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UNITED STATES

FORM 10-Q

-OR-

Commission file number 1-3552

SCOPE INDUSTRIES

233 Wilshire Boulevard, Suite 310

(Registrant’s telephone number, including area code) (310) 458-1574

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.

[X]Yes [   ]No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

[  ]Yes [X]No

The number of shares of registrant’s common stock outstanding at February 6, 2004 was 998,691.

Table of Contents

SCOPE INDUSTRIES AND SUBSIDIARIES

INDEX

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PART I. FINANCIAL INFORMATION

The accompanying notes are an integral part of these consolidated financial statements.

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SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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SCOPE INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Cash dividends of $998,961 and $1,023,167 were declared and unpaid at December 31, 2003 and December 31, 2002.

The accompanying notes are an integral part of these consolidated financial statements.

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SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2003

Note 1. Basis of Financial Statement Preparation

     The accompanying consolidated financial information of Scope Industries and its subsidiaries (“Scope” or the “Company”) should be read in conjunction with the Notes to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K to the Securities and Exchange Commission for the year ended June 30, 2003. The accompanying financial information includes all subsidiaries on a consolidated basis and all normal recurring adjustments that are considered necessary by the Company’s management for a fair presentation of the financial position, results of operations and cash flows for the periods presented. However, these results are not necessarily indicative of results for a full fiscal year. Certain prior year balances have been reclassified to conform to current period presentation.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

     Collection routes represent the value assigned upon purchase for a group of suppliers of raw materials in a similar geographic area from which the Company will derive a dependable source of raw materials. Collection routes are amortized over 3 to 5 years using the straight-line method. Certain tax deductions for tax goodwill amortization require that the income tax benefit realized from the tax goodwill amortization first reduce the carrying value of collection routes, related to the tax goodwill, until fully amortized. Contracts include non-compete agreements that are recorded at cost and are amortized over 3 to 7 years using the straight-line method. Both collection routes and contracts represent businesses that were acquired from former competitors. Amortization expense for the quarter and six months ended December 31, 2003 and 2002 was $51,429 and $600,611 and $102,857 and $1,201,227, respectively. Amortization expense for the current year and next four years is estimated to be approximately $205,700, $205,700, $35,700, $35,700 and $35,700.

     The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock Based Compensation-Transition and Disclosure, permits entities to recognize as expense, over the vesting period, the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value based method defined in SFAS No. 123 had been applied.

     The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123.

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SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2003

Note 1. Basis of Financial Statement Preparation (continued)

     In December 2003, the Financial Accounting Standards Board (“FASB”) revised Interpretation No. 46 (R), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. For special-purpose entities, this interpretation applies to the first fiscal year or interim period ending after December 15, 2003. For all other variable interest entities, this interpretation applies to the first period ending after December 15, 2004. The Company does not believe that the application of this interpretation will have an impact on the Company’s consolidated financial statements.

     In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The statement requires that contracts with comparable characteristics be accounted for similarly and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except in certain circumstances, and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have an impact on the Company’s consolidated financial statements.

     In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The Statement shall be effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have an impact on the Company’s consolidated financial statements.

Note 2. Purchase of Business Assets

     On July 1, 2002, the Company, through its wholly owned subsidiary Scope Products, Inc., purchased the bakery waste recycling plant assets and routes and contracts of two processing facilities in California. The transaction was accounted for as a purchase of a business with the purchase price allocated as follows:

     The results of operation of the new plants since July 1, 2002 are included in the accompanying consolidated statements of operations. In connection with the purchase, the Company also entered into a long-term lease for the two plant facilities with an option to purchase them at a later date for $2,250,000.

Note 3. Treasury Securities

At December 31, 2003, the Treasury securities are pledged as collateral for the $10,000,000 line of credit and included in the line Restricted cash and investments, on the December 31, 2003, consolidated balance sheet. Real estate is expected to replace the Treasury securities as collateral.

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SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2003

Note 4. Inventories

Note 5. Land, Buildings and Improvements Held for Sale

     The Company has vacant land and idled processing facilities for sale. The processing facilities are available for sale due to the construction of new plant facilities in Georgia and Texas, where the new plant in Georgia replaced, and the new plant in Texas will replace, two existing plants each within the same geographical areas. During the current year an idled facility was sold for a gain of approximately $142,700 compared to a gain of approximately $1,387,500 from the sale of idled property in the prior year.

