SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K


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

FOR THE FISCAL YEAR ENDED JUNE 30, ~~2007.~~2008.


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

FOR THE TRANSITION PERIOD FROM TO .

Commission File No. 0-13375

LSI INDUSTRIES INC.

(Exact name of Registrant as specified in its charter)


~~Incorporated under the Laws of~~Ohio	10000 Alliance Road
~~Ohio~~(State or other jurisdiction of	Cincinnati, Ohio 45242	IRS Employer I.D.
~~(State~~incorporation or ~~other jurisdiction of~~organization)	(Address of principal executive offices)	No. 31-0888951
~~incorporation or organization)~~

(513) 793-3200
(Telephone number of principal executive offices)

Securities Registered Pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered

Common shares, no par value		The NASDAQ Stock Market LLC
		(NASDAQ Global Select Market)

Securities Registered Pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yeso Noþ

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

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.
Yesþ Noo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a ~~non-accelerated filer.~~smaller reporting company. See ~~definition~~the definitions of “large accelerated filer,” “accelerated filer,” and ~~large accelerated filer”~~“smaller reporting company” in Rule12b-2 of the Exchange Act. (Check one):



Large accelerated filero	Accelerated filerþ	o ~~Accelerated filer~~þNon-accelerated filero(Do not check if a smaller reporting company)	Smaller reporting companyo

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

As of December 31, ~~2006,~~2007, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately ~~$372,301,200~~$353,261,000 based upon a closing sale price of ~~$19.85~~$18.20 per share as reported on The Nasdaq Global Select Market.

At August 28, ~~2007~~2008 there were ~~21,495,644 shares of~~21,585,323 no par value Common Shares issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement filed with the Commission for its ~~2007~~2008 Annual Meeting of Shareholders are incorporated by reference in Part III, as specified.

LSI INDUSTRIES INC.
~~2007~~2008 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS


			Begins on
			Page
PART I

ITEM 1.	BUSINESS			1
ITEM 1A.	RISK FACTORS			7
ITEM 1B.	UNRESOLVED STAFF COMMENTS			10
ITEM 2.	PROPERTIES			10
ITEM 3.	LEGAL PROCEEDINGS			11
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			1112

~~PART II~~
PART II

ITEM 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED ~~SHAREHOLDERS’~~SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES			12
ITEM 6.	SELECTED FINANCIAL DATA			1314
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			1314
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			1314
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA			15
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			1516
ITEM 9A.	CONTROLS AND PROCEDURES			15
~~ITEM 9B. OTHER INFORMATION~~		16
ITEM 9B.	OTHER INFORMATION			17
~~PART III~~
PART III
~~ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT~~		16
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE			17
ITEM 11.	EXECUTIVE COMPENSATION			1617
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS			1617
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE			1617
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES			1617

~~PART IV~~
PART IV

ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES			17
EX-21
EX-23.1
~~EX-23.2~~
EX-31.1
EX-31.2
EX-32.1
EX-32.2

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

This Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to numerous assumptions, risks or uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Forward-looking statements may be identified by words such as ”guidance,” “forecasts,” “estimates,” “anticipates,” “projects,” “plans,” “expects,” “intends,” “believes,” “seeks,” “may,” “will,” “should” or the negative versions of those words and similar expressions, and by the context in which they are used. Such statements are based upon current expectations of the Company and speak only as of the date made. Actual results could differ materially from those contained in or implied by such forward-looking statements as a result of a variety of risks and uncertainties. These risks and uncertainties include, but are not limited to, the impact of competitive products and services, product demand and market acceptance risks, reliance on key customers, financial difficulties experienced by customers, the adequacy of reserves and allowances for doubtful accounts, fluctuations in operating results or costs, unexpected difficulties in integrating acquired businesses, and the ability to retain key employees of acquired businesses. These risks and ~~uncertainities~~uncertainties also include, but are not limited to, those described in Part I, “Item IA. Risk Factors” and elsewhere in this report and those described from time to time in our future reports filed with the Securities and Exchange Commission. The Company undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or circumstances.

PART I

ITEM 1. BUSINESS

Our Company

We are a leading provider of comprehensive corporate visual image solutions through the combination of extensive screen and digital graphics capabilities, a wide variety of high quality indoor and outdoor lighting products, and related professional services. We also provide graphics and lighting products and professional services on a stand-alone basis. Our company is the leading provider of corporate visual image solutions to the petroleum/convenience store industry. We use this leadership position to penetrate national retailers and multi-site retailers, including quick service and casual restaurants, video rental and eyewear chains, retail chain stores and automobile dealerships located primarily in the United States. WeIn addition, we are ~~also~~ a leading provider of digital solid-state LED video screens and LED specialty lighting to such markets or industries as sports stadiums and arenas, digital billboards, and entertainment. We design and develop all aspects of the solid-state LED video screens and lighting, from the electronic circuit board, to the software to drive and control the LEDs, to the structure of the LED product.

Our focus on product development and innovation creates products that are essential components of our customers’ corporate visual image strategy. We develop and manufacture lighting, graphics and LED video screen and lighting products and distribute them through an extensive multi-channel distribution network that allows us to effectively service our target markets. Representative customers include British Petroleum/Amoco/Arco, Chevron Texaco, 7-Eleven, ExxonMobil, Shell, Burger King, Dairy Queen, Taco Bell, Wendy’s, Best Buy, CVS Pharmacies, Inc., Target Stores, Wal-Mart Stores, Inc., Chrysler, Ford, General Motors, Nissan, Saturn, and Toyota. We service our customers at the corporate, franchise and local levels.

We believe that national retailers and niche market companies are increasingly seeking single-source suppliers with the project management skills and service expertise necessary to execute a comprehensive visual image program. The integration of our graphics, lighting, technology and professional services capabilities allows our customers to outsource to us the development of an entire visual image program from the planning and design stage through installation. Our approach is to combine standard, high-production lighting products, custom graphics applications and professional services to create complete customer-focused visual image solutions. We also offer products and services on a stand-alone basis to service our existing image solutions customers, to establish a presence in a new market or to create a relationship with a new customer. We believe that our ability to combine graphics and lighting products and professional services into a comprehensive visual image solution differentiates us from our competitors who offer only stand-alone products for lighting or graphics and who lack professional services offerings. During the past several years, we have continued to enhance our ability to provide comprehensive corporate visual image solutions by adding additional graphics capabilities, lighting products, LED video screens, LED lighting products and professional services through acquisitions and internal development.

Our business is organized in ~~three~~two segments: the Lighting Segment, which represented ~~58%~~62% of our fiscal ~~2007~~2008 net sales; and the Graphics Segment, which represented ~~37%~~38% of our fiscal ~~2007 net sales; and the Technology Segment, which represented 5% of our fiscal 2007~~2008 net sales. Our most significant market, which includes sales of both the Lighting Segment and the Graphics Segment, is the petroleum / convenience store market with approximately ~~26%~~28%, ~~25%~~26%, and 25% of total net sales concentrated in this market in the fiscal years ended June 30, 2008, 2007, ~~2006,~~ and ~~2005,~~2006, respectively. See Note 2 of Notes to Consolidated Financial Statements beginning on page ~~S-27~~F-27 of this Form 10-K for additional information on business segments. Net sales by segment are as follows (in thousands):

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Graphics Segment

The Graphics Segment manufactures and sells exterior and interior visual image elements related to graphics, and menu board systems. These products are used in graphics displays and visual image programs in several markets, including the petroleum/convenience store market and multi-site retail operations. Our extensive lighting and graphics expertise, product offering, visual image solution implementation capabilities and other professional services represent significant competitive advantages. We work with corporations and design firms to establish and implement cost effective corporate visual image programs. Increasingly, we become the primary supplier of exterior and interior graphics for our customers. We also offer installation or installation management (utilizing pre-qualified independent subcontractors throughout the United States) services for those customers who desire that we become involved in the installation of either menu board systems, or interior or exterior graphics products.

Our business can be significantly impacted by participation in a customer’s “image conversion program,” especially if it were to involve a “roll out” of that new image to a significant number of that customer’s and its franchisees’ retail sites. The impact to our business can be very positive with growth in net sales and profitability when we are engaged in an image conversion program. This can be followed in subsequent periods by lesser amounts of business or negative comparisons following completion of an image conversion program, unless we are successful in replacing that completed business with participation in a new image conversion program of similar size with one or more customers. An image conversion program can potentially involve any or all of the following improvements, changes or refurbishments at a customer’s retail site: interior or exterior lighting (see discussion above about our lighting segment), interior or exterior store signage and graphics, interior or exterior menu board systems, exterior pre-sell menu boards, and installation of these products in both the prototype and roll out phases of their program. We believe our retail customers are implementing image conversions on a more frequent basis than in the past, say approximately every five to seven years versus ten to fifteen years in the past, in order to maintain a safe, fresh look or new image on their site in order to continue to attract customers to their site, and maintain or grow their market share.

The major products and services offered within our Graphics Segment include the following: signage and canopy graphics, pump dispenser graphics, building fascia graphics, decals, interior signage and marketing graphics, aisle markers, wall mural graphics, fleet graphics, prototype program graphics, installation services for graphics products, exterior and interior menu board systems, site surveying and permitting, site specific engineering services, and installation management services.

The $23.3 million or 16.9% decrease in Graphics Segment ~~includes~~net sales in fiscal 2008 is primarily the ~~operations~~result of ~~Grady McCauley, LSI Retail Graphics, LSI Integrated Graphic Systems, LSI Images~~completion of programs for certain graphics customers or reduction of net sales to other graphics customers, including an image conversion program for a national drug store retailer ($16.6 million decrease), two petroleum / convenience store customers ($8.0 million decrease), an LED billboard customer ($2.0 million decrease), reduced project sales to a customer involved in sports scoreboards and ~~LSI Adapt.~~video screens ($5.6 million decrease), reduced sales to a telecommunications company ($2.2 million decrease) and changes in volume or completion of other graphics programs. These decreases were partially offset by increased net sales to certain other customers, including sales related to an image conversion program in the petroleum / convenience store market ($6.1 million increase), and to a menu board conversion program for a quick serve restaurant retailer which was completed in fiscal 2008 ($10.1 million increase).

The ~~$40.4~~$53.4 million or ~~48.4%~~63.0% increase in Graphics Segment net sales in fiscal 2007 as compared to fiscal 2006 is primarily the result of increased net sales related to two image conversion programs in the petroleum / convenience store market ($22.6 million increase), to an image conversion program and normal sales to a national drug store retailer ($15.9 million increase) and to a menu board conversion program for a quick serve restaurant retailer ($9.9 million increase), plus approximately $13.0 million

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increased LED video screen sales from LSI Saco Technologies, partially offset by completion of programs or reduction of net sales to other graphics customers.

~~The $22.0 million decrease~~Goodwill and Intangible Asset Impairment

In fiscal 2008, we recorded a $28,929,000 non-cash impairment charge in the fourth quarter as follows: goodwill ($27,149,000) and certain intangible assets ($1,780,000). Charges totaling $27,832,000 were recorded in the Graphics Segment, ~~net sales~~and charges in the amount of $1,097,000 were recorded in the Lighting Segment. There was no similar impairment expense in fiscal ~~2006 as compared~~2007. The annual impairment test indicated there was a material impairment of goodwill and certain intangible assets in two of our reporting units within our Graphics Segment and one reporting unit in our Lighting Segment due to ~~fiscal 2005 is primarily~~ the ~~result~~combination of a decline in the market capitalization of the ~~$14 million re-branding program related~~Company at June 30, 2008 and a decline in the estimated forecasted discounted cash flows which management attributes to a weaker economic cycle impacting certain of our customers, notably national ~~drug store retailer~~retailers. Additionally and included in the ~~$7 million menu board enhancement program being completed~~amounts above, we determined that a certain trade name in ~~fiscal 2005 and not replaced or repeated in fiscal 2006.~~

~~Technology Segment~~

~~The Technology~~our Lighting Segment was ~~created on June 26, 2006 when~~no longer going to be used in marketing efforts, and therefore a related intangible asset had no value as we more than ever before emphasize and rely upon the ~~Company acquired substantially all the net assets of SACO Technologies, Inc., which it renamed LSI Saco Technologies,~~

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~~at a total purchase price of $45.1 million. The new subsidiary has continued to operate in Montreal, Canada as a worldwide leader and pioneer~~“LSI” brand name recognition in the design, production, and support of high-performance light engines and large format video screens using LED (light emitting diode) technology. LSI Saco Technologies offers its customers expertise in developing and utilizing high-performance LED color and white lightsource solutions for both lighting and graphics applications. The Company acquired SACO Technologies primarily in order to obtain LED technology and also to enter into the large format video screen business for the sports and entertainment markets. This LED technology has significant potential for the Company’s Lighting Segment to be combined with the Company’s existing lighting fixture expertise and technology to develop a broad spectrum of white light LED fixtures that offer equivalent or improved lighting performance with significant energy and maintenance savings as compared to the present metal halide and fluorescent lighting fixtures. Additionally, this LED technology is used in the Company’s Graphics Segment to light, accent and provide color lighting to graphics display and visual image programs of the Company’s customers.

Operating results of LSI Saco Technologies are included in fiscal 2006 results for only five days beginning with June 26, 2006, the acquisition date. As a result, the Technology Segment reported net sales of $1,247,000 in fiscal 2006. In the full year of fiscal 2007, net sales of the Technology Segment in all markets ~~served were $17,132,000.~~we serve.

Our Competitive Strengths

Single Source Comprehensive Visual Image Solution Provider.We believe that we are the only company serving our target markets that combines significant graphics capabilities, lighting products and installation implementation capabilities to create comprehensive image solutions. We believe that our position as a single-source provider creates a competitive advantage over competitors who can only address either the lighting or the graphics component of a customer’s corporate visual image program. Using our broad visual image solutions capabilities, our customers can maintain complete control over the creation of their visual image programs while avoiding the added complexity of coordinating separate lighting and graphics suppliers and service providers among multiple suppliers. We can use high technology software to produce computer-generated virtual prototypes of a customer’s new or improved retail site image. We believe that these capabilities are unique to our target markets and they allow our customers to make educated, cost-effective decisions quickly.

Proven Ability to Penetrate Target Markets.We have grown our business by establishing a leadership position in the majority, as defined by our revenues, of our target markets, including petroleum/convenience stores, automobile dealerships and specialty retailers. Although our relationship with our customers may begin with the need for a single product or service, we leverage our broad product and service offering to identify additional products and solutions. We combine existing graphics, lighting and image element offerings, develop products and add services to create comprehensive solutions for our customers.

Product Development Focus.We believe that our ability to successfully identify and develop new products has allowed us to expand our market opportunity and enhance our market position. Our product development initiatives are designed to increase the value of our product offering by addressing the needs of our customers and target markets through innovative retrofit enhancements to existing products or the development of new products. In addition, we believe our product development process creates value for our customers by producing products that offer energy efficiency, low maintenance requirements and long-term operating performance at a competitive price based upon the latest technologies available.

Strong Relationships with our Customers.We have used our innovative products and high-quality services to develop close, long-standing relationships with a large number of our customers. Many of our customers are recognized among the leaders in their respective markets; including customers such as BP, Chrysler, CVS Caremark and Burger King. Their use of our products and

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services raises the visibility of our capabilities and facilitates the acceptance of our products and services in their markets. Within each of these markets, our ability to be a single source provider of image solutions often creates repeat business opportunities through corporate reimaging programs. We have served some of our customers since our inception in 1976.

Well-capitalized Balance Sheet. As part of our long-term operating strategy, we believe the Company maintains a conservative capital structure. With a strong equity base, we are able to preserve operating flexibility in times of industry expansion and contraction. In the current business environment, a strong balance sheet demonstrates financial viability to our existing and targeted customers. In addition, a strong balance sheet enables us to continue important R&D and capital spending.

Aggressive Use of Our Image Center Capabilities.Our image center capabilities provide us with a distinct competitive advantage to demonstrate the effectiveness of integrating graphics and lighting into a complete corporate visual image program. Our technologically advanced image centers, which demonstrate the depth and breadth of our product and service offerings, have become an effective component of our sales process.

Maintain our vertically integrated business model.We consider our company to be a vertically integrated manufacturer rather than a product assembler. We focus on developing unique customer-oriented products and solutions and outsource certain non-core processes and product components as necessary.

Sales, Marketing and Customers

Our lighting products are sold primarily throughout the United States, but also in Canada, Australia and Latin America (about 3% of total net sales are outside the United States) using a combination of regional sales managers, independent sales representatives and distributors. Although in some cases we sell directly to national firms, more frequently we are designated as a preferred vendor for product sales to customer-owned as well as franchised, licensed and dealer operations. Our graphics products and program management services are sold primarily through our own sales force. Our marketing approach and means of distribution vary by product line and by type of market.

Sales are developed by contacts with national retail marketers, branded product companies, franchise and dealer operations. In addition, sales are also achieved through recommendations from local architects, engineers, petroleum and electrical distributors and contractors. Our sales are partially seasonal as installation of outdoor lighting and graphic systems in the northern states decreases during the winter months.

Our image center capabilities are an important part of our sales process. The image center, unique within the lighting and graphics industry, is a facility that can produce a computer-generated virtual prototype of a customer’s facility on a large screen through the combination of high technology software and audio/visual presentation. With these capabilities, our customers can instantly explore a wide variety of lighting and graphics alternatives to develop consistent day and nighttime images. Our image centers give our customers more options, greater control, and more effective time utilization in the development of lighting, graphics and visual image solutions, all with much less expense than traditional prototyping. In addition to being cost and time effective for our customers, we believe that our image center capabilities result in the best solution for our customers’ needs.

The image centers also contain comprehensive indoor and outdoor product display areas that allow our customers to see many of our products and services in one setting. This aids our customers in making quick and effective lighting and graphic design decisions through hands-on product demonstrations and side-by-side comparisons. More importantly, our image center capabilities allow us to expand our customer’s interest from just a single product into other products and solutions. We

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believe that our image center capabilities have further enhanced our position as a highly qualified outsourcing partner capable of guiding a customer through image alternatives utilizing our lighting and graphics products and services. We believe this capability distinguishes us from our competitors and will become increasingly beneficial in attracting additional customers.

Manufacturing and Operations

We design, engineer and manufacture substantially all of our lighting and graphics products through a vertically integrated business model. By emphasizing high-volume production of standard product lines, we achieve significant manufacturing efficiencies. When appropriate, we utilize alliances with vendors to outsource certain products and assemblies. LED products and related software ~~in the Technology Segment~~ are engineered, designed and final-assembled by the Company, while much of the manufacturing has been performed by select qualified vendors. In fiscal 2007, we made all necessary preparations to begin manufacturing within the Company certain components for certain LED video screens and products. We are not dependent on any one supplier for any of our component parts.

The principal raw materials and purchased components used in the manufacturing of our products are steel, aluminum, wire, sockets, lamps, certain fixture housings, acrylic and glass lenses, lighting ballasts, inks, various graphics substrates such as decal material and vinyls, LEDs and electrical components. We source these materials and components from a variety of suppliers. Although an interruption of these supplies and components could disrupt our operations, we believe generally that alternative sources of supply exist and could be readily arranged. We strive to reduce price volatility in our purchases of raw materials and components through quarterly or annual contracts with certain of our suppliers. Our lighting operations generally carry relatively small amounts of finished goods inventory, except for certain products that are stocked to meet quick delivery requirements. Most often lighting products are made to order and shipped shortly after they are manufactured. Our graphics operations manufacture custom graphics products for customers who frequently require us to stock certain amounts of finished goods in exchange for their commitment to that inventory. Our technology operation always makes products to order and ships shortly after assembly is complete. In some Graphics programs, customers also give us a cash advance for the inventory that we stock for them. Customers ~~in the Technology Segment~~purchasing LED video screens routinely give us cash advances for large projects prior to shipment.

We believe we are a low-cost producer for our types of products, and as such, are in a position to promote our product lines with substantial marketing and sales activities.

Our manufacturing operations are subject to various federal, state and local regulatory requirements relating to environmental protection and occupational health and safety. We do not expect to incur material capital expenditures with regard to these matters and believe our facilities are in compliance with such regulations.

Competition

We experience strong competition in all segments of our business, and in all markets served by our product lines. WeAlthough we have many competitors, some of which have greater financial and other resources, ~~however~~ we do not compete with the same companies across our entire product and service offerings. We believe product quality and performance, price, customer service, prompt delivery, and reputation to be important competitive factors.

We have several product and process patents which have been obtained in the normal course of business. In general, we do not believe that patent protection is critical to our business, however we do believe that patent protection is important for a few select products.

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Additional Information

Our sales are partially seasonal as installation of outdoor lighting and graphic systems in the northern states lessens during the harshest winter months. We had a backlog of orders, which we believe to be firm, of ~~$30.7~~$29.8 million and ~~$29.0~~$30.7 million at June 30, ~~2007~~2008 and ~~2006,~~2007, respectively. All orders are believed to be shippable within twelve months.

