UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended December 31, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

CRAFTMADE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		75-2057054
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

650 SOUTH ROYAL LANE, SUITE 100
COPPELL, TEXAS 75019
(Address of principal executive offices)
(Zip code)

(972) 393-3800
(Registrant’s telephone number, including area code)

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No þ

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, was 5,704,500 as of January 31, 2007.

 

 

CRAFTMADE INTERNATIONAL, INC.
AND SUBSIDIARIES

TABLE OF CONTENTS

Part I. Financial Information

Item 1. Financial Statements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

Part II. Other Information

Item 1. Legal Proceedings

Item 1A. Risk Factors

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

Item 3. Defaults Upon Senior Securities

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

Item 5. Other Information

Item 6. Exhibits

Certification of CEO Pursuant to Section 302

Certification of CFO Pursuant to Section 302

Certification of CEO Pursuant to Section 906

Certification of CFO Pursuant to Section 906

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)

		Three Months Ended								Six Months Ended
		December 31,				December 31,				December 31,				December 31,
		2007				2006				2007				2006
Net sales		$	20,812			$	26,563			$	43,550			$	54,689
Cost of goods sold			(14,278	)			(18,039	)			(29,506	)			(37,383	)
Gross profit			6,534				8,524				14,044				17,306
Gross profit as a percentage of net sales			31.4	%			32.1	%			32.2	%			31.6	%
Selling, general and administrative expenses			(4,977	)			(5,135	)			(10,518	)			(10,219	)
Depreciation and amortization			(213	)			(201	)			(418	)			(401	)
Total operating expenses			(5,190	)			(5,336	)			(10,936	)			(10,620	)
Income from operations			1,344				3,188				3,108				6,686
Interest expense, net			(298	)			(393	)			(620	)			(761	)
Income before income taxes and minority interest			1,046				2,795				2,488				5,925
Income taxes			(260	)			(782	)			(586	)			(1,763	)
Income before minority interest			786				2,013				1,902				4,162
Minority interest			(304	)			(513	)			(802	)			(778	)
Net income		$	482			$	1,500			$	1,100			$	3,384
Weighted average common shares outstanding:
Basic			5,205				5,204				5,205				5,204
Diluted			5,205				5,206				5,206				5,207
Basic earnings per common share		$	0.09			$	0.29			$	0.21			$	0.65
Diluted earnings per common share		$	0.09			$	0.29			$	0.21			$	0.65
Cash dividends declared per common share		$	0.12			$	0.12			$	0.24			$	0.24

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

		December 31,				June 30,
		2007				2007
		(Unaudited)
ASSETS
Current assets
Cash		$	176			$	928
Accounts receivable, net			15,818				18,082
Inventories, net			16,750				18,076
Income taxes receivable			1,855				1,376
Deferred income taxes			1,251				1,251
Prepaid expenses and other current assets			1,779				1,503
Total current assets			37,629				41,216
Property and equipment, net			8,281				8,379
Goodwill			13,952				13,644
Other intangibles, net			1,402				1,502
Other assets			157				10
Total non-current assets			23,792				23,535
Total assets		$	61,421			$	64,751
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities
Book overdrafts		$	255			$	48
Accounts payable			3,991				5,903
Other accrued expenses			2,467				2,472
Current portion of long-term obligations			491				264
Total current liabilities			7,204				8,687
Non-current liabilities
Long-term obligations			17,535				18,938
Deferred income taxes			1,178				1,107
Total non-current liabilities			18,713				20,045
Total liabilities			25,917				28,732
Minority interest			3,072				3,495
Commitments and contingencies (Note 9)
Stockholders’ equity
Preferred stock, $1.00 par value, 2,000,000 shares authorized; nil shares issued			—				—
Common stock, $0.01 par value, 15,000,000 shares authorized; 9,704,420 shares issued			97				97
Additional paid-in capital			17,887				17,831
Retained earnings			52,574				52,722
Less: treasury stock, 4,499,920 common shares at cost			(38,126	)			(38,126	)
Total stockholders’ equity			32,432				32,524
Total liabilities, minority interest and stockholders’ equity		$	61,421			$	64,751

