UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q

(Mark one)

| | x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
| | - | ---------------------------------------------------------------------------------------



For the quarterly period endedJuly 31, 2012



OR



| |  ̈ | TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------



For the transition period from
_______________ to _______________



Commission File Number: 0-15535



LAKELAND INDUSTRIES, INC.








(Exact name of Registrant as specified in
its charter)



|Delaware                                          |  | 13-3115216                          
|------------------------------------------------- |  | ------------------------------------
|(State of incorporation)                          |  | (IRS Employer Identification Number)
|                                                  |  |                                     
|701 Koehler Avenue, Suite 7, Ronkonkoma, New York |  | 11779                               
|(Address of principal executive offices)          |  | (Zip Code)                          



(631) 981-9700

(Registrant's telephone number, including
area code)



Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 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.     YesxNo ̈



Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YesxNo ̈



Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer or a smaller reporting company. See the
definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12-b-2 of the Exchange Act. Check one.



|Large accelerated filer ̈                                           | Accelerated filer ̈        
|------------------------------------------------------------------ | --------------------------
|                                                                   |                           
|Nonaccelerated filer ̈(Do not check if a smaller reporting company) | Smaller reporting companyx



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



Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



|Class                                   |  | Outstanding at September 11, 2012
|--------------------------------------- |  | ---------------------------------
|Common Stock, $0.01 par value per share |  | 5,329,861 shares                 











LAKELAND INDUSTRIES, INC.

AND SUBSIDIARIES



FORM 10-Q



The following information of the Registrant
and its subsidiaries is submitted herewith:



|                                |  | Page                                                                                 
|------------------------------- |  | -------------------------------------------------------------------------------------
|                                |  |                                                                                      
|PART I - FINANCIAL INFORMATION: |  |                                                                                      
|                                |  |                                                                                      
|Item 1.                         |  | Financial Statements:                                                                
|                                |  |                                                                                      
|                                |  | Introduction                                                                         
|                                |  |                                                                                      
|                                |  | Condensed Consolidated Statements of Operations                                      
|                                |  | Three and Six Months Ended July 31, 2012 and 2011                                    
|                                |  |                                                                                      
|                                |  | Condensed Consolidated Statements of Comprehensive Income                            
|                                |  | Three and Six Months Ended July 31, 2012 and 2011                                    
|                                |  |                                                                                      
|                                |  | Condensed Consolidated Balance Sheets                                                
|                                |  | July 31, 2012 and January 31, 2012                                                   
|                                |  |                                                                                      
|                                |  | Condensed Consolidated Statement of Stockholders' Equity                             
|                                |  | Six Months Ended July 31, 2012                                                       
|                                |  |                                                                                      
|                                |  | Condensed Consolidated Statement of Cash Flows                                       
|                                |  | Six Months Ended July 31, 2012 and 2011                                              
|                                |  |                                                                                      
|                                |  | Notes to Condensed Consolidated Financial Statements                                 
|                                |  |                                                                                      
|Item 2.                         |  | Management's Discussion and Analysis of Financial Condition and Results of Operations
|                                |  |                                                                                      
|Item 3.                         |  | Quantitative and Qualitative Disclosures about Market Risk                           
|                                |  |                                                                                      
|Item 4.                         |  | Controls and Procedures                                                              
|                                |  |                                                                                      
|PART II - OTHER INFORMATION:    |  |                                                                                      
|                                |  |                                                                                      
|Item 1.                         |  | Legal Proceedings                                                                    
|                                |  |                                                                                      
|Item 1A.                        |  | Risk Factors                                                                         
|                                |  |                                                                                      
|Item 3.                         |  | Defaults Upon Senior Securities                                                      
|                                |  |                                                                                      
|Item 5.                         |  | Other Information                                                                    
|                                |  |                                                                                      
|Item 6.                         |  | Exhibits                                                                             
|                                |  |                                                                                      
|Signature Pages                 |  | 36                                                                                   











LAKELAND INDUSTRIES, INC.

AND SUBSIDIARIES



PART I         FINANCIAL INFORMATION

Item 1. Financial Statements

Introduction



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS



This Form 10-Q may
contain certain forward-looking statements. When used in this Form 10-Q or in any other presentation, statements which are not
historical in nature, including the words “anticipate,” “estimate,” “should,” “expect,”
“believe,” “intend,” “project” and similar expressions, are intended to identify forward-looking
statements. They also include statements containing a projection of sales, earnings or losses, capital expenditures, dividends,
capital structure or other financial terms.



The forward-looking
statements in this Form 10-Q are based upon our management’s beliefs, assumptions and expectations of our future operations
and economic performance, taking into account the information currently available to us. These statements are not statements of
fact. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us that may cause our
actual results, performance or financial condition to be materially different from the expectations of future results, performance
or financial condition we express or imply in any forward-looking statements. Some of the important factors that could cause our
actual results, performance or financial condition to differ materially from expectations are:



| | · | The effect of the recent settlement of
the Brazilian arbitration proceeding pursuant to which we are required to pay out approximately $8.5 million over six years;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Risks associated with our failure to be
in compliance with certain covenants in our loan agreement with TD Bank;
| | - | ----------------------------------------------------------------------------------------------------------------

| | · | Our ability to obtain fabrics and components
from suppliers and manufacturers at competitive prices or prices that vary from quarter to quarter;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Risks associated with our international
manufacturing and start-up sales operations;
| | - | ------------------------------------------------------------------------------------

| | · | Potential fluctuations in foreign currency
exchange rates;
| | - | ----------------------------------------------------------

| | · | Our ability to respond to rapid technological
change;
| | - | -----------------------------------------------------

| | · | Our ability to identify and complete acquisitions
or future expansion;
| | - | ----------------------------------------------------------------------

| | · | Our ability to manage our growth;
| | - | ---------------------------------

| | · | Our ability to recruit and retain skilled
employees, including our senior management;
| | - | -------------------------------------------------------------------------------------

| | · | Our ability to accurately estimate customer
demand;
| | - | ---------------------------------------------------

| | · | Competition from other companies, including
some with greater resources;
| | - | ------------------------------------------------------------------------

| | · | Risks associated with sales to foreign
buyers;
| | - | ----------------------------------------------

| | · | Restrictions on our financial and operating
flexibility as a result of covenants in our credit facilities;
| | - | ----------------------------------------------------------------------------------------------------------

| | · | Our ability to obtain additional funding
to expand or operate our business as planned;
| | - | --------------------------------------------------------------------------------------

| | · | The impact of potential product liability
claims;
| | - | -------------------------------------------------

| | · | Liabilities under environmental laws and
regulations;
| | - | -----------------------------------------------------

| | · | Fluctuations in the price of our common
stock;
| | - | ----------------------------------------------

| | · | Variations in our quarterly results of
operations;
| | - | --------------------------------------------------

| | · | The cost of compliance with the Sarbanes-Oxley
Act of 2002 and rules and regulations relating to corporate governance and public disclosure;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| | · | The significant influence of our directors
and executive officers on our Company and on matters subject to a vote of our stockholders;
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| | · | The impact of a decline in federal funding
for preparations for terrorist incidents;
| | - | ------------------------------------------------------------------------------------

| | · | The limited liquidity of our common stock;
| | - | ------------------------------------------

| | · | The other factors referenced in this Form
10-Q, including, without limitation, in the sections entitled “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and the factors described under “Risk Factors” disclosed in our fiscal 2012 Form 10-K,
as modified in this Form 10-Q.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



3







We believe these forward-looking statements
are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations.
Furthermore, forward-looking statements speak only as of the date they are made. We undertake no obligation to publicly update
or revise any forward-looking statements after the date of this Form 10-Q, whether as a result of new information, future events
or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Form 10-Q might
not occur. We qualify any and all of our forward-looking statements entirely by these cautionary factors.



4







LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS

(UNAUDITED)

Three and six months ended July 31, 2012
and 2011



|                                                                        |  | THREE MONTHS ENDED |            |   | SIX MONTHS ENDED |  
|----------------------------------------------------------------------- |  | ------------------ | ---------- | - | ---------------- | -
|                                                                        |  | July 31,           |            |   | July 31,         |  
|                                                                        |  | 2012               |            |   | 2011             |  
|Net sales from continuing operations                                    |  | $                  | 23,499,324 |   |                  | $
|Cost of goods sold from continuing operations                           |  |                    | 16,368,100 |   |                  |  
|Gross profit from continuing operations                                 |  |                    | 7,131,224  |   |                  |  
|Operating expenses from continuing operations                           |  |                    | 6,979,251  |   |                  |  
|Operating profit from continuing operations                             |  |                    | 151,973    |   |                  |  
|Foreign Exchange charge gain (loss) Brazil                              |  |                    | (375,741   | ) |                  |  
|Arbitration judgment in Brazil                                          |  |                    | 2,126,153  |   |                  |  
|Other income (loss), net                                                |  |                    | (26,385    | ) |                  |  
|Interest expense                                                        |  |                    | (259,453   | ) |                  |  
|Income (loss) from continuing operations  before income taxes           |  |                    | 1,616,547  |   |                  |  
|Provision (benefit) for income taxes                                    |  |                    | (27,283    | ) |                  |  
|Income (loss) from continuing operations                                |  |                    | 1,643,830  |   |                  |  
|Discontinued operations:                                                |  |                    |            |   |                  |  
|Loss from operations of discontinued India glove manufacturing facility |  |                    | —          |   |                  |  
|Provision (benefit) for income taxes                                    |  |                    | —          |   |                  |  
|Loss on discontinued operations                                         |  |                    | —          |   |                  |  
|Net  Income (loss)                                                      |  | $                  | 1,643,830  |   |                  | $
|Earnings (loss) per share - Basic                                       |  |                    |            |   |                  |  
|Income (loss) from continuing operations                                |  |                    | 0.31       |   |                  | $
|Discontinued operations                                                 |  |                    | —          |   |                  | $
|Net income (loss)                                                       |  |                    | 0.31       |   |                  | $
|Earnings (loss) per share - Diluted                                     |  |                    |            |   |                  |  
|Income (loss) from continuing operations                                |  | $                  | 0.30       |   |                  | $
|Discontinued operations                                                 |  |                    | —          |   |                  | $
|Income (loss) net income                                                |  | $                  | 0.30       |   |                  | $
|Weighted average common shares outstanding:                             |  |                    |            |   |                  |  
|Basic                                                                   |  |                    | 5,271,997  |   |                  |  
|Diluted                                                                 |  |                    | 5,441,167  |   |                  |  



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



5







LAKELAND INDUSTRIES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three and six months ended July 31, 2012
and 2011



|                                          |  | Three Months Ended |            |   | Six Months Ended |  
|----------------------------------------- |  | ------------------ | ---------- | - | ---------------- | -
|                                          |  | July 31,           |            |   | July 31,         |  
|                                          |  | 2012               |            |   | 2011             |  
|Net income (loss)                         |  | $                  | 1,643,830  |   |                  | $
|Other comprehensive income (loss):        |  |                    |            |   |                  |  
|Cash flow hedge in China                  |  |                    | (127,094   | ) |                  |  
|Foreign currency translation adjustments: |  |                    |            |   |                  |  
|Lakeland Brazil, S.A.                     |  | $                  | (1,613,795 | ) |                  | $
|Canada                                    |  |                    | (8,938     | ) |                  |  
|United Kingdom                            |  |                    | (150,809   | ) |                  |  
|China                                     |  |                    | (31,688    | ) |                  |  
|Russia/Kazakhstan                         |  |                    | (51,179    | ) |                  |  
|Other comprehensive income (loss)         |  |                    | (1,983,503 | ) |                  |  
|Comprehensive income (loss)               |  | $                  | (339,673   | ) |                  | $



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



6







LAKELAND INDUSTRIES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED
BALANCE SHEETS

