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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC
20549

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FORM 10-Q


|                                                         
|---------------------------------------------------------
|x QUARTERLY
  REPORT PURSUANT TO SECTION 13 OR 15(d)     
|OF THE SECURITIES EXCHANGE ACT OF 1934                   
|                                                         
|For the quarterly period ended June
  30, 2008           
|                                                         
|OR                                                       
|                                                         
|o TRANSITION REPORT
  PURSUANT TO SECTION 13 OR 15(d)    
|OF THE SECURITIES EXCHANGE ACT OF 1934                   
|                                                         
|For the transition period from __________ to ____________
|                                                         
|Commission File 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)

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 o

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

|                                                                          |                              
|------------------------------------------------------------------------- | -----------------------------
|Large
  accelerated filer o                                               | Accelerated
  filer o        
|                                                                         
|Non-accelerated
  filer o (Do not check
  if a smaller reporting company) | Smaller
  reporting company x

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


Yes o No x


As of August 14, 2008,
5,331,881 shares of Common Stock, par value $0.01 per share, were issued and
outstanding.

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LEVCOR
INTERNATIONAL, INC.

INDEX

|         |                                                                                                                                          |     
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------- | ----
|         |                                                                                                                                          | Page
|         |                                                                                                                                          |     
|PART I.  | FINANCIAL INFORMATION                                                                                                                    |     
|         |                                                                                                                                          |     
|Item 1.  | Financial Statements                                                                                                                     |     
|         |                                                                                                                                          |     
|         | Condensed Consolidated Balance Sheets
  as of June 30, 2008 (Unaudited) and December 31, 2007                                            | 1   
|         |                                                                                                                                          |     
|         | Condensed Consolidated Statements of Operations (Unaudited)
  for the three and six months ended June 30, 2008 and 2007                  | 2   
|         |                                                                                                                                          |     
|         | Condensed Consolidated Statements of Comprehensive Income (Loss)
  (Unaudited) for the three and six months ended June 30, 2008 and 2007 | 3   
|         |                                                                                                                                          |     
|         | Condensed Consolidated Statements of Cash Flows (Unaudited)
  for the six months ended June 30, 2008 and 2007                            | 4   
|         |                                                                                                                                          |     
|         | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                         | 5   
|         |                                                                                                                                          |     
|Item 2.  | Managements Discussion and Analysis of Financial Condition and
  Results of Operations                                                  | 15  
|         |                                                                                                                                          |     
|Item 3.  | Quantitative and Qualitative Disclosures About Market Risk                                                                               | 26  
|         |                                                                                                                                          |     
|Item 4.  | Controls and Procedures                                                                                                                  | 27  
|         |                                                                                                                                          |     
|PART II. | OTHER INFORMATION                                                                                                                        |     
|         |                                                                                                                                          |     
|Item 1.  | Legal Proceedings                                                                                                                        | 28  
|         |                                                                                                                                          |     
|Item 2.  | Unregistered Sales of Equity, Securities
  and the Use of Proceeds                                                                       | 28  
|         |                                                                                                                                          |     
|Item 3.  | Defaults Upon Senior Securities                                                                                                          | 28  
|         |                                                                                                                                          |     
|Item 4.  | Submission of Matters to a Vote of Security
  Holders                                                                                    | 28  
|         |                                                                                                                                          |     
|Item 5.  | Other Information                                                                                                                        | 28  
|         |                                                                                                                                          |     
|Item 6.  | Exhibits                                                                                                                                 | 28  
|         |                                                                                                                                          |     
|         | Signatures                                                                                                                               | 29  

---



PART I. FINANCIAL INFORMATION

|        |                     
|------- | --------------------
|ITEM 1. | FINANCIAL STATEMENTS

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

|                                                                                                                                                                                  |  |                 |         |                     |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | ------------------- | - | ------- | -
|                                                                                                                                                                                  |  | June
  30, 2008 |         | December
  31, 2007 |  
|                                                                                                                                                                                  |  |                 |         |                     |  
|                                                                                                                                                                                  |  | (Unaudited)     |         |                     |  
|                                                                                                                                                                                  |  |                 |         |                     |   |        
|ASSETS                                                                                                                                                                            |  |                 |         |                     |   |         |  
|Current Assets:                                                                                                                                                                   |  |                 |         |                     |   |         |  
|Cash                                                                                                                                                                              |  | $               | 163     |                     | $ | 46      |  
|Accounts
  receivable trade, net                                                                                                                                                  |  |                 | 2,723   |                     |   | 2,383   |  
|Inventories, net                                                                                                                                                                  |  |                 | 4,544   |                     |   | 4,715   |  
|Other current
  assets                                                                                                                                                            |  |                 | 185     |                     |   | 139     |  
|                                                                                                                                                                                  |  |                 |         |                     |   |         |  
|Total current
  assets                                                                                                                                                            |  |                 | 7,615   |                     |   | 7,283   |  
|                                                                                                                                                                                 
|Property, Plant
  and Equipment, net                                                                                                                                              |  |                 | 1,645   |                     |   | 1,720   |  
|Goodwill                                                                                                                                                                          |  |                 | 2,543   |                     |   | 2,543   |  
|Other assets                                                                                                                                                                      |  |                 | 406     |                     |   | 378     |  
|                                                                                                                                                                                  |  |                 |         |                     |   |         |  
|Total Assets                                                                                                                                                                      |  | $               | 12,209  |                     | $ | 11,924  |  
|                                                                                                                                                                                  |  |                 |         |                     |   |         |  
|                                                                                                                                                                                 
|LIABILITIES
  AND STOCKHOLDERS DEFICIT                                                                                                                                           |  |                 |         |                     |   |         |  
|Current
  Liabilities:                                                                                                                                                            |  |                 |         |                     |   |         |  
|Revolving loan
  and current maturities of long-term debt                                                                                                                         |  | $               | 9,077   |                     | $ | 4,721   |  
|Accrued
  interest, stockholder loans                                                                                                                                             |  |                 | 648     |                     |   |        |  
|Accounts payable                                                                                                                                                                  |  |                 | 1,566   |                     |   | 1,346   |  
|Pension
  liabilities, current portion                                                                                                                                            |  |                 | 325     |                     |   | 273     |  
|Other current
  liabilities                                                                                                                                                       |  |                 | 589     |                     |   | 544     |  
|Mandatorily
  Redeemable Preferred Stock, par value $0.01 per share, 8,000,000 shares
  authorized; Shares issued and outstanding: Series A  4,555,007 as of June
  30, 2008     |  |                 | 4,555   |                     |   |        |  
|Accumulated
  dividends on Mandatorily Redeemable Stock                                                                                                                           |  |                 | 746     |                     |   |        |  
|                                                                                                                                                                                  |  |                 |         |                     |   |         |  
|Total current
  liabilities                                                                                                                                                       |  |                 | 17,506  |                     |   | 6,884   |  
|                                                                                                                                                                                  |  |                 |         |                     |   |         |  
|Long-term debt,
  less current maturities                                                                                                                                         |  |                 |        |                     |   | 4,211   |  
|Stockholder
  loans                                                                                                                                                               |  |                 |        |                     |   | 350     |  
|Accrued
  interest, stockholder loans                                                                                                                                             |  |                 |        |                     |   | 639     |  
|Pension
  liabilities, less current portion                                                                                                                                       |  |                 | 1,367   |                     |   | 1,647   |  
|Environmental
  liabilities                                                                                                                                                       |  |                 | 1,287   |                     |   | 1,287   |  
|Mandatorily
  Redeemable Preferred Stock, par value $0.01 per share, 8,000,000 shares
  authorized; Shares issued and outstanding: Series A  4,555,007 as of
  December 31, 2007 |  |                 |        |                     |   | 4,555   |  
|Accumulated
  dividends on Mandatorily Redeemable Stock                                                                                                                           |  |                 |        |                     |   | 587     |  
|                                                                                                                                                                                  |  |                 |         |                     |   |         |  
|Total
  Liabilities                                                                                                                                                               |  |                 | 20,160  |                     |   | 20,160  |  
|                                                                                                                                                                                  |  |                 |         |                     |   |         |  
|                                                                                                                                                                                  |  |                 |         |                     |   |         |  
|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 June 30, 2008 and December 31, 2007                                                                                              |  |                 | 54      |                     |   | 54      |  
|Additional
  paid-in capital                                                                                                                                                      |  |                 | 33,235  |                     |   | 33,235  |  
|Accumulated
  Deficit                                                                                                                                                             |  |                 | (39,891 | )                   |   | (40,088 | )
|Accumulated
  Other Comprehensive Loss                                                                                                                                            |  |                 | (1,349  | )                   |   | (1,437  | )
|                                                                                                                                                                                  |  |                 |         |                     |   |         |  
|Total
  Stockholders Deficit                                                                                                                                                     |  |                 | (7,951  | )                   |   | (8,236  | )
|                                                                                                                                                                                  |  |                 |         |                     |   |         |  
|Total
  Liabilities and Stockholders Deficit                                                                                                                                     |  | $               | 12,209  |                     | $ | 11,924  |  
|                                                                                                                                                                                  |  |                 |         |                     |   |         |  

