Credit Risk:
-----------

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

Accounts Receivable:
-------------------

Accounts receivable are stated at the net realizable value. An allowance for
doubtful accounts is recorded based on a combination of historical experience,
aging analysis and information on specific accounts. Account balances are
written off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. The allowance for
doubtful accounts was $11,000 at September 30, 2007 and $106,000 at December 31,
2006.

Inventories:
-----------

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

Long-Lived Assets:
-----------------

The Company evaluates the carrying value of long-lived assets whenever events or
changes in circumstances indicate the carrying value of an asset may not be
recoverable. When factors indicate the asset may not be recoverable, the Company
compares the related undiscounted future net cash flows to the carrying value of
the asset to determine if impairment exists. If the expected future net cash
flows are less than the carrying value, the asset is written down to its
estimated fair value. When assets are removed from operations and held for sale,
the impairment loss is estimated as the excess of the carrying value of the
assets over their fair value. No such impairments of long-lived assets were
recorded for the nine months ended September 30, 2007 and 2006

                                       7
<PAGE>

Goodwill:
--------

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

Income Taxes:
------------

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

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

The Company has significant deferred tax assets, resulting from net operating
loss carryforwards and deductible temporary differences. As of September 30,
2007 and December 31, 2006, the Company has provided a full valuation allowance
against its 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 decrease
in stockholder's deficit, and could have a significant impact on earnings in
future periods.

Because of the Company's net operating loss carryforward, the Company is not
required to record a provision for income taxes related to its pretax income
except in instances where minimum taxes are payable.

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

                                       8
<PAGE>

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 unaudited condensed consolidated financial statements could have
a material adverse effect on our business, results of operations and financial
condition.

Foreign Currency Translation:
----------------------------

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

Fair Value of Financial Instruments:
-----------------------------------

The Company's financial instruments are comprised of revolving debt, long-term
debt, loans payable to stockholder, Robert A. Levinson, and Series A Mandatory
Redeemable Preferred Stock at September 30, 2007 and December 31, 2006. The fair
values of the revolving debt, long-term debt, loans payable to Robert A.
Levinson and Series A Mandatory Redeemable Preferred Stock approximate the
carrying values because these obligations have 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
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 $6,000 and $17,000 during the three
and nine-month periods ended September 30, 2007, respectively. In 2006,
advertising expense during the three and nine-month periods ended September 30,
2006 totaled approximately $8,000 and $35,000, respectively.

                                       9
<PAGE>

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.

Mandatorily Redeemable Preferred Stock:
--------------------------------------

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

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

The Company follows SFAS No. 123 (revised 2004) ("SFAS No. 123(R)"),
"Share-Based Payment," to account for stock-based compensation. Among other
items, SFAS No. 123(R) requires companies to recognize in their financial
statements the cost of services received in exchange for awards of equity
instruments based on the grant date fair value of those awards. The Company
elected to use the modified prospective method for adoption, which requires
compensation expense to be recorded for all unvested stock options and other
equity-based compensation beginning in the first quarter of adoption. For all
unvested options outstanding as of January 1, 2006, the previously measured but
unrecognized compensation expense, based on the fair value at the original grant
date, has been or will be recognized in the Company's financial statements over
the remaining vesting period. For equity-based compensation awards granted or
modified subsequent to January 1, 2006, compensation expense, based on the fair
value on the date of grant or modification has been or will be recognized in the
Company's consolidated financial statements over the vesting period. The Company
utilizes the Black-Scholes option pricing model to measure the fair value of
stock options.

Reclassifications:
-----------------

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


Recently Issued Accounting Pronouncements

As of the date of filing, no new accounting pronouncements were issued that are
expected to have a material impact on the Company's consolidated financial
position or results of operations.

                                       10
<PAGE>

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

The components of inventories as of September 30, 2007 and December 31, 2006,
net of reserves are as follows (dollars in thousands):

                                                 September 30,    December 31,
                                                     2007            2006
                                                 ------------    ------------
         Raw materials                           $      2,401    $      2,614
         Work in progress                                  92              87
         Finished goods                                 2,617           2,642
                                                 ------------    ------------
                                                 $      5,110    $      5,343
                                                 ============    ============

At September 30, 2007 and December 31, 2006 inventories were valued on a
weighted-average cost method basis. Inventories are stated at the lower of cost
or market. Cost elements included in inventory are material, labor and overhead,
primarily using standard cost, which approximates actual cost.

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

The components of Property, Plant and Equipment as of September 30, 2007 and
December 31, 2006 are as follows (dollars in thousands):

                                                 September 30,    December 31,
                                                     2007            2006
                                                 ------------    ------------
         Land and improvements                   $         82    $         79
         Buildings and improvements                     2,509           2,491
         Machinery and equipment                        2,312           2,248
                                                 ------------    ------------
                                                        4,903           4,818
         Less: Accumulated depreciation
               and amortization                        (3,144)         (2,901)
                                                 ------------    ------------
                                                 $      1,759    $      1,917
                                                 ============    ============

Depreciation and amortization expense totaled approximately $108,000 and
$298,000 for the three and nine-month periods ended September 30, 2007,
respectively, and approximately $108,000 and $296,000 for the three and
nine-month periods ended September 30, 2006, 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.

The Company's credit facility with CIT (the "CIT Facility") provides for maximum
aggregate borrowings of up to $7.5 million in the form of revolving credit,
letters of credit and term loans. The CIT Facility is comprised of separate
financing agreements with the Company and its wholly-owned subsidiary,
Blumenthal Lansing Company, LLC ("Blumenthal"). There was $137,000 of unused
availability under the Company's credit facility with CIT as of September 30,
2007.

The CIT Facility provides for (i) a term loan to the Company (the "Term Loan")
in the initial amount of $2.0 million, $1.2 million of which was outstanding at
September 30, 2007, (ii) revolving credit advances to the Company, $1.5 million
of which was outstanding at September 30, 2007 and (iii) revolving credit
advances to Blumenthal based upon eligible accounts receivable and inventory,
$4.4 million of which was outstanding at September 30, 2007, and a Letter of
Credit facility with a limit of $500,000, of which there was none outstanding at

                                       11
<PAGE>

September 30, 2007. The Term Loan amortizes $12,000 per month followed by a
final installment payment of $1.0 million due on January 1, 2009. The revolving
credit advances are also due on January 1, 2009. CIT may terminate the Credit
facility upon 60 days written notice. $2.5 million of the amounts outstanding
under the CIT Facility bear interest at Chase Bank N.A. prime rate (8.25%) and
amounts in excess of $2.5 million bear interest at the Chase Bank N.A. prime
rate plus 0.5% (8.75%) with a minimum rate of 5.0%.