July 31, 2012 (unaudited) and January 31,
2012



|                                                                                                                                                                                 |  | July 31, 2012 |             |   | January 31, 2012 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ---------------- | -
|ASSETS                                                                                                                                                                           |  |               |             |   |                  |  
|Current assets:                                                                                                                                                                  |  |               |             |   |                  |  
|Cash and cash equivalents                                                                                                                                                        |  | $             | 6,462,363   |   |                  | $
|Accounts receivable, net of allowance for doubtful accounts of $271,000 at July 31, 2012 and $270,200 at January 31, 2012                                                        |  |               | 14,365,294  |   |                  |  
|Inventories, net of reserves of $1,823,000 at July 31, 2012 and $1,601,000 at January 31, 2012                                                                                   |  |               | 43,019,214  |   |                  |  
|Deferred income taxes                                                                                                                                                            |  |               | 4,671,481   |   |                  |  
|Assets of discontinued operation in India                                                                                                                                        |  |               | 1,922,505   |   |                  |  
|Prepaid income and VAT tax                                                                                                                                                       |  |               | 1,998,251   |   |                  |  
|Other current assets                                                                                                                                                             |  |               | 1,938,651   |   |                  |  
|Total current assets                                                                                                                                                             |  |               | 74,377,759  |   |                  |  
|Property and equipment, net                                                                                                                                                      |  |               | 13,792,540  |   |                  |  
|Prepaid VAT and other taxes, noncurrent                                                                                                                                          |  |               | 2,428,492   |   |                  |  
|Security deposits                                                                                                                                                                |  |               | 1,414,620   |   |                  |  
|Intangibles and other assets, net                                                                                                                                                |  |               | 3,867,965   |   |                  |  
|Goodwill                                                                                                                                                                         |  |               | 5,496,557   |   |                  |  
|Total assets                                                                                                                                                                     |  | $             | 101,377,933 |   |                  | $
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                             |  |               |             |   |                  |  
|Current liabilities:                                                                                                                                                             |  |               |             |   |                  |  
|Accounts payable                                                                                                                                                                 |  | $             | 8,203,955   |   |                  | $
|Accrued compensation and benefits                                                                                                                                                |  |               | 1,567,562   |   |                  |  
|Other accrued expenses                                                                                                                                                           |  |               | 1,997,122   |   |                  |  
|Liabilities of discontinued operation in India                                                                                                                                   |  |               | 32,480      |   |                  |  
|Current maturity of long-term debt                                                                                                                                               |  |               | 99,881      |   |                  |  
|Current maturity of arbitration settlement                                                                                                                                       |  |               | 1,760,346   |   |                  |  
|Short-term borrowing                                                                                                                                                             |  |               | 1,383,289   |   |                  |  
|Term loans to TD Bank                                                                                                                                                            |  |               | 6,080,000   |   |                  |  
|Borrowings under revolving credit facility                                                                                                                                       |  |               | 9,058,882   |   |                  |  
|Total current liabilities                                                                                                                                                        |  |               | 30,183,517  |   |                  |  
|Accrued Arbitration Award in Brazil (net of current maturities)                                                                                                                  |  |               | 5,257,133   |   |                  |  
|Borrowings under revolving credit facility                                                                                                                                       |  |               | —           |   |                  |  
|Other long-term debt                                                                                                                                                             |  |               | 1,568,323   |   |                  |  
|Other liabilities-accrued legal fees in Brazil                                                                                                                                   |  |               | 84,301      |   |                  |  
|VAT taxes payable long-term                                                                                                                                                      |  |               | 3,322,826   |   |                  |  
|Total liabilities                                                                                                                                                                |  |               | 40,416,100  |   |                  |  
|Stockholders' equity:                                                                                                                                                            |  |               |             |   |                  |  
|Preferred stock, $.01 par; authorized 1,500,000 shares (none issued)                                                                                                             |  |               | —           |   |                  |  
|Common stock, $.01 par; authorized 10,000,000 shares, issued, 5,686,302 and 5,581,919, outstanding, 5,329,861 and 5,225,478 at July 31, 2012 and January  31, 2012, respectively |  |               | 56,863      |   |                  |  
|Treasury stock, at cost, 356,441 shares at July 31, 2012 and at January 31, 2012                                                                                                 |  |               | (3,352,291  | ) |                  |  
|Additional paid-in capital                                                                                                                                                       |  |               | 50,818,584  |   |                  |  
|Retained earnings                                                                                                                                                                |  |               | 17,338,587  |   |                  |  
|Accumulated other comprehensive loss                                                                                                                                             |  |               | (3,899,910  | ) |                  |  
|Total stockholders' equity                                                                                                                                                       |  |               | 60,961,833  |   |                  |  
|Total liabilities and stockholders’ equity                                                                                                                                       |  | $             | 101,377,933 |   |                  | $



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

Certain reclassifications of prior period data have been
made to conform to current period classifications.



7







LAKELAND INDUSTRIES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY

(UNAUDITED)

Six months ended July 31, 2012



|                                                    |  | Common Stock |           |  | Treasury Stock |   |        | Additional Paid-in Capital |  |  | Retained Earnings |   |  | Accumulated Other Comprehensive Loss |            |   | Total |  
|--------------------------------------------------- |  | ------------ | --------- |  | -------------- | - | ------ | -------------------------- |  |  | ----------------- | - |  | ------------------------------------ | ---------- | - | ----- | -
|                                                    |  | Shares       |           |  | Amount         |   |        | Shares                     |  |  | Amount            |   |  |                                      |            |   |       |  
|Balance, January 31, 2012                           |  |              | 5,581,919 |  |                | $ | 55,819 |                            |  |  | (356,441          | ) |  | $                                    | (3,352,291 | ) |       | $
|Net loss                                            |  |              | —         |  |                |   | —      |                            |  |  | —                 |   |  |                                      | —          |   |       |  
|Other comprehensive loss                            |  |              | —         |  |                |   | —      |                            |  |  | —                 |   |  |                                      | —          |   |       |  
|Stock-based compensation:                           |  |              |           |  |                |   |        |                            |  |  |                   |   |  |                                      |            |   |       |  
|Grant of director stock options                     |  |              | —         |  |                |   | —      |                            |  |  | —                 |   |  |                                      | —          |   |       |  
|Restricted stock issued at par                      |  |              | 104,383   |  |                |   | 1,044  |                            |  |  | —                 |   |  |                                      | —          |   |       |  
|Return of shares in lieu of payroll tax withholding |  |              | —         |  |                |   | —      |                            |  |  | —                 |   |  |                                      | —          |   |       |  
|Restricted Stock Plan:                              |  |              |           |  |                |   |        |                            |  |  |                   |   |  |                                      |            |   |       |  
|2009 Plan                                           |  |              | —         |  |                |   | —      |                            |  |  | —                 |   |  |                                      | —          |   |       |  
|2012 Plan                                           |  |              | —         |  |                |   | —      |                            |  |  | —                 |   |  |                                      | —          |   |       |  
|Balance July 31, 2012                               |  |              | 5,686,302 |  |                | $ | 56,863 |                            |  |  | (356,441          | ) |  | $                                    | (3,352,291 | ) |       | $



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



8







LAKELAND INDUSTRIES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS

(UNAUDITED)

Six months ended July 31, 2012 and 2011



|                                                                                                  |  | For the Six Months Ended July 31, |           
|------------------------------------------------------------------------------------------------- |  | --------------------------------- | ----------
|                                                                                                  |  |                                   |           
|                                                                                                  |  | 2012                              |           
|Cash flows from operating activities:                                                             |  |                                   |           
|Net income (loss)                                                                                 |  | $                                 | (8,477,637
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities |  |                                   |           
|Arbitration award in Brazil                                                                       |  |                                   | 7,017,479 
|Provision for inventory obsolescence                                                              |  |                                   | 222,000   
|Provision for doubtful accounts                                                                   |  |                                   | 1,000     
|Deferred income taxes                                                                             |  |                                   | (927,766  
|Depreciation and amortization                                                                     |  |                                   | 746,556   
|Stock based and restricted stock compensation                                                     |  |                                   | 176,878   
|(Increase) decrease in operating assets                                                           |  |                                   |           
|Accounts receivable                                                                               |  |                                   | (2,419,650
|Inventories                                                                                       |  |                                   | 665,891   
|Prepaid income taxes and other current assets                                                     |  |                                   | (505,120  
|Other assets                                                                                      |  |                                   | (1,899    
|Assets of discontinued operations                                                                 |  |                                   | 76,065    
|Increase (decrease) in operating liabilities                                                      |  |                                   |           
|Accounts payable                                                                                  |  |                                   | 4,613,763 
|Accrued expenses and other liabilities                                                            |  |                                   | 900,099   
|Liabilities of discontinued operations                                                            |  |                                   | (32,300   
|Net cash provided by (used in) operating activities                                               |  |                                   | 2,055,359 
|Cash flows from investing activities                                                              |  |                                   |           
|Purchases of property and equipment                                                               |  |                                   | (1,074,199
|Net cash used in investing activities                                                             |  |                                   | (1,074,199
|Cash flows from financing activities                                                              |  |                                   |           
|Net borrowings under credit agreement, net of reclassification to term  loans                     |  |                                   | 146,075   
|Proceeds from term loans                                                                          |  |                                   | —         
|Canada loan repayments                                                                            |  |                                   | (150,100  
|Purchases of stock under stock repurchase program                                                 |  |                                   | —         
|Other liabilities                                                                                 |  |                                   | (15,067   
|Shares returned in lieu of taxes under restricted stock program-cash paid                         |  |                                   | (129,844  
|VAT taxes payable                                                                                 |  |                                   | 9,873     
|Net cash provided by (used in) financing activities                                               |  |                                   | (139,063  
|Effect of exchange rate changes on cash                                                           |  |                                   | (90,772   
|Net increase in cash and cash equivalents                                                         |  |                                   | 751,325   
|Cash and cash equivalents at beginning of period                                                  |  |                                   | 5,711,038 
|Cash and cash equivalents at end of period                                                        |  | $                                 | 6,462,363 



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

Certain reclassifications of prior period data have been
made to conform to current period classification.



9







LAKELAND INDUSTRIES,
INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(Unaudited)



| | 1. | Business
| | -- | --------

Lakeland Industries,
Inc. and Subsidiaries (the "Company"), a Delaware corporation organized in April 1982, manufactures and sells a comprehensive
line of safety garments and accessories for the industrial protective clothing and homeland security markets. The principal market
for our products is in the United States. No customer accounted for more than 10% of net sales during the six-month periods ended
July 31, 2012 and 2011.



| | 2. | Basis of Presentation
| | -- | ---------------------

The condensed
consolidated financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission and reflect all adjustments (consisting of only normal and recurring adjustments) which
are, in the opinion of management, necessary to present fairly the consolidated financial information required therein. Certain
information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.
While we believe that the disclosures are adequate to make the information presented not misleading, it is suggested that these
condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto
included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended January 31, 2012.



The results
of operations for the three and six-month periods ended July 31, 2012 are not necessarily indicative of the results to be expected
for the full year.



In this Form
10-Q, “FY” means fiscal year; thus, for example, FY13 refers to the fiscal year ending January 31, 2013.



| | 3. | Principles of Consolidation
| | -- | ---------------------------

The accompanying condensed consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.



| | 4. | Inventories:
| | -- | ------------

Inventories consist of the following:



|                |  | July 31, |            |  | January 31, |  
|--------------- |  | -------- | ---------- |  | ----------- | -
|                |  | 2012     |            |  | 2012        |  
|Raw materials   |  | $        | 18,335,643 |  |             | $
|Work-in-process |  |          | 2,659,855  |  |             |  
|Finished goods  |  |          | 22,023,716 |  |             |  
|                |  | $        | 43,019,214 |  |             | $



Inventories include freight-in,
materials, labor and overhead costs and are stated at the lower of cost (on a first-in, first-out basis) or market.



| | 5. | Earnings Per Share:
| | -- | -------------------

Basic earnings per share are
based on the weighted average number of common shares outstanding without consideration of common stock equivalents. Diluted earnings
per share are based on the weighted average number of common and common stock equivalents. The diluted earnings per share calculation
takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased
with the funds received from their exercise, based on the average price during the period.



10







The following table sets forth
the computation of basic and diluted earnings per share at July 31, 2012 and 2011.

|                                                                                                                                                                                                                                                         |  | Three Months Ended |           |  | Six Months Ended |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- |  | ---------------- | -
|                                                                                                                                                                                                                                                         |  | July 31,           |           |  | July 31,         |  
|                                                                                                                                                                                                                                                         |  | 2012               |           |  | 2011             |  
|Numerator                                                                                                                                                                                                                                                |  |                    |           |  |                  |  
|Net income (loss)                                                                                                                                                                                                                                        |  | $                  | 1,643,830 |  |                  | $
|Denominator                                                                                                                                                                                                                                              |  |                    |           |  |                  |  
|Denominator for basic earnings per share                                                                                                                                                                                                                 |  |                    |           |  |                  |  
|(Weighted-average shares which reflect 356,441 and 354,364 and 125,322 and 125,322 weighted average common shares in the treasury as a result of the stock repurchase program for the three months and six months in each of 2012 and 2011, respectively |  |                    | 5,271,997 |  |                  |  
|Effect of dilutive securities from restricted stock plan and from dilutive effect of stock options                                                                                                                                                       |  |                    | 169,170   |  |                  |  
|Denominator for diluted earnings per share                                                                                                                                                                                                               |  |                    | 5,441,167 |  |                  |  
|(adjusted weighted average shares)                                                                                                                                                                                                                       |  |                    |           |  |                  |  
|Basic earnings (loss) per share                                                                                                                                                                                                                          |  | $                  | 0.31      |  |                  | $
|Diluted earnings (loss) per share                                                                                                                                                                                                                        |  | $                  | 0.30      |  |                  | $



| | 6. | Revolving Credit Facility
| | -- | -------------------------

At July 31, 2012, the total balance
outstanding under our revolving credit facility amounted to $9.1 million. In January 2010, the Company entered into a one-year
$23.5 million revolving credit facility with TD Bank, N.A. In January 2011, TD Bank, N.A. agreed to a two-year extension to expire
January 2013 and in June 2011, TD Bank, N.A. agreed to extend the term to June 2014 and add a $6.5 million term loan facility to
be used to fund capital expansion in Brazil, Mexico and Argentina, as well as the ability to refinance existing debt in Canada.
In April 2012, TD Bank, N.A. agreed to add a $3.0 million term loan facility to be used to refinance a portion of the revolver.
Borrowings under this $9.5 million term loan facility are in the form of a five-year term loan, with maturity June 2014. As a result
of the arbitration award issued against the Company in May 2012 (see Note 14) and the subsequent entry into a Settlement Agreement
in respect thereof, as well as due to the recent operating results of the Company mentioned below, one or more events of default
have occurred under the TD Bank revolving credit facility and term loan facility including an event of default for failure to comply
with the minimum EBITDA covenant, which would allow TD Bank, at its option, to accelerate the loan. As such, this debt has been
reclassified as a current liability. While TD Bank has not waived the events of default, we are in discussions with TD Bank about
resolution of these matters, and we continue to otherwise operate within the terms of the credit agreement while we work out a
resolution. However, no assurances can be given that we will be able to work out a satisfactory arrangement with TD Bank.
The Company has engaged Raymond James & Associates, Inc. to assist the Board of Directors in its evaluation of a broad range
of financial and strategic alternatives for the Company.



