**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-Q**





ý
            
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                EXCHANGE ACT OF 1934For
                the quarterly period ended June 30, 2007ORo
            
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                EXCHANGE ACT OF 1934For
                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 June 30, 2007Common
                Stock, $.01 par value per share
            
            1,568,999
                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
            22Item
                6.
            Exhibits
            22SIGNATURES
            23INDEX
                TO EXHIBITS
            24











i


**PART
      I                      FINANCIAL
      INFORMATION**




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







LSB
      FINANCIAL CORP.


Consolidated
      Condensed Balance Sheets


(Dollars
      in thousands, except per share data)





June
                30,2007
            
            
            December
                31,2006(unaudited)AssetsCash
                and due from banks
            
            $
            1,222
            
            
            $
            1,391Short-term
                investments
            
            
            8,368
            
            
            
            8,336Cash
                and cash equivalents
            
            
            9,590
            
            
            
            9,727Available-for-sale
                securities
            
            
            14,429
            
            
            
            16,316Loans
                held for sale
            
            
            1,304
            
            
            
            992Total
                loans
            
            
            301,763
            
            
            
            319,469Less:
                Allowance for loan losses
            
            
            (3,008
            )
            
            
            (2,770
            )Net
                loans
            
            
            298,755
            
            
            
            316,699Premises
                and equipment, net
            
            
            6,926
            
            
            
            6,600Federal
                Home Loan Bank stock, at cost
            
            
            3,997
            
            
            
            3,997Bank
                owned life insurance
            
            
            5,495
            
            
            
            5,381Interest
                receivable and other assets
            
            
            9,512
            
            
            
            8,688Total
                Assets
            
            $
            350,008
            
            
            $
            368,400Liabilities
                and Shareholders’ EquityLiabilitiesDeposits
            
            $
            247,035
            
            
            $
            255,304Federal
                Home Loan Bank advances
            
            
            66,618
            
            
            
            76,618Interest
                payable and other liabilities
            
            
            1,898
            
            
            
            1,638Total
                liabilities
            
            
            315,551
            
            
            
            333,560Commitments
                and ContingenciesShareholders’
                EquityCommon
                stock, $.01 par valueAuthorized
                - 7,000,000 shares
              Issued
                and outstanding 2007 - 1,568,999 shares, 2006 - 1,603,209
                shares
            
            
            16
            
            
            
            15Additional
                paid-in-capital
            
            
            11,341
            
            
            
            12,227Retained
                earnings
            
            
            23,213
            
            
            
            22,623Accumulated
                other comprehensive loss
            
            
            (113
            )
            
            
            (25
            )Total
                shareholders’ equity
            
            
            34,457
            
            
            
            34,840Total
                liabilities and shareholders’ equity
            
            $
            350,008
            
            
            $
            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 endedJune
                30,
            
            
            Six
                months endedJune
                30,2007
            
            
            2006
            
            
            2007
            
            
            2006**Interest
                and Dividend Income**Loans
            
            $
            5,491
            
            
            $
            5,527
            
            
            $
            11,071
            
            
            $
            11,129SecuritiesTaxable
            
            
            128
            
            
            
            119
            
            
            
            292
            
            
            
            223Tax-exempt
            
            
            66
            
            
            
            48
            
            
            
            124
            
            
            
            96Other
            
            
            43
            
            
            
            30
            
            
            
            111
            
            
            
            62Total
                interest and dividend income
            
            
            5,728
            
            
            
            5,724
            
            
            
            11,598
            
            
            
            11,510**Interest
                Expense**Deposits
            
            
            2,033
            
            
            
            1,942
            
            
            
            4,059
            
            
            
            3,841Borrowings
            
            
            821
            
            
            
            762
            
            
            
            1,698
            
            
            
            1,527Total
                interest expense
            
            
            2,854
            
            
            
            2,704
            
            
            
            5,757
            
            
            
            5,368**Net
                Interest Income**
            
            
            2,874
            
            
            
            3,020
            
            
            
            5,841
            
            
            
            6,142**Provision
                for Loan Losses**
            
            
            490
            
            
            
            250
            
            
            
            740
            
            
            
            400**Net
                Interest Income After Provision for Loan Losses**
            
            
            2,384
            
            
            
            2,770
            
            
            