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

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

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

The Company also has a factoring agreement with CIT, which matures on January 1,
2009. As of September 30, 2007 there was no balance due to or from CIT under the
factoring agreement.

The promissory note payable to JPMorgan in the amount of $3.0 million is dated
May 2, 2002 and has a maturity date of January 1, 2009, as amended. The note
bears interest at a fixed rate per annum equal to the Adjusted LIBOR Rate
applicable to such note plus 0.75% (a "Eurodollar Loan"). The interest rate on
the note at September 30, 2007 was 6.14%. In addition, Robert A. Levinson, a
stockholder, officer and director of the Company, has provided certain
additional collateral guaranteeing the note.

Mr. Robert A. Levinson, a stockholder, has agreed to personally support the
Company's cash requirements to enable it to fulfill its obligations through
January 2, 2009, to the extent necessary, up to a maximum amount of $3.0

                                       12
<PAGE>

million. The Company believes its reliance on such commitment is reasonable and
that Mr. Levinson has sufficient liquidity and net worth to honor such
commitment. The Company believes that Mr. Levinson's written commitment provides
the Company with the legal right to request and receive such advances. In the
event that Mr. Levinson did not honor such commitment, the Company would have
the right to sue Mr. Levinson for breach of his agreement. On March 20, 2007,
Mr. Levinson reaffirmed this undertaking in writing in a commitment letter dated
March 13, 2007.

The Company had outstanding loans payable to Mr. Levinson totaling $950,000 and
$1.5 million as of September 30, 2007 and December 31, 2006, respectively. In
addition, Mr. Levinson has pledged collateral in support of certain Company
obligations. Accrued interest on Mr. Levinson's loans has been classified as
noncurrent liabilities on the Company's balance sheet and totaled $629,000 and
$587,000, respectively at September 30, 2007 and December 31, 2006. He has also
agreed not to demand any repayment of principal or interest currently owed until
January 1, 2009.

As of September 30, 2007, the Company was in compliance with all debt covenants
as defined in the respective agreements.

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

                             2008                $        144
                             2009                       4,997
                                                 ------------
                                                 $      5,141
                                                 ============

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. In 2007 the Company applied
for and was granted a waiver by the Internal Revenue Service with regard to a
deferral of $713,000 which was the remainder of the contribution still due for
the 2006 plan year. With respect to the deferral, the Company was required to
make a contribution of $275,000, which was made on September 13, 2007. Total
contributions for the 2006 plan year were $352,000. The Company had also applied
to the Internal Revenue Service to permit a change in method of accounting for
plan assets which was also granted. The Company has contributed $45,000 for the
2007 plan year and will need to contribute approximately $7,000 and $73,000 for
the 2007 plan year by December 31, 2007 and September 15, 2008, respectively,
based on current legislated discount rates and actuarial assumptions.

As a result of the waiver received and the significant contribution made by the
Company on September 13, 2007, an updated benefit obligation valuation was
prepared as of September 30, 2007, which caused a decrease in the minimum
pension liability totaling $1.1 million with a corresponding credit to
Accumulated Other Comprehensive Loss at the September 30, 2007 balance sheet
date.

                                       13
<PAGE>

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

In addition to the liability of $479,000 for this Company sponsored plan, the
Company also has an additional pension liability in the amount of $930,000 at
September 30, 2007 in connection with a terminated multi-employer plan which
requires annual payments of $142,000 inclusive of principal and interest through
2016. In addition, the Company has a $262,000 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 nine months ended
September 30, 2007 and 2006, respectively, are as follows (dollars in
thousands):
<TABLE>
<CAPTION>

                                                           Three Months Ended               Nine Months Ended
                                                              September 30,                   September 30,
                                                      ----------------------------    ----------------------------
         Pension Benefits                                 2007            2006            2007            2006
         ----------------                             ------------    ------------    ------------    ------------
<S>                                                            <C>             <C>             <C>             <C>
         Interest cost                                         284             297             851             891
         Expected return on plan assets                       (351)           (334)         (1,053)         (1,002)
         Recognized net actuarial loss                           9              45              28             135
                                                      ------------    ------------    ------------    ------------
         Net periodic benefit (income) expense        $        (58)   $          8    $       (174)   $         24
                                                      ============    ============    ============    ============
<CAPTION>

                                                           Three Months Ended               Nine Months Ended
                                                              September 30,                   September 30,
                                                      ----------------------------    ----------------------------
         Other Benefits                                   2007            2006            2007            2006
         --------------                               ------------    ------------    ------------    ------------
<S>                                                            <C>             <C>             <C>             <C>
         Interest cost                                $         --    $         13    $         --    $         39
         Amortization of prior service cost                     --              (4)             --             (12)
         Recognized net actuarial (gain)                        --             (20)             --             (60)
                                                      ------------    ------------    ------------    ------------
         Net periodic benefit (gain)                  $         --    $        (11)   $         --    $        (33)
                                                      ============    ============    ============    ============
</TABLE>

In September 2006, the Company determined that it would terminate its post
retirement medical plan as of December 31, 2006. As a result, the Company
reduced the balance sheet liability for post retirement medical costs by $1.7
million as of September 30, 2006 and recorded a corresponding non-cash gain on
the plan termination. As of September 30, 2007, the Company continued to have
approximately $9,000 included in other current liabilities related to payments
expected to be made under the plan during the run off period in 2007 for 2006
claims.

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.


                                       14
<PAGE>

NOTE 9:  INCOME TAXES
         ------------

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

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

As of September 30, 2007, we do not have any uncertain tax positions under FIN
48. As a result, there are no unrecognized tax benefits as of September 30,
2007. If we were to incur any interest and penalties in connection with income
tax deficiencies, we would classify interest in the "interest expense" category
and classify penalties in the "non-interest expense" category within the
condensed consolidated statements of income.

NOTE 10: CUSTOMER CONCENTRATIONS
         -----------------------

The Company's two largest customers (Wal-mart, a mass merchandiser and Jo-Ann
Stores a specialty chain) represented approximately 34% and 43% respectively, of
the Company's net sales in the three months ended September 30, 2007 and
represented approximately 43% and 32% respectively, of the Company's net sales
in the nine months ended September 30, 2007. These customers also represented
approximately 48% and 25% of the Company's net sales during the three months
ended September 30, 2006 and 49% and 23% respectively, of the Company's net
sales in the nine months ended September 30, 2006. These customers in the
aggregate also represented approximately 67% and 53% of the total outstanding
accounts receivable as of September 30, 2007 and December 31, 2006,
respectively. A reduction in sales to either of these customers could adversely
impact the financial condition and results of operations of the Company.