We have approximately ~~1,440~~1,360 full-time and ~~300~~140 temporary employees as of June 30, ~~2007.~~2008. We offer a comprehensive compensation and benefit program to most employees, including competitive wages, a discretionary bonus plan, a profit-sharing plan and retirement plan, and a 401(k) savings plan (for U.S. employees), a non-qualified deferred compensation plan (for certain employees), an equity compensation plan, and medical and dental insurance.

We file reports with the Securities and Exchange Commission (“SEC”) on Forms 10-K, 10-Q and 8-K. You may read and copy any materials filed with the SEC at its public reference room at 100 F. Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain that information by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding us. The address of that site ishttp://www.sec.gov. Our internet address ishttp://www.lsi-industries.com. We make available free of charge through our internet web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practical after we electronically file them with the SEC. LSI is not including the other information contained on its website as part of or incorporating it by reference into this Annual Report on Form 10-K.

LSI Industries Inc. is an Ohio corporation, incorporated in 1976.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the following factors which could materially affect our business, financial condition, cash flows or future results. Any one of these factors could cause the Company’s actual results to vary materially from recent results or from anticipated future results. The risks described below are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

The markets in which we operate are subject to competitive pressures that could affect selling ~~prices.~~prices, and therefore could adversely affect our operating results.

Our businesses operate in markets that are highly competitive, and we compete on the basis of price, quality, service and/or brand name across the industries and markets served. Some of our competitors for certain products, primarily in the Lighting Segment, have greater sales, assets and financial resources than we have. Some of our competitors are based in foreign countries and have cost structures and prices in foreign currencies. Accordingly, currency fluctuations could cause our U.S. dollar-priced products to be less competitive than our competitors’ products which are priced in other currencies. Competitive pressures could affect prices we charge our customers or demand for our products, which could adversely affect our operating results. Additionally, customers for our products are attempting to reduce the number of vendors from which they purchase in order to reduce the size and diversity of their inventories and their transaction costs. To remain competitive, we will need to invest continuously in manufacturing, marketing, customer service and support, and our distribution networks. We may not have sufficient resources to continue to make such investments and we may be unable to maintain our competitive position.

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Lower levels of economic activity in our end markets could adversely affect our operating results.

Our businesses operate in several market segments including commercial, industrial, retail, petroleum / convenience store and entertainment. Operating results can be negatively impacted by volatility in these markets. Future downturns in any of the markets we serve could adversely affect our overall sales and profitability.

Price increases or significant shortages of raw materials and components could adversely affect our operating margin.

The Company purchases large quantities of raw materials and components – mainly steel, aluminum, ballasts, sockets, wire, plastic, lenses, glass, vinyls, inks, LEDs, and corrugated cartons. Materials comprise the largest component of costs, representing nearly ~~53%~~60% and ~~55%~~53% of the cost of sales in ~~2007~~2008 and ~~2006,~~2007, respectively. While we have multiple sources of supply for each of our major requirements, significant shortages could disrupt the supply of raw materials. Further increases in the price of these raw materials and components could further increase the Company’s operating costs and materially adversely affect margins. Although the Company attempts to pass along increased costs in the form of price increases to customers, the Company may be unsuccessful in doing so for competitive reasons. Even when price increases are successful, the timing of such price increases may lag significantly behind the incurrence of higher costs.

We have a concentration of net sales to the petroleum / convenience store market, and any substantial change could have an adverse affect on our business.

Approximately ~~26%~~28% of our net sales are concentrated in the petroleum / convenience store market. Sales to this market segment are dependent upon the general conditions prevailing in and the profitability of the petroleum and convenience store industries and general market conditions. Our petroleum market business is subject to reactions by the petroleum industry to world political events, particularly those in the Middle East, and to the price and supply of oil. Major disruptions in the petroleum industry generally result in a curtailment of retail marketing efforts, including expansion and refurbishing of retail outlets, by the petroleum industry and adversely affect our business. Any substantial change in purchasing decisions by one or more of our largest customers, whether due to actions by our competitors, customer financial constraints, industry factors or otherwise, could have an adverse effect on our business.

Difficulties with integrating acquisitions could adversely affect operating costs and expected benefits from those acquisitions.

We have pursued and will continue to seek potential acquisitions to complement and expand our existing businesses, increase our revenues and profitability, and expand our markets through acquisitions. We cannot be certain that we will be able to identify, acquire or profitably manage additional companies or successfully integrate such additional companies without substantial costs, delays or other problems. Also, companies acquired recently and in the future may not achieve revenues, profitability or cash flows that justify our investment in them. We expect to spend significant time and effort in expanding our existing businesses and identifying, completing and integrating acquisitions. We expect to face competition for acquisition candidates which may limit the number of acquisition opportunities available to us, possibly leading to a decrease in the rate of growth of our revenues and profitability, and may result in higher acquisition prices. The success of these acquisitions we do make will depend on our ability to integrate these businesses into our operations. We may encounter difficulties in integrating acquisitions into our operations and in managing strategic investments. Therefore, we may not realize the degree or timing of the benefits anticipated when we first enter into a transaction.

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If acquisitions are made in the future and goodwill and intangible assets are recorded on the balance sheet, circumstances could arise in which the goodwill and intangible assets could become impaired and therefore would be written off.

We have pursued and will continue to seek potential acquisitions to complement and expand our existing businesses, increase our revenues and profitability, and expand our markets through acquisitions. Most likely, both goodwill and intangible assets would be recorded on the balance sheet at the time an acquisition is made. If there were to be a decline in our market capitalization and a decline in estimated forecasted discounted cash flows, there could be an impairment of the goodwill and intangible assets. A non-cash impairment charge could be material to the net income of the reporting period in which it is recorded.

If customers do not accept new products, we could experience a loss of competitive position which could adversely affect future revenues.

The Company is committed to product innovation on a timely basis to meet customer demands. Development of new products for targeted markets requires the Company to develop or otherwise leverage leading technologies in a cost-effective and timely manner. Failure to meet these changing demands could result in a loss of competitive position and seriously impact future revenues. Products or technologies developed by others may render the Company’s products or technologies obsolete or noncompetitive. A fundamental shift in technologies in key product markets could have a material adverse effect on the Company’s operating results and competitive position within the industry. More specifically, the development of new or enhanced products is a complex and uncertain process requiring the anticipation of technological and market trends. We may experience design, manufacturing, marketing or other difficulties, such as an inability to attract a sufficient number of experienced engineers, that could delay or prevent our development, introduction or marketing of new products or enhancements and result in unexpected expenses. Such difficulties could cause us to lose business from our customers and could adversely affect our competitive position. In addition, added expenses could decrease the profitability associated with those products that do not gain market acceptance.

Our business is cyclical and seasonal, and in downward economic cycles our operating profits and cash flows could be adversely affected.

Historically, sales of our products have been subject to cyclical variations caused by changes in general economic conditions. Our revenues in our third quarter ending March 31 are also affected by the impact of weather on construction and installation programs and the annual budget cycles of major customers. The demand for our products reflects the capital investment decisions of our customers, which depend upon the general economic conditions of the markets that our customers serve, including, particularly, the petroleum and convenience store industries. During periods of expansion in construction and industrial activity, we generally have benefited from increased demand for our products. Conversely, downward economic cycles in these industries result in reductions in sales and pricing of our products, which may reduce our profits and cash flow. During economic downturns, customers also tend to delay purchases of new products. The cyclical and seasonal nature of our business could at times adversely affect our liquidity and financial results.

A loss of key personnel or inability to attract qualified personnel could have an adverse affect on our operating results.

The Company’s future success depends on the ability to attract and retain highly skilled technical, managerial, marketing and finance personnel, and, to a significant extent, upon the efforts and abilities of senior management. The Company’s management philosophy of cost-control results in a very lean workforce. Future success of the Company will depend on, among other factors, the ability to attract and

- 9 -

also subject to various laws and regulations relating to environmental protection and the discharge of materials into the environment, and it could potentially be possible we could incur substantial costs as a result of the noncompliance with or liability for clean up or other costs or damages under environmental laws.

Uncertainties inherent in certain tax and accounting matters could adversely affect our operating results.

The discussion of goodwill impairment and tax-related matters in Note 6 to our consolidated financial statements beginning on page F-32 is incorporated by reference.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The Company has thirteen facilities:



Description		Size	Location	Status
	1	)1)	LSI Industries Corporate Headquarters, and lighting fixture and graphics manufacturing	243,000 sq. ft., (includes 66,000 sq. ft. of office space)	Cincinnati, OH	Owned

	2	)2)	LSI Industries pole manufacturing and dry powder-coat painting	122,000 sq. ft.	Cincinnati, OH	Owned

	3	)3)	LSI Metal Fabrication and LSI Images ~~manufacturing~~manu- facturing and dry powder-coat painting	98,000 sq. ft. (includes 5,000 sq. ft. of office space)	Independence, KY	Owned

	4	)4)	LSI Integrated Graphics office; screen printing manufacturing; and architectural graphics manufacturing	198,000 sq. ft. (includes 34,000 sq. ft. of office space)	Houston, TX	Leased

- 10 -


~~Description~~		~~Size~~	~~Location~~	~~Status~~
	8	)8)	LSI MidWest Lighting office and manufacturing	~~170,000~~163,000 sq. ft. (includes 6,000 sq. ft. of office space and ~~34,000~~ 27,000 sq. ft. of leased warehouse space)		Kansas City, KS		Owned and Leased

	9	)9)	LSI Retail Graphics office and manufacturing	58,000 sq. ft. (includes 5,000 sq. ft. of office space and 38,000 sq. ft. of leased warehouse space)		Woonsocket, RI		Owned and Leased

	10	)10)	LSI Lightron office and manufacturing	170,000 sq. ft. (includes 10,000 sq. ft. of office space)		New Windsor, NY		Owned* and Leased

	11	)11)	LSI West Coast Distribution Center	24,000 sq. ft.		Fontana, CA		Leased

	12	)12)	LSI Adapt offices	~~3,000~~2,000 sq. ft.		North Canton, OH Charlotte, NC		Owned Leased

	13	)13)	LSI Saco ~~Technology~~Technologies office and manufacturing		32,000 sq. ft. (includes 9,000 sq. ft. of office space)		Montreal, Canada		Leased


*		The land at this facility is leased.

The Company considers these facilities (total of ~~1,453,000~~1,421,000 square feet) adequate for its current level of operations.


~~ITEM 3.~~		ITEM 3. LEGAL PROCEEDINGS

The Company has not had any tax penalties assessed by the Internal Revenue Service related to tax shelters that have been identified by the IRS as abusive or that have a significant tax avoidance purpose.

Beginning in October 2000, the Company has been involved in a civil action against ImagePoint, Inc. (formerly PlastiLine, Inc.) and Marketing Displays, Inc. (“MDI”) in the United States District Court for the Eastern District of Kentucky. As disclosed in our previous filings, the Company is seeking a judgment that certain patents owned by MDI and licensed to ImagePoint that are directed to adjustable menu boards are invalid and/or not infringed by menu boards manufactured and sold by the Company. MDI and ImagePoint claim that LSI infringed upon and violated their patents related to menu board systems. The Company received a favorable summary judgment indicating the menu boards manufactured and sold by the Company did not infringe upon certain

- 11 -

PART II


ITEM 5.		MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED ~~SHAREHOLDERS’~~SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a)		Common share information appears in Note 1617 – SUMMARY OF QUARTERLY RESULTS (UNAUDITED) under “Range of share prices” beginning on page ~~S-40~~F-42 of this Form 10-K. Information related to “Earnings (loss) per share” and “Cash dividends paid per share” appears in SELECTED FINANCIAL DATA on page ~~S-42~~F-44 of this Form 10-K. LSI’s shares of common stock are traded on the NASDAQ Global Select Market under the symbol “LYTS.”

		The Company’s policy with respect to dividends, as revised by the Board of Directors in August 2007, is to pay a quarterly cash dividend representing a payout ratio of between 50% and 70% of the then current fiscal year net income forecast. Accordingly, the Board of Directors established a new indicated annual cash dividend rate of $0.20 per share beginning with the first quarter of fiscal 2009 consistent with the above dividend policy. In addition to the four quarterly dividend payments, the Company may declare a special year-end cash and/or stock dividend. The Company has paid annual cash dividends beginning in fiscal 1987 through fiscal 1994, and quarterly cash dividends since fiscal 1995.

		At August 18, ~~2006,~~2008, there were ~~395~~419 shareholders of record. The Company believes this represents approximately 3,000 beneficial shareholders.

(b)		The Company does not purchase into treasury its own common shares for general purposes. However, the Company does purchase its own common shares, through a Rabbi Trust, as investments of employee/participants of the LSI Industries Inc. Non-Qualified Deferred Compensation Plan. Purchases of Company common shares for this Plan in the fourth quarter of fiscal ~~2007~~2008 were as follows:

- 12 -

ISSUER PURCHASES OF EQUITY SECURITIES

(d) Maximum Number
(c) Total Number of (or Approximate Dollar
(a) Total Shares Purchased as Value) of Shares that
Number of (b) Average Part of Publicly May Yet Be Purchased
Shares Price Paid Announced Plans or Under the Plans or
Period Purchased per Share Programs Programs
4/1/07 to 4/30/07 490 $ 16.33 490 (1 )
5/1/07 to 5/31/07 370 $ 15.23 370 (1 )
6/1/07 to 6/30/07 500 $ 17.92 500 (1 )
Total 1,360 $ 16.55 1,360 (1 )


							(d) Maximum Number
					(c) Total Number of		(or Approximate Dollar
	(a) Total				Shares Purchased as		Value) of Shares that
	Number of		(b) Average		Part of Publicly		May Yet Be Purchased
	Shares		Price Paid		Announced Plans or		Under the Plans or
Period	Purchased		per Share		Programs		Programs
4/1/08 to 4/30/08		2,222	$	12.75		2,222		(1	)
5/1/08 to 5/31/08		531	$	10.78		531		(1	)
6/1/08 to 6/30/08		—		—		—		(1	)
Total		2,753	$	12.37		2,753		(1	)


(1)		All acquisitions of shares reflected above have been made in connection with the Company’s Non-Qualified Deferred Compensation Plan, which does not contemplate a limit on shares to be acquired.

The following graph compares the cumulative total shareholder return on the Company’s Common Shares during the five fiscal years ended June 30, ~~2007~~2008 with a cumulative total return on the NASDAQ Stock Market Index (U.S. companies) and the Dow Jones Electrical Equipment Index. The comparison assumes $100 was invested June 30, ~~2002~~2003 in the Company’s Common Shares and in each of the indexes presented; it also assumes reinvestment of dividends.

- 1213 -

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among LSI Industries Inc., The NASDAQ Composite Index
And The Dow Jones US Electrical Components & Equipment Index


*		~~$100 invested on 6/30/02 in stock or index-including reinvestment of dividends.~~

$100 invested on 6/30/03 in stock or index-including reinvestment of dividends.
Fiscal year ending June 30.

The stock price performance included in this graph is not necessarily indicative of future stock price performance.


ITEM 6.		SELECTED FINANCIAL DATA

~~“Selected Financial Data” begins on page S-42~~


		“Selected Financial Data” begins on page F-44 of this Form 10-K.


ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~“Management’s Discussion and Analysis of Financial Condition and Results of Operations” appears on pages S-1 through S-10~~


		“Management’s Discussion and Analysis of Financial Condition and Results of Operations” appears on pages F-1 through F-11 of this Form 10-K.


ITEM 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk from changes in variable interest rates, changes in prices of raw materials and component parts, and changes in foreign currency translation rates. Each of these risks is discussed below.

- 14 -

of interest rate fluctuations, which impact interest income, interest expense, and cash flows. With the significant increase in the Company’s short-term cash investments and fourth quarter fiscal 2007 pay down of all variable rate debt related to the June 2006 acquisition of SACO Technologies, Inc., the adverse exposure to interest rate fluctuations has decreased considerably.

All of the Company’s $57,000,000 available lines of credit are subject to interest rate fluctuations, should the Company borrow on these lines of credit. Additionally, the Company expects to generate cash from its operations that will subsequently be used to pay down as much of the debt (if any is outstanding) as possible or invest cash in short-term investments (if no debt is outstanding), while still funding the growth of the Company.

Raw Material Price Risk

The Company purchases large quantities of raw materials and components – mainly steel, aluminum, ballasts, sockets, wire, plastic, lenses, glass, vinyls, inks, LEDs and corrugated cartons. The Company’s operating results could be affected by the availability and price fluctuations of these materials. The Company uses multiple suppliers, has alternate suppliers for most materials, and has no significant dependence on any single supplier. No significant supply problems have been encountered in recent years. Price risk for these materials is related to increases in commodity items that affect all users of the materials, including the Company’s competitors. For the year ended June 30, ~~2007,~~2008, the raw material component of cost of goods sold subject to price risk was approximately ~~$132~~$135 million. The Company does not actively hedge or use derivative instruments to manage its risk in this area. The Company does, however, seek new vendors, negotiate with existing vendors, and at times commit to minimum volume levels to mitigate price increases. The Company negotiates supply agreements with certain vendors to lock in prices over a negotiated period of time. In response to the rising material prices, the Company’s Lighting Segment announced price increases ranging from 5%3% to 7%6%, depending on the product, effective with ~~June 2005 orders, and an additional 3% to 6% effective with December 2005~~August 2006 orders. Because of continued raw material cost increases, ~~especially in the fourth quarter of fiscal 2006,~~ the Company announced additional selected price increases ranging from 3%5% to 6%12% effective with August ~~2006~~2008 orders. The Company’s Graphics Segments generally establishes new sales prices, reflective of the then current raw material prices, for each custom graphics program as it begins. ~~The Technology Segment follows a similar practice.~~

Foreign Currency Translation Risk

As a result of the Company’s June 26, 2006 acquisition of SACO Technologies, Inc. (headquartered in Montreal, Canada), the Company became exposed to fluctuations in foreign currency exchange rates in ~~fiscal 2007 in~~ the operation of its Canadian business. However, a substantial amount of SACO’s business is conducted in U.S. dollars, therefore, any potential risk is deemed immaterial.

~~- 14 -~~

Begins

Index to Financial Statements

on Page

Consolidated Statements of Shareholders’ Equity for the years ended June 30, 2008, 2007, ~~2006,~~ and ~~2005~~2006

~~S-19~~F-19

Consolidated Statements of Cash Flows for the years ended June 30, 2008, 2007, ~~2006,~~ and ~~2005~~2006

~~S-20~~F-20

Notes to Consolidated Financial Statements

~~S-21~~F-21

Financial Statement Schedules:

II — -

Valuation and Qualifying Accounts for the years ended June 30, 2008, 2007, ~~2006,~~ and ~~2005~~2006

~~S-44~~F-45

Schedules other than those listed above are omitted for the reason(s) that they are either not applicable or not required or because the information required is contained in the financial statements or notes thereto. Selected quarterly financial data is found beginning on page ~~S-40~~F-42 in NOTE 1617 of the accompanying consolidated financial statements.


ITEM 9.		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.


~~ITEM 9A.~~		ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company periodically reviews the design and effectiveness of its disclosure controls and internal control over financial reporting. The Company makes modifications to improve the design and effectiveness of its disclosure controls and internal control structure, and may take other corrective action, if its reviews identify a need for such modifications or actions. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.

As of the end of the period covered by this Form 10-K, an evaluation was completed under the supervision and with the participation of our principal executive and principal financial officers regarding the design and effectiveness of our disclosure controls and procedures (as such term is

~~- 15 -~~


~~ITEM 9B.~~		ITEM 9B. OTHER INFORMATION

None.

PART III

ITEMS 10, 11, 12, 13 and 14 of Part III are incorporated by reference to the LSI Industries Inc. Proxy Statement for its Annual Meeting of Shareholders to be held November ~~15, 2007,~~20, 2008, as filed with the Commission pursuant to Regulation 14A.


ITEM 12.		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

The description of equity compensation plans required by Regulation S-K, Item 201(d) is incorporated by reference to the LSI Industries Inc. Proxy Statement for its Annual Meeting of Shareholders to be held November ~~15, 2007,~~20, 2008, as filed with the Commission pursuant to Regulation 14A.

The following table presents information about the Company’s equity compensation plans (LSI Industries Inc. 1995 Stock Option Plan, the LSI Industries Inc. 1995 Directors’ Stock Option Plan and the 2003 Equity Compensation Plan) as of June 30, ~~2007.~~2008.

(c)

Number of securities

remaining available

(a)

for future issuance

(a)

for future issuance

Number of securities to

(b)

under equity

Number of securities to

(b)

under equity

be issued upon

Weighted average

compensation plans

be issued upon

Weighted average

compensation plans

exercise of outstanding

exercise price of

(excluding securities

exercise of outstanding

exercise price of

(excluding securities

options, warrants and

outstanding options,

reflected in column

options, warrants and

outstanding options,

reflected in column

Plan category

rights

warrants and rights

(a))

rights

warrants and rights

(a))

Equity compensation plans approved by security holders

983,788

12.16

1,574,328

Equity compensation plans approved by security holders

1,197,482

14.44

1,253,040

Equity compensation plans not approved by security holders

—

Equity compensation plans not approved by security holders

—

Total

983,788

12.16

1,574,328

1,197,482

14.44

1,253,040


Exhibit No.		Exhibit Description

2.1		Stock Purchase Agreement dated as of June 26, 2006 among LSI Industries Inc. (“LSI” or the “Registrant”), Jalbout Holdings Inc., 3970957 Canada, Inc., Saco Technologies Inc., 4349466 Canada Inc., Fred Jalbout and Bassam Jalbout filed as Exhibit 2.1 to LSI’s Form 8-K filed June 29, 2006.