| | 7. | Major Supplier
| | -- | --------------

We purchased 11.9% of our cost
of goods sold from one supplier during the six-month period ended July 31, 2012. We did not purchase in excess of 10% of our cost
of goods sold from any other supplier



| | 8. | Employee Stock Compensation
| | -- | ---------------------------

Shares of our common stock may
currently be awarded under our 2012 stock incentive plan and a nonemployee director option plan. Upon the approval of the 2012
plan by stockholders of the Company in June 2012, the ability to make grants under the 2009 restricted stock plan was terminated.
The 2012 plan has the structure and includes all of the components described below:



11







|                                        |  | Nature and terms                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Restricted Stock Plan - employees       |  | Long-term incentive compensation-three-year plan.  Employees are granted potential share awards at the beginning of the three-year cycle at baseline and maximum amounts.  The level of award and final vesting is based on the Board of Director’s opinion as to the performance of the Company and management in the entire three year cycle.  All vesting is three-year “cliff” vesting - there is no partial vesting. The valuation is based on the stock price at the grant date and amortized to expense over the three-year period.                                 
|                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Restricted Stock Plan – Directors       |  | Long-term incentive compensation-three-year plan.  Directors are granted potential share awards at the beginning of the three-year cycle at baseline and maximum amounts.  The level of award and final vesting is based on the Board of Director’s opinion as to the performance of the Company and management in the entire three-year cycle.  All vesting is three-year “cliff” vesting-there is no partial vesting. The valuation is based on the stock price at the grant date and amortized to expense over the three-year period.                                   
|                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Matching award program                  |  | All participating employees are eligible to receive one share of restricted stock awarded for each two shares of Lakeland stock purchased on the open market.  Such restricted shares are subject to three-year time vesting. The valuation is based on the stock price at the grant date and amortized to expense over the three-year period.                                                                                                                                                                                                                             
|                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Bonus in stock program - employees      |  | All participating employees are eligible to elect to receive any cash bonus in shares of restricted stock.  Such restricted shares are subject to two-year time vesting. The valuation is based on the stock price at the grant date and amortized to expense over the two-year period. Since the employee is giving up cash for unvested shares, the amount of shares awarded is 133% of the cash amount based on the grant date stock price.                                                                                                                             
|                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Director fee in stock program           |  | All directors are eligible to elect to receive any director fees in shares of restricted stock.  Such restricted shares are subject to two- year time vesting. The valuation is based on the stock price at the grant date and amortized to expense over the two-year period.  Since the director is giving up cash for unvested shares, the amount of shares awarded is 133% of the cash amount based on the grant date stock price.                                                                                                                                      
|                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Non-employee director stock option plan |  | The plan provides for an automatic one-time grant of options to purchase 5,000 shares of common stock to each nonemployee director newly elected or appointed. Options are granted at not less than fair market value, become exercisable commencing six months from the date of grant and expire six years from the date of grant. In addition, all nonemployee directors re-elected to the Company’s Board of Directors at any annual meeting of the stockholders will automatically be granted additional options to purchase 1,000 shares of common stock on that date.



12







Equity Incentive
Plans



On June 17, 2009, the stockholders
of the Company authorized the issuance of 253,000 shares under a restricted stock plan (the “2009 Equity Incentive Plan”).
Under the 2009 Equity Incentive Plan, eligible employees and directors were eligible to be awarded performance-based restricted
shares of the company common stock. The amount recorded as expense for the performance-based grants of restricted stock are based
upon an estimate made at the end of each reporting period as to the most probable outcome of this plan at the end of the three-year
performance period (e.g., baseline, maximum or zero). In addition to the grants with vesting based solely on performance, certain
awards pursuant to the plan have a time-based vesting requirement, under which awards vest from two to three years after grant
issuance, subject to continuous employment and certain other conditions. Restricted stock has no voting rights until fully vested
and issued, and the underlying shares are not considered to be issued and outstanding until vested.



Under the 2009 Equity Incentive
Plan, the Company has issued 104,989 fully vested shares as of July 31, 2012. The Company has granted up to a maximum of 35,989
restricted stock awards as of July 31, 2012. All of these restricted stock awards are nonvested at July 31, 2012 and have a weighted
average grant date fair value of $8.36. The Company recognizes expense related to performance-based awards over the requisite service
period using the straight-line attribution method based on the outcome that is probable.



On June 20, 2012, the stockholders
of the Company authorized 310,000 shares under the Company’s 2012 Stock Incentive Plan the (“2012 Equity Incentive
Plan”). Under the 2012 Incentive Plan, eligible employees and directors may be awarded restricted stock, restricted stock
units, performance shares, performance units and other share-based awards. The amount recorded as expense for the performance-based
grants of restricted stock are based upon an estimate made at the end of each reporting period as to the most probable outcome
of this plan at the end of the three-year performance period (e.g., baseline, maximum or zero). In addition to the grants with
vesting based solely on performance, certain awards pursuant to the plan have a time-based vesting requirement, under which awards
vest from two to three years after grant issuance, subject to continuous employment and certain other conditions. Restricted stock
has no voting rights until fully vested and issued, and the underlying shares are not considered to be issued and outstanding until
vested.



Under the 2012 Equity Incentive
Plan, the Company has granted 216,172 restricted stock awards as of July 31, 2012, assuming all maximum awards are achieved. All
of these restricted stock awards are nonvested at July 31, 2012 (154,672 shares at “baseline”), and have a weighted
average grant date fair value of $6.44. The Company recognizes expense related to performance-based awards over the requisite service
period using the straight-line attribution method based on the outcome that is probable.



As of July 31, 2012, unrecognized
stock-based compensation expense related to restricted stock awards totaled $72,708 pursuant to the 2009 Equity Incentive Plan
and $1,337,239 pursuant to the 2012 Equity Incentive Plan, before income taxes, based on the maximum performance award level, less
what has been charged to expense on a cumulative basis through July 31, 2012, which was set at baseline. Such unrecognized stock-based
compensation expense related to restricted stock awards totaled $72,708 for the 2009 Equity Incentive Plan and $941,179 for the
2012 Equity Incentive Plan at the baseline performance level. The cost of these nonvested awards is expected to be recognized over
a weighted-average period of three years. The Board has estimated its current performance level to be at the baseline level, and
expenses have been recorded accordingly. The performance based awards are not considered stock equivalents for earnings per share
(“EPS”) calculation purposes.



13







The following table represents
our stock options granted, exercised and forfeited during the six months ended July 31, 2012.



|Stock Options                                     |  | Number of Shares |        |  | Weighted Average Exercise Price per Share |   |      | Weighted Average Remaining Contractual Term |  |  | Aggregate Intrinsic Value | 
|------------------------------------------------- |  | ---------------- | ------ |  | ----------------------------------------- | - | ---- | ------------------------------------------- |  |  | ------------------------- | 
|                                                  |  |                  |        |  |                                           |   |      |                                             |  |  |                           | 
|Outstanding at January 31, 2012                   |  |                  | 18,200 |  |                                           | $ | 7.31 |                                             |  |  | 3.38 years                | 
|Granted during the six months ended July 31, 2012 |  |                  | 10,000 |  |                                           | $ | 6.44 |                                             |  |  | 5.89 years                | 
|Outstanding at July 31, 2012                      |  |                  | 26,000 |  |                                           | $ | 7.51 |                                             |  |  | 4.33 years                | 
|Exercisable at July 31, 2012                      |  |                  | 26,000 |  |                                           | $ | 7.51 |                                             |  |  | 4.33 years                | 
|Reserved for future issuance:                     |  |                  |        |  |                                           |   |      |                                             |  |  |                           | 
|Directors’ Plan                                   |  |                  | 21,300 |  |                                           |   |      |                                             |  |  |                           | 



There were no exercises or forfeitures
during the six-months ended July 31, 2012.



Stock-Based Compensation



The Company recognized total stock-based
compensation costs of $176,878 and $367,882 for the six-months ended July 31, 2012 and 2011, respectively, of which $0 and $4,029
result from the 2006 Equity Plan, $100,129 and $330,397 result from the 2009 Equity Incentive Plan, $52,119 and $0 result from
the 2012 Equity Incentive Plan and $24,630 and $33,456, from the Directors Option Plan, for the six-months ended July 31, 2012
and 2011, respectively. These amounts are reflected in selling, general and administrative expenses. The total income tax benefit
recognized for stock-based compensation arrangements was $64,560 and $134,277 for the six-months ended July 31, 2012 and 2011,
respectively.



|Shares under 2009 Plan                 |  | Outstanding unvested grants at maximum at beginning of FY13 |         |  | Granted during FY13 through July 31, 2012 |   |       | Becoming Vested during FY13 through July 31, 2012 |  |   | Forfeited during FY13 through July 31, 2012 |  |  | Outstanding unvested grants at maximum at July 31, 2013 |       
|-------------------------------------- |  | ----------------------------------------------------------- | ------- |  | ----------------------------------------- | - | ----- | ------------------------------------------------- |  | - | ------------------------------------------- |  |  | ------------------------------------------------------- | ------
|                                       |  |                                                             |         |  |                                           |   |       |                                                   |  |   |                                             |  |  |                                                         |       
|Restricted stock grants - employees    |  |                                                             | 129,536 |  |                                           |   | —     |                                                   |  |   | 79,313                                      |  |  |                                                         | 50,223
|Restricted stock grants - directors    |  |                                                             | 63,184  |  |                                           |   | —     |                                                   |  |   | 45,232                                      |  |  |                                                         | 17,952
|Matching award program                 |  |                                                             | 3,500   |  |                                           |   | —     |                                                   |  |   | —                                           |  |  |                                                         | —     
|Bonus in stock - employees             |  |                                                             | 25,801  |  |                                           |   | —     |                                                   |  |   | —                                           |  |  |                                                         | —     
|Retainer in stock - directors          |  |                                                             | 5,572   |  |                                           |   | 1,116 |                                                   |  |   | —                                           |  |  |                                                         | —     
|Total restricted stock plan            |  |                                                             | 227,593 |  |                                           |   | 1,116 |                                                   |  |   | 124,545                                     |  |  |                                                         | 68,175
|                                       |  |                                                             |         |  |                                           |   |       |                                                   |  |   |                                             |  |  |                                                         |       
|Weighted average grant date fair value |  | $                                                           | 8.07    |  |                                           | $ | 10.45 |                                                   |  | $ | 8.00                                        |  |  | $                                                       | 8.00  



14







|Shares under 2012 Plan                 |  | Outstanding unvested grants at maximum at beginning of FY13 |   |  | Granted during FY13 through July 31, 2012 |   |         | Becoming Vested during FY13 through July 31, 2012 |  |  | Forfeited during FY13 through July 31, 2012 |  |  | Outstanding unvested grants at maximum at July 31, 2013 |  
|-------------------------------------- |  | ----------------------------------------------------------- | - |  | ----------------------------------------- | - | ------- | ------------------------------------------------- |  |  | ------------------------------------------- |  |  | ------------------------------------------------------- | -
|                                       |  |                                                             |   |  |                                           |   |         |                                                   |  |  |                                             |  |  |                                                         |  
|Restricted stock grants - employees    |  |                                                             | — |  |                                           |   | 164,500 |                                                   |  |  | —                                           |  |  |                                                         | —
|Restricted stock grants - directors    |  |                                                             | — |  |                                           |   | 49,500  |                                                   |  |  | —                                           |  |  |                                                         | —
|Matching award program                 |  |                                                             | — |  |                                           |   | —       |                                                   |  |  | —                                           |  |  |                                                         | —
|Bonus in stock – employees             |  |                                                             | — |  |                                           |   | —       |                                                   |  |  | —                                           |  |  |                                                         | —
|Retainer in stock – directors          |  |                                                             | — |  |                                           |   | 2,172   |                                                   |  |  | —                                           |  |  |                                                         | —
|                                       |  |                                                             |   |  |                                           |   |         |                                                   |  |  |                                             |  |  |                                                         |  
|Weighted average grant date fair value |  |                                                             | — |  |                                           | $ | 6.44    |                                                   |  |  | —                                           |  |  |                                                         | —



| | 9. | Manufacturing Segment Data
| | -- | --------------------------



Domestic and international sales
from continuing operations are as follows:



|              |  | Three Months Ended |            |  | Six Months Ended | 
|------------- |  | ------------------ | ---------- |  | ---------------- | 
|              |  | July 31,           |            |  | July 31,         | 
|              |  | 2012               |            |  | 2011             | 
|Domestic      |  | $                  | 9,088,224  |  |                  | 
|International |  |                    | 14,411,100 |  |                  | 
|Total         |  | $                  | 23,499,324 |  |                  | 



We manage our operations by evaluating
each of our geographic locations. Our North American operations include our facilities in Decatur, Alabama (primarily the distribution
to customers of the bulk of our products and the manufacture of our chemical, glove and disposable products), Celaya, Mexico (primarily
disposable, glove and chemical suit production) and Sinking Spring, Pennsylvania (primarily woven products production). We also
maintain three manufacturing facilities in China (primarily disposable and chemical suit production). Our China facilities and
our Decatur, Alabama facility produce themajority of the Company’s products. The accounting
policies of these operating entities are the same as those described in Note 1 to our Annual Report on Form 10-K for the fiscal
year ended January 31, 2012. We evaluate the performance of these entities based on operating profit, which is defined as income
before income taxes, interest expense and other income and expenses. We have sales forces in Canada, Europe, Chile and China, which
sell and distribute products shipped from the United States, Mexico or China. The table below represents information about reported
manufacturing segments for the three-month and six-month periods noted therein:



15







|                                                                      |  | Three Months Ended  July 31, |            |   | Six Months Ended  July 31, |  
|--------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | -------------------------- | -
|                                                                      |  | 2012                         |            |   | 2011                       |  
|Net Sales from Continuing Operations:                                 |  |                              |            |   |                            |  
|USA                                                                   |  | $                            | 9,985,821  |   |                            | $
|Other foreign                                                         |  |                              | 5,983,909  |   |                            |  
|China                                                                 |  |                              | 10,103,401 |   |                            |  
|Brazil                                                                |  |                              | 4,698,670  |   |                            |  
|Less intersegment                                                     |  |                              | (7,272,477 | ) |                            |  
|Consolidated                                                          |  | $                            | 23,499,324 |   |                            | $
|External Sales from Continuing Operations:                            |  |                              |            |   |                            |  
|USA                                                                   |  | $                            | 9,088,224  |   |                            | $
|Other foreign                                                         |  |                              | 5,426,378  |   |                            |  
|China                                                                 |  |                              | 4,289,766  |   |                            |  
|Brazil                                                                |  |                              | 4,694,956  |   |                            |  
|Consolidated                                                          |  | $                            | 23,499,324 |   |                            | $
|Intersegment Sales from Continuing Operations:                        |  |                              |            |   |                            |  
|USA                                                                   |  | $                            | 897,597    |   |                            | $
|Other foreign                                                         |  |                              | 557,531    |   |                            |  
|China                                                                 |  |                              | 5,813,635  |   |                            |  
|Brazil                                                                |  |                              | 3,714      |   |                            |  
|Consolidated                                                          |  | $                            | 7,272,477  |   |                            | $
|Operating Profit (Loss) from Continuing Operations:                   |  |                              |            |   |                            |  
|USA                                                                   |  | $                            | (787,508   | ) |                            | $
|Other foreign                                                         |  |                              | 207,151    |   |                            |  
|China                                                                 |  |                              | 310,743    |   |                            |  
|Brazil                                                                |  |                              | (243,260   | ) |                            |  
|Less intersegment                                                     |  |                              | 664,847    |   |                            |  
|Consolidated                                                          |  | $                            | 151,973    |   |                            | $
|Depreciation and Amortization Expense  from    Continuing Operations: |  |                              |            |   |                            |  
|USA                                                                   |  | $                            | 151,868    |   |                            | $
|Other foreign                                                         |  |                              | 54,425     |   |                            |  
|China                                                                 |  |                              | 84,808     |   |                            |  
|Brazil                                                                |  |                              | 80,565     |   |                            |  
|Consolidated                                                          |  | $                            | 371,666    |   |                            | $
|Interest Expense from Continuing Operations:                          |  |                              |            |   |                            |  
|USA                                                                   |  | $                            | 145,544    |   |                            | $
|Other foreign                                                         |  |                              | 51,214     |   |                            |  
|China                                                                 |  |                              | —          |   |                            |  
|Brazil                                                                |  |                              | 281,418    |   |                            |  
|Less intersegment                                                     |  |                              | (218,723   | ) |                            |  
|Consolidated                                                          |  | $                            | 259,453    |   |                            | $
|Income Tax Expense (Benefit) from Continuing Operations:              |  |                              |            |   |                            |  
|USA                                                                   |  | $                            | (241,936   | ) |                            | $
|Other foreign                                                         |  |                              | 62,953     |   |                            |  
|China                                                                 |  |                              | 211,151    |   |                            |  
|Brazil                                                                |  |                              | (194,413   | ) |                            |  
|Less intersegment                                                     |  |                              | 134,962    |   |                            |  
|Consolidated                                                          |  | $                            | (27,283    | ) |                            | $
|Total Assets (at Balance Sheet Date):                                 |  |                              |            |   |                            |  
|USA                                                                   |  |                              | —          |   |                            |  
|Other foreign                                                         |  |                              | —          |   |                            |  
|China                                                                 |  |                              | —          |   |                            |  
|India assets of discontinued operations                               |  |                              | —          |   |                            |  
|Brazil                                                                |  |                              | —          |   |                            |  
|Consolidated                                                          |  |                              | —          |   |                            |  
|Long-lived Assets (at Balance Sheet Date)                             |  |                              |            |   |                            |  
|USA                                                                   |  |                              | —          |   |                            |  
|Other foreign                                                         |  |                              | —          |   |                            |  
|China                                                                 |  |                              | —          |   |                            |  
|Brazil                                                                |  |                              | —          |   |                            |  
|India                                                                 |  |                              | —          |   |                            |  
|Consolidated                                                          |  |                              | —          |   |                            |  



16







| | 10. | Income Tax Audit/Change in Accounting Estimate
| | --- | ----------------------------------------------



Effective February 1, 2007, the
Company adopted the new guidance issued by the Financial Accounting Standards Board (“FASB”) dealing with accounting
for uncertainty in income taxes. This guidance prescribes recognition thresholds that must be met before a tax position is recognized
in the financial statements and provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. Under guidance, an entity may only recognize or continue to recognize tax positions that meet
a "more likely than not" threshold.



There was no activity during
FY12 or FY13, and the uncertain tax liability at July 31, 2012, was $0. The Company’s policy is to recognize interest and
penalties related to income tax issues as components of income tax expense.



The Company is subject to USA
federal income tax, as well as income tax in multiple USA state and local jurisdictions and a number of foreign jurisdictions.
The Company’s federal income tax returns for through FY07 have been audited by the Internal Revenue Service (“IRS”).
The FY07 audit has been completed by the IRS and the Company has received a final “No Change Letter”. The Company has
received notice from the IRS that it will shortly commence an audit for the FY09 tax return.



Our three major foreign tax jurisdictions
are China, Canada and Brazil. According to China tax regulatory framework, there is no statute of limitation on fraud or any criminal
activities to deceive tax authorities. However, the general practice is going back five years, and general practice for records
maintenance is 15 years. China tax authorities have performed limited reviews on all China subsidiaries as of tax years 2008, 2009,
2010 and 2011 with no significant issues noted. As of this statement filing date, we believe our tax positions are reasonably stated.



Lakeland Protective Wear, Inc.,
our Canadian subsidiary, follows Canada tax regulatory framework recording its tax expense and tax deferred assets or liabilities.
As of this statement filing date, we believe the Company’s tax situation is reasonably stated, and we do not anticipate future
tax liability.



The Company’s Brazilian
subsidiary is under a tax audit, which raised some issues regarding the tax impact related to the merger held in 2008 and
the resulting goodwill resulting from the structure which was set up at the Company's Brazilian counsel's suggestion. The Company
has received a formal claim from the authorities in the amount of USD$1.1 million ($R2.3 million) (mostly fines and penalty). The
Company has filed a lawsuit in order to cancel this claim. We are still in first administrative level, in case of loss we can appeal
for other administrative level. Management believes it is possible that we will have success in our defense at the administrative
level. In case we go to Judicial Level, management believes the chance of loss is remote.



The structure of our 2008 acquisition
is relatively common in acquisitions of Brazilian operations made by non-Brazilian companies. In general, acquisitions with
this structure have survived challenge by the taxing authorities in Brazil. The cumulative amount of tax benefits recognized on
the Company’s books through July 31, 2012, resulting from the tax deduction of the goodwill amortization is approximately
USD$808,000. This results from the goodwill on the Brazilian books which, for Brazilian tax purposes, is eligible for tax write-off
over a five year period dating from November 2008.



| | 11. | Derivative Instruments and Foreign Currency Exposure
| | --- | ----------------------------------------------------



The Company has foreign currency
exposure, principally through sales in Canada, Brazil, China, Argentina, Chile and the UK, and production in Brazil, Mexico and
China. Management has commenced a derivative instrument program to partially offset this risk by purchasing forward contracts to
sell the Canadian Dollar, the Chilean Peso, the Euro, the Great Britain Pound and the Argentina Peso other than the cash flow hedge
discussed below. Such contracts are largely timed to expire with the last day of the fiscal quarter, with a new contract purchased
on the first day of the following quarter, to match the operating cycle of the Company. Management has decided not to hedge its
long position in the Chinese Yuan. Management previously had not hedged the Brazilian Real, but commenced doing so in May 2012.
We designated the forward contracts as nonhedging instruments with loss and gain recognized in the current earnings. In the three
and six-months ended July 31, 2012, the Company sustained a pre-tax loss on foreign exchange in Brazil of $(375,741) or $(0.07)
per share and $(691,528) or $(0.13) per share, respectively included in pre-tax income from continuing operations. In the three
and six months ended July 31, 2011, the Company recorded a gain on foreign exchange in Brazil of $28,083 or $0.005 per share and
$248,850 or $0.05 per share, respectively included in pre-tax income from continuing operations.



17







The Company accounts for its
foreign exchange derivative instruments as either assets or liabilities at fair value, which may result in additional volatility
in both current period earnings and other comprehensive income as a result of recording recognized and unrecognized gains and losses
from changes in the fair value of derivative instruments.



Currently, we have two types
of derivatives to manage the risk of foreign currency fluctuations. We enter into forward contracts with financial institutions
to manage our currency exposure related to certain assets and liabilities denominated in foreign currencies. Those forward contracts
derivatives not designated as hedging instruments are generally settled quarterly or monthly. Gain and loss on forward contracts
are included in current earnings. We also enter cash flow hedge contracts with financial institutions to manage our currency exposure
on future cash payments denominated in foreign currencies. The effective portion of gain or loss on cash flow hedge is reported
as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged
forecasted transaction affects earnings. Our hedge positions are summarized below:



Derivatives not designated as hedging instruments (in thousands)

Foreign Exchange Forward Contracts



|                                                             |  | Three Months Ended |        |  | Six Months Ended |  
|------------------------------------------------------------ |  | ------------------ | ------ |  | ---------------- | -
|                                                             |  | July 31, 2012      |        |  | July 31, 2011    |  
|Notional Value in USD                                        |  | $                  | 22,822 |  |                  | $
|Gain and loss reported in current operating income (expense) |  | $                  | 2      |  |                  | $



The above fluctuations among the periods
are mainly from our new program started in May 2012 on Brazilian currency hedge. Total outstanding balances on the above derivatives
are $6,681,960 and $0 for the periods ended July 31, 2012 and 2011, respectively.



Derivatives designated as hedging instruments (in thousands)

Asset Derivative from Foreign Currency Cash Flow Hedge



|                                                                 |  | As of July 31, 2012 |                |   | As of  January 31, 2012 |  
|---------------------------------------------------------------- |  | ------------------- | -------------- | - | ----------------------- | -
|Notional value in USD                                            |  | $                   | 8,719          |   |                         | $
|Gain and (loss) reported in equity as other comprehensive income |  | $                   | (108           | ) |                         | $
|Reported in Balance Sheet                                        |  |                     | Other payables |   |                         |  



Effect of Derivative on Income Statement from Foreign Currency
Cash Flow Hedge



|                                                                                                                                         |  | Six Months Ended  July 31, 2012 |    |  | Six Months Ended July 31, 2011 |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | -- |  | ------------------------------ | -
|Gain reclassed from other comprehensive income into current earnings during six months ended  July 31, 2012 reported in operating income |  | $                               | 10 |  |                                | $



The cash flow hedge is designed
to hedge the payments made in Euros and USA dollars to our China subsidiaries. Fair value of $107,552 and $123,313
were recorded as other liability and other assets as of July 31, 2012 and 2011, respectively.



18







12. VAT Tax Issue in Brazil



Asserted Claims



VAT tax in Brazil is at the state
level. We commenced operations in Brazil in May 2008 through an acquisition of Qualytextil, S.A. (“QT”). At the time
of the acquisition, and going back to 2004, the acquired company used a port facility in a neighboring state (Recife-Pernambuco),
rather than its own, in order to take advantage of incentives, in the form of a discounted VAT tax, to use such neighboring port
facility. We continued this practice until April 2009. The practice was stopped largely for economic reasons, resulting from additional
trucking costs and longer lead time. The Bahia state auditors (state of domicile for the Lakeland operations in Brazil) initially
reviewed the period from 2004-2006 and filed a claim for unpaid VAT taxes in October 2009. The claim asserted that the state VAT
taxes are owed to the state of domicile of the ultimate importer/user and disregarded the fact that the VAT taxes had already been
paid to the neighboring state.



The audit notice claimed that
the taxes paid to Recife-Pernambuco should have been paid to Bahia in the amount of R$4.8 million and assessed fines and interest
of an additional R$5.6 million for a total of R$10.4 million (approximately US$3.0 million, $3.5 million and $6.5 million, respectively).



Bahia had announced an amnesty
for this tax whereby R$3.5 million (US$1.9 million) of the taxes claimed were paid by QT by the end of the month of May 2010, and
the interest and penalties related thereto were forgiven. According to fiscal regulation of Brazil, $R2.1 million (US$1.1 million)
of this amnesty payment has since been recouped as credits against future taxes due.



An audit for the 2007-2009 period
has been completed by the State of Bahia. In October 2010, the Company received a claim for 2007-2009 from the State
of Bahia for taxes of R$6.2 (US$3.1) million and fines and penalties of R$6.1 (US$3.0) million, for a total of R$12.3 (US$6.2)
million, which had been expected per above. The Company intends to defend and wait for the next amnesty period. 
Of these claims, our attorney informs us that R$0.4 (US$0.2) million in respect of fines and penalties will be successfully
defended based on state auditor misunderstanding.