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

                                       15
<PAGE>

NOTE 11: RELATED PARTY TRANSACTIONS
         --------------------------

Robert A. Levinson, a stockholder, officer and director had outstanding loans of
$950,000 and $1.5 million as of September 30, 2007 and December 31, 2006,
respectively. The Company also had $629,000 and $587,000 of accrued interest
payable to Mr. Levinson with respect to such loans as of September 30, 2007 and
December 31, 2006, respectively. He has also pledged collateral in support of
certain Company obligations. See Note 7 for a description of these transactions.

In addition to being a director of the Company, Edward H. Cohen serves as
counsel to Katten Muchin Rosenman LLP, legal counsel to the Company. During the
three and nine months ended September 30, 2007, fees for services provided to
the Company by Katten Muchin Rosenman LLP totaled approximately $39,000 and
$123,000, respectively, and fees for the three and nine months ended September
30, 2006 totaled $68,000 and $129,000, 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 12: MANDATORILY REDEEMABLE PREFERRED STOCK
         --------------------------------------

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

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

The availability of resources to make dividend payments to the holders of Series
A Preferred Stock in the future will depend on the Company's future earnings and
cash flow. Under Delaware law, preferred dividend payments are restricted to the
Company's accumulated or current earnings and profits. Losses in 2005 and
earlier years have depleted the Company's accumulated earnings and profits and,
as such, future preferred dividend payments will be limited to future earnings

                                       16
<PAGE>

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 September 30, 2007, unpaid preferred stock dividends totaled approximately
$510,000 and have been classified as a noncurrent liability on the Company's
balance sheet. The preferred stock is owned 99.5% by Mr. Robert A. Levinson, a
stockholder, officer and director of the Company. The mandatorily redeemable
preferred stock is redeemable at $1.00 per share plus accrued and unpaid
dividends.

NOTE 13: COMMITMENT AND CONTINGENCIES
         ----------------------------

Environmental. The Company is subject to a number of federal, state and local
environmental laws and regulations, including those concerning the treatment,
storage and disposal of waste, the discharge of effluents into waterways, the
emissions of substances into the air and various health and safety matters. In
addition, CERCLA and comparable state statutes generally impose joint and
several liability on present and former owners and operators, transporters and
generators for remediation of contaminated properties regardless of fault. These
parties are typically identified as "potentially responsible parties" or "PRPs."
On or about June 1992 the Company received notices from the United States
Environmental Protection Agency ("EPA") that the Company, Belding Corticelli
Thread Co. ("BCTC") (a discontinued operation) and Carlyle Manufacturing
Company, Inc. ("CM") (a subsidiary) had been identified, along with 1,300 other
parties, as PRPs in connection with the alleged release of hazardous substances
from the Solvents Recovery Service of New England Superfund Site in Southington,
Connecticut (the "SRS site"). The Company settled its alleged liability in
connection with the SRS site by paying $1,626 in connection with a settlement
offered to de minimis parties at the SRS site in 1994. BCTC and CM, along with
other PRPs, committed to perform the Remedial Investigation and Feasibility
Study ("RIFS") and two Non-Time Critical Removal Actions ("NTCRA") at the SRS
site. The RIFS, and the first NTCRA (except for certain maintenance activities)
have been completed. BCTC and CM have been allocated approximately .04% and
1.34%, respectively, of costs incurred to date, based on their alleged volume of
waste shipped to the SRS site. In September of 2005, the EPA issued its Record
of Decision ("ROD") for the SRS site. In September 2006, the EPA sent special
notice letters to the PRPs to initiate consent decree negotiations concerning,
among other things, the scope of the work to be performed under the ROD and
reimbursement of all, or a significant portion, of EPA's past response costs and
future costs to be incurred in overseeing the remedial work. In December 2006,
CM and BCTC joined in the SRS PRP Group offer to the EPA to (i) construct and
operate the remedial action contemplated by the ROD (subject to certain proposed
changes) and (ii) reimburse EPA for portions of its past and future site-related
costs. Assuming negotiations between EPA and the PRP Group are successful, it is
possible that payments by parties to the Consent Decree would begin as early as
2008.

In addition, the State of Connecticut and the Southington Water District have
sought reimbursement from the PRP Group for alleged Natural Resource Damages and
other claimed damages for supposed temporary loss of use of groundwater and
consequential loss of future use of groundwater due to contamination on and
emanating from the SRS site. In addition, the PRP Group has also received a
demand from the federal NRD trustees.

The issues referred to above do not include costs that the Company or its
subsidiaries may incur for consultants' or attorneys' fees or for administrative
expenses in connection with the participation of any of them as part of a PRP
group. The accrual the Company has established for these and other environmental
liabilities, in the amount of $1.3 million, represents the Company's best

                                       17
<PAGE>

current estimate of the costs of addressing all identified environmental
situations, based on the Company's review of currently available evidence, and
takes into consideration the Company's prior experience in remediation and that
of other companies, as well as public information released by the EPA and by the
PRP groups in which the Company or its subsidiaries are participating. Although
the reserve currently appears to be sufficient to cover these environmental
liabilities, there are uncertainties associated with environmental liabilities,
and no assurances can be given that the Company's estimate of any environmental
liability will not increase or decrease in the future. The uncertainties relate
to the difficulty of estimating the ultimate cost of any remediation that may be
undertaken, including any operating costs associated with remedial measures, the
duration of any remediation required, the amount of consultants' or attorneys'
fees that may be incurred, the administrative costs of participating in the PRP
groups, and any additional costs or requirements that may be imposed or sought
by federal, state or local agencies.

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


                                       18
<PAGE>


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

Forward-Looking Statements

Introduction

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

Overview

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

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

Products and Customers

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

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

                                       19
<PAGE>

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

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

The Company's accounts include fabric and craft specialty chains, mass
merchandisers carrying buttons and crafts, distributors and many independent
stores. Mass merchandisers and specialty chain customers are characterized by
the need for sophisticated electronic support, rapid turn-around of merchandise
and direct-to-store service to customers with hundreds to thousands of locations
nationwide. The Craft business enjoys long-standing ties to all of its key
accounts and the average relationship with its ten largest customers extends
over 30 years. Due to the large account nature of its customer base, most
customer contact is coordinated by management and additional sales coverage is
provided by regional sales managers. Many smaller retailers are serviced by
independent representatives and representative organizations.

