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 endedOctober
31, 2009




OR




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




For the
transition period from _______________ to _______________




Commission
File 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 if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes o  No x


Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.


Yes o  No x




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.


Yes x  No o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non- accelerated filer, or a smaller reporting company. See
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                  ̈Non-Accelerated
      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
12-b-2 of the Exchange Act).


Yes o   No
x




As of
July 31, 2009, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was $32,361,028 based on the closing price
of the common stock as reported on the National Association of Securities
Dealers Automated Quotation System National Market System.




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).


Yes o   No
x




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 December 10,
      2009Common
      Stock, $0.01 par value per share
              
              5,437,534







LAKELAND
INDUSTRIES, INC.


AND
SUBSIDIARIES




Table
of Contents




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




PagePART
      I - FINANCIAL INFORMATION:Item
      1.
                                Financial
      Statements (unaudited):Introduction
                                
                                3Condensed
      Consolidated Balance Sheets October 31, 2009 and January 31,
      2009
                                
                                4Condensed
      Consolidated Statements of Operations for the Three and Nine Months
      Ended  October 31, 2009 and 2008
                                
                                5Condensed
      Consolidated Statement of Stockholders' Equity and other Comprehensive
      Income – Nine Months Ended October 31, 2009
                                
                                6Condensed
      Consolidated Statements of Cash Flows –Nine Months Ended October 31, 2009
      and 2008
                                
                                7Notes
      to Condensed Consolidated Financial Statements
                                
                                8Item
      2.
                                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                
                                15Item
      3.
                                Quantitative
      and Qualitative Disclosures About Market Risk
                                
                                22Item
      4.
                                Controls
      and Procedures
                                
                                22PART
      II - OTHER INFORMATION:Item
      6.
                                Exhibits
                                
                                25Signatures
                                
                                26





LAKELAND
INDUSTRIES, INC.


AND
SUBSIDIARIES




PART
      I -
            FINANCIAL
      INFORMATION




Item
      1.
            Financial
      Statements:




Introduction




SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS




This 10-Q
may contain certain forward-looking statements.  When used in this
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 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 historical 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:




·
            Our
      ability to obtain fabrics and components from key suppliers such as DuPont
      and other manufacturers at competitive prices or prices that vary from
      quarter to quarter. We have had various talks with DuPont since 1998 about
      relationship changes and these discussions continue to date. As to what
      form these changes may take, we cannot
  speculate;


·
            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 much 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 a decline in federal funding for preparations for terrorist
      incidents;


·
            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 officer on our
      company and on matters subject to a vote of our
    stockholders;


·
            The
      limited liquidity of our common
stock;


·
            The
      other factors referenced in this 10-Q, including, without limitation, in
      the sections entitled “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations,” and
  “Business.”




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
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.


3




LAKELAND
INDUSTRIES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





October
      31,
                    2009
                  
                  
                  January
      31,
                    2009(Unaudited)ASSETSCurrent
      assets:Cash
                  
                  $
                  4,846,943
                  
                  
                  $
                  2,755,441Accounts
      receivable; net of allowance for doubtful accounts of $31,477 at
      October  31, 2009 and $104,500 at January 31,
    2009
                  
                  
                  16,215,691
                  
                  
                  
                  13,353,430Inventories,
      net of allowances of $777,808 at October 31, 2009 and $657,000 at
      January 31, 2009
                  
                  
                  44,113,038
                  
                  
                  
                  57,074,028Deferred
      income taxes
                  
                  
                  1,989,234
                  
                  
                  
                  2,578,232Prepaid
      income tax and other current assets
                  
                  
                  2,621,538
                  
                  
                  
                  2,602,292Total
      current assets
                  
                  
                  69,786,444
                  
                  
                  
                  78,363,423Property
      and equipment, net of accumulated depreciation of $10,346,830 at
      October 31, 2009 and $8,929,669 at January 31, 2009
                  
                  
                  14,063,441
                  
                  
                  
                  13,736,326Intangibles
      and other assets, net
                  
                  
                  5,998,576
                  
                  
                  
                  4,405,833Goodwill
                  
                  
                  6,121,162
                  
                  
                  
                  5,109,136$
                  95,969,623
                  
                  
                  $
                  101,614,718LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                  
                  $
                  4,533,109
                  
                  
                  $
                  3,853,890Accrued
      expenses
                  
                  
                  3,010,681
                  
                  
                  
                  3,504,218Borrowing
      under revolving credit facility expiring July 7, 2010 (*See Note
      6)
                  
                  
                  14,220,466
                  
                  
                  
                  —Current
      maturity of long-term debt
                  
                  
                  92,368
                  
                  
                  
                  94,000Total
      current liabilities
                  
                  
                  21,856,624
                  
                  
                  
                  7,452,108Canadian
      warehouse loan payable (net of current maturity)
                  
                  
                  1,585,638
                  
                  
                  
                  1,368,406Borrowings
      under revolving credit facility (*See Note 6)
                  
                  
                  —
                  
                  
                  
                  24,408,466Other
      liabilities
                  
                  
                  99,088
                  
                  
                  
                  74,611Deferred
      income tax
                  
                  
                  123,445
                  
                  
                  
                  —Total
      Liabilities
                  
                  
                  23,664,795
                  
                  
                  
                  33,303,591Commitments
      and ContingenciesStockholders'
      equity:Preferred
      stock, $.01 par; authorized 1,500,000 shares (none issued)Common
      stock $.01 par; authorized 10,000,000 shares; issued and
      outstanding 5,564,732 and 5,523,288 shares at October 31, 2009 and at
      January 31, 2009, respectively
                  
                  
                  55,648
                  
                  
                  
                  55,233Less
      treasury stock, at cost, 125,322 shares at October 31, 2009 and 107,317
      shares at January 31, 2009
                  
                  
                  (1,353,247
                  )
                  
                  
                  (1,255,459
                  )Additional
      paid-in capital
                  
                  
                  49,604,844
                  
                  
                  
                  49,511,896Accumulated
      other comprehensive (loss) (See Note 12)
                  
                  
                  (108,692
                  )
                  
                  
                  (4,191,801
                  )Retained
      earnings
                  
                  
                  24,106,275
                  
                  
                  
                  24,191,258Stockholders'
      equity
                  
                  
                  72,304,828
                  
                  
                  
                  68,311,127$
                  95,969,623
                  
                  
                  $
                  101,614,718




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




* Since
the current revolving credit facility comes due July 7, 2010, the Bank loan
amounts have been reclassified from long-term to current. We expect to replace
this facility with a new three year term by January 31, 2010.


4


LAKELAND
INDUSTRIES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)





THREE
      MONTHS ENDED
                                                      
                                                      
                                                      NINE
      MONTHS ENDEDOctober
      31,
                                                      
                                                      
                                                      October
      31,2009
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      2009
                                                      
                                                      
                                                      2008Net
      sales
                                                      
                                                      $
                                                      22,285,254
                                                      
                                                      
                                                      $
                                                      25,159,948
                                                      
                                                      
                                                      $
                                                      69,309,908
                                                      
                                                      
                                                      $
                                                      80,005,141Cost
      of goods sold
                                                      
                                                      
                                                      16,629,456
                                                      
                                                      
                                                      
                                                      17,989,076
                                                      
                                                      
                                                      
                                                      51,406,802
                                                      
                                                      
                                                      
                                                      57,994,805Gross
      profit
                                                      
                                                      
                                                      5,655,798
                                                      
                                                      
                                                      
                                                      7,170,872
                                                      
                                                      
                                                      
                                                      17,903,106
                                                      
                                                      
                                                      
                                                      22,010,336Operating
      expenses
                                                      
                                                      
                                                      5,468,067
                                                      
                                                      
                                                      
                                                      5,110,642
                                                      
                                                      
                                                      
                                                      16,823,378
                                                      
                                                      
                                                      
                                                      16,308,254Operating
      profit
                                                      
                                                      
                                                      187,731
                                                      
                                                      
                                                      
                                                      2,060,230
                                                      
                                                      
                                                      
                                                      1,079,728
                                                      
                                                      
                                                      
                                                      5,702,082Interest
      and other income, net
                                                      
                                                      
                                                      6,260
                                                      
                                                      
                                                      
                                                      44,270
                                                      
                                                      
                                                      
