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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 May 3, 2005 there were 19,792,826 shares of the Registrant’s common stock outstanding.

LSI INDUSTRIES INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2005

INDEX

“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 the negative version thereof, 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, unfavorable outcomes of litigation, unexpected difficulties in integrating acquired businesses, and the ability to retain key employees of acquired businesses. The Company has no obligation to update any forward-looking statements to reflect subsequent events or circumstances.

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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)

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)

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 March 31, 2005, and the results of its operations for each of the three and nine months ended March 31, 2005 and 2004, and its cash flows for the nine month periods ended March 31, 2005 and 2004. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2004 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 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, 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 for 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 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 capitalized implementation costs are 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.

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 fifteen 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. Historically, impairments have been recorded only with respect to goodwill (see Note 7).

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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. 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 Footnote 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. 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 375,000 shares for the three months ended March 31, 2005 and 2004, respectively, and 272,000 shares and 322,000 shares for the nine months ended March 31, 2005 and 2004, respectively. See also Note 5.

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 and six month periods ended March 31, 2005 and 2004 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.

Recent Pronouncements:

In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 151, “Inventory Costs.” This statement amends Accounting Research Board (ARB) No. 43, “Inventory Pricing,” to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials should be recognized as current-period charges. In addition, this statement requires that allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005, or the Company’s 2006 fiscal year beginning July 1, 2005. The Company is currently evaluating the impact of this statement, but does not expect any significant impact on its financial condition or results of operations when it is implemented.

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment.” This statement establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, primarily when it obtains employee services in share-based payment transactions. SFAS No. 123 (revised 2004) supersedes the Accounting Principles Board Opinion No. 25, Accounting for Stock issued to Employees. This Statement requires public entities to measure the cost of employee services received in exchange for an award of equity instruments based upon the grant date fair value of the award, with this cost being recognized over the period during which an employee is required to provide the services. This statement is effective for the first reporting period beginning after June 15, 2005, or the Company’s first quarter of fiscal 2006 which begins July 1, 2005. The Company is currently evaluating the impact of this statement, but does not expect any significant impact on its financial condition or results of operations when it is implemented.

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 153, “Exchanges of Nonmonetary Assets.” This statement addresses the measurement of exchanges of nonmonetary assets and is effective for fiscal periods beginning after June 15, 2005. The Company is currently evaluating the impact of this statement, but does not expect any significant impact on its financial condition.

Comprehensive income:

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

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Reclassification:

Certain reclassifications may have been made to prior year amounts in order to be consistent with the presentation for the current year.

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:    MAJOR CUSTOMER CONCENTRATIONS

The Company’s net sales to a major customer in the Graphics Segment, CVS Pharmacies, Inc., represented approximately $8,566,000, or 13% of consolidated net sales in the three month period ended March 31, 2005. The Company had a concentration of receivables with the receivable from CVS Pharmacies being approximately $5.4 million and the receivable from Wal-Mart being approximately $5.1 million, or each about 12% of total net accounts and notes receivable as of March 31, 2005.

NOTE 4:    BUSINESS SEGMENT INFORMATION

The Company 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) receives financial and operating information relative to these two business segments, and organizationally, has a President of LSI Lighting Solutions Plus and a President of LSI Graphics Solutions Plus reporting directly to him.

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, LSI 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 21% and 27% of total net sales concentrated in this market in the three month periods ended March 31, 2005 and 2004, respectively, and approximately 25% and 30% of total net sales concentrated in this market in the nine month periods ended March 31, 2005 and 2004, 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.

NOTE 5:    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 data):

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NOTE 6:    BALANCE SHEET DATA

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

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NOTE 7:    GOODWILL AND OTHER INTANGIBLE ASSETS

The Company completed its annual goodwill impairment test in fiscal 2005 as of July 1, 2004. The Company determined that it had three reporting units. Based upon this 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. There was no goodwill impairment in fiscal 2004.