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

                                       20
<PAGE>

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 two largest customers (Wal-mart, a mass merchandiser and Jo-Ann
Stores a specialty chain) represented approximately 34% and 43% respectively, of
the Company's net sales in the three months ended September 30, 2007 and
represented approximately 43% and 32% respectively, of the Company's net sales
in the nine months ended September 30, 2007. These customers also represented
approximately 48% and 25% of the Company's net sales during the three months
ended September 30, 2006 and 49% and 23% respectively, of the Company's net
sales in the nine months ended September 30, 2006. These customers in the
aggregate also represented approximately 67% and 53% of the total outstanding
accounts receivable as of September 30, 2007 and December 31, 2006,
respectively. A reduction in sales to either of these customers could adversely
impact the financial condition and results of operations of the Company.

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

In direct response to these factors, the Company has taken steps to reduce its
operating costs since the first quarter of 2007.

Discontinued Textile Operations

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

During 2006, the Company disposed of substantially all remaining Textile
business inventory and had inventory of $15,000 with no liabilities at December
31, 2006. As of September 30, 2007 the Company had no Textile business assets
and liabilities remaining. The Company does not expect to incur any additional
exit costs.

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


                                       21
<PAGE>
<TABLE>
<CAPTION>

                                                                    Three Months Ended               Nine Months Ended
                                                                        September 30,                  September 30,
                                                                ----------------------------    ----------------------------
                                                                    2007            2006            2007            2006
                                                                ------------    ------------    ------------    ------------
<S>                                                             <C>             <C>             <C>             <C>
         Sales                                                  $         --    $         47    $         39    $      2,393
         Cost of sales                                                    --              36              17           2,022
                                                                ------------    ------------    ------------    ------------
         Gross profit                                                     --              11              22             371
         Selling, general and administrative expense                      --              --              --             269
         Interest expense                                                 --              --              --             177
                                                                ------------    ------------    ------------    ------------
         Results of discontinued operations, net of tax         $         --    $         11    $         22    $        (75)
                                                                ============    ============    ============    ============
</TABLE>


Effective September 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.

Competition

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

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,

                                       22
<PAGE>

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.

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.

                                       23
<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 unaudited 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 carryforwards before they expire. We assess our deferred tax
valuation allowance on a quarterly basis in light of certain factors, including
our financial performance, and adjust the allowance if necessary

Pension Liabilities

The determination of pension obligations and the related pension expense or
credits to operations involves significant estimates. The most significant
estimates are the discount rate used to calculate the actuarial present value of
benefit obligations and the expected long-term rate of return on assets used in
calculating the pension charges or credits for the year. Under the Company's
defined benefit plan, the Company uses discount rates based on yields of highly
rated fixed income debt securities at the end of the year. At September 30,
2007, the weighted average discount rate for the plan was 5.75%. The Company
uses an expected long-term rate of return on assets that is based on both past
performance of the plan's assets and estimated future performance of the assets.
At September 30, 2007, the expected long-term rate of return used was 8%. Due to
the nature of the plan's assets and the volatility of debt and equity markets,
results may vary significantly from year to year.

In 2007 the Company applied for and was granted a waiver by the Internal Revenue
Service with regard to a deferral of $713,000 which was the remainder of the
contribution still due for the 2006 plan year. With respect to the deferral, the
Company was required to make a contribution of $275,000, which was made on
September 13, 2007. Total contributions for the 2006 plan year were $352,000.
The Company had also applied to the Internal Revenue Service to permit a change
in method of accounting for plan assets, which was also granted. The Company has
contributed $45,000 for the 2007 plan year and will need to contribute
approximately $7,000 and $73,000 for the 2007 plan year by December 31, 2007 and
September 15, 2008, respectively, based on current legislated discount rates and
actuarial assumptions.

As a result of the waiver received and the significant contribution made by the
Company on September 13, 2007, an updated benefit obligation valuation was
prepared as of September 30, 2007, which caused a decrease in the minimum
pension liability totaling $1.1 million with a corresponding credit to
Accumulated Other Comprehensive Loss at the September 30, 2007 balance sheet
date.

In addition to the liability of $479,000 for this Company sponsored plan, the
Company also has an additional pension liability in the amount of $930,000 at
September 30, 2007 in connection with a terminated multi-employer plan which
requires annual payments of $142,000 inclusive of principal and interest through
2016. In addition, the Company has a $262,000 deferred compensation liability
payable to the former owner of an acquired business.

                                       24
<PAGE>

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 unaudited condensed consolidated financial
statements could have a material adverse effect on our business, results of
operations and financial condition.

Revenue Recognition

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

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

Stock-Based Compensation

The Company follows SFAS No. 123 (revised 2004) ("SFAS No. 123(R)"),
"Share-Based Payment," to account for stock-based compensation. Among other
items, SFAS No. 123(R) requires companies to recognize in their financial
statements the cost of services received in exchange for awards of equity
instruments based on the grant date fair value of those awards. The Company
elected to use the modified prospective method for adoption, which requires
compensation expense to be recorded for all unvested stock options and other
equity-based compensation beginning in the first quarter of adoption. For all
unvested options outstanding as of January 1, 2006, the previously measured but
unrecognized compensation expense, based on the fair value at the original grant
date, has been or will be recognized in the Company's financial statements over
the remaining vesting period. For equity-based compensation awards granted or
modified subsequent to January 1, 2006, compensation expense, based on the fair
value on the date of grant or modification has been or will be recognized in the
Company's consolidated financial statements over the vesting period. The Company
utilizes the Black-Scholes option pricing model to measure the fair value of
stock options.

                                       25
<PAGE>

Results of Operations

Three Months Ended September 30, 2007 Compared with Three Months Ended September
30, 2006

Sales during the three months ended September 30, 2007 totaled $5.1 million as
compared to $5.6 million during the three months ended September 30, 2006. The
decrease in sales is attributable in part to the reorganization under Chapter 11
of one of the Company's largest customers and the cancellation of two product
lines by the Company's largest customer. The decrease in sales in the third
quarter of 2007 was offset by an annual modular change by a major customer.
There was no such modular change for this customer in 2006.

Gross profit during the three months ended September 30, 2007 totaled $1.6
million as compared to $1.7 million during the same period last year. The gross
profit was 31.1% during the third quarter of 2007 as compared to 29.8% during
the third quarter of 2006. The increase in gross profit percent in 2007 was the
result of a favorable product mix and reduced shipping costs during the third
quarter of 2007.