                                                      60,512
                                                      
                                                      
                                                      
                                                      130,159Interest
      expense
                                                      
                                                      
                                                      * (571,537
                                                      )
                                                      
                                                      
                                                      (284,463
                                                      )
                                                      
                                                      
                                                      * (991,786
                                                      )
                                                      
                                                      
                                                      (637,958
                                                      )Income
      (loss) before income taxes
                                                      
                                                      
                                                      (377,546
                                                      )
                                                      
                                                      
                                                      1,820,037
                                                      
                                                      
                                                      
                                                      148,454
                                                      
                                                      
                                                      
                                                      5,194,283Provision
      (benefit) for income taxes
                                                      
                                                      
                                                      (187,377
                                                      )
                                                      
                                                      
                                                      446,876
                                                      
                                                      
                                                      
                                                      233,437
                                                      
                                                      
                                                      
                                                      1,303,466Net
      income (loss)
                                                      
                                                      $
                                                      (190,169
                                                      )
                                                      
                                                      $
                                                      1,373,161
                                                      
                                                      
                                                      $
                                                      (84,983
                                                      )
                                                      
                                                      $
                                                      3,890,817Net
      income (loss) per common share*:Basic
                                                      
                                                      $
                                                      (.03
                                                      )
                                                      
                                                      $
                                                      0.25
                                                      
                                                      
                                                      $
                                                      (.02
                                                      )
                                                      
                                                      $
                                                      0.71Diluted
                                                      
                                                      $
                                                      (.03
                                                      )
                                                      
                                                      $
                                                      0.25
                                                      
                                                      
                                                      $
                                                      (.02
                                                      )
                                                      
                                                      $
                                                      0.71Weighted
      average common shares outstanding:Basic
                                                      
                                                      
                                                      5,438,400
                                                      
                                                      
                                                      
                                                      5,415,971
                                                      
                                                      
                                                      
                                                      5,420,244
                                                      
                                                      
                                                      
                                                      5,442,690Diluted
                                                      
                                                      
                                                      5,458,777
                                                      
                                                      
                                                      
                                                      5,456,536
                                                      
                                                      
                                                      
                                                      5,440,484
                                                      
                                                      
                                                      
                                                      5,480,689





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




*
Interest expense has increased because the Company has accrued $297,000 as a
non-recurring expense to buy out the remaining term of an interest rate swap
with its current bank due July 7, 2010 in order to move to its new three year
revolving credit agreement under negotiation with TD Bank.


5


LAKELAND
INDUSTRIES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


AND
COMPREHENSIVE INCOME




(UNAUDITED)




Nine
months ended October 31, 2009




Common
      Stock
                                                                  
                                                                  
                                                                  Additional
                                                                    Paid-in
                                                                  
                                                                  
                                                                  Treasury
      Stock
                                                                  
                                                                  
                                                                  Retained
                                                                  
                                                                  
                                                                  Accumulated
                                                                    Other
                                                                    ComprehensiveShares
                                                                  
                                                                  
                                                                  Amount
                                                                  
                                                                  
                                                                  Capital
                                                                  
                                                                  
                                                                  Shares
                                                                  
                                                                  
                                                                  Amount
                                                                  
                                                                  
                                                                  Earnings
                                                                  
                                                                  
                                                                  (loss)
                                                                  
                                                                  
                                                                  TotalBalance
      January 31, 2009
                                                                  
                                                                  
                                                                  5,523,288
                                                                  
                                                                  
                                                                  $
                                                                  55,233
                                                                  
                                                                  
                                                                  $
                                                                  49,511,896
                                                                  
                                                                  
                                                                  
                                                                  (107,317
                                                                  )
                                                                  
                                                                  $
                                                                  (1,255,459
                                                                  )
                                                                  
                                                                  $
                                                                  24,191,258
                                                                  
                                                                  
                                                                  $
                                                                  (4,191,801
                                                                  )
                                                                  
                                                                  $
                                                                  68,311,127Net
      (loss)
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  (84,983
                                                                  )
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  (84,983
                                                                  )Stock
      Repurchase Program
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  (18,005
                                                                  )
                                                                  
                                                                  
                                                                  (97,788
                                                                  )
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  (97,788
                                                                  )Other
      Comprehensive Income
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  4,083,109
                                                                  
                                                                  
                                                                  
                                                                  4,083,109Stock-Based
      Compensation:Restricted
      Stock
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  151,831
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  151,831Director
      options granted at fair market value
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  47,068
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  47,068Director
      stock options exercised
                                                                  
                                                                  
                                                                  3,267
                                                                  
                                                                  
                                                                  
                                                                  33
                                                                  
                                                                  
                                                                  
                                                                  23,529
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  23,562Shares
      issued from Restricted Stock Plan
                                                                  
                                                                  
                                                                  38,177
                                                                  
                                                                  
                                                                  
                                                                  382
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  382Return
      of shares in lieu of payroll tax withholding
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  (111,000
                                                                  )
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  (111,000
                                                                  )Cash
      paid in lieu of issuing shares
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  (18,480
                                                                  )
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  (18,480
                                                                  )Balance
      October  31, 2009
                                                                  
                                                                  
                                                                  5,564,732
                                                                  
                                                                  
                                                                  $
                                                                  55,648
                                                                  
                                                                  
                                                                  $
                                                                  49,604,844
                                                                  
                                                                  
                                                                  
                                                                  (125,322
                                                                  )
                                                                  
                                                                  $
                                                                  (1,353,247
                                                                  )
                                                                  
                                                                  $
                                                                  24,106,275
                                                                  
                                                                  
                                                                  $
                                                                  (108,692
                                                                  )
                                                                  
                                                                  $
                                                                  72,304,828Total
      Comprehensive Income:Net
      loss
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  (84,983
                                                                  )Foreign
      Exchange translation adjustmentsQualytextil,
      SA, Brazil
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  3,513,397Canada
      Real Estate
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  78,367UK
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  (136,089
                                                                  )China
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  533,455,728Interest
      rate swap
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  627,381Total
      Comprehensive Income
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  3,998,126





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


6





LAKELAND
INDUSTRIES, INC.  AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





NINE
      MONTHS ENDEDOctober
      31,2009
                
                
                2008Cash
      Flows from Operating Activities:Net
      income (loss)
                
                $
                (84,983
                )
                
                $
                3,890,817Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Stock
      based compensation
                
                
                177,092
                
                
                
                226,540Provision
      for doubtful accounts
                
                
                (72,658
                )
                
                
                (9,000
                )Provision
      for inventory obsolescence
                
                
                121,023
                
                
                
                (114,000
                )Depreciation
      and amortization
                
                
                1,265,310
                
                
                
                1,231,285Deferred
      income tax
                
                
                712,443
                
                
                
                (165,032
                )Changes
      in operating assets and liabilities:(Increase)
      in accounts receivable
                
                
                (2,789,603
                )
                
                
                (369,967
                )(Increase)
      decrease in inventories
                
                
                12,839,967
                
                
                
                (3,492,428
                )(Increase)
      in other assets
                
                
                (1,722,989
                )
                
                
                (2,183,085
                )Increase
      (Decrease) in accounts payable, accrued expenses and other
      liabilities
                
                
                2,555,350
                
                
                
                (74,850
                )Net
      cash provided by (used in) operating activities
                
                
                13,000,952
                
                
                
                (1,059,720
                )Cash
      Flows from Investing Activities:Purchases
      of property and equipment
                
                
                (1,068,006
                )
                
                
                (1,588,511
                )Acquisition
      of Qualytextil, S.A.
                