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

Page 1

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LEVCOR
INTERNATIONAL, INC. AND SUBSIDIARIES

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

|                                                                                                                           |  |                               |       |                             |   |       |   |      |        |   |   |       |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ----- | --------------------------- | - | ----- | - | ---- | ------ | - | - | ----- | -
|                                                                                                                           |  | Three
  Months Ended June 30, |       | Six
  Months Ended June 30, |  
|                                                                                                                           |  |                               |       |                             |  
|                                                                                                                           |  | 2008                          |       | 2007                        |   | 2008  |   | 2007 |       
|                                                                                                                           |  |                               |       |                             |   |       |   |      |       
|                                                                                                                           |  |                               |       |                             |   |       |   |      |        |   |   |       |  
|Net sales                                                                                                                  |  | $                             | 5,432 |                             | $ | 4,193 |   | $    | 10,066 |   | $ | 9,458 |  
|Cost of sales                                                                                                              |  |                               | 3,826 |                             |   | 2,875 |   |      | 6,856  |   |   | 6,359 |  
|                                                                                                                           |  |                               |       |                             |   |       |   |      |        |   |   |       |  
|Gross profit                                                                                                               |  |                               | 1,606 |                             |   | 1,318 |   |      | 3,210  |   |   | 3,099 |  
|Selling, general
  and administrative expenses                                                                             |  |                               | 1,387 |                             |   | 1,087 |   |      | 2,540  |   |   | 2,488 |  
|                                                                                                                           |  |                               |       |                             |   |       |   |      |        |   |   |       |  
|Income from
  continuing operations before interest, preferred dividends, income tax
  expense and discontinued operations |  |                               | 219   |                             |   | 231   |   |      | 670    |   |   | 611   |  
|Interest expense                                                                                                           |  |                               | 142   |                             |   | 207   |   |      | 313    |   |   | 411   |  
|Dividends on
  mandatorily redeemable preferred stock                                                                      |  |                               | 79    |                             |   | 70    |   |      | 158    |   |   | 138   |  
|                                                                                                                           |  |                               |       |                             |   |       |   |      |        |   |   |       |  
|Income (loss)
  from continuing operations before income tax expense and discontinued operations                           |  |                               | (2    | )                           |   | (46   | ) |      | 199    |   |   | 62    |  
|Income tax
  expense                                                                                                       |  |                               |      |                             |   |      |   |      | 2      |   |   |      |  
|                                                                                                                           |  |                               |       |                             |   |       |   |      |        |   |   |       |  
|Net income
  (loss) from continuing operations                                                                             |  |                               | (2    | )                           |   | (46   | ) |      | 197    |   |   | 62    |  
|Income from
  discontinued operations, net of tax                                                                          |  |                               |      |                             |   | 8     |   |      |       |   |   | 22    |  
|                                                                                                                           |  |                               |       |                             |   |       |   |      |        |   |   |       |  
|Net income
  (loss)                                                                                                        |  | $                             | (2    | )                           | $ | (38   | ) | $    | 197    |   | $ | 84    |  
|                                                                                                                           |  |                               |       |                             |   |       |   |      |        |   |   |       |  
|Income (loss) per
  share:                                                                                                 |  |                               |       |                             |   |       |   |      |        |   |   |       |  
|Basic and
  Diluted:                                                                                                       |  |                               |       |                             |   |       |   |      |        |   |   |       |  
|Income (loss)
  from continuing operations                                                                                 |  | $                             |      | *                           | $ | (.01  | ) | $    | .04    |   | $ | .01   |  
|Income from
  discontinued operations                                                                                      |  |                               |      | *                           |   |      | * |      |       | * |   |      | *
|                                                                                                                           |  |                               |       |                             |   |       |   |      |        |   |   |       |  
|Net income
  (loss)                                                                                                        |  | $                             |      | *                           | $ | (.01  | ) | $    | .04    |   | $ | .01   |  
|                                                                                                                           |  |                               |       |                             |   |       |   |      |        |   |   |       |  
|                                                                                                                           |  |                               |       |                             |   |       |   |      |        |   |   |       |  
|Weighted average
  common shares outstanding  basic and diluted                                                           |  |                               | 5,332 |                             |   | 5,332 |   |      | 5,332  |   |   | 5,332 |  
|                                                                                                                           |  |                               |       |                             |   |       |   |      |        |   |   |       |  
|                                                                                                                          
|* Less than $.005                                                                                                          |  |                               |       |                             |   |       |   |      |        |   |   |       |  