Selling, general and administrative expenses totaled $1.1 million during the
three months ended September 30, 2007 as compared to $1.5 million during the
three months ended September 30, 2006, a decrease of approximately $400,000 or
27%. The decrease in selling, general and administrative expenses in the third
quarter of 2007 was the direct result of management's efforts to lower operating
costs due to the reduction in sales as described above. This decrease included
approximately $186,000 of compensation costs due to lower headcount in 2007,
$65,000 of pension expense and $149,000 of various selling, general and
administrative expenses.

Income from continuing operations before gain on termination of post retirement
plan, interest, preferred dividends and income tax expense (benefit) during the
three months ended September 30, 2007 totaled $491,000 as compared to $168,000
during the same period last year. The increase in operating income was the
result of higher gross profit and lower selling, general and administrative
expenses as described above.

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

Interest expense during the three months ended September 30, 2007 totaled
$242,000 as compared to $330,000 during the same period last year. The reduction
in interest expense in the third quarter of 2007 is partly due to an accrual of
$100,000 being recorded in 2006 of interest payable to the State of Connecticut
related to the settlement of 1994 and 1995 state income tax audits of a
previously disposed of entity, Danfield Threads, Inc. The average outstanding
debt during the third quarter of 2007 was $10.5 million as compared to $11.7
million during the third quarter of 2006. The weighted average interest rate
during the third quarter of 2007 was 7.53% as compared to 7.42% during the third
quarter of 2006.

                                       26
<PAGE>

Dividends on mandatorily redeemable preferred stock totaled $86,000 during the
three months ended September 30, 2007 as compared to $68,000 during the three
months ended September 30, 2006. The increase in dividends was a result of the
unpaid accumulated dividends that also began to accrue dividends as of June 15,
2007, because the Company was not able to redeem the first installment of the
mandatorily redeemable preferred stock on June 15, 2007, the first redemption
date, which under the terms of the Company's Certificate of Incorporation
prohibit the mandatory redemption of the Series A Preferred Stock when the
redemption contravene or cause default under any contract, agreement or other
instrument by which the Company or its subsidiaries or any of their property is
bound. Under the terms of the Company's credit facility with CIT, preferred
stock redemption payments are prohibited and preferred stock dividend payments
are limited to $300,000 per year.

The Company has a net operating loss carryforward and a full valuation allowance
against its deferred tax asset. The Company was not required to record a
provision for income taxes related to its 2006 or 2007 pretax income and will
not be required to do so in the future except in instances where minimum taxes
are payable. An income tax benefit of $6,000 was recorded as a result of a
refund of state income taxes during the third quarter of 2007. There was an
income tax provision of $200,000 in the third quarter of 2006 which was the
result of a settlement of 1994 and 1995 state income tax audits of a previously
disposed of entity, Danfield Threads, Inc.


Nine months Ended September 30, 2007 Compared with Nine months Ended September
30, 2006

Sales during the nine months ended September 30, 2007 totaled $14.6 million as
compared to $16.4 million during the nine months ended September 30, 2006. The
decrease in sales is attributable to the reorganization under Chapter 11 of one
of the Company's largest customers and the cancellation of two product lines by
the Company's largest customer.

Gross profit during the nine months ended September 30, 2007 totaled $4.7
million as compared to $5.6 million during the same period last year. The gross
profit for the year to date period was 32.2% as compared to 33.9% during the
year to date period in 2006. The decrease in gross profit percent in 2007 was
the result of reduced leverage on fixed costs of sales during the year to date
period.

Selling, general and administrative expenses totaled $3.6 million during the
nine months ended September 30, 2007 as compared to $4.5 million during the nine
months ended September 30, 2006, a decrease of approximately $900,000 or 20%.
The decrease in selling, general and administrative expenses for the nine months
ended 2007 was the result of management's efforts to lower operating costs
beginning in the first quarter of 2007, due to the reduction in sales as
described above. The decrease in selling, general and administrative expenses
for the nine months ended September 30, 2007 included $112,000 of severance cost
and $86,000 of Hancock bad debt provision which were offset by lower
compensation costs of $485,000, due to lower headcount in 2007, pension expense
of $196,000 and $219,000 of various selling, general and administrative
expenses.

Income from continuing operations before gain on termination of post retirement
plan, interest, preferred dividends and income tax expense (benefit) totaled
$1.1 million during the nine months ended September 30, 2007 and 2006. While
there was a reduction in sales of $1.8 million for the nine months ended
September 30, 2007 as compared to the same period last year, there was no change

                                       27
<PAGE>

in income from continuing operations before gain on termination of post
retirement plan, interest, preferred dividends and income tax. This was related
to management's efforts that lowered operating costs.

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

Interest expense during the nine months ended September 30, 2007 totaled
$653,000 as compared to $625,000 during the same period last year. The average
outstanding debt during the nine months of 2007 was $9.9 million as compared to
$11.5 million during the same period of 2006. The weighted average interest rate
during the nine months of 2007 was 7.55% as compared to 7.09% during nine months
of 2006.

Dividends on mandatorily redeemable preferred stock totaled $224,000 during the
nine months ended September 30, 2007 as compared to $204,000 during the nine
months ended September 30, 2006. The increase in dividends was a result of the
unpaid accumulated dividends that also began to accrue dividends as of June 15,
2007, because the Company was not able to redeem the first installment of the
mandatorily redeemable preferred stock on June 15, 2007, the first redemption
date, which under the terms of the Company's Certificate of Incorporation
prohibit the mandatory redemption of the Series A Preferred Stock when the
redemption contravene or cause default under any contract, agreement or other
instrument by which the Company or its subsidiaries or any of their property is
bound. Under the terms of the Company's credit facility with CIT, preferred
stock redemption payments are prohibited and preferred stock dividend payments
are limited to $300,000 per year.

The Company has a net operating loss carryforward and a full valuation allowance
against its deferred tax asset. The Company was not required to record a
provision for income taxes related to its 2006 or 2007 pretax income and will
not be required to do so in the future except in instances where minimum taxes
are payable. In 2007 an income tax benefit of $6,000 was recorded which was a
result of a refund of state income taxes. There was an income tax provision of
$200,000 in 2006 which was the result of a settlement of 1994 and 1995 state
income tax audits of a previously disposed of entity, Danfield Threads, Inc.
This was offset by a refund of state income taxes which totaled $23,000.

Net income from continuing operations for the nine months ended September 30,
2007 totaled $231,000 as compared to $1.7 million during the nine months ended
September 30, 2006. The net income for continuing operations for 2006 included a
$1.7 million of non cash gain which was the termination of the Company's post
retirement medical plan. Excluding this non-cash gain, the Company's income from
continuing operations was approximately $81,000 during the nine months ended
September 30, 2006.


