LSI Industries
Annual Report 2010

Plain-text annual report

A N N U A L R E P O R T 2 0 1 0 This time last year I wrote to you about the steps we were taking to return LSI Industries to a growth oriented posture for fiscal 2010. Among the actions we took were "right sizing" operations to fit weaker end markets, maintaining a strong financial condition, upgrading facilities and modernizing equipment and production technologies, opening a new iZone Technology Education Center, and acquiring AdL Technology. Our plan for fiscal 2010 was one of preparation and one of change. I am pleased to report that we are, I believe, on the road to recovery. For the fiscal year ended June 30, 2010, net sales increased almost 9% over fiscal 2009 to $254.4 million, and we returned to profitable operations. Particularly encouraging were fourth quarter operating results which showed an increase in net sales of over 27% compared to the fourth quarter of fiscal 2009. Our theme of preparation and change continued during fiscal 2010 as we took additional actions designed to capitalize on returning economic growth and stronger demand for our lighting and graphics products. For example, we aggressively continued our development and introduction of solid-state LED lighting fixtures. During fiscal 2010 approximately 24% of our Lighting net sales was solid-state LEDs. Our acquisition of AdL Technology has provided important vertical integration and allowed us to gain more control over our supply chain for electronic circuit boards and LED drivers. In addition, during fiscal 2010 we established a relationship with a manufacturer's rep agency and distributor to promote sales in Europe and the Middle East, we invested in capital equipment to provide computer-controlled metal fabrication, and we increased our capabilities in large format digital printing with the purchase of two state-of-the-art Vutek printing presses. We also completed the sale of LSI Marcole and began the consolidation of LSI Greenlee Lighting into our Cincinnati facility to be completed in October 2010. Our strategic growth vision has not changed as we continue our commitment to developing new product technologies for our markets while maintaining and growing our world class lighting and graphics capabilities. We believe LSI Industries is very well positioned to capitalize on the growth of the lighting industry over the next decade. The already present trends of energy efficiency, environmental legislation and cost effectiveness will drive the direction of lighting products and related technologies in the future. LSI is a leader in providing and developing state-of-the-art efficient LED lighting and dynamic LED graphic signage. The potential of LSI Industries resides in how we think about our long-term growth strategies while we employ short-term oriented tactics and actions to cut costs, improve efficiencies, and remain financially sound. We are working to optimize results in challenging market conditions and, at the same time, are preparing the Company for further growth opportunities. LSI has paid regular cash dividends since 1989. With a slowly improving outlook combined with a strong cash flow and solid balance sheet, we have elected to continue with the current indicated annual cash dividend rate of $0.20 per share for fiscal 2011. We believe that the cash dividends paid by LSI Industries are important to our shareholders and the current rate is comfortable for LSI. It would be our intention to increase the cash dividend rate when actual market conditions and operating results improve. We are hopeful that the improved operating results for fiscal 2010 represent the beginning of stronger economic conditions for our lighting and graphics markets, but it is too early to be certain. Although the near term view of the economy is cloudy, we believe the longer term outlook is very bright for LSI Industries. As stated at the conclusion of last year's Annual Report to Shareholders, "LSI Industries has the right products, the stable financial platform, the motivated employees, experienced management teams and visionary technology innovation to take advantage of stronger market conditions and an increasing number of opportunities in the future." Sincerely, Robert J. Ready Chairman, CEO and President LSI Industries Inc. is an Image Solutions company, dedicated to advancing solid-state LED technology in lighting and graphics applications. We combine integrated technology, design, and manufacturing to supply high quality, environmentally friendly lighting fixtures and graphics elements for commercial, retail and specialty niche market applications. LSI is a U.S. manufacturer with marketing / sales efforts throughout the world with concentration currently on North American, Latin American, Australian, New Zealand, Asian, European and Middle Eastern markets. Building upon its success with LED lighting its fixtures and SmartVision® solid-state LED video boards, LSI is committed to producing affordable, high performance, energy efficient lighting and graphic products for indoor and outdoor use. We have a vast offering of innovative solutions for virtually any lighting or graphics application. Further, we can provide design support, engineering, installation and project management for custom graphics rollout programs for today’s retail environment. LSI’s major markets are the commercial / industrial lighting, petroleum / convenience store, multi-site retail (including automobile dealerships, restaurants and national retail accounts), sports and entertainment markets. LSI employs approximately 1,400 people in facilities located in Ohio, New York, North Carolina, Kansas, Kentucky, Rhode Island, Texas and Montreal, Canada. The Company’s common shares are traded on the NASDAQ Global Select Market under the symbol LYTS. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2010. OR ____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________. Ohio (State or other jurisdiction of incorporation or organization) Commission File No. 0-13375 LSI INDUSTRIES INC. (Exact name of Registrant as specified in its charter) 10000 Alliance Road Cincinnati, Ohio 45242 (Address of principal executive offices) IRS Employer I.D. No. 31-0888951 (513) 793-3200 (Telephone number of principal executive offices) Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Common shares, no par value Name of each exchange on which registered The NASDAQ Stock Market LLC (NASDAQ Global Select Market) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [ X] Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [ X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ X] Non-accelerated filer [ ] Smaller reporting company [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X As of December 31, 2009, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $159,904,000 based upon a closing sale price of $7.88 per share as reported on The NASDAQ Global Select Market. At August 27, 2010 there were 24,038,675 no par value Common Shares issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement filed with the Commission for its 2010 Annual Meeting of Shareholders are incorporated by reference in Part III, as specified. LSI INDUSTRIES INC. 2010 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I Begins on Page BUSINESS ...................................................................................................................... ITEM 1. ITEM 1A. RISK FACTORS .............................................................................................................. ITEM 1B. UNRESOLVED STAFF COMMENTS ................................................................................. PROPERTIES ................................................................................................................. ITEM 2. LEGAL PROCEEDINGS ................................................................................................. ITEM 3. [REMOVED AND RESERVED] ...................................................................................... ITEM 4. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ....................... SELECTED FINANCIAL DATA ....................................................................................... ITEM 6. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .................................................... ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........... FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ........................................ ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ITEM 9. ACCOUNTING AND FINANCIAL DISCLOSURE .................................................... ITEM 9A. CONTROLS AND PROCEDURES ................................................................................. ITEM 9B. OTHER INFORMATION ................................................................................................. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE .............. ITEM 11. EXECUTIVE COMPENSATION ..................................................................................... ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ............................... ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE ..................................................................................................... ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ..................................................... 1 9 12 12 13 13 13 15 15 15 16 17 17 18 18 18 18 18 18 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ............................................. 18 PART IV “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995 This Form 10-K 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,” “seeks,” “may,” “will,” “should” or the negative versions of those words and similar expressions, and by the context in which they are used. Such statements, whether expressed or implied, are based upon current expectations of the Company and speak only as of the date made. Actual results could differ materially from those contained in or implied by such forward-looking statements as a result of a variety of risks and uncertainties over which the Company may have no control. These risks and uncertainties include, but are not limited to, the impact of competitive products and services, product demand and market acceptance risks, potential costs associated with litigation and regulatory compliance, reliance on key customers, financial difficulties experienced by customers, the cyclical and seasonal nature of our business, the adequacy of reserves and allowances for doubtful accounts, fluctuations in operating results or costs whether as a result of uncertainties inherent in tax and accounting matters or otherwise, unexpected difficulties in integrating acquired businesses, the ability to retain key employees of acquired businesses, unfavorable economic and market conditions, the results of asset impairment assessments and the other risk factors that are identified herein. You are cautioned to not place undue reliance on these forward-looking statements. In addition to the factors described in this paragraph, the risk factors identified in our Form 10-K and other filings the Company may make with the SEC constitute risks and uncertainties that may affect the financial performance of the Company and are incorporated herein by reference. The Company does not undertake and hereby disclaims any duty to update any forward-looking statements to reflect subsequent events or circumstances. PART I ITEM 1. BUSINESS Our Company We are a leading provider of comprehensive corporate visual image solutions through the combination of extensive screen and digital graphics capabilities, a wide variety of high quality indoor and outdoor lighting products, and related professional services. We also provide graphics and lighting products and professional services on a stand-alone basis. Our company is the leading provider of corporate visual image solutions to the petroleum/convenience store industry. We use this leadership position to penetrate national retailers and multi-site retailers, including quick service and casual restaurants, eyewear chains, retail chain stores and automobile dealerships located primarily in the United States. In addition, we are a leading provider of digital solid-state LED (light emitting diode) video screens and LED specialty lighting to such markets or industries as sports stadiums and arenas, digital billboards, and entertainment. We design and develop all aspects of the solid-state LED video screens and lighting, from the electronic circuit board, to the software to drive and control the LEDs, to the structure of the LED product. Our focus on product development and innovation creates products that are essential components of our customers’ corporate visual image strategy. We develop and manufacture lighting, graphics and solid-state LED video screen and lighting products and distribute them through an extensive multi-channel distribution network that allows us to effectively service our target markets. Representative customers include BP, Chevron Texaco, 7-Eleven, ExxonMobil, Shell, Burger King, Dairy Queen, Taco Bell, Wendy’s, Best Buy, CVS Caremark, Target Stores, Wal-Mart Stores, Inc., Chrysler, Ford, General Motors, Nissan, and Toyota. We service our customers at the corporate, franchise and local levels. We believe that national retailers and niche market companies are increasingly seeking single- source suppliers with the project management skills and service expertise necessary to execute a comprehensive visual image program. The integration of our graphics, lighting, technology and professional services capabilities allows our customers to outsource to us the development of an entire visual image program from the planning and design stage through installation. Our approach is to combine standard, high-production lighting products, custom graphics applications and professional services to create complete customer-focused visual image solutions. We also offer products and services on a stand-alone basis to service our existing image solutions customers, to establish a presence in a new market or to create a relationship with a new customer. We believe that our ability to combine graphics and lighting products and professional services into a comprehensive visual image solution differentiates us from our competitors who offer only stand-alone products for lighting or graphics and who lack professional services offerings. During the past several years, we have continued to enhance our ability to provide comprehensive corporate visual image solutions by adding additional graphics capabilities, lighting products, LED video screens, LED lighting products and professional services through acquisitions and internal development. Our business is organized as follows: the Lighting Segment, which represented 63% of our fiscal 2010 net sales; the Graphics Segment, which represented 27% of our fiscal 2010 net sales; the Technology Segment, which represented 2% of our fiscal 2010 net sales; the Electronic Components Segment, which represented 6% of our fiscal 2010 net sales; and an All Other Category, which represented 2% of our fiscal 2010 net sales. Our most significant market, which includes sales of both the Lighting Segment and the Graphics Segment, is the petroleum / convenience store market with approximately 35%, 23%, and 28% of total net sales concentrated in this market in the fiscal years ended June 30, 2010, 2009, and 2008, respectively. See Note 2 of Notes to Consolidated Financial Statements beginning on page F-31 of this Form 10-K for additional information on business segments. Net sales by segment are as follows (in thousands): - 1 - 2010 $159,105 Lighting Segment 68,395 Graphics Segment Technology Segment 4,505 Electronic Components Segment 16,116 6,281 All Other Category $254,402 Total Net Sales 2009 $160,475 60,765 4,576 -- 7,983 $233,799 2008 $183,694 85,244 9,136 -- 27,212 $305,286 Lighting Segment Our lighting segment manufactures and markets outdoor and indoor lighting for the commercial, industrial and multi-site retail markets, including the petroleum / convenience store market. Our products are designed and manufactured to provide maximum value and meet the high-quality, competitively-priced product requirements of our niche markets. We generally avoid specialty or custom-designed, low-volume products for single order opportunities. We do, however, design proprietary products used by our national account customers in large volume, and occasionally also provide custom products for large, specified projects. Our concentration is on our high-volume, standard product lines that meet our customers’ needs. By focusing our product offerings, we achieve significant manufacturing and cost efficiencies. Our lighting fixtures, poles and brackets are produced in a variety of designs, styles and finishes. Important functional variations include types of mounting, such as pole, bracket and surface, and the nature of the light requirement, such as down-lighting, wall-wash lighting, canopy lighting, flood- lighting, area lighting and security lighting. Our engineering staff performs photometric analyses, wind load safety studies for all light fixtures and also designs our fixtures and lighting systems. Our lighting products utilize a wide variety of different light sources, including high-intensity discharge metal-halide, fluorescent, and solid-state LED. The major products and services offered within our lighting segment include: exterior area lighting, interior lighting, canopy lighting, landscape lighting, LED lighting, light poles, lighting analysis and photometric layouts. All of our products are designed for performance, reliability, ease of installation and service, as well as attractive appearance. The Company also has a focus on designing lighting system solutions and implementing strategies related to energy savings in substantially all markets served. We offer our customers expertise in developing and utilizing high-performance LED color and white lightsource solutions for our Lighting, Graphics and Technology applications, which, when combined with the Company’s lighting fixture expertise and technology has the potential to result in a broad spectrum of white light LED fixtures that offer equivalent or improved lighting performance with significant energy and maintenance savings as compared to the present metal halide and fluorescent lighting fixtures. The $1.4 million or 0.9% decrease in Lighting Segment net sales in fiscal 2010 is primarily the net result of an $18.4 million or 18.9% decrease in commissioned net sales to the commercial and industrial lighting market, partially offset by a $17.0 million or 27.0% increase in lighting sales to our niche markets of petroleum / convenience stores, automotive dealerships, and retail national accounts (7-Eleven, Inc. represented an increase of approximately $19.5 million as it replaced traditional lighting with solid-state LED lighting). Fiscal 2010 Lighting Segment net sales to the petroleum / convenience store market were approximately $51,462,000, representing 32% of total Lighting net sales. White light solid-state LED light fixtures represent a growth area for the Company, with fiscal 2010 Lighting Segment LED sales of approximately $37,800,000 (approximately 24% of total Lighting Segment net sales) up 496% from the prior year. The $23.2 million or 12.6% decrease in Lighting Segment net sales in fiscal 2009 was primarily the result of a $13.3 million or 17% net decrease in lighting sales to our niche markets (petroleum / - 2 - convenience stores, automotive dealerships, and quick service restaurants) and national retail accounts, and a $9.9 million or 9.2% decrease in commissioned net sales to the commercial / industrial lighting market. Fiscal 2009 Lighting Segment net sales to the petroleum / convenience store market were approximately $30,279,000, representing 19% of total Lighting net sales. White light solid-state LED light fixtures represent a growth area for the Company, with such fiscal 2009 Lighting Segment sales of approximately $6,340,000 (approximately 4% of total Lighting Segment net sales). Graphics Segment The Graphics Segment manufactures and sells exterior and interior visual image elements related to graphics. These products are used in graphics displays and visual image programs in several markets, including the petroleum/convenience store market and multi-site retail operations. Our extensive lighting and graphics expertise, product offering, visual image solution implementation capabilities and other professional services represent significant competitive advantages. We work with corporations and design firms to establish and implement cost effective corporate visual image programs. Increasingly, we have become the primary supplier of exterior and interior graphics for our customers. We also offer installation or installation management (utilizing pre-qualified independent subcontractors throughout the United States) services for those customers who require the installation of interior or exterior graphics products. Our business can be significantly impacted by participation in a customer’s “image conversion program,” especially if it were to involve a “roll out” of that new image to a significant number of that customer’s and its franchisees’ retail sites. The impact to our business can be very positive with growth in net sales and profitability when we are engaged in an image conversion program. This can be followed in subsequent periods by lesser amounts of business or negative comparisons following completion of an image conversion program, unless we are successful in replacing that completed business with participation in a new image conversion program of similar size with one or more customers. An image conversion program can potentially involve any or all of the following improvements, changes or refurbishments at a customer’s retail site: interior or exterior lighting (see discussion above about our lighting segment), interior or exterior store signage and graphics, and installation of these products in both the prototype and roll out phases of their program. We believe our retail customers are implementing image conversions on a more frequent basis than in the past in order to maintain a safe, fresh look or new image on their site in order to continue to attract customers to their site, and maintain or grow their market share. However, this trend has slowed down during this recessionary period. The major products and services offered within our Graphics Segment include the following: signage and canopy graphics, pump dispenser graphics, building fascia graphics, decals, interior signage and marketing graphics, aisle markers, wall mural graphics, fleet graphics, prototype program graphics, installation services for graphics products and solid state LED video screens for the sports and advertising markets. The $7.6 million or 12.6% increase in Graphics Segment net sales in fiscal 2010 is primarily the result of image conversion programs and sales to ten petroleum / convenience store customers ($16.1 million net increase), and the LED video sports screen market ($0.2 million increase). These increases were partially offset by the following decreases: a grocery retailer ($5.1 million decrease); five retail customers ($1.2 million net decrease); a national drug store retailer ($0.7 million decrease); a lawn care company ($0.4 million decrease); and changes in volume or completion of several other graphics programs. Fiscal 2010 Graphics Segment net sales to the petroleum / convenience store market were approximately $38,490,000, representing 56% of total Graphics net sales. Graphics Segment net sales related to LED products and installation totaled approximately $20,275,000 (approximately 30% of total Graphics Segment net sales). - 3 - The $24.5 million or 28.7% decrease in Graphics Segment net sales in fiscal 2009 was primarily the result of completion of programs for certain graphics customers, including an image conversion program for a national drug store retailer ($4.3 million decrease), two petroleum / convenience store customers’ programs ($25.7 million decrease), reductions of net sales to ten other petroleum / convenience store customers ($7.0 million decrease) and changes in volume or completion of other graphics programs. These decreases were partially offset by increased net sales to certain other customers, including a reimaging program for a grocery customer ($8.9 million increase), and sales of solid-state LED video screens for sports markets ($5.7 million increase). Fiscal 2009 Graphics Segment net sales to the petroleum / convenience store market were approximately $24,295,000, representing 40% of total Graphics net sales. Graphics Segment net sales related to LED products and installation totaled approximately $8,014,000 (approximately 13% of total Graphics Segment net sales). Technology Segment The Technology Segment, which is LSI Saco Technologies in Montreal, Canada, operates as a worldwide leader and pioneer in the design, production, and support of high-performance light engines and large format video screens using LED technology. LSI Saco Technologies offers its customers expertise in developing and utilizing high-performance LED color and white lightsource solutions for both lighting and graphics applications. This technology generated development in the Company’s Lighting Segment of a broad spectrum of white light LED fixtures that offer equivalent or improved lighting performance with significant energy and maintenance savings as compared to the traditional metal halide and fluorescent lighting fixtures. Additionally, this LED technology is used in the Company’s Graphics Segment to light, accent and provide color lighting to graphics display and visual image programs of the Company’s retail, quick service restaurant and sports market customers. The $0.1 million or 1.6% decrease in Technology Segment net sales in fiscal 2010 relates primarily to decreased net sales of LED video screens to the entertainment market ($0.3 million) and decreased net sales of specialty LED lighting (0.1 million), partially offset by increased net sales to other customers. The $4.6 million or 50% decrease in Technology Segment net sales in fiscal 2009 related primarily to decreased sales of solid-state LED video screens for the sports and advertising markets ($3.0 million) and decreased sales of specialty LED lighting ($2.1 million), partially offset by increased sales of solid-state LED video screens to the entertainment market ($0.8 million). Electronic Components Segment The Electronic Components Segment was created on July 22, 2009 when the Company acquired AdL Technology Inc., which it renamed LSI