            5,101
            
            
            
            5,742**Non-interest
                Income**Deposit
                account service charges and fees
            
            
            478
            
            
            
            449
            
            
            
            884
            
            
            
            873Net
                gains on loan sales
            
            
            95
            
            
            
            58
            
            
            
            137
            
            
            
            109Gain(loss)
                on sale of securities
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0Gain(loss)
                on sale other real estate owned
            
            
            (33
            )
            
            
            0
            
            
            
            (33
            )
            
            
            0Other
            
            
            245
            
            
            
            195
            
            
            
            497
            
            
            
            382Total
                non-interest income
            
            
            785
            
            
            
            702
            
            
            
            1,485
            
            
            
            1,364**Non-Interest
                Expense**Salaries
                and employee benefits
            
            
            1,243
            
            
            
            1,143
            
            
            
            2,434
            
            
            
            2,430Net
                occupancy and equipment expense
            
            
            356
            
            
            
            291
            
            
            
            669
            
            
            
            580Computer
                service
            
            
            115
            
            
            
            104
            
            
            
            237
            
            
            
            202Advertising
            
            
            111
            
            
            
            72
            
            
            
            152
            
            
            
            129Other
            
            
            644
            
            
            
            514
            
            
            
            1,166
            
            
            
            999Total
                non-interest expense
            
            
            2,469
            
            
            
            2,124
            
            
            
            4,658
            
            
            
            4,340**Income
                Before Income Taxes**
            
            
            700
            
            
            
            1,348
            
            
            
            1,928
            
            
            
            2,766**Provision
                for Income Taxes**
            
            
            249
            
            
            
            520
            
            
            
            698
            
            
            
            1,030**Net
                income**
            
            $
            451
            
            
            $
            828
            
            
            $
            1,230
            
            
            $
            1,736**Basic
                Earnings Per Share**
            
            $
            0.28
            
            
            $
            0.51
            
            
            $
            0.77
            
            
            $
            1.08**Diluted
                Earnings Per Share**
            
            $
            0.28
            
            
            $
            0.50
            
            
            $
            0.77
            
            
            $
            1.07**Dividends
                Declared Per Share**
            
            $
            0.20
            
            
            $
            0.17
            
            
            $
            0.40
            
            
            $
            0.34








See
      notes
      to consolidated condensed financial statements.








2





LSB
      FINANCIAL CORP.


Consolidated
      Condensed Statements of Changes in Shareholders’ Equity


For
      the
      Six Months Ended June 30, 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
              
              
              
              
              
              
              
              
              
              
              1,736
              
              
              
              
              
              
              
              
              
              
              
              1,736Change
                  in unrealized appreciation (depreciation) on available-for-sale
                  securities, net of taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (38
              )
              
              
              (38
              )Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,698Dividends
                  on common stock, $0.34 per share
              
              
              
              
              
              
              
              
              
              
              (522
              )
              
              
              
              
              
              
              
              
              
              
              (522
              )Purchase
                  and retirement of stock (18,500 shares)
              
              
              (1
              )
              
              
              (523
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (524
              )Stock
                  options exercised (2,152 shares)
              
              
              
              
              
              
              34
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              34Amortization
                  of stock option compensation
              
              
              
              
              
              
              12
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              12Amortization
                  of RRP expense
              
              
              
              
              
              
              15
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              15ESOP
                  shares earned
              
              
              
              
              
              
              102
              
              
              
              
              
              
              
              25
              
              
              
              
              
              
              
              127**Balance,
                  June 30, 2006**
              
              $
              14
              
              
              $
              10,183
              
              
              $
              23,616
              
              
              $
              (24
              )
              
              $
              (128
              )
              
              $
              33,661**Balance,
                  January 1, 2007**
              
              $
              15
              
              
              $
              12,227
              
              
              $
              22,623
              
              
              $
              0
              
              
              $
              (25
              )
              
              $
              34,840Comprehensive
                  incomeNet
                  income
              
              
              
              
              
              
              
              
              
              
              1,230
              
              
              
              
              
              
              
              
              
              
              
              1,230Change
                  in unrealized appreciation (depreciation) on available-for-sale
                  securities, net of taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (88
              )
              
              
              (88
              )Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,142Dividends
                  on common stock, $0.40 per share
              