Liquidity and Capital Resources

The accompanying unaudited condensed consolidated financial statements have been
prepared on a going concern basis which contemplates the realization of assets
and the satisfaction of liabilities and commitments in the normal course of
business. The Company's ability to continue as a going concern is dependent upon
its ability to execute management's plans to be profitable, generate positive
cash flow from operations and to continue to have access to existing financing
to meet obligations and repay liabilities when they come due, including amounts
payable with respect to claimed environmental liabilities in connection with the

                                       28
<PAGE>

Solvents Recovery Service of New England Superfund Site in the event the parent
corporation is determined to be responsible for these claimed liabilities and
the redemption of preferred stock due in 2007 and thereafter. Although
management continues to pursue these plans and believes it will be successful,
there is no assurance that the Company will be successful in generating such
profitable operations or maintaining such access to existing financing or
obtaining financing for such environmental obligations on terms acceptable to
the Company. The outcome of these matters cannot be predicted with any certainty
at this time. These factors raise substantial doubt about the Company's ability
to continue as a going concern. Management plans to satisfy the Company's
capital needs through cash generated from operations, advances under its
facilities with CIT and stockholder loans. These unaudited 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.

These circumstances caused our independent registered public accounting firm to
include an explanatory paragraph in their reports dated March 16, 2007 and March
15, 2006 regarding their concerns about our ability to continue as a going
concern. Substantial doubt about our ability to continue as a going concern may
create negative reactions to the price of the common shares of our stock and we
may have a more difficult time obtaining financing.

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

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, or
that it can obtain additional financing on favorable terms, or that the Company
will be able to obtain any needed additional financing, in which case the
Company's operations would be materially adversely affected and it could be
forced to cease operations. Robert A. Levinson, the Company's Chairman and
principal stockholder, has agreed to continue to personally support the
Company's cash requirements through January 2, 2009 by providing short-term
loans to the Company up to a maximum of $3.0 million. As of September 30, 2007,
there was $2.1 million of borrowing available from Mr. Levinson under this
agreement. If we (1) do not substantially achieve our overall projected revenue
levels for 2007, (2) fail to operate within our projected expense levels as
reflected in our business operating plans, or (3) do not receive the ongoing
support of our lenders, then we will be unable to meet our cash and operating
requirements for the next twelve months, which would in turn require us to seek
additional financing to fund operations and/or implement additional expense
reductions. The Company has implemented several actions to reduce losses and
improve cash flow, including exiting the textile business, reduction of
headcount, elimination of non-profitable product lines, termination of the post
retirement medical plan and reductions in other general and administrative
costs. However, there can be no assurance that Mr. Levinson will continue to
personally support the Company's cash requirements, that such support from Mr.
Levinson, together with the support of the Company's commercial lenders, will be
sufficient to address the Company's liquidity needs and cash requirements or
that the actions taken by management will be sufficient to allow the Company to
generate net income from continuing operations.

                                       29
<PAGE>

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

Failing to substantially achieve our projected cash flow levels for 2007 may
also result in a default under our credit agreement with our lenders. If a
default were to occur and is not timely cured by us or waived by our lenders, or
if this were to happen and our debt could not be refinanced or restructured, our
lenders could pursue remedies, including: (1) penalty rates of interest; (2)
demand for immediate repayment of the debt; and/or (3) the foreclosure on any of
our assets securing the debt. If this were to happen and we were liquidated or
reorganized after payment to our creditors, there would likely be insufficient
assets remaining for any distribution to our stockholders.

At September 30, 2007, the Company's principal sources of liquidity included
cash of $41,000 and trade accounts receivable of $3.7 million. There was no
unused borrowing capacity available under the Company's credit facility with CIT
as of September 30, 2007. The Company also had an additional $2.1 million of
borrowing available from Mr. Levinson who has agreed to fund up to $3.0 million
of temporary advances to the Company.

The following discussion regarding the Company's cash flows for the nine months
ended September 30, 2007 and 2006 is inclusive of both continuing and
discontinued operating activities.

Cash Flow Summary:
(in thousands)                                          Nine months Ended
                                                          September 30,
                                                 ----------------------------
                                                      2007            2006
                                                 ------------    ------------
         Net cash provided by (used in):
              Operating activities               $       (785)   $        476
              Investing activities                        (58)            (85)
              Financing activities                        815            (369)
                                                 ------------    ------------
              Net increase (decrease) in cash    $        (28)   $         22
                                                 ============    ============

Net cash flow used in operating activities totaled $785,000 during the nine
months ended September 30, 2007, as compared to $476,000 of net cash provided by
operating activities during the nine months ended September 30, 2006.

In 2007, the components of net cash used in operating activities were $821,000
of cash provided by net income adjusted for non-cash items, consisting primarily
of depreciation and amortization, non-cash stock-based compensation, accrued
interest on stockholder loans and accrued dividends on preferred stock, which
were offset by $1.6 million of cash used in operating assets and liabilities.

                                       30
<PAGE>

In 2006, the components of net cash provided by operating activities were
$679,000 of net income adjusted for non-cash items, consisting primarily of gain
on termination of post retirement medical plan, depreciation and amortization,
non-cash stock-based compensation, accrued interest on stockholder loans and
accrued dividends on preferred stock less $203,000 of cash used in operating
assets and liabilities.

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

Changes in accounts receivable utilized $711,000 of cash flow in 2007 as
compared to $346,000 in 2006. The primary reason for the decreased cash usage
related to accounts receivable was the timing of a large annual modular change
which occurred in August of 2007 for a major customer. This customer did not
have a modular change in 2006.

Changes in inventories provided $311,000 in cash flow in 2007 as compared to
$1.45 million in 2006. During the nine months ended September 30, 2006, the
Company had been liquidating inventory related to its discontinued textile
business.

Changes in accounts payable provided $128,000 of cash flow in 2007 as compared
to utilizing $893,000 of cash flow in the nine months ended September 30, 2006.
The reduction in accounts payable in 2006 was the result of the payment of 2005
accounts payable balances related to the discontinued Textile segment but in
2007 the Company negotiated better terms with its vendors.

Changes in pension liabilities utilized $568,000 during the nine months ended
September 30, 2007 as compared to $131,000 during the same period in 2006. This
increase was due primarily to a contribution of $275,000 with respect to the
2006 Plan year, based on a waiver that was granted to the Company by the
Internal Revenue Service.

Net cash used in investing activities totaled $58,000 during the nine months
ended September 30, 2007, as compared to $85,000 during the same period in 2006.
This decrease was primarily a result of higher capital expenditures during 2006.

