**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-Q**





ý QUARTERLY
      REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      quarterly period ended September 30, 2007





OR





o TRANSITION
      REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      transition period from ________________ to ________________





Commission
      file number:  0-25070





**LSB
      FINANCIAL CORP.**


(Exact
      name of registrant as specified in its charter)





Indiana
            
            35-1934975(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)101
                Main Street, Lafayette, Indiana
            
            47901(Address
                of principal executive offices)
            
            (Zip
                Code)





(765)
      742-1064


(Registrant’s
      telephone number, including area code)





None


(Former
      name, former address and former fiscal year, if changed since last
      report)





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 whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.     Large accelerated
      filer [   ]     Accelerated
      filer [   ]      Non-accelerated
      filer [X]





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange
      Act).    Yes [   ]       No [X]





Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date.





Class
            
            Outstanding
                at November 13, 2007Common
                Stock, $.01 par value per share
            
            1,557,999
                shares











**LSB
      FINANCIAL CORP.**





INDEX







PART
                I
            FINANCIAL
                INFORMATION
            1Item
                1.
            Financial
                Statements
            1Consolidated
                Condensed Balance Sheets
            1Consolidated
                Condensed Statements of Income
            2Consolidated
                Condensed Statements of Changes in Shareholders’ Equity
            3Consolidated
                Condensed Statements of Cash Flows
            4Notes
                to Consolidated Financial Statements
            5Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            8Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            19Item
                4.
            Controls
                and Procedures
            20PART
                II. OTHER INFORMATION
            20Item
                1.
            Legal
                Proceedings
            20Item
                1A.
            Risk
                Factors
            20Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            21Item
                3.
            Defaults
                Upon Senior Securities
            21Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            21Item
                5.
            Other
                Information
            21Item
                6.
            Exhibits
            21SIGNATURES
            22INDEX
                TO EXHIBITS
            23

















**PART
      I                      FINANCIAL
      INFORMATION**




**Item
                1.**
            **Financial
                Statements**







LSB
      FINANCIAL CORP.


Consolidated
      Condensed Balance Sheets


(Dollars
      in thousands, except per share data)





**September
                30,**
              **2007**
            ****
            ****
            **December
                31,**
              **2006**(unaudited)AssetsCash
                and due from banks
            
            $
            1,448
            
            
            $
            1,391Short-term
                investments
            
            
            5,852
            
            
            
            8,336Cash
                and cash equivalents
            
            
            7,300
            
            
            
            9,727Available-for-sale
                securities
            
            
            14,445
            
            
            
            16,316Loans
                held for sale
            
            
            110
            
            
            
            992Total
                loans
            
            
            300,972
            
            
            
            319,469Less:
                Allowance for loan losses
            
            
            (3,113
            )
            
            
            (2,770
            )Net
                loans
            
            
            297,859
            
            
            
            316,699Premises
                and equipment, net
            
            
            6,876
            
            
            
            6,600Federal
                Home Loan Bank stock, at cost
            
            
            3,997
            
            
            
            3,997Bank
                owned life insurance
            
            
            5,554
            
            
            
            5,381Interest
                receivable and other assets
            
            
            8,740
            
            
            
            8,688Total
                Assets
            
            $
            344,881
            
            
            $
            368,400Liabilities
                and Shareholders’ EquityLiabilitiesDeposits
            
            $
            236,903
            
            
            $
            255,304Federal
                Home Loan Bank advances
            
            
            71,118
            
            
            
            76,618Interest
                payable and other liabilities
            
            
            2,028
            
            
            
            1,638Total
                liabilities
            
            
            310,049
            
            
            
            333,560Commitments
                and ContingenciesShareholders’
                EquityCommon
                stock, $.01 par valueAuthorized
                - 7,000,000 shares
              Issued
                and outstanding 2007 - 1,565,999 shares, 2006 - 1,603,209
                shares
            
            
            15
            
            
            
            15Additional
                paid-in-capital
            
            
            11,269
            
            
            
            12,227Retained
                earnings
            
            
            23,539
            
            
            
            22,623Accumulated
                other comprehensive loss
            
            
            9
            
            
            
            (25
            )Total
                shareholders’ equity
            
            
            34,832
            
            
            
            34,840Total
                liabilities and shareholders’ equity
            
            $
            344,881
            
            
            $
            368,400





See
      notes
      to consolidated condensed financial statements.





1





LSB
      FINANCIAL CORP.


Consolidated
      Condensed Statements of Income


(Dollars
      in thousands, except per share data)


(Unaudited)





**Three
                months ended**
              **September
                30,**
            ****
            ****
            **Nine
                months ended**
              **September
                30,**
            ********
            ****
            **2007**
            ****
            ****
            **2006**
            ****
            ****
            **2007**
            ****
            ****
            **2006****Interest
                and Dividend Income**Loans
            
            $
            5,529
            
            
            $
            5,737
            
            
            $
            16,600
            
            
            $
            16,866SecuritiesTaxable
            
            
            135
            
            
            
            108
            
            
            
            427
            
            
            
            331Tax-exempt
            
            
            70
            
            
            
            47
            
            
            
            194
            
            
            
            144Other
            
            
            35
            
            
            
            32
            
            
            
            145
            
            
            
            93Total
                interest and dividend income
            
            
            5,769
            
            
            
            5,924
            
            
            
            17,366
            
            
            
            17,434**Interest
                Expense**Deposits
            
            
            2,005
            
            
            
            1,963
            
            
            
            6,065
            
            
            
            5,804Borrowings
            
            
            924
            
            
            
            869
            
            
            
            2,621
            
            
            
            2,396Total
                interest expense
            
            
            2,929
            
            
            
            2,832
            
            
            
            8,686
            
            
            
            8,200**Net
                Interest Income**
            
            
            2,840
            
            
            
            3,092
            
            
            
            8,680
            
            
            
            9,234**Provision
                for Loan Losses**
            
            
            180
            
            
            
            318
            
            
            
            920
            
            
            
            718**Net
                Interest Income After Provision for Loan Losses**
            
            
            2,660
            
            
            
            2,774
            
            
            
            7,760
            
            
            
            8,516**Non-interest
                Income**Deposit
                account service charges and fees
            
            
            486
            
            
            
            439
            
            
            
            1,371
            
            
            
            1,312Net
                gains on loan sales
            
            
            37
            
            
            
            65
            
            
            
            174
            
            
            
            172Gain(loss)
                on sale of securities
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0Gain(loss)
                on sale other real estate owned
            
            
            (115
            )
            
            
            5
            
            
            
            (148
            )
            
            
            7Other
            
            
            293
            
            
            
            200
            
            
            
            790
            
            
            
            582Total
                non-interest income
            
            
            701
            
            
            
            709
            
            
            
            2,187
            
            
            
            2,073**Non-Interest
                Expense**Salaries
                and employee benefits
            
            
            996
            
            
            
            976
            
            
            
            3,430
            
            
            
            3,406Net
                occupancy and equipment expense
            
            
            320
            
            
            
            325
            
            
            
            990
            
            
            
            905Computer
                service
            
            
            127
            
            
            
            112
            
            
            
            364
            
            
            
            314Advertising
            
            
            77
            
            
            
            55
            
            
            
            229
            
            
            
            184Other
            
            
            702
            
            
            
            614
            
            
            
            1,868
            
            
            
            1,613Total
                non-interest expense
            
            
            2,222
            
            
            
            2,082
            
            
            
            6,881
            
            
            
            6,422**Income
                Before Income Taxes**
            
            
            1,139
            
            
            
            1,401
            
            
            
            3,066
            
            
            
            4,167**Provision
                for Income Taxes**
            
            
            422
            
            
            
            534
            
            
            
            1,120
            
            
            
            1,564**Net
                income**
            
            $
            717
            
            
            $
            867
            
            
            $
            1,946
            
            
            $
            2,603**Basic
                Earnings Per Share**
            
            $
            0.46
            
            
            $
            0.53
            
            
            $
            1.23
            
            
            $
            1.62**Diluted
                Earnings Per Share**
            
            $
            0.46
            
            
            $
            0.53
            
            
            $
            1.22
            
            
            $
            1.61**Dividends
                Declared Per Share**
            
            $
            0.25
            
            
            $
            0.17
            
            
            $
            0.65
            
            
            $
            0.49






See
                notes to consolidated condensed financial statements.