                
                —
                
                
                
                (13,669,763
                )Net
      cash used in investing activities
                
                
                (1,068,006
                )
                
                
                (15,258,274
                )Cash
      Flows from Financing Activities:Purchases
      of stock under stock repurchase program
                
                
                (97,788
                )
                
                
                (1,255,459
                )Proceeds
      from exercise of stock option
                
                
                23,562
                
                
                
                —Director
      options granted
                
                
                47,068
                
                
                
                —Shares
      issued under Restricted Stock Program
                
                
                133,733
                
                
                
                —Net
      borrowings (repayments) under loan agreements
                
                
                (9,948,019
                )
                
                
                2,933,933Borrowing
      to fund Qualytextil Acquisition
                
                
                —
                
                
                
                13,344,466Net
      cash provided by (used in) financing activities
                
                
                (9,841,444
                )
                
                
                15,022,940Net  increase
      (decrease) in cash
                
                
                2,091,502
                
                
                
                (1,295,054
                )Cash
      and cash equivalents at beginning of period
                
                
                2,755,441
                
                
                
                3,427,672Cash
      and cash equivalents at end of period
                
                $
                4,846,943
                
                
                $
                2,132,618





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


7


LAKELAND
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


1.
            Business




Lakeland
Industries, Inc. and Subsidiaries, 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 the United States. No customer
accounted for more than 10% of net sales during the three and nine month periods
ended October 31, 2009 and 2008, respectively.




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, 2009.




We have
evaluated subsequent events through the time of filing on December 10, 2009, the
date of issuance of our financial statements.





The
results of operations for the three and nine month periods ended October 31,
2009 are not necessarily indicative of the results to be expected for the full
year.




On July
1, 2009, the Financial Accounting Standards Board (“FASB”) released the
Accounting Standards Codification (“ASC”). The ASC became the single source of
authoritative nongovernmental U.S. GAAP and is effective for all interim and
annual periods ending after September 15, 2009. All existing accounting
standards documents were superseded and any other literature not included in the
ASC is considered non-authoritative. The adoption of the ASC did not have any
impact on the Company’s financial condition, results of operations and cash
flows, as the ASC did not change existing U.S. GAAP. The adoption of the ASC
changes the approach of referencing authoritative literature by topic (each a
“Topic”) rather than by type of standard. Accordingly, references to former FASB
positions, statements, interpretations, opinions, bulletins or other
pronouncements in the Company’s Notes to Consolidated Financial Statements are
now presented as references to the corresponding Topic in the ASC.





3.
            Principles
      of Consolidation




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


8





4.
            Inventories:




Inventories
      consist of the following:
                    
                    October
      31,
                    
                    
                    January
      31,2009
                    
                    
                    2009Raw
      materials
                    
                    $
                    20,971,433
                    
                    
                    $
                    26,343,875Work-in-process
                    
                    
                    1,709,451
                    
                    
                    
                    2,444,160Finished
      Goods
                    
                    
                    21,432,154
                    
                    
                    
                    28,285,993TOTAL
                    
                    $
                    44,113,038
                    
                    
                    $
                    57,074,028


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 the exercise, based on the
average price during the period.




The
following table sets forth the computation of basic and diluted earnings per
share at October 31, 2009 and 2008.




Three
      Months Ended
                                                
                                                
                                                Nine
      Months EndedOctober
      31,
                                                
                                                
                                                October
      31,2009
                                                
                                                
                                                2008
                                                
                                                
                                                2009
                                                
                                                
                                                2008NumeratorNet
      income (loss)
                                                
                                                $
                                                (190,169
                                                )
                                                
                                                $
                                                1,373,161
                                                
                                                
                                                $
                                                (84,983
                                                )
                                                
                                                $
                                                3,890,817DenominatorDenominator
      for basic earnings per share
                                                
                                                
                                                5,438,400
                                                
                                                
                                                
                                                5,415,971
                                                
                                                
                                                
                                                5,420,244
                                                
                                                
                                                
                                                5,442,690(Weighted-average
      shares which reflect 125,322 and 122,547 weighted average common shares in
      the treasury as a result of the stock repurchase program for the three
      months and the nine months ended October 31, 2009,
      respectively)Effect
      of dilutive securities from restricted stock plan and from dilutive effect
      of stock options
                                                
                                                
                                                20,377
                                                
                                                
                                                
                                                40,565
                                                
                                                
                                                
                                                20,240
                                                
                                                
                                                
                                                37,999Denominator
      for diluted earnings per share (adjusted weighted average
      shares)
                                                
                                                
                                                5,458,777
                                                
                                                
                                                
                                                5,456,536
                                                
                                                
                                                
                                                5,440,484
                                                
                                                
                                                
                                                5,480,689Basic
      earnings (loss) per share
                                                
                                                $
                                                (.03
                                                )
                                                
                                                $
                                                0.25
                                                
                                                
                                                $
                                                (.02
                                                )
                                                
                                                $
                                                0.71Diluted
      earnings (loss) per share
                                                
                                                $
                                                (.03
                                                )
                                                
                                                $
                                                0.25
                                                
                                                
                                                $
                                                (.02
                                                )
                                                
                                                $
                                                0.71




9


6.
            Revolving
      Credit Facility




At
October 31, 2009, the balance outstanding under our five year revolving credit
facility amounted to $14.2 million. In May 2008, the facility was increased from
$25 million to $30 million. The credit facility is collateralized by
substantially all of the assets of the Company. The credit facility contains
financial covenants, including, but not limited to, fixed charge ratio, funded
debt to EBIDTA ratio, inventory and accounts receivable collateral coverage
ratio, with respect to which the Company was in compliance at October 31, 2009
and for the period then ended, except for the debt to EBITDA ratio. Default
under our credit facility would allow the lender to declare all amounts
outstanding to be immediately due and payable. The weighted average interest
rate for the nine month period ended October 31, 2009 was 3.32%, excluding the
buy-out of the interest rate swap.





The
Company has solicited and received proposals from several other banks, in
addition to a proposal from its existing bank. The Company has signed a term
sheet with TD Bank and is working towards closing a new facility by January 31,
2010. Management believes it will have a facility under nearly as favorable
terms as it currently had. Management believes that should the proposed facility
with TD Bank not close, it will be able to obtain other funding on terms nearly
as favorable.





In light
of the default per above and the likelihood of changing banks, the Company may
have to buy out the remaining term of its interest rate swap. The Company has
reclassified $297,000 from other comprehensive loss to allow for this buy-out
and included this in interest expense.





7.
            Major
      Supplier




We
purchased 13% of our raw materials from one supplier during the nine month
period ended October 31, 2009. We normally purchase approximately 75% of our raw
material from this suppler. We carried higher inventory levels in Q3 and Q4 FY09
and limited our material purchases in FY10. We expect this relationship to
continue for the foreseeable future. If required, similar raw materials could be
purchased from other sources; however, our competitive position in the
marketplace could be adversely affected. See Part I – Risk
Factors




8.
            Employee
      and Director Equity Compensation




The
Company’s Director’s Plan permits the grant of share options and shares to its
Directors for up to 60,000 shares of common stock as stock
compensation.  All stock options under this Plan are granted at the
fair market value of the common stock at the grant date.  This date is
fixed only once a year upon a Board Member’s re-election to the Board at the
Annual Shareholders’ meeting which is the third Wednesday in June pursuant to
the Director’s Plan and our Company By-Laws.  Directors’ stock options
vest ratably over a 6 month period and generally expire 6 years from the grant
date.





The
following table represents our stock options granted, exercised, and forfeited
during the nine months ended October 31, 2009.





Stock Options
                    
                    Number
                      of
                      Shares
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price per
                      Share
                    
                    
                    Weighted
                      Average
                      Remaining
                      Contractual
                      Term
                    
                    
                    Aggregate
                      Intrinsic
                      ValueOutstanding
      at January 31, 2009
                    
                    
                    20,567
                    
                    
                    $
                    13.42
                    
                    
                    2.27
      years
                    
                    
                    $
                    1,594Granted
      in the nine months ended October 31, 2009
                    
                    
                    8,000
                    
                    
                    $
                    6.88
                    
                    
                    6.00
      years
                    
                    
                    $
                    6,950Exercised
      in the nine months ended October 31, 2009
                    
                    
                    (3,267
                    )
                    
                    $
                    7.21
                    
                    
                    
                    —
                    
                    
                    
                    —Cancelled/Expired
      in the nine months ended October 31, 2009
                    
                    
                    (1,000
                    )
                    
                    $
                    13.10
                    
                    
                    
                    —
                    
                    
                    
