10-Q 1 v145992_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2009.

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

Commission File No. 1-7848

LAZARE KAPLAN INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)

Delaware	13-2728690
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)

19 West 44th Street, New York, NY 10036

(Address of principal executive offices)

(212) 972-9700

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x

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

Yes ¨ No x

The number of shares of the registrant’s common stock outstanding on March 31, 2009, was 8,252,679.

LAZARE KAPLAN INTERNATIONAL INC.

Index
			Page
Part I. Financial Information

	Item 1.	Financial Statements (Unaudited)

		Consolidated statement of operations	3
		Three and nine months ended February 28, 2009 and February 29, 2008

		Consolidated balance sheets	4
		February 28, 2009 and May 31, 2008

		Consolidated statements of cash flows	5
		Nine months ended February 28, 2009 and February 29, 2008

		Notes to consolidated financial statements	6 - 16

	Item 2.	Management's Discussion and Analysis of Financial	17 - 24
		Condition and Results of Operations

	Item 3.	Quantitative and Qualitative Disclosure of Market Risk	24 - 26

	Item 4.	Controls and Procedures	26

Part II. Other Information

	Item 1.	Legal Proceedings	26 - 28

	Item 1A.	Risk Factors	29

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

	Item 6.	Exhibits	31

Signature			31

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Consolidated Statements of Operations

February 28, 2009 and February 29, 2008 (unaudited)	Three Months Ended						Nine Months Ended
(In thousands, except share and per share data)	2009			2008			2009			2008

Net sales	$	42,174		$	82,169		$	161,735		$	275,290
Cost of sales		40,425			73,873			152,858			252,352
		1,749			8,296			8,877			22,938
Other Income		-			4,700			-			4,700
		1,749			12,996			8,877			27,638
Selling, general and administrative expenses		6,108			9,735			19,615			22,970
		(4,359	)		3,261			(10,738	)		4,668
Interest expense, net of interest income		(629	)		(1,120	)		(1,964	)		(4,124	)
Equity in income / (loss) of joint ventures		(735	)		2,295			2,690			4,856
Income / (loss) before income tax provision
and minority interest		(5,723	)		4,436			(10,012	)		5,400
Income tax provision / (benefit)		(2,138	)		1,127			(3,744	)		1,380
Minority Interest		45			-			(153	)		-
NET INCOME / (LOSS)	$	(3,540	)	$	3,309		$	(6,421	)	$	4,020

EARNINGS / (LOSS) PER SHARE

Basic earnings / (loss) per share	$	(0.43	)	$	0.40		$	(0.78	)	$	0.49
Average number of shares outstanding
during the period		8,252,679			8,251,616			8,252,679			8,256,227

Diluted earnings / (loss) per share	$	(0.43	)	$	0.40		$	(0.78	)	$	0.48
Average number of shares outstanding during
the period, assuming dilution		8,252,679			8,354,742			8,252,679			8,338,347

See notes to consolidated financial statements.

Consolidated Balance Sheets

	February 28,			May 31,
	(Unaudited)			(Audited)
(In thousands, except share data)	2009			2008

Assets
CURRENT ASSETS:
Cash and cash equivalents	$	13,248		$	8,815
Accounts receivable, less allowance for doubtful accounts ($1,215 and $1,559 in February and May 2008, respectively)		74,693			94,057
Inventories, net:
Rough stones		36,641			29,442
Polished stones		89,090			79,555
Total inventories		125,731			108,997
Prepaid expenses and other current assets		8,284			2,386
Deferred tax assets-current		3,059			2,271
TOTAL CURRENT ASSETS		225,015			216,526

Property, plant and equipment, net		7,578			6,475
Investments in unconsolidated joint ventures		14,210			11,521
Other assets		6,292			2,974
Deferred tax assets, net		10,100			6,934
	$	263,195		$	244,430

Liabilities and Stockholders’ Equity
CURRENT LIABILITIES:
Accounts payable and other current liabilities	$	91,943		$	61,995
Current portion of long-term debt and lines of credit		36,043			45,885
TOTAL CURRENT LIABILITIES		127,986			107,880

Long-term debt		40,114			35,571
TOTAL LIABILITIES		168,100			143,451
COMMITMENTS AND CONTINGENCIES		-			-
MINORITY INTEREST		590			404
STOCKHOLDERS’ EQUITY
Preferred stock, par value $.01 per share: Authorized 1,500,000; no shares outstanding		-			-
Common stock, par value $1 per share:

Authorized 12,000,000 shares; issued 8,948,845		8,949			8,949
Additional paid-in capital		63,176			63,104
Cumulative translation adjustment		(52	)		(331	)
Retained earnings		28,101			34,522
		100,174			106,244

Less treasury stock, 696,166 shares at cost		(5,669	)		(5,669	)
TOTAL STOCKHOLDERS’ EQUITY		94,505			100,575
	$	263,195		$	244,430

See notes to consolidated financial statements.

Consolidated Statements of Cash Flows

Nine months ended February 28 and 29, (unaudited)
(In thousands)	2009			2008

Cash Flows from Operating Activities:
Net income / (loss)	$	(6,421	)	$	4,020
Adjustments to reconcile net income / (loss) to net cash provided by operating activities:
Depreciation and amortization		1,121			1,160
Provision for uncollectible accounts		137			644
Compensation expense - noncash		72			-
Deferred income taxes		(3,954	)		1,306
Minority Interest		186			-
Equity in earnings of unconsolidated affiliates		(2,690	)		(4,856	)
Changes in operating assets and liabilities:
Accounts receivable		19,041			37,574
Rough and polished inventories		(16,441	)		4,754
Prepaid expenses and other current assets		(5,891	)		6,033
Other assets		7,334			138
Accounts payable and other current liabilities		18,843			(19,646	)
Net cash provided by operating activities		11,337			31,127

Cash Flows from Investing Activities:
Capital expenditures		(2,270	)		(135	)
Net cash used in investing activities		(2,270	)		(135	)

Cash Flows from Financing Activities:
Borrowings on revolving credit facilities		5,114			10,413
Repayments on revolving credit facilities		(9,974	)		(35,460	)
Increase / (decrease) in borrowings on demand facilities		(499	)		(7,188	)
Purchase of treasury stock		-			(71	)
Proceeds from exercise of stock options		-			16
Net cash used in financing activities		(5,359	)		(32,290	)

Effect of exchange rate changes on cash		725			576
Net increase / (decrease) in cash and cash equivalents		4,433			(722	)
Cash and cash equivalents at beginning of year		8,815			7,869
Cash and cash equivalents at end of year	$	13,248		$	7,147

See notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Interim Financial Reporting

This financial information has been prepared in conformity with the accounting principles and practices reflected in the financial statements included in the annual report filed with the Securities Exchange Commission for the preceding fiscal year. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Lazare Kaplan International Inc.'s operating results for the three and nine months ended February 28, 2009 and February 29, 2008 and its financial position as of February 28, 2009.

