, reliance on a limited number of significant customers, future revenue opportunities, inventory risk, growth of the Company's Craft business in Europe and North America, the expansion and future growth of the Company's customer base and strategic and distribution relationships future capital, marketing and sales force needs, the Company's ability to manage expenses and maintain margins, the possible acquisition of complementary products and businesses, and other risks and uncertainties that may be detailed herein, and from time-to-time, in the Company's other reports filed with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Item 1. DESCRIPTION OF BUSINESS. General

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

In 1995, the Company acquired a woven fabric converting business that converts cotton, synthetics and blended fabrics for sale to domestic apparel manufacturers. In 1999, the Company purchased a knit fabric and processing business that produces knit fabrics used in the production of apparel. These acquisitions formed the basis of the Textile division's historic fabric conversion business.

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

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

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During 2003, the Textile division results were adversely affected due to ongoing competitive pressures in the fabric converting industry. As a result of operating losses incurred by the Textile division, the Company recorded a $5.4 million charge to fiscal 2003 earnings to reflect the impairment of goodwill associated with the Textile division. The charge was based upon a third party goodwill impairment evaluation conducted in connection with the fiscal 2003 audit.

On November 9, 2005, the Company's Board of Directors approved management's plan to exit the garment manufacturing business. The decision to exit this business was the result of operating losses incurred this year resulting from lower than planned business volume from our major customer and an inability to attract additional customers. In addition, a decrease in margins due to an increase in raw material costs, the long production lead times and the related working capital requirements of the business contributed to interest costs that exceeded the segment's operating profits. The Company has been disposing of the remaining garment manufacturing inventory since early in the fourth quarter of 2005 and will continue to dispose of such inventory until fully depleted. The Company presently intends to continue to conduct until June 30, 2006 the Textile division's fabric conversion business to a very limited extent but may not be required to report the Textile division as a separate segment in the future. Garment manufacturing represented 85%, 96% and 57% of the Textile segment's revenue during the years ended December 31, 2005, 2004 and 2003. Textile segment revenues were 28%, 32% and 27% of total sales in 2005, 2004 and 2003 respectively, and as a result of exiting this business, the Company's future revenue is expected to be significantly lower than in those years.

Management has determined that its disposal of the garment manufacturing business does not meet the requirements of Financial Accounting Standards Board No. 144, "Accounting for the Impairment or Disposal of Long-Termed Assets", for classification as discontinued operations at December 31, 2005.

The results of operations of the garment manufacturing business which the Company is exiting will not be reported as discontinued operations until the period in which the related assets are abandoned, distributed or exchanged. At December 31, 2005, the assets and liabilities of the garment manufacturing business continue to be classified as held for use and the results of operations for the twelve months then ended are included in the results of continuing operations. During the fourth quarter of 2005, the Company wrote down approximately $396,000 of the carrying value of its remaining Textile division inventory.

In connection with the preparation of the financial statements for the three and nine months ended September 30, 2005, management concluded that the carrying amounts of goodwill and trademarks related to the textile segment totaling $2.3 million and $709 thousand, respectively, were deemed to be fully impaired as of September 30, 2005 and were written off accordingly.

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

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Products and Customers

Craft Division

The Craft division 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 Craft division's products are sold to mass merchandisers, specialty chains and independent retailers and wholesalers. Products are sold under the La Mode (R), Le Chic (R), Streamline (R), Favorite Findings (R), Crafter's Images (R), and Button Fashion (R) registered trademarks and the Le Bouton, La Petite, Classic, Boutique Elegant and Mill Mountain brand names. The Craft division also produces and distributes a private-label button line for one of the nation's best-known retailers.

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

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

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

The Craft division's largest three customers (Wal-Mart, a mass merchandiser and Jo-Ann Stores and Hancock Fabrics, each a specialty chain,) represented approximately 46%, 25% and 8% respectively, in 2005, 45%, 21% and 8%, respectively, in 2004, and 47%, 21% and 7%, respectively, in 2003 of the division's net revenues. These customers also represented approximately 80% and 79% of the Craft division's outstanding accounts receivable as of December 31, 2005, and December 31, 2004, respectively. The Company believes that its craft business depends on trends within the craft market including the more mature home-sewing market. The retail customer base for buttons has changed substantially over the past two decades as department stores and small independent fabric stores have been replaced by mass merchandisers and specialty retail chains which have continued to consolidate. In response to this trend, the Company has broadened its lines to include embellishments, novelty buttons and products used in the craft industry which are not viewed by management as mature markets. In addition, the Company has sought to expand its markets beyond the traditional U.S. retail outlets by expansion into the major European countries.