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

Page 2

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

|                                          |  |                               |    |                             |   |      |   |      |     |  |   |     | 
|----------------------------------------- |  | ----------------------------- | -- | --------------------------- | - | ---- | - | ---- | --- |  | - | --- | 
|                                          |  | Three
  Months Ended June 30, |    | Six Months
  Ended June 30, |  
|                                          |  |                               |    |                             |  
|                                          |  | 2008                          |    | 2007                        |   | 2008 |   | 2007 |    
|                                          |  |                               |    |                             |   |      |   |      |    
|                                          |  |                               |    |                             |   |      |   |      |     |  |   |     | 
|Net income
  (loss)                       |  | $                             | (2 | )                           | $ | (38  | ) | $    | 197 |  | $ | 84  | 
|Other
  comprehensive income (loss):      |  |                               |    |                             |   |      |   |      |     |  |   |     | 
|Foreign currency
  translation adjustment |  |                               | (5 | )                           |   | 369  |   |      | 88  |  |   | 363 | 
|                                          |  |                               |    |                             |   |      |   |      |     |  |   |     | 
|                                          |  |                               |    |                             |   |      |   |      |     |  |   |     | 
|Comprehensive
  income (loss)             |  | $                             | (7 | )                           | $ | 331  |   | $    | 285 |  | $ | 447 | 
|                                          |  |                               |    |                             |   |      |   |      |     |  |   |     | 

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

Page 3

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

|                                                                   |  |                             |        |      |   |        |  
|------------------------------------------------------------------ |  | --------------------------- | ------ | ---- | - | ------ | -
|                                                                   |  | Six
  Months Ended June 30, |       
|                                                                   |  |                             |       
|                                                                   |  | 2008                        |        | 2007 |  
|                                                                   |  |                             |        |      |  
|Cash
  Flows From Operating Activities:                            |  |                             |        |      |   |        |  
|Net income                                                         |  | $                           | 197    |      | $ | 84     |  
|Reconciliation
  of net income to net cash provided by operations: |  |                             |        |      |   |        |  
|Depreciation and
  amortization                                    |  |                             | 194    |      |   | 190    |  
|Non-cash
  stock-based compensation                                |  |                             |       |      |   | 3      |  
|Accrued interest
  on stockholder loans                            |  |                             | 9      |      |   | 24     |  
|Accrued
  dividends on mandatorily redeemable preferred stock      |  |                             | 158    |      |   | 138    |  
|Changes in
  operating assets and liabilities:                     |  |                             |        |      |   |        |  
|Accounts
  receivable trade, net                                   |  |                             | (340   | )    |   | 666    |  
|Inventories, net                                                   |  |                             | 249    |      |   | (372   | )
|Other current
  assets                                             |  |                             | (46    | )    |   | (173   | )
|Other assets                                                       |  |                             | (85    | )    |   | (115   | )
|Accounts payable                                                   |  |                             | 221    |      |   | 698    |  
|Income taxes
  payable                                             |  |                             |       |      |   | (86    | )
|Other current
  liabilities                                        |  |                             | 45     |      |   | (285   | )
|Pension
  liabilities                                              |  |                             | (228   | )    |   | (212   | )
|Environmental
  liabilities                                        |  |                             |       |      |   | (3     | )
|                                                                   |  |                             |        |      |   |        |  
|Net cash
  provided by operating activities                        |  |                             | 374    |      |   | 557    |  
|                                                                   |  |                             |        |      |   |        |  
|Cash
  Flows From Investing Activities:                            |  |                             |        |      |   |        |  
|Capital
  expenditures                                             |  |                             | (28    | )    |   | (1     | )
|Investment in
  other assets                                       |  |                             | (24    | )    |   | (22    | )
|                                                                   |  |                             |        |      |   |        |  
|Net cash used in
  investing activities                            |  |                             | (52    | )    |   | (23    | )
|                                                                   |  |                             |        |      |   |        |  
|Cash
  Flows From Financing Activities:                            |  |                             |        |      |   |        |  
|Borrowings under
  revolving loan                                  |  |                             | 8,938  |      |   | 8,835  |  
|Repayments of
  revolving loan                                     |  |                             | (8,721 | )    |   | (9,023 | )
|Repayment of
  long - term debt                                    |  |                             | (72    | )    |   | (72    | )
|Borrowings under
  stockholder loans                               |  |                             |       |      |   | 500    |  
|Repayments of
  stockholder loans                                  |  |                             | (350   | )    |   | (750   | )
|                                                                   |  |                             |        |      |   |        |  
|Net cash used in
  financing activities                            |  |                             | (205   | )    |   | (510   | )
|                                                                   |  |                             |        |      |   |        |  
|                                                                   |  |                             |        |      |   |        |  
|Increase in cash                                                   |  |                             | 117    |      |   | 24     |  
|Cash at
  beginning of period                                      |  |                             | 46     |      |   | 69     |  
|                                                                   |  |                             |        |      |   |        |  
|Cash at end of
  period                                            |  | $                           | 163    |      | $ | 93     |  
|                                                                   |  |                             |        |      |   |        |  
|Supplemental
  Disclosure of Cash Flow Information:                |  |                             |        |      |   |        |  
|Cash paid during
  the period for:                                 |  |                             |        |      |   |        |  
|Interest                                                           |  | $                           | 306    |      | $ | 432    |  
|                                                                   |  |                             |        |      |   |        |  
|Income taxes                                                       |  | $                           | 1      |      | $ | 86     |  
|                                                                   |  |                             |        |      |   |        |  

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

Page 4

---



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

NOTE 1: SUMMARY OF BUSINESS AND BASIS FOR
PRESENTATION

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 sells its
products to customers primarily in North America and also has distribution in
Canada and Europe.

The 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 GAAP 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, 2007. It is
suggested that these condensed consolidated financial statements be used in conjunction
with the financial statements and notes thereto included in the Companys
latest annual report on Form 10-K.

The condensed
consolidated balance sheets as of June 30, 2008 (unaudited) and December 31,
2007 (audited), the unaudited condensed consolidated statements of operations,
comprehensive income (loss) for the three and six months ended June 30, 2008
and 2007 and the unaudited condensed consolidated statements of cash flows for
the six months ended June 30, 2008 and 2007 include the accounts of the Company
and its wholly-owned subsidiaries, Blumenthal Lansing Company, LLC
(Blumenthal) and Button Fashion B.V.

NOTE 2: GOING CONCERN

The 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 flows from operations and to continue
to have access to existing financing, including the ability to refinance the
existing revolving loans and long-term debt, to meet obligations and repay
liabilities when they come due, including amounts payable with respect to
claimed environmental liabilities in connection with the Solvents Recovery
Service of New England Superfund Site in Southington, Connecticut (the SRS
site) in the event the parent corporation is determined to be responsible for
these claimed liabilities and the redemption of preferred stock in 2008 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 be able to refinance the existing debt at favorable terms or
obtaining financing for such environmental obligations on terms acceptable to
the Company. The outcome of these matters cannot be predicted with any
certainty at this time. These factors raise substantial doubt about the
Companys ability to continue as a going concern. Management plans to satisfy
the Companys capital needs through cash generated from operations, advances
under its facilities with CIT Group/Financial Services, Inc. (CIT) and
stockholder loans. These 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.

Page 5

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NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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 $33,000 at June 30, 2008 and $17,000 at December 31, 2007.