The balance sheet at May 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended May 31, 2008. The operating results for the interim periods presented are not necessarily indicative of the operating results for a full year. In this discussion, the years “2009” and “2008” refer to the fiscal years ended May 31, 2009 and May 31, 2008, respectively.

2.	Accounting Policies

Sales arrangements with customers

The Company’s polished diamond and diamond jewelry customers consist primarily of wholesale and retail clients. The Company’s rough diamond customers consist primarily of rough diamond cutters and wholesalers. The Company generally ships polished diamond inventory to customers subject to verification of the diamond particulars.

The Company’s policy is to recognize revenue when title and risk of ownership have passed to the buyer, the earnings process is complete and the sale price is fixed and determinable. Polished diamond sales include revenue derived from the sale of polished diamonds and the cutting, polishing and laser inscription of polished diamonds. In addition, in certain instances, the Company may be entitled to receive incremental profits from its customers on the sale of certain stones. Such profits are recognized as revenue when realized. Where the Company acts as a principal in the sales transaction, takes title to the product and has risks and rewards of ownership, the gross value of diamonds invoiced is recorded as sales with the portion of profits allocable to others (where applicable) included in cost of sales.

Where the Company believes profitability can be maximized, the Company may combine, and jointly sell, certain of its rough and polished diamonds with other wholesalers. In such instances, the participating wholesaler is required to advance funds in relation to their proportionate interest in the underlying diamonds. Under certain circumstances, primarily relating to foreign sales, the wholesaler assumes responsibility for billing and collection efforts. While the ultimate sales are made to multiple third parties, the aggregation of accounts receivable results in a concentration of credit risk. In addition, the Company is an equity partner in various joint venture companies relating to sourcing, cutting, polishing and sales of diamonds. Certain of the joint venture companies are affiliated with and / or under common control of wholesale companies with which the Company transacts significant business. As a result, the Company’s net exposure to risk may be increased, as discussed elsewhere in this Form 10-Q.

The Company has an arrangement with a diamond producer whereby the Company sells certain polished diamonds that are cut and polished in Russia. The risk and rewards of ownership of these diamonds is transferred to the Company upon delivery to the Company of the diamonds in polished form. Generally, upon receipt, the Company pays a negotiated base price and the producer receives an economic interest in future profits associated with the diamonds.

The Company has a technical cooperation agreement with an entity responsible for the development and marketing of diamonds produced in Angola. Pursuant to this agreement the Company has established a joint buying and rough diamond trading operation. The Company takes title to the diamonds upon acquisition in Angola and assumes responsibility for risk of loss. Sales by the Company are recorded at their gross invoice value. Profits in excess of operating and rough acquisition costs as defined are allocated between parties with such costs classified as cost of sales by the Company.

Credit is extended based on an evaluation of each customer’s financial condition and generally collateral is not required on the Company’s receivables.

Revenue Arrangements with Multiple Deliverables

In evaluating multiple element arrangements, the Company considers whether the components of the arrangement represent separate units of accounting as defined in Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). In accordance with EITF 00-21, the Company recognizes revenue for delivered elements only when the delivered element has stand-alone value and has objective and reliable evidence of fair value for each undelivered element. If the fair value of any undelivered element included in a multiple element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements, or such elements are insignificant. Application of this standard requires subjective determinations and requires management to make judgments about the fair value of the individual elements and whether such elements are separable from the other aspects of the contractual relationship.

Other income:

During the third fiscal quarter of 2008, the Company entered into a license agreement pursuant to which the Company granted an exclusive license to use certain of its intellectual property in Japan solely in connection with the sale, distribution, promotion, and advertisement of branded diamonds, branded diamond jewelry, and other products bearing a “Lazare Diamond” logo within Japan for a one-time fee ($4.7 million net of legal and other costs).

Customer Rebates

From time to time the Company has had arrangements whereby it would rebate to a customer a percentage of certain of its qualifying purchases. The Company characterizes such rebates as a reduction of sales.

Inventories

Inventories, including amounts on consignment with customers, are stated at the lower of cost or market, using the average cost method.

Advertising and Incentive Programs

The Company participates in cooperative advertising arrangements with customers in order to build brand awareness and product acceptance. Under such an arrangement, a customer is eligible to receive an allowance of up to a specified percentage of its purchases from the Company if certain qualitative advertising criteria are met and if specified amounts are spent on qualifying advertising. The Company characterizes as selling, general and administrative expense the consideration it pays to customers for cooperative advertising.

In addition, the Company offers programs whereby certain sales staff employed by the Company’s customers can receive consideration for sales of the Company’s products. The Company characterizes as selling, general and administrative expense the consideration it pays to the salesperson.

Consideration Received from Vendors

Periodically, the Company negotiates agreements with vendors to share certain promotional costs. The Company classifies amounts expended on such promotions as selling, general and administrative expense when incurred. Similarly, amounts reimbursed by vendors are characterized as a reduction of selling, general and administrative expense.

Shipping and Handling:

Shipping and handling costs incurred by the Company to deliver product to customers are classified in the Company’s income statement as selling, general and administrative expense.

Equity Investments

Reclassifications

Certain prior year amounts have been reclassified to conform to current year presentation.

New Accounting Pronouncements

In September 2006 the FASB issued SFAS No. 157, "Fair Value Measurements," which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Effective June 1, 2008 the Company adopted SFAS No. 157, with the exception of all non-financial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, which will be effective for years beginning after November 15, 2008. The impact of adopting SFAS No. 157 on the Company’s financial position, results of operations and cash flows was immaterial.

Effective June 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for Financial Asset and Financial Liability: Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). The standard permits all entities to elect to measure certain financial instruments and other items at fair value with changes in fair value reported in earnings. The impact of adopting SFAS No. 159 on the Company’s financial position, results of operations and cash flows was immaterial.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” which requires (1) ownership interests in subsidiaries held by parties other than the parent to be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; (2) the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; and (3) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently as equity transactions. SFAS No. 160 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier application is prohibited. The adoption of SFAS No. 160 is not expected to have a material impact on our results of operations or our financial position.