ADL Technology, at a total purchase price of $15.8 million. The new subsidiary has continued to operate in Columbus, Ohio to design, engineer and manufacture custom designed electronic circuit boards, assemblies and sub-assemblies used in various applications including the control of solid-state LED lighting. The Company acquired AdL Technology as a vertical integration of circuit boards for LED lighting as well as the Company’s other LED product lines such as digital scoreboards, advertising ribbons and billboards. LSI ADL Technology allows the Company to stay on the leading edge of product development, while at the same time providing opportunities to drive down manufacturing costs and control delivery of key components. Net sales of the Electronic Components Segment were $16,116,000 in fiscal year 2010. In addition to these customer sales, the Electronic Components Segment also supplied a significant amount of products to both the Lighting and Graphics Segments. All Other Category The All Other Category includes the results of all LSI operations that are not able to be aggregated into one of the four reportable business segments. Operating results of LSI Marcole, LSI Adapt, LSI Images as well as Corporate Administrative expenses are included in the All Other - 4 - Category. The major products and services offered by operations included in the All Other Category include: electrical wire harnesses (for LSI’s light fixtures and for the white goods or appliance industry); exterior and interior menu board systems primarily for the quick service restaurant market; and surveying, permitting and installation management services related to products of the Graphics Segment. Fiscal 2010 net sales of $6,281,000 decreased $1.7 million or 21.3% from the prior year primarily as the net result of decreased net sales to two quick service restaurant menu board customers ($0.8 million), decreased sales of electrical wire harnesses ($1.0 million) and changes in volume or completion of other customer programs. The Company sold its wire harness operation and business at the end of the third quarter of fiscal 2010 and will therefore have no further sales of wire harnesses. Fiscal 2009 net sales of $7,983,000 decreased $19.2 million or 71% from the prior fiscal year primarily as a net result of one menu board conversion program that was completed in fiscal 2008 ($19.8 million decrease). Goodwill and Intangible Asset Impairment In fiscal 2010, we recorded a $153,000 non-cash intangible asset impairment charge. Due to declining use of a trade name and a reduced outlook of future net sales, we determined that a trade name with a $137,000 carrying value in the Technology Segment was fully impaired. Additionally the Lighting Segment no longer sells a certain product that supported a $16,000 patent intangible asset, therefore it was fully impaired. In fiscal 2009, we recorded a $14,467,000 non-cash goodwill impairment charge. Charges totaling $11,185,000 were recorded in the Lighting Segment, charges totaling $716,000 were recorded in the Graphics Segment, and charges in the amount of $2,566,000 were recorded in the All Other Category. Impairment tests conducted in three of the four fiscal quarters indicated there were full or partial impairments of goodwill in one of our reporting units in our Lighting Segment, one reporting unit in the Graphics Segment and one reporting unit in our All Other Category due to the combination of a decline in the market capitalization of the Company at certain quarter-end balance sheet dates and a decline in the estimated forecasted discounted cash flows which management attributes to a weaker economic cycle impacting certain of our customers, notably national retailers. Our Competitive Strengths Single Source Comprehensive Visual Image Solution Provider. We believe that we are the only company serving our target markets that combines significant graphics capabilities, lighting products and installation implementation capabilities to create comprehensive image solutions. We believe that our position as a single-source provider creates a competitive advantage over competitors who can only address either the lighting or the graphics component of a customer’s corporate visual image program. Using our broad visual image solutions capabilities, our customers can maintain complete control over the creation of their visual image programs while avoiding the added complexity of coordinating separate lighting and graphics suppliers and service providers. We can use high technology software to produce computer-generated virtual prototypes of a customer’s new or improved retail site image. We believe that these capabilities are unique to our target markets and they allow our customers to make educated, cost-effective decisions quickly. Proven Ability to Penetrate Target Markets. We have grown our business by establishing a leadership position in the majority of our target markets as defined by our revenues, including petroleum/convenience stores, automobile dealerships and specialty retailers. Although our relationship with our customers may begin with the need for a single product or service, we leverage our broad product and service offering to identify additional products and solutions. We combine existing graphics, lighting and image element offerings, develop products and add services to create comprehensive solutions for our customers. - 5 - Product Development Focus. We believe that our ability to successfully identify and develop new products has allowed us to expand our market opportunity and enhance our market position. Our product development initiatives are designed to increase the value of our product offering by addressing the needs of our customers and target markets through innovative retrofit enhancements to existing products or the development of new products. In addition, we believe our product development process creates value for our customers by producing products that offer energy efficiency, low maintenance requirements and long-term operating performance at competitive prices based upon the latest technologies available. Strong Relationships with our Customers. We have used our innovative products and high- quality services to develop close, long-standing relationships with a large number of our customers. Many of our customers are recognized among the leaders in their respective markets, including customers such as BP, 7-Eleven, Chevron, CVS Caremark and Burger King. Their use of our products and services raises the visibility of our capabilities and facilitates the acceptance of our products and services in their markets. Within each of these markets, our ability to be a single source provider of image solutions often creates repeat business opportunities through corporate reimaging programs. We have served some of our customers since our inception in 1976. Well-capitalized Balance Sheet. As part of our long-term operating strategy, we believe the Company maintains a conservative capital structure. With a strong equity base, we are able to preserve operating flexibility in times of industry expansion and contraction. In the current business environment, a strong balance sheet demonstrates financial viability to our existing and targeted customers. In addition, a strong balance sheet enables us to continue important R&D and capital spending. Aggressive Use of Our Image Center Capabilities. Our image center capabilities provide us with a distinct competitive advantage to demonstrate the effectiveness of integrating graphics and lighting into a complete corporate visual image program. Our technologically advanced image centers, which demonstrate the depth and breadth of our product and service offerings, have become an effective component of our sales process. Maintain our Vertically Integrated Business Model. We consider our company to be a vertically integrated manufacturer rather than a product assembler. We focus on developing unique customer- oriented products, solutions and technology, and outsource certain non-core processes and product components as necessary. Sales, Marketing and Customers Our lighting products are sold primarily throughout the United States, but also in Canada, Australia and Latin America (about 3% of total net sales are outside the United States) using a combination of regional sales managers, independent sales representatives and distributors. Although in some cases we sell directly to national firms, more frequently we are designated as a preferred vendor for product sales to customer-owned as well as franchised, licensed and dealer operations. Our graphics products, which are program-driven, technology products, electronic components, and products and services sold by operations in the All Other Category are sold primarily through our own sales force. Our marketing approach and means of distribution vary by product line and by type of market. Sales are developed by contacts with national retail marketers, branded product companies, franchise and dealer operations. In addition, sales are also achieved through recommendations from local architects, engineers, petroleum and electrical distributors and contractors. Our sales are partially seasonal as installation of outdoor lighting and graphic systems in the northern states decreases during the winter months. - 6 - Our image center and i-Zone center capabilities are important parts of our sales process. The image center, unique within the lighting and graphics industry, is a facility that can produce a computer- generated virtual prototype of a customer’s facility on a large screen through the combination of high technology software and audio/visual presentation. The i-Zone center is a digitally controlled facility containing a large solid-state LED video screen and several displays that showcase our LED technology and LED products. With these capabilities, our customers can instantly explore a wide variety of lighting and graphics alternatives to develop consistent day and nighttime images. These centers give our customers more options, greater control, and more effective time utilization in the development of lighting, graphics and visual image solutions, all with much less expense than traditional prototyping. In addition to being cost and time effective for our customers, we believe that our image center and i-Zone center capabilities result in the best solution for our customers’ needs. The image and i-Zone centers also contain comprehensive indoor and outdoor product display areas that allow our customers to see many of our products and services in one setting. This aids our customers in making quick and effective lighting and graphic design decisions through hands-on product demonstrations and side-by-side comparisons. More importantly, these capabilities allow us to expand our customer’s interest from just a single product into other products and solutions. We believe that our image center and i-Zone center capabilities have further enhanced our position as a highly qualified outsourcing partner capable of guiding a customer through image alternatives utilizing our lighting and graphics products and services. We believe this capability distinguishes us from our competitors and will become increasingly beneficial in attracting additional customers. Manufacturing and Operations We design, engineer and manufacture substantially all of our lighting and graphics products through a vertically integrated business model. By emphasizing high-volume production of standard product lines, we achieve significant manufacturing efficiencies. When appropriate, we utilize alliances with vendors to outsource certain products and assemblies. LED products and related software are engineered, designed and final-assembled by the Company, while a portion of the manufacturing has been performed by select qualified vendors. We are not dependent on any one supplier for any of our component parts. The principal raw materials and purchased components used in the manufacturing of our products are steel, aluminum, wire harnesses, sockets, lamps, certain fixture housings, acrylic and glass lenses, lighting ballasts, inks, various graphics substrates such as decal material and vinyls, LEDs and electrical components. We source these materials and components from a variety of suppliers. Although an interruption of these supplies and components could disrupt our operations, we believe generally that alternative sources of supply exist and could be readily arranged. We strive to reduce price volatility in our purchases of raw materials and components through quarterly or annual contracts with certain of our suppliers. Our lighting operations generally carry relatively small amounts of finished goods inventory, except for certain products that are stocked to meet quick delivery requirements. Most often, lighting products are made to order and shipped shortly after they are manufactured. Our graphics operations manufacture custom graphics products for customers who frequently require us to stock certain amounts of finished goods in exchange for their commitment to that inventory. Our technology operation carries LED and LED component inventory due to longer lead times, makes products to order and ships shortly after assembly is complete. In some Graphics programs, customers also give us a cash advance for the inventory that we stock for them. Customers purchasing LED video screens routinely give us cash advances for large projects prior to shipment. Our electronic components operation purchases electronic components from multiple suppliers and manufactures custom electronic circuit boards. Most products are made to order and, as a result, this operation does not carry very much finished goods. We believe we are a low-cost producer for our types of products, and as such, are in a position to promote our product lines with substantial marketing and sales activities. - 7 - We currently operate out of thirteen manufacturing facilities in seven states and Canada. During fiscal 2010 we sold a wire harness manufacturing facility and announced our intention to consolidate our smallest Lighting manufacturing facility into our largest facility. This consolidation is expected to be completed in the second quarter of fiscal 2011 and will reduce our number of facilities down to twelve. Our manufacturing operations are subject to various federal, state and local regulatory requirements relating to environmental protection and occupational health and safety. We do not expect to incur material capital expenditures with regard to these matters and believe our facilities are in compliance with such regulations. Competition We experience strong competition in all segments of our business, and in all markets served by our product lines. Although we have many competitors, some of which have greater financial and other resources, we do not compete with the same companies across our entire product and service offerings. We believe product quality and performance, price, customer service, prompt delivery, and reputation to be important competitive factors. We have several product and process patents which have been obtained in the normal course of business. In general, we do not believe that patent protection is critical to our business, however we do believe that patent protection is important for a few select products. Additional Information Our sales are partially seasonal as installation of outdoor lighting and graphic systems in the northern states lessens during the harshest winter months. We had a backlog of orders, which we believe to be firm, of $60.5 million and $40.5 million at June 30, 2010 and 2009, respectively. All orders are believed to be shippable or installed within twelve months. The increase as of June 30, 2010 relates primarily to a $38 million program with 7-Eleven, Inc. to install retrofit solid-state LED lighting at over 3,000 of its sites in North America. We have approximately 1,160 full-time and 185 temporary employees as of June 30, 2010. We offer a comprehensive compensation and benefit program to most employees, including competitive wages, a discretionary bonus plan, a profit-sharing plan and retirement plan, and a 401(k) savings plan (for U.S. employees), a non-qualified deferred compensation plan (for certain employees), an equity compensation plan, and medical and dental insurance. We file reports with the Securities and Exchange Commission (“SEC”) on Forms 10-K, 10-Q and 8-K. You may read and copy any materials filed with the SEC at its public reference room at 100 F. Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain that information by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet website that contains reports, proxy and information statements and other information regarding us. The address of that site is http://www.sec.gov. Our internet address is http://www.lsi-industries.com. We make available free of charge through our internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practical after we electronically file them with the SEC. LSI is not including the other information contained on its website as part of or incorporating it by reference into this Annual Report on Form 10-K. LSI Industries Inc. is an Ohio corporation, incorporated in 1976. - 8 - ITEM 1A. RISK FACTORS In addition to the other information set forth in this report, you should carefully consider the following factors which could materially affect our business, financial condition, cash flows or future results. Any one of these factors could cause the Company’s actual results to vary materially from recent results or from anticipated future results. The risks described below are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. The markets in which we operate are subject to competitive pressures that could affect selling prices, and therefore could adversely affect our operating results. Our businesses operate in markets that are highly competitive, and we compete on the basis of price, quality, service and/or brand name across the industries and markets served. Some of our competitors for certain products, primarily in the Lighting Segment, have greater sales, assets and financial resources than we have. Some of our competitors are based in foreign countries and have cost structures and prices in foreign currencies. Accordingly, currency fluctuations could cause our U.S. dollar-priced products to be less competitive than our competitors’ products which are priced in other currencies. Competitive pressures could affect prices we charge our customers or demand for our products, which could adversely affect our operating results. Additionally, customers for our products are attempting to reduce the number of vendors from which they purchase in order to reduce the size and diversity of their inventories and their transaction costs. To remain competitive, we will need to invest continuously in manufacturing, marketing, customer service and support, and our distribution networks. We may not have sufficient resources to continue to make such investments and we may be unable to maintain our competitive position. Lower levels of economic activity in our end markets could adversely affect our operating results. Our businesses operate in several market segments including commercial, industrial, retail, petroleum / convenience store and entertainment. Operating results can be negatively impacted by volatility in these markets. Future downturns in any of the markets we serve could adversely affect our overall sales and profitability. Our operating results may be adversely affected by unfavorable economic and market conditions. Economic conditions worldwide have from time to time contributed to slowdowns in our industry at large, as well as to the specific segments and markets in which we operate. When combined with ongoing customer consolidation activity and periodic manufacturing and inventory initiatives, the current uncertain macro-economic climate, including but not limited to the effects of weakness in credit markets, could lead to reduced demand from our customers and increased price competition for our products, increased risk of excess and obsolete inventories and higher overhead costs as a percentage of revenue. If the markets in which we participate experience further economic downturns, as well as a slow recovery period, this could negatively impact our sales and revenue generation, margins and operating expenses, and consequently have a material adverse effect on our business, financial condition and results of operations. Price increases or significant shortages of raw materials and components could adversely affect our operating margin. The Company purchases large quantities of raw materials and components – mainly steel, aluminum, lighting ballasts, sockets, wire harnesses, plastic, lenses, glass lenses, vinyls, inks, LEDs, electronic components and corrugated cartons. Materials comprise the largest component of costs, - 9 - representing nearly 62% of the cost of sales in both 2010 and 2009. While we have multiple sources of supply for each of our major requirements, significant shortages could disrupt the supply of raw materials. Further increases in the price of these raw materials and components could further increase the Company’s operating costs and materially adversely affect margins. Although the Company attempts to pass along increased costs in the form of price increases to customers, the Company may be unsuccessful in doing so for competitive reasons. Even when price increases are successful, the timing of such price increases may lag significantly behind the incurrence of higher costs. As of August 2010, there are selected electronic component parts and certain other parts shortages in the market place, some of which have affected the Company’s manufacturing operations and shipment schedules even though multiple suppliers may be available. The lead times from electronic component suppliers have significantly increased for some component parts and prices of some of these electronic component parts have increased during this period of shortages. We have a concentration of net sales to the petroleum / convenience store market, and any substantial change in this market could have an adverse affect on our business. Approximately 35% of our net sales in fiscal year 2010 are concentrated in the petroleum / convenience store market. Sales to this market segment are dependent upon the general conditions prevailing in and the profitability of the petroleum and convenience store industries and general market conditions. Our petroleum market business is subject to reactions by the petroleum industry to world political events, particularly those in the Middle East, and to the price and supply of oil. Major disruptions in the petroleum industry generally result in a curtailment of retail marketing efforts, including expansion and refurbishing of retail outlets, by the petroleum industry and adversely affect our business. Any substantial change in purchasing decisions by one or more of our largest customers, whether due to actions by our competitors, customer financial constraints, industry factors or otherwise, could have an adverse effect on our business. Difficulties with integrating acquisitions could adversely affect operating costs and expected benefits from those acquisitions. We have pursued and may continue to seek potential acquisitions to complement and expand our existing businesses, increase our revenues and profitability, and expand our markets. We cannot be certain that we will be able to identify, acquire or profitably manage additional companies or successfully integrate such additional companies without substantial costs, delays or other problems. Also, companies acquired recently and in the future may not achieve revenues, profitability or cash flows that justify our investment in them. We expect to spend significant time and effort in expanding our existing businesses and identifying, completing and integrating acquisitions. We expect to face competition for acquisition candidates which may limit the number of acquisition opportunities available to us, possibly leading to a decrease in the rate of growth of our revenues and profitability, and may result in higher acquisition prices. The success of these acquisitions we do make will depend on our ability to integrate these businesses into our operations. We may encounter difficulties in integrating acquisitions into our operations, retaining key employees of acquired companies and in managing strategic investments. Therefore, we may not realize the degree or timing of the benefits anticipated when we first enter into a transaction. If acquisitions are made in the future and goodwill and intangible assets are recorded on the balance sheet, circumstances could arise in which the goodwill and intangible assets could become impaired and therefore would be written off. We have pursued and will continue to seek potential acquisitions to complement and expand our existing businesses, increase our revenues and profitability, and expand our markets through acquisitions. As a result of acquisitions, we have significant goodwill and intangible assets recorded on our balance sheet. We will continue to evaluate the recoverability of the carrying amount of our goodwill and intangible assets on an ongoing basis, and we may incur substantial non-cash impairment - 10 - charges, which would adversely affect our financial results. There can be no assurance that the outcome of such reviews in the future will not result in substantial impairment charges. Impairment assessment inherently involves judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact our assumptions as to prices, costs, holding periods or other factors that may result in changes in our estimates of future cash flows. Although we believe the assumptions we used in testing for impairment are reasonable, significant changes in any one of our assumptions could produce a significantly different result. If there were to be a decline in our market capitalization and a decline in estimated forecasted discounted cash flows, there could be an impairment of the goodwill and intangible assets. A non-cash impairment charge could be material to the earnings of the reporting period in which it is recorded. If customers do not accept new products, we could experience a loss of competitive position which could adversely affect future revenues. The Company is committed to product innovation on a timely basis to meet customer demands. Development of new products for targeted markets requires the Company to develop or otherwise leverage leading technologies in a cost-effective and timely manner. Failure to meet these changing demands could result in a loss of competitive position and seriously impact future revenues. Products or technologies developed by others may render the Company’s products or technologies obsolete or noncompetitive. A fundamental shift in technologies in key product markets could have a material adverse effect on the Company’s operating results and competitive position within the industry. More specifically, the development of new or enhanced products is a complex and uncertain process requiring the anticipation of technological and market trends. We may experience design, manufacturing, marketing or other difficulties, such as an inability to attract a sufficient number of experienced engineers, that could delay or prevent our development, introduction or marketing of new products or enhancements and result in unexpected expenses. Such difficulties could cause us to lose business from our customers and could adversely affect our competitive position. In addition, added expenses could decrease the profitability associated with those products that do not gain market acceptance. Our business is cyclical and seasonal, and in downward economic cycles our operating profits and cash flows could be adversely affected. Historically, sales of our products have been subject to cyclical variations caused by changes in general economic conditions. Our revenues in our third quarter ending March 31 are also affected by the impact of weather on construction and installation programs and the annual budget cycles of major customers. The demand for our products reflects the capital investment decisions of our customers, which depend upon the general economic conditions of the markets that our customers serve, including, particularly, the petroleum and convenience store industries. During periods of expansion in construction and industrial activity, we generally have benefited from increased demand for our products. Conversely, downward economic cycles in these industries result in reductions in sales and pricing of our products, which may reduce our profits and cash flow. During economic downturns, customers also tend to delay purchases of new products. The cyclical and seasonal nature of our business could at times adversely affect our liquidity and financial results. A loss of key personnel or inability to attract qualified personnel could have an adverse affect on our operating results. The Company’s future success depends on the ability to attract and retain highly skilled technical, managerial, marketing and finance personnel, and, to a significant extent, upon the efforts and abilities of senior management. The Company’s management philosophy of cost-control results in a very lean workforce. Future success of the Company will depend on, among other factors, the ability to attract and - 11 - retain other qualified personnel, particularly management, research and development engineers and technical sales professionals. The loss of the services of any key employees or the failure to attract or retain other qualified personnel could have a material adverse effect on the Company’s results of operations. The costs of litigation and compliance with environmental regulations, if significantly increased, could have an adverse affect on our operating profits. We are, and may in the future be, a party to any number of legal proceedings and claims, including those involving patent litigation, product liability, employment matters, and environmental matters, which could be significant. Given the inherent uncertainty of litigation, we can offer no assurance that existing litigation or a future adverse development will not have a material adverse impact. We are also subject to various laws and regulations relating to environmental protection and the discharge of materials into the environment, and it could potentially be possible we could incur substantial costs as a result of the noncompliance with or liability for clean up or other costs or damages under environmental laws. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES The Company has thirteen facilities: Description Size Location Status 1) LSI Industries Corporate Headquarters, and lighting fixture and graphics manufacturing 243,000 sq. ft., (includes 66,000 sq. ft. of office space) Cincinnati, OH Owned 2) LSI Industries pole 122,000 sq. ft. Cincinnati, OH Owned manufacturing and dry powder-coat painting 3) LSI Metal Fabrication and LSI Images manu- facturing and dry powder-coat painting 98,000 sq. ft. (includes 5,000 sq. ft. of office space) 4) LSI Integrated Graphics office; screen printing manufacturing; and architectural graphics manufacturing 5) Greenlee Lighting office and manufacturing 198,000 sq. ft. (includes 34,000 sq. ft. of office space) 40,000 sq. ft. (includes 4,000 sq. ft. of office space) - 12 - Independence, KY Owned Houston, TX Leased Dallas, TX Leased  6) Grady McCauley office and manufacturing 7) LSI MidWest Lighting office and manufacturing 8) LSI Retail Graphics office and manufacturing 9) LSI Lightron office and manufacturing 210,000 sq. ft. (includes 20,000 sq. ft. of office space) 163,000 sq. ft. (includes 6,000 sq. ft. of office space and 27,000 sq. ft. of leased warehouse space) 57,000 sq. ft. (includes 11,000 sq. ft. of office space) 170,000 sq. ft. (includes 10,000 sq. ft. of office space) 10) LSI Adapt offices 2,000 sq. ft. 11) LSI Saco Technologies office and manufacturing 12) LSI ADL Technology office and manufacturing 30,000 sq. ft. (includes 7,000 sq. ft. of office space) 57,000 sq. ft. (includes 11,000 sq. ft. of office space) North Canton, OH Owned Kansas City, KS Owned and Leased Woonsocket, RI Owned (a) New Windsor, NY Owned and Leased (b) North Canton, OH Charlotte, NC Owned Leased Montreal, Canada Leased Columbus, OH Owned (a) This represents two facilities. (b) The land at this facility is leased and the building is owned. The Company considers these facilities (total of 1,390,000 square feet) adequate for its current level of operations. ITEM 3. LEGAL PROCEEDINGS Nothing to report. ITEM 4. [REMOVED AND RESERVED] PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (a) Common share information appears in Note 17 – SUMMARY OF QUARTERLY RESULTS (UNAUDITED) under “Range of share prices” beginning on page F-48 of this Form 10-K. Information related to “Earnings (loss) per share” and “Cash dividends paid per share” appears in SELECTED FINANCIAL DATA on page F-50 of this Form 10-K. LSI’s shares of common stock are traded on the NASDAQ Global Select Market under the symbol “LYTS.” - 13 - The Company’s policy with respect to dividends, as revised by the Board of Directors in August 2007, is to pay a quarterly cash dividend representing a payout ratio of between 50% and 70% of the then current fiscal year net income forecast. Accordingly, the Board of Directors established a new indicated annual cash dividend rate of $0.20 per share beginning with the first quarter of fiscal 2010 consistent with the above dividend policy. In addition to the four quarterly dividend payments, the Company may declare a special year- end cash and/or stock dividend. The Company has paid annual cash dividends beginning in fiscal 1987 through fiscal 1994, and quarterly cash dividends since fiscal 1995. At August 18, 2010, there were 502 shareholders of record. The Company believes this represents approximately 3,000 beneficial shareholders. (b) The Company does not purchase into treasury its own common shares for general purposes. However, the Company does purchase its own common shares, through a Rabbi Trust, as investments of employee/participants of the LSI Industries Inc. Non- Qualified Deferred Compensation Plan. Purchases of Company common shares for this Plan in the fourth quarter of fiscal 2010 were as follows: ISSUER PURCHASES OF EQUITY SECURITIES (a) Total Number of Shares Purchased 422 471 462 1,355 (b) Average Price Paid per Share $6.95 $6.32 $5.43 $6.21 Period 4/1/10 to 4/30/10 5/1/10 to 5/31/10 6/1/10 to 6/30/10 Total (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 422 471 462 1,355 (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1) (1) (1) (1) (1) All acquisitions of shares reflected above have been made in connection with the Company's Non-Qualified Deferred Compensation Plan, which does not contemplate a limit on shares to be acquired. The following graph compares the cumulative total shareholder return on the Company's Common Shares during the five fiscal years ended June 30, 2010 with a cumulative total return on the NASDAQ Stock Market Index (U.S. companies) and the Dow Jones Electrical Equipment Index. The comparison assumes $100 was invested June 30, 2005 in the Company's Common Shares and in each of the indexes presented; it also assumes reinvestment of dividends. - 14 - COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among LSI Industries Inc., the NASDAQ Composite Index and the Dow Jones US Electrical Components & Equipment Index $160 $140 $120 $100 $80 $60 $40 $20 $0 6/05 6/06 6/07 6/08 6/09 6/10 LSI Industries Inc. NASDAQ Composite Dow Jones US Electrical Components & Equipment *$100 invested on 6/30/05 in stock or index, including reinvestment of dividends. Fiscal year ending June 30. Copyright© 2010 Dow Jones & Co. All rights reserved. The stock price performance included in this graph is not necessarily indicative of future stock price performance. ITEM 6. SELECTED FINANCIAL DATA "Selected Financial Data" begins on page F-50 of this Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis of Financial Condition and Results of Operations" appears on pages F-1 through F-17 of this Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in variable interest rates, changes in prices of raw materials and component parts, and changes in foreign currency translation rates. Each of these risks is discussed below. - 15 - Interest Rate Risk The Company earns interest income on its cash, cash equivalents, and short-term investments (if any) and pays interest expense on its debt. Because of variable interest rates, the Company is exposed to the risk of interest rate fluctuations, which impact interest income, interest expense, and cash flows. With the significant increase in the Company’s short-term cash investments and fourth quarter fiscal 2007 pay down of all variable rate debt, the adverse exposure to interest rate fluctuations has decreased considerably. All of the Company’s $35,000,000 available lines of credit are subject to interest rate fluctuations, should the Company borrow on these lines of credit. Additionally, the Company expects to generate cash from its operations that will subsequently be used to pay down as much of the debt (if any is outstanding) as possible or invest cash in short-term investments (if no debt is outstanding), while still funding the growth of the Company. Raw Material Price Risk The Company purchases large quantities of raw materials and components, mainly steel, aluminum, lighting ballasts, sockets, wire harnesses, plastic, lenses, glass, vinyls, inks, LEDs, electronic components, and corrugated cartons. The Company’s operating results could be affected by the availability and price fluctuations of these materials. The Company uses multiple suppliers, has alternate suppliers for most materials, and has no significant dependence on any single supplier. Other than industry-wide electronic component supply shortages, the Company has not experienced any significant supply problems in recent years. Supply shortages of certain electronic components and certain other parts in fiscal 2010 has caused some production and shipment delays, and the Company is dealing with some increased supply chain lead times. Price risk for these materials is related to increases in commodity items that affect all users of the materials, including the Company’s competitors. For the year ended June 30, 2010, the raw material component of cost of goods sold subject to price risk was approximately $124 million. The Company does not actively hedge or use derivative instruments to manage its risk in this area. The Company does, however, seek new vendors, negotiate with existing vendors, and at times commit to minimum volume levels to mitigate price increases. The Company negotiates supply agreements with certain vendors to lock in prices over a negotiated period of time. In response to rising material prices, the Company’s Lighting Segment announced price increases ranging from 4% to 6%, depending on the product, effective with late June 2010 orders. While competitors of the Company’s lighting business have announced similar price increases, the lighting market remains very price competitive. The Company’s Graphics Segment generally establishes new sales prices, reflective of the then current raw material prices, for each custom graphics program as it begins. Foreign Currency Translation Risk As a result of the operation of a subsidiary in Montreal, Canada, the Company is exposed to fluctuations in foreign currency exchange rates in the operation of its Canadian business. However, a substantial amount of this business is conducted in U.S. dollars, therefore, any potential risk is deemed immaterial. Additionally, the financial transactions and financial statements of this subsidiary are recorded in U.S. dollars. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements Financial Statements: Management’s Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm - 16 - Begins on Page F-18 F-19 Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm Consolidated Statements of Operations for the years ended June 30, 2010, 2009, and 2008 Consolidated Balance Sheets at June 30, 2010 and 2009 Consolidated Statements of Shareholders' Equity for the years ended June 30, 2010, 2009, and 2008 Consolidated Statements of Cash Flows for the years ended June 30, 2010, 2009, and 2008 Notes to Consolidated Financial Statements Financial Statement Schedules: II - Valuation and Qualifying Accounts for the years ended June 30, 2010, 2009, and 2008 F-20 F-21 F-22 F-23 F-25 F-26 F-27 F-51 Schedules other than those listed above are omitted for the reason(s) that they are either not applicable or not required or because the information required is contained in the financial statements or notes thereto. Selected quarterly financial data is found in NOTE 17 of the accompanying consolidated financial statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures The Company maintains disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company periodically reviews the design and effectiveness of its disclosure controls and internal control over financial reporting. The Company makes modifications to improve the design and effectiveness of its disclosure controls and internal control structure, and may take other corrective action, if its reviews identify a need for such modifications or actions. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. As of the end of the period covered by this Form 10-K, an evaluation was completed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, regarding the design and effectiveness of our disclosure controls and procedures. Based on this evaluation, our management, including our principal executive officer and principal financial officer, has concluded that our disclosure controls and procedures were effective as of June 30, 2010. Changes in Internal Control There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2010, - 17 - that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. See Management’s Report on Internal Control Over Financial Reporting on page F-18. ITEM 9B. OTHER INFORMATION None. PART III ITEMS 10, 11, 12, 13 and 14 of Part III are incorporated by reference to the LSI Industries Inc. Proxy Statement for its Annual Meeting of Shareholders to be held November 18, 2010, as filed with the Commission pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table presents information about the Company’s equity compensation plans (LSI Industries Inc. 1995 Stock Option Plan, the LSI Industries Inc. 1995 Directors’ Stock Option Plan and the 2003 Equity Compensation Plan) as of June 30, 2010. (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights (b) Weighted average exercise price of outstanding options, warrants and rights (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) 2,123,086 -- 2,123,086 $11.64 -- $11.64 833,585 -- 833,585 Plan category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report: PART IV (1) Consolidated Financial Statements Appear as part of Item 8 of this Form 10-K. (2) Consolidated Financial Statement Schedules Appear as part of Item 8 of this Form 10-K. (3) Exhibits -- Exhibits set forth below are either on file with the Securities and Exchange Commission and are incorporated by reference as exhibits hereto, or are filed with this Form 10-K. - 18 - Exhibit No. Exhibit Description 2.1 3.1 3.2 3.3 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 Purchase and Sale Agreement dated as of July 22, 2009 among LSI Industries Inc., LSI Acquisition Inc., ADL Technology Inc., ADL Engineering Inc., and Craig A. Miller, Kevin A. Kelly and David T. Feeney filed as Exhibit 2.1 to LSI’s Form 8-K filed July 24, 2009. Articles of Incorporation of LSI filed as Exhibit 3.1 to LSI’s Form S-3 Registration Statement File No. 33-65043. Amended Article Fourth of LSI’s Amended and Restated Articles of Incorporation filed as Exhibit 3.1 to LSI’s Form 8-K filed November 19, 2009. Amended and Restated Code of Regulations of LSI filed as Exhibit 3 to LSI’s Form 8-K filed January 22, 2009. Credit Agreement by and among LSI as the Borrower, the banks party thereto as the lenders thereunder, PNC Bank National Association as the Administrative Agent and the Syndication Agent, Dated as of March 30, 2001 filed as Exhibit 4 to LSI’s Form 10-K for the fiscal year ended June 30, 2001. Amendment No. 6 to Credit Agreement dated January 12, 2007 among the Registrant, PNC Bank, National Association, in its capacity as Lender and The Fifth Third Bank filed as Exhibit 10.1 to LSI’s Form 8-K filed January 17, 2007. Amendment to Credit Agreement dated November 4, 2009 among the Registrant, PNC Bank, National Association, in the capacity as syndication agent and administrative agent, PNC Bank, National Association, in its capacity as lender and Fifth Third Bank filed as Exhibit 10.1 to LSI’s Form 10-Q for the quarter ended September 30, 2009. Amendment to Credit Agreement dated March 31, 2010 among the Registrant, PNC Bank, National Association, in its capacity as syndication agent and administrative agent, PNC Bank, National Association, in its capacity as lender and The Fifth Third Bank filed as Exhibit 10.1 to LSI’s Form 8-K filed March 31, 2010. Loan Agreement dated January 12, 2007 among The Fifth Third Bank, LSI Saco Technologies Inc. and LSI, as guarantor, filed as Exhibit 10.2 to LSI’s Form 8-K filed January 17, 2007. Continuing and Unlimited Guaranty Agreement dated January 12, 2007 executed by the Registrant filed as Exhibit 10.3 to LSI’s Form 8-K filed January 17, 2007. Amendment to Credit Agreement (Dated March 18, 2009) filed as Exhibit 10.1 to LSI’s Form 8-K filed March 18, 2009. First Amendment to Loan Agreement and Guaranty dated as of June 8, 2007 among the Registrant, LSI Saco Technologies Inc., and Fifth Third Bank filed as Exhibit 10.1 to LSI’s Form 8-K filed June 11, 2007. - 19 - 10.9* 10.10* 10.11* 10.12* 10.13* 10.14* 10.15* 10.16* 10.17* 10.18* 10.19* 10.20 10.21 14 21 LSI Industries Inc. Retirement Plan (Amended and Restated as of February 1, 2006) filed as Exhibit 10.9 to LSI’s Form 10-K for the fiscal year ended June 30, 2009. Fourth Amendment to the LSI Industries Inc. Retirement Plan (Amended and Restated as of February 1, 2006) filed as Exhibit 10.10 to LSI’s Form 10-K for the fiscal year ended June 30, 2009. Fifth Amendment to the LSI Industries Inc. Retirement Plan (Amended and Restated as of February 1, 2006) filed as Exhibit 10 to LSI’s Form 10-Q for the quarter ended December 31, 2009. LSI Industries Inc. 1995 Directors’ Stock Option Plan (Amended as of December 6, 2001) filed as Exhibit 10 to LSI’s Form S-8 Registration Statement File No. 333-100038. LSI Industries Inc. 1995 Stock Option Plan (Amended as of December 6, 2001) filed as Exhibit 10 to LSI’s Form S-8 Registration Statement File No. 333-100039. LSI Industries Inc. 2003 Equity Compensation Plan (Amended and Restated through November 19, 2009) filed as Exhibit 10.1 to LSI’s Form 8-K filed November 19, 2009. Trust Agreement Establishing the Rabbi Trust Agreement by and between LSI Industries Inc. and Prudential Bank & Trust, FSB filed as Exhibit 10.1 to LSI’s Form 8-K filed January 5, 2006. LSI Industries Inc. Nonqualified Deferred Compensation Plan (Amended and Restated as of November 19, 2009) filed as Exhibit 10.2 to LSI’s Form 8-K filed November 19, 2009. Amended Agreement dated January 25, 2005 with Robert J. Ready filed as Exhibit 10.1 to LSI’s Form 8-K filed January 27, 2005. Amended Agreement dated January 25, 2005 with James P. Sferra filed as Exhibit 10.2 to LSI’s Form 8-K filed January 27, 2005. LSI Industries Inc. FY2010 Bonus Scorecard filed as Exhibit 99.2 to LSI’s Form 8-K filed January 20, 2010. Escrow Agreement dated as of July 22, 2009 among LSI Acquisition Inc., Craig A. Miller, Kevin A. Kelly, David T. Feeney and U.S. Bank, National Association filed as Exhibit 10.1 to LSI’s Form 8-K filed July 24, 2009. Registration Rights Agreement dated as of July 22, 2009 by and between LSI Industries Inc. and Craig A. Miller, Kevin A. Kelly and David T. Feeney filed as Exhibit 10.2 to LSI’s Form 8-K filed July 24, 2009. Code of Ethics filed as Exhibit 14 to LSI’s Form 10-K for the fiscal year ended June 30, 2004. Subsidiaries of the Registrant - 20 - 23.1 23.2 31.1 31.2 32.1 32.2 Consent of Independent Registered Public Accounting Firm (Grant Thornton LLP) Consent of Independent Registered Public Accounting Firm (Deloitte & Touche LLP) Certification of Principal Executive Officer required by Rule 13a-14(a) Certification of Principal Financial Officer required by Rule 13a-14(a) 18 U.S.C. Section 1350 Certification of Principal Executive Officer 18 U.S.C. Section 1350 Certification of Principal Financial Officer * Management Compensatory Agreements LSI will provide shareholders with any exhibit upon the payment of a specified reasonable fee, which fee shall be limited to LSI’s reasonable expenses in furnishing such exhibit. The exhibits identified herein as being filed with the SEC have been so filed with the SEC but may not be included in this version of the Annual Report to Shareholders. - 21 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LSI INDUSTRIES INC. September 8, 2010 Date BY: /s/ Robert J. Ready Robert J. Ready Chairman of the Board, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title /s/ Robert J. Ready Robert J. Ready Date: September 8, 2010 Chairman of the Board, Chief Executive Officer, and President (Principal Executive Officer) /s/ Ronald S. Stowell Ronald S. Stowell Date: September 8, 2010 Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) /s/ Gary P. Kreider Gary P. Kreider Date: September 8, 2010 /s/ Dennis B. Meyer Dennis B. Meyer Date: September 8, 2010 /s/ Wilfred T. O’Gara Wilfred T. O’Gara Date: September 8, 2010 /s/ Mark A. Serrianne Mark A. Serrianne Date: September 8, 2010 /s/ James P. Sferra James P. Sferra Date: September 8, 2010 Director Director Director Director Secretary; Executive Vice President - Manufacturing; and Director - 22 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company’s “forward looking statements” and disclosures as presented earlier in this Form 10-K in the “Safe Harbor” Statement should be referred to when reading Management’s Discussion and Analysis of Financial Condition and Results of Operations. Net Sales by Business Segment (In thousands) 2010 2009 2008 Lighting Segment Graphics Segment Technology Segment Electronic Components Segment All Other Category $159,105 68,395 4,505 16,116 6,281 $254,402 $183,694 85,244 9,136 -- 27,212 $305,286 $160,475 60,765 4,576 -- 7,983 $233,799 Operating Income (Loss) by Business Segment (In thousands) 2010 2009 2008 Lighting Segment Graphics Segment Technology Segment Electronic Components Segment All Other Category $ 9,335 3,507 (653) 2,279 (12,559) $ 1,909 $ (3,911) 2,646 (486) -- (12,660) $ (14,411) $ 15,310 (14,027) (4,876) -- (7,377) $ (10,970) Summary Comments Fiscal 2010 net sales of $254,402,000 increased $20.6 million or 8.8% as compared to fiscal 2009. Net sales were favorably influenced by increased net sales of the Graphics Segment (up $7.6 million or 12.6%), and the addition of the Electronic Components Segment (effective with the July 22, 2009 acquisition of AdL Technology) which added $16.1 million of net sales. Net sales were unfavorably influenced by decreased All Other Category net sales (down $1.7 million or 21.3%), decreased Lighting Segment net sales (down $1.4 million or 0.9%) and decreased Technology Segment net sales (down $0.1 million or 1.6%). The Company sold its wire harness business in the third quarter of fiscal 2010 and incurred a pre-tax loss of $639,000 which is included in the operating loss of the All Other Category. In fiscal 2010, the Company recorded pre-tax intangible asset impairments of $153,000, as compared to a fiscal 2009 pre-tax goodwill impairments totaling $14,467,000 -- see the paragraph below regarding goodwill and intangible asset impairments and the section below on Non-GAAP Financial Measures. Net sales to the Petroleum / Convenience Store market, the Company’s largest niche market, were $89,952,000 or 35% of total net sales and $54,574,000 or 23% of total net sales in fiscal 2010 and 2009, respectively. The $35.4 million or 65% increase is primarily due to a program with 7-Eleven, Inc., who is replacing traditional canopy, site and sign lighting with solid-state LED lighting ($36.6 million increase). The Company expects to substantially complete the conversion to solid-state LED lighting at the remaining approximately 2,800 non-petroleum retail sites by the end of calendar 2010. Net sales to this petroleum / convenience store customer are reported in both the Lighting and Graphics segments. The Company recorded intangible asset impairment expenses in fiscal 2010 totaling $153,000 ($16,000 in the Lighting Segment and $137,000 in the Technology Segment). There were no such intangible asset impairment expenses in fiscal 2009. The Company recorded significant goodwill F-1 impairment expenses in fiscal 2009 totaling $14,467,000 ($11.2 million in the Lighting Segment, $0.7 million in the Graphics Segment and $2.6 million in the All Other Category). There were no such goodwill impairment expenses in fiscal 2010. The Company also recorded significant acquisition-related and other professional fees expenses in fiscal 2010, totaling $1,198,000 ($678,000 of inventory adjustments related to acquisition fair value accounting on the