3.1		Articles of Incorporation of LSI filed as Exhibit 3.1 to LSI’s Form S-3 Registration Statement File No. ~~33-65043 .~~33-65043.

3.2		Code of Regulations of LSI filed as Exhibit 3.2 to LSI’s Form S-3 Registration Statement File No. 33-65043.

3.3		Amendment to Code of Regulations of LSI filed as Exhibit 3 to LSI’s Form 10-Q for the quarter ended December 31, ~~2004 .~~2004.

10.1		Credit Agreement by and among LSI as the Borrower, the banks party thereto as the lenders thereunder, PNC Bank National Association as the Administrative Agent and the Syndication Agent, Dated as of March 30, 2001 filed as Exhibit 4 to LSI’s Form 10-K for the fiscal year ended June 30, 2001.

10.2		Amendment to Credit Agreement (Dated June 26, 2006) filed as Exhibit 10.5 to LSI’s Form 8-K filed June 29, 2006.

10.3		Amendment No. 6 to Credit Agreement dated January 12, 2007 among the Registrant, PNC Bank, National Association, in its capacity as Lender and The Fifth Third Bank filed as Exhibit 10.1 to LSI’s Form 8-K filed January 17, ~~2007 .~~2007.

10.4		Loan Agreement dated January 12, 2007 among The Fifth Third Bank, LSI Saco Technologies Inc. and LSI, as guarantor, filed as Exhibit 10.2 to LSI’s Form 8-K filed January 17, 2007.

10.5		Continuing and Unlimited Guaranty Agreement dated January 12, 2007 executed by the Registrant filed as Exhibit 10.3 to LSI’s Form 8-K filed January 17, ~~2007~~2007.

10.6		Amendment to Credit Agreement (Dated March ~~21, 2007)~~14, 2008) filed as Exhibit 10.1 to LSI’s Form 8-K filed March ~~21, 2007~~

~~- 17 -~~


Exhibit No.		Exhibit Description

10.10*		LSI Industries Inc. 1995 Stock Option Plan (Amended as of December 6, 2001) filed as Exhibit 10 to LSI’s Form S-8 Registration Statement File No. 333-100039.

10.11*		LSI Industries Inc. 2003 Equity Compensation Plan (Amended and Restated through January 25, 2006) filed as Exhibit 10.2 to LSI’s Form 8-K filed January 5, 2006.

10.12*		Trust Agreement Establishing the Rabbi Trust Agreement by and between LSI Industries Inc. and Prudential Bank & Trust, FSB filed as Exhibit 10.1 to LSI’s Form 8-K filed January 5, 2006.

10.13*		LSI Industries Inc. Nonqualified Deferred Compensation Plan (Amended and Restated as of September 9, 2005) filed as Exhibit 10.1 to LSI’s Form 8-K filed October 18, 2005.

10.14*		Amended Agreement dated January 25, 2005 with Robert J. Ready filed as Exhibit 10.1 to LSI’s Form 8-K filed January 27, 2005.

10.15*		Amended Agreement dated January 25, 2005 with James P. Sferra filed as Exhibit 10.2 to LSI’s Form 8-K filed January 27, 2005.

10.16*		LSI Industries Inc. 2006 Corporate Officer Incentive Compensation Plan filed as Exhibit 10.1 to LSI’s Form 8-K filed January 26, 2006.

10.17		Escrow Agreement dated as of June 26, 2006 among LSI Industries Inc., Saco Technologies Inc., and The Bank of New York Trust Company, N.A. filed as Exhibit 10.1 to LSI’s Form 8-K filed June 29, 2006.

10.18		Registration Rights Agreement dated as of June 26, 2006 by and between LSI Industries Inc. and Saco Technologies Inc. filed as Exhibit 10.2 to LSI’s Form 8-K filed June 29, ~~2006 .~~2006.

10.19*		Employment Agreement dated as of June 26, 2006 by and between 4349466 Canada Inc. and Fred Jalbout filed as Exhibit 10.3 to LSI’s Form 8-K filed June 29, ~~2006 .~~2006.

10.20		Lease Agreement between 3970957 Canada, Inc. and 4349466 Canada Inc. filed as Exhibit 10.4 to LSI’s Form 8-K filed June 29, 2006.

~~- 18 -~~

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

LSI INDUSTRIES INC.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature		Title

/s/ Robert J. Ready ~~Robert J. Ready~~		Chairman of the Board, Chief Executive

Robert J. Ready		Officer, and President ~~(Principal~~
	Date: September 15, 2008	(Principal Executive Officer)

/s/ Ronald S. Stowell		Vice President, Chief Financial Officer, and

Ronald S. Stowell		Treasurer
	Date:September ~~10, 2007~~15, 2008	(Principal Financial and Accounting Officer)

/s/ Gary P. Kreider		Director

Gary P. Kreider
	Date: September 15, 2008

~~/s/ Ronald S. Stowell~~ ~~Ronald S. Stowell~~	~~Vice President, Chief Financial Officer, and Treasurer~~ ~~(Principal Financial and Accounting Officer)~~
/s/ Dennis B. Meyer		Director

Dennis B. Meyer
	Date:September ~~10, 2007~~15, 2008

/s/ ~~Gary P. Kreider~~ ~~Gary P. Kreider~~ Wilfred T. O’Gara		Director

Wilfred T. O’Gara
	Date:September ~~10, 2007~~15, 2008

/s/ ~~Dennis B. Meyer~~ ~~Dennis B. Meyer~~ Mark A. Serrianne		Director

Mark A. Serrianne
	Date:September ~~10, 2007~~15, 2008

~~/s/ Wilfred T. O’Gara~~ ~~Wilfred T. O’Gara~~	~~Director~~
~~Date:September 10, 2007~~
/s/ James P. Sferra		Secretary; Executive Vice President

~~/s/ Mark A. Serrianne~~ ~~Mark A. Serrianne~~	~~Director~~
~~Date:September 10, 2007~~
James P. Sferra
~~/s/ James P. Sferra~~ ~~James P. Sferra~~	~~Secretary; Executive Vice President -~~ - Manufacturing; and Director
	Date:September ~~10, 2007~~15, 2008

- 2021 -

Net sales of ~~$337,453,000~~$305,286,000 in fiscal ~~2007 increased 20.3%~~2008 decreased 9.5% from fiscal ~~2006~~2007 net sales of ~~$280,470,000.~~$337,453,000. Lighting Segment net sales ~~increased 0.4%~~decreased 4.4% to ~~$196,533,000~~$190,590,000 and Graphics Segment net sales ~~increased 48.4%~~decreased 16.9% to ~~$123,788,000~~$114,696,000 as compared to the prior year. ~~The new Technology Segment reported net sales of $17,132,000 in fiscal 2007 as compared to $1,247,000 for the five days of fiscal 2006 that LSI Saco Technologies was owned by the Company.~~ Sales to the petroleum / convenience store market represented ~~26%~~28% and ~~25%~~26% of net sales in fiscal ~~2007~~years 2008 and ~~2006,~~2007, respectively. Net sales to this, the Company’s largest niche market, are reported in both the Lighting and Graphics Segments, depending upon the product or service sold, and were ~~up 24%~~down 2% from last year to ~~$87,370,000~~$84,897,000 as Graphics sales to this market increased ~~significantly~~(3%) and Lighting sales ~~decreased.~~decreased (9%). The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company; however, if sales to other markets and customers increase ~~(including through the addition of the Technology Segment)~~ more than net sales to this market, then the percentage of net sales to the petroleum / convenience store market would be expected to decline. See Note 3 to these financial statements on Major Customer Concentrations.

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 of the lighting ~~graphics~~ or ~~menu board~~graphics business is awarded to the Company. Sales related to a customer’s image or brand program are reported in either the Lighting Segment and/or the Graphics Segment, depending upon the product and/or service provided.

The $15.9 million increase in Technology Segment net sales is related to having a full year of net sales in fiscal 2007 as compared to only five days in fiscal 2006 due to the late June 2006 acquisition of SACO Technologies Inc.

Gross profit of ~~$89,179,000~~$80,427,000 in fiscal ~~2007 increased 25%~~2008 decreased 10% from last year, and ~~increased~~decreased from 26.4% to 26.3% as a percentage of net ~~sales to 26.4% as compared to 25.5% last year.~~sales. The ~~increase in the gross profit percentage is primarily due to the increased weighting of net sales from the more profitable Graphics and Technology Segments. The increase~~decrease in amount of gross profit is primarily due ~~primarily~~ to ~~the net effects of the 20% increase in~~decreased Graphics net sales ~~(made up of a 0.4% increase in the Lighting Segment, a 48% increase in the Graphics Segment,~~ and ~~the $15.9 million increase in net sales in the Technology Segment),~~margins, both product and ~~increased margins on~~ installation, ~~revenue. While the Company’s fiscal 2006 and fiscal 2007 sales price increases on select lighting products improved fiscal 2007~~partially offset by increased gross profit ~~the~~from reduced lighting net sales. The following items also influenced the Company’s gross profit margin on a consolidated basis: competitive pricing pressures, increased cost of materials, decreased direct labor reflective of less sales volume, an unfavorable $1.0 million net realizable value reserve and refurbishment reserve recorded on some Graphics segment inventory, and other manufacturing expenses in support of ~~increased~~ production requirements ($~~2.5~~0.7 million of ~~increased~~decreased wage, compensation and benefits costs; ~~$0.6~~$0.5 million of ~~increased~~decreased outside services; ~~$0.4 million of increased factory supplies;~~ $0.3 million ~~of increased rent~~decreased lease and rental expense; $0.3 million ~~increased~~decreased repairs and maintenance; ~~$0.3~~$0.2 million ~~increased depreciation expense; $0.4~~decreased supplies; and $0.1 million decreased utilities and property taxes).

Selling and administrative expenses of ~~$56,629,000~~$60,642,000 in fiscal year ~~2007~~2008 increased ~~$6.7~~$3.4 million, ~~but decreased~~and increased to ~~16.8%~~19.9% as a percentage of net sales from ~~17.8%~~17.0% last year. Employee compensation and benefits expense increased ~~$1.7~~$0.4 million in fiscal ~~2007~~2008 as compared to last ~~year, partially as a result of the addition of LSI Saco Technologies as well as increases in the rest of the Company.~~year. Other changes of expense between years include increased sales commission expense ~~related to amortization of intangible assets~~ ($~~1.8 million, primarily associated with the intangible assets related to LSI Saco Technologies)~~2.0 million), increased research & development expense ($~~1.3~~1.5 million, primarily associated with research and development spending related to ~~LSI Saco Technologies)~~solid-state LED technology), increased ~~customer accommodations~~outside services ($1.0 million), decreased legal expenses ($0.8 million), reduced customer rebates and accommodations ($0.4 million), increased warranty expense ($0.3 million), decreased bad debt expense ($0.3 million), ~~increased~~decreased depreciation ~~expense ($0.1 million), increased product warranty~~ expense ($0.3 million), ~~increased legal expenses ($0.2 million)~~ and increased ~~sales commissions~~repairs and maintenance ($~~0.2~~0.1 million). ~~These increases were partially offset by~~

The Company recorded a $2.8 million expense in fiscal ~~2007 reversal of a loss contingency reserve~~2008 related to the Company’s offer to settle in a menu board patent litigation. Even though the offer to settle this matter was made in the first quarter of fiscal 2009, as a type one subsequent event, the $2.8 million charge is required to be recorded in fiscal 2008. While the Company believes its menu board designs did not infringe upon the plaintiffs’ patents, management believes it is in the best interests of the Company to achieve certainty in this matter, and therefore has extended a settlement offer. See Note 14 for further discussion. The Company had recorded a favorable reversal of a $0.6 million loss contingency reserve in fiscal 2007 related to this same menu board patent litigation following a favorable summary judgment decision in the lower court.

In fiscal 2008, the Company recorded a $28,929,000 estimated non-cash impairment charge in the fourth quarter as follows: goodwill ($~~0.6 million)~~27,149,000) and ~~reduced use~~certain intangible assets ($1,780,000). Charges totaling $27,832,000 were recorded in the Graphics Segment, and charges in the amount of ~~outside services ($0.4 million).~~$1,097,000 were recorded in the Lighting Segment. There was no similar impairment expense in fiscal 2007. Step one of the annual impairment test indicated there was a material impairment of goodwill

F-2

and certain intangible assets in two of the Company’s reporting units within its Graphics Segment and one reporting unit in its Lighting Segment due to the combination of a decline in the market capitalization of the Company at June 30, 2008 and a decline in the estimated forecasted discounted cash flows expected by the Company which management attributes to a weaker economic cycle impacting certain of the Company’s customers, notably national retailers. Because step two of the goodwill impairment testing is not complete, an estimate of the impairment charge was recorded as of June 30, 2008. It is anticipated that the impairment testing will be complete by the first quarter of fiscal 2009 at which time any adjustments to the estimate will be recorded. Additionally and included in the amounts above, the Company determined that a certain trade name in its Lighting Segment was no longer going to be used in marketing efforts, and therefore a related intangible asset had no value as the Company more than ever before emphasizes and relies upon its “LSI” brand name recognition in the lighting markets it serves.

The Company reported net interest ~~expense~~income of ~~$823,000~~$279,000 in fiscal ~~2007~~2008 as compared to net interest ~~income~~expense of ~~$472,000~~$823,000 last year. The Company was in a positive cash position and was debt free for substantially all of fiscal ~~2006~~2008 and generated interest income on invested cash. The Company was in a borrowing position the first nine and one-half months of fiscal 2007 primarily as a result of the LSI Saco Technologies acquisition in June 2006 as well as 2007 working capital needs. Customer cash advances related to a menu board conversion program brought the Company to a positive cash position in the fourth quarter of fiscal 2007.

The effective tax rate in fiscal 2007 was 34.5%, resulting in an income tax expense of $10,938,000. Income tax expense in fiscal 2008 was $3,116,000, which is reflective of income tax expense on the reduced normal operating results, $1.8 million of valuation reserves on the Company’s Canadian net operating loss tax benefit and on Canadian tax ~~rates~~credits, and ~~favorable~~the tax ~~credits~~credit provision recorded on the impairment charges (goodwill and intangible assets), some of which is not deductible for tax purposes. The Company expects an effective income tax rate in fiscal 2009 of approximately 37.5%.

The Company reported a net loss of $11,981,000 in fiscal 2008 as compared to 34.3% in fiscal 2006. The Company’s operations generate favorable tax credits, including a Canadian research and development tax credit in 2007 related to LED lighting and video screen activities in the Company’s Montreal facility.

~~S-2~~

~~Net~~net income ~~increased 43.9% in fiscal 2007 to~~of $20,789,000 ~~as compared to $14,443,000~~ last year. The ~~increase~~decrease is primarily the result of ~~increased~~decreased gross profit on ~~increased~~decreased net sales, a non-cash goodwill and intangible asset impairment charge in fiscal 2008, increased operating expenses, all partially offset by ~~increased operating expenses~~decreased income tax expense and ~~income taxes, as well as~~ net interest ~~expense~~income as compared to net interest ~~income~~expense last year. Diluted loss per share was $0.55 in fiscal 2008, as compared to diluted earnings per share ~~was~~of $0.95 ~~in fiscal 2007, as compared to $0.71 per share~~ last year. The weighted average common shares outstanding for purposes of computing diluted earnings per share in fiscal ~~2007~~2008 were ~~21,924,000~~21,764,000 shares as compared to ~~20,429,000~~21,924,000 shares last ~~year, increased primarily due to the 1.4 million shares issued as partial payment for the LSI Saco Technologies acquisition.~~year.

~~2006~~2007 Compared to ~~2005~~2006

The Company acquired SACO Technologies Inc. on June 26, 2006, which it renamed LSI Saco Technologies. The operating results of LSI Saco Technologies have been included in fiscal 2006 results for those five days of June since the acquisition date. A new business segment was created with the acquisition of LSI Saco, the Technology Segment, for which there were no results included in fiscal 2005. While the Technology Segment reported $1.2 million of net sales in those five days of June 2006, the operating profit was slightly below break even primarily due to purchase accounting requirements of capitalizing the expected gross profit on all finished goods in inventory as of the date of acquisition. When those finished goods are sold, the Company records the full amount of net sales at zero gross profit. Most of those finished goods shipped in June 2006, and the remainder will ship in the first quarter of fiscal 2007. Therefore, the Company will experience the continued effect of zero gross profit on the sale of certain finished goods, but to a lesser extent.

Net sales of ~~$280,470,000~~$337,453,000 in fiscal ~~2006 decreased 0.7%~~2007 increased 20.3% from fiscal ~~2005~~2006 net sales of ~~$282,440,000.~~$280,470,000. Lighting Segment net sales increased ~~11%~~1.8% to ~~$195,805,000~~$199,427,000 and Graphics Segment net sales ~~decreased 21%~~increased 63.0% to ~~$83,418,000~~$138,026,000 as compared to the prior year. ~~The new Technology Segment reported net sales of $1,247,000 in fiscal 2006.~~ Sales to the petroleum / convenience store market represented 26% and 25% of net sales in fiscal 2007 and 2006, ~~and 2005 net sales.~~respectively. Net sales to this, the Company’s largest niche market, are reported in both the Lighting and Graphics Segments, depending upon the product or service sold, and were up 1%24% from last year to ~~$70,649,000.~~$87,370,000 as Graphics sales to this market increased significantly and Lighting sales decreased. The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company; however, if sales to other markets and customers increase (including through acquisitions) more than net sales to this market, then the percentage of net sales to the petroleum / convenience store market would be expected to decline.

The ~~$18.8~~$3.6 million increase in Lighting Segment net sales is primarily the result of an ~~aggregate~~$8.1 million or 9.1% increase ~~of $10.1~~in commissioned net sales to the commercial and industrial lighting market plus approximately $2.9 million ofincreased LED lighting sales from LSI Saco Technologies, partially offset by decreased lighting sales to our niche markets of petroleum / convenience stores, automotive dealerships, ~~quick service restaurants,~~ and retail national accounts ~~(including sales to Wal-Mart Stores, Inc.), as well as an $8.9~~(totaling a net $6.7 million increase in commissioned net sales to the commercial and industrial lighting market. Net sales to Wal-Mart Stores, Inc. were approximately $30.4 million or 11% of the Company’s total net sales in fiscal 2006, as compared to net sales of approximately $30.2 million or 11% of the Company’s total net sales in fiscal 2005.decrease). The Company

F-3

implemented price increases in ~~June 2005, December 2005,~~fiscal year 2006 and August 2006 on many of its lighting products to follow general trends in the industry to recover the cost of increasing material components.

The ~~$22.0~~$53.4 million ~~decrease~~or 63.0% increase in Graphics Segment net sales is primarily the result of increased net sales related to two image conversion programs in the ~~effect of decreased~~petroleum / convenience store market ($22.6 million increase), to an image conversion program and normal sales to a national drug store retailer ~~for its re-branding program that was completed in the fourth quarter of fiscal 2005~~ ($~~14.0 million)~~15.9 million increase) and ~~decreased sales related~~ to a ~~quick service restaurant for its~~ menu board ~~enhancement~~conversion program ~~that was substantially completed in the fourth quarter~~for a quick serve restaurant retailer ($9.9 million increase) plus approximately $13.0 million increased LED video screen sales from LSI Saco Technologies, partially offset by completion of ~~fiscal 2005 ($7.0 million). The decrease in~~programs or reduction of net sales ~~related to both of these programs means that these large roll out~~from other graphics programs have been completed (in fiscal 2005) and sales were reflective of the ongoing business level with those two customers in fiscal 2006. The Company has begun another sizable re-branding program for the national drug store retailer in fiscal 2007 for stores it acquired.customers.

~~S-3~~

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 of the lighting, graphics or menu board business is awarded to the Company. Sales related to a customer’s image or brand program are reported in either the Lighting Segment and/or the Graphics Segment, depending upon the product and/or service provided.

