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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Commission File No. 0-13375

LSI Industries Inc.

State of Incorporation - - Ohio                      IRS Employer I.D. No. 31-0888951

10000 Alliance Road

Cincinnati, Ohio 45242

(513) 793-3200

        Indicate by checkmark 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, and (2) has been subject to such filing requirements for the past 90 days.     YES    [X]    NO [   ]

        Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES   [X]    NO [   ]

        As of January 28, 2004 there were 19,733,232 shares of the Registrant’s common stock outstanding.

LSI INDUSTRIES INC.

FORM 10-Q

FOR THE QUARTER ENDED DECEMBER 31, 2003

INDEX

Note:   All share and per share data reflect the 5-for-4 stock split announced October 28, 2003, to be effective November 14, 2003.

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

This document contains certain forward-looking statements 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 “estimates,” “anticipates,” “projects,” “plans,” “expects,” “intends,” “believes,” “should” 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. 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.

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PART I.   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

LSI INDUSTRIES INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)

The accompanying Notes to Financial Statements are an integral part of these financial statements.

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LSI INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS
(Unaudited)

(In thousands, except share amounts)

The accompanying Notes to Financial Statements are an integral part of these financial statements.

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LSI INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

The accompanying Notes to Financial Statements are an integral part of these financial statements.

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LSI INDUSTRIES INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 1:    INTERIM FINANCIAL STATEMENTS

The interim financial statements are unaudited and are prepared in accordance with rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of Management, the interim financial statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of December 31, 2003, and the results of its operations for the three and six month periods ended December 31, 2003 and 2002, and its cash flows for the six month periods ended December 31, 2003 and 2002. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2003 annual report.

NOTE 2:    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 significant intercompany transactions and balances have been eliminated.

Revenue recognition:

The Company has four sources of revenue: revenue from product sales; revenue from the installation of products; service revenue generated from providing the 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, 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, other than normal warranties, has no post-installation service contracts or responsibilities.

Service revenue from integrated design, project and construction management, site engineering and 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.

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

Amounts received from customers prior to the recognition of revenue are accounted for as customer pre-payments and are included in accrued expenses.

Facilities Expansion Grants and Credits:

The Company periodically receives either grants or credits against state income taxes when it expands a facility and/or its level of employment in certain states within which it operates. A grant is amortized to income over the time period that the state could be entitled to return of the grant if the expansion or job growth were not maintained, and is recorded as a reduction of either manufacturing overhead or administrative expenses. A credit is amortized to income over the time period that the state could be entitled to return of the credit if the expansion were not maintained, is recorded as a reduction of state income tax expense, and is subject to a valuation allowance review if the credit cannot immediately be utilized.

Inventories:

Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out basis.

Property, plant and equipment and related depreciation:

Property, plant and equipment are stated at cost. Major additions and betterments are capitalized while maintenance and repairs are expensed. For financial reporting purposes, depreciation is computed on the straight-line method over the estimated useful lives of the assets as follows:

Costs related to the purchase, internal development, and implementation of the Company’s 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 capitalized implementation costs are apportioned to and placed in service for each operating company as that company implements and begins utilization of the business operating software. The current business operating software was first implemented in January 2000. All costs capitalized for the business operating software will be fully depreciated by December 31, 2007. Other purchased computer software is being depreciated over periods ranging from three to five years.

Intangible assets:

Intangible assets consisting of customer lists, trade names, patents and trademarks are recorded on the Company’s balance sheet and are being amortized to expense over periods ranging between two and seventeen years. The excess of cost over fair value of assets acquired (“goodwill”) was amortized to expense over periods ranging between fifteen and forty years through fiscal 2002. Beginning in fiscal 2003, goodwill is no longer 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. Impairments have been recorded only with respect to goodwill (see Note 6).

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Fair value of financial instruments:

The Company has financial instruments consisting primarily of cash and cash equivalents, 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.

Contingencies:

The Company is party to various negotiations, customer bankruptcies, and legal proceedings arising in the normal course of business. 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.

Earnings per common share:

The computation of basic earnings per common share is based on the weighted average common shares outstanding for the period. 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 equivalents include the dilutive effect of stock options, contingently issuable shares (for which issuance has been determined to be probable), and common shares to be issued under a deferred compensation plan, all of which totaled 329,000 shares and 207,000 shares for the three months ended December 31, 2003 and 2002, respectively, and 301,000 shares and 217,000 shares for the six months ended December 31, 2003 and 2002, respectively. All share and per share data reflect the five-for-four stock split declared by the Company on October 20, 2003. See also Note 4.