3.	Stock Incentive Plans

The Company records stock based compensation in accordance with SFAS No. 123(R), “Accounting for Share-Based Payment,” which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. Under SFAS 123(R), share based awards that do not require future service (i.e. vested awards) are expensed immediately. Share based employee awards that require future service are amortized over the relevant service period. A Long-Term Stock Incentive Plan was approved by the Board of Directors on April 10, 1997 (the 1997 Plan). No future grants may be made under the 1997 Plan, although outstanding options may continue to be exercised.

During the first quarter of 2009, the Board of Directors approved the 2008 Long-Term Incentive Plan which has reserved 750,000 shares of the Company’s common stock for issuance to directors, officers, key employees and consultants of the Company and its subsidiaries.

A summary of the Plans’ activity for the period ended February 28, 2009 is as follows:

	Number of shares			Weighted average price per share		Weighted average remaining contractual life remaining		Aggregate intrinsic value
Outstanding - May 31, 2008		830,751		$	8.06
Options expired/cancelled		-		$	-
Options granted		125,000		$	9.26
Options exercised				$	-
Outstanding - August 31, 2008		955,751	*	$	8.22
Options expired/cancelled		-		$	-
Options granted		-		$	-
Options exercised				$	-
Outstanding - November 30, 2008		955,751	*	$	8.22
Options expired/cancelled		-		$	-
Options granted		-		$	-
Options exercised				$	-
Outstanding - February 28, 2009		955,751	*	$	8.22

Non-vested		225,000		$	8.60	6.03	$	-
Vested		730,751		$	8.10	3.09	$	-
Total		955,751	*	$	8.22	3.78	$	-

* Includes 175,000 warrants of which 75,000 are vested and 100,000 will vest upon meeting certain

contigent conditions.

4.	Income Taxes

Certain of the Company's subsidiaries conduct business in foreign countries. These subsidiaries are not subject to Federal income taxes and their provisions have been determined based upon the effective tax rates, if any, in the foreign countries.

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss carryforwards. The Company's net deferred tax asset as of February 28, 2009 is approximately $14.1 million less a valuation allowance of approximately $0.9 million resulting in a net deferred tax asset of $13.2 million.

At February 28, 2009 the Company has available U.S. net operating loss carryforwards of $35.4 million, which expire as follows (in thousands):

Year	Net Operating Losses
2019	$	8,690
2020		298
2021		120
2022		10,190
2023		25
2026		4,066
2027		12,036
	$	35,425

In addition, the Company has New York State and New York City net operating loss carryforwards of approximately $18.0 million each, expiring from 2022 through 2027.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The Company and its subsidiaries file income tax returns in international jurisdictions in addition to U.S. federal, state and local income tax jurisdictions. Based upon the statute of limitations the Company is no longer subject to U.S. federal tax examinations by tax authorities for years prior to fiscal 2005.

5. Earnings Per Share

The Company computes basic earnings per share based upon the weighted average number of common shares outstanding, and diluted earnings per share based upon the weighted average number of common shares outstanding including the impact of dilutive stock options.

	Three Months Ended				Nine Months Ended
February 28 and 29, (unaudited)	2009		2008		2009		2008
Average number of shares
outstanding during the period		8,252,679		8,251,616		8,252,679		8,256,227
Effect of dilutive stock options		-		103,126		-		82,120
Average number of shares
outstanding during the period
assuming dilution		8,252,679		8,354,742		8,252,679		8,338,347

6.	Comprehensive Income / (Loss)

The Company reports “Comprehensive Income / (Loss)” in accordance with Statement of Financial Accounting Standards No. 130, which requires foreign currency translation adjustments to be included in other comprehensive income. For the three and nine months ended February 28, 2009, total comprehensive loss was ($3.3) million and ($6.1) million, respectively. For the three and nine months ended February 29, 2008, total comprehensive income was $3.5 million and $4.6 million, respectively.

7.	Credit Agreements

The Company has a $25.0 million and a $45.0 million unsecured, uncommitted line of credit with a bank. Borrowings under both lines bear interest at a rate 160 basis points above the bank’s LIBOR reference rate. As of February 28, 2009 the balance outstanding under both lines was $43.7 million. Borrowings under these lines are available for the Company’s working capital requirements and are payable on demand.

The Company has long-term unsecured, committed revolving loan agreements in the amount of $35.0 million and unsecured, uncommitted credit agreements in the amount of $10.0 million. The Company may borrow under the committed facilities (including up to $0.8 million under letters of credit, $0.7 million issued at February 28, 2009) through December 1, 2010. Borrowings under the agreements generally bear interest at (a) the higher of the banks base rate or one half of one percent above the Federal Funds Effective Rate, or (b) 185 to 210 basis points above LIBOR. The applicable interest rate is contingent upon the method of borrowing selected by the Company. The proceeds of these facilities are available for working capital purposes. The loan agreements contain certain provisions that require, among other things, (a) maintenance of defined levels of working capital, net worth and profitability, (b) limitations on borrowing levels, investments and capital expenditures and (c) limitations on dividends and the repurchase of treasury shares. As of February 28, 2009 the balance outstanding under the facilities was $26.4 million.

A subsidiary of the Company maintains a loan facility which enables it to borrow up to 530 million Japanese yen (approximately $5.3 million U.S. dollars) at an interest rate 1% above the bank’s cost of funds through December 1, 2010. Borrowings under the facility are available for working capital purposes. The Company guarantees repayment of amounts borrowed. Borrowings under the loan are used in support of its operations in Japan. As of February 28, 2009 the balance outstanding under this facility was $5.1 million.

A majority owned subsidiary of the Company also maintains a $3.0 million line of credit relating to a joint diamond cutting and polishing operation in South Africa. The balance outstanding as of February 28, 2009 was approximately $0.9 million with a portion of this debt (approximately $0.6 million) guaranteed by the Company.

The Company also guarantees a portion of debt related to a joint rough trading operation ($21.0 million at February 28, 2009). The fair value of the guarantees is immaterial.

Long-term debt of $40.1 million outstanding at February 28, 2009 is scheduled to be repaid in the fiscal year ended May 31, 2010.

The Company’s long-term facilities do not contain subjective acceleration clauses or require the Company to utilize a lock box whereby remittances from the Company’s customers reduce the debt outstanding.