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.

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

Page 6

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Fair Value of Financial Instruments:The Companys
financial instruments include revolving debt, a term loan, promissory notes
payable, loans payable to a stockholder, officer and director, Robert A. Levinson and Series A
Mandatory Redeemable Preferred Stock at June 30, 2008 and December 31, 2007.
The fair values of the revolving debt, term loan and promissory notes payable
approximate their carrying values because these obligations have market-based
interest rates. The stockholder loans and Series A Mandatory Redeemable
Preferred Stock are recorded at their carrying value, because there is no
market for these obligations and it was impracticable to estimate their fair
value. Accounts receivable and accounts payable approximate fair value due to their short-term nature.

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.

Recently Issued Accounting Pronouncements

In June 2008, the
Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) Emerging Issues Task Force (EITF) No. 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities. Under the FSP, unvested share-based payment
awards that contain rights to receive nonforfeitable dividends (whether paid or
unpaid) are participating securities, and should be included in the two-class
method of computing earnings per share. The FSP is effective for fiscal years
beginning after December 15, 2008, and interim periods within those years.
The Company does not expect the adoption of FSP EITF No. 03-6-1 to have a
material effect on its consolidated financial statements.

In May 2008, FASB issued Statement of Financial Accounting
Standards (SFAS) No. 162, The
Hierarchy of Generally Accepted Accounting Principles(FAS 162).
FAS 162 identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally
accepted accounting principles. FAS 162 directs the hierarchy to the entity,
rather than the independent auditors, as the entity is responsible for
selecting accounting principles for financial statements that are presented in
conformity with GAAP. The Standard is effective 60 days following SEC
approval of the Public Company Accounting Oversight Board (PCAOB) amendments
to remove the hierarchy of GAAP from the auditing standards. FAS 162 is not
expected to have an impact on the Companys consolidated financial
statements.

NOTE 4: INVENTORIES

The components
of inventories, net of reserves are as follows (in thousands):

|                 |  |              |       |                   |   |       | 
|---------------- |  | ------------ | ----- | ----------------- | - | ----- | 
|                 |  | June 30,2008 |       | December 31, 2007 |  
|                 |  |              |       |                   |  
|Raw materials    |  | $            | 2,297 |                   | $ | 2,132 | 
|Work in progress |  |              | 101   |                   |   | 95    | 
|Finished goods   |  |              | 2,146 |                   |   | 2,488 | 
|                 |  |              |       |                   |   |       | 
|                 |  | $            | 4,544 |                   | $ | 4,715 | 
|                 |  |              |       |                   |   |       | 

Page 7

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NOTE
5: PROPERTY, PLANT AND EQUIPMENT

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

|                                                |  |               |        |                   |   |        |  
|----------------------------------------------- |  | ------------- | ------ | ----------------- | - | ------ | -
|                                                |  | June 30, 2008 |        | December 31, 2007 |  
|                                                |  |               |        |                   |  
|Land and improvements                           |  | $             | 85     |                   | $ | 83     |  
|Buildings and improvements                      |  |               | 2,536  |                   |   | 2,516  |  
|Machinery and equipment                         |  |               | 2,086  |                   |   | 2,007  |  
|                                                |  |               |        |                   |   |        |  
|                                                |  |               | 4,707  |                   |   | 4,606  |  
|Less: Accumulated depreciation and amortization |  |               | (3,062 | )                 |   | (2,886 | )
|                                                |  |               |        |                   |   |        |  
|                                                |  | $             | 1,645  |                   | $ | 1,720  |  
|                                                |  |               |        |                   |   |        |  

Depreciation
and amortization expense was approximately $96,000 and $194,000 for the three and
six-month periods ended June 30, 2008 respectively, and approximately $93,000
and $190,000 for the three and six-month periods ended June 30, 2007,
respectively.

NOTE 6: SHORT-TERM AND LONG-TERM DEBT

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

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. The CIT Facility provides advances up to
40% of eligible inventory and 90% of eligible accounts receivable, as defined
in the agreements. There was approximately $545,000 of availability under the
Companys CIT Facility as of June 30, 2008.

The CIT
Facility provides for (i) a term loan to the Company (the Term Loan) in the
initial amount of $2.0 million, of which $1.1 million was outstanding at June
30, 2008, (ii) revolving credit advances to the Company, of which $1.8 million
was outstanding at June 30, 2008 and (iii) revolving credit advances to
Blumenthal based upon eligible accounts receivable and inventory, of which $3.0
million was outstanding at June 30, 2008, and a Letter of Credit facility with
a limit of $500,000, of which there was none outstanding at June 30, 2008. The
Term Loan amortizes $12,000 per month followed by a final installment payment
of $1.0 million due on January 1, 2009. The revolving credit advances are due
on January 1, 2009. $2.5 million of the amounts outstanding under the CIT
Facility bear interest at Chase Bank N.A. prime rate (5.00%) and amounts in
excess of $2.5 million bear interest at the Chase Bank N.A. prime rate plus
0.5% (5.50%) 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.

Page 8

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

The Company
also has a factoring agreement with CIT. As of June 30, 2008 there was no
balance due to or from CIT under the factoring agreement.

The promissory
note payable to JPMorgan in the amount of $3.2 million is dated May 2, 2002 and
has a maturity date of January 5, 2009. 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 June 30, 2008 was 3.59%. In addition, Robert A. Levinson, a
stockholder, officer and director of the Company, has provided certain
additional collateral guaranteeing the note.

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

The Company
had outstanding loans payable to Mr. Levinson totaling $350,000 as of December
31, 2007. In addition, Mr. Levinson has pledged collateral in support of
certain Company obligations. Accrued interest payable on Mr. Levinsons loans totaled
$648,000 and $639,000, respectively at June 30, 2008 and December 31, 2007. He
has also agreed not to demand any repayment of interest currently owed until
January 6, 2009. (See Note 11)

During the six
months ended June 30, 2008, the Company was in compliance with all debt
covenants as defined in the respective agreements.

NOTE 7: FAIR VALUE MEASUREMENTS

In the first
quarter of 2008, the Company adopted SFAS No. 157, Fair Value
Measurements, for financial assets and liabilities. This standard defines fair
value, provides guidance for measuring fair value and requires certain
disclosures. This standard does not require any new fair value measurements,
but discusses valuation techniques, such as the market approach (comparable
market prices), the income approach (present value of future income or cash
flow), and the cost approach (cost to replace the service capacity of an asset
or replacement cost). The statement utilizes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels.

Page 9

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As permitted,
the Company chose not to elect the fair value option as prescribed by FASB SFAS
No. 159, The Fair Value Option For Financial Assets and Financial
LiabilitiesIncluding an Amendment of FASB Statement No. 115, for its financial
assets and liabilities that had not been previously carried at fair value.
Therefore, material financial assets and liabilities not carried at fair value,
such as stockholder loans and mandatorily redeemable preferred stock are reported at their carrying values.

