UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-K

(Mark One)

Commission file number 000-26667

Craftmade International, Inc.

(972) 393-3800
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12 (b) of the Act:
None

Securities registered pursuant to Section 12 (g) of the Act:

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 31, 2003 was $118,802,998

The number of shares outstanding of the registrant’s $.01 par value common stock as of September 24, 2004 was 5,128,948

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement pertaining to the Registrant’s 2004 annual meeting of stockholders are incorporated by reference into Part III of this report.

TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

The Company

Craftmade International, Inc. was incorporated in the state of Texas in July 1985 and reincorporated in the state of Delaware in December 1991 and is organized into two operating segments: Craftmade International, Inc. (“Craftmade”) and Trade Source International, Inc. (“TSI”). See Note 13 – Segment Information in the Notes to Consolidated Financial Statements for certain financial information about the Company’s two segments. Craftmade, TSI, their wholly-owned subsidiaries, and its two 50% owned limited liability companies (“LLCs”) are collectively referred to as the “Company”.

Craftmade – Craftmade is principally engaged in the design, distribution and marketing of ceiling fans, light kits, outdoor lighting, bath-strip lighting and related accessories to a nationwide network of over 1,600 lighting showrooms and electrical wholesalers specializing in sales to the remodeling, new home construction and replacement markets. Craftmade completed an arrangement with Fanthing Electrical Corp. (“Fanthing”), which is located in Taichung, Taiwan, in August 1986 for the manufacture of ceiling fans designed to Craftmade’s specifications. Craftmade’s ceiling fan product line consists of over two dozen series of premium priced to lower priced ceiling fans and is distributed under the Craftmade® trade name. Craftmade also markets nearly eighty light kit models in various colors for attachment and use with its ceiling fans or other ceiling fans, along with parts and accessories for its ceiling fans and light kits. In addition, nearly two dozen styles of bath-strip lighting and over forty designs of outdoor lighting are marketed under its Accolade® trade name. Craftmade purchases substantially all of its light kits from Sunlit Industries (“Sunlit”), in Taipei, Taiwan. The combination of design and functional features which characterize Craftmade ceiling fans have made them, in management’s judgment, one of the most reliable, durable, energy efficient and cost effective ceiling fans in the marketplace. Craftmade’s national sales organization, which consists of 33 independent sales groups employing approximately 65 sales representatives, markets its products to its distribution network of lighting showrooms and electrical wholesalers.

TSI - TSI is principally engaged in the design, distribution and marketing of outdoor and indoor lighting, selected ceiling fans and various fan accessories to mass merchandisers. TSI’s outdoor lighting consists of over one-hundred designs in different decorative finishes. The indoor lighting product line includes ceiling mount lighting fixtures and bath-strip lighting. TSI purchases substantially all of its products from manufacturers located in China.

50% Owned Limited Liability Companies - The Company has a 50% ownership interest in each of two entities, Design Trends, LLC (“Design Trends”) and Prime/Home Impressions, LLC (“PHI”), which are part of the TSI segment:

		Design Trends- Design Trends markets indoor lighting, including portable table lamps, floor lamps, chandeliers and wall sconces designed by Patrick Dolan. Substantially all of Design Trends’ sales are to mass merchandisers.
		PHI- PHI markets various fan accessories including decorative pull-chains, replacement switches, blade arms, blades and ceiling medallions. All of PHI’s sales are to mass merchandisers.

Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports will be made available free of charge through the Investor Relations section of our Internet website, http://www. craftmade.com, or craftmade.com, as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.

Craftmade Products

Ceiling Fans – Craftmade’s ceiling fan product line consists of over two dozen fan series for sale to the new home construction, remodeling and replacement markets. These series are differentiated on the basis of cost, air movement and appearance. Craftmade’s fans

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are manufactured and assembled in a variety of colors, styles and finishes and can be used either in conjunction with or independent of Craftmade’s light kits. Series lines include Early American, Traditional and Modern High-Tech Decor and, depending on the size, finish and other features, range in price from the premium Cameo, Constantina, Crescent and Presidential series to various low-end builder series. Craftmade’s fans come in five motor sizes, five blade sizes and over two dozen different decorative finishes. The range of styles and colors gives consumers the ability to select ceiling fans for any style of house, interior decoration or living and working area, including outdoor patios. Ceiling fans accounted for 29%, 30% and 29% of the Company’s sales for fiscal years 2004, 2003 and 2002, respectively.

Light Kits - Craftmade markets nearly eighty models of light kits, which consist of glass shades and filters, in various colors that may be utilized with Craftmade’s ceiling fans or other ceiling fans.

Bath-strip Lighting - Craftmade markets nearly two dozen series of bath-strip lighting in different lengths and decorative finishes under the Accolade® trade name. Craftmade plans to add finishes and series from time to time based on customer demand.

Outdoor Lighting – Craftmade markets over forty designs of outdoor lighting in different decorative finishes under the Accolade® trade name. Other outdoor products are also marketed under the TSI Prime brand, or under the retailers’ private label. Styles of outdoor lighting fixtures include wall-mount, pendant and post-mount. Craftmade plans to add finishes and designs from time to time based on customer demand.

Accessories - Craftmade also markets a variety of designer and standard wall controls to regulate the speed and intensity of ceiling fans and lighting fixtures and universal down-rods for use with ceiling fans.

TSI Products

Outdoor Lighting - TSI markets over sixty designs of outdoor lighting in a variety of decorative finishes, colors and sizes to various mass merchandisers under the TSI Prime brand, as well as the retailers’ private label brands. The outdoor lighting is designed for either wall mounting or as a post-mounted fixture. TSI’s sales of outdoor lighting represented less than 10% of the Company’s sales in fiscal year 2004, and 11% and 14% of the Company’s sales in fiscal year 2003 and 2002, respectively.

Indoor Lighting - During fiscal year 2000, the Company began marketing floor and table lamps, chandeliers and wall sconces designed by Pat Dolan to various mass merchandisers through Design Trends, a 50% owned limited liability company. TSI’s sales of indoor lighting represented 39%, 37% and 32% of the Company’s sales in fiscal year 2004, 2003 and 2002, respectively. TSI’s portable lamp program, which is a significant part of the TSI’s indoor lighting program, is merchandised in a mix and match system that enables the consumer to customize a lamp base and shade combination. Lamp shades are displayed separately on a revolving carousel that economizes space. The smaller packaging of the lamp bases enables the retailer to display a greater number of SKUs in the same amount of space. Selections of lamp bases include large, medium, buffet, small and mini lamps and are offered in a variety of styles and finishes.

Accessories - TSI also markets various fan accessories, including universal downrods, pull-chains and ceiling medallions, to various mass merchandisers through PHI. TSI’s accessories sales represented less than 10% of the Company’s sales in fiscal year 2004, 2003 and 2002.

Manufacturing

Craftmade’s ceiling fans, bathstrip lighting and substantially all of its light kits and certain accessories are produced by Fanthing and Sunlit. Craftmade selected Fanthing in August 1986 to manufacture all of its ceiling fans and certain fan accessories based on the Company’s belief that Fanthing has the capability to produce and ship a wide variety of product on a cost effective basis while maintaining excellent quality control in the manufacturing process. In 1989, Craftmade and Fanthing entered into a formal written agreement that is terminable on 180 days prior notice. The written agreement does not obligate Fanthing to produce and sell fans to Craftmade in any specified quantity, nor does it obligate Fanthing to sell products to Craftmade at a fixed price. Fanthing is permitted under the arrangement to manufacture ceiling fans for other distributors provided such ceiling fans are not a replication of Craftmade’s series or models. Fanthing also manufactures certain ceiling fan accessories, such as downrods, that are sold by Craftmade independently of its ceiling fans.

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Fanthing has provided Craftmade with a $1,000,000 credit limit, pursuant to which Fanthing will manufacture and ship ceiling fans prior to receipt of payment from Craftmade. Accordingly, payment can be deferred until delivery of such products. At present levels, this credit limit is equivalent to approximately three weeks’ supply of ceiling fans and represents a supplier commitment that the Company’s management believes is unusual for the industry and favorable to the Company. Fanthing is not required to provide this credit facility under its agreement with Craftmade, and Fanthing may discontinue this credit facility at any time. Craftmade places orders with Fanthing in anticipation of normally recurring orders. In the ordinary course of business, orders are filled within 60 days, which includes approximately 20 days for transport. While Craftmade’s agreement with Fanthing does not contain provisions relating to adjustments or returns as a result of product defects, Fanthing has historically extended Craftmade full credit for any product returns. Ceiling fans are shipped in container-size lots, generally consisting of 1,600 fan units. Delivery is made in Dallas, Texas upon presentment of documents by Craftmade’s designated freight forwarder following payment for such containers at Fanthing’s bank in Taiwan.

The Company’s management believes that Craftmade’s relationship with Fanthing and its ability to supply quality ceiling fans at competitive prices have been critical to the success of Craftmade. The Company’s management currently believes Craftmade’s relationship with Fanthing is excellent and foresees no reason, based on its association to date, for such relationship to deteriorate. If for any reason Fanthing were to discontinue its relationship with Craftmade in the future or should it be unable to continue to supply sufficient amounts of Craftmade products, Craftmade would be required to seek alternative sources of supply. The Company’s management currently believes Craftmade could secure alternative sources of supply with minimal business disruption.