Stock options:

The company applies the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation expense has been reflected in the financial statements as the exercise price of options granted to employees and non-employee directors is equal to the fair market value of the Company’s common shares on the date of grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), “Accounting for Stock Based Compensation.”

If the Company had adopted the expense recognition provisions of SFAS No. 123, net income and earnings per share for the three month and six month periods ended December 31, 2003 and 2002 would have been as follows:

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Since SFAS No. 123 has not been applied to options granted prior to December 15, 1994, the resulting compensation cost shown above may not be representative of that expected in future years.

Comprehensive income:

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

Reclassification:

Certain reclassifications may have been made to prior year amounts in order to be consistent with the presentation for the current year. The primary reclassification has been the Company’s business segment data as a result of organizational changes and the establishment of new reportable business segments. See Note 3.

Use of estimates:

The preparation of the financial statements in conformity with generally accepted accounting principles 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 3:    BUSINESS SEGMENT INFORMATION

Effective July 1, 2003, the Company re-aligned its business segments and operates in the following two business segments: the Lighting Segment and the Graphics Segment. The Company is organized such that the chief operating decision maker (the President and Chief Executive Officer) now receives financial and operating information relative to these two business segments, and organizationally, has a President of LSI Lighting Solutions Plus (currently vacant) and a President of LSI Graphics Solutions Plus reporting directly to him. In the seven years prior to fiscal 2004, the Company reported business segments of the Image Segment and the Commercial / Industrial Lighting Segment. All prior period information has been revised to reflect the Company’s new segments.

The Lighting Segment manufactures and sells primarily proprietary exterior, interior and landscape lighting fixtures and systems. The Lighting Segment includes the operations of LSI Lighting Systems, LSI Petroleum Lighting, LSI Automotive Lighting, Quick Service Restaurant Lighting, LSI Metal Fabrication, LSI Courtsider Lighting, LSI Greenlee Lighting, LSI Marcole, LSI MidWest Lighting and LSI Lightron. The Graphics Segment manufactures and sells custom exterior and interior graphics and visual image elements, as well as menu board systems. The Graphics Segment includes the operations of LSI Grady McCauley, LSI Integrated Graphics, LSI Retail Graphics, LSI Adapt, and LSI Images. The Company’s most significant market to which both the Lighting and Graphics Segments sell products and services, is the petroleum / convenience store market with approximately 33% and 31% of total net sales concentrated in this market in the three month periods ended December 31, 2003 and 2002, respectively, and approximately 31% and 30% of total net sales concentrated in this market in the six month periods ending December 31, 2003 and 2002, respectively. The strategy of selling both lighting and graphics to customers in the implementation, roll out or refurbishment of their exterior and/or interior visual image programs continues to be very important to the Company.

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The following information is provided for the following periods:

Operating income of the business segments includes sales less all operating expenses including allocations of corporate expense, but excluding interest expense. Sales between business segments are immaterial.

Identifiable assets are those assets used by each segment in its operations, including allocations of shared assets. Corporate assets consist primarily of cash and cash equivalents and refundable income taxes.

The Company and its business is concentrated in the United States. Approximately 3% of net sales are made to foreign customers and 100% of capital expenditures, depreciation and amortization, and identifiable assets are in the United States.

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NOTE 4:    EARNINGS PER COMMON SHARE

All share and per share data reflect the five-for-four stock split which was announced on October 28, 2003, to be effective November 14, 2003. 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 data):

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NOTE 5:    BALANCE SHEET DATA

The following information is provided as of the dates indicated (in thousands):

NOTE 6:    GOODWILL AND OTHER INTANGIBLE ASSETS

The Company has completed its annual goodwill impairment test required by Statement of Financial Accounting Standards No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets.” This test required the Company, through an independent appraisal firm, to assess the fair value, as determined on a discounted cash flow basis, of each reporting unit that had goodwill on its balance sheet, and compare that value to the carrying value of the reporting unit’s net assets as of July 1, 2003. Based upon this analysis, there was no impairment of goodwill as of July 1, 2003. The Company determined it had three reporting units to be tested in its fiscal 2004 impairment test, two of which are acquired business in the Lighting Segment and one of which is a combination of four acquired businesses in the Graphics Segment.