opening balance sheet of LSI ADL Technology; and $520,000 of acquisition transaction costs related to the acquisition of LSI ADL Technology). There were no such similar significant expenses in fiscal 2009. See also the section below on Non-GAAP Financial Measures. The Company’s total net sales of products and services related to solid-state LED technology in light fixtures and video screens for sports, advertising and entertainment markets have been recorded as indicated in the table below. In addition, the Company sells certain elements of graphic identification programs that contain solid-state LED light sources. First Quarter Second Quarter First Half Third Quarter Nine Months Fourth Quarter Full Year FY 2010 FY 2009 % Increase $ 8,798 $17,999 18,533 2,784 11,582 36,532 11,510 3,086 14,668 48,042 14,538 4,262 $62,580 $18,930 105% 566% 215% 273% 228% 241% 231% As fiscal 2010 progressed, the Company continued to encounter the effects of a global economic recession with significant negative economic forces, including declining industrial production, rapidly increasing unemployment, roller coaster commodity pricing, and record low confidence levels, as well as issues such as malfunctioning credit markets which could affect many customers and a decimated housing market that indirectly could affect the Company’s business. Taken as a whole, these factors continue to cause a substantial reduction in demand for our lighting and graphics products. Virtually all of our markets have been adversely impacted and our business has suffered as a result. During these difficult and uncertain economic conditions, we continue to take a number of proactive steps to “right size” LSI Industries to meet today’s challenges. Such actions include strict control of expenses, capital expenditure reductions, close management of accounts receivable and inventories, headcount reductions, and maintaining a conservative financial position coupled with positive free cash flow. We believe the economy will continue to improve even though the time frame for such improvement is uncertain at this time. As we continue to adjust our expense levels to lower production rates and manage working capital efficiently, we are also strategically positioning the business for future growth and are very positive about the longer term outlook and opportunities for the Company, notwithstanding the current economic conditions that will likely continue to impact results during the next several quarters. LSI is still facing a period of challenging business conditions in the near term due to the general economic conditions, but expects to emerge a stronger and more efficient company as business conditions improve. Non-GAAP Financial Measures The Company believes it is appropriate to evaluate its performance after making adjustments to the U.S. GAAP net income (loss) for the 2010 and 2009 fiscal years. Adjusted net income and earnings per share, which exclude the loss on the sale of LSI Marcole, goodwill and intangible asset impairments, a loss contingency related to a menu board patent litigation, and the impact of the LSI ADL Technology acquisition deal costs and acquisition-related fair value inventory adjustments, are non-GAAP financial measures. We believe that these adjusted supplemental measures are useful in assessing the operating performance of our business. These supplemental measures are used by our F-2 management, including our chief operating decision maker, to evaluate business results. We exclude these items because they are not representative of the ongoing results of operations of our business. Below is a reconciliation of this non-GAAP measure to net income (loss) for the periods indicated. (In thousands, except per share data; unaudited) FY 2010 FY 2009 FY 2008 Diluted Diluted Diluted Amount EPS Amount EPS Amount EPS Reconciliation of net income (loss) to adjusted net income: Net income (loss) as reported $1,424 $0.06 $(13,414) $(0.62) $(13,048) $(0.60) Adjustment for the loss on sale of LSI Marcole, inclusive of the income tax effect Adjustment for the acquisition deal costs and acquisition- related fair value inventory adjustment, inclusive of the income tax effect Adjustment for the loss contingency related to the menu board patent litigation, inclusive of the income tax effect 422(1) 0.02 -- -- -- -- 791(2) 0.03 -- -- -- -- -- -- 125(3) 0.01 1,741(4) 0.08 Adjustment for goodwill and intangible asset impairments, inclusive of the income tax effect 148(5) 0.01 13,583(6) 0.62 22,932(7) 1.05 Adjusted net income and earnings per share $2,785 $0.12 $ 294 $0.01 $11,625 $0.53 The income tax effects of the adjustments in the tables above were calculated using the estimated U.S. effective income tax rates for the periods indicated, with appropriate consideration given for the permanent non-deductible portion of the goodwill impairments in fiscal 2009 and 2008. The income tax effects were as follows (In thousands): (1) $217 (2) $407 (3) $75 (4) $1,059 (5) $5 (6) $884 (7) $5,023 F-3 Results of Operations 2010 Compared to 2009 Lighting Segment (In thousands) 2010 2009 Net Sales Gross Profit Operating Income (Loss) $159,105 $ 37,185 $ 9,335 $160,475 $ 36,403 $ (3,911) Lighting Segment net sales of $159,105,000 in fiscal 2010 decreased 0.9% from fiscal 2009 net sales of $160,475,000. The $1.4 million decrease in Lighting Segment net sales is primarily the net result of a $17.0 million or 27% net increase in lighting sales to our niche markets (petroleum / convenience store market net sales were up 70%, net sales to the automotive dealership market were down 29%, and net sales to the quick service restaurant market were down 39%) and national retail accounts, and an $18.4 million or 18.9% decrease in commissioned net sales to the commercial / industrial lighting market. Sales of lighting to the petroleum / convenience store market represented 32% and 19% of Lighting Segment net sales in the fiscal years 2010 and 2009, respectively. Net sales of lighting to this, the Company’s largest niche market, were up 70.0% from last year to $51,462,000, with approximately $21.4 million related to a program with 7-Eleven, Inc., who is replacing traditional canopy, site and sign lighting with solid-state LED lighting. The Company expects to continue to make sales to this particular customer pursuant to new orders received for their non-petroleum convenience stores to be converted in the first half of fiscal 2011. The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $37.8 million in fiscal 2010, representing a 496% increase from fiscal 2009 net sales of solid-state LED light fixtures of $6.3 million. Gross profit of $37,185,000 in fiscal 2010 increased $0.8 million or 2.1% from fiscal 2009, and increased from 21.9% to 22.5% as a percentage of Lighting Segment net sales (customer plus inter- segment net sales). The increase in amount of gross profit is due to the net effect of decreased net sales at increased margins, increased overhead absorption and reduced freight costs. The following items also influenced the Lighting Segment’s gross profit margin: competitive pricing pressures; $1.0 million increased benefits and compensation; $1.1 million increased warranty costs; $0.4 million decreased utilities; $0.3 million decreased depreciation expense; and $0.2 million increased property and real estate taxes. Selling and administrative expenses of $27,834,000 in fiscal year 2010 decreased $1.3 million primarily as the net result of: increased employee compensation and benefits expense ($0.6 million); decreased sales commission expense ($1.1 million); increased research and development expense ($0.9 million); decreased outside services expense ($0.2 million); decreased customer relations expense ($0.5 million); decreased royalty expense ($0.4 million); and decreased warranty expense ($0.4 million). The Lighting Segment recorded a fiscal 2010 patent intangible asset impairment expense of $16,000 as compared to a fiscal 2009 goodwill impairment expense of $11,185,000, resulting in a favorable change of $11.2 million. The Lighting Segment fiscal 2010 operating income of $9,335,000 compares to an operating loss of $(3,911,000) in fiscal 2009. This improvement of $13.2 million was the net result of decreased net sales, increased gross profit, and decreased selling and administrative expenses, and decreased impairment expense. F-4 Graphics Segment (In thousands) 2010 2009 Net Sales Gross Profit Operating Income $68,395 $13,781 $ 3,507 $60,765 $13,382 $ 2,646 Graphics Segment net sales of $68,395,000 in fiscal 2010 increased 12.6% from fiscal 2009 net sales of $60,765,000. The $7.6 million increase in Graphics Segment net sales is primarily the result of image conversion programs and sales to ten petroleum / convenience store customers ($16.1 million net increase), a grocery retailer ($5.1 million decrease), five retail customers ($1.2 million net decrease), the LED video sports screen market ($0.2 million increase), a national drug store retailer ($0.7 million decrease), a lawn care company ($0.4 million decrease), and changes in volume or completion of several other graphics programs. Sales of graphics products and services to the petroleum / convenience store market represented 56% and 40% of Graphics Segment net sales in fiscal years 2010 and 2009, respectively. Net sales of graphics to this, the Company’s largest niche market, were up 58% from last year to $38,490,000, with approximately $17.1 million related to a program with 7-Eleven, Inc., who is replacing traditional sign lighting with solid-state LED lighting. The Company expects to continue to make sales to this particular customer pursuant to new orders received for their non-petroleum convenience stores to be converted primarily in the first nine months of fiscal year 2011. The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company. The Graphics Segment net sales of products and services related to solid-state LED video screens and LED lighting for signage totaled $20.3 million in fiscal 2010 as compared to $8.0 million in the prior year. Image and brand programs, whether full conversions or enhancements, are important to the Company’s strategic direction. Image programs include situations where our customers refurbish their retail sites around the country by replacing some or all of the lighting, graphic elements, menu board systems and possibly other items they may source from other suppliers. These image programs often take several quarters to complete and involve both our customers’ corporate-owned sites as well as their franchisee-owned sites, the latter of which involve separate sales efforts by the Company with each franchisee. The Company may not always be able to replace net sales immediately when a large image conversion program has concluded. Brand programs typically occur as new products are offered or new departments are created within existing retail stores. Relative to net sales to a customer before and after an image or brand program, net sales during the program are typically significantly higher, depending upon how much business is awarded to the Company. Sales related to a customer’s image or brand program are reported in either the Lighting Segment, Graphics Segment, or the All Other Category depending upon the product and/or service provided. Gross profit of $13,781,000 in fiscal 2010 increased $0.4 million or 3% from fiscal 2009, and decreased from 21.5% to 19.9% as a percentage of Graphics Segment net sales (customer plus inter- segment net sales). The increase in amount of gross profit is due to increased Graphics net sales at lower margins. The following items also influenced the Graphics Segment’s gross profit margin: competitive pricing pressures, and other manufacturing expenses in support of production requirements ($0.1 million of increased indirect wage, compensation and benefits costs; $0.4 million increased warranty expense; $0.1 million decreased supplies expense; $0.1 million decreased rental expense; and $0.3 million decreased depreciation and utilities). Selling and administrative expenses of $10,274,000 in fiscal 2010 increased $0.3 million primarily as a net result of decreased compensation and benefits ($0.1 million), increased bad debt expense ($0.3 million), increased customer relations expense ($0.2 million), and decreased outside services expense ($0.1 million). F-5 The Graphics Segment recorded a fiscal 2009 goodwill impairment expense of $716,000 with no similar expense in fiscal 2010, resulting in a favorable change of $0.7 million. The Graphics Segment fiscal 2010 operating income of $3,507,000 increased $0.9 million or 32.5% from operating income of $2,646,000 in fiscal 2009. The $0.9 million increase in operating income was the result of increased net sales, increased gross profit, increased selling and administrative expenses, and decreased impairment expense. Technology Segment (In thousands) 2010 2009 Net Sales Gross Profit Operating Income (Loss) $4,505 $ 734 $ (653) $4,576 $1,028 $ (486) Technology Segment net sales of $4,505,000 in fiscal 2010 decreased 1.6% from fiscal 2009 net sales of $4,576,000. The $0.1 million decrease in Technology Segment net sales is primarily the result of decreased sales of solid-state LED video screens to the entertainment market ($0.3 million) and decreased sales of specialty LED lighting ($0.1 million), partially offset by increased net sales to other customers. Gross profit of $734,000 in fiscal 2010 decreased $0.3 million from fiscal 2009, and changed from 11.5% to 9.3% as a percentage of Technology Segment net sales (customer plus inter-segment net sales). The decrease is related to the drop in sales volume and increased warranty expense ($0.2 million). Selling and administrative expenses of $1,250,000 in fiscal year 2010 decreased $0.3 million, and decreased to 15.8% from 16.9% as a percentage of Technology Segment net sales (customer plus inter-segment net sales). Selling and administrative expenses were down in line with reduced net sales, including $0.2 million reduced outside services, $0.2 million increased royalty expense, $0.1 million reduced bad debt reserve, $0.1 million reduced depreciation expense, $0.1 million reduced intangible asset amortization expense, and $0.1 million reduced warranty expense. The Technology Segment recorded a fiscal 2010 intangible asset impairment expense of $137,000, with no similar expense in fiscal 2009, resulting in an unfavorable change of $0.1 million. The Technology Segment fiscal 2010 operating loss of $(653,000) compares to an operating loss of $(486,000) in fiscal 2009. The decrease in operating income of $0.2 million was the net result of decreased net sales and gross profit, and a fiscal 2010 impairment expense, partially offset by decreased selling and administrative expenses. Electronic Components Segment (In thousands) 2010 2009 Net Sales Gross Profit Operating Income $16,116 $ 3,847 $ 2,279 $ -- $ -- $ -- Electronic Components Segment results include the operations of LSI ADL Technology, a subsidiary that the Company acquired in July 2009. Therefore, the net sales and operating income in F-6 fiscal 2010 are incremental additions to the Company’s results as there were no net sales or operating income in fiscal 2009. Operating income in fiscal 2010 was reduced by $678,000 related to the roll-out of fair value inventory adjustments for LSI ADL Technology’s sales of products that were in finished goods or work-in-process inventory on the acquisition date and therefore were valued at fair value, as opposed to manufactured cost, in the opening balance sheet in accordance with the requirements of purchase accounting. All Other Category (In thousands) 2010 2009 Net Sales Gross Profit Operating (Loss) $ 6,281 $ 186 $(12,559) $ 7,983 $ 1,014 $(12,660) All Other Category net sales of $6,281,000 in fiscal 2010 decreased 21.3% from fiscal 2009 net sales of $7,983,000. The $1.7 million decrease in the All Other Category net sales is primarily the net result of net decreased sales to two quick service restaurant menu board customers ($0.8 million), decreased sales of electrical wire harnesses ($1.0 million) and changes in volume or completion of other customer programs. The Company sold its wire harness operation and business at the end of the third quarter of fiscal 2010 and will therefore have no further sales of wire harnesses. The gross profit of $186,000 in fiscal 2010 compares to gross profit of $1,014,000 in fiscal 2009. The change is primarily the result of the $639,000 loss recorded on the March 2010 sale of the assets and business of the Company’s wire harness operation. The remaining $0.2 million decrease in amount of gross profit is primarily due to decreased net sales and margins, and decreased indirect wage compensation and benefits. Selling and administrative expenses of $12,745,000, which includes Corporate administration expenses, increased $1.6 million in fiscal year 2010. Changes of expense between years include acquisition deal costs associated with the acquisition of LSI ADL Technology ($0.5 million increased expense), increased compensation, benefits and stock option expense ($1.4 million), decreased menu board patent settlement expense ($0.2 million), decreased outside services expense ($0.4 million), decreased professional fees ($0.2 million), increased research and development expense ($0.2 million), decrease royalty income ($0.3 million), and decreased depreciation expense ($0.1 million). The All Other Category recorded a fiscal 2009 goodwill impairment expense of $2,566,000 with no similar expense in fiscal 2010, resulting in a favorable change of $2.6 million. The All Other Category fiscal 2010 operating loss of $(12,559,000) compares to an operating loss of $(12,660,000) in fiscal 2009. This $0.1 million decreased loss was the net result of decreased net sales, decreased gross profit, and less goodwill impairment, partially offset by increased selling and administrative expenses. Consolidated Results The Company reported net interest expense of $125,000 in fiscal 2010 as compared to net interest income of $8,000 in fiscal 2009. The Company borrowed on its lines of credit occasionally in fiscal 2009 and essentially its only borrowings in fiscal 2010 were related to the mortgage loan assumed in the acquisition of AdL Technology. Commitment fees related to the unused portions of the Company’s lines of credit, and interest income on invested cash are included in the net interest expense amounts above. F-7 The $360,000 income tax expense in fiscal 2010 represents a consolidated effective tax rate of 20.2%. This is the net result of a U.S. federal income tax rate of 34% influenced by certain permanent book-tax differences that were significant relative to the amount of taxable income, by certain U.S. federal and Canadian income tax credits, by a benefit related to uncertain income tax positions, by an increase in state income taxes, and by full valuation reserves on the Company’s Canadian tax position and a certain state deferred income tax asset. The income tax benefit in fiscal 2009 of $989,000 reflects a tax benefit of $105,000 related to the operations of the Company (which includes a $333,000 release of an uncertain income tax liability associated with a voluntary disclosure program) and a tax benefit of $884,000 associated with the $14,467,000 impairment of goodwill (the majority of which was non-deductible for tax purposes). The Company reported a net income of $1,424,000 in fiscal 2010 as compared to a net loss of $(13,414,000) in fiscal 2009. The increased net income is primarily the result of increased net sales, increased gross profit, and significant goodwill impairment in fiscal 2009 as compared to a minor intangible asset impairment in fiscal 2010, partially offset by increased operating expenses, increased net interest expense and increased income tax expense. Diluted earnings per share were $0.06 in fiscal 2010 as compared to a loss of $(0.62) last year. The weighted average common shares outstanding for purposes of computing diluted earnings per share in fiscal 2010 were 24,134,000 shares as compared to 21,800,000 shares last year, with the increase in shares primarily related to the weighted effect of the 2,469,676 common shares issued in July 2009 for the acquisition of AdL Technology. 2009 Compared to 2008 Lighting Segment (In thousands) 2009 2008 Net Sales Gross Profit Operating Income (Loss) $160,475 $ 36,403 $ (3,911) $183,694 $ 48,773 $ 15,310 Lighting Segment net sales of $160,475,000 in fiscal 2009 decreased 12.6% from fiscal 2008 net sales of $183,694,000. The $23.2 million decrease in Lighting Segment net sales is primarily the result of a $13.3 million or 17% net decrease in lighting sales to our niche markets (petroleum / convenience stores, automotive dealerships, and quick service restaurants) and national retail accounts, and a $9.9 million or 9.2% decrease in commissioned net sales to the commercial / industrial lighting market. Sales of lighting to the petroleum / convenience store market represented 19% and 16% of Lighting Segment net sales in fiscal years 2009 and 2008, respectively. Net sales of lighting to this, the Company’s largest niche market, were up 2.2% from last year to $30,279,000. The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company. Gross profit of $36,403,000 in fiscal 2009 decreased $12.4 million or 25% from the same period last year, and decreased from 25.9% to 21.9% as a percentage of Lighting Segment net sales (customer plus intra-segment net sales). The decrease in amount of gross profit is due to decreased Lighting net sales and margins, caused in part by higher manufacturing overhead costs as a percentage of net sales due to the lower sales volume. The following items also influenced the Lighting Segment’s gross profit margin: competitive pricing pressures; decreased direct labor as a percentage of net sales; decreased indirect wage, compensation and benefits costs ($0.9 million decrease); $0.5 million decreased supplies; $0.4 million decreased depreciation expense; $0.3 million decreased repairs and maintenance; $0.2 million decreased utilities; and $0.2 million decreased property and real estate taxes. F-8 Selling and administrative expenses of $29,129,000 in fiscal year 2009 decreased $3.2 million, and increased to 18.2% as a percentage of Lighting Segment net sales from 17.6% in the same period last year. Employee compensation and benefits expense increased $0.2 million in fiscal 2009 as compared to last year, and other changes of expense between years include decreased sales commission expense ($2.9 million), decreased advertising and literature expense ($0.2 million), increased bad debt expense ($0.2 million), increased research and development expense ($0.7 million), decreased customer relations expense ($0.3 million) and increased outside services expense ($0.1 million). The Company recorded a full impairment of goodwill in one reporting unit in the Lighting Segment in fiscal 2009, and accordingly recorded a non-cash expense in the amount of $11,185,000 as compared to impairments totaling $1,097,000 of certain intangible assets last year. The impairments in both years were related to a decline in the market value of the Company’s stock as well as a decline in the estimated forecasted discounted cash flows expected by the respective reporting units. The Lighting Segment fiscal 2009 operating loss of $(3,911,000) compares to operating income of $15,310,000 last year. This decrease of $19.2 million was the result of decreased net sales and decreased gross profit, and increased impairment charges, partially offset by decreased selling and administrative expenses. Graphics Segment (In thousands) 2009 2008 Net Sales Gross Profit Operating Income (Loss) $60,765 $13,382 $ 2,646 $ 85,244 $ 21,507 $(14,027) Graphics Segment net sales of $60,765,000 in fiscal 2009 decreased 28.7% from fiscal 2008 net sales of $85,244,000. The $24.5 million decrease in Graphics Segment net sales is primarily the result of completion of programs for certain graphics customers, including an image conversion program for a national drug store retailer ($4.3 million decrease), two petroleum / convenience store customers’ programs ($25.7 million decrease), reductions of net sales to ten other petroleum / convenience store customers ($7.0 million decrease) and changes in volume or completion of other graphics programs. These decreases were partially offset by increased net sales to certain other customers, including a reimaging program for a grocery customer ($8.9 million increase), and sales of solid-state LED video screens for sports markets ($5.7 million increase). Sales responsibility related to solid-state LED video screens for sports markets was transferred in fiscal 2009 from the Technology Segment to the Graphics Segment. Sales of graphics products and services to the petroleum / convenience store market represented 40% and 65% of Graphics Segment net sales in fiscal years 2009 and 2008, respectively. Net sales of graphics to this, the Company’s largest niche market, were down 56% from last year to $24,295,000. The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company. Net sales of products and services related to solid-state LED video screens totaled $5.7 million in fiscal 2009, with no such sales in the Graphics Segment last year. Image and brand programs, whether full conversions or enhancements, are important to the Company’s strategic direction. Image programs include situations where our customers refurbish their retail sites around the country by replacing some or all of the lighting, graphic elements, menu board systems and possibly other items they may source from other suppliers. These image programs often take several quarters to complete and involve both our customers’ corporate-owned sites as well as their franchisee-owned sites, the latter of which involve separate sales efforts by the Company with each franchisee. The Company may not always be able to replace net sales immediately when a large image conversion program has concluded. Brand programs typically occur as new products are offered F-9 or new departments are created within an existing retail store. Relative to net sales to a customer before and after an image or brand program, net sales during the program are typically significantly higher, depending upon how much business is awarded to the Company. Sales related to a customer’s image or brand program are reported in either the Lighting Segment, Graphics Segment, or the All Other Category depending upon the product and/or service provided. Gross profit of $13,382,000 in fiscal 2009 decreased $8.1 million or 38% from last year, and decreased from 24.7% to 21.5% as a percentage of Graphics Segment net sales (customer plus intra- segment net sales). The decrease in amount