Note 6. Investments

(a)		Fair values for “Equity securities” available for sale are based upon quoted market prices at the reporting date.
(b)		The investment in the short-term tax-exempt mutual fund is pledged to the bank as collateral for the long-term bank debt of $5,000,000; interest earned from the fund is paid to the Company. Fair value is based upon quoted market prices at the reporting date. The investment is included on the December 31, 2003, consolidated balance sheet in the line, restricted cash and investments.
(c)		The Company holds shares in Chromagen, Inc., Stamet, Inc., MetaProbe, Inc., Myricom, Inc. and Holl Technologies, Inc. that are classified as “Other equity securities”. The shares are not publicly traded and are carried at cost or adjusted cost. Certain of these securities are adjusted based on the equity method of accounting or based on management’s estimates reflecting reductions in value that are other than temporary. No quoted market prices are available for these securities.

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SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2003

Note 7. Debt

     Lines of Credit: The Company has a $10,000,000 line of credit with a financial institution that expires on October 31, 2004. The line of credit was used to support a $5,000,000 standby letter of credit for the issuance of tax-exempt Industrial Revenue Bonds (“IRB”) financing in New Jersey where the company is building a new facility. The remaining $5,000,000 will be used before fiscal year-end to support a standby letter of credit for the issuance of a tax-exempt IRB for Texas where the company has recently completed a new facility for its waste recycling operations. Cash and treasury bills collateralize the utilized $5,000,000 portion of the line of credit. The Company is in process of substituting real estate for collateral to release the liquid assets.

     The Company has a $3,000,000 line of credit with a bank that expires in January 2005. Interest on the line of credit is LIBOR plus 2% or Prime minus .25%. At December 31, 2003 and June 30, 2003 there was no outstanding balance against the short-term line of credit agreement. The Company has issued stand-by letters of credit ($1,050,000) against its short-term line of credit to three state workers’ compensation self-insurance funds guaranteeing payment to the state in the event the Company defaults on its payment for insurance claims.

     Long-term: On August 1, 2002, the Company redeemed its $6,000,000 tax exempt IRB. In connection with the redemption of the IRB, the Company entered into a long-term five-year note with its bank. The financing agreement requires, as collateral, a short-term tax-exempt mutual fund where the value of the mutual fund is at least 91% of the outstanding balance. The note bears interest, payable monthly, at LIBOR plus 1.125%. The Company entered into a one-year LIBOR contract at 1.250% on August 1, 2003. The note is due on July 31, 2007 and there are no prepayment penalties. The loan balance outstanding at both December 31, 2003 and June 30, 2003 was $5,000,000.

     During the current quarter the Company issued $5,000,000 in 20-year tax-exempt IRB through the New Jersey Economic Development Authority. Interest on the bonds varies weekly based upon the tax-exempt interest rate in the bond market. The interest rate at December 31, 2003 was 1.350%. The bonds have a mandatory annual redemption of $250,000 starting on October 1, 2004 and are secured by a standby letter of credit. The Company, at its option, may retire the bonds at any time with no prepayment penalty.

Note 8. Comprehensive Income

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SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2003

Note 9. Income Taxes

     For the six-month periods ended December 31, 2003 and December 31, 2002, the effective rate for income taxes is 30% and 37%, respectively, of the income before taxes. The Company currently recognizes tax deductions for tax goodwill amortization in the tax provision, wherein last year the tax benefit related to the tax goodwill reduced the carrying value of collection routes. The determination of the income tax or benefit for income tax considers certain permanent differences between taxable income or loss and income or loss as reported using accounting methods generally accepted in the United States of America. Those differences sometimes cause distortions in the relationships between income and loss before income taxes and the provision or benefit for income taxes.

Note 10. Business Segment Information

     The majority of investment and interest income is related to corporate level investment activities and gains from the sale of idle property.

Note 11 Sale of Subsidiary

     The Company has a tentative agreement to sell its Vocational School Group. The transaction, which is scheduled to close in March 2004, is subject to the buyer completing normal due diligence procedures and receiving various federal and state regulatory approvals (“post-closing approvals”). The buyer can terminate the proposed transaction, without penalty, at any time prior to closing. Additionally, the agreement provides that if, within 90 days after the closing, the buyer does not obtain the necessary post-closing approvals, the buyer shall have the right to rescind the transaction and receive back any consideration paid.