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)

		Six Months Ended
		December 31,				December 31,
		2007				2006
Net cash provided by operating activities		$	3,271			$	836
Cash flows from investing activities
Acquisition of Marketing Impressions, Inc.
Initial payment and acquisition-related costs, net of cash acquired			—				(1,483	)
Additional contingent consideration			(359	)			(870	)
Additions to property and equipment			(215	)			(440	)
Cash used in investing activities			(574	)			(2,793	)
Cash flows from financing activities
Net proceeds from/(payments) on note payable			10,777				(555	)
Net proceeds from/(payments) on lines of credit			(11,933	)			3,008
Cash dividends			(1,249	)			(1,249	)
Distributions to minority interest members			(1,225	)			(1,347	)
Increase/(decrease) in book overdrafts			207				227
Principal payments on capital lease			(26	)			—
Proceeds from capital lease			—				173
Net cash used in financing activities			(3,449	)			257
Net decrease in cash			(752	)			(1,700	)
Cash at beginning of period			928				2,164
Cash at end of period		$	176			$	464

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — BASIS OF PREPARATION AND PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting, and include all adjustments which are, in the opinion of management, necessary for a fair presentation. The condensed consolidated financial statements include the accounts of Craftmade International, Inc. (“Craftmade”), and its wholly-owned subsidiaries, including Trade Source International, Inc., a Delaware corporation (“TSI”), Prime/Home Impressions, LLC, a North Carolina limited liability company (“PHI”), and one 50% owned limited liability company, Design Trends, LLC, a Delaware limited liability company (“Design Trends”). References to “Craftmade,” “ourselves,” “we,” “our,” “us,” “its,” “itself,” and the “Company” refer to Craftmade and its subsidiaries, including TSI, PHI and Design Trends unless the context requires otherwise.

The balance sheet at June 30, 2007 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company believes that the disclosures are adequate so that the information presented is not misleading; however, it is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007, filed with the SEC on September 13, 2007. The financial data for the interim periods may not necessarily be indicative of results to be expected for the year. Certain amounts in the prior periods’ financial statements have been reclassified to conform to the current period presentation.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 2 — ACQUISITIONS

Acquisition of Certain Net Assets of Woodard, LLC

See Note 8 — Subsequent Events.

Acquisition of Marketing Impressions, Inc.

Effective July 1, 2006, TSI acquired Marketing Impressions, Inc., a Georgia corporation (“Marketing Impressions”). Marketing Impressions owned the remaining 50% interest in the Company’s limited liability company PHI and also supplied the Company with certain fan accessory products. This acquisition increased the Company’s effective ownership of PHI to 100% and has been accounted for using the purchase method of accounting. The acquisition is more fully described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007.

The purchase price is based on a known initial payment plus a contingent amount that is based upon percentage of gross profit without any reductions for vendor displays and annual reset costs (“Adjusted Gross Profit”). The purchase price is summarized as follows:

Purchase Price Summary
(Dollars in thousands)

As of December 31, 2007:
Amount paid at closing, net of cash acquired		$	1,287
Contingent payments earned			2,005
Acquisition-related costs			220
Total consideration as of December 31, 2007		$	3,512
Percent of Adjusted Gross Profit July 1, 2006 to August 31, 2011			22	%
Additional Percent of Adjusted Gross Profit July 1, 2006 to June 30, 2007 (Actual amount paid was $677)			15	%

The Company has estimated the total remaining payout based on future levels of Adjusted Gross Profit through August 31, 2011 to be a total of $2,807,000. In accordance with SFAS No. 141, Business Combinations (“SFAS 141”), contingent consideration is recorded when a contingency is satisfied and additional consideration is issued or becomes issuable.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The purchase price was allocated based on the estimated fair values of the assets acquired and liabilities assumed as of the effective date of acquisition and is summarized as follows:

Purchase Price Allocation
(Dollars in thousands)