of gross profit is due both to decreased Graphics net sales and margins (both product and installation), increased material costs as a percentage of Graphics Segment net sales, and under utilized manufacturing capacity. The following items also influenced the Graphics Segment’s gross profit margin: competitive pricing pressures, decreased direct labor reflective of less sales volume, and other manufacturing expenses in support of production requirements ($1.3 million of decreased indirect wage, compensation and benefits costs; $0.4 million decreased supplies and repairs and maintenance; $0.2 million decreased outside services; and $0.2 million decreased depreciation and utilities). Selling and administrative expenses of $10,020,000 in fiscal year 2009 decreased $1.8 million, and increased to 16.5% as a percentage of Graphics Segment net sales from 13.8% in the same period last year. Employee compensation and benefits expense decreased $0.8 million in fiscal 2009 as compared to last year, and other changes of expense between years include decreased bad debt expense ($0.2 million), decreased customer relations expense ($0.3 million), decreased outside services expense ($0.2 million), decreased travel and entertainment ($0.1 million), decreased research and development ($0.2 million) and decreased supplies expense ($0.1 million). The Company recorded a full impairment of goodwill in one reporting unit in the Graphics Segment in fiscal 2009, and accordingly recorded a non-cash expense in the amount of $716,000 as compared to full or partial goodwill and intangible asset impairments of $23,739,000 last year. The impairments in both years were related to a decline in the market value of the Company’s stock as well as a decline in the estimated forecasted discounted cash flows expected by the respective reporting units. The Graphics Segment fiscal 2009 operating income of $2,646,000 compares to an operating loss of $(14,027,000) last year. This increased operating income of $16.7 million was the result of decreased net sales and decreased gross profit, offset by significantly decreased impairment charges and by decreased selling and administrative expenses. Technology Segment (In thousands) 2009 2008 Net Sales Gross Profit Operating Income (Loss) $4,576 $1,028 $ (486) $ 9,136 $ 1,229 $(4,876) Technology Segment net sales of $4,576,000 in fiscal 2009 decreased 49.9% from fiscal 2008 net sales of $9,136,000. The $4.6 million decrease in Technology Segment net sales is primarily the net result of decreased sales of solid-state LED video screens for sports and advertising markets ($3.0 million) and decreased sales of specialty LED lighting ($2.1 million), partially offset by increased sales of solid-state LED video screens to the entertainment market ($0.8 million). Sales responsibility related to solid-state LED video screens for sports markets was transferred in fiscal 2009 from the Technology Segment to the Graphics Segment. F-10 Gross profit of $1,028,000 in fiscal 2009 decreased $0.2 million or 16% from the same period last year, and decreased from 12.4% to 11.5% as a percentage of Technology Segment net sales (customer plus intra-segment net sales). The decrease in amount of gross profit is due to decreased Technology net sales and margins, partially offset by decreased indirect wages ($0.1 million). Selling and administrative expenses of $1,514,000 in fiscal year 2009 decreased $1.5 million, and increased to 33.1% as a percentage of Technology Segment net sales from 32.7% last year. Employee compensation and benefits expense decreased $0.2 million in fiscal 2009 as compared to last year, and other changes of expense between years include decreased warranty expense ($0.6 million), increased outside services ($0.2 million), decreased sales commissions expense ($0.2 million) and decreased expense related to amortization of intangibles ($0.2 million). The Company recorded a full impairment of goodwill in the reporting unit in the Technology Segment in fiscal 2008, and accordingly recorded a non-cash expense in the amount of $3,119,000. There was no impairment charge in fiscal 2009. The impairment was related to a decline in the market value of the Company’s stock as well as a decline in the estimated forecasted discounted cash flows expected by the reporting unit. The Technology Segment fiscal 2009 operating loss of $(486,000) compares to an operating loss of $(4,876,000) last year. This increase in operating income of $4.4 million was the net result of decreased net sales and gross profit, offset by decreased selling and administrative expenses and no impairment charge in fiscal 2009 as compared to a $3.1 million impairment in fiscal 2008. All Other Category (In thousands) 2009 2008 Net Sales Gross Profit Operating Income (Loss) $ 7,983 $ 1,014 $(12,660) $27,212 $ 8,918 $ (7,377) All Other Category net sales of $7,983,000 in fiscal 2009 decreased 70.7% from fiscal 2008 net sales of $27,212,000. The $19.2 million decrease in All Other Category net sales is primarily the result of the fiscal 2008 completion of a menu board replacement program ($19.8 million decrease) and changes in volume or completion of other customer programs. Image and brand programs, whether full conversions or enhancements, are important to the Company’s strategic direction. Image programs include situations where our customers refurbish their retail sites around the country by replacing some or all of the lighting, graphic elements, menu board systems and possibly other items they may source from other suppliers. These image programs often take several quarters to complete and involve both our customers’ corporate-owned sites as well as their franchisee-owned sites, the latter of which involve separate sales efforts by the Company with each franchisee. The Company may not always be able to replace net sales immediately when a large image conversion program has concluded. Brand programs typically occur as new products are offered or new departments are created within an existing retail store. Relative to net sales to a customer before and after an image or brand program, net sales during the program are typically significantly higher, depending upon how much business is awarded to the Company. Sales related to a customer’s image or brand program are reported in either the Lighting Segment, Graphics Segment, or the All Other Category depending upon the product and/or service provided. Gross profit of $1,014,000 in fiscal 2009 decreased $7.9 million or 89% from last year, and decreased from 22.5% to 8.4% as a percentage of the All Other Category net sales (customer plus intra-segment net sales). The decrease in amount of gross profit is primarily due to decreased net sales and margins, competitive pricing pressures, partially offset by decreased direct labor reflective of F-11 less sales volume, as well as decreased indirect wage, compensation and benefits costs ($0.1 million reduction). Selling and administrative expenses of $11,108,000, which includes Corporate administration expenses, in fiscal year 2009 decreased $5.2 million. Changes of expense between years include decreased employee compensation and benefits expense ($0.2 million), decreased menu board patent infringement settlement costs ($2.6 million), decreased legal fees primarily as a result of settlement of menu board patent litigation ($0.5 million), decreased research and development expense ($0.6 million), decreased depreciation expense ($0.4 million), increased audit/accounting and outside services fees ($0.2 million), decreased customer relations expense ($0.1 million) and decreased warranty expense ($0.1 million). The Company recorded a partial impairment of goodwill in one reporting unit in the All Other Category in fiscal 2009, and accordingly recorded a non-cash expense in the amount of $2,566,000 with no similar impairment expense in the prior year. The impairment was related to a decline in the market value of the Company’s stock as well as a decline in the estimated forecasted discounted cash flows expected by that reporting unit. The All Other Category fiscal 2009 operating loss of $(12,660,000) compares to an operating loss of $(7,377,000) in the same period last year. This increased loss of $5.3 million was the result of decreased net sales and decreased gross profit, and a goodwill impairment expense in fiscal 2009, partially offset by decreased selling and administrative expenses. Consolidated Results The Company reported net interest income of $8,000 in fiscal 2009 as compared to net interest income of $279,000 last year. The Company was in a positive cash position and was debt free for substantially all of fiscal 2008 and generated interest income on invested cash. The Company was occasionally in a borrowing position in fiscal 2009 and, when in a cash investment position, earned interest at lower rates than the prior year. The $989,000 income tax benefit in fiscal 2009 reflects a tax benefit of $105,000 related to the operations of the Company (which includes a $333,000 release of an uncertain income tax liability associated with a voluntary disclosure program) and a tax benefit of $884,000 associated with the $14,467,000 impairment of goodwill (the majority of which was non-deductible for tax purposes). Income tax expense in fiscal 2008 was $2,357,000, which is reflective of income tax expense on the reduced normal operating results, $1.8 million of valuation reserves on the Company’s Canadian net operating loss tax benefit and on Canadian tax credits, and the tax benefit recorded on the impairment charges (goodwill and intangible assets), some of which is not deductible for tax purposes. The Company reported a net loss of $(13,414,000) in fiscal 2009 as compared to a net loss of $(13,048,000) last year. The increased net loss is primarily the result of decreased operating income in all Segments (which includes pre-tax goodwill and intangible asset impairments of $14,467,000 and $27,955,000 in fiscal years 2009 and 2008, respectively) and less net interest income, partially offset by decreased income tax expense. The diluted loss per share was $(0.62) in fiscal 2009, as compared to a diluted loss per share of $(0.60) last year. The weighted average common shares outstanding for purposes of computing diluted (loss) per share in fiscal 2009 were 21,800,000 shares as compared to 21,764,000 shares last year. F-12 Liquidity and Capital Resources The Company considers its level of cash on hand, borrowing capacity, current ratio and working capital levels to be its most important measures of short-term liquidity. For long-term liquidity indicators, the Company believes its ratio of long-term debt to equity and its historical levels of net cash flows from operating activities to be the most important measures. At June 30, 2010, the Company had working capital of $73.6 million, compared to $72.5 million at June 30, 2009. The ratio of current assets to current liabilities was 3.85 to 1 as compared to a ratio of 4.70 to 1 at June 30, 2009. The $1.1 million increase in working capital from June 30, 2009 to June 30, 2010, which was influenced by the acquisition of AdL Technology in July 2009, was primarily related to increased cash and cash equivalents ($3.4 million), increased net accounts receivable ($5.6 million), partially offset by increased accounts payable ($3.3 million), increased accrued expenses ($2.9 million), decreased other current assets ($1.6 million), and decreased inventory ($0.1 million). The Company has a strategy of aggressively managing working capital, including reduction of the accounts receivable days sales outstanding (DSO) and reduction of inventory levels, without reducing service to our customers. The Company generated $16.7 million of cash from operating activities in fiscal 2010 as compared to a generation of $16.5 million in the prior year. This $0.2 million increase in net cash flows from operating activities is primarily the net result of greater net income ($14.8 million favorable), a loss on the sale of a subsidiary ($0.6 million favorable), significant goodwill impairment in fiscal 2009 as compared to a much smaller impairment of intangible assets in fiscal 2010 ($14.3 million unfavorable), an increase in accounts receivable rather than a decrease (unfavorable change of $13.0 million), less of a decrease in inventories (unfavorable change of $7.7 million), an increase in customer prepayments rather than a slight decrease (favorable change of $0.4 million), an increase in accounts payable rather than a decrease (favorable change of $8.7 million), an increase rather than a decrease in accrued expenses and other (favorable $7.1 million), a decrease rather than an increase in refundable income taxes (favorable $4.3 million), more of a reduction in the reserve for bad debts (unfavorable $0.1 million), an increase in the inventory obsolescence reserve rather than a decrease (favorable $0.4 million), increased stock option expense (favorable $1.4 million) and an increase in deferred income tax assets rather than a decrease (unfavorable $2.6 million). Net accounts receivable and notes receivable were $35.3 million and $29.7 million at June 30, 2010 and June 30, 2009, respectively. The increase of $5.6 million in net receivables is primarily due to combined effects of a higher amount of net sales in the fourth quarter of fiscal 2010 as compared to the fourth quarter of fiscal 2009, decreased DSO, and the addition of LSI ADL Technology ($3.0 million). The DSO decreased to 48 days at June 30, 2010 from 51 days at June 30, 2009. The Company believes that its receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate. Net inventories at June 30, 2010 decreased $0.1 million from June 30, 2009 levels. Based on a strategy of reducing inventory and in response to customer programs and the timing of shipments, a net inventory increase occurred in fiscal 2010 in the Lighting Segment of approximately $0.7 million (some of this inventory supports certain graphics programs), and net inventory decreases occurred in the Graphics Segment of approximately $0.8 million, in the Technology Segment of approximately $1.7 million and in the All Other Category of approximately $1.7 million (which was primarily related to the Company’s sale of its wire harness operation). Additionally, the Company acquired AdL Technology (reported in the Electronic Components Segment), which increased net inventory in fiscal 2010 by $3.5 million. Cash generated from operations and borrowing capacity under two line of credit facilities are the Company’s primary source of liquidity. The Company has an unsecured $30 million revolving line of credit with its bank group, with all $30 million of the credit line available as of August 27, 2010. This F-13 line of credit is a $30 million three year committed credit facility expiring in the third quarter of fiscal 2013. The Company previously also had a $10 million committed credit facility that it chose not to renew and therefore let it expire in the third quarter of fiscal 2010. Additionally, the Company has a separate $5 million line of credit, renewable annually in the third fiscal quarter, for the working capital needs of its Canadian subsidiary, LSI Saco Technologies. As of August 27, 2010, all $5 million of this line of credit is available. The Company believes that $35 million total renewed lines of credit plus cash flows from operating activities are adequate for the Company’s fiscal 2011 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants. The Company used $6.3 million of cash related to investing activities in fiscal 2010 as compared to a use of $3.0 million in the prior year, an unfavorable change of $3.3 million. The primary change between years relates to the amount of fixed assets purchased, $6,150,000 in fiscal 2010 as compared to $2,994,000 last year ($3.2 million unfavorable). Spending in both periods is primarily for tooling and equipment, with a manufacturing facility also being purchased in the fourth quarter of fiscal 2009. The Company received $521,000 in proceeds from the sale of fixed assets, almost entirely from the sale of the fixed assets of the Company’s wire harness operation. The other change between years relates to the fiscal 2010 acquisition of AdL Technology, net of cash received ($0.7 million unfavorable). The Company expects fiscal 2011 capital expenditures to be approximately $5.0 million, exclusive of business acquisitions, if any. The Company used $7.0 million of cash related to financing activities in fiscal 2010 as compared to a use of $6.5 million in the prior year. The $0.5 million unfavorable change between periods is primarily related to the payment of long-term debt on the opening balance sheet of the acquired LSI ADL Technology as compared to the fiscal 2009 net zero activity on the Company’s line of credit ($2.2 million unfavorable) and lower cash dividend payments ($1.7 million favorable). The $1.7 million reduction in dividend payments between years is primarily the result of a lower per share quarterly dividend rate beginning in the second quarter of fiscal 2009. The Company also used less cash in fiscal 2010 than in the prior year to purchase treasury shares for its nonqualified deferred compensation plan ($0.1 million favorable). The Company has, or could have, on its balance sheet financial instruments consisting primarily of cash and cash equivalents, short-term investments, revolving lines of credit, and long-term debt. The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates. Off-Balance Sheet Arrangements The Company has no financial instruments with off-balance sheet risk and has no off balance sheet arrangements. Contractual Obligations as of June 30, 2010 (a) Payments Due by Period Long-Term Debt Obligations Interest on Long-Term Debt Operating Lease Obligations Purchase Obligations Other Long-Term Liabilities Total Total $ 1,132 187 4,148 14,409 96 $19,972 Less than 1 year 1-3 years 3-5 years More than 5 years $ 33 87 1,607 14,020 86 $15,833 $1,099 100 2,334 333 10 $3,876 $ -- -- 203 42 -- $245 $ -- -- 4 14 _ -- $ 18 F-14 (a) The liability for uncertain tax positions of $2.5 million is not included due to the uncertainty of timing of payments. On August 18, 2010 the Board of Directors declared a regular quarterly cash dividend of $0.05 per share (approximately $1,202,000) payable September 7, 2010 to shareholders of record on August 31, 2010. The Company’s cash dividend policy is that the indicated annual dividend rate will be set between 50% and 70% of the expected net income for the current fiscal year. Consideration will also be given by the Board to special year-end cash or stock dividends. The declaration and amount of any cash and stock 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. Accordingly, the Board established the indicated annual cash dividend rate of $0.20 per share beginning with the first quarter of fiscal 2011 consistent with the above dividend policy. Critical Accounting Policies and Estimates The Company is required to make estimates and judgments in the preparation of its financial statements that affect the reported amounts of assets, liabilities, revenues and expenses, and related footnote disclosures. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company continually reviews these estimates and their underlying assumptions to ensure they remain appropriate. The Company believes the items discussed below are among its most significant accounting policies because they utilize estimates about the effect of matters that are inherently uncertain and therefore are based on management’s judgment. Significant changes in the estimates or assumptions related to any of the following critical accounting policies could possibly have a material impact on the financial statements. Revenue Recognition 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. In certain arrangements with customers, as is the case with the sale of some of our solid-state LED video screens, revenue is recognized upon customer acceptance of the video screen at the job site. Sales are recorded net of estimated returns, rebates and discounts. Amounts received from customers prior to the recognition of revenue are accounted for as customer pre-payments and are included in accrued expenses. 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 upon passing of title and risk of loss, generally at time of shipment. However, product revenue related to orders where the customer requires the Company to install the product is recognized when the product is installed. Other than normal product warranties or the possibility of installation or post-shipment service, support and maintenance of certain solid state LED video screens, billboards, or active digital signage, the Company has no post-shipment responsibilities. Installation revenue is recognized when the products have been fully installed. The Company is not always responsible for installation of products it sells and has no post-installation responsibilities, other than normal warranties. F-15 Service revenue from integrated design, project and construction management, and site permitting is recognized when all products have been installed at each individual retail site of the customer on a proportional performance basis. Shipping and handling revenue coincides with the recognition of revenue from sale of the product. The Company evaluates the appropriateness of revenue recognition in accordance with Accounting Standards Codification (ASC) Subtopic 605-25, Revenue Recognition: Multiple–Element Arrangements, and ASC Subtopic 985-605, Software: Revenue Recognition. Our solid-state LED video screens, billboards and active digital signage contain software elements which the Company has determined are incidental and excluded from the scope of ASC Subtopic 985-605. Income Taxes The Company accounts for income taxes in accordance with Accounting Standards Codification Topic 740, Income Taxes. Accordingly, deferred income taxes are provided on items that are reported as either income or expense in different time periods for financial reporting purposes than they are for income tax purposes. Deferred income tax assets and liabilities are reported on the Company’s balance sheet. Significant management judgment is required in developing the Company’s income tax provision, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against deferred tax assets. The Company operates in multiple taxing jurisdictions and is subject to audit in these jurisdictions. The Internal Revenue Service and other tax authorities routinely review the Company’s tax returns. These audits can involve complex issues which may require an extended period of time to resolve. In management’s opinion, adequate provision has been made for potential adjustments arising from these examinations. The Company is recording estimated interest and penalties related to potential underpayment of income taxes as a component of tax expense in the Consolidated Statements of Operations. The reserve for uncertain tax positions is not expected to change significantly in the next twelve months. Asset Impairment Carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment in accordance with Accounting Standards Codification Topic 350, Intangibles – Goodwill and Other. The Company’s impairment review involves the estimation of the fair value of goodwill and indefinite-lived intangible assets using a combination of a market approach and an income (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 adverse business conditions, economic factors and technological change or competitive activities may signal that an asset has become impaired. Also see Note 6. Carrying values for long-lived tangible assets and definite-lived intangible assets, excluding goodwill and indefinite-lived intangible assets, are reviewed for possible impairment as circumstances warrant as required by Accounting Standards Codification Topic 360, Property, Plant, and Equipment. Impairment reviews are conducted at the judgment of Company management when it believes that a F-16 change in circumstances in the business or external factors warrants a review. Circumstances such as the discontinuation of a product or product line, a sudden or consistent decline in the forecast for a product, changes in technology or in the way an asset is being used, a history of negative operating cash flow, or an adverse change in legal factors or in the business climate, among others, may trigger an impairment review. The Company’s initial impairment review to determine if a potential impairment charge is required is based on an undiscounted cash flow analysis at the lowest level for which identifiable cash flows exist. The analysis requires judgment with respect to changes in technology, the continued success of product lines and future volume, revenue and expense growth rates, and discount rates. Credit and Collections The Company maintains allowances for doubtful accounts receivable for probable estimated losses resulting from either customer disputes or the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against income. The Company determines its allowance for doubtful accounts by first considering all known collectibility problems of customers’ accounts, and then applying certain percentages against the various aging categories based on the due date of the remaining receivables. The resulting allowance for doubtful accounts receivable is an estimate based upon the Company’s knowledge of its business and customer base, and historical trends. The Company also establishes allowances, at the time revenue is recognized, for returns and allowances, discounts, pricing and other possible customer deductions. These allowances are based upon historical trends. New Accounting Pronouncements In October 2009, the Financial Accounting Standards Board issued ASU 2009-14, “Certain Revenue Arrangements That Include Software Elements.” This amended guidance clarifies when revenue can be recognized when tangible products contain both software and non-software components in a multiple deliverable arrangement. This update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 or the Company’s fiscal year 2011. The Company does not expect any impact on its consolidated results of operations, cash flows or financial position when this amended guidance is adopted. In October 2009, the Financial Accounting Standards Board issued ASU 2009-13, “Multiple Deliverable Revenue Arrangements.” This amended guidance enables companies to account for products or services (deliverables) separately rather than as a combined unit in certain circumstances. Accounting Standards Codification Subtopic 605-25, Revenue Recognition: Multiple-Element Arrangements, establishes the accounting and reporting guidance for arrangements under which the vendor will perform