Craftmade purchases its bathstrip lighting and substantially all of its light kits from Sunlit. Light kit orders are placed independently of ceiling fan orders, but are also received in container-size lots generally consisting of up to 4,500 light kit units under payment and delivery arrangements similar to those for ceiling fans. Craftmade offers a variety of light kits in various finishes and colors, as well as a variety of fixtures designed for ceiling fans. Craftmade also offers a variety of glass selections for the various light fixtures, including blown glass, beveled glass and crystal. Fixtures and glass are shipped from Sunlit in the light kit containers.

Craftmade’s wall controls, timers and switches as well as certain of its ceiling fan blades, are manufactured by companies based in the United States. Craftmade offers a variety of custom blade sets in various sizes and finishes, including unfinished oak, ash and other wood grains and in clear, mirror, gold mirror, black, smoke and antique white acrylic. The finished products are packaged and labeled under the Craftmade brand name.

Craftmade and TSI purchase outdoor lighting from several manufacturers located in Asia. Outdoor lighting orders are received in container-size lots, similar to light kit and ceiling fan orders. Craftmade and TSI offer a wide variety of outdoor lighting styles in various finishes, colors and sizes and are designed for either wall mounting or as post-mounted fixtures.

TSI purchases indoor lighting products, including flush mounts and bathstrip lights from the same manufacturers that produce outdoor lighting for Craftmade.

PHI purchases most of its ceiling fan accessories and all of its lamp replacement parts from several manufacturers located in Asia, with the exception of ceiling medallions, which are purchased from a manufacturer located in the United States.

Design Trends purchases its lamps and shades from multiple manufacturers located in Asia. Design Trends offers several different styles and sizes of table and floor lamps, either pre-packaged with shades or glass, or with shades sold separately, allowing customers to mix and match components. These products are also shipped on containers, either to the Company’s facility in Coppell, Texas or directly to the customer.

All of TSI, PHI and Design Trends’ foreign vendors require payment seven days after notification of shipment of product from Asia.

Distribution

Craftmade’s products are marketed through more than 1,600 lighting showrooms and electrical wholesaler locations specializing in sales to the new home construction, remodeling and replacement markets. Its ceiling fans, light kits, outdoor lighting and accessories are distributed through 33 independent sales groups on a national basis. Each sales group is selected to represent Craftmade in a specific market area. The independent sales groups comprise a sales force of approximately 65 sales representatives, who represent Craftmade exclusively in the sale of ceiling fans in return for commissions on such sales. During fiscal years 2004, 2003 and 2002, no single lighting showroom or electrical wholesaler accounted for more than 2% of Craftmade’s sales.

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Sales representatives are carefully selected and continually evaluated in order to promote high-level representation of Craftmade’s products. Craftmade employees provide initial field training to new sales representatives covering features, styles, operation and other attributes of Craftmade products to enable representatives to more effectively market Craftmade’s products. Additional training, especially for a new product series, is provided on a regular basis at semi-annual trade shows held throughout the United States. Management believes it has assembled a highly motivated and effective sales representative organization that has demonstrated a strong commitment to Craftmade and its products. Management further believes that the strength of its sales representative organization is primarily attributable to the quality and competitive pricing of Craftmade’s products as well as the ongoing administrative and marketing support that Craftmade provides to its sales representatives.

All of TSI’s sales are to mass merchandisers with two customers comprising the most significant portion of TSI’s and the Company’s sales, as follows:

The majority of TSI’s sales are by direct shipment. The remaining sales are shipped from the Company’s Coppell, Texas facility. TSI utilizes an internal sales force to market its products and sales representatives to service specific mass merchandiser locations.

Marketing

Craftmade relies primarily on the reputation of its ceiling fans, outdoor lighting and light kits for high quality and competitive prices and the efforts of its sales representative organization in order to promote the sales of its products. The principal markets for Craftmade’s products are the new home construction, remodeling and replacement markets. Craftmade utilizes advertising in home lighting magazines, particularly in special editions devoted to ceiling fans and lighting fixtures, and broadly distributes its product catalog. Craftmade also promotes its ceiling fans and light kits at semi-annual trade shows in Dallas (in January and June) and maintains a showroom at the Dallas Trade Mart. Craftmade provides warranties ranging from 10 years to lifetime on the fan motor of its ceiling fans, and includes a one year limited warranty against defects in workmanship and materials to cover the entire ceiling fan. Craftmade also provides a limited lifetime warranty on its higher-end series of fans. The Company’s management believes these warranties are highly attractive to both dealers and consumers.

TSI relies primarily on the reputation of its products and the relationship it has with its mass merchandiser

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customers with respect to its sales. TSI participates in advertising programs and special promotions performed by its customers. TSI also promotes its product line at semi-annual trade shows in Dallas (in January and June) and utilizes Craftmade’s showroom at the Dallas Trade Mart.

The Company has a 48-hour product shipment policy. In order to meet these policy delivery requirements and to ensure that it has sufficient goods on hand from its overseas suppliers, the Company maintains a significant level of inventory. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”

For information concerning revenues of the Company attributable to foreign and domestic customers, along with information concerning foreign and domestic long-lived assets of the Company, see Note 13 – Segment Information in the Notes to Consolidated Financial Statements.

Product Expansion

Craftmade continually expands its ceiling fan product line, providing proprietary products to its customer base in order to meet current and anticipated demands for unique, innovative products. During fiscal year 2004, Craftmade introduced four new series of fans: Ceylon, Sentry, American Tradition and Universal Hugger. Craftmade also added two new custom finishes – English Toffee and Oiled Bronze. In addition, Craftmade increased its selections of complimentary products such as specialty light fixtures, glass and accessories. The Company’s management will continue to search for opportunities for product expansion that it considers complementary to the Company’s existing product lines.

In fiscal year 2004, the Company enlarged its presence in the mass merchandiser market by continuing to develop and roll out its mix and match ceiling fan program to TSI’s customer base. This program features interchangeable fan motors, blade arms, blades, light kits and glass – all available in multiple finishes and styles, allowing customers to create their own fan design. The Company also introduced a line of lamp replacement and repair parts to the home center channel through its PHI partnership.

Seasonality

The Company’s product sales, particularly ceiling fans, are somewhat seasonal with sales in the warmer first and fourth quarters being historically higher than in the two other fiscal quarters.

Backlog

Backlog is not material to the Company’s operations as substantially all of the Company’s products are shipped to customers within 48 hours following receipt of orders.

Competition

The ceiling fan and lighting fixture market is highly competitive at all levels of operation. Some of the major companies in the ceiling fan industry include Casablanca, Hunter, Monte Carlo, Quorum, Emerson Electric and Taconi. A number of other well-established companies are also currently engaged in activities that compete directly with Craftmade. Some of Craftmade’s competitors are better established and have longer operating histories, substantially greater financial resources or greater name recognition than Craftmade. However, the Company’s management believes that the quality of Craftmade’s products, the strength of its marketing organization and the growing recognition of the Craftmade name will enable Craftmade to compete successfully in these highly competitive markets.

The mass merchandiser market is also highly competitive. TSI and Design Trends have numerous competitors, which are located both within the United States and outside of the country, particularly in Asia. Some of the major companies in the lighting fixture industry include Designer’s Fountain, Murray Feiss and Minka. In addition, mass merchandisers themselves will, at times, compete directly against TSI and Design Trends by purchasing private label products from TSI’s vendors. However, the Company’s management believes that TSI has positioned itself with its customers in a manner that reduces some of the risks involved with competing in the mass merchandiser market, primarily by offering unique display systems and packaging that the Company management believes other companies do not offer.

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Independent Safety Testing

All of the ceiling fans, outdoor lighting, light kits and lamps sold by the Company in the United States are tested by Underwriter’s Laboratories (UL), which is an independent non-profit corporation which tests certain products, including ceiling fans and lighting fixtures, for public safety. Under its agreement with UL, the Company voluntarily submits its products to UL, and UL tests the products for safety. If the product is acceptable, UL issues a listing report that provides a technical description of the product. UL provides the manufacturers with procedures to follow in manufacturing the products. Electrical products that are manufactured in accordance with the designated procedures display the UL listing mark, which is generally recognized by consumers as an indication of a safe product and which is often required by various governmental authorities to comply with local codes and ordinances. The contract between the Company and UL provides for automatic renewal unless either party cancels as a result of default or gives applicable prior notice.

Product Liability

The Company is engaged in businesses that could expose it to possible claims for injury resulting from the failure of its products sold. While no material claims have been made against the Company since its inception and the Company maintains product liability insurance, there can be no assurance that claims will not arise in the future or that the coverage of such policy will be sufficient to pay such claims.