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, 2004 and the nine months ended March 31, 2005 by operating segment, are as follows:

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

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 March 31, 2005 the available portion of this line of credit was $47.0 million. A portion of this credit facility is a $20 million line of credit that expires in the third quarter of fiscal 2006. There are no borrowings under this portion of the credit facility at March 31, 2005. The remainder of the credit facility is a $30 million three year committed line of credit that expires in fiscal 2008. 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 March 31, 2005 the average interest rate on borrowings under this revolving line of credit was approximately 3.37%. 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 March 31, 2005.

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NOTE 9:    INCOME TAXES

The following table presents the Company’s deferred income tax balances.

Deferred income tax asset (liability) included in:

As a result of an IRS audit, federal income taxes were repaid related to items that will now be deducted in future years. This repayment caused a decrease in the long-term deferred income tax liability.

The Company’s fiscal 2005 estimated effective income tax rate was revised in the third quarter as a result of conclusion of federal and state audits, and a more favorable filing basis in a state in which the Company operates. Resulting effective income tax rates were 34.4% for the nine month period ended March 31, 2005 and for the full year fiscal 2005, and 23.9% for the three month period ended March 31, 2005. Tax rates in these periods are down from the 37% that had been the previous estimated fiscal 2005 effective income tax rate. The Company expects the fiscal 2006 effective income tax rate to be approximately 36.7%.

NOTE 10:    CASH DIVIDENDS

The Company paid cash dividends of $4,825,000 and $3,784,000 in the nine month periods ended March 31, 2005 and 2004, respectively. In April 2005, the Company’s Board of Directors declared a $0.10 per share regular quarterly cash dividend (approximately $1,975,000) payable on May 17, 2005 to shareholders of record May 10, 2005.

NOTE 11:    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 1,863,147 shares were available for future grant or award as of March 31, 2005. 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 March 31, 2005, a total of 1,003,517 options for common shares were outstanding from this plan as well as two previous stock option plans.

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 2005 and 2004.

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At March 31, 2005, the 377,000 options granted in the first nine months of fiscal 2005 to both employees and non-employee directors had exercise prices ranging from $8.55 to $10.71, fair values ranging from $3.55 to $4.37, and remaining contractual lives of about nine and one-half years. At March 31, 2004, the 7,550 options granted to both employees and non-employee directors in the first nine months of fiscal 2004 had exercise prices ranging from $9.60 to $12.99, fair values ranging from $3.20 to $4.41, and remaining contractual lives of about nine years.

NOTE 12:    LOSS CONTINGENCY RESERVE

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 plus the Company’s legal fees. As of March 31, 2005 the Company is the defendant in a complex lawsuit alleging patent infringement with respect to some of the Company’s menu board systems sold over the past nine years. The Company intends to defend this case vigorously. In the progress of this case, the Company made a reasonable settlement offer and, accordingly, has recorded a loss contingency reserve in the amount of $590,000 (approximately $.02 per share, diluted) in the third quarter of fiscal 2005. If this settlement is not accepted by the plaintiff, there is the possibility that final resolution of this matter could result in an additional loss in excess of the presently established loss reserve. Management is not able to estimate the likeliness or amount of such additional loss, or a range of additional loss. However, management believes that while the ultimate disposition of this matter and such potential additional loss could have a material adverse effect on the Company’s results from operations and cash flows in the period in which it is recorded or paid, no such charge would have a material adverse effect on the Company’s financial position or liquidity. Should this patent infringement case be resolved against the Company, it would be likely that the Company would be responsible to make royalty payments to the plaintiff at a currently unknown percentage of future menu board system sales.

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

        Refer to “Safe Harbor” statement following the index in front of this Form 10-Q.

Net Sales by Business Segment
   (In thousands, unaudited)

Results of Operations

THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004

        Net sales of $67,814,000 in the third quarter of fiscal 2005 increased 32% from third quarter fiscal 2004 net sales of $51,500,000. Lighting Segment net sales increased 16% to $40.2 million and Graphics Segment net sales increased 63% to $27.6 as compared to the prior year. Sales to the petroleum / convenience store market represented 21% and 27% of total net sales in the quarters ended March 31, 2005 and 2004, respectively. Net sales to this, the Company’s largest market, are reported in both the Lighting and Graphics Segments, depending upon the product or service sold, and were up 4% from the third quarter of fiscal 2004 to $14.3 million. The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company; however, as sales to other markets and customers increase, the percentage of net sales to the petroleum / convenience store market would be expected to decline.