                    —Outstanding
      at October 31, 2009
                    
                    
                    24,300
                    
                    
                    $
                    11.13
                    
                    
                    2.96
      years
                    
                    
                    $
                    5,570Exercisable
      at  October 31, 2009
                    
                    
                    21,300
                    
                    
                    $
                    11.57
                    
                    
                    2.59
      years
                    
                    
                    $
                    0




10




Restricted
Stock Plan and Performance Equity Plan




On June
21, 2006, the shareholders of the Company approved a restricted stock plan (The
“2006 Equity Incentive Plan”).  A total of 253,000 shares of
restricted stock were authorized under this plan. On June 17, 2009, the
shareholders of the Company authorized 253,000 shares under the restricted stock
plan (The “2009 Equity Incentive Plan”).  Under the restricted stock
plan, eligible employees and directors are awarded performance-based restricted
shares of the Corporation’s 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 granted up to a maximum of 230,555
restricted stock awards as of October 31, 2009. All of these restricted stock
awards are non-vested at October 31, 2009 (165,725 shares at “baseline”) and
have a weighted average grant date fair value of $8.00. Under the 2006 Equity
Incentive Plan, there are outstanding as of October 31, 2009 unvested grants of
5,558 shares under the stock purchase match program and 23,311 shares under the
bonus in stock program. 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
October 31, 2009, unrecognized stock-based compensation expense related to
restricted stock awards totaled $1,900,124, consisting of $55,686 remaining
under the 2006 Equity Incentive Plan and $1,844,438 under the 2009 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
October 31, 2009, which was set at zero.  Such unrecognized
stock-based compensation expense related to restricted stock awards totaled
$1,325,800 at the baseline performance level. The cost of these non-vested
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 zero level and expenses have been recorded accordingly.  The
performance based awards are not considered stock equivalents for EPS
purposes.





Stock-Based
Compensation




The
Company recognized total stock-based compensation costs of $177,092 and $226,540
for the nine months ended October 31, 2009 and 2008, respectively, of which
$133,372 results from the 2006 Equity Incentive Plan, $0 results from the 2009
Equity Incentive Plan, and $43,720 results from the Director Option Plan in
2009. $194,996 results from the 2006 Equity Incentive Plan and $31,544 results
from the Director Option Plan in 2008.  These amounts are reflected in
selling, general and administrative expenses.  The total income tax
benefit recognized for stock-based compensation arrangements was $63,753 and
$81,554 for the nine months ended October 31, 2009 and 2008,
respectively.


11





9.
            Manufacturing
      Segment Data




Domestic
and international sales are as follows in millions of dollars:




Three
      Months Ended
                  
                  
                  Nine
      Months EndedOctober
      31,
                  
                  
                  October
      31,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Domestic
                  
                  $
                  14.3
                  
                  
                  
                  64
                  %
                  
                  $
                  18.8
                  
                  
                  
                  75
                  %
                  
                  $
                  46.9
                  
                  
                  
                  68
                  %
                  
                  $
                  61.3
                  
                  
                  
                  77
                  %International
                  
                  
                  8.0
                  
                  
                  
                  36
                  %
                  
                  $
                  6.4
                  
                  
                  
                  25
                  %
                  
                  
                  22.4
                  
                  
                  
                  32
                  %
                  
                  $
                  18.7
                  
                  
                  
                  23
                  %Total
                  
                  $
                  22.3
                  
                  
                  
                  100
                  %
                  
                  $
                  25.2
                  
                  
                  
                  100
                  %
                  
                  $
                  69.3
                  
                  
                  
                  100
                  %
                  
                  $
                  80.0
                  
                  
                  
                  100
                  %





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; Jerez, Mexico (primarily disposable,
glove and chemical suit production; St. Joseph, Missouri; and, Shillington,
Pennsylvania (primarily fire, hi-visibility and woven products production) and
Brantford, Ontario, Canada (primarily disposables sales and distribution). We
also maintain three manufacturing facilities in China (primarily disposable and
chemical suit production) and a glove manufacturing facility in New Delhi,
India. On May 13, 2008, we acquired Qualytextil S.A. which manufactures
primarily fire protective apparel for the Brazilian market. Our China facilities
produce the majority 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 year ended January 31, 2009.
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 the U.S.A., Brazil, Canada, Europe, Chile,
China, Argentina and India which sell and distribute products shipped from the
United States, Mexico, Brazil, China, and recently India.




The table
below represents information about reported manufacturing segments for the three
and nine month periods noted therein:





Three
      Months Ended
                    October
      31,
                    (in
      millions of dollars)
                  
                  
                  Nine
      Months Ended
                    October
      31,
                    (in
      millions of dollars)2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Net
      Sales:North
      America and other foreign
                  
                  $
                  17.65
                  
                  
                  $
                  22.54
                  
                  
                  $
                  56.79
                  
                  
                  $
                  73.86Brazil
                  
                  
                  3.38
                  
                  
                  
                  2.44
                  
                  
                  
                  9.21
                  
                  
                  
                  5.52China
                  
                  
                  4.55
                  
                  
                  
                  5.31
                  
                  
                  
                  13.95
                  
                  
                  
                  16.75India
                  
                  
                  .20
                  
                  
                  
                  .12
                  
                  
                  
                  .55
                  
                  
                  
                  .29Less
      inter-segment sales
                  
                  
                  (3.50
                  )
                  
                  
                  (5.25
                  )
                  
                  
                  (11.19
                  )
                  
                  
                  (16.42
                  )Consolidated
      sales
                  
                  $
                  22.28
                  
                  
                  $
                  25.16
                  
                  
                  $
                  69.31
                  
                  
                  $
                  80.00Operating
      Profit:North
      America and other foreign
                  
                  $
                  (.20
                  )
                  
                  $
                  1.37
                  
                  
                  $
                  (.16
                  )
                  
                  $
                  3.14Brazil
                  
                  
                  (.12
                  )
                  
                  
                  .34
                  
                  
                  
                  (.18
                  )
                  
                  
                  1.14China
                  
                  
                  .55
                  
                  
                  
                  .63
                  
                  
                  
                  2.0
                  
                  
                  
                  2.38India
                  
                  
                  (.22
                  )
                  
                  
                  (.22
                  )
                  
                  
                  (.68
                  )
                  
                  
                  (.63
                  )Less
      inter-segment profit
                  
                  
                  .18
                  
                  
                  
                  (.06
                  )
                  
                  
                  .1
                  
                  
                  
                  (.33
                  )Consolidated
      profit
                  
                  $
                  .19
                  
                  
                  $
                  2.06
                  
                  
                  $
                  1.08
                  
                  
                  $
                  5.70Identifiable
      Assets (at Balance Sheet date):North
      America and other foreign
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  57.57
                  
                  
                  $
                  79.57Brazil
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  19.98
                  
                  
                  
                  6.63China
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  14.47
                  
                  
                  
                  12.54India
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3.95
                  
                  
                  
                  4.38Consolidated
      assets
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  95.97
                  
                  
                  $
                  103.13Depreciation
      and Amortization Expense:North
      America and other foreign
                  
                  $
                  .20
                  
                  
                  $
                  .14
                  
                  
                  $
                  .61
                  
                  
                  $
                  .64Brazil
                  
                  
                  .05
                  
                  
                  
                  .11
                  
                  
                  
                  .10
                  
                  
                  
                  .11China
                  
                  
                  .08
                  
                  
                  
                  .07
                  
                  
                  
                  .24
                  
                  
                  
                  .21India
                  
                  
                  .11
                  
                  
                  
                  .09
                  
                  
                  
                  .31
                  
                  
                  
                  .27Consolidated
      depreciation expense
                  
                  $
                  .44
                  
                  
                  $
                  .41
                  
                  
                  $
                  1.26
                  
                  
                  $
                  1.23




12


10.
            Uncertain
      Tax Positions





U.S. GAAP
prescribes recognition thresholds that must be met before a tax position is
recognized in the financial statements and provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. Under U.S. GAAP, an entity may only recognize or
continue to recognize tax positions that meet a "more likely than not"
threshold.





The
Company’s policy is to recognize interest and penalties related to income tax
issues as components of income tax expense. The Company has no accrued interest
as of October 31, 2009.





The
Company is subject to U.S. federal income tax, as well as income tax in multiple
U.S. state and local jurisdictions and a number of foreign
jurisdictions.   The Company’s federal income tax returns for the
fiscal year ended January 31, 2007 have been audited by the Internal Revenue
Service. Such audit is complete with a final “No Change Letter” received by the
Company.