              
              
              
              
              
              
              
              
              
              (639
              )
              
              
              
              
              
              
              
              
              
              
              (639
              )Purchase
                  and retirement of stock (34,500 shares)
              
              
              
              
              
              
              (897
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (897
              )Stock
                  options exercised (290 shares)
              
              
              
              
              
              
              4
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4Amortization
                  of stock option compensation
              
              
              
              
              
              
              7
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7**Balance,
                  June 30, 2007**
              
              $
              15
              
              
              $
              11,341
              
              
              $
              23,214
              
              
              $
              0
              
              
              $
              (113
              )
              
              $
              34,457





See
      notes
      to consolidated condensed financial statements.


3


LSB
      FINANCIAL CORP.


Consolidated
      Condensed Statements of Cash Flows


(Dollars
      in thousands)


(Unaudited)





Six
                months endedJune
                30,2007
            
            
            2006Operating
                ActivitiesNet
                income
            
            $
            1,230
            
            
            $
            1,736Items
                not requiring (providing) cashDepreciation
            
            
            244
            
            
            
            232Provision
                for loan losses
            
            
            740
            
            
            
            400Amortization
                of premiums and discounts on securities
            
            
            6
            
            
            
            29ESOP
                shares earned
            
            
            0
            
            
            
            127Gain
                on sale of loans
            
            
            (129
            )
            
            
            (57
            )Loans
                originated for sale
            
            
            (957
            )
            
            
            (5,819
            )Proceeds
                on loans sold
            
            
            774
            
            
            
            5,244Amortization
                of stock options
            
            
            7
            
            
            
            12Changes
                inInterest
                receivable and other assets
            
            
            (880
            )
            
            
            (767
            )Interest
                payable and other liabilities
            
            
            260
            
            
            
            165Net
                cash from operating activities
            
            
            1,295
            
            
            
            1,290Investing
                ActivitiesPurchases
                of available-for-sale securities
            
            
            (1,361
            )
            
            
            (1,497
            )Proceeds
                from maturities of available-for-sale securities
            
            
            3,097
            
            
            
            614Net
                change in loans
            
            
            17,204
            
            
            
            7,246Purchase
                of premises and equipment
            
            
            (571
            )
            
            
            (136
            )Purchase
                of life insurance policies
            
            
            0
            
            
            
            (2,500
            )Net
                cash from investing activities
            
            
            18,369
            
            
            
            3,727Financing
                ActivitiesNet
                change in demand deposits, money market, NOW and savings
                accounts
            
            
            6,034
            
            
            
            (2,392
            )Net
                change in certificates of deposit
            
            
            (14,303
            )
            
            
            (3,150
            )Proceeds
                from Federal Home Loan Bank advances
            
            
            28,500
            
            
            
            27,500Repayment
                of Federal Home Loan Bank advances
            
            
            (38,500
            )
            
            
            (26,500
            )Proceeds
                from stock options exercised
            
            
            4
            
            
            
            34Repurchase
                of stock
            
            
            (897
            )
            
            
            (524
            )Dividends
                paid
            
            
            (639
            )
            
            
            (522
            )Net
                cash from financing activities
            
            
            (19,801
            )
            
            
            (5,542
            )Increase
                (Decrease) in Cash and Cash Equivalents
            
            
            (137
            )
            
            
            (525
            )Cash
                and Cash Equivalents, Beginning of Period
            
            
            9,727
            
            
            
            9,384Cash
                and Cash Equivalents, End of Period
            
            $
            9,590
            
            
            $
            8,859Supplemental
                Cash Flows InformationInterest
                paid
            
            
            5,867
            
            
            
            5,359Income
                taxes paid
            
            
            870
            
            
            
            890Supplemental
                Non-Cash DisclosuresCapitalization
                of mortgage servicing rights
            
            
            8
            
            
            
            52








See
      notes
      to consolidated condensed financial statements








4





LSB
      FINANCIAL CORP.


Notes
      to
      Consolidated Financial Statements


June
      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 $7,000 in compensation expense related to vested stock
      options less estimated forfeitures for the six month period ended June 30,
      2007.