The Company completed its transitional goodwill impairment test in fiscal 2003 as of July 1, 2002, its date of adoption of SFAS No. 142. The Company determined for the transitional goodwill impairment test that it had eight reporting units, each of which represented an acquired business that operated in the organizational structure one level below the business segment level. Based upon this analysis, there was full impairment of the recorded net goodwill of two reporting units in the Lighting Segment (totaling $23,593,000) and one reporting unit in the Graphics Segment (totaling $929,000). The impairment of $24,522,000, a non-cash and non-operating charge, was booked in the amount of $18,541,000, net of income taxes, as a change in accounting method and was recorded as of the date of adoption of SFAS No. 142, July 1, 2002.

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

Changes in the carrying amount of goodwill for the year ended June 30, 2003 and the six months ended December 31, by operating segment, are as follows:

The gross carrying amount and accumulated amortization by major other intangible asset class is as follows:

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NOTE 8:    REVOLVING LINES OF CREDIT AND LONG-TERM DEBT

The Company has an unsecured $50 million revolving line of credit with its bank group. As of December 31, 2003 the available portion of this line of credit was $39.2 million. A portion of this credit facility is a $20 million line of credit that expires in the third quarter of fiscal 2004. The remainder of the credit facility is a $30 million three year committed line of credit that expires in fiscal 2006. Annually in the third quarter, the credit facility is renewable with respect to adding an additional year of commitment to replace the year just ended. Interest on the revolving lines of credit is charged based upon an increment over the 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. At December 31, 2003 the average interest rate on borrowings under this revolving line of credit was approximately 1.7%. 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 December 31, 2003.

Long-term debt:

   (In thousands)

NOTE 9:    CASH DIVIDENDS

The Company paid cash dividends of $2,364,000 and $1,893,000 in the six month periods ended December 31, 2003 and 2002, respectively. In January 2004, the Company’s Board of Directors declared a $0.072 per share regular quarterly cash dividend (approximately $1,419,000) payable on February 10, 2004 to shareholders of record February 3, 2004.

NOTE 10:     SHAREHOLDERS' EQUITY

The Company has an equity compensation plan 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 exercisable and options granted to employees generally become exercisable 25% per year (cumulative) beginning one year after the date of grant. The number of shares reserved for issuance is 2,250,000, of which 2,244,375 shares were available for future grant or award as of December 31, 2003. This plan allows for the grant of both incentive stock options and non-qualified stock options. Prior to November 14, 2003, the Company had an employee stock option plan and a directors’ stock option plan in operation. Subsequent to shareholder approval of the 2003 Equity Compensation Plan, the Company can no longer grant options from these two previous plans. As of December 31, 2003, a total of 691,222 options for common shares were outstanding from these previous plans.

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Statement of Financial Accounting Standards No. 123 (SFAS No. 123) requires, at a minimum, pro forma disclosures of expense for stock-based awards based on their fair values. The fair value of each option on the date of grant has been estimated using the Black-Scholes option pricing model. The following weighted average assumptions were used for grants in fiscal 2004 and 2003.

At December 31, 2003, the 7,250 options granted in the first six months of fiscal 2004 to both employees and non-employee directors had exercise prices of $11.68, fair values ranging from $3.20 to $4.10, and remaining contractual lives of about nine years. The 5,625 options granted in the first six months of fiscal 2003 had exercise prices of $8.76, fair values of $4.01, and remaining contractual lives of about nine three-fourths years.

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS

Net Sales by Business Segment
   (In thousands, unaudited)

Results of Operations

        Results of fiscal 2003 have been revised to reflect the Company’s new reportable business segments: the Lighting Segment and the Graphics Segment. All share and per share data reflect the 5-for-4 stock split which was announced on October 28, 2003, to be effective November 14, 2003.

THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2002

        Net sales of $64,116,000 in the second quarter of fiscal 2004 increased 12% from fiscal 2003 second quarter net sales of $57,275,000. Lighting Segment net sales increased 19% to $41.7 million and Graphics Segment net sales increased 1% to $22.4 as compared to the prior year. Sales to the petroleum / convenience store market, the Company’s largest market, are reported in both the Lighting and Graphics Segments, depending upon the product or service sold, and were up over the fiscal 2003 second quarter 20% to $20.9 million. While sales to this market have increased this quarter over the prior year, the Company believes concerns about the Middle East and the war with Iraq have had the effect of reducing major image program spending by the major oil companies. The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company.