Gross profit of ~~$71,413,000~~$89,179,000 in fiscal ~~2006 decreased 1%~~2007 increased 25% from last year, and ~~decreased~~increased as a percentage of net sales to ~~25.5% in fiscal 2006~~26.4% as compared to ~~25.6%~~25.5% last year. The ~~decrease~~increase in the gross profit percentage is primarily due to the increased weighting of net sales from the more profitable Graphics Segment. The increase in amount of gross profit is due primarily to the net effects of the ~~1% net decrease~~20% increase in net sales (made up of a ~~11%~~1.8% increase in the Lighting Segment and a ~~21% decrease~~63.0% increase in the Graphics Segment), ~~product mix resulting in a lower content of material in cost of sales~~ and ~~higher labor and manufacturing overhead content, substantially improved performance in the Company’s New York facility, higher~~increased margins on installation ~~revenue, and the affect of purchase accounting on the gross profit of the Technology Segment.~~revenue. While the Company’s fiscal ~~2005~~2006 and fiscal ~~2006~~2007 sales price increases on select lighting products improved fiscal ~~2006~~2007 gross profit, the following items also influenced the Company’s gross profit ~~margin: net increased manufacturing wages, incentives and benefit costs ($2.2 million),~~margin on a consolidated basis: competitive pricing pressures, ~~unabsorbed manufacturing costs in the Company’s New York facility,~~ and other manufacturing expenses in support of increased production requirements ($~~0.6~~2.5 million of increased wage, compensation and benefits costs; $0.6 million of increased outside services; $0.4 million of increased factory supplies; $0.3 million of increased rent expense; $0.3 million increased repairs and maintenance; $0.3 million increased depreciation expense; $0.4 million decreased utilities and ~~$0.9 million reduction of supplies, maintenance and depreciation expense)~~property taxes).

Selling and administrative expenses of $57,219,000 in fiscal year ~~2006~~2007 increased ~~$0.8~~$7.3 million, ~~and increased~~but decreased to ~~17.8%~~17.0% as a percentage of net sales from ~~17.4%~~17.8% last year. The Company recorded a non-cash charge of $428,000 in fiscal 2006 for stock option expense, whereas in fiscal 2005 the Company only disclosed its stock option expense as there was no requirement to record it in the financial statements. Expense related to stock options will continue in future periods through the end of the vesting periods of stock options currently outstanding. Otherwise, employeeEmployee compensation and benefits expense ~~decreased~~increased $1.7 million in fiscal ~~2006~~2007 as compared to last year, ~~primarily~~partially as a result of ~~significantly less incentive compensation. Increased sales commissions ($1.7 million~~the addition of LSI Saco Technologies as well as increases in the rest of the Company. Other changes of expense between years include increased expense related to ~~increased lighting sales), increased legal fees~~amortization of intangible assets ($~~1.1~~1.8 million, primarily associated with ~~patent litigation)~~the intangible assets related to LSI Saco Technologies), increased research & development expense ($1.3 million, primarily associated with research and development spending related to LSI Saco Technologies), increased customer accommodations ($0.8 million), increased bad debt expense ($0.3 million), increased depreciation expense ($0.1 million), increased product warranty expense ($0.3 million), increased legal expenses ($0.2 million) and increased ~~audit expenses~~sales commissions ($~~0.3~~0.2 million). These increases were partially offset by ~~decreased product warranty expense~~reduced use of outside services ($~~0.2 million, primarily~~0.4 million). Additionally, the Company reversed a lost contingency reserve related to a menu board patent litigation ($0.6 million) in fiscal 2007 with no similar item in the Lighting Segment), decreased advertising and literature costs ($0.4 million), and the lack of any fiscal 2006 goodwill impairment charge ($0.2 million expense was recorded in fiscal 2005). Fiscal 2005 included a $370,000 gain on recovery of a bad debt from the K-mart bankruptcy, while fiscal 2006 had a much smaller recovery of $99,000 related to the K-mart bankruptcy.prior year.

F-4

The Company reported net interest expense of $823,000 in fiscal 2007 as compared to net interest income of ~~$550,000 in fiscal 2006 from short term cash and other investments as compared to $64,000 in fiscal 2005 because the~~$472,000 last year. The Company was in a positive cash position and was debt free ~~from May 2005 to June 2006.~~for substantially all of fiscal 2006 and generated interest income on invested cash. The Company ~~went into~~was in a borrowing position the first nine and one-half months of fiscal 2007 primarily as a result of the LSI Saco Technologies acquisition in June 2006 ~~and was~~as well as 2007 working capital needs. Customer cash advances related to a menu board conversion program brought the Company to a positive cash position in ~~a net borrowing position for~~ the ~~first eleven months~~fourth quarter of fiscal ~~2005, thereby resulting in $78,000 interest expense in fiscal 2006 as compared to $217,000 in fiscal 2005.~~2007. The effective tax rate in fiscal ~~2006~~2007 was ~~34.3%~~34.5% reflective of Canadian tax rates and favorable tax credits ~~and roll out of deferred taxes,~~ as compared to ~~36.0%~~34.3% in fiscal ~~2005.~~2006. The Company’s operations generate favorable tax credits, including a Canadian research and development tax credit in 2007 related to LED lighting and video screen activities in the Company’s Montreal facility.

Net income ~~decreased 1.3%~~increased 43.9% in fiscal ~~2006~~2007 to ~~$14,443,000~~$20,789,000 as compared to ~~$14,636,000~~$14,443,000 last year. The ~~decrease~~increase is primarily the result of ~~decreased~~increased gross profit on ~~decreased~~increased net sales, ~~and~~partially offset by increased operating expenses ~~partially offset by decreased~~and income taxes, ~~and~~as well as net interest ~~income~~expense as

~~S-4~~

compared to net interest ~~expense~~income last year. Diluted earnings per share was ~~$0.71~~$0.95 in fiscal ~~2006,~~2007, as compared to ~~$0.73~~$0.71 per share last year. The weighted average common shares outstanding for purposes of computing diluted earnings per share in fiscal ~~2006~~2007 were ~~20,429,000~~21,924,000 shares as compared to ~~20,087,000~~20,429,000 shares last ~~year.~~year, increased primarily due to the 1.4 million shares issued as partial payment for the LSI Saco Technologies acquisition.

Liquidity and Capital Resources

The Company considers its level of cash on hand, its borrowing capacity, its 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 June 30, ~~2007~~2008 the Company had working capital of ~~$68.4~~$74.6 million, compared to ~~$85.3 million at December 31, 2006, and $66.8~~$68.4 million at June 30, ~~2006.~~2007. The ratio of current assets to current liabilities was ~~2.24~~3.60 to 1 as compared to a ratio of ~~2.66~~2.24 to 1 at June 30, ~~2006.~~2007. The decrease in working capital from December 31, 2006 to June 30, 2007 relates primarily to a program in the Graphics Segment whereby the Company receives full payment in advance of any shipments (for which a current liability has been recorded for customer prepayments and the cash was used to pay down the Company’s long-term debt and make short-term investments). The$6.2 million increase in working capital from June 30, ~~2006~~2007 to June 30, ~~2007~~2008 was primarily related to ~~increased cash and short-term investments ($7.4 million), a significant increase in inventory ($4.4 million), increased accounts receivable ($4.4 million), and~~ decreased ~~accounts payable ($3.1 million), partially offset by increased~~ accrued expenses and customer prepayments ($~~17.8~~5.3 million and $16.7 million, respectively), increased inventories ($0.8 million), increased refundable income taxes ($1.5 million), decreased accounts payable ($4.4 million), partially offset by decreased accounts receivable ($16.9 million), decreased cash and short-term investments ($3.7 million), and decreased other current assets ($1.7 million).

The Company generated ~~$37.0~~$12.7 million of cash from operating activities in fiscal ~~2007~~2008 as compared to a generation of ~~$21.6~~$37.0 million last year. The ~~$15.4~~$24.3 million ~~increase~~decrease in net cash flows from operating activities in fiscal ~~2007~~2008 is primarily the net result of ~~more~~less net income ($~~6.3~~32.8 million unfavorable), a fiscal 2008 non-cash impairment charge ($28.9 million favorable), a decrease rather than an increase in accounts receivable (favorable change of $21.5 million), a reduction rather than an increase in customer prepayments (unfavorable change of $30.7 million), a charge directly to retained earnings for a reserve for uncertain income tax positions (unfavorable $2.6 million), a larger increase in refundable income taxes (an unfavorable change of $1.2 million), a reduction rather than increase in the allowance for doubtful accounts (unfavorable change of $0.4 million), a smaller increase in inventories (favorable change of $3.7 million), a larger decrease in accounts payable and accrued expenses (unfavorable change of $5.0 million), an increase rather than a decrease in ~~accounts receivable~~deferred income tax assets (unfavorable change of ~~$5.2~~$5.7 million), ~~a larger increase in inventories (unfavorable change of $2.4 million), a larger increase in accounts payable and accrued expenses (favorable change of $14.0 million), increased~~decreased depreciation and amortization ~~(favorable $2.2~~(unfavorable $0.2 million), less expense related to the non-qualified deferred compensation plan (unfavorable ~~$0.7~~$0.1 million), increased stock option expense (favorable ~~$0.3~~$0.5 million), less of a loss ~~rather than a gain on~~ disposal of fixed assets ~~(favorable $0.3~~(unfavorable $0.2 million). The fiscal 2008 significant reduction in customer prepayments is related to the completion of a menu board replacement program in the Graphics Segment.

F-5

Net accounts receivable were ~~$55.8~~$38.9 million and ~~$51.6~~$55.8 million at June 30, ~~2007~~2008 and June 30, ~~2006,~~2007, respectively. The ~~increase~~decrease of ~~over $4.4~~$17.1 million in gross receivables is primarily due to a larger amount of net sales in the fourth quarter of fiscal 2007 as compared to the fourth quarter of fiscal ~~2006. The~~2008, offset by increased DSO (Days’ Sales Outstanding) ~~improved to~~. The DSO increased from 48 days at June 30, 2007 ~~from 55~~to 54 days at June 30, ~~2006.~~2008, with the increased DSO primarily in the Graphics Segment. The Company believes that its receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.

Inventories at June 30, ~~2007~~2008 increased ~~$4.4~~$0.8 million from June 30, ~~2006~~2007 levels. Primarily in response to customer programs and the timing of shipments, inventory increases occurred in the Lighting Segment of approximately ~~$1.5~~$0.6 million (some of this inventory supports certain graphics ~~programs and technology products)~~programs) and the ~~Technology~~Graphics Segment of approximately ~~$2.9~~$0.2 million since June 30, ~~2006.~~2007. The ~~$3.1~~$4.4 million decrease in accounts payable from June 30, ~~2006~~2007 to June 30, ~~2007~~2008 is primarily related to flow of materials in support of anticipated sales and production volume.

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 $50 million revolving line of credit with its bank group, with all $50 million of the credit line available as of August ~~23, 2007.~~19, 2008. This line of credit consists of a $30 million three year committed credit facility expiring in fiscal ~~2010~~2011 and a $20 million credit facility expiring in the third quarter of fiscal ~~2008.~~2009. Additionally, ~~in January 2007~~ the Company ~~established~~has a separate $7 million ~~annually renewable~~ line of credit, renewable annually in the third fiscal quarter, for the working capital

~~S-5~~

needs of its Canadian subsidiary, LSI Saco Technologies. As of August 19, 2008 $5.6 of this line of credit is available. The Company believes that the total of available lines of credit plus cash flows from operating activities is adequate for the Company’s fiscal ~~2008~~2009 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.

The Company ~~used $10.3~~generated $4.3 million of cash related to investing activities in fiscal ~~2007~~2008 as compared to a use of ~~$25.7~~$10.3 million last year. The primary change between years relates to the fiscal ~~2006 acquisition~~2007 purchase of ~~SACO Technologies~~$8.0 million of short-term investments and subsequent divestiture in fiscal 2008 ($~~21.9~~16.0 million ~~favorable)~~favorable change), ~~increased~~decreased purchase of fixed assets ($2.2 million ~~unfavorable)~~favorable), ~~increased~~and decreased proceeds from the sale of fixed assets ($~~3.7~~3.8 million ~~favorable,~~unfavorable, primarily as two significant rental LED video screens in the ~~Technology~~Graphics Segment were ~~sold), and the~~sold in fiscal ~~2006 purchase of $9.0 million and divesture of short-term investments and fiscal 2007 purchase of $8.0 million of short-term investments ($8.0 million use of funds)~~2007). Capital expenditures of ~~$6.0~~$3.7 million in fiscal ~~2007 (includes approximately $1.8 million for a Salvagnini metal fabrication center that will increase both our fabrication capacity and productivity)~~2008 compared to ~~$3.8~~$6.0 million last year. Spending in both periods is primarily for tooling and equipment. The Company expects fiscal ~~2008~~2009 capital expenditures to ~~be in the $9~~approximate $5 million, ~~range,~~ exclusive of business acquisitions.

The Company used $27.3 million of cash related to financing activities in fiscal 2007 as compared to a generation of $0.2 million last year. The $27.5 million change between years is primarily the result of activities with the Company’s line of credit ($26.0 million unfavorable). Fiscal 2007 was a year in which all debt was paid off, including debt of an acquired company, and fiscal 2006 was a year of net borrowings, including debt of an acquired company. Cash dividend payments of $11.0 million in fiscal 2007 were less than cash dividend payments of $11.2 million last year. The change between years relates to the fiscal 2005 special year-end dividend of approximately $2.0 million paid in the first quarter of fiscal 2006, partially offset by a higher per share dividend rate and an increased number of outstanding shares in fiscal 2007 for the regular quarterly cash dividend. Additionally, the Company experienced less cash flow from the exercise of stock options in fiscal 2007 as compared to last year (unfavorable $1.5 million).

Contractual Obligations as Ofof June 30, ~~2007~~2008


	Payments Due by Period										Payments Due by Period
			Less than		1-3		3-5		More than				Less than		1-3		3-5		More than
	Total		1 year		years		years		5 years		Total		1 year		years		years		5 years
Long-Term Debt Obligations	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Capital Lease Obligations		—		—		—		—		—		—		—		—		—		—
Operating Lease Obligations		3,186		1,619		1,279		288		—		6,620		1,777		2,702		1,983		158
Purchase Obligations		14,721		14,677		44		—		—		15,926		15,894		32		—		—
Other Long-Term Liabilities		—		—		—		—		—		—		—		—		—		—

Total	$	17,907	$	16,296	$	1,323	$	288	$	—	$	22,546	$	17,671	$	2,734	$	1,983	$	158

Carefully selected acquisitions have long been an important part of the Company’s strategic growth plans. The Company continues to seek out, screen and evaluate potential acquisitions that could add to the Lighting, Graphics or Technology product lines or enhance the Company’s position in selected markets. The Company believes adequate financing for any such investments or acquisitions will be available through future borrowings or through the issuance of common or preferred shares in payment for acquired businesses.

Critical Accounting Policies and Estimates

The Company is required to make estimates and judgments in the preparation of its financial statements that affect the reported amounts of assets, liabilities, revenues and expenses, and related footnote disclosures. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company continually reviews these estimates and their underlying assumptions to ensure they remain appropriate. The Company believes the items discussed below are among its most significant accounting policies because they utilize estimates about the effect of matters that are inherently uncertain and therefore are based on management’s judgment. Significant changes in the estimates or assumptions related to any of the following critical accounting policies could possibly have a material impact on the financial statements.

Revenue Recognition

The Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition.” Revenue is recognized when title to goods and risk of loss have passed to the customer, there is persuasive evidence of a purchase arrangement, delivery has occurred or services have been rendered, and collectibility is reasonably assured. Revenue is typically recognized at time of shipment. Sales are recorded net of estimated returns, rebates and discounts. Amounts received from customers prior to the recognition of revenue are accounted for as customer ~~pre-payments~~prepayments and are included in accrued expenses. Revenue is recognized in accordance with EITF ~~00-21.~~00-21 or AICPA Statement of Position 97-2 (SOP 97-2), “Software Revenue Recognition,” as appropriate.

The Company has four sources of revenue: revenue from product sales; revenue from installation of products; service revenue generated from providing integrated design, project and construction management, site engineering and site permitting; and revenue from shipping and handling.Product revenue is recognized on product-only orders at the time of shipment. Product revenue related to orders where the customer requires the Company to install the product is generally recognized when the product is installed. In some situations, product revenue is recognized when the product is shipped, before it is installed, because by agreement the customer has taken title to and risk of ownership for the product before installation has been completed. Other than normal product warranties or the possibility of installation or post-shipment service and maintenance of certain solid state LED video screens or billboards, the Company has no ~~post-shipment~~post-

F-7

Income Taxes

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes;” accordingly, deferred income taxes are provided on items that are reported as either income or expense in different time periods for financial reporting purposes than they are for income tax purposes. Deferred income tax assets and liabilities are reported on the Company’s balance sheet. Significant management judgment is required in developing the Company’s income tax provision, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against deferred tax assets.

The Company operates in multiple taxing jurisdictions and is subject to audit in these jurisdictions. The Internal Revenue Service and other tax authorities routinely review the Company’s tax returns. These audits can involve complex issues which may require an extended period of time to resolve. In management’s opinion, adequate provision has been made for potential adjustments arising from these examinations.

As of June 30, ~~2007~~2008 the Company ~~had~~has recorded two deferred state income tax assets, one in the amount of ~~$22,000~~$5,000 related to a state net operating loss carryover generated by the Company’s New York subsidiary, and the other in the amount of ~~$938,000,~~$935,000, net of federal tax benefits, related to non-refundable state tax credits. The Company has determined that these deferred state income tax assets totaling $960,000 do not require any valuation reserves because, in accordance with Statement of Financial Accounting Standards No. 109 (SFAS No. 109), these assets will, more likely than not, be realized. AsAdditionally, as of June 30, ~~2006,~~2008 the Company ~~had~~has recorded ~~a total of $1,606,000~~ deferred ~~state income~~ tax assets for its Canadian subsidiary related to net operating loss carryover and ~~had~~to research and development tax credits totaling $1,819,000. In view of the impairment of the goodwill and certain intangible assets on the financial statements of this subsidiary and two consecutive loss years, the Company has determined ~~that a $622,000 valuation reserve, in accordance with SFAS No. 109, was required as of that date because a portion of those~~these assets, ~~would,~~ more likely than not, will not be ~~realized the Company. An additional deferred New York state income tax asset related to non-refundable state tax credits was~~realized. Accordingly, full valuation reserves of $1,819,000 were recorded in the fourth quarter of fiscal ~~2007, and both~~2008.

The Company adopted the ~~deferred state income tax asset and the valuation reserve were reduced~~provisions of FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in ~~fiscal 2007 as~~Income Taxes,” on July 1, 2007. As a result of ~~a reorganization of subsidiaries by~~adoption, the Company recognized $2,582,000 in reserves for uncertain tax positions and recorded a charge of $2,582,000 to the July 1, 2007 retained earnings balance. As of the adoption date, penalties were $523,000 of the reserve. Additionally, tax and interest, net of federal tax, were $1,592,000 and $467,000, respectively, of the reserves as of July 1, 2007. Of the $2,582,000 reserve for uncertain tax positions, $2,059,000 would have an unfavorable impact on the effective tax rate if recognized.

During fiscal 2008, the Company recorded net increases related to reserves for uncertain tax positions to bring the June 30, 2008 liability to $3,225,000 as more fully discussed in Note 12 to these financial statements. The Company is recording estimated interest and penalties related to potential underpayment of income taxes as a component of tax expense in the Consolidated Statement of

F-8

Operations. While it is reasonably possible that the amount of reserves for uncertain tax positions may change in ~~New York state~~the next twelve months, the Company does not anticipate that total reserves for uncertain tax ~~law. The fiscal 2007 activity netted~~positions will significantly change due to ~~an additional $249,000~~the settlement of ~~state income tax expense.~~audits or the expiration of statutes of limitations in the next twelve months.

Equity Compensation

Asset Impairment

Carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment in accordance with Statement of Financial Accounting Standards No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets.” The Company’s impairment review involves the estimation of the fair value of goodwill and indefinite-lived intangible assets using a ~~discounted~~combination of a market approach and an income (discounted cash ~~flow~~flow) approach, at the reporting unit level, that requires significant management judgment with respect to revenue and expense growth rates, changes in working capital and the selection and use of an appropriate discount rate. The estimates of fair value of reporting units are based on the best information available as of the date of the assessment. The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge. Company management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as adverse business conditions, economic factors and technological change or competitive activities may signal that an asset has become impaired. The ~~Company’s~~Company has completed step one of its annual analysis and test for impairment of

~~S-8~~

goodwill and other intangible assets, and as a result, it was ~~conducted~~determined that certain goodwill and other intangible assets were impaired. As a result, a $28,183,000 estimated impairment charge was recorded as of ~~July 1, 2006.~~June 30, 2008. This amount may increase or decrease upon completion of step two of the impairment test. Also see Note 6. There were no impairment charges related to goodwill and other intangible assets recorded by the Company during fiscal 2007 or ~~2006, and there was a $186,000 impairment charge recorded in 2005.~~2006.

Carrying values for long-lived tangible assets and definite-lived intangible assets, excluding goodwill and indefinite-lived intangible assets, are reviewed for possible impairment as circumstances warrant in connection with Statement of Financial Accounting Standards No. 144 (SFAS No. 144), “Accounting for the Impairment or Disposal of Long-Lived Assets.” Impairment reviews are conducted at the judgment of Company management when it believes that a change in circumstances in the business or external factors warrants a review. Circumstances such as the discontinuation of a product or product line, a sudden or consistent decline in the forecast for a product, changes in technology or in the way an asset is being used, a history of negative operating cash flow, or an adverse change in legal factors or in the business climate, among others, may trigger an impairment review. The Company’s initial impairment review to determine if a potential impairment charge is required is based on an undiscounted cash flow analysis at the lowest level for which identifiable cash flows exist. The analysis requires judgment with respect to changes in technology, the continued success of product lines and future volume, revenue and expense growth rates, and discount rates. As a result of the fiscal year 2008 review of long lived assets and definite-lived intangible assets in connection with SFAS No. 144, it was determined that a certain trade name within the Lighting Segment was deemed fully impaired because it was no longer used in the Company’s marketing efforts. An impairment charge of $746,000 was recorded as of June 30, 2008. There were no impairment charges related to long-lived tangible assets or definite-lived intangible assets recorded by the Company during fiscal year 2007 ~~2006,~~ or ~~2005.~~2006.

