CONDITION AND RESULTS OF OPERATIONS



The Company's "forward looking statements" and disclosures as presented earlier
in this Form 10-Q in the "Safe Harbor" Statement should be referred to when
reading Management's Discussion and Analysis of Financial Condition and Results
of Operations.


Net Sales by Business Segment
  (In thousands)

                                  Three Months Ended
                                     September 30
                                   2009          2008
Lighting Segment                $   39,641     $ 49,636
Graphics Segment                    22,097       21,136
Technology Segment                   1,061        2,818
Electronic Components Segment        3,238           --
All Other Category                   1,639        2,248
                                $   67,676     $ 75,838

Operating Income (Loss) by Business Segment
  (In thousands)
                                  Three Months Ended
                                     September 30
                                   2009          2008
Lighting Segment                $    3,480     $  4,463
Graphics Segment                     1,541        1,163
Technology Segment                     423          625
Electronic Components Segment           56           --
All Other Category                  (3,003 )     (2,035 )
                                $    2,497     $  4,216

Summary Comments

First quarter fiscal 2010 net sales of $67,676,000 and operating income of $2,497,000, as compared to the first quarter of fiscal 2009, were favorably influenced by increased net sales and operating income of the Graphics Segment (up 4.5% and 32.5%, respectively), and the addition of the Electronic Components Segment (effective with the July 22, 2009 acquisition of AdL Technology, which added $3.2 million and $0.1 million of net sales and operating income, respectively). Operating results were unfavorably influenced by decreased net sales and operating income of the Lighting Segment (down 20.1% and 22.0%, respectively), as well as decreased net sales and operating income in the Technology Segment and All Other Category. Net sales to the Petroleum / Convenience Store market, Company's largest niche market, were $20,965,000 or 31% of total net sales and $15,199,000 or 20% of total net sales in the first quarters of fiscal 2010 and 2009, respectively. The $5.8 million or 38% increase is primarily due to a program with one national petroleum / convenience store customer who is replacing traditional canopy, site and sign lighting with solid-state LED lighting ($6.3 million increase) and a net decrease in net sales to other customers in this niche market ($0.5 million decrease). Over 60% of the retail sites scheduled to be involved in this customer's program to convert to solid-state LED lighting are expected to be completed in the Company's 2010 second fiscal quarter, and the Company is in discussion with this customer regarding additional retail sites to be converted in calendar year 2010.

The Company recorded several significant expenses in the first quarter of fiscal 2010, totaling $1.3 million, that it considers to be unusual ($523,000 of inventory adjustments related to acquisition accounting on the opening balance sheet of LSI ADL Technology; $513,000 of acquisition transaction costs related to the acquisition of LSI ADL Technology; and $268,000 of professional fees). These expenses are included in the $2,497,000 operating income reported in the first quarter of fiscal 2010. There were no such significant non-recurring expenses in the first quarter of fiscal 2009.

The Company's total net sales of products and services related to solid-state LED technology in light fixtures and video screens for sports, advertising and entertainment markets totaled $18.0 million in the first quarter of fiscal 2010, representing approximately a 105% increase from last year's first quarter net sales of solid-state LED products and services of $8.8 million. In addition, the Company sells certain elements of graphic identification programs that contain solid-state LED light sources.

As fiscal 2009 progressed, the Company encountered a global economic recession with unprecedented negative economic forces, including declining industrial production, rapidly increasing unemployment, roller coaster commodity pricing, and record low confidence levels, as well as issues such as malfunctioning credit markets which could affect many

customers and a decimated housing market that indirectly could affect the Company's business. Taken as a whole, these factors have caused a substantial reduction in demand for our lighting and graphics products. Many of these conditions continue to affect fiscal 2010. Virtually all of our markets have been adversely impacted and our business has suffered as a result. During these difficult and uncertain economic conditions, we have taken a number of proactive steps to "right size" LSI Industries to meet today's challenges. Such actions include strict control of expenses, capital expenditure reductions, close management of accounts receivable and inventories, headcount reductions, and maintaining a conservative financial position coupled with positive free cash flow. We believe the economy will eventually improve. As we continue to adjust our expense levels to lower production rates and manage working capital efficiently, we are also strategically positioning the business for future growth and are very positive about the longer term outlook and opportunities for the Company, notwithstanding the current economic recession that will likely continue to impact results during the next several quarters. LSI is facing a period of challenging business conditions in the near term due to the general economic recession but expects to emerge a stronger and more efficient company as business conditions improve.