2





LSB
      FINANCIAL CORP.


Consolidated
      Condensed Statements of Changes in Shareholders’ Equity


For
      the
      Nine Months Ended September 2007 and 2006


(Dollars
      in thousands)


(Unaudited)





**Common
                  Stock**
              
              
              **Additional
                  Paid-In Capital**
              
              
              **Retained
                  Earnings**
              
              
              **Benefit
                  Plans Compensation**
              
              
              **Accumulated
                  Other Comprehensive Income (Loss)**
              
              
              **Total****Balance,
                  January 1, 2006**
              
              $
              15
              
              
              $
              10,565
              
              
              $
              22,402
              
              
              $
              (71
              )
              
              $
              (90
              )
              
              $
              32,821Reclassification
                  of unearned compensation upon adoption of SFAS 123(R)
              
              
              
              
              
              
              (22
              )
              
              
              
              
              
              
              22Comprehensive
                  incomeNet
                  income
              
              
              
              
              
              
              
              
              
              
              2,603
              
              
              
              
              
              
              
              
              
              
              
              2,603Change
                  in unrealized appreciation (depreciation) on available-for-sale
                  securities, net of taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              40
              
              
              
              40Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,6435%
                  stock dividend on common stock
              
              
              1
              
              
              
              2,074
              
              
              
              (2,075
              )
              
              
              
              
              
              
              
              
              
              
              0Dividends
                  on common stock, $0.49 per share
              
              
              
              
              
              
              
              
              
              
              (782
              )
              
              
              
              
              
              
              
              
              
              
              (782
              )Purchase
                  and retirement of stock (22,575 shares)
              
              
              (1
              )
              
              
              (606
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (607
              )Stock
                  options exercised (2,548 shares)
              
              
              
              
              
              
              38
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              38Amortization
                  of stock option compensation
              
              
              
              
              
              
              19
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              19Amortization
                  of RRP expense
              
              
              
              
              
              
              22
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              22ESOP
                  shares earned
              
              
              
              
              
              
              149
              
              
              
              
              
              
              
              37
              
              
              
              
              
              
              
              186**Balance,
                  September 30, 2006**
              
              $
              15
              
              
              $
              12,239
              
              
              $
              22,148
              
              
              $
              (12
              )
              
              $
              (50
              )
              
              $
              34,340**Balance,
                  January 1, 2007**
              
              $
              15
              
              
              $
              12,227
              
              
              $
              22,623
              
              
              $
              0
              
              
              $
              (25
              )
              
              $
              34,840Comprehensive
                  incomeNet
                  income
              
              
              
              
              
              
              
              
              
              
              1,946
              
              
              
              
              
              
              
              
              
              
              
              1,946Change
                  in unrealized appreciation (depreciation) on available-for-sale
                  securities, net of taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              34
              
              
              
              34Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,980Dividends
                  on common stock, $0.65 per share
              
              
              
              
              
              
              
              
              
              
              (1,030
              )
              
              
              
              
              
              
              
              
              
              
              (1,030
              )Purchase
                  and retirement of stock (37,500 shares)
              
              
              
              
              
              
              (973
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (973
              )Stock
                  options exercised (290 shares)
              
              
              
              
              
              
              4
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4Amortization
                  of stock option compensation
              
              
              
              
              
              11
              
              
              
              
              
              
              
              
              
              
              
              
              11**Balance,
                  September 30, 2007**
              
              $
              15
              
              
              $
              11,269
              
              
              $
              23,539
              
              
              $
              0
              
              
              $
              9
              
              
              $
              34,832






See
      notes
      to consolidated condensed financial statements.


3


LSB
      FINANCIAL CORP.


Consolidated
      Condensed Statements of Cash Flows


(Dollars
      in thousands)


(Unaudited)





**Nine
                months ended**
              **September
                30,**
            ********
            ****
            **2007**
            ****
            ****
            **2006**Operating
                ActivitiesNet
                income
            
            $
            1,946
            
            
            $
            2,603Items
                not requiring (providing) cashDepreciation
            
            
            381
            
            
            
            358Provision
                for loan losses
            
            
            920
            
            
            
            718Amortization
                of premiums and discounts on securities
            
            
            11
            
            
            
            39Federal
                Home Loan Bank stock dividend
            
            
            0
            
            
            
            157ESOP
                shares earned
            
            
            0
            
            
            
            186Gain
                on sale of loans
            
            
            (162
            )
            
            
            (100
            )Loans
                originated for sale
            
            
            (129
            )
            
            
            (7,362
            )Proceeds
                on loans sold
            
            
            1,173
            
            
            
            7,128Amortization
                of stock options
            
            
            11
            
            
            
            19Changes
                inInterest
                receivable and other assets
            
            
            (189
            )
            
            
            (2,250
            )Interest
                payable and other liabilities
            
            
            389
            
            
            
            110Net
                cash from operating activities
            
            
            4,292
            
            
            
            1,606Investing
                ActivitiesPurchases
                of available-for-sale securities
            
            
            (1,856
            )
            
            
            (4,540
            )Proceeds
                from maturities of available-for-sale securities
            
            
            3,774
            
            
            
            1,862Net
                change in loans
            
            
            17,920
            
            
            
            11,887Purchase
                of premises and equipment
            
            
            (657
            )
            
            
            (262
            )Purchase
                of life insurance policies
            
            
            0
            
            
            
            (2,500
            )Net
                cash from investing activities
            
            
            19,181
            
            
            
            6,447Financing
                ActivitiesNet
                change in demand deposits, money market, NOW and savings
                accounts
            
            
            1,656
            
            
            
            (4,209
            )Net
                change in certificates of deposit
            
            
            (20,057
            )
            
            
            (5,806
            )Proceeds
                from Federal Home Loan Bank advances
            
            
            43,000
            
            
            
            47,500Repayment
                of Federal Home Loan Bank advances
            
            
            (48,500
            )
            
            
            (46,000
            )Proceeds
                from stock options exercised
            
            
            4
            
            
            
            38Repurchase
                of stock
            
            
            (973
            )
            
            
            (607
            )Dividends
                paid
            
            
            (1,030
            )
            
            
            (782
            )Net
                cash from financing activities
            
            
            (25,900
            )
            
            
            (9,866
            )Increase
                (Decrease) in Cash and Cash Equivalents
            
            
            (2,427
            )
            
            
            (1,813
            )Cash
                and Cash Equivalents, Beginning of Period
            
            
            9,727
            
            
            
            9,384Cash
                and Cash Equivalents, End of Period
            
            $
            7,300
            
            
            $
            7,571Supplemental
                Cash Flows InformationInterest
                paid
            
            
            8,787
            
            
            
            8,183Income
                taxes paid
            
            
            1,095
            
            
            
            1,375Supplemental
                Non-Cash DisclosuresCapitalization
                of mortgage servicing rights
            
            
            12
            
            
            
            72







See
                notes to consolidated condensed financial statements





4





LSB
      FINANCIAL CORP.