        The $5.6 million increase in Lighting Segment net sales is primarily the result of an aggregate increase of $5.3 million of lighting sales to our niche markets of petroleum / convenience stores, automotive dealerships, quick service restaurants, and retail national accounts (including significantly increased sales to a large national retailer), as well as a $1.0 million increase in commissioned net sales to the commercial and industrial market.

        The $10.7 million increase in Graphics Segment net sales is primarily the result of the effect of increased graphics net sales to the petroleum / convenience store market ($1.1 million), and increased net sales to retail store customers (approximately $8.4 million). Net sales to CVS Pharmacies, Inc. were approximately $8.6 million or 13% of the Company’s total net sales in the quarter ended March 31, 2005.

        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.

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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 immediately replace net sales 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.

        The Company increased sales prices in the second half of fiscal year 2004 and again in the second quarter of fiscal 2005 on select products in some markets the Company serves, however inflation did not have a significant impact on sales in third quarter of fiscal 2005. The Company experienced competitive pricing pressures in most markets, thereby holding price increases to a minimum. In some markets the Company was able to increase sales prices to recover a portion of increased raw material costs, but generally with little or no increase in gross profit. The rise in steel and aluminum prices caused a reduction in the gross profit margin as a percentage of net sales.

        Gross profit of $15,379,000 in the third quarter of fiscal 2005 increased 30% from the same period last year, but decreased as a percentage of net sales to 22.7% in third quarter of fiscal 2005 as compared to 22.9% last year. The increase in amount of gross profit is due primarily to the 16% increase in net sales, product mix and efficiencies, partially offset by higher material costs, increased inventory adjustments, installation, freight and distribution expenses. While the Company instituted sales price increases on select products in the second half of fiscal 2004 and again in the second quarter of fiscal 2005, manufacturing wages and compensation increases ($0.3 million), competitive pricing pressures, unabsorbed manufacturing costs in the Company’s New York facility, increased manufacturing expenses ($0.3 million of utilities, factory supplies and depreciation) and increased material costs partially offset the favorable influences on the Company’s gross profit margin.

        Selling and administrative expenses in the third quarter of fiscal year 2005 increased $1.8 million and decreased as a percentage of net sales to 17.9% from 20.1% in the same period last year. The third quarter of fiscal 2005 had increased employee compensation and benefits expense ($0.8 million due to increased salary rates, staffing levels and incentive compensation), a $0.6 million expense related to alleged patent infringement, increased product warranty expense ($0.2 million primarily in the Lighting Segment), increased sales commissions and increased depreciation expense ($0.1 million, primarily related to the Company’s business operating system).

        The Company reported interest expense of $50,000 in third quarter of fiscal 2005 as compared to $58,000 last year. The average interest rate on the Company’s line of credit has increased in the third quarter of fiscal 2005 as compared to the same period last year and the average borrowings outstanding have decreased. The effective tax rate in the third quarter of fiscal 2005 was 23.9% as a result of a favorable adjustment of the Company’s expected fiscal year 2005 effective tax rate to 34.4%.

        Net income in the third quarter of fiscal 2005 was $2,422,000 as compared to $920,000 in the same period last year, a 163% increase. The increase is primarily the result of increased gross profit on increased net sales, partially offset by increased operating expenses, and income taxes. Diluted earnings per share was $0.12 in the third quarter of fiscal 2005 as compared to $0.05 per share in the same period of fiscal 2004. The weighted average common shares outstanding for purposes of computing diluted earnings per share in third quarter of fiscal 2005 was 20,109,000 shares as compared to 20,107,000 shares in the same period last year.