8.	Transactions with related parties

A member of the Company’s Board of Directors is of counsel to a law firm which serves as counsel to the Company. Amounts paid to the law firm during the three and nine months ended February 28, 2009 were $0.1 million and $0.4 million, as compared to $0.1 million and $0.2 million for the comparable prior year periods.

9.	Geographic Segment Information

Revenue, gross profit and income/(loss) before income tax provision (and minority interest where applicable) for the three months ended February 28, 2009 and February 29, 2008, classified by geographic area, which was determined by where sales originated from and where identifiable assets are held, were as follows (in thousands):

	North								Far			Elimi-			Consoli-
	America			Europe			Africa		East			nations			dated

Three months ended February 28, 2009
Net sales to unaffiliated customers	$	18,330		$	20,205		$	861	$	2,778		$	-		$	42,174
Transfers between geographic areas		1,128			-			18,480		-			(19,608	)		-
Total revenue		19,458			20,205			19,341		2,778			(19,608	)		42,174
Gross Profit		772			75			44		830			28			1,749
Depreciation Expense		256			18			-		44			-			318
Interest Expense		582			21			16		10			-			629
Income from equity method investees		(735	)		-			-		-			-			(735	)
Income/(loss) before income taxes and
minority interest		(5,365	)		(344	)		61		(70	)		(5	)		(5,723	)


Three months ended February 29, 2008
Net sales to unaffiliated customers	$	29,065		$	48,122		$	1,063	$	3,919		$	-		$	82,169
Transfers between geographic areas		20,349			-			23,070		-			(43,419	)		-
Total revenue		49,414			48,122			24,133		3,919			(43,419	)		82,169
Gross Profit		5,525			1,494			327		950			-			8,296
Depreciation Expense		259			19			-		15			-			293
Interest Expense		974			134			-		12			-			1,120
Income from equity method investees		2,295			-			-		-			-			2,295
Income/(loss) before income taxes		2,962			836			308		330			-			4,436


Revenue and gross profit for the three months ended February 28, 2009 and February 29, 2008 classified by product were as follows (in thousands):

	Polished			Rough			Total

Three months ended February 28, 2009
Net Sales	$	18,013		$	24,161		$	42,174
Gross Profit	$	1,036		$	713		$	1,749

Three months ended February 29, 2008
Net Sales	$	38,093		$	44,076		$	82,169
Gross Profit	$	5,617		$	2,679		$	8,296

9.	Geographic Segment Information (cont’d)

Revenue, gross profit and income/(loss) before income tax provision (and minority interest where applicable) for the nine months ended February 28, 2009 and February 29, 2008 and identifiable assets at the end of each of those periods, classified by geographic area, which was determined by where sales originated from and where identifiable assets are held, were as follows (in thousands):

	North								Far			Elimi-			Consoli-
	America			Europe			Africa		East			nations			dated

Nine months ended February 28, 2009
Net sales to unaffiliated customers	$	61,672		$	86,106		$	4,300	$	9,657		$	-		$	161,735
Transfers between geographic areas		40,848			270			46,019		-			(87,137	)		-
Total revenue		102,520			86,376			50,319		9,657			(87,137	)		161,735
Gross Profit		5,035			396			1,108		2,547			(209	)		8,877
Depreciation Expense		791			55					69						915
Interest Expense		1,621			265			73		5			-			1,964
Income from equity method investees		2,690														2,690
Income/(loss) before income taxes and
minority interest		(8,681	)		(1,101	)		238		(221	)		(247	)		(10,012	)
Investment in equity method investees		14,210														14,210
Identifiable assets at February 29, 2008		226,268			7,850			30,297		5,631			(6,851	)		263,195

Nine months ended February 29, 2008
Net sales to unaffiliated customers	$	81,397		$	178,636		$	3,247	$	12,010		$	-		$	275,290
Transfers between geographic areas		81,815			58			87,366		-			(169,239	)		-
Total revenue		163,212			178,694			90,613		12,010			(169,239	)		275,290
Gross Profit		14,272			2,362			3,409		2,882			13			22,938
Depreciation Expense		817			55					44						916
Interest Expense		3,410			659					55						4,124
Income from equity method investees		4,856														4,856
Income/(loss) before income taxes		1,369			227			3,314		477			13			5,400
Investment in equity method investees		8,294														8,294
Identifiable assets at February 29, 2008		161,635			50,119			22,167		9,058			(36	)		242,943

Revenue and gross profit for the nine months ended February 28, 2009 and February 29, 2008 classified by product were as follows (in thousands):

	Polished			Rough			Total

Nine months ended February 28, 2009
Net Sales	$	79,097		$	82,638		$	161,735
Gross Profit	$	7,585		$	1,292		$	8,877

Nine months ended February 29, 2008
Net Sales	$	115,007		$	160,283		$	275,290
Gross Profit	$	13,745		$	9,193		$	22,938

10. Investments in Unconsolidated Joint Ventures

The Company utilizes the equity method of accounting to record its proportionate share of income and losses from joint ventures. The equity method of accounting is used for investments in associated companies in which the Company generally has an interest of 50% or less. The Company evaluates its investments in associated companies in accordance with FIN 46 (R) “Consolidation of Variable Interest Entities”. The Company is an equity investee in several joint venture agreements relating to sourcing, cutting, polishing, processing and sales of diamonds. Combined condensed financial information concerning the Company’s unconsolidated joint venture activities is as follows: (in thousands)

February 28, 2009	Nine Months Ended
Revenues	$	295,192
Gross profit		28,763
Net income		9,318

Current assets		112,950
Non-current assets		416

Current liabilities		76,345
Non-current liabilities		18,375

The Company’s evaluation of its investments in associated companies in accordance with FIN 46 (R) “Consolidation of Variable Interest Entities” – An interpretation of ARB No. 51 identified variable interest entities included in the results above in which the Company is not the primary beneficiary. The Company has a 30% equity investment in Gemang Diamantes Angola Ltd. and Gulfdiam DMCC. The Company’s investment in unconsolidated joint ventures also includes a 50% interest in Bellataire.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

This quarterly report contains, in addition to historical information, certain forward-looking statements that involve significant risks and uncertainties. Such forward-looking statements are based on management's belief as well as assumptions made by, and information currently available to, management pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The Company's actual results could differ materially from those expressed in or implied by the forward-looking statements contained herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Liquidity - Capital Resources" and in Item 1 - "Description of Business" and elsewhere in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2008. The Company undertakes no obligation to release publicly the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this quarterly report or to reflect the occurrence of other unanticipated events.