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 fifteen years.  Our China subsidiaries were audited during the tax year
2007 for the tax years 2006, 2005 and 2004, respectively. Those audits are
associated with ordinary course of business. China tax authorities did not
perform tax audits associated with ordinary course of business during tax year
2008 or during the current year as of current filing date.   China tax
authorities performed a fraud audit but the scope was limited to the fraud
activities found in late tax year 2008 in late FY09. This audit covered tax
years from 2003 through 2008. We have reached a settlement with the Chinese
Government in January 2009. Please see Note 17 of our Annual Report on Form 10-K
for further details on the fraud issue. China tax authorities have performed
limited reviews on all China subsidiaries as of tax year 2008, with no
significant issues noted. As a result, we can reasonably conclude that we do not
anticipate any foreseeable future liabilities.





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





Qualytextil,
S.A. has never been audited under Brazilian Federal tax authorities, but by law
in Brazil they are allowed to audit the five most recent years. We do not
anticipate significant tax liability upon any future tax audits in
Brazil.





Effective
with the nine months ended October 31, 2009, management changed its estimates
for the deferred tax asset to be realized upon the final restructuring of its
Indian operations. Accordingly, management has recorded an allowance of $350,000
against the ultimate realization of the $750,000 included in Deferred Income
Taxes on the accompanying balance sheet.





11.
            Related
      Party Transactions




In
connection with the asset purchase agreement, dated August 1, 2005, between the
Company and Mifflin Valley, Inc., the Company entered into a five year lease
agreement with the seller (now an employee of the Company) to rent the
manufacturing facility in Shillington, Pennsylvania at an annual rental of
$57,504, or a per square foot rental of $3.25.  This amount was
obtained prior to the acquisition from an independent appraisal of the fair
market rental value per square feet.  In addition the Company has,
starting January 1, 2006 rented a second 12,000 sq ft of warehouse space in
Blandon, Pennsylvania from this employee, on a month-to-month basis, for the
monthly amount of $3.00 per square foot.


13


On March
1, 1999, we entered into a one year (renewable for four additional one year
terms) lease agreement with Harvey Pride, Jr., our Vice President of
Manufacturing, for a 2,400 sq. ft. customer service office located next to our
existing Decatur, Alabama facility at an annual rent of $18,900. This lease was
renewed on March 1, 2004 through March 31, 2009 at the same rental rate and
resigned on April 1, 2009 for a continuation through 2011, with a 5% increase
each year.





12.
            Derivative
      Instruments and Foreign Currency
Exposure




The
Company has foreign currency exposure, principally through its investment in
Brazil, sales in Canada, Chile and the UK and production in Mexico and
China.  Management has commenced a hedging program to offset this risk
by purchasing forward contracts to sell the Canadian Dollar and Chilean
Peso.  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, the Brazilian Real, the Euro and Great Britain Pound





Effective
January 1, 2009, the Company adopted the provisions of revised GAAP covering
Derivative Instruments
and Hedging Activities. This standard requires recognition of all derivatives as
either assets or liabilities at fair value and 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. The Company had no derivative
instruments outstanding at October 31, 2009 for foreign exchange.





Interest
Rate Risk Management





We are
exposed to interest rate risk from debt. We have hedged against the risk of
changes in the interest rate associated with our variable rate Revolving Credit
by entering into a variable-to-fixed interest rate swap agreement, designated as
fair value hedge, with a total notional amount of $18 million as of October
31, 2009. We assume no hedge ineffectiveness as each interest rate swap meets
the short-cut method requirements under U.S. GAAP for fair value hedges of debt
instruments. As a result, changes in the fair value of the interest rate swaps
are offset by changes in the fair value of the debt, both are reported in
interest and other income and no net gain or loss is recognized in
earnings.





The fair
value of the interest rate swap in a net liability position is included in Other
Liabilities on the balance sheet.





In
accordance with the bank status described in Note 6, management has reclassified
$297,000 from other comprehensive loss to allow for the subsequent buy-out of
the interest rate swap.





The fair
values of all derivatives recorded on the consolidated balance sheet are as
follows:





October
      31,2009
                  
                  
                  January
      31,
                    2009Unrealized
      (Losses):Interest
      rate swaps
                  
                  $
                  (0
                  )
                  
                  $
                  (627,380
                  )





The
financial statements of foreign subsidiaries whose functional currency is
designated as other than the U.S. Dollar, when translated into USD results in a
Currency Translation Adjustment included in Other Comprehensive Loss on the
Balance Sheet as follows at October 31, 2009:


14





Gain (loss)Brazil
                    
                    $
                    40,201UK
                    
                    
                    (136,089
                    )Canada
      Warehouse
                    
                    
                    (12,857
                    )China
                    
                    
                    53Total
      Translation loss
                    
                    $
                    (108,692
                    )





13.
            Reclassifications




Certain
reclassifications were made in the previous year’s statement of income to
conform with current classifications.




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





You
should read the following summary together with the more detailed business
information and consolidated financial statements and related notes that
appeared in our Form 10-K and Annual Report and in the documents that were
incorporated by reference into our Form 10-K for the year ended January 31,
2009.  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.




Overview




We
manufacture and sell a comprehensive line of safety garments and accessories for
the industrial protective clothing and homeland security markets. Our products
are sold by our in-house sales force and independent sales representatives to a
network of over 1,000 safety, fire and mill supply distributors. These
distributors in turn supply end user industrial customers such as integrated
oil, chemical/petrochemical, automobile, steel, glass, construction, smelting,
janitorial, pharmaceutical and high technology electronics manufacturers, as
well as hospitals and laboratories. In addition, we supply federal, state and
local governmental agencies and departments such as fire and police departments,
airport crash rescue units, the Department of Defense, the Centers for Disease
Control, and numerous other agencies of the federal, state and local
governments.





We have
operated manufacturing facilities in Mexico since 1995, in China since 1996, in
India since 2006 and in Brazil since May 2008. Beginning in 1995, we moved the
labor intensive sewing operation for our limited use/disposable protective
clothing lines to China and Mexico. Our facilities and capabilities in China,
Mexico, India and Brazil 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 they are available domestically. As we have increasingly
moved production of our products to our facilities in Mexico and China, we have
seen improvements in the profit margins for these products. We continue to move
production of our reusable woven garments and gloves to these facilities and
expect to continue this process through fiscal 2010. As a result, we expect to
see continuing profit margin improvements for these product lines over
time.





Critical
Accounting Policies and Estimates




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.




15




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,
fire fighting 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 passes 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 are made through distributors, except in Brazil. 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.





Rebates
are offered to a limited number of our distributors, who participate in a rebate
program. Rebates are predicated on total sales volume growth over the previous
year. The Company accrues for any such anticipated rebates on a pro-rata basis
throughout the year.





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.We establish an allowance for doubtful accounts to provide for accounts
receivable that may not be collectible. In establishing the allowance for
doubtful accounts, we analyze the collectability of individual large or past due
accounts customer-by-customer. We establish allowances for accounts that we
determine to be doubtful of collection.





Income Taxes and Valuation Reserves.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 other intangible assets are no longer
amortized, but are assessed for impairment annually and upon occurrence of an
event that indicates impairment may have occurred. Goodwill impairment is
evaluated utilizing a two-step process as required by U.S. GAAP. Factors that we
consider 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. When we
determine that the carrying value of intangibles and goodwill may not be
recoverable based upon one or more of these indicators of impairment, we measure
any potential impairment based on a projected discounted cash flow
method.  Estimating future cash flows requires our management to make
projections that can differ materially from actual results.


16


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 increases 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.




Significant
Balance Sheet Fluctuation October 31, 2009 as compared to January 31,
2009




Cash
increased by $2.1 million as borrowings under the revolving credit facility
decreased by $10.2 million at October 31, 2009, mainly due to the reduction in
inventory levels. Accounts receivable increased by $2.9 million mainly resulting
from government agency receivables in Brazil.  Inventory decreased by
$13.0 million, mainly due to lower levels of raw material purchasing and lower
production in its China plants. Accounts payable increased by $0.7 million due
to an increase in Brazil payables and a large vendor credit at January 31, 2009
which was subsequently applied. Other assets increased by $1.6 million, mainly
due to currency exchange fluctuation in Brazil.