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NINE MONTHS ENDED MARCH 31, 2005 COMPARED TO NINE MONTHS ENDED MARCH 31, 2004

        Net sales of $210,448,000 in the first nine months of fiscal 2005 increased 20% from first nine months of fiscal 2004 net sales of $174,715,000. Lighting Segment net sales increased 17% to $131.9 million and Graphics Segment net sales increased 26% to $78.5 as compared to the prior year. Sales to the petroleum / convenience store market represented 25% and 30% of total net sales in the nine months ended March 31, 2005 and 2004, respectively. Net sales to this, the Company’s largest market, are reported in both the Lighting and Graphics Segments, depending upon the product or service sold, and were up 2% from the first nine months of fiscal 2005 to $52.9 million. The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company.

        The $19.4 million increase in Lighting Segment net sales is primarily the result of an aggregate increase of $15.4 million of lighting sales to our niche markets of petroleum / convenience stores, automotive dealerships, quick service restaurants, and retail national accounts (including significantly increased sales to a major national retailer), as well as a $4.9 million increase of commissioned net sales to the commercial and industrial lighting market.

        The $16.3 million increase in Graphics Segment net sales is primarily the result of the net effect of decreased graphics net sales to the petroleum / convenience store market ($1.1 million), increased menu board system sales (approximately $4.9 million) and increased net sales to retail store customers (approximately $12.5 million).

        The Company increased sales prices in the second half of fiscal year 2004 and again in the second quarter of fiscal 2005 on select products in some markets the Company serves, however inflation did not have a significant impact on sales in first nine months of fiscal 2005. The Company experienced competitive pricing pressures in most markets, thereby holding price increases to a minimum. In some markets the Company was able to increase sales prices to recover increased raw material costs, but generally with little or no increase in gross profit. The rise in steel and aluminum prices caused a reduction in the gross profit margin.

        Gross profit of $53,190,000 in the first nine months of fiscal 2005 increased 18% from the same period last year, and decreased as a percentage of net sales to 25.3% in first nine months of fiscal 2005 as compared to 25.9% last year. The increase in amount of gross profit is due primarily to the 20% increase in net sales, product mix and efficiencies, partially offset by higher inventory adjustments related to obsolete inventory, installation, freight and distribution expenses. While the Company instituted sales price increases on select products in the second half of fiscal 2004 and again in the second quarter of fiscal 2005, manufacturing wages and compensation increases ($1.4 million), increased manufacturing expenses ($1.1 million of utilities, factory supplies and depreciation) competitive pricing pressures, unabsorbed manufacturing costs in the Company’s New York facility, and increased material costs partially offset the favorable influences on the Company’s gross profit margin.

        Selling and administrative expenses in the first nine months of fiscal year 2005 increased $3.6 million and decreased as a percentage of net sales to 17.5% from 19.0% in the same period last year. The first nine months of fiscal 2005 had increased employee compensation ($1.8 million due to increased salary rates, and increased staffing levels and incentive compensation), increased sales commissions in line with the increased

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commissionable net sales ($0.4 million), increased depreciation expense ($0.6 million, primarily related to the Company’s business operating system), increased other selling costs ($0.6 million) and a $0.6 million expense related to alleged patent infringement. These increases were partially offset by a favorable $370,000 gain related to the Company’s Graphics Segment’s partial settlement of its bankruptcy claim against Kmart, and a decreased provision for bad debts ($0.2 million).

        The Company completed its annual goodwill impairment test as of July 1, 2004 as required by Statement of Financial Accounting Standards No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets,” and recorded an impairment of $186,000 in the first quarter of fiscal 2005. There was no impairment in fiscal 2004. See Note 7 to the financial statements for additional information.

        The Company reported interest expense of $195,000 in first nine months of fiscal 2005 as compared to $194,000 in the same period last year. The average interest rate on the Company’s line of credit has increased in the first nine months of fiscal 2005 as compared to the same period last year and the average outstanding borrowings have decreased. The effective tax rate in first nine months of fiscal 2005 was reduced to 34.4% in the third quarter, and compares to a fiscal 2004 rate for the first nine months of 36.8%.

        Net income in the first nine months of fiscal 2005 was $10,530,000 as compared to $7,527,000 in the same period last year, a 40% increase. The increase is primarily the result of increased gross profit on increased net sales, partially offset by increased operating expenses, goodwill impairment and income taxes. Diluted earnings per share was $0.53 in the first nine months of fiscal 2005 as compared to $0.38 per share in the same period of fiscal 2004. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first nine months of fiscal 2005 was 20,043,000 shares as compared to 20,033,000 shares last year.