Lakeland intends to apply for
amnesty and make any necessary payments upon the forthcoming, anticipated amnesty periods imposed by the local Brazilian authorities.
Of this R$6.2 (US$3.1) million exposure, R$3.4 (US$1.7) million is eligible for future credit.



Company Brazilian counsel advises
the Company that in its opinion the next amnesty will come before the end of the judicial process. There has been a long history
in Bahia of the state declaring such amnesty periods every two to three years going back 25 years. The litigation process begins
as two separate administrative proceedings and, after a period of time, must be switched to a formal court judicial proceeding.
If the next amnesty does not arrive prior to the commencement of the formal court proceedings, the Company will have to remit a
“judicial deposit” covering the exposure from 2007-2009 in taxes of approximately R$6.2 (US$3.1) million plus assessed
fines and interest bringing the judicial deposit needed to approximately R$12.3 (US$6.2) million. The initial estimated time period
to Judicial Court deposit was 1.5-2 years.



Set forth below are the total
amounts of potential tax liability from both the first and second claims, the amount of payments already made into amnesty or scheduled
for future payment, which are not eligible for future credit (essentially the discount allowed as an incentive by the neighboring
state), less the amount of VAT taxes actually paid which are available as a credit and the amounts of the escrow released by one
of the three sellers of the Brazilian company acquired by the Company. The foregoing forms the basis for the US$1.6 million charge
to expense recorded by Lakeland in the first quarter of fiscal 2011.



19











|                                     |  | BRL (millions)                                                       |     |  | USD (millions)                    | 
|------------------------------------ |  | -------------------------------------------------------------------- | --- |  | --------------------------------- | 
|Foreign exchange rate                |  |                                                                      |     |  |                                   | 
|                                     |  | Total Paid
 Or To Be 
Paid Into 
Government 
Under 
Amnesty 
Program |     |  | Total Not 
Available 
For Credit1 | 
|Original claim 2004-2006             |  |                                                                      | 3.5 |  |                                   | 
|Second claim                         |  |                                                                      |     |  |                                   | 
|Preacquisition 2007-April 2008       |  |                                                                      | 2.4 |  |                                   | 
|Postacquisition May 2008-April 2009  |  |                                                                      | 3.3 |  |                                   | 
|                                     |  |                                                                      |     |  |                                   | 
|Totals                               |  |                                                                      | 9.2 |  |                                   | 
|                                     |  |                                                                      |     |  |                                   | 
|Escrow released from one seller      |  |                                                                      | 1.0 |  |                                   | 
|Charged to expense at April 30, 2010 |  |                                                                      | -   |  |                                   | 



1 Essentially represents the discount
originally offered as incentive by the neighboring state.

2The amount allowed as credit
against future payments represents the VAT taxes actually previously paid to the neighboring state.



Of these claims, our attorney
informs us that R$1.0 (US$0.6) million will be successfully defended based on a lapse of statute of limitations and R$0.3 (US$0.2)
million based on state auditor misunderstanding. No accrual has been made for these items.



The total taxes paid into the
amnesty program on May 31, 2010 were R$3.5 (US$2.2) million.



Future Accounting for Funds

Following payment into the amnesty
program, the taxes were since recouped via credits against future taxes due. The Company does not expect any further charges
to expense other than as described below:



In addition to the direct cost
of the additional tax liability accrued per above, there are several additional costs which will be future costs. There will be
interest costs on the cash paid during the period from the payment to the state and the credit to be subsequently used which has
been and will be charged to expense as incurred. There will be legal fees to defend and resolve this legal matter before the state,
which will be charged to expense as incurred. Further, there will be a loss of an incentive known as “desenvolve”3
as a result of using the credit rather than cash payments for the future VAT taxes. The “desenvolve” has already been
reflected in the operating results subsequent to May 2010 through August 2011 when the initial credit was exhausted and the Company
resumed normal monthly cash payments for VAT taxes. This has been reflected as a reduction in the gross margin in the ensuing period
through August 2011. This is not a cost but a lost discount.












3“Desenvolve” is an incentive remaining from Brazil’s hyperinflationary days about 10 years ago. It
is based on the net ICMS (VAT) tax payable. (QT pays ICMS to suppliers on raw materials, bills and collects ICMS from customers,
takes credit for ICMS paid to suppliers and remits the difference. The net amount payable is payable 30% immediately and 70% for
up to five years. The “desenvolve” is an incentive to pay the 70% quickly, like
a cash discount. If the full amount is paid immediately, there is an 80% discount of the 70% (or 56% of the total).



20







Summary
of Cash Flow Requirements: (R$ millions and US$ millions)



|Claim period/description                                                                                  |  | Taxes |  | Fines and  penalties |  | Maximum judicial  deposit | 
|--------------------------------------------------------------------------------------------------------- |  | ----- |  | -------------------- |  | ------------------------- | 
|                                                                                                          |  |       |  |                      |  |                           | 
|2004-2006 not paid into amnesty and being defended. Management does not plan
    to pay this into amnesty |  | R$1.3 |  | R$1.9                |  | R$3.2                     | 
|                                                                                                          |  |       |  |                      |  |                           | 
|2007-2009 claim by State of Bahia (1)                                                                     |  | R$6.2 |  | R$6.1                |  | R$12.3                    | 
|                                                                                                          |  |       |  |                      |  |                           | 
|TOTAL                                                                                                     |  | R$7.5 |  | R$8.0                |  | R$15.5                    | 



(1) Our attorney
informs us that based on the slow progress so far in the administrative proceedings for the 2007-2009 claim, they believe it is
now more likely than not that the next amnesty will arrive prior to the need to pay the R$12.3 judicial deposit. Therefore, the
most likely cash flow outlook in management’s opinion is as follows:



R$3.1 (US$1.6) million 2004-2006 Judicial deposit          Quarter
Three Fiscal year 2013 (around Sept, 2012)

R$6.2 (US$3.1) million 2007-2009
claim into amnesty     From Quarter Three Fiscal year 2013 to Quarter Four Fiscal Year 2013



Further, management has been
able to satisfy the R$3.1 (US$1.6) million judicial deposits by pledging real estate owned rather than paying cash.



At the next amnesty period:

| | · | If before judicial process - still
administration proceeding - the Company would pay only the taxes with no penalty or interest. This would then be recouped via credits
against future taxes on future imports. As before, the Company would lose desenvolve and interest.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | If after judicial process commences
- the amount of the judicial deposit previously remitted would be reclassified to the taxes at issue, and the excess submitted
to cover fines and interest would be refunded to QT. As above, the taxes would be recouped via credits against future taxes on
future imports, but we would lose desenvolve and interest.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | The desenvolve is scheduled to expire
on February 2013 and will be partially phased out starting February 2011. Based on the anticipated timing of the next amnesty,
there may be little amounts of lost desenvolve since it would largely expire on its own terms in any case.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Balance Sheet Treatment



The Company has reflected the
above items on its July 31, 2012, balance sheet as follows:



|                      |  |                                      |  | (R$ millions) |  | US$ millions | 
|--------------------- |  | ------------------------------------ |  | ------------- |  | ------------ | 
|Noncurrent assets     |  | VAT taxes eligible for future credit |  | 3.4           |  | 1.7          | 
|Long-term liabilities |  | Taxes payable                        |  | 6.2           |  | 3.0          | 



13. Termination of License
Agreement with DuPont



The Company received notice,
dated July 12, 2011, from E.I. DuPont de Nemours and Company (“DuPont”) stating that DuPont is terminating the DuPont
Wholesaler Agreement dated January 1, 2011. DuPont has fulfilled orders for purchases of finished garments containing Tychem®
and Tyvek® through September 10, 2011.



21







14. Brazil Management
and Share Purchase Agreement-Arbitration and Subsequent Event



Lakeland Industries, Inc. and
its wholly-owned subsidiary, Lakeland Brasil S.A. (“Lakeland Brasil” and together with Lakeland Industries, Inc., the
“Company”) were parties to an arbitration proceeding in Brazil involving the Company and two former officers (the “former
officers”) of Lakeland Brasil.  On May 8, 2012, the Company received notice of an arbitral award in favor of the former
officers as described below.  On May 12, 2012, the Company filed a request for clarification seeking a modification of the
award or to have it set aside. However, no such relief was awarded to the Company.



The arbitration proceeding arose
out of the acquisition by the Company in 2008 of Qualytextil, S.A., a company of which the former officers were owners.  In
connection with the acquisition, the Company entered into management agreements with the former officers and agreed to pay the
former officers a supplemental purchase price payment (“SPP”), calculated based upon the 2010 EBITDA of the acquired
company, subject to a cap (the “Maximum SPP”).  Based upon actual results for 2010 as contractually specified,
the Company determined that no SPP would be payable.  Contractual provisions further provided for the former officers to be
paid the Maximum SPP in the event that either of them were terminated by the Company without cause even if a SPP would not otherwise
be payable. In May 2010, the Company terminated the former officers for cause.



In the arbitration proceeding,
the former officers sought a determination that they were terminated by the Company without cause and, therefore, entitled to be
paid their portion of the Maximum SPP and the monthly remuneration that they would have been paid from the date of termination
through the end of their contractual employment period on December 31, 2011. On May 8, 2012, the Company received the arbitration
decision which accepted the former officers’ requests to declare that their employments were terminated without cause and
determined that, among other things, the non-compete clauses of each of the stock purchase agreement and management agreements
were null and non-applicable. The Company was ordered to pay to the former officers damages representing their portion of
the Maximum SPP in the aggregate amount of R$18,037,500 (approximately US$9 million at current exchange rates) and monthly remuneration
from the date of termination through December 31, 2011, which the Company estimates at an aggregate amount of R$1,150,000 (US$580,000). The
arbitration panel further ordered that the Company pay the former officers approximately R$450,000 (US$226,000) from an escrow
account established in connection with the acquisition and the Company is responsible for payment of 85% of the costs and arbitrators’
fees associated with the arbitration. The arbitration award, with all taxes, expenses, interest and applicable adjustments to date
amounts to R$25,148,252 (approximately US$ 12,575,000) as adjusted for inflation, plus interest and penalties.



On September 11, 2012, the Company
and the former officers entered into a settlement agreement (the “Settlement Agreement”) which fully and finally resolves
all alleged outstanding claims against the Company arising from the arbitration proceeding. Pursuant to the Settlement Agreement,
the Company agreed to pay to the former officers an aggregate of approximately US $8.5 million (the “Settlement Amount”)
over a period of six (6) years. The Settlement Amount is payable in combined Brazilian Real and United States dollars as follows:
(i) R$3 million (approximately US $1.5 million) was paid on the effective date of the Settlement Agreement, of which amount (A)
R$2.294 million (approximately US $1.15 million) in cash was released from the escrow account established in connection with the
Qualytextil, S.A. acquisition, and (B) R$706,000 (approximately US $350,000) was paid directly by the Company; (ii) R$2 million
(approximately US $1.0 million) is payable on or before December 31, 2012; and (iii) the balance of $6.0 million of the Settlement
Amount will be made in United States dollars consisting of 24 consecutive quarterly installments of US $250,000 beginning on March
31, 2013. In the event the Company fails to pay the remainder of the Settlement Amount in accordance with terms of the Settlement
Agreement, the former officers will be entitled to seek payment by the Company of R$25,148,252.47 (approximately US $12,575,000)
as adjusted for inflation, plus interest and penalties, less prior payments, which represents the original arbitral award inclusive
of all taxes, expenses, interest and applicable adjustments.



In addition, pursuant to the
Settlement Agreement, as additional security for payment of the Settlement Amount, Lakeland Brasil agreed to grant the former officers
a second mortgage interest on certain of its property in Brazil, which mortgage is expressly behind the lien securing the payment
of tax debts to a state within Brazil related to certain notices of tax assessment on such property (see Note 12). Lakeland also
agreed to become a co-obligor, in lieu of a guarantor, for payment of the Settlement Amount.



22







Previously, the Company recorded
a current liability of US $10,000,000 in respect of the arbitration proceeding. The Company has recorded a revised settlement liability
at net present value of $7.0 million, by applying a risk-free interest rate of 1.58% to discount the non-interest bearing payment
schedule. Together with estimated total fees for the settlement of $856,000, the total cost for the settlement is now estimated
at $7.9 million and a $2.1 million reduction in the $10 million charge taken at the first quarter of FY13 has been recorded.



As a result of the Settlement
Agreement, one or more events of default are continuing under the Company’s loan and security agreement (the “Loan
Agreement”) with TD Bank, N.A. (“TD Bank”) and TD Bank may, at its option, accelerate the loan. There is currently
approximately $15.1 million outstanding under the Loan Agreement. While TD Bank has orally indicated that it would not object to
the Company’s payment of the portion of the Settlement Amount due upon execution of the Settlement Agreement, it has not
expressly waived the events of default under the Loan Agreement. The Company continues to be in discussions with TD Bank about
resolution of these matters and is continuing to otherwise operate within the terms of the Loan Agreement, however, no assurance
can be given that the Company will work out a satisfactory arrangement with TD Bank or that TD Bank will not accelerate the loan.