		As of				Additional				As of
		June 30,				Contingent				December 31,
		2007				Consideration				2007
Assets:
Accounts receivable		$	368			$	—			$	368
Inventory			2				—				2
Property and equipment			214				—				214
Deferred tax assets			70				—				70
Acquired intangibles			1,530				—				1,530
Goodwill			2,164				308				2,472
			4,348				308				4,656
Liabilities:
Accounts payable			1,120				—				1,120
Note payable and other liabilities			24				—				24
			1,144				—				1,144
Total purchase price		$	3,204			$	308			$	3,512

The amount of goodwill allocated to the purchase price was $2,472,000, all of which is deductible for tax purposes over a 15-year period.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 3 — EARNINGS PER SHARE

The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations:

		Three Months Ended								Six Months Ended
		December 31,				December 31,				December 31,				December 31,
		2007				2006				2007				2006
		(In thousands, except per share data)
Basic and diluted earnings per share:
Numerator
Net income		$	482			$	1,500			$	1,100			$	3,384
Denominator for basic EPS
Weighted average common shares outstanding			5,205				5,204				5,205				5,204
Denominator for diluted EPS
Weighted average common shares outstanding			5,205				5,204				5,205				5,204
Incremental shares for stock options			—				2				1				3
Dilutive weighted average common shares			5,205				5,206				5,206				5,207
Basic earnings per share		$	0.09			$	0.29			$	0.21			$	0.65
Diluted earnings per share		$	0.09			$	0.29			$	0.21			$	0.65

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 4 — SEGMENT INFORMATION

As of December 31, 2007, the Company operates in two reportable segments, Craftmade and TSI. The accounting policies of the segments are the same as those described in Note 2 — Summary of Significant Accounting Policies to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007, as filed with the SEC on September 13, 2007. The Company evaluates the performance of its segments and allocates resources to them based on their income from operations and cash flows.

The Company is organized on a combination of product type and customer base. The Craftmade segment primarily derives its revenue from home furnishings, including ceiling fans, light kits, bathstrip lighting, lamps, light bulbs, door chimes, ventilation systems and other lighting accessories offered primarily through lighting showrooms, certain major retail chains and catalog houses. The TSI segment derives its revenue from outdoor lighting, portable lamps, indoor lighting and fan accessories marketed solely to mass retailers.

The following table presents net sales, gross profit and income from operations for the reportable segments:

Summary of Segment Information

		Three Months Ended								Six Months Ended
		December 31,				December 31,				December 31,				December 31,
		2007				2006				2007				2006
		(In thousands)
Net sales
Craftmade		$	12,297			$	13,778			$	26,580			$	30,229
TSI			8,515				12,785				16,970				24,460
Total		$	20,812			$	26,563			$	43,550			$	54,689
Gross profit
Craftmade		$	4,487			$	4,905			$	9,495			$	10,657
TSI			2,047				3,619				4,549				6,649
Total		$	6,534			$	8,524			$	14,044			$	17,306
Income from operations
Craftmade		$	996			$	1,338			$	1,902			$	3,313
TSI			348				1,850				1,206				3,373
Total		$	1,344			$	3,188			$	3,108			$	6,686

Subsequent to the acquisition of certain net assets of Woodard, LLC, we are reassessing our position under Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 5 — STOCK-BASED COMPENSATION

Effective July 1, 2005, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”). The Company elected to use the modified prospective method for adoption, which requires compensation expense to be recorded for all unvested stock options and restricted shares beginning in the first quarter of adoption.