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 June 30,**
            
            
            **Six
                months ended June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Weighted
                average shares outstanding (excluding unearned ESOP
                shares)
            
            
            1,608,977
            
            
            
            1,622,573
            
            
            
            1,596,638
            
            
            
            1,610,951Shares
                used to compute diluted earnings per share
            
            
            1,616,667
            
            
            
            1,633,341
            
            
            
            1,604,646
            
            
            
            1,622,130Earnings
                per share
            
            $
            0.28
            
            
            $
            0.51
            
            
            $
            0.77
            
            
            $
            1.08Diluted
                earnings per share
            
            $
            0.28
            
            
            $
            0.50
            
            
            $
            0.77
            
            
            $
            1.07










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 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.




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 May
      2007 was 3.7% compared to 4.3% for the State of Indiana and 4.5%
      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 is the continuing 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.  Our expectation for 2007 is that both short-term and
      long-term rates will be relatively flat through most of the year, with the
      possibility of both declining slightly in the third or fourth quarters resulting
      in a yield curve that remains inverted throughout most 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 portfolio, and existing
      adjustable rate loans can be expected to reprice to higher rates, both
      of




8


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 June 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 June 30, 2007 and December 31,
      2006***




Our
      total
      assets decreased $18.4 million, or 4.99%, during the six months from December
      31, 2006 to June 30, 2007 primarily due to a $17.6 million decrease in net
      loans
      receivable including loans held for sale and a $1.9 million decrease in
      investments, offset by an $824,000 increase in other assets due mostly to an
      increase in other real estate owned.  Management attributes the
      decrease in loans primarily to the slow recovery of the local economy,
      residential overbuilding in the last few years, the tightening of credit due
      to
      the interagency regulatory focus on commercial real estate lending and the
      increase in campus properties being purchased by out-of-area Real Estate
      Investment Trusts.  Because of decreased funding needs we allowed $8.3
      million of deposits and $10.0 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 $16.8
      million at June 30, 2007.  Non-performing loans and accruing loans 90
      days past due totaled $12.2 million at June 30, 2007 and consisted of $8.8
      million, or 72.36%, of one- to four-family or multi-family residential real
      estate loans or one- to four-family construction loans, $2.7 million, or 21.78%,
      of loans on land or commercial property, $611,000, or
      5.01%,****of commercial business loans and $103,000, or
      0.85%,****of consumer loans.  Non-performing assets
      also include $4.6 million in foreclosed assets.  At June 30, 2007, our
      allowance for loan losses equaled 0.99% of total loans compared to 0.86% at
      December 31, 2006.  The allowance for loan losses at June 30, 2007
      totaled 17.91% of non-performing assets compared to 23.72% at December 31,
      2006,
      and 24.68% of non-performing loans at June 30, 2007 compared to 36.88% at
      December 31, 2006.  Our non-performing assets equaled 4.80% of total
      assets at June 30, 2007 compared to 3.17% at December 31, 2006.  The
      ratio of total non-performing real-estate related loans to total collateral
      was
      64.93% at June 30, 2007.  Non-performing assets totaling $524,000 were
      charged off in the first six months of 2007, offset by recoveries of
      $25,000.  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




11


regulatory
      agencies, as an integral part of their examination process, periodically review
      our allowance for loan losses.  These agencies may require the
      recognition of additions to the allowance based upon their judgments of
      information available at the time of their examination.




Shareholders’
      equity decreased from $34.8 million at December 31, 2006 to $34.4 million at
      June 30, 2007, a decrease of $383,000, or 1.10%, primarily as a result of net
      income of $1.2 million, offset by our payment of $639,000 of dividends on common
      stock, and the repurchase of 34,500 shares of our stock as part of a stock
      repurchase plan.






**Results
      of Operations**




***Comparison
      of Operating Results for the Six Months and the Quarter Ended June 30, 2007
      and
      June 30, 2006***




***General****.*  Net
      income for the six months ended June 30, 2007 was $1.2 million, a decrease
      of
      $506,000, or 29.15%, over the six months ended June 30, 2006.  Net
      income for the quarter ended June 30, 2007 was $451,000, a decrease of $377,000,
      or 45.53%, over the comparable quarter in 2006. This decrease for the six month
      period was primarily due to a $301,000 decrease in net interest income, a
      $340,000 increase in the provision for losses and a $318,000 increase in
      non-interest expenses partially offset by a $121,000 increase in non-interest
      income and a $332,000 decrease in taxes on income.  The decrease for
      the three month period was primarily due to a $146,000 decrease in net interest
      income, a $240,000 increase in the provision for losses and a $345,000 increase
      in non-interest expenses partially offset by an $83,000 increase in non-interest
      income and a $271,000 decrease in taxes on income.