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SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
December 31, 2003

CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

     Certain statements herein, that are not related to historical results, including anticipated new plant openings, trends in or expectations regarding Scope Industries growth, operating expenses, capital expenditures, and net earnings, all constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to corn prices, commodity prices of certain animal fats, availability and prices of bakery waste and other raw materials, impact of dietary fads stressing low carbohydrates on raw material sources, successful execution of internal performance and expansion plans, fluctuations in the economy and the impact of competitors’ initiatives. Further, certain forward-looking statements are based upon assumptions of future events, which may not prove to be accurate. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Users should not place undue reliance on the forward-looking statements, whether as a result of new information, future events or otherwise. Potential risk and uncertainties include, but are not limited to, general business conditions, unusual volatility in equity and interest rate markets and in competing commodity markets, disruptions in the availability or pricing of raw materials, transportation difficulties, changing governmental educational aid policies, or disruption of operations due to unavailability of fuels or from acts of God.

     This information should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operation contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003.

MANAGEMENT’S OVERVIEW

     Historically, the primary factor impacting changes in the Company’s revenue has been the price of corn, availability of raw materials and the acquisition of competitors businesses. Corn and certain animal fats are direct substitutes for the Company’s dried bakery products produced by the waste recycling segment, which approximates 90% of the Company’s annual revenues. As such, depending upon the commodity market pricing, given the same relative sales volume, waste-recycling revenues can vary significantly. As an example of the pricing volatility of corn, during the Company’s fiscal year ended June 30, 1996 the average price of a bushel of corn was $3.60 and for the fiscal year ended June 30, 2001 the average price of a bushel of corn was $1.80, a decrease of 50%. The average price of a bushel of corn for fiscal year end June 30, 2003 was $2.37 as compared to an average of $2.20 during the past six months. The volatility in corn prices depends upon both domestic and international corn crop harvests and estimated demand.

     During the past few years there has been a consolidation within the bakery industry, bakeries have been adding more preservatives into their products to enhance shelf life and have implemented better production practices thereby reducing the amount of excess waste material available. The Company has been able to acquire competitors businesses or purchase collection routes to help compensate for the reduction in raw material volume caused by the above factors.

     The Company has established a capital expansion program to build new plants to replace older plants within a geographic area thereby substantially reducing costs. New plants in Illinois (2000) and Georgia (2002) have been completed and are operating. A new plant in Texas was completed in February of 2004 and currently under construction is a plant in New Jersey that will be completed by the end of the calendar year. The Company is also replacing older plant equipment and transportation equipment to help increase production efficiency and lower transportation costs. Since the Company has limited ability to control its revenue growth due to the influence of corn pricing, the Company attempts to control its costs through cost reduction programs.

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SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
December 31, 2003

RESULTS OF OPERATIONS

Three Months Ended December 31, 2003 and 2002:

     The Company had net income of $1,012,120, or $1.01 per share, for the second quarter ended December 31, 2003, compared to the prior year’s second quarter net income of $1,398,885, or $1.37 per share. Company revenues for the second quarter ended December 31, 2003 were $20,108,008 compared to $21,095,613 for the comparable quarter last year. The 5% decrease in revenues for the second quarter over the prior year’s comparable quarter was attributable to a decrease in sales for the Waste Material Recycling segment.

     Waste Material Recycling segment sales for the current quarter decreased approximately $1,152,300 or 6% from the comparable quarter last year. The change was due to a decrease of 4% in sales volume and to a 3% decrease in the average selling price of recycled dried bakery products. The decrease in sales volume is due to the decreased availability of raw materials due to bakeries adding more preservatives into their products for longer shelf life and the popularity of recent diet fads stressing low carbohydrates. The decrease in the average selling price is attributed to the volatility in the commodity market due to changes in future estimates in the volume of corn crops, both domestically and internationally. Corn is an alternate substitute feed supplement that competes directly with our dried bakery product. The average price of corn for the current quarter was approximately $2.25 per bushel, or a 5% decrease when compared to $2.36 per bushel for the comparable quarter last year. The Waste Material Recycling segment generated increased pre-tax income before Investment and other income in the current quarter due primarily to reduced raw material costs and improved production efficiencies from new capital equipment.