The Companys
population of financial assets and liabilities subject to recurring fair value
measurements and the necessary disclosures are as follows:

|                         |  |                  |       |                                                                          |   |         |  |         |       |         |   |   |  |   |   | 
|------------------------ |  | ---------------- | ----- | ------------------------------------------------------------------------ | - | ------- |  | ------- | ----- | ------- | - | - |  | - | - | 
|(In thousands)           |  | At June 30, 2008 |       | Fair Value Measurements at 
  June 30, 2008 using
  Fair Value Hierarchy |  
|                         |  |                  |       |                                                                          |   |         |  |         |       |         |   |  
|                         | 
|                         |  |                  |       |                                                                          |  
|                         |  | Cost             |       | Fair Value                                                               |   | Level 1 |  | Level 2 |       | Level 3 |  
|                         |  |                  |       |                                                                          |   |         |  |         |       |         |  
|LIABILITIES:             |  |                  |       |                                                                          |   |         |  |         |       |         |   |   |  |   |   | 
|Revolving Loan           |  | $                | 4,794 |                                                                          | $ | 4,794   |  | $       | 4,794 |         | $ |  |  | $ |  | 
|Term Loan                |  |                  | 1,083 |                                                                          |   | 1,083   |  |         | 1,083 |         |   |  |  |   |  | 
|Promissory notes payable |  |                  | 3,200 |                                                                          |   | 3,200   |  |         | 3,200 |         |   |  |  |   |  | 
|                         |  |                  |       |                                                                          |   |         |  |         |       |         |   |   |  |   |   | 
|                         |  | $                | 9,077 |                                                                          | $ | 9,077   |  | $       | 9,077 |         | $ |  |  | $ |  | 
|                         |  |                  |       |                                                                          |   |         |  |         |       |         |   |   |  |   |   | 

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.

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. Under the new law, the 90% funding target is replaced with a 100% target.
Shortfalls from the 100% target must be amortized over a seven-year period

The benefits
under the plan are determined based on formulas, which reflect the employees
years of service and compensation during their employment period. The projected
unit credit method is used to determine pension cost. Funding requirements for
the plan are based on the unit credit method. The Companys policy is to fund
pension cost as required by ERISA. In 2007 the Company applied for and was
granted a waiver by the Internal Revenue Service with regard to a deferral of
$713,000 which was the remainder of the contribution still due for the 2006
plan year. With respect to the deferral, the Company was required to make a
contribution of $275,000, which was made on September 13, 2007. The Company had
also applied to the Internal Revenue Service to permit a change in method of accounting
for plan assets which was also granted. With respect to the 2007 plan year, the
Company has made contributions to the plan in 2007 of $52,000 with an
additional approximately $72,000 due in 2008, based on current legislated
discount rates and actuarial assumptions. In addition, the Company anticipates
contributions with respect to the 2008 plan year of $93,000 based on actuarial
assumptions during the year ending December 31, 2008 and $31,000 by January 15,
2009.

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In addition to
the liability of $584,000 for this Company sponsored plan, the Company also has
an additional pension liability in the amount of $876,000 at June 30, 2008 in
connection with a terminated multi-employer plan which requires annual payments
of $142,000 inclusive of principal and interest through 2016. The Company also
has a $232,000 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 are as follows
(in thousands):

|                                        |  |                             |      |                           |   |      |   |      |      |   |   |      |  
|--------------------------------------- |  | --------------------------- | ---- | ------------------------- | - | ---- | - | ---- | ---- | - | - | ---- | -
|                                        |  | Three Months Ended June 30, |      | Six Months Ended June 30, |  
|                                        |  |                             |      |                           |  
|Pension
  Benefits                      |  | 2008                        |      | 2007                      |   | 2008 |   | 2007 |     
|                                        |  |                             |      |                           |   |      |   |      |     
|Interest cost                           |  | $                           | 285  |                           | $ | 284  |   | $    | 570  |   | $ | 567  |  
|Expected return on plan
  assets        |  |                             | (365 | )                         |   | (351 | ) |      | (731 | ) |   | (702 | )
|Recognized net actuarial
  loss         |  |                             | 7    |                           |   | 9    |   |      | 15   |   |   | 19   |  
|                                        |  |                             |      |                           |   |      |   |      |      |   |   |      |  
|Net periodic benefit
  (income) expense |  | $                           | (73  | )                         | $ | (58  | ) | $    | (146 | ) | $ | (116 | )
|                                        |  |                             |      |                           |   |      |   |      |      |   |   |      |  

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.

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NOTE 9: INCOME TAXES

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 June 30,
2008, we do not have any uncertain tax positions under FIN 48. As a result,
there are no unrecognized tax benefits as of June 30, 2008. 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 operations.

NOTE 10: CUSTOMER
CONCENTRATIONS

The Companys two largest customers
(Wal-mart, a mass merchandiser and Jo-Ann Stores, a specialty chain) represented
approximately 48% and 27% respectively, of the Companys net sales in the three
months ended June 30, 2008 and represented approximately 44% and 28%
respectively, of the Companys net sales in the six months ended June 30, 2008.
These customers also represented approximately 49% and 25% respectively of the
Companys net sales for the three months ended June 30, 2007 and 48% and 26%
respectively, of the Companys net sales in the six months ended June 30, 2007.
These customers in the aggregate also represented approximately 72% and 73% of
the total outstanding accounts receivable as of June 30, 2008 and December 31,
2007, 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. As of March 31, 2007, the Company recorded an 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.

NOTE 11: RELATED PARTY TRANSACTIONS

The Company
had outstanding loans payable to Robert A. Levinson, a stockholder, officer and
director of $350,000 as of December 31, 2007. The Company also had $648,000 and
$639,000 of accrued interest payable to Mr. Levinson with respect to such loans
as of June 30, 2008 and December 31, 2007, respectively. Mr. Levinson has
agreed not to demand any repayment of interest currently owed until January 6,
2009. He has also pledged collateral in support of certain Company obligations.
See Note 6 for a description of these transactions.

While serving as director of the Company, Edward H. Cohen served as
counsel to Katten Muchin Rosenman LLP, legal counsel to the Company. Mr. Cohen
resigned as a director of the Company on December 31, 2007. During the three
and six months ended June 30, 2007, fees for services provided to the Company by Katten Muchin Rosenman LLP
totaled approximately $45,000 and $86,000
respectively. Mr. Cohen did not share in the fees that the Company pays to
such law firm and his
compensation was not based on such fees.

Page 12

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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 two of which were due on
June 15, 2007 and 2008 and the remaining one on June 15, 2009. Such
installments are payable from funds legally available, 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 two installments due on June 15, 2007 and 2008
respectively were 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 as long as the CIT Facility is
outstanding. The two installments which were due on June 15, 2007 and 2008 and
the one due on June 15, 2009, including accumulated dividends, are classified
as current liabilities as 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 2006 and
earlier years have depleted the Companys accumulated earnings and profits and,
as such, future preferred dividend payments will be limited to future earnings
and profits. Preferred dividends which cannot be paid under Delaware law will
continue to accrue and will be added to the Preferred Stock liability account.

