Forward-looking Statements

This report contains forward-looking statements that relate to future events or our future financial performance. We have attempted to identify these statements by terminology including "believe," "anticipate," "plan," "expect," "estimate," "intend," "seek," "goal," "may," "will," "should," "can," "continue," or the negative of these terms or other comparable terminology. These statements include statements about our market opportunity, our growth strategy, competition, expected activities, and the adequacy of our available cash resources. These statements may be found throughout the report, including in the section of this report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." Readers are cautioned that matters subject to forward-looking statements involve known and unknown risks and uncertainties, including those described in our most recent Annual Report on Form 10-K. These risks and uncertainties may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will occur, or if any of them do, what impact they will have on our results of operations or financial condition. We expressly decline any obligation to publicly revise any forward-looking statements that have been made to reflect the occurrence of events after the date of this report.

Given these uncertainties, undue reliance should not be placed on such forward-looking statements. Unless otherwise required by law, the Company disclaims an obligation to update any such factors or to publicly announce the results of any revisions to any forward-looking statements contained herein to reflect future events or developments.

Overview

The Company designs, engineers and produces sophisticated electronic and electromechanical systems and devices, and complex interconnect systems on a contract basis for its customers. Engineering and manufacturing facilities are located in Arkansas, Missouri, Oklahoma, Pennsylvania, Texas and Wisconsin.

The Company employs approximately 1,440 people, including approximately 1,220 people who provide support for production activities (including assembly, testing and engineering) and approximately 220 people who provide administrative support.

The Company uses a fiscal year ending the Sunday closest to June 30; each fiscal quarter is 13 weeks.

The Company's customers conduct business in a variety of markets with significant revenues from customers in the defense, government systems, medical, aerospace, natural resources, industrial and other commercial markets. As a contract manufacturer, revenues are impacted primarily by the volume of shipments in the particular period.

The Company provides information about its end markets to demonstrate the diversity of its customer base, which the Company believes helps to reduce potential volatility in its revenue stream. However, the Company does not target customers in individual markets, but rather targets companies whose manufacturing requirements match the services and capabilities the Company provides. Within all end markets, gross profit margins vary widely by customer and by contract.

The most significant factors influencing profitability in a particular period are: the mix of contracts with deliveries in that period and the volume of sales in relation to the Company's fixed costs during that period. Delivery schedules are generally determined by the Company's customers. The significant factors that influence the profitability of the individual contracts include: (i) the competitive environment in which the contract was bid; (ii) the experience level of the Company in manufacturing the particular product(s); (iii) the stability of the design of the product(s); and (iv) the accuracy of the Company's original cost estimates as reflected in the sale price for the product(s).

The Company has a centralized sales organization. Though the selling and marketing personnel have a customer and prospective customer focus, they are not limited to exclusively developing a specific end market.

Results of Operations - Three Months Ended September 27, 2009

Backlog
(in thousands)

                                                                  September 27,                 June 28,
                                              Change                  2009                        2009

Defense                                            $  427               $   113,907            $ 113,480
Natural resources                                   4,321                    18,790               14,469
Medical                                            (1,954 )                  18,598               20,552
Industrial                                          2,446                    14,776               12,330
Commercial aerospace                                 (815 )                   2,440                3,255
Other                                                (721 )                   3,201                3,922

 Total backlog                                     $3,704               $   171,712            $ 168,008

Backlog at September 27, 2009 increased $3.7 million from June 28, 2009. The $4.3 million increase in natural resources backlog is primarily related to bookings in the wind power generation sector. Backlog growth in the industrial market of $2.4 million is related to stronger bookings from a customer acquired in the Pensar acquisition. The medical backlog decline reflects continued weakness in that market.

As of September 27, 2009, approximately $19.5 million of the backlog is scheduled to ship beyond the following 12 months, pursuant to the shipment schedules of the contracts that comprise backlog. This compares with $22.9 million as of June 28, 2009.

Net Sales
(in thousands)

                                                                           Three Months Ended

                                                                 September 27,             September 28,
                                                   Change            2009                       2008

Defense                                             $  (331 )         $  30,857                 $ 31,188
Industrial                                           (3,633 )            10,980                   14,613
Natural resources                                    (1,235 )             9,939                   11,174
Medical                                               2,124               6,852                    4,728
Commercial aerospace                                 (1,207 )             1,867                    3,074
Other                                                  (755 )             2,660                    3,415

 Total net sales                                    $(5,037 )         $  63,155                 $ 68,192

The Pensar acquisition, described in note 2 to consolidated financial statements, contributed $10.1 million of net sales to the 2010 first quarter. The net sales for the Company, excluding the impact of the Pensar acquisition, decreased $15.2 million from the comparable period a year earlier.