F-9

Credit and Collections

The Company maintains allowances for doubtful accounts receivable for probable estimated losses resulting from either customer disputes or the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against income. The Company determines its allowance for doubtful accounts by first considering all known collectibility problems of customers’ accounts, and then applying certain percentages against the various aging categories of the remaining receivables. The resulting allowance for doubtful accounts receivable is an estimate based upon the Company’s knowledge of its business and customer base, and historical trends. The Company also establishes allowances, at the time revenue is recognized, for returns and allowances, discounts, pricing and other possible customer deductions. These allowances are based upon historical trends.

New Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN 48 provides guidance for the recognition, measurement, classification and disclosure of the financial statement effects of a position taken or expected to be taken in a tax return (“tax position”). The financial statement effects of a tax position must be recognized when there is a likelihood of more than 50 percent that based on the technical merits, the position will be sustained upon examination and resolution of the related appeals or litigation processes, if any. A tax position that meets the recognition threshold must be measured initially and subsequently as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority. In addition, FIN 48 specifies certain annual disclosures that are required to be made once the interpretation has taken effect. The Interpretation is effective for fiscal years beginning after December 15, 2006. The cumulative effect of FIN 48 adoption will be reported as an adjustment to the opening balance of retained earnings at July 1, 2007. The Company is currently evaluating the impact of adopting FIN 48, and estimates that a liability net of taxes in the range of $2.4 million to $3.1 million will be recorded as of July 1, 2007. The Company estimates adoption of FIN 48 will not result in a material impact on its consolidated results of operations, cash flows or financial position.

~~S-9~~

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements.” This Statement ~~defines~~provides a new definition of fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. The Statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, or the Company’s fiscal year 2009. Two FASB Staff Positions (FSP) were subsequently issued. In February 2007, FSP No. 157-2 delayed the effective date of this SFAS No. 157 for non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. This FSP is effective for fiscal years beginning after November 15, 2008, or the Company’s fiscal year 2010. FSP No. 157-1, also issued in February 2007, excluded FASB No. 13 “Accounting for Leases” and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under FASB No. 13. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value under FASB Statement No. 141, “Business Combinations” or FASB No. 141R, “Business Combinations.” This FSP is effective upon initial adoption of SFAS No. 157. The Company ~~will be~~is currently evaluating the disclosure impact of adopting SFAS No. ~~157, and cannot currently estimate the impact on its consolidated results of operations, cash flows or financial position.~~157.

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The effective date to initially recognize the funded status and to provide the required disclosures is for fiscal years ending after December 15, 2006, or the Company’s fiscal year 2007. SFAS No. 158 requires companies to measure plan assets and benefit obligations for fiscal years ending after December 15, 2008, or the Company’s fiscal year 2009. The Company has adopted the disclosure provisions of SFAS No. 158 and as such, did not have a significant impact on its consolidated results of operations, cash flows or financial position.

F-10

the pronouncement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This ~~statement~~Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, or in the Company’s case, July 1, 2008. The Company ~~is evaluating the impact of adopting~~has not made any fair value elections under SFAS No. 159 and ~~cannot currently estimate the~~does not expect any impact on its consolidated results of operations, cash flows or financial position.

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), “Business Combinations,” which replaces SFAS No. 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition related costs as incurred. SFAS No. 141R is effective for us beginning July 1, 2009 and will apply prospectively to business combinations completed on or after that date.

~~S-10~~F-11

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Management of LSI Industries Inc. is responsible for the preparation and accuracy of the financial statements and other information included in this report. LSI’s Management is also responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rules 13a-15(f). Under the supervision and with the participation of Management, including LSI’s principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting as of June 30, ~~2007,~~2008, based on the criteria set forth in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the reality that judgments in decision making can be faulty, the possibility of human error, and the circumvention or overriding of the controls and procedures.

In meeting its responsibility for the reliability of the financial statements, the Company depends upon its system of internal accounting controls. The system is designed to provide reasonable assurance that assets are safeguarded and that transactions are properly authorized and recorded. The system is supported by policies and guidelines, and by careful selection and training of financial management personnel. The Company also has a Disclosure Controls Committee, whose responsibility is to help ensure appropriate disclosures and presentation of the financial statements and notes thereto. Additionally, the Company has an Internal Audit Department to assist in monitoring compliance with financial policies and procedures.

The Board of Directors meets its responsibility for overview of the Company’s financial statements through its Audit Committee which is composed entirely of independent Directors who are not employees of the Company. The Audit Committee meets periodically with Management and Internal Audit to review and assess the activities of each in meeting their respective responsibilities. Deloitte & Touche LLP has full access to the Audit Committee to discuss the results of their audit work, the adequacy of internal accounting controls, and the quality of financial reporting.

Based on LSI’s evaluation, the Company’s principal executive officer and principal financial officer concluded that internal control over financial reporting was effective as of June 30, ~~2007.~~2008. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors. Additionally, our independent registered public accounting firm audited ~~management’s assessment~~ and independently assessed the effectiveness of the Company’s internal control over financial reporting. Deloitte & Touche LLP, an independent registered public accounting firm ~~as stated in their report which is presented in these financial statements~~ has issued an attestation report on ~~Management’s assessment~~the effectiveness of the Company’s internal control over financial ~~reporting.~~reporting, which is presented in the financial statements.


~~/s/ Robert J. Ready~~ Robert J. Ready President and Chief Executive Officer (Principal Executive Officer)

~~/s/ Ronald S. Stowell~~ Ronald S. Stowell Vice President, Chief Financial Officer, and Treasurer (Principal Financial Officer)

~~S-11~~F-12

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
LSI Industries Inc.
Cincinnati, Ohio

We have audited the accompanying consolidated balance sheets of LSI Industries Inc. and subsidiaries (the “Company”) as of June 30, ~~2007~~2008 and ~~2006,~~2007, and the related consolidated statements of ~~income,~~operations, shareholders’ equity, and cash flows for each of the three years ~~then ended.~~in the period ended June 30, 2008. Our audits also included the consolidated financial statement schedule ~~for the years ended June 30, 2007 and 2006~~ listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such ~~2007 and 2006~~ consolidated financial statements present fairly, in all material respects, the financial position of LSI Industries Inc. and subsidiaries as of June 30, ~~2007~~2008 and ~~2006,~~2007, and the results of their operations and their cash flows for each of the three years ~~then~~in the period ended June 30, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, ~~the 2007 and 2006~~such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 ~~on July 1, 2005~~to the consolidated financial statements, the Company adopted ~~Statement~~Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes – an Interpretation of Financial Accounting Standards Board Statement No. ~~123(R)~~109, ~~“Share-Based Payment,” using the modified prospective method of application.~~on July 1, 2007.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the ~~effectiveness of the~~ Company’s internal control over financial reporting as of June 30, ~~2007,~~2008, based on the criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September ~~10, 2007~~11, 2008 expressed an unqualified opinion on ~~management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of~~ the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

~~Deloitte & Touche LLP~~

Cincinnati, Ohio
September ~~10, 2007~~11, 2008

~~S-12~~F-13

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and ~~Stockholders~~Shareholders of
LSI Industries Inc.
Cincinnati, Ohio

We have audited ~~management’s assessment, included in~~ the ~~accompanying Management’s Report on Internal Control Over Financial Reporting, that LSI Industries Inc. (the “Company”) maintained effective~~ internal control over financial reporting of LSI Industries Inc. and subsidiaries (the “Company”) as of June 30, ~~2007,~~2008, based on criteria established inInternal ~~Control—~~Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial ~~reporting.~~reporting, included in the accompanying Management’s Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on ~~management’s assessment and an opinion on the effectiveness of~~ the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, ~~evaluating management’s assessment,~~assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our ~~opinions.~~opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of June 30, 2007, is fairly stated, in all material respects, based on the criteria established in~~Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion,~~ the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, ~~2007,~~2008, based on the criteria established inInternal ~~Control—~~Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

~~S-13~~

~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~

~~Board of Directors and~~
~~Shareholders of LSI Industries Inc.~~

We have audited the accompanying consolidated statements of income, shareholders’ equity, and cash flows of LSI Industries Inc. (an Ohio Corporation) and subsidiaries for the year ended June 30, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LSI Industries Inc. and subsidiaries as of June 30, 2005, and the results of LSI Industries Inc. and subsidiaries operations and their cash flows for the year ended June 30, 2005 in conformity with accounting principles generally accepted in the United States of America.

Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II as of and for the year ended June 30, 2005 is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

~~/s/ Grant Thornton LLP~~

~~Grant Thornton LLP~~

~~Cincinnati, Ohio~~
~~August 19, 2005~~

~~S-15~~F-15

LSI INDUSTRIES INC.

CONSOLIDATED ~~INCOME~~ STATEMENTS OF OPERATIONS

For the years ended June 30, 2008, 2007, ~~2006,~~ and ~~2005~~2006

(In thousands, except per share)


	2007			2006			2005			2008			2007			2006
Net sales	$	337,453		$	280,470		$	282,440		$	305,286		$	337,453		$	280,470

Cost of products and services sold		248,274			209,057			210,144			224,859			248,274			209,057


Gross profit		89,179			71,413			72,296			80,427			89,179			71,413

Selling and administrative expenses		56,629			49,898			49,084			60,642			57,219			49,898

Goodwill impairment		—			—			186
Loss contingency (see Note 14)											2,800			(590	)		—

Goodwill and intangible asset impairment											28,929			—			—


Operating income		32,550			21,515			23,026
Operating income (loss)											(11,944	)		32,550			21,515

Interest (income)		(139	)		(550	)		(64	)		(360	)		(139	)		(550	)

Interest expense		962			78			217			81			962			78


Income before income taxes		31,727			21,987			22,873
Income (loss) before income taxes											(11,665	)		31,727			21,987

Income tax expense		10,938			7,544			8,237			2,057			10,938			7,544


Net income	$	20,789		$	14,443		$	14,636
Net income (loss)										$	(13,722	)	$	20,789		$	14,443


Earnings per common share
Earnings (loss) per common share (see Note 4)

Basic	$	0.96		$	0.72		$	0.74		$	(0.63	)	$	0.96		$	0.72


Diluted	$	0.95		$	0.71		$	0.73		$	(0.63	)	$	0.95		$	0.71


Weighted average common shares outstanding

Basic											21,764			21,676			20,194


Diluted											21,764			21,924			20,429

LSI INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS

June 30, ~~2007~~2008 and ~~2006~~2007

(In thousands, except shares)


	2007			2006			2008			2007
ASSETS

Current Assets

Cash and cash equivalents	$	2,731		$	3,322		$	6,992		$	2,731

Short-term investments		8,000			—			—			8,000

Accounts receivable, less allowance for doubtful accounts of $822 and $656, respectively		55,750			51,557
Accounts receivable, less allowance for doubtful accounts of $585 and $822, respectively								38,857			55,750

Inventories		49,731			45,345			50,509			49,731

Refundable income taxes		364			139			1,834			364

Other current assets		6,782			6,725			6,111			6,782


Total current assets		123,358			107,088			104,303			123,358

Property, Plant and Equipment, at cost
Land		6,180			6,695			6,190			6,180
Buildings		32,920			32,630			33,344			32,920
Machinery and equipment		59,515			62,930			62,473			59,515
Construction in progress		2,232			229			125			2,232

		100,847			102,484			102,132			100,847
Less accumulated depreciation		(53,289	)		(50,121	)		(57,378	)		(53,289	)

Net property, plant and equipment		47,558			52,363			44,754			47,558

Goodwill, net		42,200			59,802			15,051			42,200

Other Intangible Assets, net		19,166			3,751			15,060			19,166

Other Assets, net		1,330			1,397			4,372			1,330


Total assets	$	233,612		$	224,401		$	183,540		$	233,612

LSI INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the years ended June 30, 2008, 2007, ~~2006,~~ and ~~2005~~
2006

(In thousands, except per share)


	Common Shares												Common Shares
	Number of						Retained
	Shares			Amount			Earnings			Total
Balance at June 30, 2004		19,734		$	53,059		$	75,804		$	128,863

Net income		—			—			14,636			14,636
Stock compensation awards		4			55			—			55
Sale of treasury shares, net		19			208			—			208
Deferred stock compensation		—			(71	)		—			(71	)
Stock options exercised, net		113			1,154			—			1,154
Dividends — $0.372 per share		—			—			(6,805	)		(6,805	)
													Number of						Retained
													Shares			Amount			Earnings			Total
Balance at June 30, 2005		19,870			54,405			83,635			138,040			19,870		$	54,405		$	83,635		$	138,040
Net income		—			—			14,443			14,443			—			—			14,443			14,443
Stock compensation awards		2			41			—			41			2			41			—			41
Purchase of treasury shares, net		(2	)		(111	)		—			(111	)		(2	)		(111	)		—			(111	)
Deferred stock compensation		—			903			—			903			—			903			—			903
Stock option expense		—			428			—			428			—			428			—			428
Stock options exercised, net		173			2,039			—			2,039			173			2,039			—			2,039
Common shares issued for acquisition		1,419			20,382			—			20,382			1,419			20,382			—			20,382
Dividends — $0.56 per share		—			—			(11,180	)		(11,180	)		—			—			(11,180	)		(11,180	)


Balance at June 30, 2006		21,462			78,087			86,898			164,985			21,462			78,087			86,898			164,985
Net income		—			—			20,789			20,789			—			—			20,789			20,789
Stock compensation awards		3			44			—			44			3			44			—			44
Purchase of treasury shares, net		(16	)		(292	)		—			(292	)		(16	)		(292	)		—			(292	)
Deferred stock compensation		—			229			—			229			—			229			—			229
Stock option expense		—			721			—			721			—			721			—			721
Stock options exercised, net		44			537			—			537			44			537			—			537
Dividends — $0.51 per share		—			—			(10,952	)		(10,952	)		—			—			(10,952	)		(10,952	)


Balance at June 30, 2007		21,493		$	79,326		$	96,735		$	176,061			21,493			79,326			96,735			176,061
Net (loss)														—			—			(13,722	)		(13,722	)
Adoption of FIN 48 — reserve for uncertain tax positions														—			—			(2,582	)		(2,582	)
Stock compensation awards														2			44			—			44
Purchase of treasury shares, net														(7	)		(177	)		—			(177	)
Deferred stock compensation														—			150			—			150
Stock option expense														—			1,246			—			1,246
Stock options exercised, net														97			1,076			—			1,076
Dividends — $0.63 per share														—			—			(13,580	)		(13,580	)


Balance at June 30, 2008														21,585		$	81,665		$	66,851		$	148,516

LSI INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended June 30, 2008, 2007, ~~2006,~~ and ~~2005~~
2006

(In thousands)


	2007			2006			2005			2008			2007			2006
Cash Flows From Operating Activities

Net income	$	20,789		$	14,443		$	14,636
Net income (loss)										$	(13,722	)	$	20,789		$	14,443

Non-cash items included in net income
Non-cash items included in net income (loss)
Depreciation and amortization		9,002			6,773			6,974			8,789			9,002			6,773
Goodwill and intangible asset impairment											28,929			—			—
Deferred income taxes		545			569			(178	)		(6,204	)		545			569
Deferred compensation plan		229			903			(71	)		150			229			903
Stock option expense		721			428			—			1,246			721			428
Issuance of common shares as compensation		44			41			55			44			44			41
(Gain) loss on disposition of fixed assets		245			(47	)		54			59			245			(47	)
Goodwill impairment		—			—			186
Allowance for doubtful accounts		166			(460	)		(148	)		(237	)		166			(460	)
Inventory obsolescence reserve		22			21			132			(32	)		22			21

Change (excluding effects of acquisitions) in
Accounts receivable, gross		(4,359	)		867			(4,033	)		17,130			(4,359	)		867
Inventories, gross		(4,408	)		(1,976	)		8,088			(746	)		(4,408	)		(1,976	)
Refundable income taxes		(225	)		(139	)		516			(1,470	)		(225	)		(139	)
Accounts payable		(3,140	)		4,901			(2,482	)		(4,382	)		(3,140	)		4,901
Accrued expenses and other		17,333			(4,697	)		3,753			(2,358	)		3,281			(8,865	)
Reserve for uncertain tax positions charged against retained earnings											(2,582	)		—			—
Customer prepayments											(16,670	)		14,052			4,168


Net cash flows from operating activities		36,964			21,627			27,482			12,660			36,964			21,627


Cash Flows From Investing Activities

Purchase of property, plant, and equipment		(5,960	)		(3,754	)		(3,630	)
Purchases of property, plant, and equipment											(3,723	)		(5,960	)		(3,754	)
Proceeds from sale of fixed assets		3,846			116			150			5			3,846			116
Purchase of short-term investment		(8,000	)		(9,000	)		—
Proceeds from sale of short-term investment		—			9,000			—
Purchases of short-term investments											—			(8,000	)		(9,000	)
Proceeds from sale of short-term investments											8,000			—			9,000
Acquisition of a business, net of cash received		(141	)		(22,043	)		—			—			(141	)		(22,043	)


Net cash flows (used in) investing activities		(10,255	)		(25,681	)		(3,480	)
Net cash flows from (used in) investing activities											4,282			(10,255	)		(25,681	)


Cash Flows From Financing Activities

Proceeds from issuance of long-term debt		9,881			16,528			3,460			958			9,881			16,528
Payment of long-term debt		(26,474	)		(7,110	)		(15,014	)		(958	)		(26,474	)		(7,110	)
Cash dividends paid		(10,952	)		(11,180	)		(6,805	)		(13,580	)		(10,952	)		(11,180	)
Exercise of stock options		537			2,039			1,154			1,076			537			2,039
Sale of treasury shares		15			262			389
Issuance of treasury shares											85			15			262
Purchase of treasury shares		(307	)		(373	)		(181	)		(262	)		(307	)		(373	)


Net cash flows from (used in) financing activities		(27,300	)		166			(16,997	)		(12,681	)		(27,300	)		166


Increase (decrease) in cash and cash equivalents		(591	)		(3,888	)		7,005			4,261			(591	)		(3,888	)

Cash and cash equivalents at beginning of year		3,322			7,210			205			2,731			3,322			7,210


Cash and cash equivalents at end of year	$	2,731		$	3,322		$	7,210		$	6,992		$	2,731		$	3,322

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation:

The consolidated financial statements include the accounts of LSI Industries Inc. (an Ohio corporation) and its subsidiaries, all of which are wholly owned. All intercompany transactions and balances have been eliminated.

Revenue Recognition:

The Company recognizes revenue in accordance with Securities Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition.” Revenue is recognized when title to goods and risk of loss have passed to the customer, there is persuasive evidence of a purchase arrangement, delivery has occurred or services have been rendered, and collectibility is reasonably assured. Revenue is typically recognized at time of shipment. Sales are recorded net of estimated returns, rebates and discounts. Amounts received from customers prior to the recognition of revenue are accounted for as customer pre-payments and are included in accrued expenses. Revenue is recognized in accordance with ~~EITF 00-21.~~Emerging Issues Task Force (EITF) 00-21, “Revenue Arrangements with Multiple Deliverables,” or AICPA Statement of Position 97-2 (SOP 97-2), “Software Revenue Recognition,” as appropriate.

Product revenue is recognized on product-only orders at the time of shipment. Product revenue related to orders where the customer requires the Company to install the product is generally recognized when the product is installed. In some situations, product revenue is recognized when the product is shipped, before it is installed, because by agreement the customer has taken title to and risk of ownership for the product before installation has been completed. Other than normal product warranties or the possibility of installation or post-shipment service and maintenance of certain solid state LED video screens or billboards, the Company has no post-shipment responsibilities.

Installation revenue is recognized when the products have been fully installed. The Company is not always responsible for installation of products it sells and has no post-installation responsibilities, other than normal warranties.

Service revenue from integrated design, project and construction management, and site permitting is recognized at the completion of the contract with the customer. With larger customer contracts involving multiple sites, the customer may require progress billings for completion of identifiable, time-phased elements of the work, in which case revenue is recognized at the time of the progress billing which coincides with the completion of the earnings process. Post-shipment service and maintenance revenue, if applicable, related to solid state LED video screens or billboards is recognized according to terms defined in each individual service agreement and in accordance with generally accepted accounting principles.

Shipping and handling revenue coincides with the recognition of revenue from sale of the product.