As of June 30,
2008, unpaid preferred stock dividends totaled approximately $746,000 and have
been classified as a current liability on the Companys balance sheet. The
preferred stock is owned 99.4% by Mr. Robert A. Levinson, a stockholder,
officer and director of the Company.

NOTE 13: COMMITMENT AND CONTINGENCIES

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

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NOTE 14: PROPOSED
REVERSED STOCK SPLIT

On June 25,
2008, the Company announced its intent to engage in a going-private transaction
by means of a 1-for-300,000 reverse stock split of its common stock, with
cash being issued in lieu of any resulting fractional shares in the amount of
$0.16 per pre-split share. On June 25, 2008, the Company filed with the SEC a
preliminary proxy statement and Schedule 13E-3 describing the anticipated
transaction in detail. The Company filed revised versions of these documents on
July 31, 2008 and has filed definitive versions on August 12, 2008. The
principal reason for the Companys decision to go private is to eliminate the
substantial expenses associated with filing various periodic reports with the
SEC. The Companys Board of Directors reserves the right not to proceed with
the proposed transaction in the event stockholder approval is obtained, but the
Board may determine that it would still not be in the best interest of the
Company to proceed any time prior to the effective date of the reverse stock
split.

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|        |                                                                                        
|------- | ---------------------------------------------------------------------------------------
|Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking
Statements

Introduction

This Quarterly 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.

On June 25,
2008, the Company announced its intent to engage in a going-private transaction
by means of a 1-for-300,000 reverse stock split of its common stock, with
cash being issued in lieu of any resulting fractional shares in the amount of
$0.16 per pre-split share. On June 25, 2008, the Company filed with the SEC a
preliminary proxy statement and Schedule 13E-3 describing the anticipated
transaction in detail. The Company filed revised versions of these documents on
July 31, 2008 and has filed definitive versions on August 12, 2008. The
principal reason for the Companys decision to go private is to eliminate the
substantial expenses associated with filing various periodic reports with the
SEC. The Companys Board of Directors reserves the right not to proceed with
the proposed transaction in the event stockholder approval is obtained, but the
Board may determine that it would still not be in the best interest of the
Company to proceed any time prior to the effective date of the reverse stock
split.

Page 15

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Products and Customers

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

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

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

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

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

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

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

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

The Companys two largest customers
(Wal-mart, a mass merchandiser and Jo-Ann Stores a specialty chain) represented
approximately 48% and 27% respectively, of the Companys net sales in the three
months ended June 30, 2008 and represented approximately 44% and 28%
respectively, of the Companys net sales in the six months ended June 30, 2008.
These customers also represented approximately 49% and 25% respectively of the
Companys net sales for the three months ended June 30, 2007 and 48% and 26%
respectively, of the Companys net sales in the six months ended June 30, 2007.
These customers in the aggregate also represented approximately 72% and 73% of
the total outstanding accounts receivable as of June 30, 2008 and December 31,
2007, 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 in 2006, announced it will
close approximately 134 of its 443 stores in 2007 as it reorganizes under
Chapter 11. As of March 31, 2007, the Company recorded an 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, 2008 will result in increased sales to Hancock as compared to 2007.

Competition

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

Critical Accounting Policies and Estimates

The Companys
Annual Report on Form 10-K for the year ended December 31, 2007 includes a discussion
of the critical accounting policies and estimates that the Company uses in the
preparation of its consolidated financial statements. There were no significant
changes in the Companys critical accounting policies and estimates during the
six months ended June 30, 2008.

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Results of Operations

Three Months
Ended June 30, 2008 Compared with Three Months Ended June 30, 2007

Sales during
the three months ended June 30, 2008 totaled $5.4 million as compared to $4.2
million during the three months ended June 30, 2007. The increase in sales is
primarily the result of broader distribution and new product introductions to a
major customer in 2008.

Gross profit
during the three months ended June 30, 2008 totaled $1.6 million as compared to
$1.3 million during the same period last year. The gross profit was 29.6%
during the second quarter of 2008 as compared to 31.4% during the second
quarter of 2007. The lower gross profit percentage in 2008 was the result of
reduced leverage on fixed cost of sales during the second quarter of 2008.

Selling,
general and administrative expenses totaled $1.4 million during the three
months ended June 30, 2008 as compared to $1.1 million during the three months
ended June 30, 2007, an increase of approximately $300,000 or 21%. The increase
in selling, general and administrative expenses in the second quarter of 2008
was due to an increase of legal and appraisal fees of $164,000
relating to the proposed going private transaction in June of 2008. The
remaining increase was primarily the result of increased compensation costs of $115,000 due to an
accrual under the Companys Management Incentive Plan (MIP). The Company
uses the MIP, which is a performance-based bonus plan to award its eligible
employees on an annual basis if certain targets are met.

Interest
expense during the three months ended June 31, 2008 totaled $142,000 as
compared to $207,000 during the same period last year. The average outstanding
debt during the second quarter of 2008 and 2007 was $9.6 million. The
weighted average interest rate during the second quarter of 2008 was 4.88% as
compared to 7.55% during the second quarter of 2007.

Dividends on
mandatorily redeemable preferred stock totaled $79,000 during the three months
ended June 30, 2008 as compared to $70,000 during the three months ended June
30, 2007. 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 two installments of the mandatorily
redeemable preferred stock which became due on June 15, 2007 and 2008. Under
the terms of the Companys Certificate of Incorporation, the mandatory
redemption of the Series A Preferred Stock is prohibited 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.

The Company
has a net operating loss (NOL) carryforward and a full valuation allowance
against its deferred tax asset. The Company was not required to record a
provision for income taxes related to its 2008 or 2007 pretax income, except in
instances where minimum taxes are payable.

Page 18

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Six Months
Ended June 30, 2008 Compared with Six Months Ended June 30, 2007

Sales during
the six months ended June 30, 2008 totaled $10.1 million as compared to $9.5
million during the six months ended June 30, 2007. The increase in sales is
primarily the result of broader distribution and new product introductions to a
major customer in 2008.

Gross profit
during the six months ended June 30, 2008 totaled $3.2 million as compared to
$3.1 million during the same period last year. The gross profit during the
year-to-date period in 2008 was 31.9% as compared to 32.8% during the
year-to-date period in 2007. The decrease in gross profit percent in 2008 was
the result of reduced leverage on fixed cost of sales during the year-to-date
period.

Selling,
general and administrative expenses totaled $2.5 million during each of the six
months ended June 30, 2008 and 2007. Selling, general and administrative
expenses increased in the second quarter of 2008 as a result of an increase of
legal and appraisal fees of $164,000 relating to the proposed going private
transaction in June of 2008. This increase was offset by decreases in compensation costs of
$65,000 due to lower headcount, pension expense of $30,000 and various other
selling, general and administrative expenses of $50,000 in 2008.