Overview

The Company is engaged in the cutting, polishing and selling of branded and non-branded (“commercial”) diamonds. The Company’s premier product line is comprised of ideally proportioned diamonds which it markets internationally under the brand name "Lazare Diamonds®". Ideally proportioned diamonds are distinguished from non-ideal cut diamonds by the symmetrical relationship of their facets, which optimize the balance of brilliance, sparkle and fire in a polished diamond. The Company owns and operates a domestic manufacturing facility located in Puerto Rico. In addition, through various cooperative agreements, the Company cuts and polishes commercial diamonds which it markets to wholesalers, distributors and retail jewelers. Rough stones purchased by the Company are either selected for manufacturing or resold as rough diamonds in the marketplace.

The Company's overall revenues are, in part, dependent upon the availability of rough diamonds, the world's known sources of which are highly concentrated. The Diamond Trading Company (“DTC”) is the world’s largest rough diamond selling organization. The DTC periodically appoints clients – known as “Sightholders” – who are among the world’s leading diamantaires, and are carefully chosen for their ability to add value to the diamonds sold by the DTC. The Company has been a client of the DTC for approximately 60 years. The Company was recently re-appointed as a Sightholder. The Company supplements its rough diamond needs by secondary market purchases and has entered into relationships with other primary source suppliers.

The Company has an agreement regarding the purchasing and marketing of rough diamonds with Sociedade de Comercializacao de Diamantes de Angola SARL (“SODIAM”), the government entity responsible for development and marketing of diamonds produced in Angola. Informal sector rough diamond buying from this operation commenced during fiscal 2005. During fiscal 2006, the Company’s rough buying operations expanded to include buying in the Angolan formal sector. Angolan formal sector operations are generally conducted by separate joint venture companies. The Company is currently negotiating a further expansion and restructuring of its Angolan operations which includes exploration and development through various additional joint ventures.

The Company has a ten year agreement signed in March 1999 with AK ALROSA of Russia, which is the largest producer of rough diamonds in Russia. Under the terms of this agreement, the Company sells polished diamonds that are cut in facilities jointly managed and supervised by the Company and ALROSA personnel. The proceeds from the sale of these polished diamonds, after deduction of rough diamond cost, generally are shared equally with ALROSA. The Company is currently in negotiations with ALROSA to extend the term of the agreement.

The Company has signed a strategic cooperation agreement with NamGem Diamond Manufacturing Company (PTY) Ltd. ("NamGem") for the cutting and polishing of diamonds in Namibia. NamGem is Namibia's flagship venture in the international diamond polishing industry. Under the terms of the agreement, the Company provides technical manufacturing assistance and supervises the manufacture of the Company’s rough diamonds deemed suitable to cut and polish.

During September 2006, the Company and the Overseas Private Investment Corporation, an independent agency of the United States Government (“OPIC”) signed a commitment letter pursuant to which OPIC committed to provide approximately $25 million of long-term financing in support of the acquisition of certain rough diamonds to be cut and polished in Namibia. Pursuant thereto, a subsidiary of the Company and OPIC subsequently entered into a financing agreement. The Company is currently in negotiations with third parties regarding changes to its existing Namibian operations. Pending a satisfactory outcome of these negotiations and subject to various conditions precedent under the financing agreement, the Company anticipates initial borrowing under the facility to commence during calendar 2009.

The Company has an agreement with Nozala Investments (Pty) Ltd., a broadly based women’s empowerment investment group, for cooperation in South Africa’s diamond sector. The agreement contemplates diamond mining, cutting, polishing, and distribution. The joint venture is in line with the South African Government’s recently announced program to promote new entrants and investment in the domestic diamond sector, increasing the sector’s contribution to economic development. Cutting and polishing activities which concentrate on local sources of rough diamond supply commenced during fiscal 2006.

In February 2006, Lazare Kaplan Botswana (Pty) Ltd., a wholly owned subsidiary, was granted a license from the Government of Botswana to cut and polish diamonds in that country. The Company is currently constructing a new cutting facility in Gaborone, Botswana.

The Company continues its efforts to develop additional sources of rough diamonds, including potential opportunities in Africa.

Through December 2009, the Company’s wholly-owned subsidiary, Pegasus Overseas Ltd. (“POL”) has an exclusive agreement with Diamond Innovations Inc. (“DI”) under which POL will market natural diamonds that have undergone a new high pressure, high temperature (HPHT) process to improve the color of certain gem diamonds without reducing their all-natural content. POL only sells and markets diamonds that have undergone the HPHT process under the Bellataire® brand name.

In November 2005, the Company (including certain of its subsidiaries) amended certain terms of its agreement with DI relating to the sourcing, manufacture and marketing of Bellataire diamonds. The amendment and related agreements seek to increase the sales and profitability of Bellataire diamonds by more closely aligning the economic interests of the parties through shared management of product sourcing, manufacturing and marketing as well as the sharing of related costs.

While the Company believes that its success in maintaining quantities and qualities of polished inventory that best meet its customers’ needs is achieved through its ability to fully integrate its diverse rough and polished diamond sources, any significant disruption of the Company’s access to its primary source suppliers could have a material adverse effect on the Company.

The financial market crisis and economic downturn has disrupted credit and equity markets worldwide and led to deterioration in the global economic environment, a general tightening of credit, lower levels of liquidity and discretionary spending, and increases in the rates of default and bankruptcy. During the fiscal quarters ended November 30, 2008 and February 28, 2009 rough and polished diamond sales slowed significantly as customers focused on selling owned inventory and preserving liquidity in response to the global economic downturn. As a result, diamond producers have substantially reduced mining activity and are reportedly stockpiling significant amounts of inventory. In the current economic environment, some of the Company’s customers may experience difficulty in paying for previously purchased products.

At February 28, 2009, the Company had a net aggregated exposure to a group of affiliated and / or associated companies amounting to approximately $34.0 million. In addition, the Company guaranties a portion of debt relating to a joint rough trading venture ($21.0 million at February 28, 2009) in which one of the affiliated companies is a principal operating partner. The Company’s aggregate exposure consists primarily of accounts receivables, inventory and advances offset by advances and investments funded by such companies. At February 28, 2009 certain of the affiliated companies and certain third party customers were experiencing liquidity difficulty in the current economic environment. As a result, certain receivables and joint venture funding for which these companies are responsible were past due. The Company is continuing to work with the affiliated companies and their management to alleviate the situation.