F-21


Buildings		31 -— 40 years
Machinery and equipment		3 -— 10 years
Computer software		3 -— 8 years

Costs related to the purchase, internal development, and implementation of the Company’s fully integrated enterprise resource planning/business operating software system are either capitalized or expensed in accordance with the American Institute of Certified Public Accountants’ Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” The current business operating software was first implemented in January 2000. All costs capitalized for the business operating software are being depreciated over an eight year life from the date placed in service. Other purchased computer software is being depreciated over periods ranging from three to five years. Leasehold improvements are depreciated over the shorter of fifteen years or the remaining term of the lease. The Company recorded $6,463,000, $6,674,000, ~~$6,294,000,~~ and ~~$6,494,000~~$6,294,000 of depreciation expense in the years ended June 30, 2008, 2007 ~~2006~~ and ~~2005,~~2006, respectively.

Intangible Assets:

Intangible assets consisting of customer relationships, trade names and trademarks, patents, technology and software, and non-compete agreements are recorded on the Company’s balance sheet and the definite-lived intangible assets are being amortized to expense on a straight line basis over periods ranging between two and forty years. The excess of cost over fair value of assets acquired (“goodwill”) is not amortized but is subject to review for impairment. See additional information about goodwill and intangibles in Note 6. The Company periodically evaluates intangible assets, goodwill and other long-lived assets for permanent impairment.

Fair Value of Financial Instruments:

The Company customarily has financial instruments consisting primarily of cash and cash equivalents and short-term investments, revolving lines of credit, and long-term debt. The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates. The Company has no financial instruments with off-balance sheet risk.

Product Warranties:

The Company offers a limited warranty that its products are free of defects in workmanship and materials. The specific terms and conditions vary somewhat by product line, but generally cover defects returned within one to five years from date of shipment. The Company records warranty liabilities to cover the estimated future costs for repair or replacement of defective returned
products as well as products that need to be repaired or replaced in the field after installation. The Company calculates its liability for warranty claims by applying estimates to cover unknown claims, as well as estimating the total amount to be incurred for known warranty issues. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

Changes in the Company’s warranty liabilities, which are included in accrued expenses in the accompanying consolidated balance sheets, during the years ended June 30 were as follows:

(In thousands) 2007 2006
Balance at beginning of the year $ 378 $ 301
Additions charged to expense 1,172 584
Deductions for repairs and replacements (1,236 ) (507 )

Balance at end of the year $ 314 $ 378

~~S-23~~F-23


(In thousands)	2008			2007
Balance at beginning of the year	$	314		$	378
Additions charged to expense		1,141			1,172
Deductions for repairs and replacements		(1,198	)		(1,236	)

Balance at end of the year	$	257		$	314

Contingencies:

The Company is party to various negotiations, customer bankruptcies, and legal proceedings arising in the normal course of business. The Company provides reserves for these matters when a loss is probable and reasonably estimable. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity. See also Note ~~13.~~14.

Employee Benefit Plans:

The Company has a defined contribution retirement plan and a discretionary profit sharing plan covering substantially all of its non-union employees in the United States, and a non-qualified deferred compensation plan covering certain employees. The costs of employee benefit plans are charged to expense and funded annually. Total costs were $2,197,000 in 2008, $2,064,000 in 2007, and $2,127,000 in ~~2006, and $1,864,000 in 2005.~~2006. Additionally, non-cash expenses of $573,000 ~~and $775,000~~ were recorded in fiscal 2006 ~~and fiscal 2005, respectively,~~ in accordance with variable accounting procedures related to the deferred compensation plan.

Research and Development Costs:

Research and development expenses are costs directly attributable to new product development and consist of salaries, payroll taxes, employee benefits, materials, supplies, depreciation and other administrative costs. All costs are expensed as incurred and are classified as operating expenses. Research and development costs incurred total $4,111,000 for fiscal 2008, $2,592,000 for fiscal 2007 and $1,304,000 for fiscal ~~2006 and $1,183,000 for fiscal 2005.~~2006.

Advertising Expense:

The Company recorded $530,000, $556,000 ~~$509,000,~~ and ~~$838,000~~$509,000 of advertising expense in 2008, 2007 ~~2006~~ and ~~2005,~~2006, respectively. Advertising costs are expensed the first time the advertising occurs. Expense related to printed product or capabilities literature, brochures, etc. is recorded on a ratable basis over the useful life of that printed media.

Income Taxes:

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS No. 109) and Financial Accounting Standards Board Interpretation No. 48 (FIN 48); accordingly, deferred income ~~taxes~~tax assets and liabilities are ~~provided on items that~~determined based upon the difference between the financial statement basis and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are ~~reported as either income or expense in different time periods for financial reporting purposes than they are for income tax purposes.~~expected to reverse. Deferred income tax assets and liabilities are reported on the Company’s balance sheet. See also Note ~~11.~~12.

Earnings Per Common Share:

The computation of basic earnings per common share is based on the weighted average common shares outstanding for the period net of treasury shares held in the Company’s non-qualified deferred compensation plan. The computation of diluted earnings per share is based on the weighted average common shares outstanding for the period and includes common share equivalents. Common share

F-24

Stock Options:

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment,” effective July 1, 2005. SFAS No. 123(R) requires public entities to measure the cost of employee services received in exchange for an award of equity instruments and recognize this cost over the period during which an employee is required to provide the services. The Company has adopted SFAS No. 123(R) using the “modified prospective application” as defined in the Statement, and therefore financial statements from periods ended prior to July 1, 2005 have not been retroactively adjusted. As a result of adopting SFAS No. 123(R) on July 1, 2005, the Company’s income before income taxes and net income for fiscal 2006 are lower by $428,000 and $281,000, respectively, than if it had continued to account for share-based compensation under Accounting Principles Board Opinion No. 25 (APB No. 25), “Accounting for Stock Issued to Employees.”

The Company recorded $228,500 in fiscal 2008 as a reduction of federal income taxes payable, $221,300 as an increase in common stock, and $7,200 as a reduction of income tax expense to reflect the tax credits it will receive as a result of disqualifying dispositions of shares from stock option exercises. This had the effect of reducing cash flow from operating activities and increasing cash flow from financing activities by $221,300. The Company recorded $115,200 in fiscal 2007 as a reduction of federal income taxes payable, $104,950 as an increase in common stock, and $10,250 as a reduction of income tax expense to reflect the tax credits it will receive as a result of disqualifying dispositions of shares from stock option exercises. This had the effect of reducing cash flow from operating activities and increasing cash flow from financing activities by $104,950. The Company recorded $433,400 in fiscal 2006 as a reduction of federal income taxes payable, $425,300 as an increase in common stock, and $8,100 as a reduction of income tax expense to reflect the tax credits it will receive as a result of disqualifying dispositions of shares from stock option exercises. This had the effect of reducing cash flow from operating activities and increasing cash flow from financing activities by $425,300. See further discussion in Note 9.10.

Prior to July 1, 2005, the Company applied the provisions of APB No. 25. Accordingly, no compensation expense was reflected in the financial statements as the exercise price of options granted to employees and non-employee directors equaled the fair market value of the Company’s common shares on the date of grant. The Company had adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock Based Compensation.”

~~If the Company had adopted the expense recognition provisions of SFAS No. 123 prior to July 1, 2005, net income and earnings per share for fiscal year 2005 would have been as follows:~~

(In thousands except earnings per share) 2005
Net income as reported $ 14,636
Add: Stock-based compensation expense included in reported net income, net of related tax effects 35
Deduct: Total stock-based compensation determined under the fair value based method for all awards, net of tax effects (452 )

Pro forma net income $ 14,219

Earnings per common share
Basic
As reported $ 0.74
Pro forma $ 0.72
Diluted
As reported $ 0.73
Pro forma $ 0.71

~~S-25~~

~~Recent~~New Accounting Pronouncements:

In July 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN 48 provides guidance for the recognition, measurement, classification and disclosure of the financial statement effects of a position taken or expected to be taken in a tax return (“tax position”). The financial statement effects of a tax position must be recognized when there is a likelihood of more than 50 percent that based on the technical merits, the position will be sustained upon examination and resolution of the related appeals or litigation processes, if any. A tax position that meets the recognition threshold must be measured initially and subsequently as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority. In addition, FIN 48 specifies certain annual disclosures that are required to be made once the interpretation has taken effect. The Interpretation is effective for fiscal years beginning after December 15, 2006. The ~~cumulative effect~~Company adopted the provisions of FIN 48 ~~adoption will be reported as an adjustment to the opening balance of retained earnings at~~on July 1, 2007. ~~The~~As a result of adoption, the Company ~~is currently evaluating~~recognized a $2,582,000 increase to reserves for uncertain tax positions and recorded a charge of $2,582,000 to the ~~impact of adopting FIN 48, and estimates that a liability net of taxes in the range of $2.4 million to $3.1 million will be recorded as of~~ July 1, ~~2007. The Company estimates adoption of FIN 48 will not result in a material impact on its consolidated results of operations, cash flows or financial position.~~2007 retained earnings balance. For additional information, see Note 8 to the Consolidated Financial Statements.

F-25

Statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, or the Company’s fiscal year 2009. Two FASB Staff Positions (FSP) were subsequently issued. In February 2007, FSP No. 157-2 delayed the effective date of this SFAS No. 157 for non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. This FSP is effective for fiscal years beginning after November 15, 2008, or the Company’s fiscal year 2010. FSP No. 157-1, also issued in February 2007, excluded FASB No. 13 “Accounting for Leases” and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under FASB No. 13. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value under FASB Statement No. 141, “Business Combinations” or FASB No. 141R, “Business Combinations.” This FSP is effective upon initial adoption of SFAS No. 157. The Company ~~will be~~is currently evaluating the disclosure impact of adopting SFAS No. ~~157, and cannot currently estimate the impact on its consolidated results of operations, cash flows or financial position.~~157.

In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This ~~statement~~Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, SFAS No. 159 specifies that all subsequent changes in fair value for that instrument shall be reported in earnings. The objective of the pronouncement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This ~~statement~~Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, or in the Company’s case, July 1, 2008. The Company ~~is evaluating the impact of adopting~~has not made any fair value elections under SFAS No. 159 and ~~cannot~~

~~S-26~~

Comprehensive Income:

The Company does not have any comprehensive income items, other than net income.

~~Reclassification:~~Reclassifications:

Certain reclassifications may have been made to prior year amounts in order to be consistent with the presentation for the current year. The Company has revised its business segment reporting in these financial statements to now report two business segments (Lighting and Graphics), rather than three segments as had previously been reported in the prior two fiscal years. See further discussion in Note 2.

Additionally in Note 2, the disclosure for the fiscal years ending June 30, 2007 and 2006 was revised to eliminate intangible assets and goodwill from the disclosure on long-lived assets in order to be consistent with current year ~~including~~disclosure. A new line item titled “loss contingency” was added to the ~~presentation~~statement of ~~changes~~operations to report a settlement on a menu board patent litigation, thereby requiring a break out of a related item in ~~non-cash items, specifically the allowance for doubtful accounts~~fiscal 2007 and ~~the inventory obsolescence reserve, within the consolidated statements of cash flows.~~fiscal 2005.

Use of Estimates:

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

NOTE 2 — BUSINESS SEGMENT INFORMATION

~~The Company operates~~Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for reporting information regarding operating segments in ~~the following three business segments: the Lighting Segment, the Graphics Segment,~~annual financial statements and ~~the Technology Segment. The Company~~requires selected information of those segments to be presented in interim financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is ~~organized such that~~available for evaluation by the chief operating decision maker (the Company’s President and Chief Executive Officer) ~~receives financial~~in making decisions on how to allocate resources and assess performance. While the Company has thirteen operating ~~information relative to these three~~segments, it has only two reportable operating business segments: Lighting and Graphics. These segments ~~and organizationally, has~~are strategic business units organized around product categories that follow management’s internal organization structure with a President of LSI Lighting SolutionsPlus, and a President of LSI Graphics SolutionsPlus,reporting directly to the Company’s President and aChief Executive Officer.

The Lighting Segment includes outdoor, indoor, and landscape lighting that has been fabricated and assembled for the commercial, industrial and multi-site retail lighting markets, including the petroleum/convenience store market. The Lighting Segment includes the operations of LSI Ohio Operations, LSI Metal Fabrication, LSI MidWest Lighting, LSI Lightron and LSI Greenlee Lighting. These operations have been integrated and have similar economic characteristics. LSI Marcole, which produces wire harnesses used in the Company’s lighting products and also manufactures electric wiring used by appliance manufacturers in commercial and industrial markets, has been aggregated into the Lighting Segment based on management’s plans to continue to integrate its Lighting operations by increasing its intercompany volume.

The Graphics Segment designs, manufactures and installs exterior and interior visual image elements related to image programs, menu board systems, solid state LED digital advertising billboards, and solid state LED digital sports and entertainment video screens. These products are used in visual image programs in several markets, including the petroleum/convenience store market and multi-site retail operations. The Graphics Segment includes the operations of Grady McCauley, LSI Retail Graphics and LSI Integrated Graphic Systems, which have been aggregated as such facilities

F-27

manufacture two-dimensional graphics with the use of screen and digital printing, fabricate three-dimensional structural graphics sold in the multi-site retail and petroleum/convenience store markets, and exhibit each of the similar economic characteristics and meet the other requirements outlined in paragraph 17 of SFAS No. 131. The Graphics Segment also includes LSI Images, which manufactures three-dimensional menu board systems, LSI Adapt, which provides customers with surveying, permitting, engineering and installation services related to products of the Graphics Segment, the solid-state LED billboards and sports video boards, and the Smartvision video screens for the entertainment market.

In its evaluation of business segment reporting, the Company determined that the total of external revenues reported by the operating segments in the Lighting Segment (LSI Ohio Operations, LSI Metal Fabrication, LSI MidWest Lighting, LSI Lightron, Greenlee Lighting) and the operating segments in the Graphics Segment (Grady McCauley, LSI Retail Graphics and LSI Integrated Graphic Systems) comprised more than 75% of total consolidated revenue.

Effective with the first quarter of fiscal 2008, the Company has realigned its business segment reporting structure to reflect changes in its manufacturing operations and changes in its internal management reporting to the President and CEO, and to appropriately report operating results to shareholders of the Company. This change resulted in the former Technology Segment, which was comprised of the LSI Saco Technologies operations, being collapsed into the Lighting and Graphics Segments. LSI Saco Technologies will serve as the Company’s R&D center with its primary mission to continue to develop solid-state LED technology to be employed in both the Lighting and Graphics Segments, and will also be responsible for Smartvision^® video screens for the entertainment market. The marketing and sales of solid-state LED billboards and sports video boards has been transferred from LSI Saco Technologies and will be overseen by the President of LSI ~~Technology~~Graphics SolutionsPlus~~reporting directly~~. Segment information from earlier periods contained herein has been recast to ~~him.~~ reflect the change in business segment composition.

The ~~Company’s most significant market is the petroleum / convenience store market with approximately 26%, 25%,~~Company recorded an estimated impairment of goodwill and ~~25% of total net sales concentrated in this market~~certain intangible assets in fiscal ~~2007, 2006,~~2008 in the amount of $28,929,000. These non-cash charges are included in the Graphics Segment in the amount of $27,832,000 and ~~2005, respectively.~~in the Lighting Segment in the amount of $1,097,000. See further discussion in Note 6. The ~~following~~Company also recorded an expense of $2,800,000 in fiscal 2008 for a loss contingency in the Graphics Segment related to a menu board patent litigation. See Note 14.

Summarized financial information for the Company’s reportable business segments is provided for the following periods:


(In thousands)	2007		2006			2005		2008			2007		2006
Net sales:
Lighting Segment	$	196,533	$	195,805		$	177,021	$	190,590		$	199,427	$	195,810
Graphics Segment		123,788		83,418			105,419		114,696			138,026		84,660
Technology Segment		17,132		1,247			—

	$	337,453	$	280,470		$	282,440	$	305,286		$	337,453	$	280,470


Operating income:
Operating income (loss):
Lighting Segment	$	13,453	$	13,641		$	9,088	$	9,593		$	13,948	$	13,637
Graphics Segment		17,434		7,879			13,938		(21,537	)		18,602		7,878
Technology Segment		1,663		(5	)		—

	$	32,550	$	21,515		$	23,026	$	(11,944	)	$	32,550	$	21,515


Identifiable assets:
Capital expenditures:
Lighting Segment	$	100,811	$	103,852		$	102,831	$	2,360		$	4,241	$	2,262
Graphics Segment		67,427		61,767			61,883		1,363			1,719		1,492
Technology Segment		41,535		54,544			—

		209,773		220,163			164,714
Corporate		23,839		4,238			7,923

	$	233,612	$	224,401		$	172,637	$	3,723		$	5,960	$	3,754

NOTE 4 — EARNINGS PER COMMON SHARE

The following table presents the amounts used to compute earnings per common share and the effect of dilutive potential common shares on net income and weighted average shares outstanding:


(In thousands, except per share)	2007		2006		2005			2008				2007			2006
BASIC EARNINGS PER SHARE

Net income	$	20,789	$	14,443	$	14,636
Net income (loss)								$	(13,722	)		$	20,789		$	14,443


Weighted average shares outstanding during the period, net of treasury shares ~~(A)~~(a)		21,676		20,194		19,782	21,554				21,476			19,998
Weighted average shares outstanding in the Deferred Compensation Plan during the period									210				200			196

Weighted average shares outstanding									21,764				21,676			20,194


Basic earnings per share	$	0.96	$	0.72	$	0.74
Basic earnings (loss) per share								$	(0.63	)		$	0.96		$	0.72


DILUTED EARNINGS PER SHARE

Net income	$	20,789	$	14,443	$	14,636
Net income (loss)								$	(13,722	)		$	20,789		$	14,443


Weighted average shares outstanding during the period, net of treasury shares		21,676		20,194		19,782
Weighted average shares outstanding

Effect of dilutive securities (B):
Basic									21,764				21,676			20,194

Effect of dilutive securities (b):
Impact of common shares to be issued under stock option plans, and contingently issuable shares, if any		248		235		305			—				248			235


Weighted average shares outstanding (C)		21,924		20,429		20,087
Weighted average shares outstanding (c)									21,764				21,924			20,429


Diluted earnings (loss) per share	$	0.95	$	0.71	$	0.73		$	(0.63	)		$	0.95		$	0.71

In accordance with Statement of Financial Accounting Standard No. 142 (SFAS No. 142) “Goodwill and Other Intangible Assets,” the Company is required to perform an annual impairment test of its goodwill and indefinite-lived intangible assets. The Company ~~completed~~performs this test as of July 1^st of each fiscal year and on an interim basis when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company uses a combination of the market approach and the income (discounted cash flow) approach in determining the fair value of its reporting units. Under SFAS No. 142, the goodwill impairment test is a two-step process. Under the first step, the fair value of the Company’s reporting unit is compared to its respective carrying value. An indication that goodwill is impaired occurs when the fair value of a reporting unit is less than the carrying value. When there is an indication that goodwill is impaired, the Company is required to perform a second step. In step two, the actual impairment of goodwill is calculated by comparing the implied fair value of the goodwill with the carrying value of the goodwill.

and other intangible assets was $28,929,000. The majority of impairment charges occurred within the Graphics Segment and totaled $27,832,000. The remaining impairment charge of $1,097,000 occurred within the Lighting Segment. The majority of the impairment charge in the Lighting Segment occurred as a result of the fiscal 2008 review of long-lived assets in connection with Statement of Financial Accounting Standard (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets.” It was determined that a certain trade name was fully impaired because it was no longer used in the Company’s marketing efforts. An impairment charge of ~~goodwill.~~$746,000 was recorded as of June 30, 2008 related to this trade name. The remaining impairment charge of $28,183,000 was primarily comprised of goodwill and was a direct result of the SFAS No. 142 testing. This impairment charge was due primarily to the combination of a decline in the market capitalization of the Company at June 30, 2008 and the decline in the estimated forecasted discounted cash flows expected by the Company. This impairment charge was recorded in fourth quarter of fiscal 2008 rather than in the first quarter of fiscal 2009 due to the decline in the company’s stock price as of June 30, 2008. Because step two of the goodwill impairment testing is not complete, an estimate of the impairment charge was recorded as of June 30, 2008. It is anticipated that the impairment testing will be complete by the first quarter of fiscal 2009 at which time any adjustments to the estimate will be recorded. A similar analysis was performed in fiscal ~~2006~~2008 and ~~2005~~2007 as of July 1, ~~2005~~2007 and ~~2004, respectively. As a result of the fiscal~~ 2006, ~~analysis, it was determined~~respectively, and there was no ~~impairment. As a result of the fiscal 2005 analysis, there was full~~ impairment of ~~the recorded net goodwill of one reporting unit in the Lighting Segment. The impairment of $186,000, a non-cash charge, was recorded as an operating expense in the first quarter of fiscal 2005.~~

The Company acquired substantially all the net assets of SACO Technologies, Inc. on June 26, 2006 (see Note 15). The acquisition was accounted for as a purchase, effective on the date of acquisition. As of June 30, 2006, the total purchase exceeded the estimated fair value of net assets by approximately $42.8 million. A valuation of the Company’s goodwill and intangible assets along with the purchase price allocation was completed in fiscal year 2007, thereby determining a value of $25,083,000 for goodwill and $17,743,000 for identified intangible assets. Identified intangible assets related to the LSI Saco Technologies acquisition are being amortized effective July 1, 2006 over appropriate asset lives. Goodwill and certain intangible assets such as the Saco trade name, non-compete agreements and customer relationships are included in the assets of the Technology Segment. Intangible assets such as the Smartvision^® ~~trade name, the LED technology, firmware and software are included as corporate assets.~~Goodwill.