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Textile Division

As described above, the Company experienced significant operating losses in the Textile division and is now in the process of exiting this business. The Company presently intends to continue to conduct until June 30, 2006 the Textile division's fabric conversion business to a very limited extent but may not be required to report the Textile division as a separate segment in the future.

Competition

The bulk of the Company's Craft 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 Craft division'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 Craft division's product development team and most of these products are sourced and produced in the U.S. and Asia. The general craft market is served by many and varied competitors with innovation and competitive pricing being of major importance.

Backlog

The Craft division fills at least 95% of its orders within 48 hours and as a result, had no backlog of any significance at either December 31, 2005 or 2004. The Textile division had no material backlog as of December 31, 2005.

Employees

The Company currently employs 130 persons, all of whom are employed full time, and none of its employees are represented by a collective bargaining agreement. The Company believes relations with employees are satisfactory.

Item 1A. RISK FACTORS

Going Concern Consideration

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

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

Due To Limited Cash Resources The Company Is Dependent Upon Its Principal Stockholder, and Its Lenders To Fund Its Future Operations.

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

Losses sustained in 2005 and in prior years have materially adversely affected the Company's liquidity. The Company has no availability under its existing credit facilities, and there can be no assurance the Company will not require additional financing to support its operations, that the Company will be able to obtain any needed additional financing, or that it can obtain additional financing on favorable terms. Robert A. Levinson, the Company's Chairman and principal stockholder, has agreed to continue to personally support the Company's cash requirements through January 1, 2008 by providing short-term loans to the Company up to a maximum of $3 million. There is currently $1 million of borrowing available from Mr. Levinson. If we (1) do not substantially achieve our overall projected revenue levels for 2006, (2) fail to operate within our projected expense levels as reflected in our business operating plans, or (3) do not receive the ongoing support of our lenders, then we will be unable to meet our cash and operating requirements for the next twelve months, which would in turn require us to seek additional financing to fund operations and/or implement additional expense reductions. Levcor has implemented several actions to reduce losses and improve cash flow, including exiting the textile business, reduction of headcount, elimination of non-profitable product lines and reductions in other general and administrative costs. However, there can be no assurance that Mr. Levinson will continue to personally support the Company's cash requirements, that such support from Mr. Levinson, together with the support of the Company's commercial lenders, will be sufficient to address the Company's liquidity needs and cash requirements or that the actions taken will be sufficient to allow the Company to generate net income from continuing operations.

Maintenance of Existing Credit Facilities is Necessary for the Company to Continue Operations.

The Company is dependent on the ongoing support of its commercial lenders. Under its existing credit facilities (which are secured by all the Company's assets), the lenders have the right to accelerate payment of the loans in the event of material adverse changes in the Company's business. In addition, CIT has the right to require repayment of the Company's indebtedness with them on 60 days notice. The Company has had and continues to have discussions with its lenders and has provided them with operating forecasts for 2006. The Company's lenders continue to support the Company, although there is no assurance they will continue to do so. Management of the Company believes that the likelihood of the lenders accelerating the payment of any of the obligations under the Company's facility during the next twelve months is not likely.

Failing to substantially achieve our projected revenue levels for 2006 may also result in a default under our credit agreement with our lenders. If a default were to occur and is not timely cured by us or waived by our lenders, or if this were to happen and our debt could not be refinanced or restructured, our lenders could pursue remedies, including: (1) penalty rates of interest; (2) demand for immediate repayment of the debt; and/or (3) the foreclosure on any of our assets

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securing the debt. If this were to happen and we were liquidated or reorganized after payment to our creditors, there would likely be insufficient assets remaining for any distribution to our stockholders.

If Cash Flows from Operations are Not Sufficient to Meet Our Operational Needs, We may Be Forced to Sell Assets, Refinance Debt, or Further Downsize our Operations

During the second half of 2005 and first quarter of 2006, we have commenced and will continue to implement certain expense reduction initiatives which we anticipate will reduce our operating expenses so that our operating expenses are in line with our sales forecasts. Our operating plan for 2006 focuses on eliminating Textile segment operations and lowering fixed and variable expenses. Although we believe the actions we are taking should allow us to generate profit from continuing operations, we cannot assure our stockholders that we will achieve the sales necessary to achieve sufficient liquidity and avoid further expense reduction actions such as selling assets or consolidating operations, reducing staff, refinancing debt and/or otherwise restructuring our operations.