multiple revenue-generating activities. The Subtopic addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. The amended guidance will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 or the Company’s fiscal year 2011. The Company does not expect any impact on its consolidated results of operations, cash flows or financial position when this amended guidance is adopted. In April 2010, the Financial Accounting Standards Board issued ASU 2010-17, “Revenue Recognition – Milestone Method.” The amended guidance provides the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate for research and development transactions. The amended guidance will be effective prospectively for milestones achieved in fiscal years beginning on or after June 15, 2010 or the company’s fiscal year 2011. The Company does not expect any impact on its consolidated results of operations, cash flows or financial position when the amended guidance is adopted. F-17 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Management of LSI Industries Inc. and subsidiaries (the “Company” or “LSI”) is responsible for the preparation and accuracy of the financial statements and other information included in this report. LSI’s Management is also responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rules 13a-15(f). Under the supervision and with the participation of Management, including LSI’s principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting as of June 30, 2010, based on the criteria set forth in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the reality that judgments in decision making can be faulty, the possibility of human error, and the circumvention or overriding of the controls and procedures. In meeting its responsibility for the reliability of the financial statements, the Company depends upon its system of internal accounting controls. The system is designed to provide reasonable assurance that assets are safeguarded and that transactions are properly authorized and recorded. The system is supported by policies and guidelines, and by careful selection and training of financial management personnel. The Company also has a Disclosure Controls Committee, whose responsibility is to help ensure appropriate disclosures and presentation of the financial statements and notes thereto. Additionally, the Company has an Internal Audit Department to assist in monitoring compliance with financial policies and procedures. The Board of Directors meets its responsibility for overview of the Company's financial statements through its Audit Committee which is composed entirely of independent Directors who are not employees of the Company. The Audit Committee meets periodically with Management and Internal Audit to review and assess the activities of each in meeting their respective responsibilities. Grant Thornton LLP has full access to the Audit Committee to discuss the results of their audit work, the adequacy of internal accounting controls, and the quality of financial reporting. Based upon LSI’s evaluation, the Company’s principal executive officer and principal financial officer concluded that internal control over financial reporting was effective as of June 30, 2010. We reviewed the results of Management’s assessment with the Audit Committee of our Board of Directors. Additionally, our independent registered public accounting firm audited and independently assessed the effectiveness of the Company’s internal control over financial reporting. Grant Thornton LLP, an independent registered public accounting firm has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting, which is presented in the financial statements. Robert J. Ready President and Chief Executive Officer (Principal Executive Officer) Ronald S. Stowell Vice President, Chief Financial Officer, and Treasurer (Principal Financial Officer) F-18 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of LSI Industries Inc. Cincinnati, Ohio We have audited LSI Industries Inc. (an Ohio corporation) and subsidiaries’ internal control over financial reporting as of June 30, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). LSI Industries Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on LSI Industries Inc. and subsidiaries’ internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, LSI Industries Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30, 2010, based on criteria established in Internal Control — Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet and the related consolidated statements of operations, shareholders’ equity, cash flows, and financial statement schedule as of and for the year ended June 30, 2010 of LSI Industries Inc. and subsidiaries, and our report dated September 8, 2010 expressed an unqualified opinion on those financial statements and financial statement schedule. /s/ Grant Thornton LLP Cincinnati, Ohio September 8, 2010 F-19 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of LSI Industries Inc. Cincinnati, Ohio We have audited the accompanying consolidated balance sheet of LSI Industries Inc. (an Ohio corporation) and subsidiaries (the “Company”) as of June 30, 2010, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year ended June 30, 2010. Our audit of the basic consolidated financial statements included the financial statement schedule for the year ended June 30, 2010 listed in the index appearing under Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LSI Industries Inc. and subsidiaries as of June 30, 2010, and the results of their operations and their cash flows for the year ended June 30, 2010 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), LSI Industries Inc. and subsidiaries’ internal control over financial reporting as of June 30, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated September 8, 2010 expressed an unqualified opinion. /s/ Grant Thornton LLP Cincinnati, Ohio September 8, 2010 F-20 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of LSI Industries Inc. Cincinnati, Ohio We have audited the accompanying consolidated balance sheet of LSI Industries Inc. and subsidiaries (the “Company”) as of June 30, 2009, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the two years in the period ended June 30, 2009. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15 for the years ended June 30, 2009 and 2008. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of LSI Industries Inc. and subsidiaries as of June 30, 2009, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule for the years ended June 30, 2009 and 2008, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 11 to the consolidated financial statements, the Company adopted the provisions of accounting for uncertainty in income taxes in Financial Accounting Standards Board Accounting Standards Codification Topic No. 740, Income Taxes, on July 1, 2007. /s/ Deloitte & Touche LLP Cincinnati, Ohio September 11, 2009 F-21 LSI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended June 30, 2010, 2009, and 2008 (In thousands, except per share) 2010 2009 2008 Net sales $254,402 $233,799 $305,286 Cost of products and services sold 198,030 181,972 224,859 Loss on sale of subsidiary 639 -- -- Total cost of products and services sold 198,669 181,972 224,859 Gross profit 55,733 51,827 80,427 Selling and administrative expenses 53,671 51,571 60,642 Loss contingency (see Note 13) -- 200 2,800 Goodwill and intangible asset impairment 153 14,467 27,955 Operating income (loss) 1,909 (14,411) (10,970) Interest (income) Interest expense (28) (97) (360) 153 89 81 Income (loss) before income taxes 1,784 (14,403) (10,691) Income tax expense (benefit) 360 (989) 2,357 Net income (loss) $ 1,424 $(13,414) $(13,048) Earnings (loss) per common share (see Note 4) Basic Diluted Weighted average common shares outstanding $ 0.06 $ (0.62) $ (0.60) $ 0.06 $ (0.62) $ (0.60) Basic Diluted 24,128 21,800 21,764 24,134 21,800 21,764 The accompanying notes are an integral part of these financial statements. F-22 LSI INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS June 30, 2010 and 2009 (In thousands, except shares) 2010 2009 ASSETS Current Assets Cash and cash equivalents $ 17,417 $ 13,986 Accounts and notes receivable, less allowance for doubtful accounts of $399 and $532, respectively Inventories Refundable income taxes Other current assets Total current assets Property, Plant and Equipment, at cost Land Buildings Machinery and equipment Construction in progress Less accumulated depreciation Net property, plant and equipment Goodwill, net Other Intangible Assets, net 35,254 40,082 1,146 5,512 99,411 6,784 36,148 65,507 434 108,873 (63,962) 44,911 10,766 15,103 29,681 40,196 3,619 4,635 92,117 6,501 35,270 61,342 167 103,280 (61,237) 42,043 1,558 12,981 Other Long-Term Assets, net 3,654 4,419 Total assets $173,845 $153,118 The accompanying notes are an integral part of these financial statements. F-23  2010 2009 LIABILITIES & SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt Accounts payable Accrued expenses Total current liabilities Other Long-Term Liabilities Commitments and contingencies (Note 13) Shareholders' Equity Preferred shares, without par value; Authorized 1,000,000 shares, none issued Common shares, without par value; Authorized 40,000,000 shares; Outstanding 24,054,213 and 21,579,741 shares, respectively Retained earnings $ 33 12,553 13,257 25,843 3,784 -- -- $ -- 9,249 10,368 19,617 3,028 -- -- 99,963 44,255 82,833 47,640 Total shareholders' equity 144,218 130,473 Total liabilities & shareholders’ equity $173,845 $153,118 The accompanying notes are an integral part of these financial statements. F-24 LSI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended June 30, 2010, 2009, and 2008 (In thousands, except per share) Common Shares Number of Retained Shares Amount Earnings Total Balance at June 30, 2007 21,493 $79,326 $96,735 $176,061 Net (loss) Adoption of reserve for uncertain tax positions Stock compensation awards Purchase of treasury shares, net Deferred stock compensation Stock option expense Stock options exercised, net -- -- 2 (7) -- -- 97 -- (13,048) (13,048) -- 44 (177) 150 1,246 1,076 (2,582) (2,582) -- -- -- -- -- 44 (177) 150 1,246 1,076 Dividends - $0.63 per share -- -- (13,580) (13,580) Balance at June 30, 2008 21,585 81,665 67,525 149,190 Net (loss) Stock compensation awards Purchase of treasury shares, net Deferred stock compensation Stock option expense Stock options exercised, net -- 6 (11) -- -- -- -- 41 (29) (28) 1,184 -- (13,414) (13,414) -- -- -- -- -- 41 (29) (28) 1,184 -- Dividends - $0.30 per share -- -- (6,471) (6,471) Balance at June 30, 2009 21,580 82,833 47,640 130,473 Net income Stock compensation awards Purchase of treasury shares, net Deferred stock compensation Stock option expense Stock options exercised, net -- 7 (2) -- -- -- -- 46 52 (49) 2,633 -- Common shares issued for acquisition 2,469 14,448 1,424 1,424 -- -- -- -- -- -- 46 52 (49) 2,633 -- 14,448 Dividends - $0.20 per share -- -- (4,809) (4,809) Balance at June 30, 2010 24,054 $99,963 $44,255 $144,218 The accompanying notes are an integral part of these financial statements. F-25 LSI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended June 30, 2010, 2009, and 2008 (In thousands) 2010 2009 2008 Cash Flows From Operating Activities Net income (loss) $ 1,424 $(13,414) $(13,048) Non-cash items included in net income (loss) Depreciation and amortization Loss on sale of a subsidiary Goodwill and intangible asset impairment Deferred income taxes Deferred compensation plan Stock option expense Issuance of common shares as compensation Loss on disposition of fixed assets Allowance for doubtful accounts Inventory obsolescence reserve Change in certain assets and liabilities, net of acquisition Accounts and notes receivable Inventories Refundable income taxes Accounts payable Accrued expenses and other Customer prepayments 7,849 639 153 (1,564) (49) 2,633 46 41 (142) 176 (3,751) 2,826 2,473 2,487 1,071 417 7,746 -- 14,467 1,001 (28) 1,184 41 36 (53) (228) 9,229 10,541 (1,785) (6,203) (6,044) (4) Net cash flows provided by operating activities 16,729 16,486 Cash Flows From Investing Activities Purchases of property, plant, and equipment Proceeds from sale of fixed assets Proceeds from sale of short-term investments Acquisition of a business, net of cash received (6,150) 521 -- (675) Net cash flows provided by (used in) investing activities (6,304) Cash Flows From Financing Activities Payment of long-term debt Proceeds from issuance of long-term debt Cash dividends paid Purchase of treasury shares Issuance of treasury shares Exercise of stock options (2,237) -- (4,809) (111) 163 -- (2,994) 2 -- -- (2,992) (1,282) 1,282 (6,471) (188) 159 -- 8,789 -- 27,955 (5,904) 150 1,246 44 59 (237) (32) 17,130 (746) (1,470) (4,382) (224) (16,670) 12,660 (3,723) 5 8,000 -- 4,282 (958) 958 (13,580) (262) 85 1,076 Net cash flows (used in) financing activities (6,994) (6,500) (12,681) Increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year The accompanying notes are an integral part of these financial statements. 3,431 13,986 $17,417 6,994 6,992 $13,986 4,261 2,731 $ 6,992 F-26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation: The consolidated financial statements include the accounts of LSI Industries Inc. (an Ohio corporation) and its subsidiaries, all of which are wholly owned. All intercompany transactions and balances have been eliminated in consolidation. 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 from product sales is typically recognized at time of shipment. In certain arrangements with customers, as is the case with the sale of some of our solid-state LED (light emitting diode) video screens, revenue is recognized upon customer acceptance of the video screen at the job site. Sales are recorded net of estimated returns, rebates and discounts. Amounts received from customers prior to the recognition of revenue are accounted for as customer pre-payments and are included in accrued expenses. 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 upon passing of title and risk of loss, generally at time of shipment. However, product revenue related to orders where the customer requires the Company to install the product is recognized when the product is installed. Other than normal product warranties or the possibility of installation or post-shipment service, support and maintenance of certain solid state LED video screens, billboards, or active digital signage, the Company has no post-shipment responsibilities. Installation revenue is recognized when the products have been fully installed. The Company is not always responsible for installation of products it sells and has no post-installation responsibilities, other than normal warranties. Service revenue from integrated design, project and construction management, and site permitting is recognized when all products have been installed at each individual retail site of the customer on a proportional performance basis. Shipping and handling revenue coincides with the recognition of revenue from sale of the product. The Company evaluates the appropriateness of revenue recognition in accordance with Accounting Standards Codification (ASC) Subtopic 605-25, Revenue Recognition: Multiple–Element Arrangements, and ASC Subtopic 985-605, Software: Revenue Recognition. Our solid-state LED video screens, billboards and active digital signage contain software elements which the Company has determined are incidental and excluded from the scope of ASC Subtopic 985-605. Credit and Collections: The Company maintains allowances for doubtful accounts receivable for probable estimated losses resulting from either customer disputes or the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against income. The Company determines its allowance for doubtful accounts by first considering all F-27 known collectibility problems of customers’ accounts, and then applying certain percentages against the various aging categories based on the due date 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, discounts, pricing and other possible customer deductions. These allowances are based upon historical trends. The following table presents the Company’s net accounts and notes receivable at the dates indicated. (In thousands) June 30, June 30, 2010 2009 Accounts and notes receivable less Allowance for doubtful accounts Accounts and notes receivable, net $35,653 (399) $35,254 $30,213 (532) $29,681 Cash and Cash Equivalents: The cash balance includes cash and cash equivalents which have original maturities of less than three months. The Company maintains balances at financial institutions in the United States and Canada. The balances at financial institutions in Canada are not covered by insurance. As of June 30, 2010 and 2009, the Company had bank balances of $18,530,000 and $1,741,000, respectively, in excess of FDIC insured limits and therefore without insurance coverage. 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: Buildings Machinery and equipment Computer software 28 - 40 years 3 - 10 years 3 - 8 years Costs related to the purchase, internal development, and implementation of the Company’s fully integrated enterprise resource planning/business operating software system are either capitalized or expensed in accordance with ASC Subtopic 350-40, Intangibles – Goodwill and Other: Internal-Use Software. Leasehold improvements are depreciated over the shorter of fifteen years or the remaining term of the lease. The following table presents the Company’s property, plant and equipment at the dates indicated. (In thousands) June 30, June 30, 2010 2009 Property, plant and equipment, at cost less Accumulated depreciation Property, plant and equipment, net $108,873 (63,962) $ 44,911 $103,280 (61,237) $ 42,043 F-28 The Company recorded $5,294,000, $5,667,000 and $6,463,000 of depreciation expense in the years ended June 30, 2010, 2009 and 2008, respectively. Intangible Assets: Intangible assets consisting of customer relationships, trade names and trademarks, patents, technology and software, and non-compete agreements are recorded on the Company's balance sheet. The definite-lived intangible assets are being amortized to expense over periods ranging between two and twenty years. The Company periodically evaluates definite-lived intangible assets for permanent impairment. Neither indefinite-lived intangible assets nor the excess of cost over fair value of assets acquired ("goodwill") are amortized, however they are subject to review for impairment. See additional information about goodwill and intangibles in Note 6. 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. Product Warranties: The Company offers a limited warranty that its products are free of defects in workmanship and materials. The specific terms and conditions vary somewhat by product line, but generally cover defective product returned within one to five years from the date of shipment. The Company records warranty liabilities to cover the estimated future costs for repair or replacement of defective returned products as well as products that need to be repaired or replaced in the field after installation. The Company calculates its liability for warranty claims by applying estimates to cover unknown claims, as well as estimating the total amount to be incurred for known warranty issues. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Changes in the Company’s warranty liabilities, which are included in accrued expenses in the accompanying consolidated balance sheets, during the periods indicated below were as follows: Twelve Twelve Months Ended Months Ended (In thousands) June 30, June 30, 2010 2009 Balance at beginning of the period Additions charged to expense Addition from acquisition Deductions for repairs and replacements Balance at end of the period $ 223 1,870 5 (1,509) $ 589 $257 557 -- (591) $223 Employee Benefit Plans: The Company has a defined contribution retirement plan and a discretionary profit sharing plan covering substantially all of its non-union employees in the United States, and a non-qualified deferred compensation plan covering certain employees. The costs of employee benefit plans are charged to expense and funded annually. Total costs were $943,000 in 2010, $1,592,000 in 2009, and $2,197,000 in 2008. F-29 Research and Development Costs: Research and development expenses are costs directly attributable to new product development, including the development of new technology for both existing and new products, and consist of salaries, payroll taxes, employee benefits, materials, supplies, depreciation and other administrative costs. All costs are expensed as incurred and are classified as operating expenses. The Company follows the requirements of ASC Subtopic 985-20, Software: Costs of Software to be Sold, Leased, or Marketed, by expensing as research and development all costs associated with development of software used in solid- state LED products. Research and development costs incurred related to both product and software development totaled $5,148,000, $4,052,000 and $4,111,000 for the fiscal years ended June 30, 2010, 2009 and 2008, respectively. Advertising Expense: The Company recorded $281,000, $301,000, and $530,000 of advertising expense in 2010, 2009 and 2008, respectively. Advertising costs are expensed the first time the advertising occurs. Expense related to printed product or capabilities literature, brochures, etc. is recorded on a ratable basis over the useful life of that printed media. Earnings Per Common Share: The computation of basic earnings per common share is based on the weighted average common shares outstanding for the period net of treasury shares held in the Company’s non-qualified deferred compensation plan. The computation of diluted earnings per share is based on the weighted average common shares outstanding for the period and includes common share equivalents. Common share equivalents include the dilutive effect of stock options, contingently issuable shares and common shares to be issued under a deferred compensation plan, all of which totaled 238,000 shares in 2010, 226,000 shares in 2009 and 210,000 shares in 2008. See further discussion in Note 4. Stock Options: The Company measures the cost of employee services received in exchange for an award of equity instruments and recognizes this cost over the period during which an employee is required to provide the services. There were no disqualifying dispositions of shares from stock option exercises in fiscal years 2010 or 2009. The Company recorded $228,500 in fiscal 2008 as a reduction of federal income taxes payable, $221,300 as an increase in common stock, and $7,200 as a reduction of income tax expense to reflect the tax credits it will receive as a result of disqualifying dispositions of shares from stock option exercises. This had the effect of reducing cash flow from operating activities and increasing cash flow from financing activities by $221,300. See further discussion in Note 9. New Accounting Pronouncements In February 2010, the Financial Accounting Standards Board issued ASU 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements.” The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. The amended guidance was effective on February 24, 2010, the issuance date of the ASU. The Company adopted this ASU during the three months ended March 31, 2010. In February 2010, the Financial Accounting Standards Board issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” The ASU amends the disclosure requirements related to Fair Value Measurements and Disclosures - F-30 Overall Subtopic (Subtopic 820-10) of the FASB Accounting Standards Codification, originally issued as FASB Statement No. 157, Fair Value Measurements. The intent of the amended guidance is improved disclosure and increased transparency related to Fair Value Measurement in financial reporting. This amended guidance is effective for interim and annual periods beginning after December 15, 2009, except for the disaggregation requirement for the reconciliation disclosure of Level 3 measurements, which is effective for fiscal years beginning after December 15, 2010 and for interim periods within those years. The Company partially adopted the new guidance during the three months ended March 31, 2010 and there was no impact on the Company’s consolidated results of operations, cash flows or financial position. Comprehensive Income: The Company does not have any comprehensive income items other than net income. Subsequent Events: The Company has evaluated subsequent events for potential recognition and disclosure for the year ended June 30, 2010. No items were identified during this evaluation that required adjustment to or disclosure in the accompanying financial statements. Reclassifications: 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 accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE 2 - BUSINESS SEGMENT INFORMATION Accounting Standards Codification Topic 280, Segment Reporting, establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in interim financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s President and Chief Executive Officer) in making decisions on how to allocate resources and assess performance. While the Company has thirteen operating segments, one of which was sold during fiscal 2010, it has only four reportable operating business segments (Lighting, Graphics, Technology, and Electronic Components) and an All Other Category. The Lighting Segment includes outdoor, indoor, and landscape lighting that has been fabricated and assembled for the commercial, industrial and multi-site retail lighting markets, including the petroleum/convenience store market. The Lighting Segment includes the operations of LSI Ohio Operations, LSI Metal Fabrication, LSI MidWest Lighting, LSI Lightron and LSI Greenlee Lighting. These operations have been integrated, have similar economic characteristics and meet the other requirements for aggregation in segment reporting. The Graphics Segment designs, manufactures and installs exterior and interior visual image elements related to image programs, solid state LED digital advertising billboards, and solid state LED digital sports video screens. These products are used in visual image programs in several markets, including F-31 the petroleum/convenience store market, multi-site retail operations, sports and advertising. The Graphics Segment includes the operations of Grady McCauley, LSI Retail Graphics and LSI Integrated Graphic Systems, which have been aggregated as such facilities manufacture two-dimensional graphics with the use of screen and digital printing, fabricate three-dimensional structural graphics sold in the multi-site retail and petroleum/convenience store markets, and exhibit each of the similar economic characteristics and meet the other requirements