Patents and Trademarks

The Company has patented certain of its product designs and the functional features of some of its products, including a patent on its Cathedral Ceiling Adapter and the Carousel light kit. The expiration dates of Craftmade’s patents (excluding pending applications) currently range from 2008 to 2014. In addition, Fanthing holds certain Taiwanese patents covering specific technology employed in Craftmade ceiling fans, but the Company’s management does not believe that such patents are material to the production of Craftmade products. From time to time, the Company also enters into license agreements with various designers of the Company’s products, including license agreements concerning licenses on patents for eight series of fans and certain other license agreements entered into in the ordinary course of its business. The Company has registered the trademarks Craftmade ®, Accolade ® and Durocraft ®, along with the product names of certain of its designs, with the United States Patent and Trademark Office.

Design Trends merchandises its portable lamp program in a patented display system that makes more efficient use of the retailer’s space than conventional lighting displays. The Company’s management believes that the display patent is material to Design Trends’ business.

Employees

As of August 31, 2004, the Company employed a total of 122 full time employees, including 4 executive officers, (one of whom is a TSI officer), 20 managers, 21 clerical and administrative personnel, 21 marketing personnel, 44 warehouse personnel and 12 Design Trends/shipping/production personnel. The Company’s employees are not covered by any collective bargaining agreements, and the Company believes its employee relations are satisfactory.

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ITEM 2. PROPERTIES

The Company’s headquarters are located in Coppell, Texas. The facility consists of approximately 378,000 square feet of general office and warehouse space, which is owned by the Company and is used by both Craftmade and TSI. The Company’s management believes that this Company-owned facility will be sufficient for its purposes for the foreseeable future. See Note 4 – Note Payable in the Notes to Consolidated Financial Statements for a discussion of the Company’s term loan used to finance the Company’s acquisition of this facility.

The Company also leases permanent display facilities at the Dallas Trade Mart, which are used by both Craftmade and TSI. The lease provides for monthly rental payments of $6,632 per month from May 1, 2003 through April 30, 2004 and $6,831 from May 1, 2004 through April 30, 2005, with three percent annual increases thereafter. The lease expires April 30, 2007.

ITEM 3. LEGAL PROCEEDINGS

     On August 8, 2001, Lamps Plus, Inc. and Pacific Coast Lighting (collectively “Lamps Plus”) sued several defendants, including Patrick S. Dolan, Dolan Northwest, LLC, Design Trends, and Craftmade International, Inc. (collectively, the “Craftmade Parties”), for alleged patent infringement in the United States District Court for the Northern District of Texas. The suit alleged that the Craftmade Parties infringed two patents – a design patent and a utility patent – held by Lamps Plus related to a design for a free-standing torchiere lamp with attached sidelights. The suit sought a declaration that the two patents were infringed, treble damages, a preliminary and permanent injunction from further alleged infringement, attorneys’ fees, and other unspecified damages. The Craftmade Parties denied the allegations of patent infringement, asserting affirmative defenses, and counterclaimed for a declaration that the patents are invalid, not infringed, and unenforceable.

     On November 3, 2003, the lawsuit went to trial and on November 20, 2003, the jury found that the Craftmade Parties directly and indirectly infringed the utility patent with four of the five lamp models, and that their infringement was willful. The jury found that the Craftmade Parties did not infringe the design patent for any of the five accused lamp models. The jury further found that neither patent was invalid or unenforceable, and awarded damages against Dolan, Design Trends L.L.C., and Craftmade International, Inc., jointly and severally, in the amount of $143,385. On September 14, 2004, the Court entered a Judgment and Permanent Injunction and issued an Order Awarding Attorneys’ Fees. The Judgment awards Lamps Plus $143,385 in actual damages plus costs of court. The Order awards $600,000 in attorneys’ fees to Lamps Plus. Dolan, Design Trends, and Craftmade have been enjoined from selling infringing lamps including 4 of the 5 models at issue in the case. Management believes that the exclusion of these lamp models would not have a material adverse effect on the business of the Company. Dolan, Design Trends, and Craftmade intend to appeal the Judgment and Order. The outcome of this appeal is uncertain.

     With regard to the foregoing litigation (the “Lawsuit”), the Craftmade Parties entered into an agreement (the “Agreement”), that sets forth the responsibilities of the Craftmade Parties for payment of additional fees, costs and expenses of the Lawsuit, along with the rights to any recovery that might be had by reason of the Lawsuit. Pursuant to the Agreement, Design Trends (which is owned jointly by Craftmade and Dolan Northwest, LLC) agreed to pay the first $150,000 of legal fees and expenses incurred by the Parties after February 21, 2003. On April 16, 2003, Dolan Northwest became responsible for all legal fees and expenses incurred by the Craftmade Parties in connection with the Lawsuit from that date forward, and agreed to indemnify and hold harmless Craftmade and Design Trends from and against any and all claims, liabilities, or losses arising out of the legal fees and expenses incurred in the defense of the Lawsuit after February 21, 2003.

     Pursuant to the Agreement, Dolan Northwest is solely responsible for the payment of any judgment which may be rendered in the Lawsuit against any of the Craftmade Parties and has agreed to indemnify and hold harmless Craftmade and Design Trends from and against any and all liabilities, losses, damages, costs or other expenses associated with said judgment. Dolan Northwest is also responsible for all additional legal fees and expenses (including any supersedeas bond posted), which may be incurred in the prosecution or defense of any appeal, perfected by any party to the Lawsuit. Dolan Northwest has additionally agreed to assume and be responsible for all obligations of Design Trends to indemnify Lowe’s Companies, Inc. or any of its subsidiaries for any loss or damage incurred as a result of the Lawsuit. In the event of a recovery in the Lawsuit in favor of any or all of the Craftmade Parties, Dolan is entitled to retain all of the proceeds of such recovery.

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     As an accommodation and convenience to Dolan Northwest, Design Trends has agreed to advance the funds necessary to pay the legal fees and expenses for which Dolan Northwest will be responsible as well as any final judgment that may be entered against any of the Craftmade Parties in the Lawsuit. Any such advances have been and will continue to be treated by Design Trends as loans and are charged against Dolan Northwest’s capital account in Design Trends. In the event that Dolan Northwest’s capital account is insufficient to pay any such fees and expenses for which Dolan Northwest is responsible under the Agreement, Design Trends shall notify in writing both Pat Dolan and Dolan Northwest of such deficiency and Dolan Northwest shall reimburse Design Trends for any such fees and expenses (including any final judgment) within ten days. Pat Dolan has agreed to unconditionally guarantee the obligations of Dolan Northwest under this Agreement.

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

No matters were submitted to a vote of stockholders during the fourth quarter of fiscal year 2004.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The initial public offering price of the Company’s common stock, $0.01 par value per share (“Common Stock”) in April 1990 was $1.55 per share, adjusted for the Company’s three-for-two stock splits effective October 30, 1998 and October 31, 1997. The Common Stock trades on Nasdaq National Market System under the symbol CRFT.

The following table sets forth, for the periods indicated, the high and low bid information per share of Common Stock on the Nasdaq National Market System, as reported by Nasdaq.

Computershare Investor Services, Two North Lasalle Street, Chicago IL 60602, is the transfer agent and registrar for the Common Stock.

Holders

On September 8, 2004, there were 95 holders of record of the Common Stock.

ISSUER PURCHASES OF EQUITY SECURITIES

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On December 9, 2003 the Company’s Board of Directors authorized the Company’s management to repurchase up to 500,0000 shares of Common Stock. No expiration date was specified for the repurchase program; however, it is estimated to be completed within twelve months of the authorization. No shares were purchased by the Company other than through publicly announced plans or programs.

Management anticipates that future dividend increases will be implemented in keeping with anticipated future earnings growth.

ITEM 6. SELECTED FINANCIAL DATA.

The selected financial data in the tables below are for the five fiscal years ended June 30. The data should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the consolidated financial statements included herein.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

Cautionary Statement

With the exception of historical information, the matters discussed in this Item 7 and elsewhere in this Annual Report on Form 10-K contain forward-looking statements. There are certain important factors which could cause results to differ materially from those anticipated by these forward-looking statements. Some of the important factors which would cause actual results to differ materially from those in the forward-looking statements include, among other things, the success of the Design Trends portable lamp program, changes in anticipated levels of sales, whether due to future national or regional economic and competitive conditions, changes in relationships with customers, TSI’s dependence on select mass merchandisers, customer acceptance of existing and new products, pricing pressures due to excess capacity, cost increases, exchange rate fluctuations in the U.S. and Taiwanese dollar, changes in tax or interest rates, unfavorable economic and political developments in Asia, the location of the Company’s primary vendors, declining conditions in the home construction industry, inability to realize deferred tax assets, and other uncertainties, all of which are difficult to predict and many of which are beyond the control of the Company.

Critical Accounting Policies and Estimates

The Company’s management’s discussion and analysis of its financial condition and results of operations following are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company’s estimates are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for the Company’s conclusions. The Company continually evaluates the information used to make these estimates as its business and the economic environment changes. The Company’s management believes that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on its financial statements, so the Company considers these to be its critical accounting policies.