Notes
      to
      Consolidated Financial Statements


September
      30, 2007


Note
      1 -
      General




The
      financial statements were prepared in accordance with the instructions for
      Form
      10-Q and, therefore, do not include all of the disclosures necessary for a
      complete presentation of financial position, results of operations and cash
      flows in conformity with accounting principles generally accepted in the United
      States of America.  These interim financial statements have been
      prepared on a basis consistent with the annual financial statements and include,
      in the opinion of management, all adjustments, consisting of only normal
      recurring adjustments, necessary for a fair presentation of the results of
      operations and financial position for and at the end of such interim
      periods.  All outstanding shares and per share figures have been
      adjusted to reflect a 5% stock dividend payable by LSB Financial Corp. (the
      “Company” or “LSB Financial”) to shareholders of record on October 6,
      2006.  The consolidated condensed balance sheet of LSB Financial Corp.
      as of December 31, 2006 has been derived from the audited consolidated balance
      sheet of LSB Financial Corp. as of that date.




Certain
      information and note disclosures normally included in the Company’s annual
      financial statements prepared in accordance with generally accepted accounting
      principles have been condensed or omitted.  These condensed
      consolidated financial statements should be read in conjunction with the
      consolidated financial statements and notes thereto included in the Company’s
      annual report on Form 10-K for the fiscal year ended December 31, 2006 filed
      with the Securities and Exchange Commission.  The results of
      operations for the period are not necessarily indicative of the results to
      be
      expected for the full year.




Stock
      Options: Effective January 1, 2006, the Company adopted Statement of
      Financial Accounting Standards No. 123(R), *Share-Based Payment* (“SFAS
      123R”).  SFAS 123R addresses all forms of share-based payment awards,
      including shares under employee stock purchase plans, stock options, restricted
      stock and stock appreciation rights. SFAS 123R requires all share-based payments
      to be recognized as expense, based upon their fair values, in the financial
      statements over the vesting period of the awards.  The Company has
      elected the modified prospective application method and, as a result, has
      recorded approximately $11,000 in compensation expense related to vested stock
      options less estimated forfeitures for the nine month period ended September
      30,
      2007 compared to $19,000 for the same period in 2006.






Note
      2 -
      Principles of Consolidation




The
      accompanying financial statements include the accounts of LSB Financial, its
      wholly owned subsidiary Lafayette Savings Bank, FSB (“Lafayette Savings”), and
      Lafayette Savings’ wholly owned subsidiaries, LSB Service Corporation and
      Lafayette Insurance and Investments, Inc.  All significant
      intercompany transactions have been eliminated upon consolidation.




5


Note
      3 -
      Earnings per share




Earnings
      per share are based upon the weighted average number of shares outstanding
      during the period.  Diluted earnings per share further assume the
      issuance of any potentially dilutive shares.  Unearned ESOP shares are
      not considered to be outstanding for the earnings per share
      computation.  All shares were included in the diluted earnings per
      share calculation as their effect would be dilutive.  The following
      table presents information about the number of shares used to compute earnings
      per share and the results of the computations:







**Three
                months ended September 30,**
            
            
            **Nine
                months ended September 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Weighted
                average shares outstanding (excluding unearned ESOP
                shares)
            
            
            1,567,129
            
            
            
            1,637,872
            
            
            
            1,586,694
            
            
            
            1,608,551Shares
                used to compute diluted earnings per share
            
            
            1,573,546
            
            
            
            1,647,136
            
            
            
            1,594,100
            
            
            
            1,618,646Earnings
                per share
            
            $
            0.46
            
            
            $
            0.53
            
            
            $
            1.23
            
            
            $
            1.62Diluted
                earnings per share
            
            $
            0.46
            
            
            $
            0.53
            
            
            $
            1.22
            
            
            $
            1.61










Note
      4 –
Future Accounting Pronouncements




In
      September 2006, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standards (SFAS) No. 157, Fair Value
      Measurements.  This Statement defines fair value, establishes a
      framework for measuring fair value and expands disclosures about fair value
      measurements. This Statement establishes a fair value hierarchy about the
      assumptions used to measure fair value and clarifies assumptions about risk
      and
      the effect of a restriction on the sale or use of an asset. The standard is
      effective for fiscal years beginning after November 15, 2007. The Company does
      not expect that the adoption of SFAS No. 157 will have a material impact on
      financial condition or results of operations.




In
      September 2006, the FASB Emerging Issues Task Force (EITF) finalized Issue
      No.
      06−5, Accounting for Purchases of Life Insurance - Determining the Amount That
      Could Be Realized in Accordance with FASB Technical Bulletin No. 85−4
      (Accounting for Purchases of Life Insurance).  This Issue requires
      that a policyholder consider contractual terms of a life insurance policy in
      determining the amount that could be realized under the insurance
      contract.  It also requires that if the contract provides for a
      greater surrender value if all individual policies in a group are surrendered
      at
      the same time, that the surrender value be determined based on the assumption
      that policies will be surrendered on an individual basis.  Lastly, the
      Issue discusses whether the cash surrender value should be discounted when
      the
      policyholder is contractually limited in its ability to surrender a
      policy.  This Issue is effective for fiscal years beginning after
      December 15, 2006.  The Company does not expect that the adoption of
      EITF No. 06-5 will have a material impact on financial condition of results
      of
      operations.




6


On
      February 15, 2007, the FASB issued its Statement No. 159, The Fair Value Option
      for Financial Assets and Financial Liabilities—Including an Amendment of FASB
      Statement No. 115.  SFAS No. 159 permits entities to elect to report
      most financial assets and liabilities at their fair value with changes in fair
      value included in net income.  The fair value option may be applied on
      an instrument-by-instrument or instrument class-by-class basis.  The
      option is not available for deposits withdrawable on demand, pension plan assets
      and obligations, leases, instruments classified as stockholders’ equity,
      investments in consolidated subsidiaries and variable interest entities and
      certain insurance policies. The new standard is effective at the beginning
      of
      the Company’s fiscal year beginning January 1, 2008, and early application may
      be elected in certain circumstances.  The Company expects to first
      apply the new standard at the beginning of its 2008 fiscal year.  The
      Company does not expect that the adoption of SFAS No. 159 will have a material
      impact on financial condition or results of operations.




The
      Company adopted the provisions of the Financial Accounting Standards Board
      (FASB) Interpretation No. 48 (FIN 48), *Accounting for Uncertainty in Income
      Taxes - an interpretation of FASB Statement No. 109*, on January 1,
      2007.  FIN 48 prescribes a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return.  FIN 48 also
      provides guidance on derecognition, classification, interest and penalties,
      accounting in interim periods, disclosure and transition.  As a result
      of the implementation of FIN 48, the Company did not identify any material
      uncertain tax positions that it believes should be recognized in the financial
      statements.












7


**Item
                2.**
            **Management’s
                Discussion and Analysis of Financial Condition and **Results
                of Operations****




**Executive
      Summary**




LSB
      Financial Corp. (the “Company” or “LSB Financial”) is an Indiana corporation
      which was organized in 1994 by Lafayette Savings Bank, FSB (“Lafayette Savings”)
      for the purpose of becoming a thrift institution holding company. Lafayette
      Savings is a federally chartered stock savings bank headquartered in Lafayette,
      Indiana.  References in this Form 10-Q to “we,” “us,” and “our” refer
      to LSB Financial and/or Lafayette Savings as the context requires.




Lafayette
      Savings has been, and intends to continue to be, a community-oriented financial
      institution. Our principal business consists of attracting retail deposits
      from
      the general public and investing those funds primarily in permanent first
      mortgage loans secured by owner-occupied, one- to four-family residences and,
      to
      a lesser extent, non-owner occupied one- to four-family residential, commercial
      real estate, multi-family, construction and development, consumer and commercial
      business loans. Our revenues are derived principally from interest on mortgage
      and other loans and interest on securities.