The following table presents information about the Company’s goodwill and other intangible assets on the dates or for the periods indicated.


	As of June 30, 2007						As of June 30, 2006						As of June 30, 2008						As of June 30, 2007
	Carrying		Accumulated				Carrying		Accumulated				Carrying		Accumulated				Carrying		Accumulated
(In thousands)	Amount		Amortization		Net		Amount		Amortization		Net		Amount		Amortization		Net		Amount		Amortization		Net
Goodwill	$	44,585	$	2,385	$	42,200	$	62,187	$	2,385	$	59,802	$	15,427	$	376	$	15,051	$	44,585	$	2,385	$	42,200


Other Intangible Assets	$	24,173	$	5,007	$	19,166	$	6,430	$	2,679	$	3,751	$	22,219	$	7,159	$	15,060	$	24,173	$	5,007	$	19,166

LIBOR rate as periodically determined, an increment over the Federal Funds Rate as periodically determined, or at the bank’s base lending rate, at the Company’s option. The increment over the LIBOR borrowing rate, as periodically determined, fluctuates between 50 and 75 basis points depending upon the ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (EBITDA). The increment over the Federal Funds borrowing rate, as periodically determined, fluctuates between 150 and 200 basis points, and the commitment fee on the unused balance of the $30 million committed portion of the line of credit fluctuates between 15 and 25 basis points based upon the same leverage ratio. Under terms of these agreements, the Company has agreed to a negative pledge of assets, to maintain minimum levels of profitability and net worth, and is subject to certain maximum levels of leverage. The Company is in compliance with all of its loan covenants as of June 30, ~~2007.~~2008.

The Company also established a $7 million line of credit for its Canadian subsidiary. The line of credit expires in the third quarter of fiscal ~~2008.~~2009. Interest on the Canadian subsidiary’s line of credit is charged based upon an increment over the LIBOR rate or based upon an increment over the United States base rates if funds borrowed are denominated in U.S. dollars or an increment over the Canadian prime rate if funds borrowed are denominated in Canadian dollars. There have been noonly minimal borrowings against this line of ~~credit.~~credit during the year ended June 30, 2008.

NOTE 8 — RESERVE FOR UNCERTAIN TAX LIABILITIES

The Company ~~had two equipment loans~~adopted the provisions of FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” on July 1, 2007. As a result of adoption, the Company recognized $2,582,000 in reserves for uncertain tax positions and recorded a charge of $2,582,000 to the July 1, 2007 retained earnings balance. At June 30, 2008, tax and interest, net of potential federal tax benefits, were $2,098,000 and $534,000, respectively, of the total reserves of $3,225,000. Additionally,

F-33

penalties were $593,000 of the reserve at June 30, ~~2006 totaling $65,000~~2008. Of the $3,225,000 reserve for uncertain tax positions, $2,632,000 would have an unfavorable impact on the effective tax rate if recognized.

The Company recognized $385,000 tax expense in fiscal 2008 related to the increase in reserves for uncertain tax positions. The Company is recording estimated interest and penalties related to potential underpayment of income taxes as a ~~result~~component of ~~the acquisition of Saco Technologies. These loans were paid off~~tax expense in the ~~first quarter~~Consolidated Statement of Operations. While it is reasonably possible that the amount of reserves for uncertain tax positions may change in the next twelve months, the Company does not anticipate that total reserves for uncertain tax positions will significantly change due to the settlement of audits or the expiration of statutes of limitations in the next twelve months.

The fiscal ~~2007.~~2008 activity in the Liability for Uncertain Tax Positions, which is included in Other Long-Term Liabilities, was as follows:

(In thousands) 2006
Long-term debt:

Revolving Line of Credit (3 year committed line) $ 16,528

Equipment loans 65

Subtotal 16,593

Less current maturities of long-term debt (22 )

Long-term debt $ 16,571


(in thousands)
Unrecognized tax reserve – July 1, 2007 Adoption	$	2,449
Increases – tax positions in prior period		349
Decreases – tax positions in prior period		—
Increases – tax positions in current period		436
Decreases – tax positions in current period		—
Settlements and payments		(179	)
Lapse of statute of limitations		(15	)

Unrecognized tax reserve – June 30, 2008	$	3,040

The Company files a consolidated federal income tax return in the United States, and files various combined and separate tax returns in several foreign, state, and local jurisdictions. With limited exceptions, the Company is no longer subject to U.S. Federal, state and local tax examinations by tax authorities for fiscal years ending prior to June 30, 2004. The Company is currently under audit by the Internal Revenue Service on its fiscal year 2006 Federal Income Tax Return.

NOTE 89 — CASH DIVIDENDS

The Company paid cash dividends of $13,580,000, $10,952,000, ~~$11,180,000~~ and ~~$6,805,000~~$11,180,000 in fiscal years 2008, 2007, ~~2006,~~ and ~~2005,~~2006, respectively. In August ~~2007,~~2008, the Company’s Board of Directors declared a ~~$0.13~~$0.15 per share regular quarterly cash dividend (approximately ~~$2,794,000) as well as a $0.05 per share special year-end cash dividend (approximately $1,075,000)~~$3,238,000) payable on September ~~11, 2007~~9, 2008 to shareholders of record September ~~4, 2007.~~2, 2008.

NOTE 910 — EQUITY COMPENSATION

On July 1, 2005, the Company adopted SFAS No. 123(R), “Share-Based Payment,” which requires the Company to measure the cost of employee services received in exchange for an award of equity instruments and to recognize this cost in the financial statements over the period during which an employee is required to provide services. The Company has adopted SFAS No. 123(R) using the “modified prospective application” as defined in the Statement, and therefore financial statements for periods ended prior to July 1, 2005 have not been retroactively adjusted. Prior to July 1, 2005, the Company had applied provisions of Accounting Principles Board Opinion No. 25, (“Accounting for Stock Issued to Employees”) and recorded no compensation expense in the financial statements. The Company had adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), “Accounting for Stock Based Compensation.”

~~S-32~~F-34

Stock Options

The Company has an equity compensation plan that was approved by shareholders which covers all of its full-time employees, outside directors and advisors. The options granted or stock awards made pursuant to this plan are granted at fair market value at date of grant or award. Options granted to non-employee directors ~~are immediately~~become exercisable 25% each ninety days (cumulative) from date of grant and options granted to employees generally become exercisable 25% per year (cumulative) beginning one year after the date of grant. Prior to fiscal 2007, options granted to non-employee directors were immediately exercisable. The number of shares reserved for issuance is 2,250,000, of which ~~1,574,328~~1,253,040 shares were available for future grant or award as of June 30, ~~2007.~~2008. This plan allows for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted and unrestricted stock awards, performance stock awards, and other stock awards. As of June 30, ~~2007,~~2008, a total of ~~983,788~~1,197,482 options for common shares were outstanding from this plan as well as two previous stock option plans (both of which had also been approved by shareholders), and of these, a total of ~~540,631~~615,482 options for common shares were vested and exercisable. The approximate unvested stock option expense as of June 30, ~~2007~~2008 that will be recorded as expense in future periods is ~~$1,610,000.~~$2,489,000. The weighted average time over which this expense will be recorded is approximately 2322 months.

Statement of Financial Accounting Standards No. 123 (SFAS No. 123) was effective for the Company through June 30, 2005 and required, at a minimum, pro forma disclosures of expense for stock-based awards based on their fair values. See Note 1 for this information. The fair value of each option on the date of grant was estimated using the Black-Scholes option pricing model. The below listed weighted average assumptions were used for grants in the periods indicated.


	2007			2006			2005			2008			2007			2006
Dividend yield		2.97	%		3.42	%		3.29	%		3.61	%		2.97	%		3.42	%
Expected volatility		39	%		40	%		38	%		36	%		39	%		40	%
Risk-free interest rate		4.8	%		5.1	%		3.3	%		4.3	%		4.8	%		5.1	%
Expected life	6¹/2 yrs.			6¹/2 yrs.			8 yrs.			4.3 yrs.			6.5 yrs.			6.5 yrs.

SFAS No. 123(R) requires stock option expense to be recorded on the financial statements for all reporting periods beginning after June 15, 2005. Accordingly, expense of $721,000 and $428,000 was recorded in fiscal years 2007 and 2006, respectively. No similar expense was recorded in fiscal 2005. No equity compensation expense has been capitalized in inventory or fixed assets. The Company records stock option expense using a straight line Black-Scholes method with an estimated 4.2% forfeiture rate (revised in the second quarter of fiscal 2008 from the 10% forfeiture ~~rate.~~rate previously used). The expected volatility of the Company’s stock was calculated based upon the historic monthly fluctuation in stock price for a period approximating the expected life of option grants. The risk-free interest rate is the rate of a five year Treasury security at constant, fixed maturity on the approximate date of the stock option grant. The expected life of outstanding options is determined to be less than the contractual term for a period equal to the aggregate group of option holders’ estimated weighted average time within which options will be exercised. It is the Company’s policy that when stock options are

Deferred Compensation Plan

The Company has a non-qualified deferred compensation plan providing for both Company contributions and participant deferrals of compensation. The Plan is fully funded in a Rabbi Trust. All Plan investments are in common shares of the Company. As of June 30, ~~2007~~2008 there were 36 participants ~~with~~and all but one had fully vested account balances. A total of 211,151 common shares with a cost of $2,426,800, and 203,688 common shares with a cost of $2,249,400 ~~and 187,725 common shares with a cost of $1,957,500~~ were held in the Plan as of June 30, ~~2007~~2008 and June 30, ~~2006,~~2007, respectively, and, accordingly, have been recorded as treasury shares. The change in the number of shares held by this plan is the net result of share purchases and sales on the open stock market for compensation deferred into the Plan and for distributions to terminated employees. The Company does not issue new common shares for purposes of the ~~Nonqualified Deferred Compensation Plan.~~non-qualified deferred compensation plan. The Company accounts for assets held in the non-qualified deferred compensation plan in accordance with Emerging Issues Task Force 97-14, “Accounting for Deferred Compensation Arrangements where amounts earned are held in a Rabbi Trust and invested.” As a result of the Company changing the distribution method for this deferred compensation plan in April 2004 from one of issuing shares of Company stock to terminated participants to one of issuing cash, it was determined that this plan was subject to variable accounting. Therefore, the shares in this plan were “marked-to-market” in the first quarter of fiscal 2006 and a $573,000 non-cash expense and long-term liability were recorded to reflect the $16.82 per share market price of the Company’s common shares at September 9, 2005, the date this Plan was amended to provide for distributions to participants only in the form of common shares of the Company. Accordingly, no future “mark-to-market” expense will be required with respect to this plan. ~~A similar expense of $775,000 was recorded in fiscal 2005.~~ For fiscal year ~~2008,~~2009, the Company estimates the Rabbi Trust for the Nonqualified Deferred Compensation Plan will make net repurchases in the range of ~~20,000~~18,000 to ~~25,000~~22,000 common shares of the Company. During fiscal years ~~2007~~2008 and ~~2006,~~2007, the Company used approximately ~~$307,100~~$262,100 and ~~$373,000,~~$307,100, respectively, to purchase common shares of the Company in the open stock market for either employee salary deferrals or Company contributions into the ~~Nonqualified Deferred Compensation Plan.~~non-qualified deferred compensation plan. The Company does not currently repurchase its own common shares for any other purpose.

NOTE 1011 — LEASES AND PURCHASE COMMITMENTS

The Company leases certain of its facilities and equipment under operating lease arrangements. Rental expense was $2,554,000 in 2008, $2,779,000 in 2007, and $2,241,000 in ~~2006, and $2,342,000 in 2005.~~2006. Minimum annual rental commitments under non-cancelable operating leases are: ~~$1,837,000 in 2008, $791,000~~$1,777,000 in 2009, ~~$248,000~~$1,372,000 in 2010, ~~$215,000~~$1,330,000 in 2011, $1,031,000 in 2012 and ~~$95,000~~$952,000 in ~~2012.~~2013. Purchase commitments of the Company totaled ~~$17,907,000~~$22,546,000 and ~~$22,700,000~~$17,907,000 as of June 30, ~~2007~~2008 and June 30, ~~2006~~2007 respectively.

NOTE 1112 — INCOME TAXES

The following information is provided for the years ended June 30:


(In thousands)	2007			2006			2005		2008			2007			2006
Components of income before income taxes
Components of income (loss) before income taxes
United States	$	32,376		$	21,992		$	22,873	$	(6,792	)	$	32,376		$	21,992
Foreign		(649	)		(5	)		—		(4,873	)		(649	)		(5	)

Income before income taxes	$	31,727		$	21,987		$	22,873
Income (loss) before income taxes									$	(11,665	)	$	31,727		$	21,987

As of June 30, ~~2007~~2008 the Company ~~had~~has recorded two deferred state income tax assets, one in the amount of ~~$22,000~~$5,000 related to a state net operating loss carryover generated by the Company’s New York subsidiary, and the other in the amount of ~~$938,000,~~$935,000, net of federal tax benefits, related to non-refundable state tax credits. The Company has determined that these deferred state income tax assets totaling ~~$960,000~~$940,000 do not require any valuation reserves because, in accordance with Statement of Financial Accounting Standards No. 109 (SFAS No. 109), these assets will, more likely than not, be realized. As of June 30, ~~2006,~~2007, the Company had recorded a total of ~~$1,606,000~~$960,000 deferred state income tax assets ~~and had determined that a $622,000~~with no corresponding valuation reserve, ~~in accordance with SFAS No. 109, was required as of that date because a portion of those assets would, more likely than not, not be realized by the Company. An additional deferred New York~~related to these same state income tax ~~asset related~~assets. The activity netted to ~~non-refundable state tax credits was recorded in fiscal 2007, and both the deferred state income tax asset and the valuation reserve were~~an

~~reduced in fiscal 2007 as a result of a reorganization of subsidiaries by the Company, and an unfavorable change in New York state tax law. The fiscal 2007 activity netted to an~~ additional ~~$249,000 of~~ state income tax ~~expense.~~expense of $16,000 and $249,000, respectively, in fiscal years 2008 and 2007.

Additionally, as of June 30, 2008 the Company has recorded deferred tax assets for its Canadian subsidiary related to net operating loss carryover and to research and development tax credits totaling $1,819,000. In view of the impairment of the goodwill and certain intangible assets on the financial statements of this subsidiary and two consecutive loss years, the Company has determined these assets, more likely than not, will not be realized. Accordingly, full valuation reserves of $1,819,000 were recorded in the fourth quarter of fiscal 2008.

NOTE 1213 — SUPPLEMENTAL CASH FLOW INFORMATION


(In thousands)	2007		2006		2005		2008		2007		2006
Cash payments:
Interest	$	1,576	$	36	$	257	$	73	$	1,576	$	36
Income taxes	$	9,439	$	6,916	$	7,704	$	10,877	$	9,439	$	6,916

Issuance of common shares as compensation	$	44	$	41	$	55	$	44	$	44	$	41

Issuance of common shares for an acquisition	$	—	$	20,382	$	—	$	—	$	—	$	20,382

The Company is party to various negotiations and legal proceedings arising in the normal course of business, most of which are dismissed or resolved with minimal expense to the Company, exclusive of legal fees. Since October of 2000, the Company has been the defendant in a complex lawsuit alleging patent infringement with respect to some of the Company’s menu board systems sold over the past approximately ~~ten~~eleven years. The Company ~~has~~ defended ~~and will continue to defend~~ this case vigorously. The Company made a reasonable settlement offer in the third quarter of fiscal 2005 and, accordingly, recorded a loss contingency reserve in the amount of $590,000. This settlement offer was not accepted by the ~~plaintiff~~plaintiffs and the Company received a counter offer of $4.1 million to settle the majority of the alleged patent infringement. In March 2007, the Company received a favorable summary judgment decision. As a result of the favorable summary judgment decision, the loss contingency reserve of $590,000 was written off to income in the third quarter of fiscal 2007. The plaintiffs in this lawsuit ~~have~~ appealed the summary judgment ~~decision. In what we believe~~decision and in March 2008 the ~~unlikely~~summary judgment decision was vacated by the Appeals Court and the lawsuit was remanded back to the lower level court for additional consideration. Pursuant to settlement discussions initiated by the plaintiffs, the Company made a $2,800,000 offer to settle this matter. The plaintiffs have not yet responded to the Company’s offer to settle. Even though the settlement offer was made in the first quarter of fiscal 2009, as a type one subsequent event, the $2,800,000 charge is required to be recorded in fiscal 2008. While the Company believes its menu board designs did not infringe upon the plaintiffs’ patents, management believes it is in the best interest of the Company to make this offer to settle. However, if the Company and the plaintiffs are ~~successful in~~unable to agree upon the terms of a settlement, the Company intends to continue to contest this ~~appeal, the lawsuit would be back in progress.~~matter vigorously.

Company’s Graphics Segment, provides metal fabricated components. 3970957 Canada Inc., which is owned by the president and another executive of the Company’s ~~Technology Segment,~~LSI Saco Technologies subsidiary, owns the building that the Canadian operation occupies and rents. All related parties provide the Company either products or services at market-based arms-length prices.

NOTE 1516 — ACQUISITION

The Company acquired substantially all the net assets of SACO Technologies, Inc. on June 26, 2006, which it renamed LSI Saco Technologies. The purchase price was $45.1 million, consisting of $23.2 million in cash, 1,419,355 common shares of LSI Industries valued at $20.4 million (at $14.36 per share, the closing price on the date of acquisition), and approximately $1.3 million in transaction costs, which primarily consisted of financial advisory, legal and accounting services, and bank debt prepayment fees. The new subsidiary operates in Montreal, Canada as a worldwide leader and pioneer in the design, production, and support of high-performance light engines and large format video screens using LED (light emitting diode) technology. LSI Saco Technologies will offer its customers expertise in developing and utilizing high-performance LED color and white lightsource solutions for both lighting and graphics applications. The Company acquired SACO Technologies primarily in order to obtain LED technology and also to enter into the large format video screen business for the sports and entertainment markets. This LED technology has significant potential for the Company’s Lighting Segment to be combined with the Company’s existing lighting fixture expertise and technology to develop a broad spectrum of white light LED fixtures that will offer equivalent or improved lighting performance with significant energy and maintenance savings as compared to the present metal halide and fluorescent lighting fixtures. Additionally, this LED technology is used in the Company’s Graphics Segment to light, accent and provide color lighting to graphics display and visual image programs of the Company’s customers.

The acquisition has been accounted for as a purchase, effective on the date of acquisition. The total purchase price exceeded the estimated fair value of net assets by approximately $42.8 million. The valuation study related to the intangible assets and goodwill was completed in Fiscal 2007 of which $17.7 million was identified as various intangible assets. Of the total intangible assets identified, ~~$3.9~~$3.5 million is included in the assets of the ~~Technology~~Graphics Segment, $0.4 million is included in the assets of the Lighting Segment and the remaining $13.8 million is considered a corporate asset. The remaining goodwill of $25.1 million is included in the assets of the ~~Technology Segment.~~Graphics Segment ($13.9 million) and the Lighting Segment ($11.2 million). Identified definite-lived intangible assets were amortized beginning July 1, 2006 over appropriate lives, whereas goodwill ~~was~~and indefinite-lived intangible assets are not amortized to expense on the Company’s financial statements. Approximately 75% of ~~this~~the $3.1 million of goodwill on the books of LSI Saco Technologies is amortizable to expense for Canadian tax purposes. The Company’s consolidated financial statements for Fiscal 2006 include the results of LSI Saco Technologies ~~in the Technology Segment~~ from the June 26, 2006 date of acquisition.

~~The cost to acquire LSI Saco Technologies has been allocated to the assets acquired~~ See Note 6 for discussion of impairment of some of this goodwill and ~~liabilities assumed according to their respective fair values. (In fiscal 2007, adjustments were made to the original purchase price. The nature and amount~~certain of ~~those adjustments were immaterial to the purchase price.) The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at June 26, 2006.~~

(In thousands)
Current assets $ 12,408
Property, plant & equipment 3,888
Intangible assets 17,743
Goodwill 25,083
Current liabilities (10,306 )
Long-term debt (3,741 )

Total purchase price $ 45,075

these intangible assets.

~~S-39~~F-41

The following table sets forth the unaudited proforma results of operations of the Company for the years ended June 30, 2006 and 2005, respectively. The unaudited proforma financial information summarizes the results of operations for the periods indicated as if the SACO Technologies acquisition had occurred at the beginning of the first period presented. The proforma information contains the actual combined operating results of the Company and SACO Technologies, with results prior to the acquisition date adjusted to eliminate transactions between LSI and SACO, to adjust the facility lease expense to reflect the terms of a renegotiated lease agreement, and to add estimated interest expense on the amount financed for the acquisition. These proforma results do not purport to be indicative of the results that would have actually been obtained if the acquisition had occurred at the beginning of the first period presented, or that may be obtained in the future.