***Net
      Interest Income****.*  Net interest income for the
      six months ended June 30, 2007 decreased $301,000, or 4.90%, over the same
      period in 2006.  This decrease was generally due to a $1.3 million
      decrease in net interest-earning assets and a 2 basis point decrease in our
      net
      interest margin (net interest income divided by average interest-earning assets)
      from 3.50% for the six months ended June 30, 2006 to 3.48% for the six months
      ended June 30, 2007.  The decrease in net interest margin is primarily
      due to the increase in the average rate on interest-bearing liabilities from
      3.21% for the six months ended June 30, 2006 to 3.59% for the six months ended
      June 30, 2007 for an increase of 38 basis points while the average rate earned
      on interest-earning assets increased from 6.56% for the six months ended June
      30, 2006 to 6.91% for the six months ended June 30, 2007 for an increase of
      35
      basis points.  Net interest income for the three months ended June 30,
      2007 decreased $146,000, or 4.83%, over the same period in 2006.




Interest
      income on loans decreased $58,000, or 0.52%, for the six months ended June
      30,
      2007 compared to the same six months in 2006.  This decrease was the
      result of a decrease in the average balance of loans from $327.2 million in
      June
      2006 to $308.0 million in June 2007 due to a continued slow local economy,
      offset by an increase in the average yield on loans from 6.80% for the first
      six
      months of 2006 to 7.19% for the first six 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 $36,000 for the second quarter of 2007 compared to the second quarter
      of 2006 due to a decrease in the average balance of loans from $323.6 million
      in
      June 2006 to $303.1 million in June 2007 offset by an increase in
      the




12


average
      yield on loans from 6.83% for the first six months of 2006 to 7.25% for the
      first six months of 2007 for similar reasons to those mentioned
      above.




Interest
      earned on other investments and Federal Home Loan Bank stock increased by
      $146,000 for the six months ended June 30, 2007 compared to the same period
      in
      2006.  This was primarily the result of a $3.8 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 3.21% for the first
      six
      months of 2006 to 3.82% over the same period in 2007 due to increasing interest
      rates in the economy.  We purchased additional investment securities
      to offset the slower loan growth, increasing investment securities from $24.0
      million at June 30, 2006 to $26.8 million at June 30, 2007.  Interest
      income on other investments and Federal Home Loan Bank stock increased $40,000
      for the second quarter of 2007 compared to the second quarter of 2006 due to
      an
      increase of $3.0 million in average balances as well as an increase in the
      average yield on the average balance of other investments and Federal Home
      Loan
      Bank stock from 3.35% for the second quarter of 2006 to 3.57% over the same
      period in 2007.




Interest
      expense for the six months ended June 30, 2007 increased $389,000, or 7.25%,
      over the same period in 2006.  This increase was due to an increase in
      the average rate paid on interest-bearing liabilities from 3.21% for the first
      six months of 2006 to 3.59% for the first six months of 2007 partially offset
      by
      a $14.1 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 $69.8 million at June 30,
      2006 to $55.5 million at June 30, 2007.  Interest expense increased
      $150,000, or 5.55%, for the second 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 3.26% for the three month period ended June
      30, 2006 to 3.62% for the same period in 2007, offset by a $16.2 million
      decrease in average interest-bearing liabilities for the three month period
      ended June 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 $740,000 provision for loan losses for the six months ended June
      30,
      2007 as a result of our analysis of our current loan portfolios compared to
      $400,000 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 six months of 2007 we recorded charge-offs of
      $524,000 offset by recoveries of $25,000.  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
      $740,000 provision for loan losses for the first six months of 2007 was
      considered adequate to cover further charge-offs based on our evaluation and
      our
      loan mix.