Tippecanoe
      County and the eight surrounding counties comprise Lafayette Savings’ primary
      market area.  Lafayette is the county seat of Tippecanoe County and
      West Lafayette is the home of Purdue University.  In addition to the
      jobs provided by these two major employers, Greater Lafayette has a strong
      manufacturing sector as well as many high-tech industries attracted to the
      area
      by the presence of Purdue University.  The Purdue Research Park
      continues to attract high-tech jobs to the area, housing over 140 companies
      and
      employing nearly 2,900 people.  Further growth is expected in this
      area.  Tippecanoe County consistently shows better growth and lower
      unemployment rates than Indiana or the national economy because of the diverse
      employment base.  The unemployment rate in Tippecanoe County in August
      2007 was 4.2% compared to 4.9% for the State of Indiana and 4.6%
      nationally.





Our
      primary source of income is net interest income, which is the difference between
      the interest income earned on our loan and investment portfolios and the
      interest expense incurred on deposits and borrowings.  Our net
      interest income depends on the balance of our loan and investment portfolios
      and
      the size of our net interest margin, which is the difference between the income
      generated from loans and the cost of the funding.  A major area of
      concern in the growth of net interest income has been the inversion of the
      yield
      curve.  Since January 2004 short-term rates have continued to increase
      steadily while long-term rates have remained comparatively
      flat.    Because deposits are generally tied to shorter-term
      market rates, and loans are generally tied to longer-term rates, the shrinking
      spread between the two has made it more difficult to maintain desired operating
      income levels.  While the Federal Reserve’s move to lower the Fed Fund
      rate in September restored the yield curve to its more typical slope it will
      take some time for the effects to be felt. Our expectation is that the Federal
      Reserve is done with rate changes for the year and that the yield curve will
      be
      generally flat to slightly upward-sloping through the rest of the
      year.





Rate
      changes could be expected to have an impact on interest
      income.  Rising rates generally increase borrower preference for
      variable rate products which we typically keep in our




8


portfolio,
      and existing adjustable rate loans can be expected to reprice to higher rates,
      both of which could be expected to have a favorable impact on interest
      income.  Alternatively, continuing low interest rates could have a
      negative impact on our interest income as new loans are put on the books at
      comparatively low rates and our existing adjustable rate loans reprice to lower
      rates.  Even if rates do fall, because so many borrowers refinanced
      their mortgages in the last few years, we do not expect to see a return to
      a
      high volume of refinancing.  However, low rates may be expected to
      encourage borrowers to initiate additional real estate related
      purchases.




We
      consider expected changes in interest rates when structuring our
      interest-earning assets and our interest-bearing liabilities.  If
      rates are expected to increase we try to book shorter-term assets that will
      reprice relatively quickly to higher rates over time, and book longer-term
      liabilities that will remain for a longer time at lower
      rates.  Conversely, if rates are expected to fall, we intend to
      structure our balance sheet such that loans will reprice more slowly to lower
      rates and deposits will reprice more quickly.  We currently offer a
      three-year and a five-year certificate of deposit that allows depositors one
      opportunity to have their rate adjusted to the market rate at a future date
      to
      encourage them to choose longer-term deposit products.  However, since
      we are not able to predict market interest rate fluctuations, our
      asset/liability management strategy may not prevent interest rate changes from
      having an adverse effect on our results of operations and financial
      condition.




Our
      results of operations may also be affected by general and local competitive
      conditions, particularly those with respect to changes in market interest rates,
      government policies and actions of regulatory authorities.






**Critical
      Accounting Policies**




Generally
      accepted accounting principles are complex and require management to apply
      significant judgments to various accounting, reporting and disclosure matters.
      Management of LSB Financial must use assumptions and estimates to apply these
      principles where actual measurement is not possible or practical. For a complete
      discussion of LSB Financial’s significant accounting policies, see Note 1 to the
      Consolidated Financial Statements as of September 30, 2007.  Certain
      policies are considered critical because they are highly dependent upon
      subjective or complex judgments, assumptions and estimates. Changes in such
      estimates may have a significant impact on the financial statements. Management
      has reviewed the application of these policies with the Audit Committee of
      LSB
      Financial’s Board of Directors. These policies include the
      following:






***Allowance
      for Loan Losses***




The
      allowance for loan losses represents management’s estimate of probable losses
      inherent in Lafayette Savings’ loan portfolios. In determining the appropriate
      amount of the allowance for loan losses, management makes numerous assumptions,
      estimates and assessments.




The
      strategy also emphasizes diversification on an industry and customer level,
      regular credit quality reviews and quarterly management reviews of large credit
      exposures and loans experiencing deterioration of credit quality.




9


Lafayette
      Savings’ allowance consists of three components: probable losses estimated from
      individual reviews of specific loans, probable losses estimated from historical
      loss rates, and probable losses resulting from economic or other deterioration
      above and beyond what is reflected in the first two components of the
      allowance.




Larger
      commercial loans that exhibit probable or observed credit weaknesses are subject
      to individual review. Where appropriate, reserves are allocated to individual
      loans based on management’s estimate of the borrower’s ability to repay the loan
      given the availability of collateral, other sources of cash flow and legal
      options available to Lafayette Savings.  Included in the review of
      individual loans are those that are impaired as provided in SFAS No. 114,
*Accounting by Creditors for Impairment of a Loan.*  Any
      allowances for impaired loans are determined by the present value of expected
      future cash flows discounted at the loan’s effective interest rate or fair value
      of the underlying collateral.  Historical loss rates are applied to
      other commercial loans not subject to specific reserve allocations.




Homogenous
      smaller balance loans, such as consumer installment and residential mortgage
      loans are not individually risk graded. Reserves are established for each pool
      of loans based on the expected net charge-offs for one year. Loss rates are
      based on the average net charge-off history by loan category.




Historical
      loss rates for commercial and consumer loans may be adjusted for significant
      factors that, in management’s judgment, reflect the impact of any current
      conditions on loss recognition.  Factors which management considers in
      the analysis include the effects of the national and local economies, trends
      in
      the nature and volume of loans (delinquencies, charge-offs and nonaccrual
      loans), changes in mix, asset quality trends, risk management and loan
      administration, changes in the internal lending policies and credit standards,
      collection practices and examination results from bank regulatory agencies
      and
      Lafayette Savings’ internal loan review.




An
      unallocated reserve is maintained to recognize the imprecision in estimating
      and
      measuring loss when evaluating reserves for individual loans or pools of
      loans.  Allowances on individual loans are reviewed quarterly and
      historical loss rates are reviewed annually and adjusted as necessary based
      on
      changing borrower and/or collateral conditions and actual collection and
      charge-off experience.




Lafayette
      Savings’ primary market area for lending is Tippecanoe County, Indiana. When
      evaluating the adequacy of allowance, consideration is given to this regional
      geographic concentration and the closely associated effect of changing economic
      conditions on Lafayette Savings’ customers.






***Mortgage
      Servicing Rights***




Mortgage
      servicing rights (MSRs) associated with loans originated and sold, where
      servicing is retained, are capitalized and included in other intangible assets
      in the consolidated balance sheet. The value of the capitalized servicing rights
      represents the present value of the future servicing fees arising from the
      right
      to service loans in the portfolio.  Critical accounting policies for
      MSRs relate to the initial valuation and subsequent impairment
      tests.  The methodology used to determine the valuation of MSRs
      requires the development and use of a




10


number
      of
      estimates, including anticipated principal amortization and prepayments of
      that
      principal balance.  Events that may significantly affect the estimates
      used are changes in interest rates, mortgage loan prepayment speeds and the
      payment performance of the underlying loans. The carrying value of the MSRs
      is
      periodically reviewed for impairment based on a determination of fair
      value.  For purposes of measuring impairment, the servicing rights are
      compared to a valuation prepared based on a discounted cash flow methodology,
      utilizing current prepayment speeds and discount rates.  Impairment,
      if any, is recognized through a valuation allowance and is recorded as
      amortization of intangible assets.