     Vocational School Group revenues increased approximately $193,600 or 11% from the comparable quarter last year due primarily to an increase in tuition fees charged to new students. The total number of students at the end of the current quarter is the same as last year with a slightly larger count in the beautician program and fewer in the manicurist program than the prior year. The Vocational School Group had pre-tax income for both the current quarter and the comparable quarter of last year.

     The Company has a tentative agreement to sell its Vocational School Group. The transaction, which is scheduled to close in March 2004, is subject to the buyer completing normal due diligence procedures and receiving various federal and state regulatory approvals (“post-closing approvals”). The buyer can terminate the proposed transaction, without penalty, at any time prior to closing. Additionally, the agreement provides that if, within 90 days after the closing, the buyer does not obtain the necessary post-closing approvals the buyer shall have the right to rescind the transaction and receive back any consideration paid.

     General and administrative expenses for the Company decreased $257,250 or 10% for the quarter ended December 31, 2003, as compared to the prior year quarter. The decrease is due primarily to smaller bonuses paid to executive management in the current quarter compared to last year. The other increases and decreases in expenses are not significant when viewed individually compared to the comparable quarter last year.

     Investment and other income for the quarter ended December 31, 2003, was $105,398 compared to $1,402,634 for the comparable quarter last year. During the current quarter the Company recognized a gain of approximately $142,700 from the sale of idle property held for sale. In the comparable quarter last year the Company recognized a gain of approximately $1,387,500 from the sale of idle property no longer being utilized in the Waste Material Recycling operations. Interest income of $87,854 from U.S. Treasury bills and money market accounts in the current quarter decreased from $151,437 for the comparable quarter last year primarily due to lower interest rates and a smaller investment portfolio. Offsetting the above investment and other income in the current quarter were losses of $150,000 recognized on an investment accounted for by the equity method of accounting compared to $161,000 during the same period last year.

     Interest expense for the three months ended December 31, 2003, was $46,594 compared to $61,996 for the comparable quarter last year. The decrease in interest expense is related primarily to lower interest rates.

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SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
December 31, 2003

RESULTS OF OPERATIONS

Six Months Ended December 31, 2003 and 2002:

     The Company had net income of $2,265,976, or $2.27 per share, for the six months ended December 31, 2003, compared to the previous year’s six months net income of $2,211,212, or $2.16 per share. Total Company revenues for the six months ended December 31, 2003 were $40,494,165 compared to $42,133,340 for the comparable period last year. The 4% decrease in revenues for the current six months over the prior year’s comparable period was attributable to the Waste Material Recycling segment.

     Waste Material Recycling segment sales for the current six months decreased approximately $1,827,100 or 5% from the comparable period last year. The decrease was due primarily to a decrease of 6% in sales volume while the average selling price of recycled dried bakery products remained comparable to the average six months last year. Raw material volume for the current six months decreased 8% from last year’s volume during the comparable period. The decreased volume in raw materials can be attributed to bakeries adding more preservatives into their products for longer shelf life and the popularity of recent diet fads stressing low carbohydrates. The average selling price remaining comparable to last year is primarily attributed to the volatility in the commodity market as certain animal grade fat items pricing increased significantly during the current six months. The increase in animal grade fat items helped maintain the pricing of dried bakery products despite the decrease in average price of corn for the six months of $2.20 per bushel compared to $2.40 per bushel for the comparable six months last year, a decrease of 8%. The Waste Material Recycling segment generated operating profit in both the current six months and in the comparable six months last year due primarily to reduced raw material costs and improved production efficiencies from new capital equipment.

     Vocational School Group revenues increased 5% from the comparable six months last year due primarily to increased tuition fees charged to new students. Student enrollment was slightly higher during the current six months when compared to the comparable period last year. The Vocational School Group had operating income for both the current six months and for the comparable six months last year. As indicated above, the Company has a tentative agreement to sell its Vocational School Group.

     General and administrative expenses for the Company decreased 7% for the six months ended December 31, 2003, as compared to the prior year six months. The decrease is due primarily to lower bonus payments when compared to the prior year. The remaining increases and decreases in expenses are not significant when viewed individually compared to the comparable period last year.