At
      June
      30, 2007, non-performing assets, consisting of non-accruing loans, accruing
      loans 90 or more days delinquent and other real estate owned, totaled $16.8
      million compared to $11.7 million at December 31, 2006.  In addition
      to our non-performing assets, we identified $5.5 million in other loans of
      concern, compared to $4.6 million identified at December 31, 2006, where known
      information about possible credit problems of borrowers causes management to
      have doubts as to the ability of the borrowers to comply with present repayment
      terms, 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 six months ended
      June 30, 2007 increased by $121,000, or 8.87%, compared to the same period
      in
      2006.  This was primarily due to a $65,000 increase in other income
      consisting of, among other things, a $95,000 decrease in reserve for losses
      and
      other adjustments on our overdraft program, a $60,000 increase in income
      recognized from bank owned life insurance and a $25,000 increase in debit card
      fees. The increase in other income was augmented by an $11,000 increase in
      fees
      on deposit accounts and a $28,000 increase in the gain on the sale of mortgage
      loans due to an increase in loans sold and was partially offset by a $33,000
      loss on the sale of other real estate owned.




Non-interest
      income for the second quarter of 2007 increased by $83,000 over the same period
      in 2006, primarily due to a $50,000 increase in other income for the reasons
      mentioned above, a $29,000 increase in fees on deposit accounts and a $37,000
      increase in the gain on the sale of mortgage loans in the secondary market
      offset by a $33,000 loss on the sale of other real estate owned.




***Non-Interest
      Expense***.  Non-interest expense for the six months ended
      June 30, 2007 increased $318,000 over the same period in 2006.  The
      major components of this increase included an $83,000 increase in other expenses
      primarily related to foreclosed property expenses, a $56,000 increase in FDIC
      Insurance, an $89,000 increase in occupancy expenses including increased
      depreciation on assets scheduled for replacement and a $58,000 increase in
      computer service and advertising expenses.  Salary expenses for the
      six months ended June 30, 2007 were unchanged from the same period in 2006
      as
      the hiring of a credit administrator and increased commissions paid to
      residential loan originators due to an increase in volume in the second quarter
      largely offset a decrease in salaries due to lower benefit costs resulting
      from
      a change from an Employee




14


Stock
      Ownership Plan to a 401(k) match program and lower health insurance costs due
      to
      a change in carrier.  Non-interest expense for the second quarter of
      2007 increased by $345,000 over the same period in 2006, due largely to the
      factors mentioned above.




***Income
      Tax Expense****.*Our
      income tax provision
      decreased by $332,000 for the six months ended June 30, 2007 compared to the
      six
      months ended June 30, 2006, primarily due to decreased income.  Our
      income tax provision decreased by $271,000 for the second quarter of 2007
      compared to the second 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 June 30, 2007 were 7.79% and 7.18%,
      respectively, compared to a regulatory liquidity base, and 6.09% and 5.69%
      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 June 30, 2007, we had outstanding commitments to
      originate loans and available lines of credit totaling $41.8 million and
      commitments to provide funds to complete current construction projects in the
      amount of $2.3 million. In addition we had commitments to sell $125,000 of
      fixed-rate residential loans.  Certificates of deposit, including
      brokered deposits, which will mature in one year or less at June 30, 2007
      totaled $126.1****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
      June 30, 2006, $55.5 million of our deposits were in brokered deposits, $40.1
      million of which will mature in one year or less.  These deposits can
      be expected not to renew at maturity and will have to be replaced with
      other




15


funding
      upon maturity.  We also have $16.0****million of
      Federal Home Loan Bank advances maturing in the next twelve months.






**Capital
      Resources**




Shareholders’
      equity totaled $34.5 million at June 30, 2007 compared to $34.8 million at
      December 31, 2006, a decrease of $383,000, or 1.10%, due primarily to net income
      of $1.2 million, partially offset by our payment of dividends on common stock
      and the repurchase of 34,500 shares of our stock as part of a stock repurchase
      plan.  Shareholders’ equity to total assets was 9.84% at June 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 June 30, 2007, Lafayette Savings was categorized as well
      capitalized.  Our actual and required capital amounts and ratios at
      December 31, 2006 and June 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 June 30, 2007Total
                      risk-based capital (to risk-weighted assets)
                  
                  $
                  36,424
                  
                  
                  
                  13.5
                  %
                  
                  $
                  21,580
                  
                  
                  
                  8.0
                  %
                  
                  $
                  26,975
                  
                  
                  