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        The $6.5 million increase in Lighting Segment net sales is primarily the result of an approximate $2.1 million increase in sales to the commercial / industrial lighting markets (resulting, in part, from a slight improvement in the economy, as well as good response from the Company’s new commercial sales reps), and an aggregate increase of $3.8 million of lighting sales to our niche markets of petroleum / convenience store, automotive dealerships, quick service restaurants, and retail national accounts (including increased sales to a major national retailer).

        The $0.3 million increase in Graphics Segment net sales is primarily the result of the net effect of increased sales to the petroleum / convenience store market ($1.9 million), increased sales to a retail store customer (approximately $2.4 million), and reduced menu board system sales (one quick service restaurant customer sales are down $3 million as their roll out program is now nearing completion). The Company expects some additional sales in fiscal 2004 as the remaining franchisee-operated restaurants of this customer implement this new menu board system.

        Image conversion programs are important to the Company’s strategic direction. Image conversion programs include situations where our customer refurbishes its 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 conversions take several quarters to complete and involve both our customer’s corporate-owned sites as well as its franchisee-owned sites, the latter of which involve separate sales efforts by the Company with each franchisee. Relative to net sales to a customer before and after an image conversion program, net sales during the image conversion 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 conversion program are reported in either the Lighting Segment and/or the Graphics Segment, depending upon the product and/or service provided.

        Gross profit of $18,319,000 in the second quarter of fiscal 2004 increased 22% from last year, and increased as a percentage of net sales to 28.6% in fiscal 2004 as compared to 26.2% last year. The increase in amount of gross profit is due primarily to the 12% increase in net sales, improved direct labor efficiencies, product mix and operating efficiencies, partially offset by higher installation, freight and distribution expenses. Selling and administrative expenses increased $1.2 million or 11%. As compared to last year, the second quarter 2004 expenses were increased primarily in the areas of employee compensation ($0.5 million), outside sales representative commission ($0.3 million) and bad debt expense ($0.1 million).

        The Company reported interest expense of $52,000 in the second quarter of fiscal 2004 as compared to $106,000 in the same period last year. The change between years is reflective of both reduced interest rates and reduced average outstanding borrowings on the Company’s line of credit. The effective tax rate in the second quarter of fiscal 2004 was 37% as compared to 37.5% in the same period last year. The Company expects an effective income tax rate of approximately 37% in fiscal 2004.

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        Net income was $4,006,000 in the second quarter of fiscal 2004, a 49% increase as compared to $2,687,000 in the same period of fiscal 2003. The increase is primarily the result of increased gross profit on increased net sales, decreased interest expense, partially offset by increased selling and administrative expenses, increase other expense and increased income taxes. Diluted earnings per share of $0.20 in the second quarter of fiscal 2004, increased 54% from $0.13 per share reported in the same period of fiscal 2003. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the second quarter of fiscal 2004 was 20,033,000 shares as compared to 19,911,000 shares in the same period last year. All share and per share data reflect the five-for-four stock split declared October 20, 2003.

SIX MONTHS DECEMBER 31, 2003 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2002

        Net sales of $123,215,000 in the first half of fiscal 2004 increased 9% from fiscal 2003 first half net sales of $113,320,000. Lighting Segment net sales increased 12% to $77.9 million and Graphics Segment net sales increased 3% to $45.3 as compared to the prior year. Sales to the petroleum / convenience store market, the Company’s largest market, are reported in both the Lighting and Graphics Segments, depending upon the product or service sold, and were up over the fiscal 2003 first half 13% to $38.1 million. While sales to this market have increased this half over the prior year, the Company believes concerns about the Middle East and the war with Iraq have had the effect of reducing major image program spending by the major oil companies. The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company.

        The $8.4 million increase in Lighting Segment net sales is primarily the result of an approximate $4.3 million increase in sales to the commercial / industrial lighting markets (resulting, in part, from a slight improvement in the economy, as well as good response from the Company’s new commercial sales reps), and an aggregate increase of $3.3 million of lighting sales to our niche markets of petroleum / convenience store, automotive dealerships, quick service restaurants, and retail national accounts (including increased sales to a major national retailer).

        The $1.5 million increase in Graphics Segment net sales is primarily the result of the net effect of increased sales to the petroleum / convenience store market ($3.2 million), increased sales to a retail store customer (approximately $6.4 million), and reduced menu board system sales (one quick service restaurant customer sales are down $6.7 million as their roll out program is now nearing completion). The Company expects some additional sales in fiscal 2004 as the remaining franchisee-operated restaurants of this customer implement this new menu board system.