**Financial
      Condition**




***Comparison
      of Financial Condition at September 30, 2007 and December 31,
      2006***




Our
      total
      assets decreased $23.5 million, or 6.38%, during the nine months from December
      31, 2006 to September 30, 2007 primarily due to a $19.7 million decrease in
      net
      loans receivable including loans held for sale, a $1.9 million decrease in
      investments, and a $2.5 million decrease in short term
      investments.  Management attributes the decrease in loans primarily to
      the slow recovery of the local economy, residential overbuilding in the last
      few
      years, and the tightening of credit due to the interagency regulatory focus
      on
      commercial real estate lending.  Because of decreased funding needs,
      we allowed $18.4 million of higher cost deposits and $5.5 million of Federal
      Home Loan Bank advances to run off.




Non-performing
      assets, which include non-accruing loans, accruing loans 90 days past due and
      foreclosed assets, increased from $11.7 million at December 31, 2006 to $15.2
      million at September 30, 2007.  Non-performing loans and accruing
      loans 90 days past due totaled $11.2 million at September 30, 2007 and consisted
      of $9.1 million, or 81.13%, of one- to four-family or multi-family residential
      real estate loans or one- to four-family construction loans, $1.7 million,
      or
      14.99%, of loans on land or commercial property, $392,000, or
      3.48%,****of commercial business loans and $45,000, or
      0.40%,****of consumer loans.  Non-performing assets
      also include $3.9 million in foreclosed assets.  At September 30,
      2007, our allowance for loan losses equaled 1.06% of total loans compared to
      0.88% at December 31, 2006.  The allowance for loan losses at
      September 30, 2007 totaled 27.68% of non-performing loans at September 30,
      2007
      compared to 36.88% at December 31, 2006.  Our non-performing assets
      equaled 4.40% of total assets at September 30, 2007 compared to 3.17% at
      December 31, 2006.  Non-performing loans totaling $606,000 were
      charged off in the first nine months of 2007, offset by recoveries of
      $32,000.  The charge-offs included a $311,000 charge-off of a loan on
      a newly constructed one- to four-family rental property which was sinking and
      has been condemned by the county.  We expect the final disposition on
      this property to take months while the various lawsuits are
      adjudicated.  Although our charge-offs are largely covered by existing
      reserves there was no expectation that this property was at risk and an
      additional reserve was required to cover the charge-off.   We
      believe we use the best information available to determine the adequacy of
      our
      allowance for loan losses, however future adjustments to the allowance may
      be
      necessary, and net income could be significantly affected, if circumstances
      and/or economic conditions cause substantial changes in the estimates we use
      in
      making the determinations about the levels of the allowance for
      losses.  Additionally, various regulatory agencies, as an integral
      part of their examination process, periodically review our allowance for loan
      losses.  These agencies may require the recognition of




11


additions
      to the allowance based upon their judgments of information available at the
      time
      of their examination.




Shareholders’
      equity decreased from $34.84 million at December 31, 2006 to $34.83 million
      at
      September 30, 2007, a decrease of $7,000, or 0.02%, primarily as a result of
      net
      income of $1.9 million, offset by our payment of $1.0 million of dividends
      on
      common stock, and the repurchase of 37,500 shares of our stock as part of a
      stock repurchase plan.






**Results
      of Operations**




***Comparison
      of Operating Results for the Nine Months and the Quarter Ended September 30,
      2007 and September 30, 2006***




***General****.*  Net
      income for the nine months ended September 30, 2007 was $1.9 million, a decrease
      of $657,000, or 25.24%, over the nine months ended September 30,
      2006.  Net income for the quarter ended September 30, 2007 was
      $717,000, a decrease of $150,000, or 17.31%, over the comparable quarter in
      2006. The decrease for the nine month period was primarily due to a $554,000
      decrease in net interest income, a $202,000 increase in the provision for losses
      and a $459,000 increase in non-interest expenses partially offset by a $114,000
      increase in non-interest income and a $444,000 decrease in taxes on
      income.  The decrease for the three month period was primarily due to
      a $252,000 decrease in net interest income and a $140,000 increase in
      non-interest expenses partially offset by a $138,000 decrease in the provision
      for losses and a $112,000 decrease in taxes on income.




***Net
      Interest Income****.*  Net interest income for the
      nine months ended September 30, 2007 decreased $554,000, or 6.00%, over the
      same
      period in 2006.  This decrease was generally due to a 4 basis point
      decrease in our net interest margin (net interest income divided by average
      interest-earning assets) from 3.53% for the nine months ended September 30,
      2006
      to 3.49% for the nine months ended September 30, 2007, partially offset by
      a
      $2.3 million increase in net interest-earning assets.  The decrease in
      net interest margin is primarily due to the increase in the average rate on
      interest-bearing liabilities from 3.28% for the nine months ended September
      30,
      2006 to 3.70% for the nine months ended September 30, 2007 for an increase
      of 42
      basis points while the average rate earned on interest-earning assets increased
      from 6.66% for the nine months ended September 30, 2006 to 6.99% for the nine
      months ended September 30, 2007 for an increase of 33 basis
      points.  Net interest income for the three months ended September 30,
      2007 decreased $252,000, or 8.15%, over the same period in 2006.




Interest
      income on loans decreased $266,000, or 1.58%, for the nine months ended
      September 30, 2007 compared to the same nine months in 2006.  This
      decrease was the result of a $20.4 million decrease in the average balance
      of
      loans from $325.1 million in September 2006 to $305.7 million in September
      2007
      due to a continued slow local economy, offset by an increase in the average
      yield on loans from 6.92% for the first nine months of 2006 to 7.26% for the
      first nine months of 2007 due to increasing interest rates in the economy.
      The
      higher rates caused both new and adjustable rate mortgages to price and reprice
      higher.  Interest income on loans decreased $208,000 for the third
      quarter of 2007 compared to the third quarter of 2006 due to a decrease in
      the
      average balance of loans from $320.9 million in September 2006 to $298.1 million
      in September 2007 offset by an increase in the average yield on loans from
      7.15%
      for the




12


first
      nine months of 2006 to 7.42% for the first nine months of 2007 for similar
      reasons to those mentioned above.




Interest
      earned on other investments and Federal Home Loan Bank stock increased by
      $198,000 for the nine months ended September 30, 2007 compared to the same
      period in 2006.  This was primarily the result of a $2.7 million
      increase in average balances and an increase in the average yield on the average
      balance of other investments and Federal Home Loan Bank stock from 3.17% for
      the
      first nine months of 2006 to 3.83% over the same period in 2007 due to
      increasing interest rates in the economy.  Interest income on other
      investments and Federal Home Loan Bank stock increased $53,000 for the third
      quarter of 2007 compared to the third quarter of 2006 due to an increase in
      the
      average yield on other investments and Federal Home Loan Bank stock from 3.09%
      for the third quarter of 2006 to 3.86% over the same period in 2007, as well
      as
      an increase of $630,000 in average balances.