The Company continues to strongly
believe that the Brazilian arbitration decision is inconsistent with the underlying facts. However, the Company entered into the
Settlement Agreement to eliminate the uncertainty, burden, risk, expense and distraction of further arbitration or litigation



The Company further believes
that its available resources, together with additional outside funding through debt or equity financings or asset sales, will enable
it to make timely payment of the Settlement Amount and continue its operations on a viable basis. There can, however, be no assurance
that such outside funding will ultimately be obtained. The Company is continuing to work with Raymond James & Associates, Inc.
in its evaluation of a broad range of financial and strategic alternatives for the Company.



The legal and arbitration fees
are being charged to expense as incurred.



15. Goodwill



The changes in the carrying amount
of goodwill during fiscal year 2012 are summarized in the following:

|                                              |  | USA |         |  | Brazil |   |           | Total | 
|--------------------------------------------- |  | --- | ------- |  | ------ | - | --------- | ----- | 
|Balance as of January 31, 2012                |  | $   | 871,297 |  |        | $ | 5,261,657 |       | 
|During fiscal year 2013 through July 31, 2012 |  |     |         |  |        |   |           |       | 
|Effect of foreign currency translation        |  |     | -       |  |        |   | (636,397  | )     | 
|Balance as of July 31, 2012                   |  | $   | 871,297 |  |        | $ | 4,625,260 |       | 



16. Recent Accounting
Pronouncements



In June 2011, the FASB issued
amendments to the presentation of comprehensive income, which became effective for interim and annual periods beginning after December
15, 2011. The amendments eliminated the previous reporting option of displaying components of other comprehensive income within
the statement of changes in stockholders’ equity. Under the new guidance, the Company will be required to present either
a single continuous statement of comprehensive income or an income statement immediately followed by a statement of comprehensive
income. In addition, the amendment requires the reclassification adjustments from other comprehensive income to net income be shown
on the face of the financial statements, however the FASB has postponed the implementation regarding the reclassification indefinitely..



17. Discontinued Operations
in India



The Company decided to discontinue
operations in its India glove manufacturing facility and put the assets and business up for sale. The Company decided to sell this
division primarily because it has incurred significant operating losses since inception, and the Company has been unsuccessful
in developing sufficient sales to reach at least break even. The Company was attempting to sell the operations as an ongoing operation
but shut down its operations in December 2011.



23







Prior year financial statements
for the three and six months ended July 31, 2011, have been restated to present the operations of the India glove manufacturing
subsidiary as a discontinued operation.



In conjunction with the discontinuance
of operations in FY12, the Company recognized a pretax loss on disposal of $1.7 million, primarily consisting of $0.9 million in
fixed asset write-downs, $0.4 million in inventory write-downs and $0.1 million in professional fees relating to the sale and $0.3
million in shutdown expenses. The assets and liabilities of the discontinued operations are presented separately under the captions
“Assets of discontinued operations in India” and “Liabilities of discontinued operations in India,” respectively,
in the accompanying Balance Sheets at July 31, 2012 and January 31, 2012, and consist of the following:



|                                             |  | July 31, 2012 |           |  | January 31, 2012 |  
|-------------------------------------------- |  | ------------- | --------- |  | ---------------- | -
|Cash                                         |  | $             | 159,152   |  |                  | $
|Accounts receivable                          |  |               | 665       |  |                  |  
|Inventory                                    |  |               | 214,409   |  |                  |  
|Other current asset                          |  |               | 22,724    |  |                  |  
|Property and equipment                       |  |               | 1,525,555 |  |                  |  
|Total assets of discontinued operations      |  |               | 1,922,505 |  |                  |  
|Liabilities of discontinued operations:      |  |               |           |  |                  |  
|Accounts payable                             |  |               | 10,063    |  |                  |  
|Other liabilities                            |  |               | 22,417    |  |                  |  
|Total liabilities of discontinued operations |  |               | 32,480    |  |                  |  
|                                             |  |               |           |  |                  |  
|Net assets of discontinued operations        |  | $             | 1,890,025 |  |                  | $



The following table illustrates
the reporting of the discontinued operations reclassified on the face of the Statements of Operations for the six months ended
July 31, 2012 and 2011:



|                                                       |  | Six Months Ended July 31, |  
|------------------------------------------------------ |  | ------------------------- | -
|                                                       |  | 2012                      |  
|Net sales                                              |  |                           | —
|Cost of goods sold                                     |  |                           | —
|Gross profit (loss)                                    |  |                           | —
|Operating expense                                      |  |                           | —
|Operating loss                                         |  |                           | —
|Shutdown expense accrual                               |  |                           | —
|Loss from discontinued operations before income taxes  |  |                           | —
|Benefit from income taxes from discontinued operations |  |                           | —
|Net loss from discontinued operations                  |  |                           | —



The above amounts presented for
the previous fiscal year have been reclassified to conform to the current presentation.



24







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



This Form 10-Q may contain
certain “forward-looking” information within the meaning of the Private Securities Litigation Reform Act of 1995. This
information involves risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking
statements. See Part I, Item 1.



Overview

We manufacture and sell a comprehensive
line of safety garments and accessories for the industrial protective clothing market. Our products are sold by our in-house customer
service group, our regional sales managers and independent sales representatives to a network of over 1,200 North American safety
and mill supply distributors. These distributors in turn supply end user industrial customers, such as integrated oil, chemical/petrochemical,
utilities, automobile, steel, glass, construction, smelting, munition plants, janitorial, pharmaceutical, mortuaries and high technology
electronics manufacturers, as well as scientific and medical laboratories. In addition, we supply federal, state and local governmental
agencies and departments, such as fire and law enforcement, airport crash rescue units, the Department of Defense, the Department
of Homeland Security and the Centers for Disease Control.



We have operated manufacturing
facilities in Mexico since 1995, in China since 1996 and in Brazil since 2008. Beginning in 1995, we moved the labor intensive
sewing operation for our limited use/disposable protective clothing lines to these facilities. Our facilities and capabilities
in China and Mexico allow access to a less expensive labor pool than is available in the United States and permit us to purchase
certain raw materials at a lower cost than are available domestically. As we have increasingly moved production of our products
to our facilities in China, Mexico and Brazil (other than issues with the Navy contract as discussed herein), we have seen improvements
in the profit margins for these products except for cost increases early in the second quarter of FY13 for which transfer pricing
has been adjusted effective in the third quarter of FY13.



Critical Accounting
Policies and Estimates

Our discussion and analysis of
our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements in
conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, net sales and expenses and disclosure of contingent assets and liabilities.
We base estimates on our past experience and on various other assumptions that we believe to be reasonable under the circumstances,
and we periodically evaluate these estimates.



We believe the following critical
accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.



Revenue Recognition.The
Company derives its sales primarily from its limited use/disposable protective clothing and secondarily from its sales of high-end
chemical protective suits, firefighting and heat protective apparel, gloves and arm guards and reusable woven garments. Sales are
recognized when goods are shipped, at which time title and the risk of loss pass to the customer. Sales are reduced for sales returns
and allowances. Payment terms are generally net 30 days for United States sales and net 90 days for international sales.



Substantially all the Company’s
sales outside Brazil are made through distributors. There are no significant differences across product lines or customers in different
geographical areas in the manner in which the Company’s sales are made.



Lakeland offers a growth rebate
to certain distributors each year on a calendar-year basis. Sales are tracked on a monthly basis, and accruals are based on sales
growth over the prior year. The growth rebate accrual is booked on a monthly basis as a reduction to revenue and an increase to
liabilities if the accrual is increased and the reverse if the trend goes in the opposite direction over the prior year in a given
month. Based on volume and products purchased, distributors can earn anywhere from 1% to 4% rebates in the form of either a quarterly
or annual credit to their account, depending on the specific agreement. In estimating the accrual needed, management tracks sales
growth over the prior year.



25







Our sales are generally final;
however, requests for return of goods can be made and must be received within 90 days from invoice date. No returns will be accepted
without a written authorization. Return products may be subject to a restocking charge and must be shipped freight prepaid. Any
special made-to-order items are not returnable. Customer returns have historically been insignificant.



Customer pricing is subject to
change on a 30-day notice; exceptions based on meeting competitors’ pricing are considered on a case-by-case basis.



Inventories. Inventories
include freight-in, materials, labor and overhead costs and are stated at the lower of cost (on a first-in, first-out basis) or
market. Provision is made for slow-moving, obsolete or unusable inventory.



Allowance for Doubtful Accounts.
Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to make required payments. The Company recognizes losses
when information available before the financial statements are issued or available to be issued indicates that it is probable that
an asset has been impaired based on criteria noted above at the date of the financial statements, and the amount of the loss can
be reasonably estimated. Management considers the following factors when determining the collectability of specific customer accounts:



Customer creditworthiness,
past transaction history with the customer, current economic industry trends and changes in customer payment terms. Past due
balances over 90 days and other higher risk amounts are reviewed individually for collectability. If the financial condition of
the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would
be required. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge
to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection
efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.



Uncertain Tax Positions.
The Company adopted the guidance for uncertainly in income taxes effective February 1, 2007. This guidance prescribes recognition
thresholds that must be met before a tax benefit is recognized in the financial statements and provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition. Under this guidance, an entity
may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold.



Income Taxes and Valuation
Allowances.We are required to estimate our income taxes in each of the jurisdictions in which we operate as part of preparing
our consolidated financial statements. This involves estimating the actual current tax in addition to assessing temporary differences
resulting from differing treatments for tax and financial accounting purposes. These differences, together with net operating loss
carry forwards and tax credits, are recorded as deferred tax assets or liabilities on our balance sheet. A judgment must then be
made of the likelihood that any deferred tax assets will be realized from future taxable income. A valuation allowance may be required
to reduce deferred tax assets to the amount that is more likely than not to be realized. In the event we determine that we may
not be able to realize all or part of our deferred tax asset in the future, or that new estimates indicate that a previously recorded
valuation allowance is no longer required, an adjustment to the deferred tax asset is charged or credited to net income in the
period of such determination.



Valuation of Goodwill and
Other Intangible Assets.Goodwill and indefinite lived, intangible assets are tested for impairment at least annually; however,
these tests may be performed more frequently when events or changes in circumstances indicate the carrying amount may not be recoverable.
Goodwill impairment is evaluated utilizing a two-step process as required by US GAAP. Factors that the Company considers important
that could identify a potential impairment include: significant underperformance relative to expected historical or projected future
operating results; significant changes in the overall business strategy; and significant negative industry or economic trends.
The Company measures any potential impairment on a projected discounted cash flow method. Estimating future cash flows requires
the Company’s management to make projections that can differ materially from actual results.



Foreign Currency Risks.
The functional currency for the Brazil operation is the Brazil Real; the United Kingdom, the Euro, the trading company in China,
the RenminBi; the Canada Real Estate, the Canadian dollar, and the Russia operation, the Russian Ruble and Kazakhstan Tenge. All
other operations have the U.S. dollar as its functional currency.



26







Impairment of Long-Lived Assets.
The Company evaluates the carrying value of long-lived assets to be held and used when events or changes in circumstances indicate
the carrying value may not be recoverable. The carrying value of a long-lived asset is considered impaired when the total projected
undiscounted cash flows from the asset are separately identifiable and are less than its carrying value. In that event, a loss
is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset.



Self-Insured Liabilities.We have a self-insurance program for certain employee health benefits. The cost of such benefits is recognized as expense based
on claims filed in each reporting period and an estimate of claims incurred but not reported during such period. Our estimate of
claims incurred but not reported is based upon historical trends. If more claims are made than were estimated or if the costs of
actual claims increase beyond what was anticipated, reserves recorded may not be sufficient, and additional accruals may be required
in future periods. We maintain separate insurance to cover the excess liability over set single claim amounts and aggregate annual
claim amounts.



Loss Contingencies. Certain
conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will
only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess
such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related
to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s
legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of
the amount of relief sought or expected to be sought therein.



If the assessment of a contingency
indicates that it is probable that a material loss has been or is probable of being incurred and the amount of the liability can
be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates
that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material,
would be disclosed.



Loss contingencies considered
remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.



Significant
Balance Sheet Fluctuation July 31, 2012, As Compared to January 31, 2012



Cash increased by $0.8 million
as TD borrowings increased by $0.8 million at July 31, 2012, with all TD borrowings including $6.1 million in term loans now classified
as current. Accounts receivables increased $1.8 million, primarily due to the increase of sales in the six months ended July 31,
2012 in Brazil of $1.8 million or 22.3% from the six months ended January 31, 2012, primarily resulting from our Brazilian Navy
contract. Inventory decreased by $2.6 million, including the $1.6 million of which decrease was in the U.S., with $0.8 million
in chemical, as we changed our inventory mix to Lakeland branded products only. Our wovens division inventory decreased $1.0 million
as a planned reduction as we physically moved this division from Missouri to Alabama. Accounts payables increased $3.6 million
due primarily to the $1.7 million increase in China payables as more materials are sourced and purchased in China and in Brazil
in respect of raw material for the Navy Contract, all of which are paid on a more prolonged schedule than the average payable.
As a result of the Settlement Agreement in Brazil, the balance sheet now reflects a total accrual of $7.9 million, with $5.3 million
in non-current with $1.8 million current maturity and $0.6 million in accrued fees at July 31, 2012.



At July 31, 2012, the Company
had an outstanding loan balance of $9.1 million under its revolving facility with TD Bank, N.A. compared with $11.5 million at
January 31, 2012. The term loan balance at July 31, 2012 was $6.1 million. Total stockholders’ equity decreased $12.3 million
principally due to the arbitration award in Brazil and changes in foreign exchange translations in other comprehensive income of
$3.9 million.