        Image conversion programs are important to the Company’s strategic direction. Image conversion programs include situations where our customer refurbishes its 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 conversions take several quarters to complete and involve both our customer’s corporate-owned sites as well as its franchisee-owned sites, the latter of which involve separate sales efforts by the Company with each franchisee. Relative to net sales to a customer before and after an image conversion program, net sales during the image conversion 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 conversion program are reported in either the Lighting Segment and/or the Graphics Segment, depending upon the product and/or service provided.

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        Gross profit of $33,542,000 in the first half of fiscal 2004 increased 12% from last year, and increased as a percentage of net sales to 27.2% in fiscal 2004 as compared to 26.5% last year. The increase in amount of gross profit is due primarily to the 9% increase in net sales, improved direct labor efficiencies, product mix and efficiencies, partially offset by higher installation, freight and distribution expenses. Selling and administrative expenses decreased $0.1 million. The first half of fiscal 2004 had $0.9 million lower bad debt expense (first half fiscal 2003 Graphics Segment had significant additional expense due primarily to customer bankruptcies and cash flow difficulties). Offsetting most of this reduction of expense were increased employee compensation ($0.6 million) and outside sales representative commission expense ($0.2 million).

        The Company reported interest expense of $136,000 in the first half of fiscal 2004 as compared to $223,000 in the same period last year. The change between years is reflective of both reduced interest rates and reduced average outstanding borrowings on the Company’s line of credit. The effective tax rate in the first half of fiscal 2004 was 37%. The first half fiscal 2003 effective tax rate of 29% is the net result of a normal tax provision of about 37.5% that was reduced as the Company recorded federal and state income tax credits. The Company expects an effective income tax rate of approximately 37% in fiscal 2004.

        Income before cumulative effect of an accounting change was $6,607,000 in the first half of fiscal 2004, a 35% increase as compared to $4,902,000 in the same period of fiscal 2003. The increase is primarily the result of increased gross profit on increased net sales, decreased operating expenses and interest expense, partially offset by increased other expense and income taxes. Diluted earnings per share, before the cumulative effect of an accounting change, was $0.33 in the first half of fiscal 2004, increased 32% from $0.25 per share reported in the same period of fiscal 2003. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first half of fiscal 2004 was 20,002,000 shares as compared to 19,926,000 shares in the same period last year. All share and per share data reflect the five-for-four stock split declared October 20, 2003.

        The Company completed the transitional goodwill impairment test required by Statement of Financial Accounting Standards No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets,” as of July 1, 2003. This test required the Company, through an independent appraisal firm, to assess the fair value, as determined on a discounted cash flow basis, of each reporting unit that had goodwill on its balance sheet, and compare that value to the carrying value of the reporting unit’s net assets as of July 1, 2002. The Company determined for the fiscal 2003 transitional goodwill impairment test that it had eight reporting units, each of which represented an acquired business that operated in the organizational structure one level below the business segment level. Based upon this analysis, there was full impairment of the recorded net goodwill of two reporting units in the Lighting Segment (totaling $23,593,000) and one reporting unit in the Graphics Segment (totaling $929,000). The impairment of $24,522,000, a non-cash and non-operating charge, was booked in the amount of $18,541,000, net of income taxes, as a change in accounting method and was recorded as of the date of adoption of SFAS No. 142, July 1, 2002. The Company has determined that it will perform its annual goodwill impairment test in accordance with SFAS No. 142 as of July 1st each year. There were no changes in accounting methods in the first half of fiscal 2004.

        The Company recorded a net loss of $13,639,000 in the first half of fiscal 2003 as compared to net income of $6,607,000 in the first half of fiscal 2004. The increase is the result of the $18,541,000 goodwill impairment loss that was recorded as an accounting change in fiscal 2003, plus the increased fiscal 2004 income before cumulative effect of accounting change. Diluted earnings or (loss) per share was $(0.68) in the first half of fiscal 2003 as compared to $0.33 per share reported in the first half of fiscal 2004.