Net cash provided by financing activities totaled $815,000 during the nine
months ended September 30, 2007 as compared to $369,000 used in financing
activities during the same period last year. In 2007 cash flow from operating
activities was negative. This was primarily due to a large modular change in the
third quarter for a major customer and a contribution of $275,000 for a Company
sponsored pension plan. As a result, $815,000 was provided by financing
activities to fund cash used in operations and cash used in investing
activities. In 2006 the cash flow from operating activities was sufficient to
fund operating and investing activities.

During the nine months ended September 30, 2007, the Company had net repayments
to Mr. Levinson of $550,000 against his stockholder loans as compared to
$350,000 during the nine months ended September 30, 2006. The outstanding
stockholder borrowings are the result of funding of operating activities of the
discontinued Textile segment in earlier years.

Total borrowings during the first nine months of 2007 and 2006 under the CIT
revolving credit facility were $13.9 million and $15.8 million respectively;
total repayments during the periods under this facility were $12.4 million and
$14.9 million, respectively. Repayments under the Company's term loan totaled
$108,000 during the nine months ended September 30, 2007 and 2006. Net amounts
repaid to factor totaled $797,000 in 2006; there were no such repayments in
2007.

                                       31
<PAGE>

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 September 30, 2007, the Company's credit facility with CIT (the "CIT
Facility") provided for maximum aggregate borrowings of up to $7.5 million in
the form of revolving credit, letters of credit and term loans. The CIT Facility
is comprised of separate financing agreements with the Company and its
wholly-owned subsidiary, Blumenthal Lansing Company, LLC ("Blumenthal"). There
was $137,000 of unused availability under the Company's credit facility with CIT
as of September 30, 2007.

The CIT Facility provides for (i) a term loan to the Company (the "Term Loan")
in the initial amount of $2.0 million, $1.2 million of which was outstanding at
September 30, 2007, (ii) revolving credit advances to the Company, $1.5 million
of which was outstanding at September 30, 2007 and (iii) revolving credit
advances to Blumenthal based upon eligible accounts receivable and inventory,
$4.4 million of which was outstanding at September 30, 2007, and a Letter of
Credit facility with a limit of $500,000, of which there was none outstanding at
September 30, 2007. The Term Loan amortizes $12,000 per month followed by a
final installment payment of $1.0 million due on January 1, 2009. The revolving
credit advances are also due on January 1, 2009. CIT may terminate the Credit
facility upon 60 days written notice. $2.5 million of the amounts outstanding
under the CIT Facility bear interest at Chase Bank N.A. prime rate (8.25%) and
amounts in excess of $2.5 million bear interest at the Chase Bank N.A. prime
rate plus 0.5% (8.75%) with a minimum rate of 5.0%.

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

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

On July 26, 2006, the CIT Facility was amended to increase the advance
percentage against the value of Eligible Inventory (as defined in the agreement)
to 40% (from 20%) of Eligible Inventory with respect to the revolving credit

                                       32
<PAGE>

portion of the CIT Facility. Total borrowing availability under the entire CIT
Facility remains at $7.5 million. In addition, the guaranty of the CIT Facility
by Robert A. Levinson, the Company's Chief Executive Officer and principal
shareholder, was removed and the applicable interest rate was changed to the
Chase Rate on the first $2.5 million of average net balances owed, and the Chase
Rate plus .50% per annum on average net balances owed in excess of $2.5 million,
but in either case not less than 5% per annum.

The Company also has a factoring agreement with CIT, which matures on January 1,
2009. As of September 30, 2007 there was no balance due to or from CIT under the
factoring agreement.

The promissory note payable to JPMorgan in the amount of $3.0 million is dated
May 2, 2002 and has a maturity date of January 1, 2009, as amended. The note
bears interest at a fixed rate per annum equal to the Adjusted LIBOR Rate
applicable to such note plus 0.75% (a "Eurodollar Loan"). The interest rate on
the note at September 30, 2007 was 6.14%. In addition, Robert A. Levinson, a
stockholder, officer and director of the Company, has provided certain
additional collateral guaranteeing the note.

Mr. Robert A. Levinson, a stockholder, has agreed to personally support the
Company's cash requirements to enable it to fulfill its obligations through
January 2, 2009, to the extent necessary, up to a maximum amount of $3.0
million. The Company believes its reliance on such commitment is reasonable and
that Mr. Levinson has sufficient liquidity and net worth to honor such
commitment. The Company believes that Mr. Levinson's written commitment provides
the Company with the legal right to request and receive such advances. In the
event that Mr. Levinson did not honor such commitment, the Company would have
the right to sue Mr. Levinson for breach of his agreement. On March 20, 2007,
Mr. Levinson reaffirmed this undertaking in writing in a commitment letter dated
March 13, 2007.

The Company had outstanding loans payable to Mr. Levinson totaling $950,000 and
$1.5 million as of September 30, 2007 and December 31, 2006, respectively. In
addition, Mr. Levinson has pledged collateral in support of certain Company
obligations. Accrued interest on Mr. Levinson's loans has been classified as
noncurrent liabilities on the Company's balance sheet and totaled $629,000 and
$587,000, respectively at September 30, 2007 and December 31, 2006. He has also
agreed not to demand any repayment of principal or interest currently owed until
January 1, 2009.

As of September 30, 2007, the Company was in compliance with all debt covenants
as defined in the respective agreements.

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


                             2008                $        144
                             2009                       4,997
                                                 -------------
                                                 $      5,141
                                                 ============

The Series A Preferred Stock is subject to mandatory redemption, to the extent
the Company may lawfully do so, in three equal annual installments one of which
was due on June 15, 2007, and the remaining two on June 15, 2008 and June 15,
2009, in each case, from funds legally available therefore, at a price per share
of Series A Preferred Stock equal to $1 per share, together with an amount

                                       33
<PAGE>

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

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

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

As of September 30, 2007, unpaid preferred stock dividends totaled approximately
$510,000 and have been classified as a noncurrent liability on the Company's
balance sheet. The preferred stock is owned 99.5% by Mr. Robert A. Levinson, a
stockholder, officer and director of the Company. The mandatorily redeemable
preferred stock is redeemable at $1.00 per share plus accrued and unpaid
dividends.

Off Balance Sheet Arrangements

The Company has no off balance sheet arrangements.

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

                                       34
<PAGE>

and experience an acceptable level of sell-through. The Company develops and
introduces new program ideas on a regular basis. However, there is no assurance
that its retail customers will buy the new product lines and if they do, there
is no assurance the consumer will purchase the new product at an acceptable
level.