for aggregation in segment reporting. The Technology Segment designs and produces high-performance light engines, large format video screens using solid-state LED technology, and certain specialty LED lighting. The primary markets served with LED video screens are the entertainment market, outdoor advertising billboard and sports markets not served by our Graphics Segment. The Technology Segment includes the operations of LSI Saco Technologies. The Electronic Components Segment designs, engineers and manufactures custom designed electronic circuit boards, assemblies and sub-assemblies used in various applications including the control of solid-state LED lighting. Capabilities of this Segment also have applications in the Company’s other LED product lines such as digital scoreboards, advertising ribbon boards and billboards. The Electronic Components Segment includes the operations of LSI ADL Technology, which was acquired by the Company on July 22, 2009. See further discussion in Note 15. The All Other Category includes the Company’s operating segments that do not meet the aggregation criteria, nor the criteria to be a separate reportable segment. Operations of LSI Images (menu board systems) and LSI Adapt (surveying, permitting and installation management services related to products of the Graphics Segment) are combined in the All Other Category. Operations of LSI Marcole (electrical wire harnesses) are included in the All Other Category, although this business was sold in March 2010. Additionally, the Company’s Corporate Administration expense is included in the All Other Category. Summarized financial information for the Company’s reportable business segments is provided for the following periods and as of June 30, 2010, June 30, 2009 and June 30, 2008: (In thousands) 2010 2009 2008 Net sales: Lighting Segment Graphics Segment Technology Segment Electronic Components Segment All Other Category Operating income (loss): Lighting Segment Graphics Segment Technology Segment Electronic Components Segment All Other Category Capital expenditures: Lighting Segment Graphics Segment Technology Segment Electronic Components Segment All Other Category $159,105 68,395 4,505 16,116 6,281 $254,402 $ 9,335 3,507 (653) 2,279 (12,559) $ 1,909 $ 3,033 2,098 10 566 443 $ 6,150 $160,475 60,765 4,576 -- 7,983 $233,799 $ (3,911) 2,646 (486) -- (12,660) $(14,411) $ 977 1,933 45 -- 39 $ 2,994 $183,694 85,244 9,136 -- 27,212 $305,286 $ 15,310 (14,027) (4,876) -- (7,377) $ (10,970) $ 1,950 886 270 -- 617 $ 3,723 F-32 Depreciation and amortization: Lighting Segment Graphics Segment Technology Segment Electronic Components Segment All Other Category $ 3,179 1,058 320 854 2,438 $ 7,849 $ 3,467 1,234 450 -- 2,595 $ 7,746 $ 3,852 1,299 663 -- 2,975 $ 8,789 June 30, June 30, June 30, 2010 2009 2008 Identifiable assets: Lighting Segment Graphics Segment Technology Segment Electronic Components Segment All Other Category $ 76,938 33,166 11,991 23,136 28,614 $173,845 $ 97,169 34,517 13,806 -- 38,722 $184,214 $ 72,222 32,280 12,317 -- 36,299 $153,118 Segment net sales represent sales to external customers. Intersegment revenues were eliminated in consolidation as follows: (In thousands) 2010 2009 2008 Lighting Segment intersegment net sales $ 6,383 $ 6,097 $ 4,278 Graphics Segment intersegment net sales $ 862 $ 1,479 $ 1,781 Technology Segment intersegment net sales $ 3,413 $ 4,400 $ 814 Electronic Components intersegment net sales $ 5,394 -- -- All Other Category intersegment net sales $ 3,562 $ 4,307 $12,755 Segment operating income, which is used in management’s evaluation of segment performance, represents net sales less all operating expenses including impairment of goodwill and intangible assets, but excluding interest expense and interest income. Identifiable assets are those assets used by each segment in its operations. Corporate assets, which consist primarily of cash and cash equivalents and short-term investments, refundable income taxes, and certain intangible assets, are included in the All Other Category. The Company considers its geographic areas to be: 1) the United States, and 2) Canada. The majority of the Company’s operations are in the United States; one operation is in Canada. The geographic distribution of the Company’s net sales and long-lived assets are as follows: F-33 (In thousands) 2010 2009 2008 Net sales (a): United States Canada $249,897 4,505 $254,402 $229,223 4,576 $233,799 $296,150 9,136 $305,286 June 30, June 30, June 30, 2010 2009 2008 Long-lived assets (b): United States Canada $ 45,898 564 $ 46,462 $ 47,928 898 $ 48,826 $ 48,220 345 $ 48,565 a. b. Net sales are attributed to geographic areas based upon the location of the operation making the sale. Long-lived assets includes property, plant and equipment, and other long term assets. Goodwill and intangible assets are not included in long-lived assets. NOTE 3 - MAJOR CUSTOMER CONCENTRATIONS The Company’s Lighting Segment and Graphics Segment net sales to 7-Eleven, Inc. represented approximately $41,997,000 or 17% of consolidated net sales in the fiscal year ended June 30, 2010. There were no customers or customer programs representing a concentration of 10% or more of the Company’s net sales in the fiscal years ended June 30, 2009 or 2008. There was no concentration of accounts receivable at June 30, 2010 or 2009. NOTE 4 - EARNINGS PER COMMON SHARE The following table presents the amounts used to compute basic and diluted earnings (loss) per common share, as well as the effect of dilutive potential common shares on weighted average shares outstanding: (In thousands, except per share data) 2010 2009 2008 BASIC EARNINGS (LOSS) PER SHARE Net income (loss) $ 1,424 $(13,414) $(13,048) Weighted average shares outstanding during the period, net of treasury shares (a) Weighted average shares outstanding in the Deferred Compensation Plan during the period Weighted average shares outstanding 23,896 21,574 21,554 232 24,128 226 21,800 210 21,764 Basic earnings (loss) per share $ 0.06 $ (0.62) $ (0.60) DILUTED EARNINGS (LOSS) PER SHARE Net income (loss) $ 1,424 $(13,414) $(13,048) Weighted average shares outstanding Basic 24,128 21,800 21,764 F-34 Effect of dilutive securities (b): Impact of common shares to be issued under stock option plans, and contingently issuable shares, if any 6 -- -- Weighted average shares outstanding (c) 24,134 21,800 21,764 Diluted earnings (loss) per share $ 0.06 $ (0.62) $ (0.60) (a) Includes shares accounted for like treasury stock in accordance with Accounting Standards Codification Topic 710, Compensation - General. (b) Calculated using the “Treasury Stock” method as if dilutive securities were exercised and the funds were used to purchase common shares at the average market price during the period. (c) Options to purchase 2,046,573 common shares, 1,512,367 common shares, and 563,467 common shares at June 30, 2010, 2009, and 2008, respectively, were not included in the computation of diluted earnings per share because the exercise price was greater than the average fair market value of the common shares. NOTE 5 - BALANCE SHEET DATA The following information is provided as of June 30: (In thousands) 2010 2009 Inventories: Raw materials Work-in-process Finished goods Accrued Expenses: Compensation and benefits Customer prepayments Accrued sales commissions Other accrued expenses $19,029 8,891 12,162 $40,082 $ 6,725 2,233 884 3,415 $13,257 $20,498 7,097 12,601 $40,196 $ 5,788 1,816 919 1,845 $10,368 NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS In accordance with Accounting Standards Codification (ASC) Topic 350, Intangibles – Goodwill and Other, the Company is required to perform an annual impairment test of its goodwill and indefinite-lived intangible assets. The Company performs this test as of July 1st of each fiscal year and on an interim basis when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company uses a combination of the market approach and the income (discounted cash flow) approach in determining the fair value of its reporting units. Under ASC Topic 350, the goodwill impairment test is a two-step process. Under the first step, the fair value of the Company’s reporting unit is compared to its respective carrying value. An indication that goodwill is impaired occurs when the fair value of a reporting unit is less than the carrying value. When there is an indication that goodwill is impaired, the Company is required to perform a second step. In step two, the actual impairment of goodwill is calculated by comparing the implied fair value of the goodwill with the carrying value of the goodwill. F-35 The Company identified its reporting units in conjunction with its annual goodwill impairment testing. The Company relies upon a number of factors, judgments and estimates when conducting its impairment testing. These include operating results, forecasts, anticipated future cash flows and marketplace data, to name a few. There are inherent uncertainties related to these factors and judgments in applying them to the analysis of goodwill impairment. Due to economic conditions, the effects of the recession on the Company’s markets and the decline in the Company’s stock price, management believed that additional goodwill impairment tests were required as of December 31, 2008, March 31, 2009 and June 30, 2009. The impairment test performed as of June 30, 2009 was actually the Company’s annual goodwill impairment test that was to be performed in fiscal 2010 as of July 1, 2009; however, because the conditions that resulted in goodwill impairment were present as of June 30, 2009, the impairment charge of $260,000 was recorded as of that date. Based upon the Company’s analysis as of these three balance sheet dates, it was determined that the goodwill associated with three of the remaining five reporting units that contained goodwill was either fully or partially impaired. The total amount of the goodwill impairment in fiscal 2009 was $14,467,000, of which $11,185,000 was full impairment of the goodwill in one reporting unit in the Lighting Segment, $716,000 was full impairment of the goodwill in one reporting unit in the Graphics Segment, and $2,566,000 was a partial impairment of goodwill in one reporting unit in the All Other Category. The impairment charges were due to a combination of a decline in the market capitalization of the Company and/or a decline in the estimated forecasted discounted cash flows since the previous goodwill impairment test was performed. There were no triggering events in fiscal 2010 related to goodwill impairment testing and, as a result, there was no impairment of goodwill recorded in fiscal 2010. The following table presents information about the Company's goodwill on the dates or for the periods indicated. Goodwill (In thousands) Electronic Lighting Graphics Technology Components All Other Segment Segment Segment Segment Category Total Balance as of June 30, 2008 Goodwill Accumulated impairment losses $34,913 $24,959 $3,119 $ -- $3,917 $66,908 (23,593) $11,320 (23,985) (3,119) $ 974 $ -- -- $ -- (186) $3,731 (50,883) $16,025 Impairment (11,185) (716) -- -- (2,566) (14,467) Balance as of June 30, 2009 Goodwill Accumulated impairment losses $34,913 $24,959 $3,119 $ -- $3,917 $66,908 (34,778) $ 135 (24,701) (3,119) $ 258 $ -- -- $ -- (2,752) $1,165 (65,350) $ 1,558 Acquisition -- -- -- 9,208 -- 9,208 Balance as of June 30, 2010 Goodwill (a) Accumulated impairment losses (a) $34,913 $24,959 $3,119 $9,208 $3,731 $75,930 (34,778) $ 135 (24,701) (3,119) $ 258 $ -- -- (2,566) $9,208 $1,165 (65,164) $10,766 F-36 (a) One operating segment in the All Other Category with fully impaired goodwill of $186 was sold in fiscal 2010. In fiscal 2010, the Company determined that an intangible asset with a net carrying value of $16,000 for a patent in the Lighting Segment was fully impaired and that an intangible asset with a carrying value of $137,000 for a trade name in the Technology Segment was also fully impaired. Accordingly, the Company recorded $153,000 of intangible asset impairment expense in fiscal 2010. The acquisition of LSI ADL Technology resulted in the following amortizable intangible assets being recorded on the Company’s balance sheet as of the July 22, 2009 acquisition date: customer relationships $2,880,000 (twelve year amortization period); Technology $780,000 (ten year amortization period); trade name $460,000 (five year amortization period) and non-compete agreements $710,000 (seven year amortization period). The weighted average amortization period of these four intangible assets is ten years three months. See further discussion in Note 15. The gross carrying amount and accumulated amortization by major other intangible asset class is as follows: June 30, 2010 Intangible Assets Gross Carrying Accumulated Net (In thousands) Amount Amortization Amount Amortized Intangible Assets Customer relationships Patents LED Technology firmware, software Trade name Non-compete agreements $10,352 70 $ 4,950 42 $ 5,402 28 11,228 460 890 23,000 6,043 86 198 11,319 5,185 374 692 11,681 Indefinite-lived Intangible Assets Trademarks and trade names 3,422 3,422 -- -- 3,422 3,422 Total Intangible Assets $26,422 $11,319 $15,103 June 30, 2009 Gross Carrying Accumulated Net (In thousands) Amount Amortization Amount Amortized Intangible Assets Customer relationships Patents LED Technology firmware, software Non-compete agreements $ 7,472 110 10,448 630 18,660 $4,173 59 4,478 528 9,238 $3,299 51 5,970 102 9,422 F-37 Indefinite-lived Intangible Assets Trademarks and trade names 3,559 3,559 -- -- 3,559 3,559 Total Intangible Assets $22,219 $9,238 $12,981 Amortization Expense of Other Intangible Assets (In thousands) 2010 2009 2008 $2,555 $2,079 $2,326 The Company expects to record amortization expense through fiscal 2015 as follows: 2011 through 2012 -- $2,588,000 per year; 2013 -- $2,325,000; 2014 -- $619,000; 2015 -- $532,000; and after 2015 -- $3,029,000. NOTE 7 - REVOLVING LINES OF CREDIT AND LONG-TERM DEBT The Company has a $30 million unsecured revolving line of credit with its bank group in the U.S., all of which was available as of June 30, 2010. The line of credit expires in the third quarter of fiscal 2013. Annually in the third quarter, the credit facility is renewable with respect to adding an additional year of commitment, if the bank group so chooses, 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, 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 225 and 265 basis points depending upon the ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (EBITDA), as defined in the credit facility. The fee on the unused balance of the $30 million committed line of credit is 25 basis points. Under terms of this credit facility, 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. A second U.S. revolving line of credit in the amount of $10 million, which the Company chose to not renew, expired in the third quarter of fiscal 2010. The Company also has a $5 million line of credit for its Canadian subsidiary. The line of credit expires in the third quarter of fiscal 2011. Interest on the Canadian subsidiary’s line of credit is charged based upon a 200 basis point increment over the LIBOR rate or based upon an increment over the United States base rate if funds borrowed are denominated in U.S. dollars or an increment over the Canadian prime rate if funds borrowed are denominated in Canadian dollars. There are no borrowings against this line of credit as of June 30, 2010. The Company assumed a mortgage loan with the acquisition of AdL Technology in July 2009. Monthly principal payments of approximately $10,000 are to be made through August, 2012 at an interest rate of 7.76%, at which time the balance is payable in full. The real estate of LSI ADL Technology has been pledged as collateral for the mortgage. (In thousands) June 30, 2010 Total mortgage balance Less current maturities Long-term debt $1,132 33 $1,099 Maturities of long-term debt are as follows: F-38 (In thousands) Fiscal year ended June 30 2011 2012 2013 $ 33 34 1,065 $1,132 The Company also assumed approximately $2.2 million of additional long-term debt with the acquisition of AdL Technology and paid it off at the time of the acquisition. In connection with the lines of credit, the Company is required to comply with financial covenants that limit the amount of debt obligations, require a minimum amount of tangible net worth, and limit the ratio of indebtedness to EBITDA (earnings before income taxes, depreciation and amortization). The Company is in compliance with all of its loan covenants as of June 30, 2010. NOTE 8 - CASH DIVIDENDS The Company paid cash dividends of $4,809,000, $6,471,000, and $13,580,000 in fiscal years 2010, 2009, and 2008, respectively. In August 2010, the Company’s Board of Directors declared a $0.05 per share regular quarterly cash dividend (approximately $1,202,000) payable on September 7, 2010 to shareholders of record August 31, 2010. NOTE 9 - EQUITY COMPENSATION Stock Options The Company has an equity compensation plan that was approved by shareholders which covers all of its full-time employees, outside directors and advisors. The options granted or stock awards made pursuant to this plan are granted at fair market value at date of grant or award. Options granted to non- employee directors become exercisable 25% each ninety days (cumulative) from date of grant and options granted to employees generally become exercisable 25% per year (cumulative) beginning one year after the date of grant. If a stock option holder’s employment with the Company terminates by reason of death, disability or retirement, as defined in the Plan, any award shall be fully vested. The number of shares reserved for issuance is 2,800,000, of which 833,585 shares were available for future grant or award as of June 30, 2010. This plan allows for the grant of incentive stock options, non- qualified stock options, stock appreciation rights, restricted and unrestricted stock awards, performance stock awards, and other stock awards. As of June 30, 2010, a total of 2,123,086 options for common shares were outstanding from this plan as well as two previous stock option plans (both of which had also been approved by shareholders), and of these, a total of 1,051,211 options for common shares were vested and exercisable. The approximate unvested stock option expense as of June 30, 2010 that will be recorded as expense in future periods is $1,211,000. The weighted average time over which this expense will be recorded is approximately 20 months. The fair value of each option on the date of grant was estimated using the Black-Scholes option pricing model. The below listed weighted average assumptions were used for grants in the periods indicated. 2010 2009 2008 Dividend yield Expected volatility Risk-free interest rate Expected life 2.95% 52% 2.4% 4.3 yrs. 4.60% 45% 3.0% 5.1 yrs. 3.61% 36% 4.3% 4.3 yrs. F-39 At June 30, 2010, the 648,500 options granted during fiscal 2010 to employees and non-employee directors had exercise prices ranging from $5.37 to $8.40, fair values ranging from $1.87 to $2.87 per option, and remaining contractual lives of nine years ten months to nearly ten years. At June 30, 2009, the 365,800 options granted in fiscal 2009 to non-employee directors had exercise prices ranging from $4.34 to $8.98, fair values ranging from $1.12 to $2.21, and remaining contractual lives of approximately nine and one-half to ten years. At June 30, 2008, the 328,200 options granted in fiscal 2008 to both employees and non-employee directors had exercise prices ranging from $12.58 to $19.76, fair values ranging from $3.07 to $6.61, and remaining contractual lives of between four years eight months and nine years two months. The Company calculates stock option expense using the Black-Scholes method, and records the expense on a straight line basis with an estimated 6.6% forfeiture rate. The expected volatility of the Company’s stock was calculated based upon the historic monthly fluctuation in stock price for a period approximating the expected life of option grants. The risk-free interest rate is the rate of a five year Treasury security at constant, fixed maturity on the approximate date of the stock option grant. The expected life of outstanding options is determined to be less than the contractual term for a period equal to the aggregate group of option holders’ estimated weighted average time within which options will be exercised. It is the Company’s policy that when stock options are exercised, new common shares shall be issued. The Company recorded $2,633,000, $1,184,000, and $1,246,000 of expense related to stock options in fiscal years 2010, 2009 and 2008, respectively. As of June 30, 2010, the Company expects that approximately 1,015,400 outstanding stock options having a weighted average exercise price of $10.42, intrinsic value of $9,400 and weighted average remaining contractual terms of 8.4 years will vest in the future. Information related to all stock options for the years ended June 30, 2010, 2009 and 2008 is shown in the table below: Twelve Months Ended June 30, 2010 Weighted Weighted Average Average Aggregate Exercise Remaining Intrinsic Shares Price Contractual Term Value Outstanding at 6/30/09 1,537,212 $ 13.07 6.4 years $33,800 Granted Forfeitures Exercised 648,500 (62,626) -- $ 8.24 $ 11.59 n/a Outstanding at 6/30/10 2,123,086 $ 11.64 6.6 years $15,270 Exercisable at 6/30/10 1,051,211 $ 12.98 4.7 years $ 5,078 F-40  Twelve Months Ended June 30, 2009 Weighted Weighted Average Average Aggregate Exercise Remaining Intrinsic Shares Price Contractual Term Value Outstanding at 6/30/08 1,197,482 $ 14.44 6.5 years $ -- Granted Forfeitures Exercised 365,800 (26,070) -- $ 8.57 $ 12.68 -- $ Outstanding at 6/30/09 1,537,212 $ 13.07 6.4 years $33,800 Exercisable at 6/30/09 830,087 $ 12.52 4.8 years $ 2,550 Twelve Months Ended June 30, 2008 Weighted Weighted Average Average Aggregate Exercise Remaining Intrinsic Shares Price Contractual Term Value Outstanding at 6/30/07 983,788 $ 12.16 6.3 years $5,642,400 Granted Forfeitures Exercised 328,200 (9,500) (105,006) $ 19.74 $ 16.81 $ 9.52 Outstanding at 6/30/08 1,197,482 $ 14.44 6.5 years $ -- Exercisable at 6/30/08 615,482 $ 11.43 4.9 years $ -- The aggregate intrinsic value of options exercised during the year ended June 30, 2008 was $913,700. No options were exercised in the years ended June 30, 2010 and 2009. The Company received $855,000 of cash and 8,068 common shares of the Company’s stock from employees who exercised 105,006 options during the twelve months ended June 30, 2008. Additionally, the Company recorded $228,500 in fiscal 2008 as a reduction of federal income taxes payable, $221,300 as an increase in common stock, and $7,200 as a reduction of income tax expense related to the exercises of stock options in which the employees sold the common shares prior to the passage of twelve months from the date of exercise. Information related to unvested stock options for the twelve months ended June 30, 2010 is shown in the table below: F-41  Weighted Weighted Average Average Aggregate Exercise Remaining Intrinsic Shares Price Contractual Term Value Outstanding unvested stock options at 6/30/09 8.3 years 707,125 $13.72 $31,245 Vested Forfeitures Granted (255,500) (28,250) 648,500 $14.18 $12.53 $ 8.24 Outstanding unvested stock options at 6/30/10 Stock Compensation Awards 1,071,875 $10.32 8.4 years $10,193 The Company awarded a total of 6,848 common shares in fiscal 2010, and 6,032 in fiscal 2009, and 2,558 in fiscal 2008 as stock compensation awards. These common shares were valued at their approximate $45,538, $40,680 and $43,875 fair market values on their dates of issuance, respectively, pursuant to the compensation programs for non-employee directors who receive a portion of their compensation as an award of Company stock and for employees who receive a nominal stock award following their twentieth employment anniversary. Stock compensation awards are made in the form of newly issued common shares of the Company. Deferred Compensation Plan The Company has a non-qualified deferred compensation plan providing for both Company contributions and participant deferrals of compensation. The Plan is fully funded in a Rabbi Trust. All Plan investments are in common shares of the Company. As of June 30, 2010 there were 28 participants, all with fully vested account balances. A total of 224,884 common shares with a cost of $2,403,600, and 222,832 common shares with a cost of $2,455,900 were held in the Plan as of June 30, 2010 and June 30, 2009, respectively, and, accordingly, have been recorded as treasury shares. The change in the number of shares held by this plan is the net result of share purchases and sales on the open stock market for compensation deferred into the Plan and for distributions to terminated employees. The Company does not issue new common shares for purposes of the non-qualified deferred compensation plan. The Company accounts for assets held in the non-qualified deferred compensation plan in accordance with Accounting Standards Codification Topic 710, Compensation – General. For fiscal year 2011, the Company estimates the Rabbi Trust for the Nonqualified Deferred Compensation Plan will make net repurchases in the range of 18,000 to 20,000 common shares of the Company. During fiscal years 2010 and 2009, the Company used approximately $110,600 and $188,500, respectively, to purchase common shares of the Company in the open stock market for either employee salary deferrals or Company contributions into the non-qualified deferred compensation plan. The Company does not currently repurchase its own common shares for any other purpose. NOTE 10 - LEASES AND PURCHASE COMMITMENTS The Company leases certain of its facilities and equipment under operating lease arrangements. Rental expense was $2,254,000 in 2010, $2,243,000 in 2009, and $2,554,000 in 2008. Minimum annual rental commitments under non-cancelable operating leases are: $1,607,000 in 2011, $1,338,000 in 2012, $996,000 in 2013, $185,000 in 2014 and $18,000 in 2015. Purchase commitments, including minimum annual rental commitments, of the Company totaled $19,972,000 and $22,404,000 as of June 30, 2010 and June 30, 2009, respectively. F-42 NOTE 11 - INCOME TAXES The following information is provided for the years ended June 30: (In thousands) 2010 2009 2008 Components of income (loss) before income taxes United States Foreign Income (loss) before income taxes Provision (benefit) for income taxes: Current U.S. federal State and local Foreign Total current Deferred (1,564) Total provision (benefit) for income taxes $ 360 $ 2,323 (539) $ 1,784 $ 2,015 (12) (79) 1,924 $(13,911) (492) $(14,403) $ (5,818) (4,873) $(10,691) $(1,629) (147) (214) (1,990) 1,001 $ (989) $ 7,523 928 (190) 8,261 (5,904) $ 2,357 Reconciliation