The overall decrease in net sales for the three months ended September 27, 2009, versus the three months ended September 28, 2008 was primarily due to the economic downturn. Industrial sales declined by $5.5 million due to the economic downturn but the decline was offset by $1.9 million of sales from the Pensar acquisition. Sales to customers in the natural resources market decreased $4.5 million due to lower commodity prices in the mining and oil and gas industries. This reduction was partially offset by $3.3 million of natural resources sales from the Pensar acquisition, primarily in the wind-power generation sector. The increase in medical sales was driven by $3.6 million of sales from the Pensar acquisition, which was offset by a $1.5 million reduction to other medical customers due to the economic downturn. Commercial aerospace sales decreased due to the bankruptcy of a commercial aerospace customer in November 2008. The decrease in other markets was primarily due to the completion of a large multi-year contract for baggage scanning equipment in December 2008.

Sales to the Company's 10 largest customers represented 60% of total revenue for the three months ended September 27, 2009, versus 70% for the same period in fiscal 2009. The Company's top three customers and their relative contributions to fiscal 2010 first quarter sales were Owens-Illinois Group Inc., 10.9%; BAE Systems, 9.2%; and Raytheon Company, 8.6%. The Company's top three customers for the three months ended September 28, 2008 were Owens-Illinois Group, Inc., 17.5%; Raytheon Company, 9.2%; and Schlumberger Ltd., 9.0%.

Cost of Sales and Gross Profit

(dollars in thousands)

                                                                                   Three Months Ended

                                                                         September 27,             September 28,
                                             Change                           2009                      2008

Cost of sales                      $(3,004 )                                  $  50,925                 $ 53,929
Percent of net sales                   150   basis pts.                            80.6 %                   79.1 %
Gross profit                        (2,033 )                                     12,230                   14,263

Gross profit margins vary significantly by contract. The most significant factors influencing profitability in a particular period are: the mix of contracts and orders with deliveries in that period; and, the volume of sales in relation to the Company's fixed costs during the period. Delivery schedules are generally determined by the Company's customers. The significant factors that influence the profitability of individual contracts include: (i) the competitive environment in which the contract was bid; (ii) the experience level of the Company in manufacturing the particular product(s); (iii) the stability of the design of the product(s); and (iv) the accuracy of the Company's original cost estimates.

Cost of sales for the three months ended September 27, 2009 decreased $3.0 million, compared with the three months ended September 28, 2008, driven primarily by the sales decline of $5.0 million from the prior year first quarter. Gross profit for the three months ended September 27, 2009 was down $2.0 million and the gross profit margin was down 150 basis points versus same period of fiscal 2009. The decline in gross profit margin from 20.9% in the first fiscal quarter of 2009 to 19.4% in the first fiscal quarter of 2010 was primarily driven by the acquisition of Pensar. In addition, gross profit margin was negatively impacted by a percentage drop in sales that exceeded the percentage drop in indirect manufacturing expenses.

The acquisition of Pensar added cost of sales of $9.1 million and gross profit of $1.0 million for the three months ended September 27, 2009. For the three months ended September 27, 2009, the Pensar operation generated gross profit margin of 10.1%. Excluding the Pensar operation, the gross profit margin would have been 21.1% for the three months ended September 27, 2009, an increase of 20 basis points compared with the same period in fiscal 2009.

For the three months ended September 27, 2009, gross profit was positively impacted by $227,000, or 40 basis points, for the payment of a claim on a contract completed in the third quarter of fiscal year 2009. The Company continues to pursue additional claims related to this contract. However, no amounts have been recorded in the consolidated financial statements related to these claims. The gross margin, excluding the impact of the Pensar acquisition, was negatively impacted by the fact that sales dropped 22.3% while indirect manufacturing expenses fell only 13.7% compared with the same period a year earlier. However, the Company had improvements in the direct manufacturing costs as these costs as a percent of sales improved in first fiscal quarter 2010. For the three months ended September 28, 2008, gross margins were negatively impacted by higher than anticipated labor and material costs on certain early-stage long-term contracts that were not fully recoverable from the Company's customers, and start-up expenses on a significant new contract for the assembly of heavy mechanical products in the industrial market.

Selling and Administrative Expense

(dollars in thousands)

                                                                             Three Months Ended

                                                                   September 27,              September 28,
                                              Change                    2009                       2008

Selling and administrative expense         $ (180 )                     $   8,090                   $ 8,270
Percent of net sales                           70   basis pts.               12.8 %                    12.1 %

The Pensar acquisition added $912,000 to the Company's selling and administrative expense for the quarter ended September 27, 2009. Excluding the expenses attributable to Pensar, selling and administrative expense decreased by $1.1 million from the same period a year earlier. This decrease resulted from reductions in the current year first quarter incentive compensation expense of $577,000, employee relocation expenses of $122,000, bad debt expense of $113,000, professional service fees of $73,000 and $63,000 of expense related to the temporary suspension of the Company's contributions to employee retirement accounts.