27







Three months ended
July 31, 2012, As Compared to the Three Months Ended July 31, 2011



Net Sales.Net sales decreased
$2.3 million, or 9%, to $23.5 million for the three months ended July 31, 2012, from $25.8 million for the three months ended July
31, 2011. The net decrease was due to a $4.5 million decrease in domestic sales offset in part by a $1.8 million increase in foreign
sales. USA domestic sales of disposables decreased by $3.9 million, chemical suit sales decreased by $0.2 million, wovens decreased
by $0.1 million and reflective sales decreased by $0.5 million. The decrease in domestic sales was mainly due to the loss of the
DuPont product sales as a result of the termination of the DuPont supply contract in July 2011, and partially due to a shortage
in stock situation that management believes has been resolved (but may have continuing impact resulting from lost customers), and
also to operating inefficiencies resulting from the move from St. Joseph, MO to Decatur, AL and Mexico which resulted in additional
lost sales. The sales team continues to make progress in converting customers from Tyvek, previously supplied DuPont product, to
Lakeland branded products. Currently, the decreased sales due to the loss of the DuPont contract have not been offset by such sales
of Lakeland branded products; however, the sales achieved from Lakeland branded products have greater gross profit margins than
the DuPont Tyvek products, lessening the impact of the revenue reduction. While the Company’s sales of Lakeland branded products
show strong gains over the Lakeland branded product sales from the same period in the prior year, it will take time to rebuild
the lost sales volume, for which there can be no assurance. Domestic sales in China and to the Asia Pacific Rim remain strong.
UK sales increased by $1.0 million, or 69%. Chile and Argentina sales increased by 37%, Beijing sales increased by $0.4 million
or 35% and sales in Brazil increased by $0.7 million or 16.7%. The increase in foreign sales is primarily due to increases in sales
of high end chemical suits, fire retardant garments, and completion of some large contracts.



Gross Profit.Gross profit
decreased $0.7 million, or 8.6%, to $7.1 million for the three months ended July 31, 2012, from $7.8 million for the three months
ended July 31, 2011. Gross profit as a percentage of net sales was flat at 30% for the three months ended July 31, 2012, from 30.2%
for the three months ended July 31, 2011. Major factors driving the changes in gross margins were:



| | * | Disposables margins increased 6.8 percentage
points in the second quarter of FY13 over the second quarter of FY12, resulting mainly from changed sales mix of nearly all Lakeland
branded products this year, while last year had more than 50% sales of DuPont products at a lower margin. This year’s margin
was lower than it otherwise would be as a result of lower volume and an increase in inventory reserves against Tyvek items remaining.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | * | China manufacturing gross margin at our
Weifang plant decreased 10 percentage points over last year due to a 12% labor cost increase and the negative impact to margins
from sales to our UK operations in Euros.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | * | China margins in our Beijing Trading Company
increased 2.8 percentage points, based on continued strong operations.
| | - | -------------------------------------------------------------------------------------------------------------------

| | * | Brazil margin decreased by 14.3 percentage points in the second quarter of FY13 from the second
quarter of FY12 entirely due to issues with the Brazilian Navy contract.  This contract was to supply coveralls to the Brazilian
Navy made from Fire-Resistant cotton for a total value of approximately USD$5 million.  The Brazilian currency weakened significantly
in May 2012, thereby greatly increasing the material cost purchased from a USA supplier. Further, due to the length of time elapsed
since the bid was submitted; there were increases in the material invoiced cost, along with a need to change certain components
at a higher cost.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | * | Wovens gross margin increased by approximately
10 percentage points in the second quarter of FY13 over the second quarter of FY12 mainly reflecting unusually low margins in the
prior year. The current period would have been even higher, but was impacted by continuing inefficiencies resulting from its facility
move in April 2012.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



28







Operating Expenses.Operating
expenses were flat at $7 million for the three months ended July 31, 2012 and July 31, 2011. As a percentage of sales, operating
expenses increased to 29.7% for the three months ended July 31, 2012 from 27.0% for the three months ended July 31, 2011.



|$ 0.3  | million increase in sales salaries, resulting partly from paying in cash foreign participants in the Restricted Stock Plan, with the balance of the increase resulting from additional sales personnel in Argentina, China and Alabama.
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|$ 0.1  | million increase in professional fees, due to additional legal matters relating to various compliance issues and also several personnel terminations.                                                                                  
|$(0.1) | million decreased equity compensation resulting from a reversal of expenses relating to foreign participants, who were compensated in cash in their local countries.                                                                   
|$(0.1) | million decrease in freight out, mainly from lower volume in disposables in the USA.                                                                                                                                                   
|$(0.2) | million decrease in administration payroll, mainly from reductions in Brazil.                                                                                                                                                          



Operating Profit. Operating
profit decreased 81.6% to $0.2 million for the three months ended July 31, 2012, from $0.8 million for the three months ended July
31, 2011. Operating margins were 0.6% for the three months ended July 31, 2012, compared to 3.2% for the three months ended July
31, 2011.



Arbitration Judgment in Brazil.As a result of the settlement of the Brazilian arbitration matter in September 2012 a positive adjustment of $2.1 million was
recorded in the second quarter of FY13.



Interest Expenses. Interest
expenses increased $0.1 million to $0.3 million for the three months ended July 31, 2012, from $0.1 million for the three months
ended July 31, 2011, due to higher borrowing levels outstanding.



Income Tax Expense. Income
tax expenses consist of federal, state and foreign income taxes. Income tax expenses decreased $0.1 million to $0.0 million for
the three months ended July 31, 2012, from $0.1 million for the three months ended July 31, 2011. Our effective tax rates were
1.7% for the second quarter of FY13 and 13.4% for the second quarter of FY12. Our effective tax rate for both periods varied from
the 34% federal statutory rate primarily due to goodwill amortization in Brazil and tax loss benefits in the USA at higher rates
than China profits were taxed, certain losses in China which are carried forward and the arbitration settlement.



Net Income (Loss). Net
income increased by $1.1 million to $1.6 million for the three months ended July 31, 2012, from $0.6 million for the three months
ended July 31, 2011, reflecting the $2.1 million adjustment due to the arbitration settlement in September 2012. Without this adjustment,
net loss would have been $0.5 million, or $(0.09) per share.



Six months ended July
31, 2012, As Compared to the Six Months Ended July 31, 2011



Net Sales.Net sales from
continuing operations decreased $3.9 million, or 7.7%, to $47.5 million for the six months ended July 31, 2012, from $51.4 million
for the six months ended July 31, 2011. The net decrease was due to a $9.4 million decrease in domestic sales, offset in part by
a $5.4 million increase in foreign sales. USA domestic sales of disposables decreased by $1.2 million, as wovens increased by $0.4
million, and glove sales increased by $0.3 million. The decrease in disposable sales is due primarily to the loss of the DuPont
Tyvek sales, to a shortage in stock situation that management believes has been resolved (but may have continuing impact resulting
from lost customers), and also to operating inefficiencies resulting from the move from St. Joseph, MO to Decatur, AL and Mexico
which resulted in additional lost sales, and a decline in direct container shipments to the USA resulting from high stock levels
from larger customers in the USA after the Gulf oil spill in the prior year. External sales from China were up $4.5 million from
the year ago period. In addition, domestic sales in China and to the Asia Pacific Rim remain strong recording a $1.0 million increase
for the six months ended July 31, 2012. UK sales increased by $1.5 million, or 45.7%, and Chile and Argentina sales increased by
0.6%. Sales in Brazil increased by $1.8 million or 22.3%. The increase in foreign sales is primarily due to introduction of new
products and new marketing material targeting specific markets.



29







Gross Profit.Gross profit
from continuing operations decreased $1.6 million, or 10%, to $14.4 million for the six months ended July 31, 2012, from $16.0
million for the six months ended July 31, 2011. Gross profit as a percentage of net sales decreased to 30.4% for the six months
ended July 31, 2012, from 31.2% for the six months ended July 31, 2011. Major factors driving the changes in gross margins were:



| | * | Disposables gross margins increased 5.1
percentage points in the second quarter of FY13 over in the second quarter of FY12, resulting mainly from changed sales mix of
nearly all Lakeland branded products this year, while last year had more than 50% sales derived from lower margin DuPont products.
This year’s margin was lower than it otherwise would have been mainly as a result of lower volume.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | * | China manufacturing gross margins at our
Weifang plant decreased by 10 percentage points over last year due to a 12% labor cost increase in April 2012 and the negative
impact to margins from sales to our UK operations in Euros.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | * | China margins in our Beijing Trading Company
increased 3.3 percentage points based on continued strong operations.
| | - | ------------------------------------------------------------------------------------------------------------------

| | * | Brazil margins decreased by 4.3 percentage
points in the second quarter of FY13 from the second quarter of FY12 entirely due to issues with the Brazilian Navy contract. The
Brazilian currency weakened significantly in May, thereby greatly increasing its material cost purchased from a USA supplier. Further,
due to the length of time elapsed since the bid was submitted in respect of the Navy contract, there were increases in the material
cost, along with a need to change certain components at a higher cost.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | * | Wovens gross margins decreased by approximately
8.5 percentage points in the six months ended July 2012 over the prior year as a result of the facility closure in the first quarter
of FY13, partially offset by improvements in the second quarter of FY13.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | * | Chemical gross margins decreased by 13.6
percentage points resulting from different sales mix, with improvements in the second quarter of FY13 over the first quarter of
FY13.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | * | Gloves gross margins improved by 5.6 percentage
points resulting from improved mix.
| | - | -----------------------------------------------------------------------------------



Operating Expenses.Operating
expenses from continuing operations increased $0.6 million, or 4%, to $14.3 million for the six months ended July 31, 2012, from
$13.7 million for the six months ended July 31, 2011. As a percentage of sales, operating expenses increased to 30% for the six
months ended July 31, 2012, from 27% for the six months ended July 31, 2011. The $0.6 million increase in operating expenses in
the six months ended July 31, 2012, as compared to the six months ended July 31, 2011, was comprised of:



|$ 0.6  | million increase in sales commissions mainly resulting from large bid contracts in Brazil.                                                                                       
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|$ 0.5  | million increase in sales salaries resulting from new hires in the USA and cash payments for foreign participants in the Restricted Stock Plan.                                  
|$ 0.2  | million increase in selling, general and administrative costs reallocated back to China to reflect growth in domestic China sales increases SGA and decreases cost of goods sold.
|$ 0.1  | million increase in currency fluctuation expense mainly from the Euro depreciation into sales made from our China plants to our U.K. operation.                                  
|$(0.1) | million miscellaneous decreases.                                                                                                                                                 
|$(0.2) | million reduction in equity compensation mainly resulting from foreign participants being paid in cash in their local countries.                                                 
|$(0.2) | million reduction in freight out resulting from lower volume in disposables in the USA.                                                                                          
|$(0.3) | million decrease in administration payroll mainly resulting from staff reductions in the USA and cutbacks in Brazil.                                                             



Operating Profit. Operating
profit from continuing operations decreased to $0.2 million for the six months ended July 31, 2012 from $2.4 million for the six
months ended July 31, 2011. Operating margins were 0.4% for the six months ended July 31, 2012, compared to 4.7% for the six months
ended July 31, 2011.



Arbitration Judgment in Brazil.As a result of the decision of the arbitration matter and the subsequent settlement thereof, the Company took a $7.9 million
charge, inclusive of expenses, for the six months ended July 31, 2012.



Interest Expenses. Interest
expenses from continuing operations increased by $0.2 million for the six months ended July 31, 2012, as compared to the six months
ended July 31, 2011, due to higher borrowing levels outstanding.



30







Income Tax Expense. Income
tax expenses from continuing operations consist of federal, state and foreign income taxes. There was an income tax benefit of
$0.4 million for the six months ended July 31, 2012, as compared to an expense of $0.5 million for the six months ended July 31,
2011. Our effective tax rates were 38.2% for the second quarter of FY13 (excluding the settlement charge for which there was not
tax benefit recorded) and 20.5% for the second quarter of FY12. Our effective tax rate for the second quarter of FY13 varied from
the 34% federal statutory rate primarily due to goodwill amortization in Brazil and tax benefits from operating losses in the USA
at higher rates than China profits were taxed along (resulting in a lower overall net rate) with certain losses in China which
are carried forward with no tax benefit recorded.



Income (Loss). Loss from
continuing operations was $8.5 million for the six months ended July 31, 2012 and income from continuing operations was $2.0 million
for the six months ended July 31, 2011. Without the $7.9 million charge in respect of the Brazilian arbitration and settlement,
the loss from continuing operations would have been $(0.6) million.



Liquidity and Capital Resources

Cash Flows. As of July 31, 2012,
we had cash and cash equivalents of $6.5 million and working capital of $44.2 million. Cash and cash equivalents increased $0.8
million, and working capital decreased $20.1 million from January 31, 2012, mainly resulting from reclassifying all TD Bank debt
as current and the arbitration accrual. Our primary sources of funds for conducting our business activities have been cash flow
provided by operations and borrowings under our credit facilities described below. We require liquidity and working capital primarily
to fund operating losses while we transition to Lakeland branded product sales in the USA and, to a lesser extent, for capital
expenditures.



Net cash provided by operating
activities of $2.1 million for the six months ended July 31, 2012 was due primarily to a $4.6 million increase in accounts payable
mainly in China as they source directly from local suppliers and in Brazil as part of the Navy contract, partially offset
by a $0.4 million increase in accounts receivable mainly resulting from the Brazilian Navy contract.