Revenue Recognition

Revenue is recognized as product is shipped and related services are performed in accordance with all applicable revenue recognition criteria. For these transactions the Company applies the provisions of SEC Staff Accounting Bulletin No. 104 “Revenue Recognition.” The Company recognizes revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title generally transfers upon shipment of goods from our warehouse. The Company does not have an obligation or policy of replacing, at no cost, customer products damaged or lost in transit. In some instances, the Company ships product directly from our suppliers to the customers. In these cases, the Company recognizes revenue when the product is accepted by the customer’s representative. The Company applies the provisions of Emerging Issues Task Force (EITF) Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” The Company’s application of EITF 99-19 includes evaluation of the terms of each major customer contract relative to a number of criteria that management considers in making its determination with respect to gross vs. net reporting of revenue for transactions with its customers. Management’s criteria for making these judgments place particular emphasis on determining the primary obligor in a transaction and which party bears general inventory risk. The Company records all shipping and handling fees billed to customers as revenue, and related costs as cost of sales, when incurred, in accordance with EITF 00-10, “Accounting for Shipping and Handling Fees and Costs.”

As part of its revenue recognition policy, the Company records estimated incentives payable to its customers at a future date as a reduction of revenue at the time the revenues are recorded. The Company bases its estimates on contractual terms of the programs and estimated or actual sales to individual customers. Actual incentives in any future period are inherently uncertain and, thus, may differ from its estimates. If actual or expected incentives were significantly greater than the reserves the Company had established, the Company would record a reduction to net revenues in the period in which the Company made such determination.

In addition to various incentive programs, from time to time the Company is required to provide mark-down funds to certain of it mass retail customers to assist them in clearing slow-moving inventory. These mark-down funds were recorded as a reduction of revenue in the period in which they were granted. In March 2004, the Company began to estimate and record reductions to revenue for these mark-down funds that it records when the revenue is recorded because based on its past practice these mark-down funds were estimable and considered likely to be granted.

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Allowance for Doubtful Accounts

The Company regularly analyzes significant customer balances, and, when it becomes evident a specific customer will be unable to meet its financial obligations to the Company, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position, a specific allowance for doubtful account is recorded to reduce the related receivable to the amount that is believed reasonably collectible. The Company also records allowances for doubtful accounts for all other customers based on a variety of factors including the length of time the receivables are past due, the financial health of the customer and historical experiences. If circumstances related to specific customers change, estimates of the recoverability of receivables could be further adjusted.

Inventories

The Company’s inventories are primarily comprised of finished goods and are recorded at the lower of cost or market using the average cost method. The Company provides estimated inventory allowances for excess, slow-moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. These reserves are based on current assessments about future demands, market conditions and related management initiatives. If market conditions and actual demands are less favorable than those projected by management, additional inventory write-downs may be required.

Goodwill

The Company assesses the carrying values of goodwill annually or when circumstances dictate that the carrying value might be impaired. The method for determining if impairment has occurred requires estimates of future cash flows and the Company’s weighted average cost of capital. In the event that an impairment is determined to have occurred, the Company will reduce the carrying value of the asset in that period.

Income Taxes

The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In estimating future tax consequences, all expected future events other than enactments of changes in the tax law or rates are considered. Deferred income taxes have been provided on unremitted earnings from foreign investees. The Company reviews its deferred tax assets for ultimate realization and will record a valuation allowance to reduce the deferred tax asset if it is more likely than not that some portion, or all, of these deferred tax assets will not be realized.

TSI’s 50% owned LLCs operate in the form of partnerships for tax purposes and, consequently, do not file federal income tax returns. Accordingly, the Company recognizes it’s share of their income and the related tax effects on it’s provision for income taxes.

FIN 46

In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46) and amended it by issuing FIN 46R in December 2003. Among other things, FIN 46R generally deferred the effective date of FIN 46 to the quarter ended March 31, 2004. Variable interest entities (VIEs) are primarily entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

The Company has a 50% ownership interest in two limited liability companies, Design Trends and PHI. In connection with the adoption of FIN 46R, the Company concluded that Design Trends and PHI are VIEs and that the Company is the primary beneficiary of each of Design Trends and PHI. Pursuant to the provisions of FIN 46R, effective January 1, 2004, the Company began to consolidate Design Trends and PHI and restated its previously issued financial statements to reflect Design Trends and PHI as consolidated entities.

Results of Operations

Fiscal year ended June 30, 2004 compared to fiscal year ended June 30, 2003.

Net Sales — Net sales for the Company increased $12,205,000, or 11.2%, to $121,238,000 for the year ended June 30, 2004 from $109,033,000 for the year ended June 30, 2003. Net sales of the Craftmade segment increased $4,372,000, or 8.9%, to $53,526,000 for the year ended June 30, 2004, from $49,154,000 for the year ended June 30, 2003. The increase in sales of the Craftmade segment was due to an increased focus on sales and marketing and new product introductions, as well as the overall strength of the housing sector of the U.S. economy. Management anticipates that Craftmade’s sales will continue to trend upwardly, in the range of 5% to 10% annually, assuming continued strength in the housing sector and the overall U.S. economy.

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Net sales of the TSI segment increased $7,833,000, or 13.1% to $67,712,000 for the year ended June 30, 2004 from $59,879,000 for the year ended June 30, 2003. The increase was primarily attributable to the strong performance of Design Trends’ portable lamp business, which generated $7,343,000 in incremental revenue during the period. Management does not anticipate future growth of the TSI division to continue at the robust rate generated in Fiscal 2004 from existing products sold to existing customers. Future growth of the TSI division is contingent upon the success of the Company’s ongoing efforts to introduce new products to existing customers and to expand the business to new customers.

Gross Profit — Gross profit of the Company as a percentage of sales declined to 29.6% of sales compared to 32.5% of sales for the years ended June 30, 2004 and 2003, respectively. Gross profit of the Craftmade segment declined to 39.3% of net sales for the year ended June 30, 2004 compared to 40.2% for the year ended June 30, 2003. The decline in the gross margin of Craftmade was primarily due to price increases from the Company’s ceiling fan manufacturer that were not passed through to customers. The gross margin of the TSI segment declined to 22.0% of sales for the year ended June 30, 2004 compared to 26.1% of sales for the year ended June 30, 2003. The decline in the gross profit percentage of TSI was primarily due to a shift in the sales mix with a greater portion of revenue made of direct shipment sales which carry lower gross margins and lower SG&A expenses. In addition, the TSI division experienced an increase in mark-down money and price concessions provided to mass retail customers. Management anticipates that based on current market conditions, future gross profit margins for the Company will not differ significantly from gross margins generated in Fiscal 2004.

Selling, General and Administrative Expenses — Total selling, general and administrative (“SG&A”) expenses of the Company decreased $20,000 to $18,580,000 or 15.3% of net sales for the year ended June 30, 2004 from $18,600,000 or 17.1% of net sales for the year ended June 30, 2003. Total SG&A expense of the Craftmade segment declined $12,000 to $11,359,000 or 21.2% of sales compared to $11,371,000 or 23.1% of sales for the year ended June 30, 2003. The decline in SG&A expense as a percent of sales is primarily attributable to the effect of increased sales leveraging down fixed SG&A expenses. Total SG&A expenses of the TSI segment decreased $8,000 to $7,221,000 or 10.7% of sales for the year ended June 30, 2004 from $7,229,000 or 12.1% of sales for the year ended June 30, 2003. The decrease in SG&A expense as a percentage of sales was partially related to cost savings derived from the closing of the California office, which occurred in the second quarter of fiscal 2004, as well as a change in the sales mix. Management anticipates that based on current market conditions, future SG&A expenses as a percentage of sales will not be significantly different from results generated in Fiscal 2004.

Interest Expense — Net interest expense of the Company decreased $119,000 to $777,000 for the year ended June 30, 2004 from $896,000 for the year ended June 30, 2003. This decrease was primarily the result of a decline in the average outstanding balance on the Company’s lines of credit and its facility note payable. Management anticipates that in the future, lower outstanding balances on its lines of credit will offset expected increases in interest rates, resulting in total interest expense that is not significantly different from the expense generated in Fiscal 2004.

Minority Interests — As a result of a decline in income generated by the Company’s 50% owned LLCs, minority interests decreased $516,000 to $3,719,000 for the year ended June 30, 2004 compared to $4,235,000 for the year ended June 30, 2003. The decline was primarily related to the $2,100,000 sales allowance provided by PHI to a mass retail customer in connection with the roll out of its new lamp parts business in the second quarter of fiscal 2004. The decline was partially offset by increased sales generated in the second half of fiscal 2004 related to the new business, as well as increased sales of Design Trends portable lamp business, as previously discussed.

Provision for Income Taxes — The provision for income taxes increased to $4,540,000 or 28.5% of income for the year ended June 30, 2004, from $4,158,000 or 27.3% for the year ended June 30, 2003.