The options to purchase common stock are issued at fair market value on the date of the grant. Generally, the options vest and become exercisable ratably over a four-year period, commencing one year after the grant date, and expire ten years from issuance. The fair value of each option is recognized as compensation expense on a straight-line basis between the grant date and the date the options become fully vested. The Company has recognized compensation cost for all stock-based payments in the consolidated financial statements as follows:

Stock-Based Compensation Expense
(Dollars in thousands)

		Three Months Ended								Six Months Ended
		December 31,				December 31,				December 31,				December 31,
		2007				2006				2007				2006
Stock-based compensation expense recognized:
Selling, general & administrative		$	28			$	7			$	56			$	11

Total future compensation cost related to non-vested options is expected to be amortized over the following future periods as follows:

Future Stock-Based Compensation Expense
(Dollars in thousands)

		Expected
		Future
		Compensation
Fiscal Year Ending		Cost
June 30, 2008 (remaining six months)		$	56
June 30, 2009			113
June 30, 2010			113
June 30, 2011			52

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table summarizes information about outstanding and exercisable options at December 31, 2007:

Stock Option Information

										Weighted
										Average
						Weighted				Remaining
						Average				Contractual
		Number of				Exercise				Life
		Shares				Price				(Years)
Outstanding at June 30, 2007			99,100			$	18.06				8.8
Options granted			—				—
Options exercised			—				—
Options forfeited			(2,600	)			18.85
Options expired			—				—
Outstanding at December 31, 2007			96,500			$	18.06				8.3
Exercisable at December 31, 2007			3,500			$	6.00				1.8

The fair value of each option grant is calculated on the date of grant using the Black-Scholes option pricing model.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 6 — INCOME TAXES

The Company’s effective tax rate is summarized in the following table:

Summary of Effective Tax Rate

		Three Months Ended								Six Months Ended
		December 31,				December 31,				December 31,				December 31,
		2007				2006				2007				2006
Effective tax rate			35.0	%			34.3	%			34.8	%			34.3	%

The effective tax rate is calculated by dividing income tax expense by income after minority interest and before income taxes. The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 34% primarily due to state income taxes. The tax provisions for the current fiscal year are based on our estimate of the Company’s annualized income tax rate.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The statute of limitations has lapsed for all U.S. federal returns prior to and including the fiscal year ended June 30, 2003. In May 2007, the Internal Revenue Service completed an examination of the Company’s U.S. income tax return for the fiscal year ended June 30, 2005. There were no material adjustments, penalties or interest resulting from this examination.

With respect to state and local jurisdictions and countries outside of the United States, the Company and its subsidiaries are typically subject to examination for four to five years after the income tax returns have been filed. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties have been provided for in the accompanying financial statements for any adjustments that might be incurred due to state, local or foreign audits.

On July 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). At the date of adoption, the gross amount of unrecognized tax benefits, interest and penalties was $290,000 that, if recognized, would affect the effective tax rate. As a result of the implementation of FIN 48, we recognized no additional adjustments in the liability for unrecognized income tax benefits. Additionally, adoption of FIN 48 resulted in the reclassification of certain accruals for uncertain tax positions in the amount of $190,000 from current to other long-term expenses.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

For the six months ended December 31, 2007, there was no change in our unrecognized income tax benefits:

Reconciliation of Unrecognized Tax Benefits
(Dollars in thousands)

						Increases/(Decreases) in Unrecognized
						Tax Benefits As a Result of
						Tax Positions from												Lapse in
		July 1,				Prior				Current								Statute of				December 31,
		2007				Periods				Period				Settlements				Limitations				2007
Unrecognized tax benefits		$	290				—				—				—				—			$	290

It is reasonably possible that the amount of the unrecognized benefit with respect to certain of our unrecognized tax positions could significantly increase or decrease within the next 12 months as a result of settling ongoing tax matters. At this time, an estimate of the range of the reasonably possible outcomes cannot be made.

The Company has historically recognized interest relating to income tax matters as a component of interest expense and recognized penalties relating to income tax matters as a component of selling, general and administrative expense. Such interest and penalties have historically been immaterial. Upon adoption of FIN 48, the Company will recognize accrued interest and penalties related to income tax matters in income tax expense. There was $48,000 in interest and penalties related to unrecognized tax benefits accrued at the date of adoption and as of December 31, 2007.

Note 7 — COMMITMENTS AND CONTINGENCIES

There are no material legal proceedings pending to which the Company is party or to which any of its properties are subject.