     Investment and other income for the six months ended December 31, 2002, was $260,587 compared to $1,465,937 for the comparable six months last year. Included in investment and other income for the current six months and comparable period last year were gains of approximately $142,700 and $1,493,400 from the sale of idle property and equipment in the Waste Material Recycling segment. Interest and dividend income from investments and money market accounts during the current six months compared to the comparable six months last year were $319,899 and $283,495, respectively. The increase in interest and dividend income was primarily due to dividends received from an investment offset by a decrease in interest income due to a smaller interest bearing investment portfolio and by lower interest rates. Offsetting the above investment and other income during the current and prior year six months were losses of approximately $300,000 and $311,000 recognized on an investment accounted for by the equity method of accounting.

     Interest expense for the six months ended December 31, 2003, was $82,663 compared to $132,896 for the comparable six months last year. The decrease in interest expense is related primarily to lower interest rates.

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SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
December 31, 2003

LIQUIDITY AND CAPITAL RESOURCES

     The Company has used its cash principally to fund purchases of capital equipment and investments, and for working capital needs. The Company funded its cash requirements principally from operations and long-term debt borrowings. During the current six months the Company issued $5,000,000 of tax-exempt Industrial Revenue Bonds (“IRB”) in New Jersey to help finance the construction of a new plant being built in Perth Amboy. The Company is planning on issuing $5,000,000 of tax-exempt IRB in Texas before fiscal year-end to help finance the construction of the new plant that was completed in February 2004. During the current six months the Company expended $6,982,206 for capital projects primarily within the Waste Material Recycling segment. The working capital ratio of 1.7 to 1 at December 31, 2003 decreased when compared to the June 30, 2003 ratio of 2.6 to 1. The change in components of working capital is mainly attributed to the reduction in Treasury securities, increases in other current liabilities and reclassification of $5,085,000 of restricted cash and treasury bills from current assets to long-term assets. Capital expenditures for all of fiscal 2004 are currently estimated at $9,000,000 to $12,000,000 depending upon when some of the capital projects are started. The majority of capital expenditures are for the Waste Material Recycling segment plant facilities in Texas and New Jersey. The cost of each new facility is estimated at $6,000,000. The Company believes that the combination of cash on hand, IRB financings and cash flow expected to be generated from operations will be sufficient to fund planned capital investments and working capital requirements through fiscal 2005. The Company has pledged cash and treasury bills as collateral for a line of credit for the issuance of letters of credit to support the IRB financings and at December 31, 2003 a combination of cash and treasury bills totaling $5,085,000 was restricted. Additionally, the Company has an investment in a mutual fund that is pledged as collateral for the Company’s long-term note, the value of the investment at December 31, 2003 was $5,996,193. The Company is in process of substituting real estate for the restricted cash and treasury bills. The Company is continually reviewing options to finance major capital projects through tax-exempt Industrial Revenue Bonds or long–term bank loans taking advantage of current low interest rates.

Contractual Obligations

     The Company has committed to purchase obligations in the construction of two waste recycling facilities. The plant in Texas was recently completed in February 2004 and the Company anticipates by the end of this calendar year completing the plant in New Jersey.

CRITICAL ACCOUNTING ESTIMATES

     The preparation of consolidated financial statements requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of certain accounting estimates considered critical by the Company.

     Accrued self-insurance. The Company is self-insured for workers’ compensation in many states where it does business. As a result of the self-insurance, the Company must make estimates as to its current and future liabilities resulting from workers’ injuries. The Company uses outside consultation and third party administrators in reviewing its liability. These reviews involve estimated extent of injury, length of disability, cost of medical procedures and rehabilitation costs. However, actual expenses could differ from these estimates and could result in adjustments to be recognized.

     Other equity investments. The Company holds shares in companies that are not publicly traded and for which quoted market prices are not available. These investments are carried at cost or adjusted cost. Certain of these costs are adjusted based upon management’s estimates reflecting reductions in value that are considered other than temporary. One investment is accounted for by the equity method of accounting.

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SCOPE INDUSTRIES AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
December 31, 2003

TAXES

     For the six-month periods ended December 31, 2003 and December 31, 2002, the effective rate for income taxes is 30% and 37%, respectively, of the income before taxes. The Company currently recognizes tax deductions for tax goodwill amortization in the tax provision, wherein last year the tax benefit related to the tax goodwill reduced the carrying value of collection routes. The determination of the income tax or benefit for income tax considers certain permanent differences between taxable income or loss and income or loss as reported using accounting methods generally accepted in the United States of America. Those differences sometimes cause distortions in the relationships between income and loss before income taxes and the provision or benefit for income taxes.