Results of Operations

THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED
TO THREE MONTHS ENDED SEPTEMBER 30, 2008

Lighting Segment
  (In thousands)
                     Three Months Ended
                        September 30
                      2009          2008
Net Sales          $   39,641     $ 49,636

Operating Income   $    3,480     $  4,463

Lighting Segment net sales of $39,641,000 in the first quarter fiscal 2010 decreased 20.1% from first quarter fiscal 2009 net sales of $49,636,000. The $10.0 million decrease in Lighting Segment net sales is primarily the result of a $1.0 million or 5% net decrease in lighting sales to our niche markets (petroleum / convenience stores, automotive dealerships, and quick service restaurants) and national retail accounts, and a $9.0 million or 29.1% decrease in commissioned net sales to the commercial / industrial lighting market. Sales of lighting to the petroleum / convenience store market represented 29% and 17% of Lighting Segment net sales in fiscal years 2010 and 2009, respectively. Net sales of lighting to this, the Company's largest niche market, were up 37.6% from last year to $11,515,000. The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company. The Lighting Segment's net sales of light fixtures having solid-state LED technology totaled $7.3 million in the first quarter of fiscal 2010, representing over a 450% increase from last year's first quarter net sales of solid-state LED light fixtures of $1.3 million.

Gross profit of $10,586,000 in the first quarter of fiscal 2010 decreased $1.8 million or 15% from the same period last year, and increased from 23.3% to 23.7% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The decrease in amount of gross profit is due to decreased Lighting net sales and margins. The following items also influenced the Lighting Segment's gross profit margin: competitive pricing pressures; decreased direct labor as a percentage of net sales; increased indirect wage, compensation and benefits costs ($0.4 million increase); $0.2 million decreased supplies; $0.1 million decreased depreciation expense; $0.2 million decreased utilities; and $0.1 million decreased outside services.

Selling and administrative expenses of $7,106,000 in the first quarter of fiscal year 2010 decreased $0.8 million, and increased to 15.9% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales) from 14.9% in the same period last year. Employee compensation and benefits expense increased $0.1 million in the first quarter of fiscal 2010 as compared to last year, and other changes of expense between years include decreased sales commission expense ($0.8 million), increased research and development expense ($0.2 million), decreased customer relations expense ($0.2 million) and decreased outside services expense ($0.1 million).

The Lighting Segment first quarter fiscal 2010 operating income of $3,480,000 compares to operating income of $4,463,000 last year. This decrease of $1.0 million was the result of decreased net sales and decreased gross profit, partially offset by decreased selling and administrative expenses.

Graphics Segment
  (In thousands)


                     Three Months Ended
                        September 30
                      2009          2008
Net Sales          $   22,097     $ 21,136

Operating Income   $    1,541     $  1,163

Graphics Segment net sales of $22,097,000 in the first quarter of fiscal 2010 increased 4.5% from fiscal 2009 net sales of $21,136,000. The $1.0 million increase in Graphics Segment net sales is primarily the result of image conversion programs for three petroleum / convenience store customers ($4.6 million increase) and a national drug store retailer ($0.3 million increase), sales of solid-state LED video screens to two sports market customers (netting to a $1.6 million increase), and changes in volume or completion of other graphics programs. These identified increases were partially offset by decreased net sales to certain other customers, including a reimaging program for a grocery customer ($3.0 million decrease). Sales of graphics products and services to the petroleum / convenience store market represented 43% and 32% of Graphics Segment net sales in the first quarter of fiscal years 2010 and 2009, respectively. Net sales of graphics to this, the Company's largest niche market, were up 46% from last year to $9,450,000. The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company. The Graphics Segment net sales of products and services related to solid-state LED video screens and LED lighting for signage totaled $9.6 million in the first quarter of fiscal 2010, representing approximately a 43% increase from last year's first quarter net sales of solid-state LED light fixtures of $4.9 million.