Pension Funding

The Company's accumulated benefit obligation with its defined benefit plan at December 31, 2005 was $21.4 million. The Plan's portfolio of investments totaled $17.6 million. The current actuarial estimate is that a contribution with respect to the 2006 Plan Year in the approximate amount of $1.5 million will be required by September 15, 2007 based on current legislated discount rates and other actuarial assumptions. The Company is investigating its options regarding seeking a deferral of such 2006 Plan Year contribution to later years. In addition, legislation is currently being proposed in the United States Senate and House of Representatives which could mitigate a portion of this contribution requirement. There can be no assurance that the Company will be granted a deferral or that legislation favorable to the Company will be passed, in which case the Company will be required to obtain additional financing to allow it to make the payment. There can be no assurance the Company will be able to obtain such additional financing.

Our Business Is In An Industry That Is Subject To Significant Fluctuations In Operating Results That May Result In Unexpected Reductions In Revenue.

Our business is in an industry that is subject to significant fluctuations in operating results, which may lead to unexpected reductions in revenues. Factors that may influence the Company's operating results include:

o the volume and timing of customer orders received;

o the timing and magnitude of customers' marketing campaigns;

o the loss or addition of a major customer;

o the availability and pricing of materials for our products;

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

o currency fluctuations;

o delays caused by third parties; and

o changes in our product mix.

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The Company's Business Is Extremely Competitive.

Competition in the Craft business is based on product innovation, range of selection, brand names, price, display techniques and speed of distribution. We cannot assure you that our domestic or foreign competitors will not be able to offer products that are more attractive to our customers or potential customers than what we are able to provide. A large number of domestic and foreign manufacturers supply craft products to the United States market, many of which have a much more significant market presence and also have substantially greater financial, marketing, personnel and other resources than the Company. This may enable the Company's competitors to compete more aggressively in pricing and marketing and to react more quickly to market trends and to better weather market downturns. Increased competition by existing and future competitors could result in reductions in sales or reductions in prices of the Company's products. There is no assurance that the Company will be able to compete successfully against present or future competitors or that competitive pressures faced by the Company will not have a material adverse effect on the Company's results of operations or financial condition.

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

The Company's customer base has been and continues to be highly concentrated. The Textile division's two largest customers (Alfred Dunner, Inc. and Lana Winer International) accounted for approximately 76% and 21%, respectively, during 2005 and 90% and 6%, respectively, during 2004, and 71% and 4%, respectively, during 2003 of the division's sales. The Textile division accounted for 28%, 32% and 27% of the Company's total sales in 2005, 2004 and 2003 respectively. The Company is in the process of exiting the garment manufacturing business, which represented substantially all of the Textile division sales.

The Craft division's largest three customers (Wal-Mart, a mass merchandiser and Jo-Ann Stores and Hancock Fabrics, specialty chains,) represented approximately 46%, 25% and 8%, respectively, in 2005 and 45%, 21% and 8%, respectively, in 2004 and 47%, 21% and 7% respectively, in 2003 of the division's net revenues. These customers also represented approximately 80% and 79% of the Craft division's outstanding accounts receivable as of December 31, 2005 and 2004, respectively.

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

The Company's Crafts Business is Subject To The Seasonal Nature Of The Industry

The Craft business is largely based on reorders from its retail customers and on its ability to place new product lines with retail customers; as a result, the business is influenced by the buying habits of consumers. Home sewing and craft activities take place on a year-round basis; however, they are generally indoor

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activities and as a result they experience an increased participation level during the fall, winter and early spring months. Anticipating this pattern, the Company's retail customers place somewhat larger reorders during the July through March period. Sales are influenced by the introduction of new product lines and the discontinuance of existing product lines. A successful new program requires the retail customer to add the program and experience an acceptable level of sell-through. The Company develops and introduces new program ideas on a regular basis. However, there is no assurance that its retail customers will buy the new product lines and if they do, there is no assurance the consumer will purchase the new product at an acceptable level.