Interest
expense during the six months ended June 30, 2008 totaled $313,000 as compared
to $411,000 during the same period last year. The average outstanding debt
during the year to date period in 2008 was $9.5 million as compared to $9.7
million during the year to date period in 2007. The weighted average interest
rate during the six months ended June 30, 2008 was 5.70% as compared to 7.56%
during the six months ended June 30, 2007.

Dividends on
mandatorily redeemable preferred stock totaled $158,000 during the six months
ended June 30, 2008 as compared to $138,000 during the six months ended June
30, 2007. 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 two installments of the mandatorily
redeemable preferred stock which became due on June 15, 2007 and 2008. Under
the terms of the Companys Certificate of Incorporation, the mandatory
redemption of the Series A Preferred Stock is prohibited 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.

The Company
has a NOL 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 2008 or 2007 pretax income, except in instances where minimum
taxes are payable.

Page 19

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Liquidity and Capital Resources

The 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, including the ability to refinance the
existing revolving loans and long-term debt, to meet obligations and repay
liabilities when they come due, including amounts payable with respect to
claimed environmental liabilities in connection with the Solvents Recovery
Service of New England Superfund Site in Southington, Connecticut (the SRS
site) in the event the parent corporation is determined to be responsible for
these claimed liabilities and the redemption of preferred stock in 2008 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 be able to refinance the existing debt at favorable terms or
obtaining financing for such environmental obligations on terms acceptable to
the Company. The outcome of these matters cannot be predicted with any
certainty at this time. These factors raise substantial doubt about the
Companys ability to continue as a going concern. Management plans to satisfy
the Companys capital needs through cash generated from operations, advances
under its facilities with CIT Group/Financial Services, Inc. (CIT) and
stockholder loans. These 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 26, 2008 and
March 16, 2007 regarding their concerns about our ability to continue as a
going concern. Substantial doubt about our ability to continue as a going
concern may create negative reactions to the price of the common shares of our
stock and we may have a more difficult time obtaining financing.

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

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

Page 20

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

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

At June 30,
2008, the Companys principal sources of liquidity included cash of $163,000
and trade accounts receivable of $2.7million. There was approximately $545,000
of unused borrowing capacity available under the Companys credit facility with
CIT as of June 30, 2008. The Company also had an additional $3.0 million of
borrowing available through January 5, 2009 from Mr. Levinson who has agreed to
fund up to $3.0 million of temporary advances to the Company.

Following is a
summary and discussion regarding the Companys cash flows for the six months
ended June 30, 2008 and 2007.

Cash Flow
Summary:(in thousands)

|                                |  |                           |      |      |   |      |  
|------------------------------- |  | ------------------------- | ---- | ---- | - | ---- | -
|                                |  | Six months Ended June 30, |     
|                                |  |                           |     
|                                |  | 2008                      |      | 2007 |  
|                                |  |                           |      |      |  
|Net cash provided by (used in): |  |                           |      |      |   |      |  
|Operating activities            |  | $                         | 374  |      | $ | 557  |  
|Investing activities            |  |                           | (52  | )    |   | (23  | )
|Financing activities            |  |                           | (205 | )    |   | (510 | )
|                                |  |                           |      |      |   |      |  
|Net increase in cash            |  | $                         | 117  |      | $ | 24   |  
|                                |  |                           |      |      |   |      |  

Net cash flows
provided by operating activities totaled $374,000 during the six months ended June
30, 2008, as compared to $557,000 of net cash provided by operating activities
during the six months ended June 30, 2007.

In 2008, the
components of net cash provided by operating activities were $558,000 of cash
provided by net income adjusted for non-cash items, consisting primarily of
depreciation and amortization, accrued interest on stockholder loans and
accrued dividends on preferred stock, which were offset by $186,000 of cash
used in operating assets and liabilities.

In 2007, the
components of net cash provided by operating activities were $439,000 of cash
provided by net income adjusted for non-cash items, consisting primarily of
depreciation and amortization, accrued interest on stockholder loans and
accrued dividends on preferred stock plus $118,000 of cash provided by
operating assets and liabilities.

Page 21

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Major
components of the changes in operating assets and liabilities in 2008 as
compared to 2007 were accounts receivable, inventories, other current assets,
accounts payable, and other current liabilities.

Changes in
accounts receivable utilized $340,000 of cash flows in 2008 as compared to
providing $666,000 in 2007. The primary reason for the increase in cash usage
related to accounts receivable was the increased sales volume due to broader
distribution and the introduction of new product to a major customer.

Changes in
inventories provided $249,000 in cash flows in 2008 as compared to utilizing
$372,000 of cash during the same period in 2007. This was directly due to
managements successful efforts to lower inventory levels in 2008.

Changes in
other current assets utilized $46,000 in cash flows in 2008 as compared to
$173,000 in 2007. This reduction in 2008 was primarily due to lower prepaid
balances as the Company negotiated better terms with its vendors.

Changes in
accounts payable provided $220,000 of cash flows in 2008 as compared to
$698,000 of cash flow in the six months ended June 30, 2007. The reduction in
accounts payable in 2008 was the result of lower inventory balances related to
the cancellation of two product lines by the Companys largest customer.

Changes in
other current liabilities provided $45,000 of cash flows in 2008 as compared to
$285,000 utilized in 2007. This was primarily due to severance costs incurred
in the first quarter of 2007. The Company had lowered its headcount as part of
the Companys cost reduction efforts.

Net cash used
in investing activities totaled $52,000 during the six months ended June 30,
2008, as compared to $23,000 during the same period in 2007. This increase was
primarily a result of higher capital expenditures during 2008.

Net cash used
in financing activities totaled $205,000 during the six months ended June 30,
2008 as compared to $510,000 used in financing activities during the same period
last year. In 2007 and 2008 the cash flow from operating activities was
sufficient to fund operating and investing activities.

During the six
months ended June 30, 2008, the Company made repayments to Mr. Levinson against
his stockholder loans of $350,000 as compared to $750,000 during the six months
ended June 30, 2008. There were no borrowings during the six months ended June
30, 2008 as compared to $500,000 for the same period last year. The outstanding
stockholder borrowings were the result of funding of operating activities.

Total
borrowings during the first six months of 2008 and 2007 under the CIT revolving
credit facility were $8.9 million and $8.8 million respectively; total
repayments during the periods under this facility were $8.7 million and $9.0
million, respectively. Repayments under the Companys term loan totaled $72,000
during the six months ended June 30, 2008 and 2007.

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

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At June 30,
2008, 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. The CIT Facility provides advances up
to 40% of eligible inventory and 90% of eligible accounts receivable, as
defined in the agreements. There was approximately $545,000 of unused
availability under the Companys credit facility with CIT as of June 30, 2008.