Interest Expense

(in thousands)

                                                                             Three Months Ended

                                                                   September 27,            September 28,
                                                      Change           2009                      2008

Interest expense                                       $350              $   508                    $ 158

Interest expense increased for the three months ended September 27, 2009 from the three months ended September 28, 2008 due to higher average debt levels as a result of borrowings to finance the Pensar acquisition.

Income Tax Expense

(in thousands)

                                                                             Three Months Ended

                                                                   September 27,            September 28,
                                                      Change           2009                      2008

Income tax expense                                     $(1,651 )         $   505                  $ 2,156

The estimated annual effective income tax rate for the three months ended September 27, 2009 was 36.6%, compared with 37.9% for the three months ended September 28, 2008. The income tax expense recorded for the three months ended September 27, 2009 was also impacted favorably by $795,000 for the recording of refunds due to a correction to the apportionment factor for state income tax returns as described in Note 1 of the consolidated financial statements.

Liquidity and Capital Resources

Cash Flow


(in thousands)

                                                                 Three Months Ended

                                                  September 27,                 September 28,
                                                       2009                         2008

Net cash provided by operating activities              $  6,262                    $  7,260
Net cash used by investing activities                    (2,196 )                      (454 )
Net cash used by financing activities                      (571 )                    (7,499 )

   Net increase (decrease) in cash and                                                      )
    cash equivalents                                   $  3,495                    $   (693

The Company's operations generated $6.3 million of cash in the three months ended September 27, 2009, compared with cash generated of $7.3 million in the three months ended September 28, 2008. The Pensar acquisition generated positive operating cash flow of $1.0 million for the quarter ended September 27, 2009. The primary driver of the lower net operating cash flow in the fiscal 2010 first quarter versus the same period a year earlier was a $11.6 million reduction in cash received from customers due to lower sales levels in the fiscal 2009 fourth quarter and the fiscal 2010 first quarter as compared with the same fiscal periods in the prior year. The lower receipts were offset by a $6.7 million reduction in disbursements for inventory purchases and other costs of production. The lower inventory purchases and other production costs were primarily driven by the reduction of sales volume for the three months ended September 27, 2009, exclusive of the Pensar acquisition, and a reduction of purchases of long lead time materials. In addition, the cash used for payroll-related expenditures decreased by $2.0 million in fiscal 2010 first quarter, compared with the fiscal 2009 first quarter.

The $1.7 million increase in cash used by the Company's investing activities in the three months ended September 27, 2009 versus the three months ended September 28, 2008 was primarily driven by capital expenditures of $1.9 million in the three months ended September 27, 2009. These expenditures relate primarily to facility improvements at the Houston, Joplin and Tulsa plants as compared with $281,000 of capital expenditures for equipment in the three months ended September 28, 2008.

The $6.9 million decrease in cash used by financing activities in the three months ended September 27, 2009 versus the three months ended September 28, 2008 is due to the fact that in, the fiscal 2009 first quarter, the Company repaid short-term debt of $5.8 million and long-term debt of $1.6 million. The Company had no short-term debt outstanding at the beginning of the quarter ended September 27, 2009 and did not borrow any cash under its revolving credit facility during the quarter ended September 27, 2009. In addition, the only required long-term debt payment during the quarter ended September 27, 2009 was $40,000.

Capital Structure

The Company entered into a senior secured loan agreement on December 22, 2008, amended on January 30, 2009. The following is a summary of certain provisions of the agreement:

• The agreement provides for a revolving credit facility, up to $30.0 million, which is available for direct borrowings or letters of credit. The facility is based on a borrowing base formula equal to the sum of 85% of eligible receivables and 35% of eligible inventories. As of September 27, 2009, there were no outstanding loans under the revolving credit facility. As of September 27, 2009, letters of credit issued were $1.1 million, leaving an aggregate of $28.9 million available under the revolving credit facility. This credit facility matures on December 22, 2011.

• The agreement provides for an aggregate $45.0 million term loan, with quarterly principal payments beginning in September 2009, of $2.0 million, increasing to $2.5 million in September 2010 and increasing to $2.7 million in September 2011. The balance is due on December 22, 2011.

• Interest on the revolving facility and the term loan is calculated at a base rate or LIBOR plus a stated spread based on certain ratios. For the fiscal quarter ended September 27, 2009, the average rate was approximately 3.8%.

• All loans are secured by substantially all the assets of the Company other than real estate.

• The Company must comply with covenants and certain financial performance criteria consisting of Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") in relation to debt, minimum net worth and operating cash flow in relation to fixed charges. The Company was in compliance with its borrowing agreement covenants as of and during the fiscal quarter ended September 27, 2009.