At
October 31, 2009 the Company had an outstanding loan balance of $14.2 million
under its facility with Wachovia Bank, N.A. compared with $24.4 million at
January 31, 2009, with the decrease mainly due to reductions in the Company’s
inventory levels. Total stockholders equity increased principally due to the
foreign exchange gains from the Brazilian operations, and offset by the
Company’s stock repurchase program of purchases of $0.1 million in FY10 and the
net loss for the period of $0.1 million.





Three
months ended October 31, 2009 as compared to the three months ended October 31,
2008




Net Sales.Net sales
decreased $2.9 million, or 11.4% to $22.3 million for the three months ended
October 31, 2009 from $25.2 million for the three months ended October 31,
2008.  The net decrease was comprised of a 26% decrease in domestic
sales partially offset by a 25% increase in foreign sales. Qualytextil sales
increased by $0.9 million or 38.5%. External sales from China increased by $0.4
million, or 24%, driven by sales to the new Australian distributor. Canadian
sales increased by $0.1 million, or 3.5%, UK sales increased by $0.2 million, or
23.8%, Chile sales increased by $0.2 million, or 78.9%. US domestic sales
decreased by $5.2 million or 26.6%.





Gross Profit.Gross profit
decreased $1.5 million or 21.1% to $5.7 million for the three months ended
October 31, 2009 from $7.2 million for the three months ended October 31,
2008.  Gross profit as a percentage of net sales decreased to 25.4%
for the three months ended October 31, 2009 from 28.5% for the three months
ended October 31, 2008. The major factors driving the changes in gross margins
were:





·
            Disposables
      gross margins declined by 10 percentage points in Q3 this year compared
      with Q3 last year. This decline was mainly due to higher priced raw
      materials and an extremely aggressive pricing environment coupled with
      lower volume, partially offset by labor
  cutbacks.


·
            Brazil
      gross margin was 41.1% for Q3 this year compared with 49.3% last year.
      Several features were at play. There were several large sales which had
      bid requirements for complete fire ensembles including boots and/or
      helmets. This required Qualytextil to obtain these items from vendors.
      There were several issues with these vendors causing Qualytextil to use
      different vendors under delivery pressure, resulting in higher costs.
      Qualytextil is presently negotiating with a boot vendor and also a helmet
      vendor to obtain more reliable delivery and pricing and has begun
      maintaining a stock of these items on hand in inventory to avoid such
      problems in the future. Much of Qualytextil’s fabric used as raw materials
      is imported from vendors in the U.S. which caused unfavorable costs
      earlier in the quarter resulting from exchange rate differences. Since
      then the exchange rates have changed to strengthen the Brazilian real
      which should favorably impact the cost and margins in the future. Further,
      the margins obtained in FY2009 were exceptional, partially due to a very
      weak U.S. dollar and may not be achieved in the near future. In normal
      conditions, in the future, the Qualytextil margins will be expected to be
      between 42% and 46%.


17


·
            Glove
      division reduction in volume coupled with inventory
      write-offs.


·
            Continued
      gross losses of $0.2 million from India in Q3
  FY2010.


·
            Chemical
      and Reflective margins were lower than the prior year mainly due to lower
      volume.


·
            Canada
      gross margin increased by 16.1 percentage points primarily from more
      favorable exchange rates and the local competitive pricing
      climate.


·
            UK
      and Europe margins increased by 24 percentage points primarily from
      exchange rate differentials.


·
            Chile
      margins increased by 10.2 percentage points primarily from higher volume
      and several larger sales orders.





Operating Expenses.Operating
expenses increased $0.36 million, or 7.0% to $5.5 million for the three months
ended October 31, 2009 from $5.1 million for the three months ended October 31,
2008.  As a percentage of sales, operating expenses increased to 24.5%
for the three months ended October 31, 2009 from 20.3% for the three months
ended October 31, 2008. Excluding Qualytextil in Brazil, operating expenses
declined $0.2 million for Q3 FY2010 compared with Q3 FY2009. Major items
comprising this are as follows:





·
            $(0.1)
            million
      - officers salaries declined, reflecting the retirement of Ray Smith to
      become a non-employee director and Chairman of the Board, and also
      reflecting an 8% across the board reduction in total officer
      compensation.·
            (0.1)
            million
      - freight out declined, mainly resulting from lower
  volume.·
            (0.1)
            million
      – consulting fees were reduced, resulting from using interns and revising
      Sarbanes Oxley procedures.·
            (0.1)
            million
      reduction in foreign exchange cost resulting from the company’s hedging
      program and more favorable rates.·
            (0.2)
            million
      - sales commissions declined, mainly resulting from lower
      volume.·
            0.2
            million
      increase due to severance pay in August resulting from reduction in
      force.·
            0.2
            million
      – increase in operating costs in China were the result of the large
      increase in direct international sales made by China, are now allocated to
      SG&A costs, previously allocated to cost of goods
  sold·
            0.3
            million
      – miscellaneous increases





Qualytextil,
Brazil operating expenses increased $0.5 million in Q3 FY2010 compared with Q3
FY2009. Major factors in this increase are as follows:





·
            (0.1)
            million
      miscellaneous decrease.·
            0.1
            million
      – in additional employee benefits and payroll taxes resulting from hiring
      as employees certain people who had been performing services on an
      out-sourcing basis.·
            0.1
            million
      in additional freight out and commissions resulting from higher sales
      volume.·
            0.4
            million
      – start-up expenses in connection with Qualytextil gearing up to sell
      Lakeland branded products. This includes hiring 20 sales and logistical
      support staff, printing of catalogs, lease of two new distribution centers
      and increased travel expense.





Operating profit. Operating
profit decreased 90.9% to $0.19 million for the three months ended October 31,
2009 from $2.1 million for the three months ended October 31, 2008. Operating
margins were 0.8% for the three months ended October 31, 2009 compared to 8.2%
for the three months ended October 31, 2008.


18


Interest
Expenses.  Interest expenses increased by $0.29 million for the
three months ended October 31, 2009 as compared to the three months ended
October 31, 2008 due to higher borrowing levels outstanding, partially offset by
lower interest rates in the current year. Also impacting interest expense in the
current year was the charge of $297,000 resulting from the reclassification from
other comprehensive loss of the anticipated buy-back of the interest rate
swap.





Income Tax
Provision.  Income tax provision consists of federal, state,
and foreign income taxes. Income tax expenses decreased $0.6 million, or 141.9%,
to $(0.2) million for the three months ended October 31, 2009 from $0.4 million
for the three months ended October 31, 2008. Our effective tax rate was 49.6%
for the three months ended October 31, 2009. Major factors in the October 2009
income tax expenses are losses in India and profit in Chile and UK with no tax
benefit or expense, and tax benefits in Brazil resulting from government
incentives and goodwill write-offs.





Net Income.  Net
income decreased $1.6 million, or 113.9% to $(0.2) million for the three months
ended October 31, 2009 from $1.4 million for the three months ended October 31,
2008. The decrease in net income primarily resulted from the Qualytextil results
and a decrease in sales and profits across all domestic operations, coupled with
an extremely aggressive pricing environment in the US for
disposables.





Nine
months ended October 31, 2009 as compared to the nine months ended October 31,
2008




Net Sales.Net sales
decreased $10.7 million, or 13.4% to $69.3 million for the nine months ended
October 31, 2009 from $80 million for the nine months ended October 31,
2008.  The net decrease was comprised of a $14.4 million decrease in
domestic sales or 23.5%, partially offset by a $3.7 million increase in foreign
sales or 19.8%. Qualytextil sales included in the current year were $9.2
million, while prior years sales of $5.5 million included Q2 and Q3. External
sales from China increased by $1.1 million, or 24%, driven by sales to the new
Australian distributor. Canadian sales were flat, UK sales decreased by $0.4
million, or 11.7%, Chile sales increased by $0.7 million, or 76%.





Gross Profit.Gross profit
decreased $4.1 million or 18.7% to $17.9 million for the nine months ended
October 31, 2009 from $22.0 million for the nine months ended October 31,
2008.  Gross profit as a percentage of net sales decreased to 25.8%
for the nine months ended October 31, 2009 from 27.5% for the nine months ended
October 31, 2008.  The major factors driving the changes in gross
margins were:






·
              Disposables
      gross margins declined by 6.1 percentage points for the nine months ended
      October 31, 2009 compared with Q3 last year. This decline was mainly due
      to higher priced raw materials and an extremely aggressive pricing
      environment coupled with lower
volume.