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 March 31, 2005 the Company had working capital of $64.6 million, compared to $64.7 million at June 30, 2004. The ratio of current assets to current liabilities increased to 3.25 to 1 from 3 to 1. While working capital was essentially unchanged, several balance sheet items did change. Cash increased ($1.4 million) and all of the following decreased: receivables ($0.6 million), inventories ($3.2 million), other current assets ($1.4 million), accounts payable ($3.2 million) and accrued expenses ($0.4 million). The $0.6 million increase in accounts receivable is due to higher third quarter fiscal 2005 net sales as compared to fourth quarter fiscal 2004, offset by a decrease in days sales outstanding (DSO). The DSO was 55 days at March 31, 2005, down from 59 days at June 30, 2004. Finished goods inventories have increased $0.1 million in fiscal 2005, while raw materials and work in process are down $3.3 million since the end of fiscal 2004.

        The Company generated $17.0 million of cash from operating activities in first nine months of fiscal 2005 as compared to a generation of cash of $10.3 million in the same period last year. The $6.7 million increase in net cash flows from operating activities in the first nine months of fiscal 2005 is primarily the net result of increased net income ($3.0 million favorable), less of a decrease in accounts receivable and refundable income taxes (unfavorable change of

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$4.9 million), a decrease in inventories rather than an increase (favorable change of $11.0 million), a decrease in other current assets rather than an increase (favorable change of $3.3 million), an aggregate $3.7 million decrease in accounts payable and accrued expenses in first nine months of fiscal 2005 as compared to an aggregate $2.3 million increase last year (net $6.0 million unfavorable), more depreciation, amortization and goodwill impairment in the first nine months of fiscal 2005 ($1.1 million favorable), a greater reduction in deferred income tax liabilities ($0.4 unfavorable), and an unfavorable change of $0.3 million related to distributions out of the Company’s non-qualified deferred compensation plan.

        Net accounts and notes receivables were $42.0 million and $42.5 million at March 31, 2005 and June 30, 2004, respectively. The 1% decrease in receivables is due to the net result of increased sales of the third quarter of fiscal 2005 as compared to the fourth quarter of fiscal 2004 as well as the timing of customer payments which produced a lower DSO (days sales outstanding). As of the date this Form 10-Q was filed, the Company has received payment in full of the $0.5 million note receivable pursuant to a settlement agreement. 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 March 31, 2005 are down $3.2 million from June 30, 2004. An inventory increase of about $1.7 million occurred in the Graphics Segment in support of shipping requirements of various customer programs, primarily that of a large national retailer. The Lighting Segment inventories decreased about $4.9 million in the first nine months of fiscal 2005 (includes an inventory adjustment charge of $535,000 at the Company’s New York facility). The $3.2 million reduction of accounts payable from June 30, 2004 to March 31, 2005 is related to the timing of both purchases of inventory and payments to suppliers.

        Cash generated from operations and borrowing capacity under a line of credit agreement are the Company’s primary source of liquidity. The Company has an unsecured $50 million revolving line of credit with its bank group. As of May 3, 2005 there was $47 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 2008 and a $20 million credit facility with an annual renewal in the third quarter of fiscal 2006. The Company believes that the total of available lines of credit plus cash flows from operating activities is adequate for the Company’s fiscal 2005 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.

        Capital expenditures of $2.9 million in first nine months of fiscal 2005 compare to $4.2 million in the same period of fiscal 2004. Fiscal 2005 spending is primarily for tooling and equipment. The Company intends to expand its graphics facility in Rhode Island and may incur some spending in the fourth quarter of fiscal 2005, but the majority of the approximate $4 million expenditure will be in fiscal 2006. Total capital expenditures in fiscal 2005 are expected to be in the range of $3.5 to $4.0 million, exclusive of business acquisitions.