• With the acquisition of Pensar and the term loan associated with the purchase, the Company's exposure to variable interest rates has increased. This variability and market volatility creates a level of uncertainty in interest payments on a period-to-period basis.

Other Long-Term Debt:


Other long-term debt includes capital lease agreements with outstanding balances
totaling $199,000 at September 27, 2009 and $238,000 at June 28, 2009.

The aggregate maturities of long-term obligations are as follows:
(in thousands)

Fiscal Year

2010                                  $  8,123
2011                                    12,068
2012                                    25,258
2013                                       ---
2014                                       ---

  Total                               $ 45,449

The following table shows LaBarge's equity and total debt positions:

Stockholders'Equity and Debt

(in thousands)

                                   September 27,            June 28,
                                        2009                  2009

Stockholders' equity                   $ 105,804           $ 103,151
 Total debt                               45,449              45,488

Management believes the availability of funds going forward from cash generated from operations and available bank credit facilities should be sufficient to support the planned operations and capital expenditures of the Company's business for the next two fiscal years.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements. In preparing these financial statements, management has made its best estimates and judgment of certain amounts included in the financial statements. The Company believes there is a likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. Application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. The Company's senior management discusses the accounting policies described below with the Audit Committee of the Company's Board of Directors on a periodic basis.

The following discussion of critical accounting policies is intended to bring to the attention of readers those accounting policies that management believes are critical to the Company's consolidated financial statements and other financial disclosures. It is not intended to be a comprehensive list of all of the Company's significant accounting policies that are more fully described in the notes to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 2009, incorporated herein by reference.

Revenue Recognition and Cost of Sales

The Company's revenue is derived from units and services delivered pursuant to contracts. The Company has a significant number of contracts for which revenue is accounted for under the percentage of completion method using the units of delivery as the measure of completion. This method is consistent with FASB Accounting Standards Codification ("ASC") Topic 605-35 (formerly the Statement of Position 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" ("SOP 81-1")). The percentage of total revenue recognized from contracts under the percentage of completion method is generally 40-60% of total revenue in any given quarter. These contracts are primarily fixed price contracts that vary widely in terms of size, length of performance period and expected gross profit margins. Under the units of delivery method, the Company recognizes revenue when title transfers, which is usually upon shipment of the product or completion of the service.

The Company also sells products under purchase agreements, supply contracts and purchase orders that are not within the scope of ASC Topic 605-35. The Company provides goods from continuing production over a period of time. The Company builds units to the customer specifications based on firm purchase orders from the customer. The purchase orders tend to be of a relatively short duration and customers place orders on a periodic basis. The pricing is generally fixed for some length of time and the quantities are based on individual purchase orders. Revenue is recognized in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition." Revenue is recognized on substantially all transactions when title transfers, which is usually upon shipment.

Therefore, revenue for contracts within the scope of ASC Topic 605-35 and for those not within the scope of ASC Topic 605-35 is recognized when title transfers, which is usually upon shipment or completion of the service.

However, the cost of sales recognized under both contract types is determined differently. The percentage-of-completion method for contracts that are within the scope of ASC Topic 605-35 gives effect to the most recent contract value and estimates of cost at completion. Contract costs generally include all direct costs, such as materials, direct labor, subcontracts and indirect costs identifiable with or allocable to the contracts. Learning or start-up costs, including tooling and set-up costs incurred in connection with existing contracts, are charged to existing contracts. The contract costs do not include any sales, marketing or general and administrative costs. Revenue is calculated as the number of units shipped multiplied by the sales price per unit. The Company estimates the total revenue of the contract and the total contract costs and calculates the contract cost percentage and gross profit margin. The gross profit during a period is equal to the earned revenue for the period times the estimated contract gross profit margin. Thus, if no changes to estimates were made, the procedure results in every dollar of earned revenue having the same cost of earned revenue percentage and gross profit percentages. This method is applied consistently on all of the contracts accounted for in accordance with ASC Topic 605-35.

The Company periodically reviews all estimates to complete as required by the authoritative guidance and the estimated total cost and expected gross profit are revised as required over the life of the contract. Any revisions to the estimated total cost are accounted for as a change of an estimate. A cumulative catch up adjustment is recorded in the period of the change of the estimated costs to complete the contract. Therefore, cost of sales and gross profit in a period includes (a) a cumulative catch-up adjustment to reflect the adjustment of previously recognized profit associated with all prior period revenue recognized based on the current estimate of gross profit margin, as appropriate, and (b) an entry to record the current period costs of sales and related gross profit margin based on the current period sales multiplied by the current estimate of the gross profit margin on the contract. Cumulative adjustments are . . .