Fiscal year ended June 30, 2003 compared to fiscal year ended June 30, 2002

Net Sales — Net sales increased $2,983,000 to $109,033,000 for the year ended June 30, 2003 from $106,050,000 for the year ended June 30, 2002. Sales of the Craftmade division decreased 1.3% or $642,000, to $49,154,000 from $49,798,000 for the year ended June 30, 2002. The decrease in sales of the Craftmade division was primarily due to lower unit sales and lower prices on certain discontinued models of

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fans that were replaced by new models that were introduced in the January lighting market. Sales of the TSI division increased 6.4%, or $3,627,000, to $59,879,000 for the year ended June 30, 2003 from $56,252,000 for the year ended June 30, 2002. The increase in sales of the TSI division was attributable to an increase in Design Trends’ portable lamp business, which generated $3,404,000 in incremental revenue during the period.

Gross Profit — Gross profit increased to 32.5% of sales, or $35,394,000, for the year ended June 30, 2003 compared to 30.1% of sales, or $31,923,000, for the year ended June 30, 2002. The gross margin of the Craftmade division increased to 40.2% of sales for the year ended June 30, 2003 from 39.3% of sales for the year ended June 30, 2002. The improvement in the gross margin of the Craftmade division was due primarily to increased sales of higher margin products. The gross margin of the TSI division improved to 26.1% for the year ended June 30, 2003 compared to 21.9% of sales, for the year ended June 30, 2002. The improvement in the gross margin of TSI was primarily due to the successful re-merchandising of the Design Trends portable lamp program, at which time slower turning and lower margin items were replaced with more productive inventory.

Selling, General and Administrative Expenses — Total selling, general and administrative (“SG&A”) expenses of the Company increased $638,000 to $18,600,000, or 17.1% of net sales, for the year ended June 30, 2003 from $17,962,000, or 16.9% of net sales, for the year ended June 30, 2002. Total SG&A expenses of the Craftmade division decreased $168,000 to $11,371,000 or 23.1% of net sales, compared to $11,539,000 or 23.2% of net sales in the previous year. The Craftmade division’s SG&A expense as a percentage of sales was relatively unchanged from fiscal 2002 to fiscal 2003. The decline in SG&A expense in total dollars was primarily related to the decline in sales of the Craftmade division from fiscal 2002 to fiscal 2003. Total SG&A expenses of TSI increased $806,000 to $7,229,000 or 12.1% of sales compared to $6,423,000 or 12.5% of net sales, for the year ended June 30, 2002. The increase in TSI’s SG&A expenses in dollars as well as a percentage of sales was primarily due to an increase in payroll related expenses.

Interest Expense — Interest expense declined $376,000 to $896,000 for the year ended June 30, 2003 from $1,272,000 for the previous year. This decline was primarily the result of lower average outstanding balances on the company’s lines of credits and its facility note, combined with lower interest rates in effect during the period.

Minority Interests — As a result of an increase in income generated by the Company’s 50% owned LLCs, minority interests increased $1,719,000 to $4,235,000 for the year ended June 30, 2003 from $2,516,000 for the year ended June 30, 2002. The increase was due to an increase in sales of Design Trends’ portable lamp program which generated $3,404,000 in incremental revenue during the year, as well as a $1,272,000 increase in sales of PHI for fiscal 2003 compared to the previous year.

Provision for Income Taxes — The provision for income taxes increased to $4,158,000 or 27.3% of income for the year ended June 30, 2003 from $3,435,000 or 28.4% of income for the year ended June 30, 2002.

Liquidity and Capital Resources

Fiscal year ended June 30, 2004.

The Company’s cash increased $846,000 from $4,992,000 at June 30, 2003 to $5,838,000 at June 30, 2004. The Company’s operating activities provided cash of $11,814,000, which was primarily attributable to income from operations before minority interest.

The $195,000 of cash used in investing activities related to additions to property and equipment, which consisted primarily of warehouse racking, as well as purchases of office equipment in connection with the relocation of employees from the California office to the Company’s headquarters in Coppell, Texas.

Cash used in financing activities of $10,936,000 was primarily the result of (i) repurchases of the Company’s outstanding common stock of $8,269,000, (ii) distributions to minority interest members of $5,302,000, and (iii) cash dividends of $2,123,000, and (iv) principal payments on the Company’s notes payable of $1,982,000. These amounts were

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partially offset by (i) net advances on the Company’s revolving lines of credit of $4,125,000, and (ii) proceeds from a note payable of $2,100.000.

The Company’s management believes that its current lines of credit, combined with cash flows from operations, are adequate to fund the Company’s current operating needs, debt service payments, and any future dividend payments, as well as fund its projected growth over the next twelve months. Based on current market conditions, management anticipates that future cash flows will be used primarily to retire existing debt and to repurchase Company common stock. On December 9, 2003, the Company’s Board of Directors authorized the Company’s management to repurchase up to 500,000 shares of the Company’s outstanding common stock. As of June 30, 2004, the Company had repurchased 331,510 shares at an aggregate cost of $8,269,000 under this program. The average price paid for shares repurchased during the period was $24.96.

At June 30, 2004, subject to continued compliance with certain covenants and restrictions, the Company had a $20,000,000 line of credit with The Frost National Bank (“Frost”), of which $14,577,000 had been utilized. The Frost line of credit is due on demand; however if no demand is made, it is scheduled to mature on October 31, 2005. Management believes that alternative bank financing on acceptable terms would be available should the Company not be able to renew its line of credit. Debt covenants of the Frost line of credit requires the maintenance of a tangible net worth ratio of 2.5 to 1.0.

By entering into the Unconditional Guaranty of the Promissory Note dated as of November 24, 2003 to Prime/Home Impressions, LLC with Wachovia Bank, NA, the Company violated its negative covenant not to guarantee debts contained in the Loan Agreement dated as of November 6, 2001 with Frost. The Company has obtained a waiver of such violation from Frost, for the quarters ended December 31, 2003, March 31, 2004 and for the fiscal year ended June 30, 2004 and for the period ending September 15, 2005. Nevertheless the amount outstanding under this note at June 30, 2004, $14,577,000, has been classified as current due to its terms. Management believes that alternative bank financing on acceptable terms would be available should the Company not be able to renew its loan agreement.

The Company was in violation of its negative covenant not to retire or otherwise acquire any of its capital stock contained in the Unconditional Guaranty of the Promissory Note dated as of November 24, 2003 to PHI with Wachovia Bank, N.A. The Company has obtained a waiver of such violation from Wachovia Bank, N.A. for the quarters ended December 31, 2003; March 31, 2004; and for the fiscal year ended June 30, 2004 and for the period ending September 15, 2005. Nevertheless the amount outstanding under this note at June 30, 2004, $1,575,000, has been classified as current due to its terms. Management believes that alternative bank financing on acceptable terms would be available should the Company not be able to renew its loan agreement.

At June 30, 2004, Design Trends had a $2,000,000 loan agreement with Frost, of which none had been utilized. Design Trends can borrow under this loan subject to continued compliance with certain covenants. Management believes that alternative bank financing on acceptable terms would be available should the Company not be able to renew its loan agreement.

One of the Company’s 50%-owned LLCs, PHI, has a $2,000,000 line of credit (the “$2 Million Line of Credit”) with Wachovia Bank, N.A. (“Wachovia”), at an interest rate equal to the Monthly LIBOR index plus 2%, which expires October 1, 2004. During fiscal year 2003, PHI reduced the amount available on its line of credit from $3,000,000 to its present level. There was an outstanding balance of $1,548,000 on the $2 Million Line of Credit at June 30, 2004. PHI has a $500,000 three-year note payable to Wachovia (the “$500,000 Note”) maturing on July 29, 2005, of which $195,000 was outstanding at June 30, 2004. The $500,000 Note bears interest at a rate equal to 1-month LIBOR plus 2.5%. In addition, on November 24, 2003, PHI entered into a loan agreement with Wachovia (the “$2.1 Million Note”) whereby Wachovia agreed to advance up to $2,100,000 to PHI, subject to PHI’s continued compliance with certain loan covenants specified by the agreement. The $2.1 Million Note bears interest at a rate equal to the 1-month LIBOR plus 2.5%. At June 30, 2004, there was a $1,575,000 balance outstanding under the $2.1 million Note, which is scheduled to mature on March 15, 2005. The PHI members agreed to be guarantors of the $2 Million Line of Credit, the $500,000 Note and the $2.1 Million Note for business purposes, in order to induce the lender to provide these loans to PHI.

At June 30, 2004, $3,841,000 remained outstanding under the note payable for the Company’s 378,000 square foot operating facility. The Company’s management believes that this facility will be sufficient for its purposes for the foreseeable future. The facility note payable matures on January 1, 2008.

Fanthing, Craftmade’s ceiling fan vendor, has provided Craftmade with a $1,000,000 credit limit, pursuant to which it will manufacture and ship ceiling fans prior to receipt of payment from Craftmade. Accordingly, payment can be deferred until delivery of such products. At present levels, such credit facility is equivalent to approximately three weeks’ supply of ceiling fans and represents a supplier commitment, which, in the opinion of the Company’s management, is unusual for the industry and favorable to the Company. This manufacturer is not required to provide this credit facility under its agreement with Craftmade, and it may discontinue this arrangement at any time.