The Company's seasonality, along with other factors that are beyond its control, including general economic conditions, changes in consumer behavior, weather conditions, availability of import quotas and currency exchange rate fluctuations, could adversely affect the Company and cause its results of operations to fluctuate. Results of operations in any period should not be considered indicative of the results to be expected for any future period. The sale of the Company's products can be subject to substantial cyclical fluctuation. Sales may decline in periods of recession or uncertainty regarding future economic prospects that affect consumer spending, particularly on discretionary items. This cyclicality and any related fluctuation in consumer demand could have a material adverse effect on the Company's results of operations and financial condition.

The Future Of The Company Will Depend On Key Personnel That It May Not Be Able To Retain.

If the Company does not succeed in retaining and motivating existing personnel, its business will be affected, and the loss of such personnel might result in the Company not being able to retain customer accounts, generate new business or maintain sales. The Company depends on the continued services of its key personnel particularly its employees comprising its sales and marketing department, product development, purchasing and distribution groups as well as its two executive officers, Robert A. Levinson and Edward F. Cooke. Each of these individuals has acquired specialized knowledge and skills with respect to the Company's lines of businesses and their respective operations. As a result, if any of these individuals were to leave the Company, the Company could face substantial difficulty in hiring qualified successors and could experience a loss in productivity while any such successor obtains the necessary training and experience.

Recently enacted changes in the Securities Laws and Regulations are likely to increase costs.

The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") has required changes in some of our corporate governance, securities disclosure and compliance practice. In response to the requirements of the Sarbanes-Oxley Act, the SEC has promulgated new rules in a variety of subjects. Compliance with these new rules has increased our legal and accounting costs, and we expect these increased costs to continue indefinitely. These developments may also make it more difficult for us to attract and retain qualified members of our board of directors or qualified executive officers.

If we receive other than an unqualified opinion on the adequacy of our internal control over financial reporting as of December 31, 2007 and future year-ends as required by Section 404 of the Sarbanes-Oxley Act, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock.

As required by Section 404 of the Sarbanes-Oxley Act, the SEC adopted rules requiring public companies to include a report of management on the company's internal control over financial reporting in their annual reports on Form 10-K or 10-KSB that contains an assessment by management of the effectiveness of the

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Company's internal control over financial reporting. In addition, the public accounting firm auditing a company's financial statements must attest to and report on both management's assessment as to whether the company maintained effective internal control over financial reporting and on the effectiveness of the company's internal control over financial reporting.

We will be implementing a comprehensive effort to comply with Section 404 of the Sarbanes-Oxley Act. If we are unable to complete our assessment in a timely manner or if our independent auditors issue other than an unqualified opinion on the design, operating effectiveness or management's assessment of internal control over financial reporting, this could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our shares to decline.

The Company Is Impacted By Environmental Laws And Regulations.

The Company is subject to a number of federal, state and local environmental laws and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), and comparable state statutes that impose joint and several liability on present and former owners and operators, transporters and generators for remediation of contaminated properties regardless of fault. In addition, the Company is subject to laws concerning treatment, storage and disposal of waste, the discharge of effluents into waterways, the emissions of substances into the air and various health and safety matters. The Company's operations must meet extensive federal, state and local regulatory standards in the areas of safety, health and environmental pollution controls. Although the Company believes that its business is operating in compliance in all material respects with such laws, statutes and regulations, many of which provide for substantial penalties for violations, there can be no assurance that future changes in federal, state, or local regulations, interpretations of existing regulations or the discovery of currently unknown problems or conditions will not require substantial additional expenditures.

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

The Company's Series A preferred stock is subject to mandatory redemption, in three equal annual installments on June 15, 2007, June 15, 2008 and June 15, 2009, at a price per share of Series A preferred stock equal to $1 per share, together with an amount representing accrued and unpaid dividends, whether or not declared, to the date of redemption. This represents a significant future liability of the Company. There can be no assurance that the Company's business will generate sufficient cash flow from operations or that future borrowings will be available in sufficient amounts to enable the Company to redeem the Series A preferred stock when required to do so. In the event that the Company fails to redeem the Series A preferred stock on any of the mandatory redemption dates, the Series A preferred stockholders will be entitled to receive cumulative cash dividends, and no distribution or dividend in cash, shares of capital stock or other property will be paid or declared on the common stock. Similarly, if the redemption on the Series A preferred is not met, and should the Company liquidate or dissolve, no payment of any kind may be made to the common stockholders without first satisfying the accrued cash dividends owed to the Series A preferred stockholders. In addition, Series A preferred stock redemption payments are currently restricted under the Company's financing arrangements with its lenders.

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