The CIT
Facility provides for (i) a term loan to the Company (the Term Loan) in the
initial amount of $2.0 million, of which $1.1 million was outstanding at June
30, 2008, (ii) revolving credit advances to the Company, of which $1.8 million
was outstanding at June 30, 2008 and (iii) revolving credit advances to Blumenthal
based upon eligible accounts receivable and inventory, of which $3.0 million
was outstanding at June 30, 2008, and a Letter of Credit facility with a limit
of $500,000, of which there was none outstanding at June 30, 2008. The Term
Loan is amortized at $12,000 per month followed by a final installment payment
of $1.0 million due on January 1, 2009. The revolving credit advances are also
due on January 1, 2009. At June 30, 2008, all amounts outstanding under the CIT
Facility in excess of $2.5 million bear interest at 5.50% (the Chase Bank N.A.
prime rate plus 0.5%) with a minimum rate of 5.0%. The first $2.5 million of
advances from CIT bears interest at the prime rate (5.00%).

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.

The Company also
has a factoring agreement with CIT, which matures on January 1, 2009. As of
June 30, 2008 there was no balance due to or from CIT under the factoring
agreement.

The promissory
note payable to JPMorgan in the amount of $3.2 million is dated May 2, 2002 and
has a maturity date of January 5, 2009. The note bears interest at a fixed rate
per annum equal to the Adjusted LIBOR rate applicable to such note plus 0.75%
(a Eurodollar Loan) and the remaining $200,000 bears interest at Chase Bank
N.A. prime rate. The interest rate on the note at June 30, 2008 was 3.59%. In addition, Robert A. Levinson, a
stockholder, officer and director of the Company, has provided certain
additional collateral guaranteeing the note.

Page 23

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

The Company
had outstanding loans payable to Mr. Levinson of $350,000 as of
December 31, 2007. In addition, Mr. Levinson
has pledged collateral in support of certain Company obligations. Accrued
interest payable on Mr. Levinsons loans has been classified as current liabilities on
the Companys balance sheet and totaled $648,000 and $639,000 at
June 30, 2008 and December 31, 2007, respectively. He has also agreed not to
demand any repayment of interest currently owed until January 6, 2009.

During the six
months ended June 30, 2008, the Company was in compliance with all debt
covenants as defined in the respective agreements.

The Series A
Preferred Stock is subject to mandatory redemption, to the extent the Company
may lawfully do so, in three equal annual installments two of which were due on
June 15, 2007 and 2008 and the remaining one on June 15, 2009. Such
installments are payable from funds legally available, 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 two installments due on June 15, 2007 and 2008 respectively
were 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 as long as the CIT Facility is outstanding. The two
installments which were due on June 15, 2007 and 2008 and the one due on June
15, 2009, including accumulated dividends, are classified as current
liabilities as 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 that date forward at the rate of 6%
per year.

The
availability of resources to make dividend payments to the holders of Series A
Preferred Stock in the future will depend on the Companys future earnings and
cash flow. Under Delaware law, preferred dividend payments are restricted to
the Companys accumulated or current earnings and profits. Losses in 2006 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.

Page 24

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As of June 30,
2008, unpaid preferred stock dividends totaled approximately $746,000 and have
been classified as a current liability on the Companys balance sheet. The
preferred stock is owned 99.4% by Mr. Robert A. Levinson, a stockholder,
officer and director of the Company.

The Company
sponsors a defined benefit plan. 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. The Company had also applied to
the Internal Revenue Service to permit a change in method of accounting for
plan assets which was also granted. With respect to the 2007 plan year, the
Company has made contributions to the plan in 2007 of $52,000 with an
additional approximately $72,000 due in 2008, based on current legislated
discount rates and actuarial assumptions. In addition, the Company anticipates
contributions with respect to the 2008 plan year of $93,000 based on actuarial
assumptions during the year ending December 31, 2008 and $31,000 by January 15,
2009.

In addition to
the liability of $584,000 for this Company sponsored plan, the Company also has
an additional pension liability in the amount of $876,000 at June 30, 2008 in
connection with a terminated multi-employer plan which requires annual payments
of $142,000 inclusive of principal and interest through 2016. The Company also
has a $232,000 deferred compensation liability payable to the former owner of
an acquired business.

Seasonality and New Product Lines

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

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

Page 25

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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.

|        |                                                             
|------- | ------------------------------------------------------------
|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES
  ABOUT MARKET RISK

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

Interest Rate Risk

Our short-term
and long-term third party debt bears interest at floating rates, and
accordingly we are sensitive to changes in prevailing interest rates. At June
30, 2008, our indebtedness with CIT was at a 5.00% interest rate (based on the
Chase Bank N.A. prime rate plus .5%). The applicable rate is the Chase Bank,
N.A. prime rate on the first $2.5 million of outstanding borrowing plus .05% on
outstanding borrowing in excess of $2.5 million but in either case not less
than 5% per annum. Our indebtedness with JP Morgan Chase was at a 3.59%
interest rate (based on adjusted LIBOR plus .75%) at June 30, 2008. Our
stockholder loan interest is not variable and bears a 6% interest rate. A 1%
increase or decrease in market interest rates that affect our borrowing
arrangements would have a material impact on earnings and cash flow of
approximately $91,000 during the next fiscal year.

Foreign Currency Exchange Rates

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

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

Customer Concentration

Our sales are
concentrated with major retail chains and as such, approximately 70-80% of our
sales in 2008 are expected to be from our top two accounts. These accounts
represented approximately 72% of our trade accounts receivable at June 30,
2008. The loss of any one of our major accounts would have a material adverse
impact on our financial condition and results of operations.

Page 26

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|        |                        
|------- | -----------------------
|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 SECs rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by 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 SECs rules and forms.

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

No change
occurred in the Companys internal controls concerning financial reporting
during the quarter ended June 30, 2008 that has materially affected, or is
reasonably likely to materially affect, the Companys internal controls over
financial reporting.

Page 27

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PART II. OTHER
INFORMATION

|        |                  
|------- | -----------------
|ITEM 1. | LEGAL PROCEEDINGS

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

|        |                                                              
|------- | -------------------------------------------------------------
|ITEM 2. | UNREGISTERED
  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|        |                                                              
|        | None.                                                        
|        |                                                              
|ITEM 3. | DEFAULTS
  UPON SENIOR SECURITIES                            
|        |                                                              
|        | None.                                                        
|        |                                                              
|ITEM 4. | SUBMISSION
  OF MATTERS TO A VOTE OF SECURITY HOLDERS        
|        |                                                              
|        | None.                                                        
|        |                                                              
|ITEM 5. | OTHER
  INFORMATION                                          
|        |                                                              
|        | None.                                                        
|        |                                                              
|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.

Page 28

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SIGNATURES

Pursuant to
the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.

|                        |                                                                 
|----------------------- | ----------------------------------------------------------------
|                        | LEVCOR
  INTERNATIONAL, INC.                                    
|                        |                                                                 
|Date: August
  14, 2008 | /s/ Robert A.
  Levinson                                        
|                        |                                                                 
|                        | Robert A.
  Levinson                                            
|                        | Chairman of
  the Board, President and Chief Executive
  Officer
|                        |                                                                 
|Date: August
  14, 2008 | /s/ Pramila
  Devi Shaheed                                      
|                        |                                                                 
|                        | Pramila Devi
  Shaheed                                          
|                        | Chief
  Financial Officer and Secretary                         

Page 29

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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.

Page 30

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