Management does not anticipate that the covenants and restrictions of its lines of credit and loan agreements will limit the Company's growth potential.

During fiscal year 2004, the Company extended its accounts receivable payment terms with its largest mass retail customer (Lowes Companies) to 60 days from a previous range of 30 to 45 days. The Company does not anticipate that this will have a material impact on the availability of future cash collections to meet the Company’s expected future cash obligations.

TSI maintained inventory levels of $6,253,000 at June 30, 2004. TSI’s sales are highly concentrated with Lowes Companies. Should the revenues generated by TSI from its programs with Lowes Companies be at levels significantly lower than originally anticipated, the Company would be required to find other customers for this inventory. There can be no assurances that the Company would be able to obtain additional customers for this inventory or that any alternative sources would generate similar sales levels and profit margins as anticipated with the current mass merchandiser customer.

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Fiscal year ended June 30, 2003.

The Company’s cash increased $3,680,000 from $1,312,000 at June 30, 2002 to $4,992,000 at June 30, 2003. The Company’s operating activities provided cash of $14,895,000 during the year. This cash flow was primarily attributable to the Company’s income from operations before minority interest and a reduction in accounts receivable from trade.

Cash used for investing activities of $186,000 was related to additions to property, plant and equipment, primarily for additional racking installed in the Company’s warehouse facility.

Cash used for financing activities of $11,029,000 was primarily the result of (i) the repurchase of 558,000 shares of the Company’s common stock at an aggregate cost of $7,746,000, (ii) principal payments of $950,000 on the Company’s notes payable (iii) cash dividends of $1,542,000 and (iv) minority interest distributions of $2,912,000. These amounts were partially offset by proceeds of $1,798,000 from the Company’s lines of credit and $323,000 from the exercise of employee stock options.

Fiscal year ended June 30, 2002

The Company’s cash decreased $326,000 from $1,638,000 at June 30, 2001 to $1,312,000 at June 30, 2002. The Company’s operating activities, provided cash of $17,849,000 during the year. This cash flow was primarily attributable to the Company’s Income from operations before minority interest of $8,676,000 and a reduction in inventory of $8,127,000. The reduction in inventory was related primarily to the TSI segment, in which a substantial portion of the business shifted toward sales of direct shipments rather than warehouse shipments.

Cash used for investing activities of $2,988,000 was primarily related to (i) capital expenditures of $2,292,000 incurred in connection with the installation of Design Trends patented lamp display program in all stores of the Company’s largest mass retail customer and (ii) $617,000 of capital expenditures associated with the implementation of the Company’s logistics and accounting systems upgrade.

Cash used for financing activities of $15,187,000 was primarily the result of (i) principal payments of $10,396,000 on the Company’s revolving lines of credit, (ii) principal payments of $2,146,000 on the Company’s notes payable (iii) cash dividends of $1,666,000 (iv) minority interest distributions of $1,322,000 and (iv) the repurchase of 17,000 shares of the Company’s common stock at an aggregate cost of $236,000. These amounts were partially offset by proceeds of $578,000 from the exercise of employee stock options.

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the opinion of the Company’s management, is unusual for the industry and favorable to the Company. This manufacturer is not required to provide this credit facility under its agreement with Craftmade, and it may discontinue this arrangement at any time.

Contractual Obligations

The table below, as well as the information contained in Note 4 – “Revolving Lines of Credit and Notes Payable” and Note 10 – “Commitments and Contingencies” to the Company’s consolidated financial statements, summarizes the Company’s various repayment requirements at June 30, 2004. The Company expects to meet these obligations with cash flows from existing operations.

At June 30, 2004, the Company had a $20,000,000 line of credit with The Frost National Bank (the “Craftmade Line of Credit”) at an interest rate of prime (4.00% at June 30, 2004) less .5%, of which $14,577,000 was outstanding. The line of credit is due on demand; however, if no demand is made, it is scheduled to mature October 31, 2005.

At June 30, 2004, PHI had a $2 Million Line of Credit with Wachovia at an interest rate equal to the one-month LIBOR plus 2%. At June 30, 2004, the one-month LIBOR rate was equal to 1.3582%. There was a $1,548,000 outstanding balance on the line of credit at June 30, 2004. The $2 Million Line of Credit is due on demand; however, if no demand is made, it is scheduled to mature October 1, 2004.

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Effects of Recent Accounting Pronouncements

In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition”, which supercedes SAB 101, “Revenue Recognition in Financial Statements”. SAB 104 rescinds the accounting guidance contained in SAB 101 specifically related to multiple elements revenue managements, but leaves the remaining SAB 101 principles largely unchanged. The adoption of SAB 104 did not have an impact on Craftmade’s consolidated results of operations or financial position.

Inflation

Generally, inflation has not had, and the Company does not expect it to have, a material impact upon operating results. However, there can be no assurance that the Company’s business will not be affected by inflation in the future.

Related Party Transactions

The Company has a non-interest bearing note receivable from its chief executive officer for $50,000. Principal payments on the note are being amortized monthly, which will result in the note being paid in full in August 2005.

TSI leased office space from a former director of the Company, who was also an executive officer of the Company. This lease was for five months at $7,500 per month of the fiscal year, until the office was relocated in November 2003.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information set forth below constitutes a “forward looking statement.” See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cautionary Statement.

At June 30, 2004, the Company had a $20,000,000 line of credit with The Frost National Bank (the “Craftmade Line of Credit”) at an interest rate of prime (4.00% at June 30, 2004) less .5%, of which $14,577,000 was outstanding. The line of credit is due on demand; however, if no demand is made, it is scheduled to mature October 31, 2005.

At June 30, 2004, PHI had a $2 Million Line of Credit with Wachovia at an interest rate equal to the one-month LIBOR plus 2%. At June 30, 2004, the one-month LIBOR rate was equal to 1.3582%. There was a $1,548,000 outstanding balance on the line of credit at June 30, 2004. The $2 Million Line of Credit is due on demand; however, if no demand is made, it is scheduled to mature October 1, 2004.

PHI has a $500,000 Note payable to Wachovia maturing on July 29, 2005, of which $195,000 was outstanding at June 30, 2004. The note bears interest at a rate equal to the Monthly LIBOR Index plus 2.5%. In addition, on November 24, 2003, PHI entered into the $2.1 million Note with Wachovia whereby Wachovia agreed to advance up to $2,100,000 to PHI, subject to PHI’s continued compliance with certain loan covenants specified by the agreement. At June 30, 2004, there was a $1,575,000 balance outstanding under the $2.1 Million Note, which is scheduled to mature on March 15, 2005.

The short-term nature of each of the Craftmade Line of Credit and the $2 Million Line of Credit, the $500,000 Note and the $2.1 Million Note (collectively, the “PHI Lines of Credit”), subjects the Company to market-risk-associated with adverse changes in interest rates. A sharp rise in interest rates could materially adversely affect the financial condition and results of operations of the Company. The Company has not entered into any instruments to minimize this market risk of adverse changes in interest rates because the Company believes the cost associated with such instruments would outweigh the benefits that would be obtained from utilizing such instruments.

Under the Craftmade Line of Credit, for each one-percentage point (1%) incremental increase in the prime rate, the Company’s annualized interest expense would increase by approximately $146,000. Consequently, an increase in the prime rate of five percentage points (5%) would result in an estimated annualized increase in interest expense for the Company of approximately $729,000.

Under the PHI Lines of Credit, for each one-percentage point (1%) incremental increase in LIBOR, the Company’s annualized interest expense would increase by approximately $33,000. Consequently, an increase in LIBOR of five percentage points (5%) would result in an estimated annualized increase in interest expense for the Company of approximately $166,000.

The Company currently purchases a substantial amount of ceiling fans and other products of its Craftmade segment from Fanthing, a Taiwanese company. The Company’s verbal understanding with Fanthing provides that all transactions are to be denominated in U.S. dollars; however, the understanding further provides that, in the event that the value of the U.S. dollar appreciates or depreciates against the Taiwanese dollar by one Taiwanese dollar or more, Fanthing’s prices will be accordingly adjusted by 2.5%. As of September 1, 2004 one U.S. dollar equaled $33.87 Taiwanese dollars. A sharp appreciation of the Taiwanese dollar relative to the U.S. dollar could materially adversely affect the financial condition and results of operations of the Company. The Company has not entered into any instruments to minimize this market risk of adverse changes in currency rates because the Company believes the cost associated with such instruments would outweigh the benefits that would be obtained from utilizing such instruments. All other purchases of the Company from foreign vendors are denominated in U.S. dollars and are not subject to adjustment provisions with respect to foreign currency fluctuations. As a result, the Company does not believe that it is subject to any material foreign currency exchange risk with respect to such purchases.