Interest
      expense for the nine months ended September 30, 2007 increased $486,000, or
      5.93%, over the same period in 2006.  This increase was due to an
      increase in the average rate paid on interest-bearing liabilities from 3.28%
      for
      the first nine months of 2006 to 3.70% for the first nine months of 2007
      partially offset by a $19.9 million decrease in average interest-bearing
      liabilities.  While we generally invest deposits in investment
      securities when loan growth is slow, we typically allow higher rate brokered
      deposits to run off if they are not needed to fund loan
      growth.  Brokered deposits decreased from $64.6 million at September
      30, 2006 to $54.2 million at September 30, 2007.  Interest expense
      increased $97,000, or 3.43%, for the third quarter of 2007 from the same period
      in 2006 primarily due to an increase in the average rate paid on average
      interest-bearing liabilities from 3.43% for the three month period ended
      September 30, 2006 to 3.65% for the same period in 2007, offset by a $9.4
      million decrease in average interest-bearing liabilities for the three month
      period ended September 30, 2007 compared to the same period in
      2006.




***Provision
      for Loan Losses***.   We establish our provision for
      loan losses based on a systematic analysis of risk factors in the loan
      portfolio.  The analysis includes consideration of concentrations of
      credit, past loss experience, current economic conditions, the amount and
      composition of the loan portfolio, estimated fair value of the underlying
      collateral, delinquencies and industry standards. On at least a quarterly basis,
      a formal analysis of the adequacy of the allowance is prepared and reviewed
      by
      management and the Board of Directors.  This analysis serves as a
      point-in-time assessment of the level of the allowance and serves as a basis
      for
      provisions for loan losses.




Our
      analysis of the loan portfolio begins at the time the loan is originated, when
      each loan is assigned a risk rating.  If the loan is a commercial
      credit, the borrower will also be assigned a similar rating.  Loans
      that continue to perform as agreed will be included in one of ten non-classified
      loan categories.  Portions of the allowance are allocated to loan
      portfolios in the various risk grades, based upon a variety of factors,
      including historical loss experience, trends in the type and volume of the
      loan
      portfolios, trends in delinquent and non-performing loans, and economic trends
      affecting our market.  Loans no longer performing as agreed are
      assigned a lower risk rating, eventually resulting in their being regarded
      as
      classified loans.  A collateral re-evaluation is completed on all
      classified loans.  This process results in the allocation of specific
      amounts of the allowance to individual problem loans, generally based on an
      analysis of the




13


collateral
      securing those loans.  These components are added together and
      compared to the balance of our allowance at the evaluation date.




We
      recorded a $920,000 provision for loan losses for the nine months ended
      September 30, 2007 as a result of our analysis of our current loan portfolios
      compared to $718,000 for the same period in 2006. The increased provision during
      2007 was deemed necessary to maintain the allowance for loan losses at a level
      considered adequate to absorb losses inherent in the loan portfolio and cover
      anticipated charge-offs. During the first nine months of 2007 we recorded
      charge-offs of $606,000 offset by recoveries of $32,000.  The
      charge-offs included a $311,000 charge-off of a loan on a newly constructed
      one-
      to four-family rental property which had unexpectedly begun sinking and has
      been
      condemned by the county.  We expect the final disposition on this
      property to take months while the various lawsuits are
      adjudicated.****The $920,000 provision for loan losses for
      the first nine months of 2007 was considered adequate to cover further
      charge-offs based on our evaluation and our loan mix.




At
      September 30, 2007, non-performing assets, consisting of non-accruing loans,
      accruing loans 90 or more days delinquent and other real estate owned, totaled
      $15.2 million compared to $11.7 million at December 31, 2006.  In
      addition to our non-performing assets, we identified $5.0 million in other
      loans
      of concern, compared to $4.6 million identified at December 31, 2006, where
      information about possible credit or cash flow problems of borrowers caused
      management to designate these loans as needing additional monitoring, and may
      result in disclosure of such loans as non-performing assets in the
      future.  The vast majority of these loans, as well as our
      non-performing assets, are well collateralized.




***Non-Interest
      Income***.  Non-interest income for the nine months ended
      September 30, 2007 increased by $114,000, or 5.50%, compared to the same period
      in 2006.  This was primarily due to a $208,000 increase in other
      income consisting of, among other things, a $126,000 decrease in our reserve
      for
      losses due to and other adjustments on our overdraft program as our loss
      experience on this program has been less than originally estimated, and a
      $68,000 increase in income recognized from bank owned life insurance because
      of
      the purchase of an additional $2.5 million in insurance in May of 2006. The
      increase in other income was augmented by a $59,000 increase in fees on deposit
      accounts consisting primarily of non-sufficient funds fees from our overdraft
      program and was partially offset by a $155,000 loss on the sale of other real
      estate owned as we work to dispose of properties acquired through
      foreclosure.




Non-interest
      income for the third quarter of 2007 decreased by $8,000 compared to the same
      period in 2006, primarily due to a $120,000 loss on the sale of other real
      estate owned and a $28,000 decrease in the gain on the sale of mortgage loans
      in
      the secondary market due to lower activity offset by a $93,000 increase in
      other
      income for the reasons mentioned above and a $47,000 increase in fees on deposit
      accounts.




***Non-Interest
      Expense***.  Non-interest expense for the nine months ended
      September 30, 2007 increased $459,000 over the same period in
      2006.  The major components of this increase included a $255,000
      increase in other expenses primarily related to foreclosed property expenses,
      a
      $50,000 increase in FDIC Insurance and a $41,000 increase in deposit fraud
      losses primarily due to a local business whose customer credit card information
      was compromised and the subsequent fraudulent use of these cards, some of which
      belonged to bank customers.  An $85,000 increase in occupancy expenses
      included increased depreciation on assets scheduled for




14


replacement.  Salary
      expenses for the nine months ended September 30, 2007 were virtually unchanged
      from the same period in 2006 due to lower benefit
      expenses.  Non-interest expense for the third quarter of 2007
      increased by $140,000 over the same period in 2006, due largely to the factors
      mentioned above.




***Income
      Tax Expense****.*Our
      income tax provision
      decreased by $444,000 for the nine months ended September 30, 2007 compared
      to
      the nine months ended September 30, 2006, primarily due to decreased
      income.  Our income tax provision decreased by $112,000 for the third
      quarter of 2007 compared to the third quarter of 2006 for the same
      reason.






**Liquidity**




Our
      primary sources of funds are deposits, repayment and prepayment of loans,
      interest earned on or maturation of investment securities and short-term
      investments, borrowings and funds provided from operations.  While
      maturities and the scheduled amortization of loans, investments and
      mortgage-backed securities are a predictable source of funds, deposit flows
      and
      mortgage prepayments are greatly influenced by general market interest rates,
      economic conditions and competition.




We
      monitor our cash flow carefully and strive to minimize the level of cash held
      in
      low-rate overnight accounts or in cash on hand.  We also carefully
      track the scheduled delivery of loans committed for sale to be added to our
      cash
      flow calculations.   Our current internal policy for liquidity
      requires minimum liquidity of 4.0% of total assets.




Liquidity
      management is both a daily and long-term function for our senior management.
      We
      adjust our investment strategy, within the limits established by the investment
      policy, based upon assessments of expected loan demand, expected cash flows,
      Federal Home Loan Bank advance opportunities, market yields and objectives
      of
      our asset/liability management program.  Base levels of liquidity have
      generally been invested in interest-earning overnight and time deposits with
      the
      Federal Home Loan Bank of Indianapolis.  Funds for which a demand is
      not foreseen in the near future are invested in investment and other securities
      for the purpose of yield enhancement and asset/liability
      management.




Our
      liquidity ratios at December 31, 2006 and September 30, 2007 were 7.79% and
      6.51%, respectively, compared to a regulatory liquidity base, and 6.09% and
      4.94% compared to total assets at the end of each period.