Results of Operations

The recent global financial crisis and economic downturn has negatively impacted the sectors of the diamond and jewelry industry in which the Company operates. Diamond and diamond jewelry purchases are ultimately dependant on the availability of consumer discretionary spending. Uncertainties regarding future economic prospects and a decline in consumer confidence during the current fiscal year translated into lower purchases and sales by diamond retailers, wholesalers and producers in most sectors of the diamond and jewelry industry.

Net Sales

Net sales for the three and nine months ended February 28, 2009 were $42.2 million and $161.7 million, respectively, as compared to $82.2 million and $275.3 million for the prior year periods.

Polished diamond revenue for the three and nine months ended February 28, 2009 were $18.0 million and $79.1 million, respectively, as compared to $38.1 million and $115.0 million for the prior year periods. The current quarter and year to date decrease reflects lower sales of both branded diamonds and fine cut commercial diamonds. Polished diamond sales have been significantly impacted by the worsening economic conditions, and the reluctance of customers to take inventory positions in response to liquidity concerns.

Rough diamond sales were $24.2 million and $82.6 million for the three and nine months ended February 28, 2009, as compared to $44.1 million and $160.3 million for the comparable prior year periods. The decrease in rough diamond sales primarily reflects reduced sourcing activities as the Company sought to preserve liquidity and declined to purchase rough diamonds it considered overpriced in light of current market conditions.

Gross Profit

Gross Margin on net polished sales for the three and nine months ended February 28, 2009 were 5.8% and 9.6%, respectively, as compared to 14.7% and 12.0% for the prior year periods. The decrease in polished gross margin during the current quarter primarily reflects lower margins on the sales of both branded and fine cut commercial diamonds. The decline in gross margin reflects the liquidation of slower moving diamonds and diamond jewelry items at reduced prices, the expensing of unabsorbed manufacturing overhead.

Rough diamond gross margin for the three and nine months ended February 28, 2009 was 3.0% and 1.6%, respectively, as compared to 6.1% and 5.7% in the comparable prior year periods. The decrease in rough gross margin reflects trading losses incurred by the Company as falling demand resulted in decreased prices for rough. In addition, rough margin reflects the expensing of unabsorbed sourcing costs associated with the Company’s informal sector rough buying operation.

Other Income

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three and nine months ended February 28, 2009 were $6.1 million and $19.6 million, respectively, as compared to $9.7 million and $23.0 million for the prior year periods. The decrease for the current quarter and year-to-date period reflects efforts by the Company to reduce operating costs in response to the current global recession. The reduction in selling, general and administrative expenses reflect decreased legal, advertising and compensation expense partially offset by costs associated with manufacturing operations in Southern Africa.

Equity in Income of Joint Ventures

The Company is an equity owner in several joint venture companies relating to sourcing, cutting, polishing, processing and sales of diamonds. The Company’s combined share of income / (loss) from these joint venture operations for the three and nine months ended February 28, 2009 was ($0.7) million and $2.7 million, respectively, as compared to $2.3 million and $4.9 million for the comparable prior year periods. Reduced joint venture earnings primarily reflect lower levels of operating activity attributable to the effects of the global economic downturn in the diamond industry.

Interest Expense

Net interest expense for the three and nine months ended February 28, 2009 was $0.6 million and $2.0 million, respectively, as compared to $1.1 million and $4.1 million in the comparable prior year periods. The decrease for the three and nine months ended February 28, 2009 reflects lower interest rates and net borrowing levels compared to the comparable prior year period.

Income Tax

The Company’s effective tax rate for the three and nine months periods ended February 28, 2009 was 37.4%, as compared to 25.4% and 25.6% for the prior year periods. The increase is primarily attributable to an increase in the percentage of income / loss applicable to higher tax rate jurisdictions.

Liquidity and Capital Resources

The Company provided $11.3 million of cash flow from operations for the nine months ended February 28, 2009, as compared to generating $31.1 million in the prior year.

The primary sources and uses of operating cash flow by the Company relate to the purchase and sale of diamonds.

Rough diamond buying operations commonly involve the commitment of significant monies for opportunistic purchases of groups of diamonds. Rough trading requires accumulation, sorting and aggregation of purchases for resale, generally in large volume transactions. The timing of sales depends on many factors, including the Company’s ability to source adequate quantities of similar categories of diamonds, the balance of supply and demand in the broader market, the availability of financial liquidity and confidence on the part of customers and consumers in the normal operation of the broader economy.

By comparison, polished diamond operations involve a substantially longer holding period during which the Company manufactures grades and sells individual diamonds to customers, generally in transactions involving a relatively small number of diamonds.

Payment for rough diamonds sourced directly from producers is generally required to be made at, or prior to, title transfer. Open market purchases of both rough and polished diamonds, which the Company uses to supplement its inventories, are generally paid for over time base on negotiated terms.

As a result of the foregoing, the Company’s cash flow and changes in operating assets and liabilities can vary significantly between fiscal periods depending on the source, mix and timing of diamonds the Company purchases changes in the availability of credit and macroeconomic shifts in consumer confidence and spending patterns.

For the nine months ended February 28, 2009 changes in accounts receivable generated $19.0 million of cash from operations as compared to $37.6 million for the comparable prior year period. The decrease in accounts receivable primarily reflects the impact of lower sales during the current period.

For the nine months ended February 28, 2009 changes in inventory levels used $16.4 million of net cash flows as compared to generating $4.8 million of cash flows for the comparable prior year period. Increased inventory levels reflect higher levels of both rough and polished diamonds, primarily attributable to reduced sales volume, and the timing of certain rough purchases.

For the nine months ended February 28, 2009 changes in accounts payable and other current liabilities provided $18.8 million of cash flow as compared to a usage of $19.6 million during the comparable prior year period. The increase in accounts payable and other current liabilities primarily reflects the timing of payments by the Company.

The Company’s working capital at February 28, 2009 was $97.0 million as compared to $108.6 million at May 31, 2008.

The Company maintains long-term unsecured, committed, revolving credit facilities that it utilizes for general working capital purposes in the amount of $35.0 million. In addition, the Company has a 530 million Yen denominated facility (approximately $5.3 million U.S. dollars) that is used in support of its operations in Japan. The Company’s long-term facilities do not contain subjective acceleration clauses or require the Company to utilize a lock box whereby remittances from the Company’s customers reduce the debt outstanding.

The Company also maintains an additional $80.0 million of uncommitted lines of credit that are used to finance rough inventory transactions and other working capital needs.

A majority owned subsidiary of the Company also maintains $3.0 million line of credit relating to a joint diamond cutting and polishing operation in South Africa. The balance outstanding as of February 28, 2009 was approximately $0.9 million with a portion of this debt (approximately $0.6 million) guaranteed by the Company’s partner.