We currently have one revolving
credit facility with TD Bank of which $9.1 million of borrowings were outstanding as of July 31, 2012. In April 2012, TD Bank,
N.A. agreed to provide a $3.0 million term loan facility, in addition to the existing $6.5 million term loan facility, to be used
to refinance a portion of the revolver. Borrowings under this $9.5 million term loan facility are in the form of a five-year term
loan, with maturity June 2014. Our revolving credit and term loan facility with TD Bank (the “loan facility”) requires
that we comply with specified financial covenants relating to fixed charge ratio, funded debt to EBIDTA coverage and inventory
and accounts receivable collateral coverage ratios. These restrictive covenants could affect our financial and operational
flexibility or impede our ability to operate or expand our business.  Default under our loan facility would allow TD Bank
to declare all amounts outstanding to be immediately due and payable. Our lender has a security interest in substantially all of
our assets to secure the debt under our loan facility. We are currently in default with covenants contained in our loan facility
resulting from the Arbitration award in Brazil (and subsequent Settlement Agreement) and financial covenants. While we are in discussions
with TD Bank about resolution of these matters, we continue to otherwise operate within the terms of the credit agreement while
we work out a resolution.



We believe that we have available
resources, together with additional outside funding through debt or equity financings or asset sales, which will enable us to satisfy
the payments required under the Settlement Agreement and enable us to meet our currently anticipated operating, capital expenditures
and debt service requirements for at least the next 12 months. While we are in discussions with TD Bank about resolution of
the matters discussed in the prior paragraph, no assurances can be given that we will be able to work out a satisfactory arrangement
with TD Bank. In addition, the Company has engaged Raymond James & Associates, Inc. to assist the Board of Directors in its
evaluation of a broad range of financial and strategic alternatives for the Company. There can be no assurance that we will successfully
commensurate a fund-raising transaction that will enable us to make payments in accordance with the Settlement Agreement or otherwise
satisfy our future cash flow needs.



Capital Expenditures.Our capital expenditures principally relate to purchases of manufacturing equipment, computer equipment and leasehold improvements.
Our facilities in China are not encumbered by commercial bank mortgages and, thus, Chinese commercial mortgage loans may be available
with respect to these real estate assets if we need additional liquidity.We expect our capital expenditures for the remainder
of FY13 to be approximately $0.5million to purchase our capital equipment which primarily consists of computer equipment and apparel
manufacturing equipment and approximately $0.6 million for the facility expansion in China.



31







Foreign Currency Exposure.The Company has foreign currency exposure, principally through its investment in Brazil, sales in China, Canada and the UK
and production in Mexico and China. Management has in place a hedging program to offset this risk by purchasing forward contracts
to sell the Canadian Dollar, Chilean Peso, Euro and Great Britain Pound. Such contracts are largely timed to expire with the last
day of the fiscal quarter, with a new contract purchased on the first day of the following quarter, to match the operating cycle
of the Company. Management has decided not to hedge its long position in the Chinese Yuan and previously the Brazilian Real. In
May 2012 we began a limited program to hedge the Brazilian Real on very short term forward contracts.



Health Care Reform. During
March 2010, a comprehensive health care reform legislation was signed into law in the USA under the Patient Protection and Affordable
Care Act, as amended  by the Health Care and Education Reconciliation Act of 2010 (the “Acts”).  Included
among the major provisions of the law is a change in tax treatment of the federal drug subsidy paid with respect to Medicare-eligible
retirees.  This change did not have a significant impact because the Company operates its principal drug plan for Medicare-eligible
retirees as secondary to Medicare and manages Medicare Part D reimbursement through a third- party administrator.  The effect
of the Acts on the Company’s other long-term employee benefit obligation and cost depends on finalization of related regulatory
requirements.  The Company will continue to monitor and assess the effect of the Acts as the regulatory requirements are finalized.



Item 3.          Quantitative and Qualitative
Disclosures About Market Risk



There have been no significant
changes in market risk from that disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2012.



Item 4.          Controls and Procedures



We conducted
an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of July 31, 2012. There are
inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human
error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control objectives. Based on their evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of July 31, 2012.



Changes
in Internal Control over Financial Reporting



There have been no changes in
Lakeland Industries, Inc.’s internal control over financial reporting that occurred during Lakeland’s second quarter
of fiscal 2013 that have materially affected, or are reasonably likely to materially affect, Lakeland Industries, Inc.’s
internal control over financial reporting.



PART II. OTHER INFORMATION



Item 1.         
Legal Proceedings.



The Company and its wholly-owned
subsidiary, Lakeland Brasil S.A. (“Lakeland Brasil” and together with Lakeland Industries, Inc., the “Company”)
were parties to an arbitration proceeding in Brazil involving the Company and two former officers (the “former officers”)
of Lakeland Brasil.  On May 8, 2012, the Company received notice of an arbitral award in favor of the former officers. 
Subsequently, on May 14, 2012, the Company filed a request for clarification seeking a modification of the award or to have it
set aside. However, no such relief was awarded to the Company.



32







The arbitration proceeding arose
out of the acquisition by the Company in 2008 of Qualytextil, S.A., a company of which the former officers were owners.  In
connection with the acquisition, the Company entered into management agreements with the former officers and agreed to pay the
former officers a supplemental purchase price payment (“SPP”), calculated based upon the 2010 EBITDA of the acquired
company, subject to a cap (the “Maximum SPP”). Based upon actual results for 2010 as contractually specified,
the Company determined that no SPP would be payable.  Contractual provisions further provided for the former officers to be
paid the Maximum SPP in the event that either of them were terminated by the Company without cause even if a SPP would not otherwise
be payable. In May 2010, the Company terminated the former officers for cause.



In the arbitration proceeding,
the former officers sought a determination that they were terminated by the Company without cause and, therefore, entitled to be
paid their portion of the Maximum SPP and the monthly remuneration that they would have been paid from the date of termination
through the end of their contractual employment period on December 31, 2011. On May 8, 2012, the Company received the arbitration
decision which accepted the former officers’ requests to declare that their employments were terminated without cause and
determined that, among other things, the non-compete clauses of each of the stock purchase agreement and management agreements
were null and non-applicable. The Company was ordered to pay to the former officers damages representing their portion of
the Maximum SPP in the aggregate amount of R$18,037,500 (approximately US$9 million at current exchange rates) and monthly remuneration
from the date of termination through December 31, 2011, which the Company estimates at an aggregate amount of R$1,150,000 (US$580,000). The
arbitration panel further ordered that the Company pay the former officers approximately R$450,000 (US$226,000) from an escrow
account established in connection with the acquisition and the Company is responsible for payment of 85% of the costs and arbitrators’
fees associated with the arbitration. The arbitration award, with all taxes, expenses, interest and applicable adjustments to date
amounts to R$25,148,252 (approximately US$12,575,000) as adjusted for inflation, plus interest and penalties.



On September 11, 2012, the Company
and the former officers entered into a settlement agreement (the “Settlement Agreement”) which fully and finally resolves
all alleged outstanding claims against the Company arising from the arbitration proceeding. Pursuant to the Settlement Agreement,
the Company agreed to pay to the former officers an aggregate of approximately US $8.5 million (the “Settlement Amount”)
over a period of six (6) years. The Settlement Amount is payable in combined Brazilian Real and United States dollars as follows:
(i) R$3 million (approximately US$1.5 million) was paid on the effective date of the Settlement Agreement, of which amount (A)
R$2.294 million (approximately US$1.15 million) in cash was released from the escrow account established in connection with the
Qualytextil, S.A. acquisition, and (B) R$706,000 (approximately US$350,000) was paid directly by the Company; (ii) R$2 million
(approximately US$1.0 million) is payable on or before December 31, 2012; and (iii) the balance of $6.0 million of the Settlement
Amount will be made in United States dollars consisting of 24 consecutive quarterly installments of US$250,000 beginning on March
31, 2013. [In the event the Company fails to pay the remainder of the Settlement Amount in accordance with terms of the Settlement
Agreement, the former officers will be entitled to seek payment by the Company of R$25,148,252.47 (approximately US$12,575,000)
as adjusted for inflation, plus interest and penalties, less prior payments, which represents the original arbitral award inclusive
of all taxes, expenses, interest and applicable adjustments.]



In addition, pursuant to the
Settlement Agreement, as additional security for payment of the Settlement Amount, Lakeland Brasil agreed to grant the former officers
a second mortgage interest on certain of its property in Brazil, which mortgage is expressly behind the lien securing the payment
of tax debts to a state within Brazil related to certain notices of tax assessment on such property. Lakeland also agreed to become
a co-obligor, in lieu of a guarantor, for payment of the Settlement Amount.



The Company continues to strongly
believe that the Brazilian arbitration decision is inconsistent with the underlying facts. However, the Company entered into the
Settlement Agreement to eliminate the uncertainty, burden, risk, expense and distraction of further arbitration or litigation.



33







Item 1A.      
Risk Factors.



The following risk factor supplements
the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended January 31, 2012:



As a result of the Company’s
recent settlement of its arbitration proceeding in Brazil, the Company will be required to obtain additional capital, for which
there can be no assurance, and its loan with TD Bank may become accelerated. In the event that the Company is unable to obtain
the requisite capital or in the event the TD Bank loan is accelerated, the Company’s financial condition and results of operations
would be materially impaired.



As further described under Part
II, Item 1 “Legal Proceedings,” the Company, on September 11, 2012, entered into a Settlement Agreement with two former
officers of its Brazilian subsidiary, Lakeland Brasil, pursuant to which the Company agreed to pay to the former officers an aggregate
of approximately US$8.5 million (the “Settlement Amount”) over a period of six (6) years, of which approximately US$1,500,000
was paid upon execution of the Settlement Agreement. [In the event the Company fails to pay the remainder of the Settlement Amount
in accordance with terms of the Settlement Agreement, the former officers will be entitled to seek payment by the Company of R$25,148,252.47
(approximately US$12,575,000) as adjusted for inflation, plus interest and penalties, less prior payments, which represents the
original arbitral award inclusive of all taxes, expenses, interest and applicable adjustments.]



The Company believes that its
available resources, together with additional outside funding through debt or equity financings or asset sales, will enable it
to make timely payment of the Settlement Amount and continue its operations on a viable basis. There can, however, be no assurance
that such outside funding will ultimately be obtained. The Company is continuing to work with Raymond James & Associates, Inc.
in its evaluation of a broad range of financial and strategic alternatives for the Company. In addition, even if the Company were
to pay such amounts, there nonetheless could be a material adverse effect on its liquidity and thereby materially adversely affect
operations.



In addition, as a result of the
Settlement Agreement, one or more events of default are continuing under the Company’s Loan Agreement with TD Bank and TD
Bank may, at its option, accelerate the loan. There is approximately $15.1 million as of July 31, 2012 outstanding under the Loan
Agreement. While TD Bank has orally indicated that it would not object to the Company’s payment of the portion of the Settlement
Amount due upon execution of the Settlement Agreement, it has not expressly waived the events of default under the Loan Agreement.
The Company continues to be in discussions with TD Bank about resolution of these matters and is continuing to otherwise operate
within the terms of the Loan Agreement, however, no assurance can be given that the Company will work out a satisfactory arrangement
with TD Bank or that TD Bank will not accelerate the loan.



Item
3.          Defaults Upon Senior Securities.



As a result of the arbitration
proceeding and the Settlement Agreement and the recent operating results of the Company, an event of default has occurred and is
continuing under the Company’s Loan Agreement with TD Bank for failure of the Company to comply with the financial covenants,
including minimum EBITDA requirements, under its Loan Agreement, as discussed above in Item 1A of Part II. TD Bank may, at its
option, accelerate the loan. There is currently approximately $15,139,000 outstanding under the Loan Agreement. All scheduled payments
of principal and interest under the Loan Agreement have been made.



Item
5.          Other Information:



We hereby incorporate by reference
the information relating to the Settlement Agreement contained in Note 14, “Brazil Management and Share Purchase Agreement
- Arbitration and Subsequent Event” of the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of
this quarterly report.



34







Item
6.          Exhibits:



|Exhibits: |                                                                                                   
|--------- | --------------------------------------------------------------------------------------------------
|10.1      | Settlement Agreement                                                                              
|31.1      | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|31.2      | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|32.1      | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|32.2      | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|101.INS   | XBRL instance Document*                                                                           
|101.SCH   | XBRL Taxonomy Extension Schema Document*                                                          
|101.CAL   | XBRL Taxonomy Extension Definitions Document*                                                     
|101.DEF   | XBRL Taxonomy Extension Labels Document*                                                          
|101.LAB   | XBRL Taxonomy Extension Labels Document*                                                          
|101.PRE   | XBRL Taxonomy Extension Presentations Document*                                                   



| | * | In accordance with Regulation S-T, the XBRL-related information in
Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed”.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



35







_________________SIGNATURES_________________

Pursuant to the requirements
of Section 13 or 15(d) 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.



|                         | LAKELAND INDUSTRIES, INC.                              
|------------------------ | -------------------------------------------------------
|                         | (Registrant)                                           
|                         |                                                        
|Date: September 13, 2012 | /s/ Christopher J. Ryan                                
|                         | Christopher J. Ryan,                                   
|                         | Chief Executive Officer, President and Secretary       
|                         | (Principal Executive Officer and Authorized Signatory) 
|                         |                                                        
|Date: September 13, 2012 | /s/Gary Pokrassa                                       
|                         | Gary Pokrassa,                                         
|                         | Chief Financial Officer                                
|                         | (Principal Accounting Officer and Authorized Signatory)



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