                  10.0
                  %Tier
                      I capital (to risk-weighted assets)
                  
                  
                  33,843
                  
                  
                  
                  12.6
                  
                  
                  
                  10,790
                  
                  
                  
                  4.0
                  
                  
                  
                  16,185
                  
                  
                  
                  6.0Tier
                      I capital (to adjusted total assets)
                  
                  
                  33,843
                  
                  
                  
                  9.7
                  
                  
                  
                  10,504
                  
                  
                  
                  3.0
                  
                  
                  
                  17,507
                  
                  
                  
                  5.0Tier
                      I capital (to adjusted tangible assets)
                  
                  
                  33,843
                  
                  
                  
                  9.7
                  
                  
                  
                  7,003
                  
                  
                  
                  2.0
                  
                  
                  N/A
                  
                  
                  N/ATangible
                      capital (to adjusted tangible assets)
                  
                  
                  33,843
                  
                  
                  
                  9.7
                  
                  
                  
                  5,252
                  
                  
                  
                  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 March 31, 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
                March 31, 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%
            
            10.48%
            
            (172)
                bp
            
            10.38%
            
            (156)
                bp200
            
            7.00
            
            11.41
            
            (79)
            
            11.25
            
            (68)100
            
            8.00
            
            12.09
            
            (11)
            
            11.92
            
            (1)0
            
            8.00
            
            12.20
            
            --
            
            11.94
            
            ---100
            
            8.00
            
            12.29
            
            9
            
            11.96
            
            3-200
            
            7.00
            
            12.28
            
            8
            
            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 June 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 June 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 June 30, 2007, that have materially affected,
      or are reasonably likely to affect, our internal control over the financial
      reporting.






**PART
      II. OTHER INFORMATION**




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




The
      Supervisory Agreement between Lafayette Savings and the OTS (the “Agreement”)
      described in the Form 10-Q for the quarter ended March 31, 2006 was executed
      on
      May 15, 2006.  See LSB Financial’s report on Form 10-Q for the quarter
      ended March 31, 2006 for a detailed description of the terms and conditions
      of
      the Agreement.






**Item
                1A.  R**isk
                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**April
                1 – April 30, 2007
            
            
            2,000
            
            
            $
            26.25
            
            
            
            2,000
            
            
            
            99,717May
                1 – May 31, 2007
            
            
            5,000
            
            
            $
            25.90
            
            
            
            5,000
            
            
            
            94,717June
                1 – June 30, 2007
            
            
            20,000
            
            
            $
            25.70
            
            
            
            20,000
            
            
            
            74,717Total
            
            
            27,000
            
            
            $
            25.78
            
            
            
            27,000
            
            
            
            74,717


_______________________




1
      There were no
      shares repurchased other than through a publicly announced plan or
      program.




2We have in place a plan, announced
      September 27, 2004, to repurchase 5% of our common
      stock.  We also
      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****




On
      April
      18, 2007, LSB Financial Corp. held its Annual Meeting of Stockholders (the
      “Meeting”).




Proposal
      1:




The
      directors who were elected at the Meeting for a term to expire in 2010, are
      as
      follows:







**For**
            
            
            **Withheld**Mariellen
                M. Neudeck
            
            
            1,203,856
            
            
            
            15,357Charles
                W. Shook
            
            
            1,207,336
            
            
            
            11,877





21




The
        directors
        whose terms continued after the Meeting are as follows: James A. Andrew,
        Kenneth
        P. Burns, Mary Jo David, Philip W. Kemmer, Thomas R. McCully,  Jeffrey
        A. Poxon and Randolph F. Williams.




Proposal
      2:




A
      proposal to
      approve and ratify the LSB Financial Corp. 2007 Stock Option and Incentive
      Plan
      was approved by shareholders as follows:




**For**
            
            
            **Against**
            
            
            **Abstain**Proposal
                2
            
            
            580,327
            
            
            
            126,149
            
            
            
            7,567







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




None.




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




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




22




**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: 
                August 14, 2007
            By:
            /s/
              Randolph
              F. WilliamsRandolph
                F. Williams, President(Principal
                Executive Officer)Date: 
                    August 14, 2007
            By:
            /s/
              Mary Jo DavidMary
                Jo David, Treasurer(Principal
                Financial and AccountingOfficer)





23






**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