The Company also guarantees a portion of debt related to a joint rough trading operation ($21.0 million at February 28, 2009). The fair value of the guarantees is immaterial.

Long-term debt includes the portion of borrowings which the Company has the intention to refinance on a long-term basis.

Stockholders' equity was $94.5 million at February 28, 2009 as compared to $100.6 million at May 31, 2008. No dividends were paid to stockholders during the nine months ended February 28, 2009.

The Company believes that it has the ability to meet its anticipated financing needs for at least the next twelve months.

New Pronouncements

Transactions with related parties

Item 3.

Quantitative and Qualitative Disclosure About Market Risk.

I Debt and Interest Rate Risk

At February 28, 2009 and May 31, 2008, the Company had borrowings of $76.2 million and $81.5 million, respectively, outstanding under various revolving credit agreements. Under its agreements, the Company may pay down and re-draw borrowings during the year at any time. The interest rates on these borrowings are variable and accordingly interest expense is impacted by both changes in interest rates and the level of outstanding borrowings. Increases in interest expense resulting from an increase in interest rates could adversely impact the Company’s results of operations. The Company’s policy is to take actions that would mitigate such risk when appropriate. These actions include staggering the term and rate of its borrowings to match anticipated cash flow.

	($000's)	2/28/2009					5/31/2008
	Debt Catgory	Amount Outstanding		Wghtd Avg Rate			Amount Outstanding		Wghtd Avg Rate
	Revoving Credit Agreements:
(a)	Short Term Rates		26,400		3.91	%		40,800		5.01	%
(b)	Libor - 90 Days		44,643		3.11	%		40,088		4.28	%
(c)	Short Term Rates - Japanese Libor		5,114		2.49	%		571		2.56	%
	Total		76,157		3.35	%		81,459		4.63	%

(a)

Borrowings generally bear interest at (a) the higher of the banks base rate or one half of one percent above the Federal Funds Effective Rate, or (b) 185 to 210 basis points above the banks LIBOR reference rate. The applicable interest rate is contingent upon the method of borrowing selected by the Company.

(b)	Borrowings are generally based on the bank's Libor reference rate plus 160 basis points and are reset daily.

(c)	Borrowings bear interest at 1% above the bank's cost of funds.

The Company believes that a 100 basis point increase in market interest rates occurring on February 28, 2009, would result in an increase in interest expense of approximately $0.1 million.

II Foreign Currency Risk

The Company’s foreign sales are denominated in U.S. dollars, with the exception of those sales made by two of the Company’s subsidiaries, Lazare Kaplan Japan Inc., which are denominated in Japanese yen, and Nozala Diamonds (PTY) Ltd., which are denominated in South African Rand. As of February 28, 2009 and May 31, 2008, the Company recognized cumulative foreign currency translation adjustments with regard to the activities of these subsidiaries in the amount of $(0.1) million and $(0.3) million respectively, which are shown as a component of stockholders’ equity in the accompanying balance sheets.

III Commodity Risk

The principal commodity risk for the Company relates to market price fluctuations in diamonds and precious metals. The Company seeks to pass along price increases to its customers to mitigate this risk. The Company currently does not purchase or sell financial instruments for purpose of hedging commodity risk. At February 28, 2009, the Company had borrowings totaling approximately $76.2 million outstanding under various credit agreements. The interest rates on these borrowings are variable and therefore the general level of U.S. and foreign interest rates affects interest expense. Increases in interest expense resulting from an increase in interest rates could impact the Company’s results of operations. The Company’s policy is to take actions that would mitigate such risk when appropriate. These actions include staggering the term and rate of its borrowings to match anticipated cash flow. International business represents a major portion of the Company’s revenues and profits. All purchases of rough diamonds worldwide are denominated in U.S. dollars.

Item 4.

Controls and Procedures.

As of February 28, 2009 an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of February 28, 2009 to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC rules and forms, and to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding disclosure. There has been no change in the Company’s internal controls over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to affect, the Company’s internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

On May 25, 2006, the Company filed a complaint in the United States District Court for the Southern District of New York against Photoscribe Technologies, Inc. (“Photoscribe”). The complaint asserted infringement of the Company’s intellectual property rights by Photoscribe with respect to two of the Company’s patents (the “patents-in-suit”). The patents-in-suit have claims relating to methods of, and apparatus for, laser inscribing gemstones, as well as the inscribed gemstones themselves.

On November 22, 2006, the Company amended its complaint against Photoscribe to include the Gemological Institute of America (the “GIA”) as a co-defendant. In February 1996, the Company and the GIA entered into an exclusive United States inscription agreement (except for the Company’s own use) with respect to certain intellectual property, which is owned by the Company relating to certain laser inscription equipment and methods (the “Inscription Agreement”) and which includes the patents-in-suit. The GIA purportedly terminated the Inscription Agreement as of July 31, 2006 under its terms. The GIA then began to commercially use Photoscribe equipment to inscribe gemstones, thus providing the basis to include the GIA in the suit. In addition to the same charges of patent infringement that were originally made against Photoscribe, the amended complaint also charges the GIA with breach of the exclusive license agreement prior to its purported termination and breach of a letter agreement by which GIA was to maintain in good working order the Company’s equipment that it had been using. The amended complaint further charged Photoscribe with tortious interference with the Company’s business relationship with the GIA.

On July 19, 2007, the Company filed a Second Amended Complaint which included Mr. David Benderly, President of Photoscribe, as an additional individual defendant, based on discovery during the case, which showed that Mr. Benderly controlled and directed the infringing activity of Photoscribe, and was thus personally liable for patent infringement. Further, the Second Amended Complaint charged Mr. Benderly with fraud based on a demonstration of Photoscribe equipment he gave in 2000 to counsel for the Company to show that the equipment did not infringe the Company's patents. However, discovery indicated that he setup the machine for use during the demonstration to give the impression that the Photoscribe equipment could not operate to infringe the Company's patents when he knew that it could.

In the Photoscribe-GIA-Benderly litigation the Company sought injunctive relief, as well as damages, including inscription fees and lost profits based on lost sales and the value added to inscribed gemstones by reason of the use of infringing systems by Photoscribe and the GIA. The Company also sought to recover damages it suffered as a result of Mr. Benderly’s fraud. The Court bifurcated the request for damages from the liability phase of the case.