Note 8 — SUBSEQUENT EVENTS

On January 2, 2008, Woodard — CM, LLC, a wholly owned subsidiary of Craftmade, completed the purchase of substantially all of the assets of Woodard, LLC, a Chicago-based designer, manufacturer and distributor of a broad line of outdoor furniture products and related accessories pursuant to the Asset Purchase Agreement, dated as of December 18, 2007 (the “Purchase Agreement”) by and among Craftmade; Woodard, LLC; and Henry Crown and Company d/b/a CC Industries, Inc. The Asset Purchase Agreement is filed as Exhibit 2.1 to Craftmade’s Form 8-K as filed with the SEC on January 4, 2008.

The Woodard acquisition is a strategic addition to our fast-growing outdoor product lines. It allows us entry into the growing hospitality market, expands our retail customer base and adds a new independent distribution channel.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The purchase price includes (i) cash paid at closing, (ii) 500,000 shares of Craftmade common stock, (iii) warrants to purchase up to 200,000 shares of common stock for 10 years from the date of issuance at a purchase price of $8.10 per share and (iv) professional fees. The preliminary purchase price is summarized as follows:

Preliminary Purchase Price
(Dollars in thousands)

Cash paid at closing		$	16,135
Value of 500,000 shares of common stock			4,000	(1)
Value of 200,000 common stock warrants			279	(2)
Professional fees			587
		$	21,001

Expected volatility			33	%
Risk-free interest rate			3.81	%
Expected lives		10 years
Dividend yield			5.8	%

The final purchase price for the acquired assets is subject to a working capital adjustment. In addition, we have funded an escrow account in the amount of $2.5 million for a period of 18 months from the closing date for indemnifications made by the seller arising from its representations, warranties or covenants pursuant to the asset purchase agreement. This contingent amount has been included in the preliminary purchase price above.

The purchase price will be allocated based on the estimated fair values of the assets acquired and liabilities assumed as of the effective date of the acquisition. This allocation has yet to be finalized. Pro forma financial information will be filed by an amendment to the Form 8-K that we filed on January 4, 2008.

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

Disclosure Regarding Forward-looking Statements

With the exception of historical information, the matters discussed in this document contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Craftmade International, Inc. to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements include, but are not limited to, (i) statements concerning future financial condition and operations, including future cash flows, revenues, gross margins, earnings and variations in quarterly results, (ii) statements relating to anticipated completion dates for new products and (iii) other statements identified by words such as “may,” “will,” “should,” “could,” “might,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “forecasts,” “intends,” “potential,” “continue,” and similar words or phrases. These factors that could affect our financial and other results can be found in the risk factors section of our Annual Report on Form 10-K for the fiscal year ended June 30, 2007, filed with the SEC on September 13, 2007. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this filing with the SEC, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or other circumstances.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of the Company’s financial condition and results of operations is 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 change. The Company’s management believes that certain estimates, assumptions and judgments derived from the accounting policies have significant impact on its financial statements, so the Company considers these to be its critical accounting policies. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in the Company’s Annual Report on Form 10-K for the year ended June 30, 2007, as filed with the SEC on September 13, 2007.

Accounting for Uncertainty in Income Taxes. In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) which clarifies the accounting for uncertainty in income taxes recognized under FASB Statement No. 109, Accounting for Income Taxes. FIN 48 addresses the recognition and measurement of tax positions taken or expected to be taken, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. We adopted and applied FIN 48 under the transition provisions to all of our income tax positions at the required effective date of July 1, 2007. See Note 6 in the Notes to the Unaudited Condensed Consolidated Financial Statements for additional detail.

Results of Operations

Management reviews a number of key indicators to evaluate the Company’s financial performance, including net sales, gross profit and selling, general and administrative expenses by segment.

