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.

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.

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%.

· 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.

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.

· 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.

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 because of 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.

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