to federal statutory rate: Federal statutory tax rate State and local taxes, net of federal benefit Impact of Foreign Operations Federal and state tax credits Goodwill Valuation allowance Domestic Production Activities Deduction Other Effective tax rate 34.0% (11.5) (9.3) (5.8) (0.5) 19.8 (4.6) (1.9) 20.2% 34.0% 1.5 3.6 1.1 (27.9) (3.2) -- (2.2) 6.9% 35.0% (5.8) (1.3) 1.2 (36.2) (15.6) 3.2 (2.5) (22.0)% The components of deferred income tax assets and (liabilities) at June 30, 2010 and 2009 are as follows: (In thousands) 2010 2009 Reserves against current assets Accrued expenses Depreciation Goodwill, acquisition costs and intangible assets Deferred compensation State net operating loss carryover and credits Foreign net operating loss carryover and credits Valuation reserve $ 213 1,132 (2,701) 3,026 809 1,017 2,447 (2,531) $ 160 1,093 (4,049) 5,181 890 958 1,940 (1,940) Net deferred income tax asset $ 3,412 $ 4,233 Reconciliation to the balance sheets as of June 30, 2010 and 2009: (In thousands) 2010 2009 Deferred income tax asset included in: Other current assets Other long-term assets Net deferred income tax asset $1,345 2,067 $1,253 2,980 $3,412 $4,233 F-43 As of June 30, 2010 the Company has recorded a deferred state income tax asset in the amount of $933,000, net of federal tax benefits, related to non-refundable New York state tax credits. As of June 30, 2009 the Company had recorded two deferred state income tax assets, one in the amount of $18,000 related to a state net operating loss carryover generated by the Company’s New York subsidiary, and the other in the amount of $940,000, net of federal tax benefits, related to non-refundable New York state tax credits. The Company has determined that these deferred state income tax assets totaling $933,000 and $958,000 as of June 30, 2010 and 2009, respectively, do not require any valuation reserves because, in accordance with Accounting Standards Codification Subtopic 740-10, Income Taxes: Overall, these assets will, more likely than not, be realized. Additionally, the Company has recorded an $84,000 deferred state income tax asset related to a state net operating loss carryover in Tennessee, and has determined that a full valuation reserve is required. This activity netted to an additional state income tax expense (benefit) of $(59,000), $25,000 and $16,000 in fiscal years 2010, 2009 and 2008, respectively. As of June 30, 2010 and 2009, the Company has recorded deferred tax assets for its Canadian subsidiary related to net operating loss carryover and to research and development tax credits totaling $2,447,000 and $1,940,000, respectively. In view of the impairment of the goodwill and certain intangible assets on the financial statements of this subsidiary and a current series of loss years, the Company has determined these assets, more likely than not, will not be realized. Additionally, the Company has recorded an $84,000 deferred state tax asset related to its subsidiary in Tennessee. Since this business was sold, the Company has determined this asset more likely than not, will not be realized. Accordingly, full valuation reserves of $2,531,000 and $1,940,000 were recorded as of June 30, 2010 and 2009, respectively. The Company adopted the provisions of accounting for uncertainty in income taxes (ASC Subtopic 740- 10, Income Taxes: Overall) on July 1, 2007. As a result of adoption, the Company recognized $2,582,000 in reserves for uncertain tax positions and recorded a charge of $2,582,000 to the July 1, 2007 retained earnings balance. At June 30, 2010, tax and interest, net of potential federal tax benefits, were $1,660,000 and $449,000, respectively, of the total reserves of $2,456,000. Additionally, penalties were $347,000 of the reserve at June 30, 2010. Of the $2,456,000 reserve for uncertain tax positions, $2,109,000 would have an unfavorable impact on the effective tax rate if recognized. At June 30, 2009, tax and interest, net of potential federal tax benefits, were $1,873,000 and $447,000, respectively, of the total reserves of $2,734,000. Additionally, penalties were $414,000 of the reserve at June 30, 2009. Of the $2,734,000 reserve for uncertain tax positions, $2,320,000 would have an unfavorable impact on the effective tax rate if recognized. The Company recognized a $216,000 tax benefit in fiscal 2010, a $226,000 tax benefit in fiscal 2009 and a $385,000 tax expense in 2008 related to the change in reserves for uncertain tax positions. The Company is recording estimated interest and penalties related to potential underpayment of income taxes as a component of tax expense in the Consolidated Statements of Operations. The reserve for uncertain tax positions is not expected to change significantly in the next twelve months. The fiscal 2010 and 2009 activity in the Liability for Uncertain Tax Positions, which is included in Other Long-Term Liabilities, was as follows: (in thousands) 2010 2009 2008 Balance at beginning of the fiscal year Unrecognized tax reserve – July 1, 2007 adoption Increases – tax positions in prior period Decreases – tax positions in prior period Increases – tax positions in current period Decreases – tax positions in current period Settlements and payments $2,693 -- -- (255) 37 -- (85) $3,040 -- -- -- 14 -- (361) $ -- 2,449 349 -- 436 -- (179) F-44 Lapse of statute of limitations Unrecognized tax reserve -- end of the fiscal year (24) $2,366 -- $2,693 (15) $3,040 The Company files a consolidated federal income tax return in the United States, and files various combined and separate tax returns in several foreign, state, and local jurisdictions. With limited exceptions, the Company is no longer subject to U.S. Federal, state and local tax examinations by tax authorities for fiscal years ending prior to June 30, 2007. The Company’s U.S. Federal income tax return for the fiscal year ended June 30, 2009 is currently under examination by the Internal Revenue Service. NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION (In thousands) 2010 2009 2008 Cash payments: Interest Income taxes Issuance of common shares as compensation NOTE 13 – LOSS CONTINGENCY $144 $519 $ 46 $119 $564 $ 73 $10,877 $ 41 $ 44 The Company is party to various negotiations, customer bankruptcies, and legal proceedings arising in the normal course of business. The Company had been the defendant for a number of years in a complex lawsuit alleging patent infringement with respect to some of the Company’s menu board systems sold over approximately eleven years. Pursuant to settlement discussions initiated by the plaintiffs, the Company made a $2,800,000 offer to settle this matter and, accordingly, recorded a loss contingency reserve in the fourth quarter of fiscal 2008. Following additional discussions in the second quarter of fiscal 2009, the Company reached a full and complete settlement of all matters related to this menu board patent infringement lawsuit. Accordingly, an additional $200,000 expense was recorded in the second quarter of fiscal 2009 and a payment of $3,000,000 was made to the plaintiffs. NOTE 14 – RELATED PARTY TRANSACTIONS The Company has recorded expense for the following related party transactions in the fiscal years indicated (amounts in thousands): 2010 2009 2008 Keating Muething & Klekamp PLL American Engineering and Metal Working 3970957 Canada Inc. $277 $200 $181 $266 $202 $180 $177 $192 $189 As of the balance sheet date indicated, the Company had the following liabilities recorded with respect to related party transactions (amounts in thousands): June 30, June 30, 2010 2009 Keating Muething & Klekamp PLL American Engineering and Metal Working $ 34 $ 61 $ 89 $ 2 The law firm of Keating Muething & Klekamp PLL, of which one of the Company’s independent outside directors is a senior partner, is the Company’s primary outside law firm providing legal services in most all areas required other than patents and intellectual property. The manufacturing firm of American Engineering and Metal Working, which is owned and operated by the son of the president of the F-45 Company’s Graphics Segment, provides metal fabricated components. 3970957 Canada Inc., which is owned by the former president and another executive of the Company’s LSI Saco Technologies subsidiary, owns the building that the Canadian operation occupies and rents. All related parties provide the Company either products or services at market-based arms-length prices. NOTE 15 – ACQUISITION On July 22, 2009, the Company completed the acquisition of certain net assets and 100% of the business of three related companies (AdL Technology, AdL Engineering and Kelmilfeen – collectively, “AdL” or “AdL Technology”), which were privately owned and based in Columbus, Ohio. This new 100% owned subsidiary operates under the name of LSI ADL Technology Inc. Consideration for the asset purchase of these businesses totaled $15,781,480, and consisted of 2,469,676 shares of LSI’s unregistered common stock (the fair value of which was determined based upon the closing market price of LSI’s common shares on the acquisition date) and cash of $1,333,875. The purchase price exceeded the fair value of the net assets being acquired, and therefore goodwill in the amount of $9,208,000 was recorded with this acquisition. Additionally, LSI assumed long-term debt of $3,368,874 in the purchase of substantially all net assets of these businesses. The goodwill associated with this acquisition consists largely of the synergies expected from combining AdL and LSI Industries and the vertical integration of the design and manufacture of electronic circuit boards used in many of the Company’s products. None of the goodwill will be deductible by the Company for tax purposes. There were no contingent liabilities or assets associated with the purchase of AdL. There were $520,000 of acquisition transaction costs included in the financial results for the fiscal year ended June 30, 2010 in selling and administrative expenses, and $678,000 of expense in cost of products sold related to the roll-out of fair value inventory adjustments for LSI ADL Technology’s sales of products that were in finished goods or work-in-process inventory on the acquisition date and therefore were valued at fair value, as opposed to manufactured cost, in the opening balance sheet in accordance with the requirements of purchase accounting. The operations of LSI ADL Technology are included in the Company’s operating results beginning July 23, 2009. The results of LSI ADL Technology are reported in a separate reportable business segment named the Electronic Components Segment. The recognized amounts of identifiable assets acquired and liabilities assumed with the acquisition of AdL Technology were as follows: (In thousands) Financial assets Inventory Property, plant and equipment Identifiable intangible assets Financial liabilities Total identifiable net assets Goodwill Total purchase consideration $ 2,398 3,677 3,094 4,830 (7,426) 6,573 9,208 $15,781 A liability of $5,000 was recognized in the opening balance sheet (included in financial liabilities above) for expected warranty claims on products sold by AdL Technology prior to acquisition. Additionally, the Company recorded a deferred tax liability of $2,154,000 in the opening balance sheet related primarily to intangible assets, inventory and fixed asset depreciation. LSI ADL Technology Inc. designs, engineers, and manufactures custom designed circuit boards, assemblies, and sub-assemblies used in various applications including the control of solid-state LED lighting. With the acquisition of AdL, we made a decision to further establish and advance our leadership position in LED lighting by vertically integrating our capabilities in connection with designing, engineering, and producing the solid-state electronics that control and power LEDs. LSI ADL Technology allows us to stay on the leading edge of product development, while at the same time F-46 provide opportunities to drive down manufacturing costs and control delivery of key components. LSI ADL’s capabilities also have applications in our other LED product lines such as digital scoreboards, advertising ribbon boards and billboards. The management team and substantially all employees of the acquired companies remain with LSI ADL Technology. The results of LSI ADL Technology included in the fiscal 2010 consolidated results of the Company are net sales of $16,116,000 and net income of $1,448,000. The consolidated proforma results of the combined entities of LSI Industries and LSI ADL Technology, had the acquisition date been July 1, 2007, are as follows for the periods indicated: (In thousands; unaudited) Net Sales Net Income (Loss) Consolidated pro forma fiscal 2010 $255,111 $ 1,488 Consolidated pro forma fiscal 2009 $250,422 $(12,011) Consolidated pro forma fiscal 2008 $322,674 $(11,663) The fiscal 2010 consolidated pro forma results listed above include pre-tax expenses for acquisition deal costs and an acquisition-related fair value inventory adjustment, totaling $1,198,000. Fiscal 2009 and 2008 have no similar pre-tax expenses. These pre-tax expenses are included in the as reported consolidated fiscal 2010 results. NOTE 16 – SALE OF LSI MARCOLE On January 20, 2010, the Board of Directors approved a plan to close the LSI Marcole facility in Manchester, Tennessee. This facility manufactures wire harnesses used in the manufacture of LSI’s light fixtures and also sells wire harness to select outside customers. The Company decided to sell this facility primarily due to low cost competition of wire harnesses produced outside the United States. While the Company expected to cease production at the facility by April 2, 2010, an interested buyer came forward and purchased certain assets and the business of LSI Marcole on March 30, 2010. The Company received $500,000 of the sales proceeds in cash as well as interest bearing promissory notes in the amount of $669,682 to be paid in full via quarterly payments through June 2011. The Company recorded a $638,747 loss on the sale of certain LSI Marcole assets in cost of products and services sold in the third quarter of fiscal 2010. Subsequent to the sale of the LSI Marcole assets, the Company will continue to purchase wire harnesses from the new owner of the facility pursuant to a manufacturing and supply agreement. The operating results of LSI Marcole are reported under the All Other Category. The assets and liabilities of LSI Marcole were comprised of the following on the dates indicated: (In thousands) June 30, December 31, June 30, 2010 2009 2009 Accounts receivable, net Notes receivable, current portion Inventory Other current assets Property, plant and equipment, net Other assets Total Assets $ 349 -- 1,520 143 978 1 $2,991 $ 316 -- 1,491 160 1,024 2 $2,993 $ 1 670 -- 14 -- -- $ 685 F-47 The net customer sales and operating (loss) of LSI Marcole for the periods indicated were as follows: (In thousands) 2010 2009 2008 Net sales $ 2,886 $3,970 $3,621 Operating (loss) $(1,101) $ (614) $ (475) NOTE 17 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED) (In thousands except per share data) Quarter Ended Fiscal Sept. 30 Dec. 31 March 31 June 30 Year 2010 Net sales Gross profit Net income (loss) $67,676 16,597 1,637 $69,374 16,300 1,592 $53,466 8,873 (2,532) $63,886 13,963 727 $254,402 55,733 1,424 Earnings (loss) per share Basic Diluted Range of share prices High Low 2009 Net sales Gross profit Loss contingency Goodwill impairment Net income (loss) Earnings (loss) per share Basic Diluted Range of share prices High Low 2008 Net sales Gross profit Loss contingency Goodwill and intangible asset impairment Net income (loss) $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ (.10) $ (.10) $ 0.03 $ 0.03 $ 0.06(a) $ 0.06(a) $ 8.48 $ 5.05 $ 8.43 $ 6.52 $ 8.42 $ 5.50 $ 7.41 $ 4.86 $ 8.48 $ 4.86 $75,838 18,179 -- -- 2,687 $60,787 13,257 200 13,250 (13,377) $46,989 8,774 -- 957 (2,467) $50,185 11,617 -- 260 (257) $233,799 51,827 200 14,467 (13,414) $ 0.12 $ 0.12 $ (0.61) $ (0.61) $ (0.11) $ (0.11) $ (0.01) $ (0.01) $ (0.62)(a) $ (0.62)(a) $ 10.91 $ 7.02 $ 8.28 $ 4.25 $ 7.39 $ 2.75 $ 6.51 $ 4.15 $ 10.91 $ 2.75 $90,001 25,751 -- $84,062 23,459 -- $64,780 15,982 -- $66,443 15,235 2,800 $305,286 80,427 2,800 -- 6,953 -- 4,823 -- 997 27,955 (25,821) 27,955 (13,048) F-48 Earnings (loss) per share Basic Diluted Range of share prices High Low $ 0.32 $ 0.32 $ 0.22 $ 0.22 $ 0.05 $ 0.05 $ (1.18) $ (1.18) $ (0.60)(a) $ (0.60)(a) $ 21.39 $ 15.70 $ 23.05 $ 17.42 $ 18.65 $ 8.12 $ 14.41 $ 8.04 $ 23.05 $ 8.04 (a) The total of the earnings per share for each of the four quarters does not equal the total earnings per share for the full year because the calculations are based on the average shares outstanding during each of the individual periods. At August 19, 2010, there were 502 shareholders of record. The Company believes this represents approximately 3,000 beneficial shareholders. F-49 LSI INDUSTRIES INC. SELECTED FINANCIAL DATA (In thousands except per share data) The following data has been selected from the Consolidated Financial Statements of the Company for the periods and dates indicated: Statement of Operations Data: 2010 2009 2008 2007 2006 Net sales Cost of products and services sold Loss on sale of a subsidiary Operating expenses Loss contingency (a) Goodwill and intangible asset $254,402 198,030 639 53,671 -- $233,799 181,972 -- 51,571 200 $305,286 224,859 -- 60,642 2,800 $337,453 248,274 -- 57,219 (590) $280,470 209,057 -- 49,898 -- impairment (b) 153 14,467 27,955 -- -- Operating income (loss) Interest (income) Interest expense 1,909 (28) 153 (14,411) (97) 89 (10,970) (360) 81 32,550 (139) 962 Income (loss) before income taxes Income taxes 1,784 360 (14,403) (989) (10,691) 2,357 31,727 10,938 21,515 (550) 78 21,987 7,544 Net income (loss) $ 1,424 $(13,414) $(13,048) $ 20,789 $ 14,443 Earnings (loss) per common share Basic Diluted $ 0.06 $ 0.06 $ (0.62) $ (0.62) $ (0.60) $ (0.60) $ 0.96 $ 0.95 $ 0.72 $ 0.71 Cash dividends paid per share $ 0.20 $ 0.30 $ 0.63 $ 0.51 $ 0.56 Weighted average common shares Basic Diluted 24,128 24,134 21,800 21,800 21,764 21,764 21,676 21,924 20,194 20,429 Balance Sheet Data: (At June 30) 2010 2009 2008 2007 2006 Working capital Total assets Long-term debt, including current maturities Shareholders' equity $ 73,568 173,845 $ 72,500 153,118 $ 72,863 184,214 $ 68,397 233,612 $ 66,787 224,401 1,132 144,218 -- 130,473 -- 149,190 -- 176,061 16,593 164,985 (a) (b) The Company recorded loss contingency reserves in fiscal years 2009 and 2008, and reversed a loss contingency reserve in fiscal 2007 – all related to a patent litigation matter. See Note 14. The Company recorded a significant impairment of goodwill and intangible assets in fiscal 2009 and 2008. See Note 6. F-50 LSI INDUSTRIES INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 2010, 2009, AND 2008 (In Thousands) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F Additions Additions Balance Charged to from Balance Beginning Costs and Acquired (a) End of Description of Period Expenses Company Deductions Period Allowance for Doubtful Accounts: Year Ended June 30, 2010 Year Ended June 30, 2009 Year Ended June 30, 2008 $ 532 $ 585 $ 822 $ 424 $ 135 $ 155 Inventory Obsolescence Reserve: Year Ended June 30, 2010 Year Ended June 30, 2009 Year Ended June 30, 2008 $1,410 $1,638 $1,606 $1,517 $1,568 $1,479 Deferred Tax Asset Valuation Reserve: Year Ended June 30, 2010 Year Ended June 30, 2009 Year Ended June 30, 2008 $1,940 $1,819 $ -- $ 591 $ 121 $1,819 $ 9 $ -- $ -- $89 $ -- $ -- $ -- $ -- $ -- $ (566) $ (188) $ (392) $ 399 $ 532 $ 585 $(1,479) $(1,796) $(1,447) $1,537 $1,410 $1,638 $ -- $ -- $ -- $2,531 $1,940 $1,819 (a) For Allowance for Doubtful Accounts, deductions are uncollectible accounts charged off, less recoveries. F-51 Subsidiary Grady McCauley Inc. EXHIBIT 21 Subsidiaries of the Registrant Business and Location Digital image and screen printed graphics North Canton, OH Percent Owned by Registrant State of Incorporation 100% Ohio LSI Greenlee Lighting Inc. Landscape lighting Dallas, TX LSI Adapt Inc. Project management and installation services North Canton, OH 100% Delaware 100% Ohio *LSI ADL Technology Inc. Electronic Circuit Boards Columbus, OH 100% Ohio LSI Kentucky LLC LSI Lightron Inc. Menu board systems; metal fabrication Independence, KY 100% Ohio Fluorescent lighting New Windsor, NY 100% Ohio LSI Marcole Inc. [Inactive] 100% Tennessee LSI MidWest Lighting Inc. Fluorescent lighting Kansas City, KS LSI Retail Graphics LLC Interior graphics and signs Woonsocket, RI LSI Integrated Graphics LLC Screen and digital printed materials, and illuminated and non-illuminated architectural graphics Houston, TX LSI Saco Technologies Inc. LED lighting and LED video screen manufacturing, research and development Montreal, Quebec 100% Kansas 100% Ohio 100% Ohio 100% Quebec, Canada *This subsidiary was acquired July 22, 2009. EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our reports dated September 8, 2010, with respect to the consolidated financial statements, schedule and internal control over financial reporting included in the Annual Report of LSI Industries Inc. on Form 10-K for the year ended June 30, 2010. We hereby consent to the incorporation by reference of said reports in the Registration Statements of LSI Industries Inc. on Forms S-8 (File No. 333-11503, effective September 6, 1996, File No. 333-91531, effective November 23, 1999, File No. 333-100038, effective September 24, 2002, File No. 333-100039, effective September 24, 2002 and File No. 33-333-110784, effective November 26, 2003). /s/ Grant Thornton LLP Cincinnati, Ohio September 8, 2010 EXHIBIT 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement Nos. 333-11503, 333-91531, 333-100038, 333-100039, and 333-110784 on Form S-8 of our report dated September 11, 2009 relating to the consolidated financial statements and financial statement schedule of LSI Industries Inc. (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the adoption of the provisions of accounting for uncertainty in income taxes in Financial Accounting Standards Board Accounting Standards Codification Topic No. 740, Income Taxes, on July 1, 2007), appearing in this Annual Report on Form 10-K of LSI Industries Inc. for the year ended June 30, 2010. /s/ Deloitte & Touche LLP Cincinnati, Ohio September 8, 2010 Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) EXHIBIT 31.1 I, Robert J. Ready, certify that: 1. I have reviewed this annual report on Form 10-K of LSI Industries Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: September 8, 2010 /s/ Robert J. Ready Principal Executive Officer Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) EXHIBIT 31.2 I, Ronald S. Stowell, certify that: 1. I have reviewed this annual report on Form 10-K of LSI Industries Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: September 8, 2010 /s/ Ronald S. Stowell Principal Financial Officer CERTIFICATION OF ROBERT J. READY Pursuant to Section 1350 of Chapter 63 of the United States Code and Rule 13a-14b EXHIBIT 32.1 In connection with the filing with the Securities and Exchange Commission of the Annual Report of LSI Industries Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2010 (the “Report”), I, Robert J. Ready, Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) (2) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert J. Ready Robert J. Ready Chairman of the Board, Chief Executive Officer and President September 8, 2010 A signed original of this written statement required by Section 906 has been provided to LSI Industries Inc. and will be retained by LSI Industries Inc. and furnished to the Securities and Exchange Commission or its staff upon request. CERTIFICATION OF RONALD S. STOWELL Pursuant to Section 1350 of Chapter 63 of the United States Code and Rule 13a-14b EXHIBIT 32.2 In connection with the filing with the Securities and Exchange Commission of the Annual Report of LSI Industries Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2010 (the “Report”), I, Ronald S. Stowell, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) (2) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Ronald S. Stowell Ronald S. Stowell Vice President, Chief Financial Officer, and Treasurer September 8, 2010 A signed original of this written statement required by Section 906 has been provided to LSI Industries Inc. and will be retained by LSI Industries Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Board of Directors Robert J. Ready Chairman of the Board Chief Executive Officer and President James P. Sferra Secretary Executive Vice President - Manufacturing Gary P. Kreider Senior Partner of Keating Muething & Klekamp PLL Cincinnati, Ohio Corporate Officers and Executive Management Robert J. Ready Chief Executive Officer and President James P. Sferra Secretary; Executive Vice President - Manufacturing Ronald S. Stowell Vice President, Chief Financial Officer, and Treasurer Dennis B. Meyer Director of Midmark Corporation Versailles, Ohio Wilfred T. O’Gara Chief Executive Officer – The O'Gara Group, Inc. Cincinnati, Ohio Mark A. Serrianne Chairman of the Board (retired) - Northlich, Inc. Cincinnati, Ohio David W. McCauley President LSI Graphic Solutions Plus Scott D. Ready President LSI Lighting Solutions Plus Shareholder Information Dividend Reinvestment Plan Legal Counsel Keating Muething & Klekamp PLL Cincinnati, Ohio Independent Registered Public Accounting Firm Grant Thornton LLP Cincinnati, Ohio Transfer Agent and Registrar Computershare Trust Company, N.A. 250 Royall Street, Mail Stop 1A Canton, Massachusetts 02021-1011 Annual Meeting The LSI Industries Inc. annual shareholders' meeting will be held Thursday, November 18, 2010 at 10:00 a.m. at the Company’s corporate offices located at 10000 Alliance Road, Cincinnati, Ohio. Corporate Headquarters LSI Industries Inc. 10000 Alliance Road Cincinnati, Ohio 45242 The LSI Industries Automatic Dividend Reinvestment and Stock Purchase Plan offers registered shareholders and employees an opportunity to purchase additional shares through automatic dividend reinvestment and/or optional cash investments. For additional information, contact: Computershare Trust Company, N.A. 250 Royall Street, Mail Stop 1A Canton, Massachusetts 02021-1011 (312) 588-4990 (866) 770-0656 E-mail: web.queries@computershare.com Internet: www.computershare.com Market for the Company’s Common Shares LSI Industries Inc. Common Shares are traded on the NASDAQ Global Select Market under the symbol LYTS. Internet Site The LSI Industries site on the Internet, www.lsi-industries.com, contains the Company’s 10-K and 10-Q filings, proxy statements, other SEC filings, annual reports, news releases, stock prices, and a variety of other information about LSI Industries and its products and services. 

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