We
      anticipate that we will have sufficient funds available to meet current funding
      commitments.  At September 30, 2007, we had outstanding commitments to
      originate loans and available lines of credit totaling $40.6 million and
      commitments to provide funds to complete current construction projects in the
      amount of $2.1 million. In addition, we had commitments to sell $110,000 of
      fixed-rate residential loans.  Certificates of deposit, including
      brokered deposits, which will mature in one year or less at September 30, 2007
      totaled $113.4****million.   Based on our
      experience, our certificates of deposit have been a relatively stable source
      of
      long-term funds as such certificates are generally renewed upon maturity since
      we have established long-term banking relationships with our
      customers.  Therefore, we believe a significant portion of such
      deposits will remain with us, although this cannot be assured.  At
      September 30, 2007, $54.2 million of our deposits were in brokered deposits,
      $34.4 million of which will mature in one year




15


or
      less.  These deposits can be expected not to renew at maturity and
      will have to be replaced with other funding upon maturity.  We also
      have $20.0****million of Federal Home Loan Bank advances
      maturing in the next twelve months.






**Capital
      Resources**




Shareholders’
      equity totaled $34.83 million at September 30, 2007 compared to $34.84 million
      at December 31, 2006, a decrease of $7,000, or 0.02%, due primarily to net
      income of $1.9 million, partially offset by our payment of dividends on common
      stock and the repurchase of 37,500 shares of our stock as part of a stock
      repurchase plan.  Shareholders’ equity to total assets was 10.10% at
      September 30, 2007 compared to 9.46% at December 31, 2006.




Federal
      insured savings institutions are required to maintain a minimum level of
      regulatory capital.  If the requirement is not met, regulatory
      authorities may take legal or administrative actions, including restrictions
      on
      growth or operations or, in extreme cases, seizure.  As of December
      31, 2006 and September 30, 2007, Lafayette Savings was categorized as well
      capitalized.  Our actual and required capital amounts and ratios at
      December 31, 2006 and September 30, 2007 are presented below:




16





**Actual**
              
              
              **For
                  Capital Adequacy Purposes**
              
              
              **To
                  Be Well Capitalized Under Prompt Corrective Action
                  Provisions****Amount**
              
              
              **Ratio**
              
              
              **Amount**
              
              
              **Ratio**
              
              
              **Amount**
              
              
              **Ratio**As
                  of September 30, 2007Total
                  risk-based capital (to risk-weighted assets)
              
              $
              36,841
              
              
              
              13.7
              %
              
              $
              21,479
              
              
              
              8.0
              %
              
              $
              26,849
              
              
              
              10.0
              %Tier
                  I capital (to risk-weighted assets)
              
              
              34,188
              
              
              
              12.7
              
              
              
              10,740
              
              
              
              4.0
              
              
              
              16,109
              
              
              
              6.0Tier
                  I capital (to adjusted total assets)
              
              
              34,188
              
              
              
              9.9
              
              
              
              10,339
              
              
              
              3.0
              
              
              
              17,231
              
              
              
              5.0Tier
                  I capital (to adjusted tangible assets)
              
              
              34,188
              
              
              
              9.9
              
              
              
              6,892
              
              
              
              2.0
              
              
              N/A
              
              
              N/ATangible
                  capital (to adjusted tangible assets)
              
              
              34,188
              
              
              
              9.9
              
              
              
              5,169
              
              
              
              1.5
              
              
              N/A
              
              
              N/AAs
                  of December 31, 2006Total
                  risk-based capital (to risk-weighted assets)
              
              $
              36,533
              
              
              
              13.0
              %
              
              $
              22,532
              
              
              
              8.0
              %
              
              $
              28,164
              
              
              
              10.0
              %Tier
                  I capital (to risk-weighted assets)
              
              
              34,037
              
              
              
              12.1
              
              
              
              11,266
              
              
              
              4.0
              
              
              
              16,899
              
              
              
              6.0Tier
                  I capital (to adjusted total assets)
              
              
              34,037
              
              
              
              9.2
              
              
              
              1,055
              
              
              
              3.0
              
              
              
              18,425
              
              
              
              5.0Tier
                  I capital (to adjusted tangible assets)
              
              
              34,037
              
              
              
              9.2
              
              
              
              7,370
              
              
              
              2.0
              
              
              N/A
              
              
              N/ATangible
                  capital (to adjusted tangible assets)
              
              
              34,037
              
              
              
              9.2
              
              
              
              5,527
              
              
              
              1.5
              
              
              N/A
              
              
              N/A




**Disclosure
      Regarding Forward-Looking Statements**




This
      document, including information included or incorporated by reference, contains,
      and future filings by LSB Financial on Form 10-K, Form 10-Q and Form 8-K and
      future oral and written statements by LSB Financial and our management may
      contain, forward-looking statements about LSB Financial and its subsidiaries
      which we believe are within the meaning of the Private Securities Litigation
      Reform Act of 1995.  These forward-looking statements include, without
      limitation, statements with respect to anticipated future operating and
      financial performance, growth opportunities, interest rates, cost savings and
      funding advantages expected or anticipated to be realized by
      management.  Words such as may, could, should, would, believe,
      anticipate, estimate, expect, intend, plan and similar expressions are intended
      to identify forward-looking statements.  Forward-looking statements by
      LSB Financial and its management are based on beliefs, plans, objectives, goals,
      expectations, anticipations, estimates and intentions of management and are
      not
      guarantees of future performance.  We disclaim any obligation to
      update or revise any forward-looking statements based on the occurrence of
      future events, the receipt of new information or otherwise.  The
      important factors we discuss below and elsewhere in this document, as well
      as
      other factors discussed under the caption Management’s Discussion and Analysis
      of Financial Condition and Results of Operations in this document and identified
      in our filings with the SEC and those presented elsewhere by our management
      from
      time to time, could cause actual results to differ materially from those
      indicated by the forward-looking statements made in this document.






17




The
      following factors, many of which are subject to change based on various other
      factors beyond our control, could cause our financial performance to differ
      materially from the plans, objectives, expectations, estimates and intentions
      expressed in such forward-looking statements:






**·**
            the
                strength of the United States economy in general and the strength
                of the
                local economies in which we conduct our
                operations;




**·**
            the
                effects of, and changes in, trade, monetary and fiscal policies and
                laws,
                including interest rate policies of the Federal Reserve
                Board;




**·**
            financial
                market, monetary and interest rate fluctuations, particularly the
                relative
                relationship of short-term interest rates to long-term interest
                rates;




**·**
            the
                timely development of and acceptance of our new products and services
                of
                Lafayette Savings and the perceived overall value of these products
                and
                services by users, including the features, pricing and quality compared
                to
                competitors’ products and services;




**·**
            the
                willingness of users to substitute competitors’ products and services for
                our products and services;




**·**
            the
                impact of changes in financial services laws and regulations (including
                laws concerning taxes, accounting standards, banking, securities
                and
                insurance);




**·**
            the
                impact of technological changes;




**·**
            acquisitions;




**·**
            changes
                in consumer spending and saving habits;
                and




**·**
            our
                success at managing the risks involved in the
                foregoing.









18


**Item
                3.**
            **Quantitative
                and Qualitative Disclosures About Market
                Risk**




We,
      like
      other financial institutions, are subject to interest rate risk to the extent
      that our interest-bearing liabilities reprice on a different basis than our
      interest-earning assets.  The Office of Thrift Supervision (“OTS”),
      our primary regulator, supports the use of a net portfolio value (“NPV”)
      approach to the quantification of interest rate risk.  In essence,
      this approach calculates the difference between the present value of expected
      cash flows from assets and the present value of expected cash flows from
      liabilities, as well as cash flows from off-balance-sheet
      contracts.  An NPV ratio, in any interest rate scenario, is defined as
      the NPV in that rate scenario divided by the market value of assets in the
      same
      scenario, essentially a market value adjusted capital ratio.