During the fiscal year ended June 30, 2004, the Company purchased approximately $16,649,000 of products from Fanthing. Under the Company’s understanding with Fanthing, each $1 incremental appreciation of the Taiwanese dollar would result in an estimated annualized net increase in cost of goods sold of approximately $416,000, based on the Company’s purchases during the fiscal year ended June 30, 2004, (on an annualized basis). A $5 incremental appreciation of the Taiwanese dollar would result in an estimated annualized increase in cost of goods sold of approximately $2,081,000 based on the Company’s purchases during the fiscal year ended June 30, 2004 (on an annualized basis). A $10 incremental

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appreciation of the Taiwanese dollar would result in an increase of approximately $4,162,000 on an annualized basis, based on the Company’s purchases during the fiscal year ended June 30, 2004 (on an annualized basis). These amounts are estimates of the financial impact of an appreciation of the Taiwanese dollar relative to the U.S. dollar and are based on annualizations of the Company’s purchases from Fanthing for the fiscal year ended June 30, 2004. Consequently, these amounts are not necessarily indicative of the effect of such changes with respect to an entire year.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements and supplementary data are included under Item 15(a)(1) and 15(a)(2) of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES.

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report were not designed nor were functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. This conclusion is based on the identified material weakness in internal control over financial reporting and in the disclosure controls that is described below under the heading, Change in Internal Control over Financial Reporting.

Change in Internal Control over Financial Reporting

The Company previously disclosed in its Form 10-Q for the quarter ended March 31, 2004, that in evaluating its disclosure controls and procedures, management considered “reportable conditions” (as defined under standards established by the American Institute of Certified Public Accountants (“AICPA”)) that were identified in a letter dated April 19, 2004, addressed to the Company’s Chief Executive Officer from PricewaterhouseCoopers, LLP (“PwC”), the Company’s independent registered public accounting firm, and then communicated to the Company’s Audit Committee.

From January 2004 to the present, the Company has been engaged in extensive remediation efforts with respect to the reportable conditions mentioned in the April 19, 2004 letter, including engaging an outside internal control consultant to evaluate, analyze and document all of the Company’s internal controls over its financial reporting. However, in connection with the audit of the fiscal year ended June 30, 2004, PwC informed the Company’s Audit Committee that it believes that the personnel and management of the Company who perform its accounting and financial reporting functions are not sufficiently expert in U.S. GAAP and the requirements of the SEC and the Public Company Accounting Oversight Board, and this lack of expertise represents a material weakness (as defined under standards established by AICPA) in the operation of internal control over financial reporting. With respect to this material weakness, PwC noted the following as failures in the Company’s operation of internal control: (i) failure of financial reporting controls in preventing or detecting misstatements of accounting information that resulted in certain adjustments to the financial statements; (ii) failure to perform internal control tasks such as the timely preparation of account reconciliations; and (iii) failure to correct internal control deficiencies it previously identified such as earnings per share computational errors, audit adjustments, discipline around financial reporting, depth of financial accounting and reporting personnel, timely reconciliation of cash accounts, review and ascertainment of the amount of inventory reserve on a quarterly basis and the failure to use financial consolidation software.

In this regard, PwC has recommended that the Company engage personnel with expertise or train existing personnel in the following areas:

•		U.S. GAAP;
•		financial reporting in accordance with SEC regulations;
•		requirements of the Public Company Accounting Oversight Board; and
•		application of technical accounting pronouncements.

Management of the Company has presented to the Company’s Audit Committee a plan to remedy the concerns raised by PwC. This plan is designed to ensure that the preparation of the Company’s consolidated financial statements, including the process to review and analyze elements of the Company’s financial statement close process, is in accordance with U.S. GAAP. In addition, the plan will ensure that the personnel involved in this process have available to them the relevant information about U.S. GAAP, SEC financial reporting requirements, and the requirements of the Public Company Accounting Oversight Board necessary for them to be able to prepare the Company’s financial statements. Specifically, our plan provides for additional resources and further training of the Company’s accounting team including:

•		the employment of additional staff on the Company’s accounting team, including a new chief accounting officer;
•		increasing the level of attendance at targeted U.S. GAAP and SEC reporting courses by senior Company finance staff responsible for the preparation of U.S. GAAP financial reports and SEC disclosures; and
•		subscribing to additional information networks that provide publications and updates of SEC and U.S. GAAP releases and rule changes and of information about the requirements of the Public Company Accounting Oversight Board.

The Company is actively recruiting additional accounting staff and plans to complete the hiring process during the second fiscal quarter of 2005. Additionally, the Company’s senior accounting staff have already committed to taking training courses during the next several months and will continue to evaluate the merits of additional courses as they become available. The Company will begin receiving additional publications and updates of SEC, U.S. GAAP and the Public Company Accounting Oversight Board requirements and will review the adequacy of this additional information within the next several months to determine whether additional resources are required.

Until management of the Company is satisfied that it has addressed its need for sufficient expertise in preparing financial statements required in its filings under the securities laws, the Company will seek to mitigate this weakness by conferring with its accounting advisers with respect to the technical requirements applicable to the Company’s financial statements.

The implementation of the initiatives described above is among the Company’s highest priorities. The Company’s Board of Directors, in coordination with the Company’s Audit Committee, will continually assess the progress and sufficiency of these initiatives and make adjustments as and when necessary. As of the date of this report, management of the Company believes that the plans outlined above, when completed, will eliminate the material weakness in internal accounting control as described above. However a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues have been detected.

ITEM 9B. OTHER INFORMATION.

Not applicable.

22

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by this item is incorporated herein by reference to our proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the “Proxy Statement”).

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this Item is incorporated herein by reference to the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Equity Compensation Plan Information

The following table sets forth (a) the number of securities to be issued upon exercise of outstanding options, (b) the weighted average of exercise price of such outstanding options, and (c) the number of securities remaining available for future issuance, under the Company’s equity compensation plans. All of the Company’s equity compensation plans have been approved by security holders of the Company.

The remaining information required by this Item is incorporated herein by reference to the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this Item is incorporated herein by reference to the Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by this Item is incorporated herein by reference to the Proxy Statement.

23

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)

The following documents are filed as a part of this report:

	1.		Financial Statements — The financial statements listed in the “Index to Consolidated Financial Statements” described at F-1.
	2.		Financial Statement Schedule – The financial statement schedule listed in the “Index to Consolidated Financial Statements” described at F-1.
	3.		Exhibits – Refer to (c) below.

(b)		Reports on Form 8-K
		None.

(c)

Exhibits

24

25

26

(d)

All other financial statement schedules have been omitted since they are either not required, not applicable or the required information is shown in the financial statements or related notes.

     ** A management contract or compensatory plan or arrangement required to be filed as an exhibit to this form.

27

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on September 24, 2004.

CRAFTMADE INTERNATIONAL, INC.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

28

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

All other financial statement schedules have been omitted since they are either not required, not applicable, or the required information is shown in the financial statements or related notes.

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
     of Craftmade International, Inc.

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Craftmade International, Inc. and its subsidiaries (the “Company”) at June 30, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements and financial statement schedule in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As noted in Note 3 to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 46R, effective January 1, 2004.

PRICEWATERHOUSECOOPERS LLP

Fort Worth, Texas
September 13, 2004,
except for Note 10, as to which
the date is September 24, 2004

F-2

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

F-3

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

ASSETS

SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

F-4

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Supplemental disclosures of cash flow information:

SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

F-6

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED JUNE 30, 2004

SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

F-7

CRAFTMADE INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND NATURE OF THE COMPANY

Craftmade International, Inc., a Delaware corporation, is organized into two operating segments: Craftmade International, Inc. (“Craftmade”) and Trade Source International, Inc. (“TSI”). Craftmade is principally engaged in the design, distribution and marketing of ceiling fans, light kits, outdoor lighting, bathstrip lighting and related accessories to a nationwide network of lighting showrooms and electrical wholesalers specializing in sales to the remodeling, new home construction and replacement markets. TSI, a wholly-owned subsidiary acquired July 1, 1998, and its two 50% owned limited liability companies, Prime/Home Impressions, LLC (“PHI”) and Design Trends, LLC (“Design Trends”), are principally engaged in the design, distribution and marketing of outdoor and indoor lighting, selected ceiling fans and various fan accessories to mass merchandisers. Craftmade, TSI, their wholly-owned subsidiaries and 50% owned limited liability companies are collectively referred to as the “Company”.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation - The Company’s consolidated financial statements include the accounts of all wholly-owned subsidiaries and the accounts of two variable interest entities, PHI and Design Trends, in which the Company is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated. The functional currency of the Company’s foreign subsidiaries is the United States dollar.

Accounts receivable - Accounts receivable balances represent customer trade receivables generated from the Company’s operations. To reduce the potential for credit risk, the Company evaluates the collectibility of customer balances based on a combination of factors but does not generally require collateral. The Company regularly analyzes significant customer balances, and, when it becomes evident a specific customer will be unable to meet its financial obligations to the Company, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position, a specific allowance for doubtful account is recorded to reduce the related receivable to the amount that is believed reasonably collectible. The Company also records allowances for doubtful accounts for all other customers based on a variety of factors including the length of time the receivables are past due, the financial health of the customer and historical experiences. If circumstances related to specific customers change, estimates of the recoverability of receivables could be further adjusted. Receivables are pledged under the Company’s borrowing arrangements.