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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 December 31, 2003 the Company had working capital of $62.5 million, compared to $59.6 million at June 30, 2003. The ratio of current assets to current liabilities decreased to 3.35 to 1 from 3.50 to 1. The $2.9 million increase in working capital is primarily attributed to increased accounts receivable and inventories, and decreased accounts payable, partially offset by increased accrued expenses and decreased other current assets. The $1.1 million increase in accounts receivable is due to higher second quarter fiscal 2004 sales as compared to fourth quarter fiscal 2003. The days sales outstanding was consistent at 58 days, both at June 30, 2003 and December 31, 2003. Inventories, primarily raw materials and finished goods, have increased $5.5 million in the first half of fiscal year 2004. The first quarter fiscal 2004 inventory build up in the Graphics Segment shipped out in the second quarter. Raw materials and work in process are up an aggregate $1.9 million, and finished goods are up approximately $3.6 million since the end of fiscal 2003.

        The Company generated $7.3 million of cash from operating activities in the first half of fiscal 2004 as compared to $11.6 million in the same period of fiscal 2003. The $4.3 million decrease in net cash flows from operating activities in fiscal 2004 is primarily the net result of increased income before cumulative effect of accounting change ($1.7 million favorable), increased accounts receivables rather than a decrease (unfavorable change of $8.8 million), an increase in inventories rather than a decrease ($6.5 million), and an aggregate $4.4 million increase in accounts payable and accrued expenses in the second half of fiscal 2004 as compared to an aggregate $4.9 million decrease in the same period last year.

        As of December 31, 2003, the Company’s days sales outstanding (DSO) were at approximately 58 days, the same as of June 30, 2003. Net accounts and notes receivables were $38.4 million and $37.3 million at December 31, 2003 and June 30, 2003, respectively. The Company believes that its net receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.

        Inventories at December 31, 2003 are up $5.5 million from June 30, 2003. The inventory increase occurred in the Lighting Segment in support of shipping requirements of various lighting programs, primarily that of a large national retailer scheduled to begin in the third quarter of fiscal 2004.

        Cash generated from operations and borrowing capacity under its line of credit agreement are the Company’s primary source of liquidity. In addition, the Company has an unsecured $50 million revolving line of credit with its bank group. As of January 23, 2004 there was approximately $41.0 million available on this line of credit. This line of credit is composed of a $30 million three year committed credit facility expiring in fiscal 2006 and a $20 million credit facility with an annual renewal in the third quarter of fiscal 2004. The Company believes that the total of available lines of credit plus cash flows from operating activities is adequate for the Company’s fiscal 2004 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.

        Capital expenditures of $2.5 million in the first half of fiscal 2004 compare to $3.4 million in the same period of fiscal 2003. The primary spending early in fiscal 2003 was for final construction costs of the $11 million manufacturing facility for LSI Lightron. The Company commenced operations in this facility in July 2003. Fiscal 2004 spending to date is primarily for tooling and equipment ($2.1 million), and capitalization of system design costs related to the Company’s fully integrated enterprise resource planning / business operating system ($0.4 million). Total capital expenditures in fiscal 2004 are expected to be approximately $5 million, exclusive of business acquisitions.

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        The Company used $4.8 million in financing activities in the first half of fiscal 2004 as compared to a use of $8.1 million in the same period of fiscal 2003. The change between years is the net result of lesser net payments on the Company’s line of credit in fiscal 2004 and no required repayment of funded debt in the first half of fiscal 2004, partially offset by increased dividend payments ($0.5 million) pursuant to the Company’s increased indicated annual dividend payment amount.

        The Company has been implementing a fully integrated enterprise resource planning / business operating system over the past several fiscal years, and will continue to do so throughout all operations of the Company, with completion of the implementation scheduled in fiscal 2005. Of the $8.9 million of software expenditures that are capitalized to date, a total of $2.9 million is being depreciated for the subsidiary companies currently using the software. A total of $1.1 million of depreciation has been expensed to date. As additional subsidiaries implement this software, proportionately more of this capitalized asset will be depreciated and the depreciation per period will significantly increase to approximately $1.5 million per fiscal year. This software is scheduled to be fully depreciated in fiscal 2008. The Company expects to capitalize additional design costs for this internal-use software, as well as to expense implementation costs as they are incurred.

        On January 20, 2004 the Board of Directors declared a regular quarterly cash dividend of $0.072 per share (approximately $1,419,000), payable February 10, 2004 to shareholders of record on February 3, 2004. During the second half of fiscal 2004, the Company paid cash dividends of $2,364,000, as compared to $1,893,000 in the same period of fiscal 2003.