GIA, Photoscribe and Benderly answered the Second Amended Complaint and denied liability for the charges made by the Company. GIA also filed counterclaims alleging non-infringement, invalidity and unenforceability of the patents-in-suit. Further, GIA asserted counterclaims for (i) breach of contract based on the allegation that the Company failed to provide operative equipment or to maintain the equipment and (ii) false marking for allegedly placing patent numbers on equipment that was not covered by the patents. GIA additionally filed a counterclaim for equitable estoppel and implied license on the basis that the Company had submitted diamonds to GIA to be graded and these stones were inscribed by GIA on Photoscribe equipment. The Company moved to strike this defense.

Photoscribe and David Benderly alleged counterclaims for non-infringement, invalidity and unenforceability of the patents-in-suit. Further, Photoscribe and Benderly asserted a counterclaim which charged the Company with an antitrust violation under Section 2 of the Sherman Act for monopolizing the laser inscription market. The antitrust claim was bifurcated from the main case.

A two week trial of the Company’s contract and patent suit against Photoscribe, the GIA and David Benderly began in a federal district court on February 25, 2008. On March 7, 2008 the jury returned a verdict in which they found that all of the asserted claims of the Company’s patents, except one claim, were valid. However, the jury also found that the claims were not infringed by the defendants.

Prior to the conclusion of the trial the parties settled most of their contract claims, but GIA’s liability for repair of the Company’s equipment that was returned after the license agreement was pending. After the patent liability trial the Company dropped the fraud claim against Benderly, and Photoscribe dropped the antitrust claim against the Company.

At a bench trial held on April 16, 17 and May 1 and 2, the Court determined that the patents in the suit were unenforceable for inequitable conduct. On August 14, 2008, the Court held a hearing, after which the Court determined that due to the finding of inequitable conduct, the case was exceptional within the meaning of 35 U.S.C. § 285 and that the defendants should be awarded their reasonable attorneys fees. On January 5, 2009, the court approved an agreement between the parties that dropped the remaining contract dispute and set the award of attorneys fees and costs to the GIA and Photoscribe in an aggregate amount of $6.3 million.

On January 12, 2009, the Company filed post-trial motions which asked the Court to grant a new trial and that the Court grant a judgment in LKI’s favor as a matter of law. The motions have been fully briefed and await a decision of the Court.

The Company filed a Notice of Appeal to the Court of Appeals for the Federal Circuit on January 17, 2009, seeking to overturn the adverse part of the jury verdict and the District Court’s finding of inequitable conduct and exceptional case. Currently the appeal has been deactivated pending a decision by the District Court on the post-trial motions.

The District Court entered judgment for the defendants on January 22, 2009 with respect to the award of costs and attorneys fees. The Company has posted a bond covering the judgment pending resolution of the appeal.

Consistent with the opinion of counsel, the Company’s management believes it is likely that the District Court’s finding of inequitable conduct will be reversed on appeal and; as such, any award of attorney’s fees would be vacated.

On September 1, 2006, Fifth Avenue Group, LLC (“Fifth Avenue”), a stockholder of the Company, filed a Complaint for a Declaratory Judgment and Other Relief in the Supreme Court of the State of New York, County of New York, against the Company and Mellon Investor Services. The Complaint seeks a declaratory judgment that 1,180,000 shares of the Company’s stock purchased by Fifth Avenue from the Company in a private sale in January 2002 are not “restricted stock” pursuant to Rule 144(k) of the Securities Exchange Act of 1934 and that any subsequent purchaser of such shares would not be subject to an irrevocable proxy granted to Messrs. Maurice and Leon Tempelsman by Fifth Avenue in connection with the private sale. The Company intends to vigorously pursue all defenses and counterclaims available to it.

Item 1A.

Risk Factors

We documented our risk factors in Item 1A of Part 1 of our Annual Report on Form 10-K for the fiscal year ended May 31, 2008. To our knowledge, there have been no material changes to our risk factors as discussed in that report except for the additional risk factors listed below. The risk factors detailed in our Annual Report on Form 10-K, and those detailed below, could materially harm our business, operating results and financial condition and / or negatively affect our stock price. Additional factors and uncertainties not currently know to us or that we currently consider immaterial could also harm our business, operating results and financial condition.

The recent global financial crisis and economic downturn has negatively impacted our revenue and sourcing activities and imposed risks on our business.

During the current fiscal period, the Company took steps to reduce headcount and lower expenses, and may need to take additional cost reduction measures if our sales remain at substantially reduced levels. Despite our efforts to focus on sales of existing inventory, lower our raw material cost and manage our expenses, there is risk that the Company will not be able to achieve its business plan in this difficult global economic environment. The Company is currently in compliance with the financial covenants required by its various loan agreements. Should the Company not be able to achieve its business plan, the Company could fail to comply with certain financial covenants required by its various loan agreements, thereby adversely affecting the Company’s liquidity and financial condition.

In addition, financial institution failures and consolidation and the increasingly tight credit markets may cause the Company to incur increased expenses or make it more difficult to obtain or maintain financing for its operations.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

(c)	Issuer Purchase of Equity Securities

On April 13, 2009, the Company adopted a resolution to continue to purchase in the open market, at any time and from time to time during the fiscal year ending May 31, 2010, shares of the Company’s common stock with an aggregate value not to exceed $2.0 million. The Company has made no purchases under this program to date.

Item 6.

Exhibits

(31)	Rule 13a – 14(a) / 15d – 14 (a) Certifications

(32)	Section 1350 Certifications

(10au)

Second amendment to the Line of Credit Agreement between the Company, as Borrower, and Bank Leumi USA, as Lender, dated December 1, 2008.

(10av)

Amended and Restated Credit Facility Agreement among ABN AMRO Bank N.V., Tokyo Branch, Lazare Kaplan Japan Inc., and the Company dated as of February 28, 2009.

(10aw)	Guarantee, dated as of February 28, 2009 made by the Company in favor of ABN AMRO Bank N.V., Tokyo Branch.

(10ax)	Credit Facility Letter Agreement between the Company, as Borrower, and ABN AMRO Bank N.V., as Lender dated as of February 27, 2009.

(10ay)

Amended and Restated Revolving Credit Agreement between the Company, as Borrower, and ABN AMRO Bank N.V., dated as of February 27, 2009.

SIGNATURE

Pursuant to the requirements 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.

	LAZARE KAPLAN INTERNATIONAL INC.

	By	/s/ William H. Moryto
		William H. Moryto
		Vice President and
		Chief Financial Officer

Dated: April 13, 2009