Image and brand programs, whether full conversions or enhancements, are important to the Company's strategic direction. Image programs include situations where our customers refurbish their retail sites around the country by replacing some or all of the lighting, graphic elements, menu board systems and possibly other items they may source from other suppliers. These image programs often take several quarters to complete and involve both our customers' corporate-owned sites as well as their franchisee-owned sites, the latter of which involve separate sales efforts by the Company with each franchisee. The Company may not always be able to replace net sales immediately when a large image conversion

program has concluded. Brand programs typically occur as new products are offered or new departments are created within an existing retail store. Relative to net sales to a customer before and after an image or brand program, net sales during the program are typically significantly higher, depending upon how much business is awarded to the Company. Sales related to a customer's image or brand program are reported in either the Lighting Segment, Graphics Segment, or the All Other Category depending upon the product and/or service provided.

Gross profit of $4,654,000 in the first quarter of fiscal 2010 increased $0.7 million or 18% from last year, and increased from 18.4% to 20.9% as a percentage of Graphics Segment net sales (customer plus inter-segment net sales). The increase in amount of gross profit is due both to increased Graphics net sales and margins (both product and installation), increased material costs as a percentage of Graphics Segment net sales, and under utilized manufacturing capacity. The following items also influenced the Graphics Segment's gross profit margin: competitive pricing pressures, and other manufacturing expenses in support of production requirements ($0.1 million of decreased indirect wage, compensation and benefits costs; $0.1 million decreased supplies and repairs and maintenance; and $0.1 million decreased depreciation and utilities).

Selling and administrative expenses of $3,113,000 in the first quarter of fiscal year 2010 increased $0.3 million, and increased to 14.0% as a percentage of Graphics Segment net sales (customer plus inter-segment net sales) from 13.0% in the same period last year. Changes of expense between years include increased bad debt expense ($0.1 million), increased customer relations expense ($0.1 million), and increased warranty expense ($0.1 million).

The Graphics Segment first quarter fiscal 2010 operating income of $1,541,000 compares to $1,163,000 in the same period last year. The $0.4 million increase in operating income was the result of increased net sales and increased gross profit, offset by increased selling and administrative expenses.

Technology Segment
  (In thousands)
                     Three Months Ended
                        September 30
                      2009          2008
Net Sales          $    1,061      $ 2,818

Operating Income   $      423      $   625

Technology Segment net sales of $1,061,000 in the first quarter of fiscal 2010 decreased 62.4% from first quarter fiscal 2009 net sales of $2,818,000. The $1.8 million decrease in Technology Segment net sales is primarily the net result of decreased sales of solid-state LED video screens to the entertainment market ($2.0 million) partially offset by increased sales of specialty LED lighting ($0.2 million).

Gross profit of $712,000 in the first quarter of fiscal 2010 decreased $0.5 million or 39% from the same period last year, and increased from 18.7% to 21.2% as a percentage of Technology Segment net sales (customer plus inter-segment net sales). The decrease in amount of gross profit is due to decreased Technology net sales, partially offset by increased margins on the net sales.

Selling and administrative expenses of $289,000 in the first quarter of fiscal year 2010 decreased $0.2 million, and remained at 8.6% as a percentage of Technology Segment net sales (customer plus inter-segment net sales). Selling and administrative expenses were down in line with reduced net sales.

The Technology Segment first quarter fiscal 2010 operating income of $423,000 compares to operating income of $625,000 last year. The decrease in operating income of $0.2 million was the net result of decreased net sales and gross profit, partially offset by decreased selling and administrative expenses.

Electronic Components Segment
  (In thousands)

                      Three Months Ended
                         September 30
                       2009           2008
Net Sales          $      3,238       $  --

Operating Income   $         56       $  --

Electronic Components Segment results include the operations of LSI ADL Technology, a subsidiary that the Company acquired in July 2009. Therefore, the net sales and operating income in fiscal 2010 are incremental additions to the Company's results as there were no net sales or operating income in fiscal 2009. Operating income in the first quarter fiscal 2010 was reduced by $523,000 related to the roll-out of fair value inventory adjustments for LSI ADL Technology's sales of products that were in finished goods or work-in-process inventory on the acquisition date and therefore were valued at fair value, as opposed to manufactured cost, in the opening balance sheet in accordance with the requirements of purchase accounting. The final such inventory adjustment of $155,000 is expected to unfavorably impact the second quarter of fiscal 2010 as the remaining specific inventory items are sold.