        The Company continues to seek opportunities to invest in new products and markets, and in acquisitions that fit its strategic growth plans in the lighting and graphics 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.

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Revenue Recognition

        The Company recognizes revenue in accordance with Securities Exchange Commission Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” and the Emerging Issues Task Force EITF No. 00-21, “Revenue Arrangements With Multiple Deliverables.” 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 rendered, and collectibility is reasonably assured. Revenue is typically recognized at time of shipment. Sales are recorded net of estimated returns, rebates and discounts. Any cash received from customers prior to the recognition of revenue is accounted for as a customer pre-payment and is included in accrued expenses.

        The Company has four sources of revenue: revenue from product sales; revenue from the installation of product; service revenue generated from providing the 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, 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, other than normal warranties, has no post-installation service contracts or responsibilities. Service revenue from integrated design, project and construction management, site engineering and 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. Shipping and handling revenue coincides with the recognition of revenue from sale of the product.

Asset Impairment

        Carrying values of goodwill and other intangible assets with indefinite lives are reviewed annually for possible impairment in accordance with Statement of Financial Accounting Standards No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets,” which was adopted on July 1, 2002. The Company’s impairment review involves the estimation of the fair value of goodwill and indefinite-lived intangible assets using a discounted cash 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 unexpected adverse business conditions, economic factors and unanticipated technological change or competitive activities may signal that an asset has become impaired. An impairment charge of $24.5 million, or $18.5 million net of tax, related to goodwill was recorded in fiscal 2003 as the cumulative effect of an accounting change and charged against income. See Note 6 to the financial statements for further discussion.

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        Carrying values for long-lived tangible assets and definite-lived intangible assets, excluding goodwill, 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,” which was adopted on July 1, 2002. 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 operating or cash flow losses, 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 an impairment test 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. There were no impairment charges related to long-lived tangible assets or definite-lived intangible assets recorded by the Company during 2003.

Credit and Collections

        The Company maintains allowances for doubtful accounts receivable for estimated losses resulting from 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.

Facilities Expansion Grants and Credits

        The Company periodically receives either grants or credits against state income taxes when it expands a facility and/or its level of employment in certain states within which it operates. A grant is amortized to income over the time period that the state could be entitled to return of the grant if the expansion or job growth were not maintained, and is recorded as a reduction of either manufacturing overhead or administrative expenses. A credit is amortized to income over the time period that the state could be entitled to return of the credit if the expansion were not maintained, is recorded as a reduction of state income tax expense, and is subject to a valuation allowance review if the credit cannot immediately be utilized.

        The Company currently has $814,000 of benefits from a state in which it operates related to facilities expansion and employment growth. Given the facts and circumstances of these benefits, the Company’s evaluation of U.S. generally accepted accounting principles (GAAP) indicates that the accounting treatment, as defined above, as either a grant or a tax credit is acceptable. The Company believes treatment of these benefits as a grant and amortizing them into income as a reduction of manufacturing overhead over the vesting period is most appropriate. Accordingly, $131,000 of grant benefits were recorded in the second quarter of fiscal 2004 and the remaining balance of $683,000 will be amortized into income on a straightline basis through fiscal year 2014. All amounts discussed above are subject to federal taxes, currently at a rate of 35%.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

      Nothing to report.

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ITEM 4.    CONTROLS AND PROCEDURES.

An evaluation was performed as of December 31, 2003 under the supervision and with the participation of the Registrant’s management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures. Based upon this evaluation, these disclosure controls and procedures were found to be effective with no significant weaknesses noted.

There have been no changes in the Registrant’s internal control over financial reporting that occurred during the most recently ended fiscal period of the Registrant or in other factors that have materially affected or are reasonably likely to materially affect the Registrant’s internal control over financial reporting.

PART II.    OTHER INFORMATION

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

        At the Company’s Annual Meeting of Shareholders held November 13, 2003, the following actions were taken by shareholders:

        4.1     All persons nominated as Class A Directors were elected with the votes for each person being:

        The terms of the Class B Directors (Wilfred T. O’Gara and James P. Sferra) continue until the 2004 Annual Shareholders’ Meeting.

        4.2     Approval of the new LSI Industries Inc. 2003 Equity Compensation Plan.

        4.3     Ratification of the appointment of Grant Thornton LLP as independent certified public accountants for fiscal 2004.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

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        [All other items required in Part II have been omitted because they are not applicable or are not required.]

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

January 28, 2004

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