·
              Brazil
      gross margin was 42.5% for the nine months ended October 31, 2009,
      compared with 53% last year, but Brazil’s operations were only included
      for Q2 and Q3 in the prior year. Several features were at play. There were
      several large sales which had bid requirements for complete fire ensembles
      including boots and/or helmets. This required Qualytextil to obtain these
      items from vendors, resulting in higher costs. Qualytextil is presently
      negotiating with a boot and also a helmet vendor to obtain more reliable
      delivery and pricing and has commenced maintaining a stock of these items
      in inventory to avoid similar problems in the future. Much of
      Qualytextil’s fabric that was used as raw materials was imported from
      vendors in the US which caused higher costs in the quarter resulting
      from exchange rate differences. The exchange rates have since changed to
      strengthen the Brazilian Real which should favorably impact the cost and
      margins in the future. Further, the margin of 53% obtained in FY2009 was
      unusually higher, partially due to a very weak U.S. dollar and may not be
      achieved in the near future. In the future, the Qualytextil margins will
      be expected to range between 42% and 46%. There was also a large
      order shipped in April 2009, but bid in the summer of 2008,
      which included items impacted by the major change in foreign exchange
      rates in August to October 2008. Further, the month of March had low sales
      resulting in no incentives from the Brazilian government. Management
      expects these factors will be
non-recurring.


19


·
              Glove
      division reduction in volume coupled with inventory
      write-offs.


·
              Continued
      gross losses of $0.4 million from India for the nine months ended October
      31, 2009.


·
              Chemical
      margins were flat for the nine months ended October 2009, mainly resulting
      from favorable sales mix in the first quarter, offset by lower volume in
      Q3.


·
              Reflective
      margins decreased by 5.6 percentage points due to sales mix and lower
      volume.


·
              Canada
      gross margin increased by 15.6 percentage points mainly resulting from
      more favorable exchange rates and a better economic
    climate.


·
              UK
      and Europe margins increased by 5.2 percentage points mainly resulting
      from exchange rate differentials, unfavorable in Q1 and favorable in Q2
      and Q3.


·
              Chile
      margins increased by 4.4 percentage points mainly resulting from higher
      volume and several larger sales orders in
FY10.





Operating Expenses.Operating
expenses increased $0.5 million, or 3.2% to $16.8 million for the nine months
ended October 31, 2009 from $16.3 million for the nine months ended October 31,
2008. As a percentage of sales, operating expenses increased to 24.3% for the
nine months ended October 31, 2009 from 20.4% for the nine months ended October
31, 2008.  This increase as a percent of sales is largely due to
Brazil operations, which runs at a higher margin with higher operating
expense.  Excluding Qualytextil, operating expenses decreased $1.8
million for the nine months ended October 31, 2009 compared with the nine months
ended October 31, 2008. The decrease in operating expenses, excluding Brazil, in
the nine months ended October 31, 2009 as compared to the nine months ended
October 31, 2008 included:





·
            $(0.7)
            million
      - freight out declined, mainly resulting from lower volume and lower
      prevailing carrier rates.·
            (0.6)
            million
      - sales commissions declined, mainly resulting from lower
      volume.·
            (0.4)
            million
      - officers salaries declined, reflecting the retirement of Ray Smith to
      become a non-employee director and Chairman of the Board, and also
      reflecting an 8% across the board reduction in total office
      compensation.·
            (0.3)
            million
      - shareholder expenses declined, reflecting the proxy fight in the prior
      year.·
            (0.3)
            million
      – reduction in foreign exchange costs resulting from the Company’s hedging
      program and more favorable rates.·
            (0.2)
            million
      – consulting fees were reduced, resulting from using interns and revising
      Sarbanes Oxley procedures.·
            (0.1)
            million
      reduction in employee benefits, mainly resulting from the suspension of
      the employer match for the 401-K plan.·
            (0.1)
            million
      miscellaneous reductions·
            0.6
            million
      – in increased operating costs in China were the result of the large
      increase in direct international sales made by China, are now allocated to
      SG&A costs, previously allocated to cost of goods
  sold.·
            0.3
            million
      – professional fees increased resulting from analysis of tax issues and an
      IRS audit. The company has changed independent auditing firms in the
      expectation that such professional fees will be reduced in the
      future.





Qualytextil,
Brazil operating expenses increased $1.9 million for the nine months ended
October 31, 2009 compared with the nine months ended October 31, 2008. Major
factors in this increase are as follows:





·
            $1.1
            million
      – Brazil operating expenses in Q1 of this year. Brazil operations were not
      included in Q1 last year, as it was acquired effective May 1,
      2008.·
            0.6
            million
      – start-up expenses in connection with Qualytextil gearing up to sell
      Lakeland branded products. This includes hiring 20 sales and logistical
      support staff, printing of catalogs, lease of two new distribution centers
      and increased travel expense.·
            0.2
            million
      –in additional employee benefits and payroll taxes resulting from hiring
      as employees certain people who had been performing services on an
      out-sourcing basis.




20


Operating Profit. Operating
profit decreased 81.1% to $1.1 million for the nine months ended October 31,
2009 from $5.7 million for the nine months ended October 31,
2008.  Operating margins were 1.6% for the nine months ended October
31, 2009 compared to 7.1% for the nine months ended October 31,
2008.





Interest
Expenses.  Interest
expenses increased by $0.4 million for the nine months ended October 31, 2009 as
compared to the nine months ended October 31, 2008 becauseof higher
amounts borrowed and lower interest rates under the Company’s credit facility.
Also impacting interest expense in the current year was the charge of $297,000
resulting from the reclassification from Other Comprehensive Loss resulting from
the anticipated buy-back of the interest rate swap.





Income Tax
Provision.  The Income tax provision consists of federal,
state, and foreign income taxes.  Income tax expenses decreased $1.1
million, or 82.1%, to $0.2 million for the nine months October 31, 2009 from
$1.3 million for the nine months ended July 31, 2008.  Our effective
tax rates were 157.3% and 25.1% for the nine months ended October 31, 2009 and
2008, respectively. Our effective tax rate for the current year was affected by
a $350,000 allowance against deferred taxes resulting from the India
restructuring recorded in Q1, losses in India with no tax benefit, tax benefits
in Brazil resulting from government incentives and goodwill write-offs, and
credits to prior year taxes in the U.S. not previously recorded.





Net Income.  Net
income decreased $4.0 million to a loss of $0.1 million for the nine months
ended October 31, 2009 from income of $3.9 million for the nine months ended
October 31, 2008. The decrease in net income primarily resulted from a decrease
in sales, larger losses in India and reduction in gross margins and extremely
aggressive pricing environment in disposables and margin reduction and cost
buildups in Brazil, a $350,000 allowance against deferred taxes resulting from
the India restructuring, the reclassification from Other Comprehensive Loss of
$297,000 resulting from the anticipated buy out of the interest rate swap,
offset by management’s cost reduction program.





Liquidity
and Capital Resources




Cash Flows.As of October 31,
2009, we had cash and cash equivalents of $4.8 million and working capital of
$47.9 million; an increase of $2.0 million and a decrease of $23.0 million,
respectively, from January 31, 2009. 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 increases in inventories and
accounts receivable associated with our net sales and, to a lesser extent, for
capital expenditures.





Net cash
provided by operating activities of $13.0 million for the nine months ended
October 31, 2009 was due primarily to a decrease in inventories of $12.8
million, with an increase in accounts receivable of $2.8 million. Net cash used
in investing activities of $1.1 million in the nine months ended October 31,
2009, was mainly due to the purchases of property and equipment.





We
currently have one credit facility - a $30 million revolving credit, of which
$14.2 million of borrowings were outstanding as of October 31,
2009.  Our credit facility requires that we comply with specified
financial covenants relating to fixed charge ratio, debt to EBITDA 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 credit facility would allow the lender 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 credit
facility.  As of October 31, 2009, we were in compliance with all
covenants contained in our credit facility, except for the ratio of debt to
EBITDA.