Concentration of credit risk - Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. Substantially all of Craftmade’s customers are lighting showrooms; however, credit risk is limited due to the large number of customers and their dispersion across many different geographic locations. As of June 30, 2004, Craftmade had no significant concentration of credit risk. As part of its ongoing control procedures, TSI monitors the creditworthiness of its customers thereby mitigating the effect of its concentration of credit risk. All of TSI’s sales are to mass merchandisers with two customers comprising the most significant portion as follows:

Inventories - The Company’s inventories are primarily comprised of finished goods and are recorded at the lower of cost or market using the average cost method. The Company provides estimated inventory allowances for excess, slow-moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. These reserves are based on current assessments about future demands, market conditions and related management initiatives. If market conditions and actual demands are less favorable than those projected by management, additional inventory write-downs may be required.

F-8

Deferred financing costs - Deferred financing costs, consisting of fees and other expenses associated with debt financing, are amortized over the term of the related debt using the straight-line method, which approximates the effective interest method.

Property and equipment - Property and equipment is recorded at cost. Depreciation is determined using the straight-line method over the estimated useful lives of the property and equipment, as follows:

Leasehold improvements are amortized over the life of the lease or its useful life, whichever is shorter.

Depreciation expense for the years ended June 30, 2004, 2003 and 2002 approximated $2,102,000, $2,295,000 and $2,218,000, respectively. Depreciation expense of $1,454,000, $1,636,000 and $1,640,000 was recorded as a reduction of revenue related to display equipment in one of the Company’s customer’s retail stores.

Maintenance and repairs are charged to expense as incurred; renewals and betterments are charged to appropriate property or equipment accounts. Upon sale or retirement of depreciable assets, the cost and related accumulated depreciation is removed from the accounts, and the resulting gain or loss is included in the results of operations in the period of the sale or retirement.

Impairment of long-lived assets - The Company reviews potential impairments of long-lived assets and certain identifiable intangibles on an exception basis when there is evidence that events or changes in circumstances have made recovery of an asset’s carrying value unlikely. An impairment loss is recognized if the sum of the expected future cash flows, undiscounted and before interest, from the use of the asset is less than the net book value of the asset. Generally, the amount of the impairment loss is measured as the difference between the net book value of the assets and the estimated fair value.

Goodwill - Goodwill relates to Craftmade’s acquisition of TSI in fiscal 1999. The Company assesses the carrying values of goodwill annually or when circumstances dictate that the carrying value might be impaired. The method for determining if impairment has occurred requires estimates of future cash flows and the Company’s weighted average cost of capital. In the event that an impairment is determined to have occurred, the Company will reduce the carrying value of the asset in that period.

Product warranties - Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information on the nature, frequency, and average cost of warranty claims.

Income taxes - The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In estimating future tax consequences, all expected future events other than enactments of changes in the tax law or rates are considered. Deferred income taxes have been provided on unremitted earnings from foreign investees. The Company reviews its deferred tax assets for ultimate realization and will record a valuation allowance to reduce the deferred tax asset if it is more likely than not that some portion, or all, of these deferred tax assets will not be realized.

TSI’s 50% owned LLCs operate in the form of partnerships for tax purposes and, consequently, do not file federal income tax returns. Accordingly, the Company recognizes its share of their income and the related tax effects on its provision for income taxes.

Revenue recognition - Revenue is recognized as product is shipped and related services are performed in accordance with all applicable revenue recognition criteria. For these transactions the Company applies the provisions of SEC Staff Accounting Bulletin No. 104 “Revenue Recognition.” The Company recognizes revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title generally transfers upon shipment of goods from our warehouse. The Company does not have an obligation or policy of replacing, at no cost, customer products damaged or lost in transit. In some instances, the Company ships product directly from our suppliers to the customers. In these cases, the Company recognizes revenue when the product is accepted by the customer’s representative. The Company applies the provisions of Emerging Issues Task Force (EITF) Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” The Company’s application of EITF 99-19 includes evaluation of the terms of each major customer contract relative to a number of criteria that management considers in making its determination with respect to gross vs. net reporting of revenue for transactions with its customers. Management’s criteria for making these judgments place particular emphasis on determining the primary obligor in a transaction and which party bears general inventory risk. The Company records all shipping and handling fees billed to customers as revenue, and related costs as cost of sales, when incurred, in accordance with EITF 00-10, “Accounting for Shipping and Handling Fees and Costs.”

As part of its revenue recognition policy, the Company records estimated incentives payable to its customers at a future date as a reduction of revenue at the time the revenues are recorded. The Company bases its estimates on contractual terms of the programs and estimated or actual sales to individual customers. Actual incentives in any future period are inherently uncertain and, thus, may differ from its estimates. If actual or expected incentives were significantly greater than the reserves the Company had established, the Company would record a reduction to net revenues in the period in which the Company made such determination.

In addition to various incentive programs, from time to time the Company is required to provide mark-down funds to certain of its mass retail customers to assist them in clearing slow-moving inventory. These mark-down funds were recorded as a reduction of revenue in the period in which they were granted. In March 2004, the Company began to estimate and record reductions to revenue for these mark-down funds that it records when the revenue is recorded because based on its past practice these mark-down funds were estimable and considered likely to be granted.

Advertising cost - The Company’s advertising expenditures consist primarily of print advertising programs, and are expensed as incurred or used. Advertising expense for the years ended June 30, 2004, 2003 and 2002, was $1,154,000, $1,299,000 and $1,326,000, respectively. Prepaid advertising costs consisting of current catalogs on hand at June 30, 2004 and 2003 were $339,000 and $471,000, respectively and are expensed in relation to use.

Research and development - Research, development and engineering expenditures for the creation and application of new products and processes were approximately $293,000, $167,000 and $219,000 for the years ended June 30, 2004, 2003 and 2002, respectively.

F-9

Stock-based compensation - The Company follows the disclosure only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148. However, the Company continues to measure compensation cost for those plans using the intrinsic value based method of accounting as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”.

Had compensation cost for the Company’s stock option plans been determined based on the fair value of the stock options at grant date, in accordance with the provisions of FAS 123, “Accounting for Stock-Based Compensation”, the Company’s net income and diluted earnings per common share would have been adjusted to the pro forma amounts indicated below (in thousands, except per share amounts):

The fair value of each option grant is calculated on the date of grant using the Black-Scholes option pricing model based upon the following weighted-average assumptions:

The weighted average fair value of options granted during fiscal 2004, 2003 and 2002 with an exercise equal to fair market value on the grant date was $5.06, $5.11 and $5.92, respectively.

Earnings per common share - Basic earnings per share measures the performance of an entity over the reporting period. Diluted earnings per share measures the performance of an entity over the reporting period while giving effect to all potentially dilutive common shares that were outstanding during the period. The treasury stock method is used to determine the dilutive potential of stock options. Options which, based on their exercise price, would be anti-dilutive are not considered in the treasury stock method calculation. There have been no options excluded from the earnings per share calculations due to their anti-dilutive nature.

Segment information - The Company presents two reportable segments, Craftmade and TSI. The Company’s reportable segments have been identified utilizing the management approach which designates the internal organization that is used by management for making operating decisions and assessing performance.

Pervasiveness of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications - Certain prior year amounts have been reclassified to conform with the current year presentation.

Effects of recent accounting pronouncements - In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition”, which supercedes SAB 101, “Revenue Recognition in Financial Statements”. SAB 104 rescinds the accounting guidance contained in SAB 101 specifically related to multiple elements revenue managements, but leaves the remaining SAB 101 principles largely unchanged. The adoption of SAB 104 did not have an impact on Craftmade’s condensed consolidated results of operations or financial position.

F-10

NOTE 3 - ACCOUNTING CHANGES

FIN 46

In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46) and amended it by issuing FIN 46R in December 2003. Among other things, FIN 46R generally deferred the effective date of FIN 46 to the quarter ended March 31, 2004. Variable interest entities (VIEs) are primarily entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

The Company has a 50% ownership interest in two limited liability companies Design Trends and PHI. In connection with the adoption of FIN 46R, the Company concluded that Design Trends and PHI are VIEs and that the Company is the primary beneficiary of each of Design Trends and PHI. Pursuant to the provisions of FIN 46R, effective January 1, 2004, the Company began to consolidate Design Trends and PHI and restated its previously issued financial statements to reflect Design Trends and PHI as consolidated entities.

Prior to the adoption of FIN 46, the Company guaranteed the debt of PHI; thus, the recognition of the debt of PHI in the Condensed Consolidated Balance Sheets does not represent an incremental increase in the claims on the general assets of the Company. Further, management believes that recognition of the other liabilities as a result of consolidating Design Trends and PHI does not result in any incremental increase in the level of claims on the general assets of the Company; rather, the additional liabilities represent claims against the additional assets recognized by the Company as a result of the consolidations. Conversely, the additional assets recognized as a result of consolidating Design Trends and PHI do not represent additional assets of the Company that could be used to satisfy claims by the creditors of the Company.

The following tables present the balance sheets of Design Trends and PHI as of June 30, 2004 and June 30, 2003 and the results of operations for the three years ended June 30, 2004.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
as of June 30, 2004