All Other Category
  (In thousands)

                     Three Months Ended
                        September 30
                      2009          2008
Net Sales          $    1,639     $  2,248

Operating (Loss)   $   (3,003 )   $ (2,035 )

All Other Category net sales of $1,639,000 in the first quarter of fiscal 2010 decreased 27.1% from first quarter fiscal 2009 net sales of $2,248,000. The $0.6 million decrease in the All Other Category net sales is primarily the result of decreased sales to a quick service restaurant menu board customer ($0.1 million), decreased sales of electrical wire harnesses ($0.3 million) and changes in volume or completion of other customer programs.

Gross profit of $261,000 in the first quarter of fiscal 2010 decreased $0.4 million or 61% from last year, and decreased from 16.1% to 11.5% as a percentage of the All Other Category net sales (customer plus inter-segment net sales). The decrease in amount of gross profit is primarily due to decreased net sales and margins.

Selling and administrative expenses of $3,179,000, which includes Corporate administration expenses, in the first quarter of fiscal year 2010 increased $0.5 million. Changes of expense between years include acquisition deal costs associated with the acquisition of LSI ADL Technology ($0.5 million increased expense), increased employee compensation and benefits expense ($0.1 million), decreased legal fees primarily as a result of settlement of menu board patent litigation ($0.1 million), and decreased depreciation expense ($0.1 million).

The All Other Category first quarter fiscal 2010 operating loss of $(3,003,000) compares to an operating loss of $(2,035,000) in the same period last year. This increased loss of $1.0 million was the result of decreased net sales and decreased gross profit, and increased selling and administrative expenses.

Consolidated Results

The Company reported net interest expense of $34,000 in the first quarter of fiscal 2009 as compared to net interest expense of $5,000 last year. The Company borrowed on its Canadian line of credit occasionally in the first quarter of fiscal 2009 and its only borrowings in fiscal 2010 were related to the mortgage loan assumed in the acquisition of AdL Technology. Commitment fees related to the unused portions of the Company's lines of credit, and interest income on invested cash are included in the net interest expense amounts above.

The $826,000 income tax expense (consolidated effective tax rate of 33.5%) in the first quarter of fiscal 2010 reflects an effective tax rate of 39.4% for the Company's U.S. operations combined with a 30.4% effective tax rate for the Company's Canadian operation, less a $0.1 million reduction of the valuation reserve for the Company's Canadian net operating loss tax benefit and Canadian tax credits. Income tax expense in the first quarter of fiscal 2009 was $1,524,000 (consolidated effective tax rate of 36.2%) which reflects partial utilization of the net operating loss carryover in Canada and deferred tax expense of $90,000.

The Company reported a net income of $1,637,000 in the first quarter of fiscal 2010 as compared to net income of $2,687,000 last year. The decreased net income is primarily the result of decreased operating income and increased net interest expense, partially offset by decreased income tax expense. Diluted earnings per share were $0.07 in the first quarter of fiscal 2009 as compared to $0.12 last year. The weighted average common shares outstanding for purposes of computing diluted earnings per share in fiscal 2010 were 23,688,000 shares as compared to 21,805,000 shares last year, with the increase in shares primarily related to the weighted effect of the 2,469,676 common shares issued in July 2009 for the acquisition of AdL Technology.

Liquidity and Capital Resources

The Company considers its level of cash on hand, borrowing capacity, current ratio and working capital levels to be its most important measures of short-term liquidity. For long-term liquidity indicators, the Company believes its ratio of long-term debt to equity and its historical levels of net cash flows from operating activities to be the most important measures.

At September 30, 2009, the Company had working capital of $74.7 million, compared to $72.5 million at June 30, 2009. The ratio of current assets to current liabilities was 4.38 to 1 as compared to a ratio of 4.70 to 1 at June 30, 2009. The $2.2 million increase in working capital from June 30, 2009 to September 30, 2009, which was influenced by the acquisition of AdL Technology, was primarily related to increased net accounts receivable ($6.2 million), and increased inventory ($4.6 million), partially offset by decreased cash and cash equivalents ($4.7 million), increased accounts payable ($2.5 million), and decreased other current assets ($1.2 million). The Company has a strategy of aggressively managing working capital, including reduction of the accounts receivable days sales outstanding (DSO) and reduction of inventory levels, without reducing service to our customers.