        The Company used $12.9 million in financing activities in first nine months of fiscal 2005 as compared to a use of $6.2 million in the same period of fiscal 2004. The $6.7 million change between years is primarily the net result of increased net payments on the Company’s line of credit (unfavorable $5.8 million), increased dividend payments (unfavorable $1.0 million) pursuant to the Company’s increased indicated annual dividend payment amount, and increased cash flow from the exercise of stock options and issuance of common shares pursuant to compensation programs (favorable $0.2 million).

        On April 27, 2005 the Board of Directors declared a regular quarterly cash dividend of $0.10 per share (approximately $1,979,000), payable May 17, 2005 to shareholders of record on May 10, 2005. During the first nine months of fiscal 2005, the Company paid cash dividends

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of $4,825,000, as compared to $3,784,000 in the same period of fiscal 2004. The declaration and amount of dividends will be determined by the Company’s Board of Directors, in its discretion, based upon its evaluation of earnings, cash flow, capital requirements and future business developments and opportunities, including acquisitions.

        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 or graphics 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 have a material impact on the financial statements.

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. 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 installation of product; 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, 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 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,

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time-phased elements of the work, in which case revenue is recognized at the time of the progress billing. 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 at least 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 $186,000 related to goodwill was recorded as an operating expense in the first quarter of fiscal 2005. See Note 7 to the financial statements for further discussion.

        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 a potential impairment charge is required was 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 or 2004.

Credit and Collections

        The Company maintains allowances for doubtful accounts receivable for 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.

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New Accounting Pronouncements

        In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 151, “Inventory Costs.” This statement amends Accounting Research Board (ARB) No. 43, “Inventory Pricing,” to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials should be recognized as current-period charges. In addition, this statement requires that allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005, or the Company’s 2006 fiscal year beginning July 1, 2005. The Company is currently evaluating the impact of this statement, but does not expect any significant impact on its financial condition or results of operations when it is implemented.

        In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment.” This statement establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, primarily when it obtains employee services in share-based payment transactions. SFAS No. 123 (revised 2004) supersedes the Accounting Principles Board Opinion No. 25, Accounting for Stock issued to Employees. This Statement requires public entities to measure the cost of employee services received in exchange for an award of equity instruments based upon the grant date fair value of the award, with this cost being recognized over the period during which an employee is required to provide the services. This statement is effective for the first fiscal year beginning after June 15, 2005, or the Company’s first quarter of fiscal 2006 which begins July 1, 2005. The Company is currently evaluating the impact of this statement, but does not expect any significant impact on its financial condition or results of operations when it is implemented.

        In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 153, “Exchanges of Nonmonetary Assets.” This statement addresses the measurement of exchanges of nonmonetary assets and is effective for fiscal periods beginning after June 15, 2005. The Company is currently evaluating the impact of this statement, but does not expect any significant impact on its financial condition or results of operations when it is implemented.

        In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position FSP FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities provided by the American Jobs Creation Act of 2004.” The Company has implemented this Staff Position that was effective immediately.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Nothing to report.

ITEM 4.    CONTROLS AND PROCEDURES.

        An evaluation was performed as of March 31, 2005 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 pursuant to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934. Based upon this evaluation, these disclosure controls and procedures were found to be effective with no significant weaknesses noted.

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Management had reported, as a result of its December 31, 2004 evaluation of internal controls, to the Audit Committee a matter involving internal control that is considered a material weakness under standards established by the Public Company Accounting Oversight Board. Grant Thornton, the Company’s independent registered public accounting firm, concurred with Management’s findings. The identified material weakness related to the lack of a procedure or process to perform a detailed review of the inventory at the Company’s New York facility for purposes of writing down the cost of inventories to reflect lower of cost-or-market adjustments, excess quantities or obsolete items. The Company implemented a procedure requiring an objective-based as well as subjective-based review of the inventory for the purpose of establishing an appropriate obsolete inventory reserve. Such a review was performed in the third quarter of fiscal 2005, resulting in an additional write down of the cost of inventory in the amount of $535,000 to reflect lower of cost-or-market adjustments. This formalized procedure will be followed in the future in accordance with the Company’s policy.

        There have been no other 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 6.    EXHIBITS

    a)        Exhibits

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.

May 4, 2005

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