21


The
Company has solicited and received proposals from several other banks, in
addition to a proposal from its existing bank. The Company has signed a term
sheet with TD Bank and is working towards closing a new facility. Management
believes it will have a facility under nearly as favorable terms as it currently
had. Management believes that should the proposed facility with TD Bank not
close, it will be able to obtain other funding on terms nearly as
favorable.





We
believe that our current cash position of $4.8 million, our cash flow from
operations along with borrowing availability under our $30 million revolving
credit facility will be sufficient to meet our currently anticipated operating,
capital expenditures and debt service requirements for at least the next 12
months; management believes it will have a new revolving credit agreement in
place by January 31, 2010.





Capital Expenditures. Our
capital expenditures principally relate to purchases of manufacturing equipment,
computer equipment, and leasehold improvements, as well as payments related to
the construction of our new facilities in China. 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. Our capital expenditures are expected to be approximately
$1.5 million for capital equipment, primarily computer equipment and apparel
manufacturing equipment in fiscal 2010, and plant renovations in
Brazil.





Foreign Currency
Exposure.The Company has foreign currency exposure,
principally through its investment in Brazil, sales in Canada, Latin America and
the UK and production in Mexico and China.  Management has commenced a
hedging program to offset this risk by purchasing forward contracts to sell the
Canadian Dollar and Chilean Peso.  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 positions in
the Chinese Yuan and Brazilian Real the Euro and Great Britain
Pound





The
Company recognizes all derivatives as either assets or liabilities at fair value
and 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.





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,
2009.




Item
      4.
            Controls
      and Procedures




We
conducted an evaluation, under the supervision and with the participation of the
our management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation 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 October 31, 2009. 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 October 31, 2009 for the reasons discussed below, to ensure them that
information relating to the Company (including our consolidated subsidiaries)
required to be included in our reports filed or submitted under the Exchange Act
are recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. Our Chief
Executive Officer and Chief Financial Officer have concluded that we no longer
have a material weakness over our China operations and financial reporting as of
October 31, 2009.


22


Management’s
Report on Internal Control over Financial Reporting




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act. Our internal control system is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles.




Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




Management
has assessed the effectiveness of the Company’s internal control over financial
reporting as of October 31, 2009. In making this assessment, management used the
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on this evaluation, management has concluded that the Company’s internal control
over financial reporting was effective as of October 31, 2009. Our Chief
Executive Officer and Chief Financial Officer have concluded that we no longer
have a material weakness over our inventory relating to sales of raw material
waste in China at October 31, 2009.




In
response to the fraud in China (as fully explained in Note 17 to the Annual
Report filed under Form 10-K) and the material weakness identified at October
31, 2008, we have initiated a China Internal Control Committee. Such Committee
reviews, examines and evaluates China operating activities, and plans, designs
and implements internal control procedures and policies. The Committee reports
to the Chief Financial Officer. In particular, the Committee focuses on:
strengthening controls over waste/scrap sales, upgrading local accounting
manager authority and responsibility, and creating new banking and inventory
controls.




We believe the above remediation steps
now provide us with the infrastructure and processes necessary to accurately
prepare our financial statements on a quarterly basis.




A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis.




Other Previous Material Weaknesses-In its report at April 30, 2008, management had previously identified a
material weakness in its period-end financial reporting process relating to
employee withholding for medical insurance. The employee withholding for medical
insurance was not offset against the expenses as a result of human error and was
not identified on review due to the favorable claim experience resulting in
lowered expenses. This control deficiency resulted in an adjustment to our April
30, 2008 financial statements and could have resulted in an overstatement of
cost of sales and operating expenses that would have resulted in an
understatement of net earnings in the amount of $127,000 to the interim
financial statements if not detected and prevented.





In
response to the material weakness identified at April 30, 2008, we have
initiated additional review procedures to reduce the likelihood of future human
error on the assets and liabilities trial balance amounts. Management believes
that the remediation relating to the weakness relating to the Chinese
subsidiaries is now completely in effect.


23


Management
had also previously identified two material weaknesses at January 31, 2008, in
its period-end financial reporting process relating to the elimination of
inter-company profit in inventory and the inadequate review of inventory cutoff
procedures and financial statement reconciliations from one of our China
subsidiaries.  The material weakness which related to the elimination
of inter-company profit in inventory resulted from properly designed controls
that did not operate as intended due to human error. The material weakness that
resulted in the inventory cut-off error was as a result of the improper
reconciliation of the conversion of one of our China subsidiaries’ financial
statements from Chinese GAAP to U.S. GAAP. We engaged a CPA firm in China to
assist management in this conversion, and the Chinese CPA firm’s review as well
as management’s final review did not properly identify the error in the
reconciliation. These control deficiencies resulted in audit adjustments to our
January 31, 2008 financial statements and could have resulted in a misstatement
to cost of sales that would have resulted in a material misstatement to the
annual and interim financial statements if not detected and
prevented.





Remediation - In response to
the material weaknesses identified at January 31, 2008, we continue the process
of initiating additional review procedures to reduce the likelihood of future
human error and are transitioning to internal accounting staff with greater
knowledge of U.S. GAAP to improve the accuracy of the financial reporting of our
Chinese subsidiary.  We have automated key elements of the calculation
of intercompany profits in inventory and formalized the review process of the
data needed to calculate this amount. With the implementation of this corrective
action we believe that the previously identified material weakness relating to
intercompany profit elimination has been remediated as of the first quarter of
the fiscal year 2009.





Effective
in full at October 31, 2008, management has taken primary responsibility to
prepare the U.S. GAAP financial reporting based on China GAAP financial
statements. This function was previously performed by outside accountants in
China. Further, U.S. corporate management is now also reviewing the China GAAP
financial statements. In addition, in July 2008, an internal auditor was hired
in China who will report directly to the U.S. corporate internal audit
department and who will work closely with U.S. management.





As
described below under the heading “Changes in Internal Controls Over
Financial Reporting,” we have previously taken a number of steps designed
to improve our accounting for our Chinese subsidiaries,  the
elimination of intercompany profit in inventory, and employee withholding for
medical insurance.





Management
is in the process of reviewing, evaluating and upgrading the systems of internal
control existing at our new subsidiary in Brazil, Qualytextil, S.A.





Lakeland
Industries, Inc.’s management, with the participation of Lakeland Industries,
Inc.’s Chief Executive Officer and Chief Financial Officer, has evaluated
whether any change in the Company’s internal control over financial reporting
occurred during the second quarter of fiscal 2010.  Based on that
evaluation, management concluded that other than the China Internal Control
Committee discussed above, there have not been changes in Lakeland Industries,
Inc.’s internal control over financial reporting during the second quarter of
fiscal 2010 that have materially affected, or is reasonably likely to materially
affect, Lakeland Industries, Inc.’s internal control over financial
reporting.




Holtz Rubenstein Reminick LLP, the
Company's previous independent registered public accounting firm has issued a
report on management’s assessment of the Company’s internal control over
financial reporting. That report dated April 14, 2009 is included in the
Company’s Annual Report on Form 10-K for the year ended January 31,
2009.




Changes
in Internal Control over Financial Reporting





Other
than the China Internal Control Committee discussed above and the appointment of
a new financial manager at one of the Company’s China subsidiaries, there have
been no other changes in Lakeland Industries, Inc.’s internal control over
financial reporting during the third quarter of fiscal 2010 that have materially
affected, or is reasonably likely to materially affect, Lakeland Industries,
Inc.’s internal control over financial reporting.


24





PART
II. OTHER INFORMATION




Items 1, 2, 3, 4 and 5 are not
applicable





Item
      6.
            Exhibits:





Exhibits:


10.2
              License
      Agreement, dated and effective as of June 6, 2009, by and between Lakeland
      Industries, Inc. and I.E. duPont de Nemours and Company (portions of which
      have been filed with the SEC under a confidentiality
    request).31.1
              Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
              Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1
              Certification
      of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 200232.2
              Certification
      of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002


25





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:  December
      10, 2009
                /s/ Christopher J. RyanChristopher
      J. Ryan,Chief
      Executive Officer, President,Secretary
      and General Counsel(Principal
      Executive Officer and AuthorizedSignatory)Date:
      December 10, 2009
                /s/ Gary PokrassaGary
      Pokrassa,Chief
      Financial Officer(Principal
      Accounting Officer and AuthorizedSignatory)


26