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

Impact of Inflation

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

Recently Issued Accounting Pronouncements

As of the date of filing, no new accounting pronouncements were issued that are
expected to have a material impact on the Company's consolidated financial
position or results of operations.


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
September 30, 2007, 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 borrowing in excess of $2.5
million but in either case not less than 5% per annum. Our indebtedness with JP
Morgan Chase was at a 6.14% interest rate (based on adjusted LIBOR plus .75%) at
September 30, 2007. 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 $101,000 during the next fiscal year.

                                       35
<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 2007 are expected to be from our top two accounts; these
accounts represented 67% of our trade accounts receivable at September 30, 2007.
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 (i) accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer as
appropriate to allow timely decisions regarding required disclosure and (ii)
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

                                       36
<PAGE>

possible controls and procedures. We believe that our disclosure controls and
procedures provide such reasonable assurance.

No change occurred in the Company's internal controls concerning financial
reporting during the third quarter of the fiscal year ended December 31, 2007
that has materially affected, or is reasonably likely to materially affect, the
Company's internal controls over financial reporting.




                                       37
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Environmental. The Company is subject to a number of federal, state and local
environmental laws and regulations, including those concerning the treatment,
storage and disposal of waste, the discharge of effluents into waterways, the
emissions of substances into the air and various health and safety matters. In
addition, CERCLA and comparable state statutes generally impose joint and
several liability on present and former owners and operators, transporters and
generators for remediation of contaminated properties regardless of fault. These
parties are typically identified as "potentially responsible parties" or "PRPs."
On or about June 1992 the Company received notices from the United States
Environmental Protection Agency ("EPA") that the Company, Belding Corticelli
Thread Co. ("BCTC") (a discontinued operation) and Carlyle Manufacturing
Company, Inc. ("CM") (a subsidiary) had been identified, along with 1,300 other
parties, as PRPs in connection with the alleged release of hazardous substances
from the Solvents Recovery Service of New England Superfund Site in Southington,
Connecticut (the "SRS site"). The Company settled its alleged liability in
connection with the SRS site by paying $1,626 in connection with a settlement
offered to de minimis parties at the SRS site in 1994. BCTC and CM, along with
other PRPs, committed to perform the Remedial Investigation and Feasibility
Study ("RIFS") and two Non-Time Critical Removal Actions ("NTCRA") at the SRS
site. The RIFS, and the first NTCRA (except for certain maintenance activities)
have been completed. BCTC and CM have been allocated approximately .04% and
1.34%, respectively, of costs incurred to date, based on their alleged volume of
waste shipped to the SRS site. In September of 2005, the EPA issued its Record
of Decision ("ROD") for the SRS site. In September 2006, the EPA sent special
notice letters to the PRPs to initiate consent decree negotiations concerning,
among other things, the scope of the work to be performed under the ROD and
reimbursement of all, or a significant portion, of EPA's past response costs and
future costs to be incurred in overseeing the remedial work. In December 2006,
CM and BCTC joined in the SRS PRP Group offer to the EPA to (i) construct and
operate the remedial action contemplated by the ROD (subject to certain proposed
changes) and (ii) reimburse EPA for portions of its past and future site-related
costs. Assuming negotiations between EPA and the PRP Group are successful, it is
possible that payments by parties to the Consent Decree would begin as early as
2008.

In addition, the State of Connecticut and the Southington Water District have
sought reimbursement from the PRP Group for alleged Natural Resource Damages and
other claimed damages for supposed temporary loss of use of groundwater and
consequential loss of future use of groundwater due to contamination on and
emanating from the SRS site. In addition, the PRP Group has also received a
demand from the federal NRD trustees.

The issues referred to above do not include costs that the Company or its
subsidiaries may incur for consultants' or attorneys' fees or for administrative
expenses in connection with the participation of any of them as part of a PRP
group. The accrual the Company has established for these and other environmental
liabilities, in the amount of $1.3 million, represents the Company's best
current estimate of the costs of addressing all identified environmental
situations, based on the Company's review of currently available evidence, and
takes into consideration the Company's prior experience in remediation and that
of other companies, as well as public information released by the EPA and by the
PRP groups in which the Company or its subsidiaries are participating. Although
the reserve currently appears to be sufficient to cover these environmental
liabilities, there are uncertainties associated with environmental liabilities,

                                       38
<PAGE>

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

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


ITEM 1A. RISK FACTORS

There has been a material change to our Risk Factors from those presented in our
2006 Form 10-K. The "Pension Funding" paragraph was removed because the Company
had applied for and received a waiver from the Internal Revenue Service in
September 2007. There have also been certain updating changes to the Risk
Factors "Going Concern," and "A Substantial Portion Of The Company's Revenues
And Gross Profits Is Derived From Two Large Customers And The Loss Of Either Of
These Customers Could Substantially Reduce Our Revenues," as presented below.


Going Concern

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

These circumstances caused our independent registered public accounting firm to
include an explanatory paragraph in their reports dated March 16, 2007 and March
15, 2006 regarding their concerns about our ability to continue as a going

                                       39
<PAGE>

concern. Substantial doubt about our ability to continue as a going concern may
create negative reaction to the price of the common shares of our stock and we
may have a more difficult time obtaining financing.


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

The Company's two largest customers (Wal-mart, a mass merchandiser and Jo-Ann
Stores a specialty chain) represented approximately 34% and 43% respectively, of
the Company's net sales in the three months ended September 30, 2007 and
represented approximately 43% and 32% respectively, of the Company's net sales
in the nine months ended September 30, 2007. These customers also represented
approximately 48% and 25% of the Company's net sales during the three months
ended September 30, 2006 and 49% and 23% respectively, of the Company's net
sales in the nine months ended September 30, 2006. These customers in the
aggregate also represented approximately 67% and 53% of the total outstanding
accounts receivable as of September 30, 2007 and December 31, 2006,
respectively. A reduction in sales to either of these customers could adversely
impact the financial condition and results of operations of the Company.

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

In direct response to these factors, the Company has taken steps to reduce its
operating costs since the first quarter of 2007.

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.

                                       40
<PAGE>

ITEM 6.  EXHIBITS

(a)      Exhibits

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.

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


                                       41
<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: November 13, 2007               /s/ Robert A. Levinson
      -----------------               ------------------------------------------
                                      Robert A. Levinson
                                      Chairman of the Board, President and Chief
                                      Executive Officer


Date: November 13, 2007               /s/ Pramila Devi Shaheed
      -----------------               ------------------------------------------
                                      Pramila Devi Shaheed
                                      Chief Financial Officer and Secretary



                                       42
<PAGE>

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


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.



                                       43