The Company generated $0.6 million of cash from operating activities in the first quarter of fiscal 2010 as compared to a use of $3.2 million in the same period last year. This $3.8 million increase in net cash flows from operating activities is primarily the net result of less net income ($1.1 million unfavorable), less of an increase in accounts receivable (favorable change of $4.1 million), an increase rather than a decrease in inventories (unfavorable change of $4.0 million), less of a reduction in customer prepayments (favorable change of $0.9 million), an increase rather than a decrease in accounts payable and other (favorable change of $3.9 million), a larger increase in the reserve for bad debts (favorable $0.1 million), a larger increase in obsolete inventory reserves (favorable $0.1 million) and no increase in deferred income tax assets rather than an increase (unfavorable $0.1 million).

Net accounts receivable were $35.9 million and $29.7 million at September 30, 2009 and June 30, 2009, respectively. The increase of $6.2 million in net receivables is primarily due to combined effects of a higher amount of net sales in the first quarter of fiscal 2010 as compared to the fourth quarter of fiscal 2009, decreased DSO (Days' Sales Outstanding), and the addition of LSI ADL Technology ($2.2 million). The DSO decreased to 47 days at September 30, 2009 from 51 days at June 30, 2009. The Company believes that its receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.

Net inventories at September 30, 2009 increased $4.6 million from June 30, 2009 levels. Based on a strategy of reducing inventory and in response to customer programs and the timing of shipments, inventory increases occurred in the Lighting Segment of approximately $1.3 million (some of this inventory supports certain graphics programs), in the Graphics Segment of approximately $0.5 million, and in the All Other Category of approximately $0.3 million, and the Technology Segment reported a decrease of approximately $0.9 million since June 30, 2009. Additionally, the Company acquired AdL Technology (reported in the Electronic Components Segment), which increased inventory in the first quarter of fiscal 2010 by $3.4 million.

Cash generated from operations and borrowing capacity under two line of credit facilities are the Company's primary source of liquidity. The Company has an unsecured $40 million revolving line of credit with its bank group, with all $40 million of the credit line available as of November 2, 2009. This line of credit consists of a $30 million two year committed credit facility expiring in the third quarter of fiscal 2011 and a $10 million committed credit facility expiring in the third quarter of fiscal 2010. Additionally, the Company has a separate $5 million line of credit, renewable annually in the third fiscal quarter, for the working capital needs of its Canadian subsidiary, LSI Saco Technologies. As of November 2, 2009, all $5 million of this line of credit is available. The Company believes that the $45 million total of available lines of credit plus cash flows from operating activities is adequate for the Company's fiscal 2010 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.

The Company used $1.8 million of cash related to investing activities in the first quarter of fiscal 2010 as compared to a use of $0.5 million in the same period last year, an unfavorable change of $1.3 million. One of the changes between years relates to the amount of fixed assets purchased, $1,133,000 in fiscal 2010 as compared to $475,000 last year ($0.6 million unfavorable). Spending in both periods is primarily for tooling and equipment. The other change between years relates to the fiscal 2010 acquisition of AdL Technology, net of cash received ($0.7 million unfavorable) . The Company expects fiscal 2010 capital expenditures to be approximately $3.0 million, exclusive of business acquisitions.

The Company used $3.5 million of cash related to financing activities in the first quarter of fiscal 2010 as compared to a use of $2.1 million in the same period last year. The $1.4 million unfavorable change between periods is primarily related to the payment of long-term debt on the opening balance sheet of the acquired LSI ADL Technology ($2.2 million unfavorable), lower cash dividend payments ($2.0 million favorable) and borrowing on the Company's line of credit in the first quarter of fiscal 2009 with none in fiscal 2010 ($1.3 million unfavorable). The $2.0 million reduction in dividend payments between years is primarily the result of a lower per share quarterly dividend rate beginning in the second quarter of fiscal 2009.

Contractual Obligations

As a result of the July 2009 acquisition of AdL Technology, the Company has a
material increase in its contractual obligations as of September 30, 2009 as
compared to June 30, 2009 as follows:

                                                      Payments Due by Period
                                               Less than        1-3         3-5       More than
                                  Total         1 year         years       years       5 years
. . .