It
      has
      been and continues to be a priority of the Board of Directors and management
      to
      manage interest rate risk to maintain an acceptable level of potential changes
      to interest income as a result of interest rate changes.  Our
      asset/liability management policy, established by the Board of Directors, sets
      forth acceptable limits on the amount of change in net portfolio value given
      certain changes in interest rates.  We have an asset/liability
      management committee which meets quarterly to review our interest rate position,
      and an investment committee which reviews the interest rate risk position and
      other related matters with the Board of Directors, and makes recommendations
      for
      adjusting this position to the full Board of Directors.  In addition,
      the investment committee of the Board of Directors meets semi-annually with
      our
      outside investment advisors to review our investment portfolio and strategies
      relating to interest rate risk.  Specific strategies have included the
      sale of long-term, fixed-rate loans to reduce the average maturity of our
      interest-earning assets and the use of Federal Home Loan Bank advances to
      lengthen the effective maturity of our interest-bearing
      liabilities.  In the future, our community banking emphasis, including
      the origination of commercial business loans, is intended to further increase
      our portfolio of short-term and/or adjustable rate loans.




Presented
      below, as of June 30, 2007 and December 31, 2006, is an analysis of our interest
      rate risk as measured by the effect on NPV caused by instantaneous and sustained
      parallel shifts in the yield curve, in 100 basis point increments, up 300 basis
      points and down 200 basis points, and compared to Board policy
      limits.  The Board Limit column indicates the lowest allowable limits
      for NPV after each interest rate shock.  Assumptions used in
      calculating the amounts in this table are OTS assumptions.  No
      information is provided for a negative 300 basis point shift in interest rates,
      due to a low prevailing interest rate environment making such scenarios
      unlikely.




Change
                in
            
            Board
                Limit
            
            At
                June 30, 2007
            
            At
                December 31, 2006Interest
                Rate
            
            Post-shock
            
            Post-shock
            
            Change
            
            Post-shock
            
            Change(Basis
                Points)
            
            NPV
                Ratio
            
            NPV
                Ratio
            
            (Basis
                Points)
            
            NPV
                Ratio
            
            (Basis
                Points)300
                bp
            
            6.00%
            
            10.34%
            
            (200)
                bp
            
            10.38%
            
            (156)
                bp200
            
            7.00
            
            11.33
            
            (100)
            
            11.25
            
            (68)100
            
            8.00
            
            12.10
            
            (24)
            
            11.92
            
            (1)0
            
            8.00
            
            12.34
            
            --
            
            11.94
            
            ---100
            
            8.00
            
            12.46
            
            12
            
            11.96
            
            3-200
            
            7.00
            
            12.48
            
            14
            
            11.92
            
            (2)





19


In
      evaluating our exposure to interest rate risk, certain shortcomings inherent
      in
      the method of analysis presented in the foregoing table must be
      noted.  For example, although certain assets and liabilities may have
      similar maturities or periods to repricing, they may react in different degrees
      to changes in market interest rates.  Also, the interest rates on
      certain types of assets and liabilities may fluctuate in advance of changes
      in
      market interest rates, while interest rates on other types may lag behind
      changes in market rates.  Further, in the event of a change in
      interest rates, prepayments and early withdrawal levels may deviate
      significantly from those assumed in calculating the table.  Finally,
      the ability of many borrowers to service their debt may decrease in the event
      of
      an interest rate increase.  As a result, the actual effect of changing
      interest rates may differ from that presented in the foregoing
      table.




Management
      believes that at September 30, 2007 there have been no material changes in
      Lafayette Savings’ interest rate sensitivity which would cause a material change
      in the market risk exposures that affect the quantitative and qualitative risk
      disclosures as presented above, from the Company’s Annual Report on Form 10-K
      for the period ended December 31, 2006.






**Item
                4.**
            **Controls
                and Procedures**




An
      evaluation of the Company’s disclosure controls and procedures (as defined in
      Sections 13a-15(e) and 15d-15(e) of the regulations promulgated under the
      Securities Exchange Act of 1934, as amended (the “Act”)), as of September 30,
      2007, was carried out under the supervision and with the participation of the
      Company’s Chief Executive Officer, Chief Financial Officer and several other
      members of the Company’s senior management.  The Company’s Chief
      Executive Officer and Chief Financial Officer concluded that the Company’s
      disclosure controls and procedures currently in effect are effective in ensuring
      that the information required to be disclosed by the Company in the reports
      it
      files or submits under the Act is (i) accumulated and communicated to the
      Company’s management (including the Chief Executive Officer and Chief Financial
      Officer) in a timely manner and (ii) recorded, processed, summarized and
      reported within the time periods specified in the Securities and Exchange
      Commission’s rules and forms.  There have been no changes in our
      internal control over financial reporting (as defined in Rule 13a-15(f) of
      the
      Act) identified in connection with the Company’s evaluation of controls that
      occurred during the quarter ended September 30, 2007, that have materially
      affected, or are reasonably likely to materially affect, our internal control
      over the financial reporting.






**PART
      II. OTHER INFORMATION**




**Item
                1.**
            **Legal
                Proceedings**




None.






**Item
                1A.**
            **Risk
                Factors**




There
      have been no material changes from the risk factors as previously disclosed
      in
      our Form 10-K Report for the fiscal year ended December 31,
      2006.




20


**Item
                2.**
            **Unregistered
                Sales of Equity Securities and Use of
                Proceeds**




The
      following table sets forth the number and prices paid for repurchased
      shares.




**Issuer
                Purchases of Equity Securities****Month
                of Purchase**
            
            **Total
                Number of Shares Purchased1**
            
            
            **Average
                Price Paid per Share**
            
            
            **Total
                Number of Shares Purchased as Part of Publicly Announced Plan2**
            
            
            **Maximum
                Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased
                Under the Plan**July
                1 – July 30, 2007
            
            
            0
            
            
            $
            0
            
            
            
            0
            
            
            
            74,717August
                1 – August 31, 2007
            
            
            3,000
            
            
            $
            25.00
            
            
            
            3,000
            
            
            
            71,717September
                1 – September 30, 2007
            
            
            0
            
            
            $
            0
            
            
            
            0
            
            
            
            71,717Total
            
            
            3,000
            
            
            $
            25.00
            
            
            
            3,000
            
            
            
            71,717


_______________________


1
              There
                  were no shares repurchased other than through a publicly announced
                  plan or
                  program.
 2
              We
                  have in place a program, announced February 6, 2007, to repurchase
                  up to
                  100,000 shares of our common stock.


**Item
                3.**
            **Defaults
                Upon Senior Securities**




None
      to
      be reported.






**Item
                4.**
            **Submission
                of Matters to a Vote of Security
                Holders**




None.






**Item
                5.**
            **Other
                Information**




None.






**Item
                6.**
            **Exhibits**




The
      exhibits listed in the Index to Exhibits are incorporated herein by
      reference.




21




**SIGNATURES**




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









LSB
                FINANCIAL CORP.(Registrant)Date:  
                November 14, 2007
            By:
            /s/ 
              Randolph F. WilliamsRandolph
                F. Williams, President(Principal
                Executive Officer)Date:  
                  November 14, 2007
            By:
            /s/
              Mary
              Jo DavidMary
                Jo David, Treasurer(Principal
                Financial and AccountingOfficer)





22








**INDEX
      TO EXHIBITS**










Regulation
                  S-K Exhibit Number
            
            Document31.1
            
            Rule
                13(a)-14(a) Certification (Chief Executive Officer)31.2
            
            Rule
                13(a)-14(a) Certification (Chief Financial Officer)32
            
            Section
                906 Certification









23