NEW ACCOUNTING STANDARDS

     In December 2003, the Financial Accounting Standards Board (“FASB”) revised Interpretation No. 46 (R), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. For special-purpose entities, this interpretation applies to the first fiscal year or interim period ending after December 15, 2003. For all other variable interest entities, this interpretation applies to the first period ending after December 15, 2004. The Company does not believe that the application of this interpretation will have an impact on the Company’s consolidated financial statements.

     In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The statement requires that contracts with comparable characteristics be accounted for similarly and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except in certain circumstances, and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have an impact on the Company’s consolidated financial statements.

     In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The Statement shall be effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have an impact on the Company’s consolidated financial statements.

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SCOPE INDUSTRIES AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
AND DISCLOSURE CONTROLS AND PROCEDURES

Item 3. Quantitative and Qualitative Disclosures About Market Risk:

The Company’s primary market risk results from the commodities market where corn and certain animal grade fat items can be substituted for its dried bakery products as an alternative feed supplement for animals. The Company also acquires its raw material sources from bakeries and other vendors typically under contract and priced to follow the corn commodities market. As a result, when corn prices are low the Company must lower its selling prices to compete with alternative feed supplements and the cost of raw material supplies typically will decrease following the lower corn prices. However, demand for raw material suppliers is often more competitive in major market areas where the cost of raw materials increases in order to maintain adequate supplies of materials for production. Dietary concerns about high carbohydrate intake by popular diets have impacted the bakery industry reducing the sale of bakery products nation wide and in turn reducing the amount of available surplus raw materials. The average price of corn over the last 25 years has been approximately $2.50 per bushel. During the past five fiscal years the average price of corn was $2.37, $1.94, $1.80, $1.90 and $2.01, in 2003, 2002, 2001, 2000 and 1999, respectively. The decrease from the historical average is due primarily to record corn crops during those years. The average price of corn for the first six months of the current year has decreased to $2.20 per bushel from last fiscal years average price of $2.37 based upon a higher projected corn crop by the Department of Agriculture due to favorable conditions in the corn producing states during the planting season. Recently, the projected corn crop in the United States and worldwide was reduced by the Department of Agriculture. As a result of the latest forecast the average price of corn during the month of January rose to $2.52 per bushel.

The Company maintains cash and cash equivalents and liquid securities that expose the Company to interest rate risk and market risk. The Company minimizes its risk by investing its cash primarily in short-term U.S. Treasury bill and money market accounts. Additionally, the Company invested $6,000,000 in a Short-term Tax-Exempt Mutual Fund that is pledged as collateral for a $5,000,000 bank loan. Due to the nature of the short-term tax-exempt securities held, the Mutual Fund value historically does not fluctuate with the securities market retaining much of its original cost basis.

The Company, with respect to interest rate risk exposure on its debt, has elected to reduce its market risk by entering into LIBOR interest rate contracts on a long-term basis. Currently the Company has entered into a one year LIBOR contract of 1.25%, plus 1.125% for the interest on its $5,000,000 bank loan. The interest rate risk exposure on the Company’s IRB is minimized as interest is at lower paying tax-exempt interest rates.

Item 4. Controls and Procedures:

(a)

Evaluation of disclosure controls and procedures.

The Company’s Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures, as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, the Company’s disclosure controls and procedures are effective, as of the end of the quarterly period covered by this report in ensuring that material information relating to Scope Industries, including its consolidated subsidiaries, required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b)

Changes in internal control over financial reporting.

	There have been no significant changes in the Company’s internal controls over financial reporting during its most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

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Table of Contents

PART II. OTHER INFORMATION
SCOPE INDUSTRIES AND SUBSIDIARIES

Item 5. Other Information.

On October 28, 2003, the Company’s board of directors declared a regular dividend of $1.00 per share payable on January 6, 2004, to shareowners of record at November 21, 2003. There were 998,691 shares of common stock outstanding at the record date.

Item 6. Exhibits and Reports on Form 8-K.

(A)

Exhibits:

(B) No Form 8-K was filed for the quarter ended December 31, 2003.

SIGNATURES

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

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