Erm ... Well, I admit it's somewhat confusing.

    factor(x = character(), levels, labels = levels, exclude = NA, ordered = is.ordered(x), nmax = NA)

    [...]

    levels
    :   an optional vector of the values (as character strings) that x might 
        have taken. The default is the unique set of values taken by 
        as.character(x), sorted into increasing order of x. Note that this set 
        can be specified as smaller than sort(unique(x)).

    labels
    :   either an optional character vector of (unique) labels for the 
        levels (in the same order as levels after removing those in exclude), or 
        a character string of length 1.

This way, you can do something like that:

    > x <- 1:3
    > factor(x, levels = 1:2, labels = c("foo", "bar"))
    [1] foo  bar  <NA>
    Levels: foo bar

But this actually is:

    > factor(as.character(x), levels = c("1", "2"), labels = c("foo", "bar"))
    [1] foo  bar  <NA>
    Levels: foo bar