(Proforma; unaudited; in thousands,
except per share amounts) 2006 2005
Net sales $ 293,323 $ 293,933
Net income $ 14,128 $ 15,292
Diluted earnings per share $ 0.65 $ 0.71

NOTE 1617 — SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

Quarter Ended Fiscal
(In thousands except per share data) Sept. 30 Dec. 31 March 31 June 30 Year
2007

Net sales $ 86,667 $ 81,640 $ 75,323 $ 93,823 $ 337,453
Gross profit 23,122 22,194 18,474 25,389 89,179
Net income 5,495 5,035 3,298 6,961 20,789

Earnings per share
Basic $ 0.25 $ 0.23 $ 0.15 $ 0.32 $ 0.96 (a)
Diluted $ 0.25 $ 0.23 $ 0.15 $ 0.32 $ 0.95

Range of share prices
High $ 18.95 $ 20.81 $ 20.04 $ 18.45 $ 20.81
Low $ 12.83 $ 15.22 $ 15.22 $ 14.65 $ 12.83

2006

Net sales $ 70,900 $ 73,322 $ 64,504 $ 71,744 $ 280,470
Gross profit 18,712 18,837 15,053 18,811 71,413
Net income 3,669 3,906 2,415 4,453 14,443

Earnings per share
Basic $ 0.18 $ 0.20 $ 0.12 $ 0.22 $ 0.72
Diluted $ 0.18 $ 0.19 $ 0.12 $ 0.22 $ 0.71

Range of share prices
High $ 19.15 $ 19.94 $ 17.09 $ 18.56 $ 19.94
Low $ 13.82 $ 15.16 $ 12.71 $ 12.00 $ 12.00
(In thousands except per share data)


	Quarter Ended									Fiscal
	Sept. 30		Dec. 31		March 31		June 30			Year
2008

Net sales	$	90,001	$	84,062	$	64,780	$	66,443		$	305,286
Gross profit		25,751		23,459		15,982		15,235			80,427
Loss contingency		—		—		—		2,800			2,800
Goodwill and intangible asset impairment		—		—		—		28,929			28,929
Net income (loss)		6,953		4,823		997		(26,495	)		(13,722	)

Earnings (loss) per share
Basic	$	0.32	$	0.22	$	0.05	$	(1.22	)	$	(0.63	)
Diluted	$	0.32	$	0.22	$	0.05	$	(1.22	)	$	(0.63	)

Range of share prices
High	$	21.39	$	23.05	$	18.65	$	14.41		$	23.05
Low	$	15.70	$	17.42	$	8.12	$	8.04		$	8.04

2007

Net sales	$	86,667	$	81,640	$	75,323	$	93,823		$	337,453
Gross profit		23,122		22,194		18,474		25,389			89,179
Net income		5,495		5,035		3,298		6,961			20,789

Earnings per share
Basic	$	0.25	$	0.23	$	0.15	$	0.32		$	0.96	(a)
Diluted	$	0.25	$	0.23	$	0.15	$	0.32		$	0.95

Range of share prices
High	$	18.95	$	20.81	$	20.04	$	18.45		$	20.81
Low	$	12.83	$	15.22	$	15.22	$	14.65		$	12.83

2006

Net sales	$	70,900	$	73,322	$	64,504	$	71,744		$	280,470
Gross profit		18,712		18,837		15,053		18,811			71,413
Net income		3,669		3,906		2,415		4,453			14,443

Earnings per share
Basic	$	0.18	$	0.20	$	0.12	$	0.22		$	0.72
Diluted	$	0.18	$	0.19	$	0.12	$	0.22		$	0.71

Range of share prices
High	$	19.15	$	19.94	$	17.09	$	18.56		$	19.94
Low	$	13.82	$	15.16	$	12.71	$	12.00		$	12.00

~~S-40~~F-42

LSI INDUSTRIES INC.
SELECTED FINANCIAL DATA
(In thousands except per share)

The following data has been selected from the Consolidated Financial Statements of the Company for the periods and dates indicated:

~~Income~~ Statement of Operations Data:


	2007			2006			2005			2004			2003			2008			2007			2006			2005			2004
Net sales	$	337,453		$	280,470		$	282,440		$	241,405		$	213,133		$	305,286		$	337,453		$	280,470		$	282,440		$	241,405
Cost of products sold		248,274			209,057			210,144			181,883			157,966
Cost of products and services sold																	224,859			248,274			209,057			210,144			181,883
Operating expenses		56,629			49,898			49,084			45,488			43,801			60,642			57,219			49,898			48,494			45,488
Goodwill impairment		—			—			186			—			—
Loss contingency (a)																	2,800			(590	)		—			590			—
Goodwill and intangible asset impairment (b)																	28,929			—			—			186			—


Operating income		32,550			21,515			23,026			14,034			11,366
Operating income (loss)																	(11,944	)		32,550			21,515			23,026			14,034
Interest (income)		(139	)		(550	)		(64	)		(23	)		(259	)		(360	)		(139	)		(550	)		(64	)		(23	)
Interest expense		962			78			217			260			378			81			962			78			217			260


Income before income taxes		31,727			21,987			22,873			13,797			11,247
Income (loss) before income taxes																	(11,665	)		31,727			21,987			22,873			13,797
Income taxes		10,938			7,544			8,237			5,107			3,454			2,057			10,938			7,544			8,237			5,107


Income before cumulative effect of accounting change		20,789			14,443			14,636			8,690			7,793

Cumulative effect of accounting change, net of tax (a)		—			—			—			—			18,541


Net income (loss)	$	20,789		$	14,443		$	14,636		$	8,690		$	(10,748	)	$	(13,722	)	$	20,789		$	14,443		$	14,636		$	8,690


Earnings per common share before cumulative effect of accounting change
Basic	$	0.96		$	0.72		$	0.74		$	0.44		$	0.40
Diluted	$	0.95		$	0.71		$	0.73		$	0.43		$	0.39

Earnings (loss) per common share
Basic	$	0.96		$	0.72		$	0.74		$	0.44		$	(0.55	)	$	(0.63	)	$	0.96		$	0.72		$	0.74		$	0.44
Diluted	$	0.95		$	0.71		$	0.73		$	0.43		$	(0.54	)	$	(0.63	)	$	0.95		$	0.71		$	0.73		$	0.43

Cash dividends paid per share	$	0.51		$	0.56		$	0.37		$	0.26		$	0.19		$	0.63		$	0.51		$	0.56		$	0.37		$	0.26

Weighted average common shares
Basic		21,676			20,194			19,782			19,717			19,708			21,764			21,676			20,194			19,782			19,717
Diluted		21,924			20,429			20,087			20,038			19,923			21,764			21,924			20,429			20,087			20,038

LSI INDUSTRIES INC. AND SUBSIDIARIES

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED JUNE 30, 2008, 2007, ~~2006,~~ AND ~~2005~~2006

(In Thousands)


COLUMN A	COLUMN B		COLUMN C			COLUMN D			COLUMN E		COLUMN B		COLUMN C		COLUMN D			COLUMN E
			Additions										Additions
	Balance		Charged to						Balance		Balance		Charged to					Balance
	Beginning		Costs and			(a)			End of		Beginning		Costs and		(a)			End of
Description	of Period		Expenses			Deductions			Period		of Period		Expenses		Deductions			Period
Allowance for Doubtful Accounts:

Year Ended June 30, 2008											$	822	$	155	$	(392	)	$	585
Year Ended June 30, 2007	$	656	$	469		$	(303	)	$	822	$	656	$	469	$	(303	)	$	822
Year Ended June 30, 2006	$	1,116	$	60		$	(520	)	$	656	$	1,116	$	60	$	(520	)	$	656
Year Ended June 30, 2005	$	1,264	$	403		$	(551	)	$	1,116

Inventory Obsolescence Reserve:

Year Ended June 30, 2008											$	1,606	$	1,479	$	(1,447	)	$	1,638
Year Ended June 30, 2007	$	1,584	$	1,687		$	(1,665	)	$	1,606	$	1,584	$	1,687	$	(1,665	)	$	1,606
Year Ended June 30, 2006	$	1,563	$	1,297		$	(1,276	)	$	1,584	$	1,563	$	1,297	$	(1,276	)	$	1,584
Year Ended June 30, 2005	$	1,431	$	1,804		$	(1,672	)	$	1,563

Deferred Tax Asset Valuation Reserve (b):

Year Ended June 30, 2007	$	622	$	—		$	(622	)	$	—
Year Ended June 30, 2006	$	776	$	(154	)	$	—		$	622
Year Ended June 30, 2005	$	596	$	180		$	—		$	776


	5	)Description	Size	Location	Status
5)		Greenlee Lighting office and manufacturing	40,000 sq. ft. (includes 4,000 ~~sq.ft.~~ sq. ft. of office space)	Dallas, TX	Leased

	6	)6)	Grady McCauley office and manufacturing	~~234,000~~210,000 sq. ft. (includes 20,000 sq. ft. of office ~~space and 24,000~~ ~~sq. ft. of leased warehouse~~ space)	North Canton, OH	Owned

	7	)7)	LSI Marcole office and manufacturing of electrical wire harnesses; contract assembly services	61,000 sq. ft. (includes 5,000 sq. ft. of office space)	Manchester, TN	Owned


~~Exhibit No.~~		~~Exhibit Description~~14, 2008.

10.7		First Amendment to Loan Agreement and Guaranty dated as of June 8, 2007 among the Registrant, LSI Saco Technologies Inc., and Fifth Third Bank filed as Exhibit 10.1 to LSI’s Form 8-K filed June 11, 2007.

10.8*		LSI Industries Inc. Retirement Plan (Amended and Restated as of October 1, 1999) filed as Exhibit 10.1 to LSI’s Form 10-Q for the quarter ended September 30, 1999.

10.9*		LSI Industries Inc. 1995 Directors’ Stock Option Plan (Amended as of December 6, 2001) filed as Exhibit 10 to LSI’s Form S-8 Registration Statement File No. 333-100038.


~~Exhibit No.~~		~~Exhibit Description~~

14		Code of Ethics filed as Exhibit 14 to LSI’s Form 10-K for the fiscal year ended June 30, 2004.

21		Subsidiaries of the Registrant

23.1		Consent of Independent Registered Public Accounting Firm ~~(Deloitte & Touche LLP)~~

~~23.2~~		~~Consent of Independent Registered Public Accounting Firm (Grant Thornton LLP)~~

31.1		Certification of Principal Executive Officer required by Rule 13a-14(a)

31.2		Certification of Principal Financial Officer required by Rule 13a-14(a)

32.1		18 U.S.C. Section 1350 Certification of Principal Executive Officer


(In thousands)	6/30/07			6/30/06			6/30/08			6/30/07
Accounts receivable	$	56,572		$	52,213		$	39,442		$	56,572
less Allowance for doubtful accounts		(822	)		(656	)		(585	)		(822	)

Accounts receivable, net	$	55,750		$	51,557		$	38,857		$	55,750


(In thousands)	2008		2007		2006
Lighting Segment net sales to the Graphics Segment	$	4,461	$	4,062	$	3,439

Graphics Segment net sales to the Lighting Segment	$	2,123	$	1,926	$	2,021


~~ITEM 4.~~		ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


~~ITEM 15.~~		ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

	(1)		Consolidated Financial Statements
			Appear as part of Item 8 of this Form 10-K.

	(2)		Consolidated Financial Statement Schedules
			Appear as part of Item 8 of this Form 10-K.


Exhibit No.		Exhibit Description

32.2		18 U.S.C. Section 1350 Certification of Principal Financial Officer


(In thousands except earnings per share)	2005
Net income as reported	$	14,636
Add: Stock-based compensation expense included in reported net income, net of related tax effects		35
Deduct: Total stock-based compensation determined under the fair value based method for all awards, net of tax effects		(452	)

Pro forma net income	$	14,219


Earnings per common share
Basic
As reported	$	0.74
Pro forma	$	0.72
Diluted
As reported	$	0.73
Pro forma	$	0.71


	June 30,		June 30,		June 30,
	2008		2007		2006
Identifiable assets:
Lighting Segment	$	107,627	$	112,266	$	115,372
Graphics Segment		55,529		97,507		104,791

		163,156		209,773		220,163
Corporate		20,384		23,839		4,238

	$	183,540	$	233,612	$	224,401


a.		Net sales are attributed to geographic areas based upon the location of the operation making the sale.


b.		Long-lived assets includes property, plant and equipment, ~~intangible assets, goodwill,~~ and other long term assets. As part of the purchase accounting entry related to the acquisition of SACO Technologies, Inc., certain long-lived assets were transferred from the Company’s foreign operation into its operations in the United States.


~~(A)~~(a)		Includes shares accounted for like treasury stock in accordance with EITF 97-14.

~~(B)~~(b)		Calculated using the “Treasury Stock” method as if dilutive securities were exercised and the funds were used to purchase common shares at the average market price during the period.


~~(C)~~(c)		Options to purchase 563,467 common shares, 206,261 common shares ~~3,748 common shares,~~ and ~~227,851~~3,748 common shares at June 30, 2008, 2007, ~~2006,~~ and ~~2005,~~2006, respectively, were not included in the computation of diluted earnings per share because the exercise price was greater than the average fair market value of the common shares.


(In thousands)	2007		2006		2008		2007
Inventories:
Raw materials	$	23,111	$	21,508	$	25,150	$	23,111
Work-in-process		8,211		7,402		7,955		8,211
Finished goods		18,409		16,435		17,404		18,409

	$	49,731	$	45,345	$	50,509	$	49,731


Accrued Expenses:
Compensation and benefits	$	8,837	$	6,902	$	7,060	$	8,837
Customer prepayments		18,490		4,438		1,820		18,490
Accrued sales commissions		1,287		1,501		1,552		1,287
Accrued income taxes						—		1,726
Loss contingency						2,800		—
Other accrued expenses		6,513		4,464		2,756		4,787

	$	35,127	$	17,305	$	15,988	$	35,127


	Lighting			Graphics		Technology						Lighting			Graphics
(In thousands)	Segment			Segment		Segment			Total			Segment			Segment			Total
Balance as of June 30, 2004	$	321		$	16,982	$	—		$	17,303

Impairment loss		(186	)		—		—			(186	)


Balance as of June 30, 2005		135			16,982		—			17,117

Acquisition		—			—		42,685			42,685


Balance as of June 30, 2006		135			16,982		42,685			59,802		$	11,671		$	48,131		$	59,802

Acquisition		—			—		141			141			—			141			141

Reclassification to intangible assets		—			—		(17,743	)		(17,743	)		(351	)		(17,392	)		(17,743	)


Balance as of June 30, 2007	$	135		$	16,982	$	25,083		$	42,200			11,320			30,880			42,200

Impairment													—			(27,149	)		(27,149	)


Balance as of June 30, 2008												$	11,320		$	3,731		$	15,051


	June 30, 2007				June 30, 2006				June 30, 2008				June 30, 2007
	Gross				Gross				Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated		Carrying		Accumulated		Carrying		Accumulated
(In thousands)	Amount		Amortization		Amount		Amortization		Amount		Amortization		Amount		Amortization
Amortized Intangible Assets
Customer relationships	$	7,472	$	3,068	$	5,400	$	2,513	$	7,472	$	3,620	$	7,472	$	3,068
Trademarks and tradenames		5,513		151		920		128		3,559		—		5,513		151
Patents		110		45		110		38		110		52		110		45
LED Technology firmware, software		10,448		1,493		—		—		10,448		2,985		10,448		1,493
Non-compete agreements		630		250		—		—		630		502		630		250

	$	24,173	$	5,007	$	6,430	$	2,679	$	22,219	$	7,159	$	24,173	$	5,007


(In thousands)	2006
Long-term debt:

Revolving Line of Credit (3 year committed line)	$	16,528

Equipment loans		65


Subtotal		16,593

Less current maturities of long-term debt		(22	)


Long-term debt	$	16,571


	Twelve Months Ended								Twelve Months Ended
	June 30, 2007								June 30, 2008
				Weighted		Weighted						Weighted		Weighted
				Average		Average	Aggregate					Average		Average	Aggregate
				Exercise		Remaining	Intrinsic					Exercise		Remaining	Intrinsic
(Shares in thousands)	Shares			Price		Contractual Term	Value
Outstanding at 6/30/06		784		$	10.32		$	5,232,500
									Shares			Price		Contractual Term	Value
Outstanding at 6/30/07										983,788		$	12.16		$	5,642,400


Granted		251		$	17.54					328,200		$	19.74
Forfeitures		(5	)	$	11.57					(9,500	)	$	16.81
Exercised		(46	)	$	10.00					(105,006	)	$	9.52


Outstanding at 6/30/07		984		$	12.16	6.3 years	$	5,642,400
Outstanding at 6/30/08										1,197,482		$	14.44	6.5 years	$	—


Exercisable at 6/30/07		541		$	10.33	4.7 years	$	4,090,400
Exercisable at 6/30/08										615,482		$	11.43	4.9 years	$	—


	Twelve Months Ended								Twelve Months Ended
	June 30, 2005								June 30, 2006
				Weighted		Weighted						Weighted		Weighted
				Average		Average	Aggregate					Average		Average	Aggregate
				Exercise		Remaining	Intrinsic					Exercise		Remaining	Intrinsic
(Shares in thousands)	Shares			Price		Contractual Term	Value
Outstanding at 6/30/04		667		$	9.73		$	1,183,600
									Shares			Price		Contractual Term	Value
Outstanding at 6/30/05										922,725		$	9.88		$	3,748,400


Granted		377		$	9.97					51,800		$	14.74
Forfeitures		(8	)	$	11.57					(17,288	)	$	10.25
Exercised		(113	)	$	9.16					(173,280	)	$	9.31


Outstanding at 6/30/05		923		$	9.88	6.6 years	$	3,748,400
Outstanding at 6/30/06										783,957		$	10.32	6.4 years	$	5,232,500


Exercisable at 6/30/05		520		$	9.63	5.0 years	$	2,241,700
Exercisable at 6/30/06										472,394		$	10.11	5.0 years	$	3,248,600


(In thousands)
Current assets	$	12,408
Property, plant & equipment		3,888
Intangible assets		17,743
Goodwill		25,083
Current liabilities		(10,306	)
Long-term debt		(3,741	)


Total purchase price	$	45,075


(Proforma; unaudited; in thousands,
except per share amounts)	2006		2005
Net sales	$	293,323	$	293,933
Net income	$	14,128	$	15,292
Diluted earnings per share	$	0.65	$	0.71


	Quarter Ended								Fiscal
(In thousands except per share data)	Sept. 30		Dec. 31		March 31		June 30		Year
2007

Net sales	$	86,667	$	81,640	$	75,323	$	93,823	$	337,453
Gross profit		23,122		22,194		18,474		25,389		89,179
Net income		5,495		5,035		3,298		6,961		20,789

Earnings per share
Basic	$	0.25	$	0.23	$	0.15	$	0.32	$	0.96	(a)
Diluted	$	0.25	$	0.23	$	0.15	$	0.32	$	0.95

Range of share prices
High	$	18.95	$	20.81	$	20.04	$	18.45	$	20.81
Low	$	12.83	$	15.22	$	15.22	$	14.65	$	12.83

2006

Net sales	$	70,900	$	73,322	$	64,504	$	71,744	$	280,470
Gross profit		18,712		18,837		15,053		18,811		71,413
Net income		3,669		3,906		2,415		4,453		14,443

Earnings per share
Basic	$	0.18	$	0.20	$	0.12	$	0.22	$	0.72
Diluted	$	0.18	$	0.19	$	0.12	$	0.22	$	0.71

Range of share prices
High	$	19.15	$	19.94	$	17.09	$	18.56	$	19.94
Low	$	13.82	$	15.16	$	12.71	$	12.00	$	12.00


(a)		The total of the earnings per share for each of the four quarters does not equal the total earnings per share for the full year because the calculations are based on the average shares outstanding during each of the individual periods.

~~(b)~~		The fourth quarter of fiscal 2005 includes a $775,000 non-cash expense ($469,000 net of taxes) associated with “marking-to-market” the Company’s common shares held in its non-qualified deferred compensation plan in accordance with variable accounting procedures.


(a)		The ~~2003 expense relates~~Company recorded loss contingency reserves in fiscal years 2008 and 2005, and reversed a loss contingency reserve in fiscal 2007 – all related to ~~write off~~a patent litigation matter. See Note 14.

(b)		The Company recorded a significant impairment of ~~impaired~~ goodwill ~~when~~and intangible assets in the ~~Company adopted Statement~~fourth quarter of ~~Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”~~fiscal 2008. See Note 6.


(a)		For Allowance for Doubtful Accounts, deductions are uncollectible accounts charged off, less recoveries.

~~(b)~~		~~The Valuation Reserve is net of the federal tax benefit.~~

September 15, 2008

~~LSI INDUSTRIES INC.~~BY:

/s/ Robert J. Ready

~~September 10, 2007~~
Date

~~/s/ Robert J. Ready~~
Robert J. Ready

Chairman of the Board and President