Three Months Ended December 31, 2007 Compared to Three Months Ended December 31, 2006

An unaudited, condensed overview of results for the three months ended December 31, 2007 and the corresponding prior year period is summarized as follows:

Summary Income Statement by Segment
(Dollars in thousands)

		Three Months Ended												Three Months Ended
		December 31, 2007												December 31, 2006
		Craftmade				TSI				Total				Craftmade				TSI				Total
Net sales		$	12,297			$	8,515			$	20,812			$	13,778			$	12,785			$	26,563
Cost of goods sold			(7,810	)			(6,468	)			(14,278	)			(8,873	)			(9,166	)			(18,039	)
Gross profit			4,487				2,047				6,534				4,905				3,619				8,524
As a % of net sales			36.5	%			24.0	%			31.4	%			35.6	%			28.3	%			32.1	%
Selling, general and administrative			(3,344	)			(1,633	)			(4,977	)			(3,427	)			(1,708	)			(5,135	)
As a % of net sales			27.2	%			19.2	%			23.9	%			24.9	%			13.4	%			19.3	%
Depreciation and amortization			(147	)			(66	)			(213	)			(140	)			(61	)			(201	)
Total operating expenses			(3,491	)			(1,699	)			(5,190	)			(3,567	)			(1,769	)			(5,336	)
Income from operations		$	996			$	348				1,344			$	1,338			$	1,850				3,188
Interest expense, net											(298	)											(393	)
Income before income taxes and minority interest											1,046												2,795
Income taxes											(260	)											(782	)
Income before minority interest											786												2,013
Minority interest											(304	)											(513	)
Net income										$	482											$	1,500

Net Sales. Net sales for the Company decreased $5,751,000 or 21.7% to $20,812,000 for the quarter ended December 31, 2007, compared to $26,563,000 for the quarter ended December 31, 2006, from a decline in net sales of both segments.

Net sales from the Craftmade segment decreased $1,481,000 or 10.7% to $12,297,000 for the quarter ended December 31, 2007, compared to $13,778,000 for the quarter ended December 31, 2006. The decline was primarily due to a continued decrease in demand for decorative ceiling fans and Accolade lighting products as a result of the weak overall housing market.

Management continues to focus on introducing new lighting products, expanding Teiber accounts and developing new accounts for the Durocraft product lines to offset the weak housing market. Management believes that long-term growth will be favorably affected by more competitive product sourcing and additional product offerings through enhanced product development efforts. Along these lines, the

Company introduced the largest number of new products that we ever have at our semi-annual lighting market in January 2008. Management believes that these new product lines were well received by our customers.

Net sales of the TSI segment declined $4,270,000 or 33.4% to $8,515,000 for the quarter ended December 31, 2007, compared to $12,785,000 for the quarter ended December 31, 2006, as summarized in the following table:

Net Sales of TSI Segment
(Dollars in thousands)

		Trade				Design				Segment
Three Months Ended		Source				Trends				Total
December 31, 2007		$	3,952			$	4,563			$	8,515
December 31, 2006			7,101				5,684				12,785
Dollar decrease		$	(3,149	)		$	(1,121	)		$	(4,270	)
Percent decrease			(44.3	%)			(19.7	%)			(33.4	%)

The decrease in net sales of Trade Source was primarily the result of a decline in orders from Lowe’s related to indoor lighting, outdoor lighting and fan accessories. In November 2006, Lowe’s notified Trade Source that it will no longer source the 14 indoor and outdoor lighting SKUs previously sold to Lowe’s via direct import. Additional information is detailed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007.

The decline in Design Trends’ net sales was primarily due to the benefit obtained last year from the rollout of the mix and match portable lamps to the four additional Lowe’s regional distribution centers that Design Trends had not been supplying since the quarter ended September 30, 2005. Currently, Design Trends supplies mix and match portable lamps to all 13 Lowe’s regional distribution centers.

Based on the most recent annual line review, management believes that Lowe’s remains committed to the respective programs for Design Trends and PHI, a subsidiary of Trade Source. Management believes that, based on the amount of product currently shipped to Lowe’s, Design Trends and PHI continue to be a primary vendors for Lowe’s mix and match portable lamp and fan accessory/ceiling medallion programs, respectively. Design Trends and PHI have been invited to participate in each of Lowe’s scheduled line reviews for its existing and new product lines. The line reviews occur on an annual basis for each product category throughout the year for each product category and give both Design Trends and PHI the potential to add new SKUs to the Lowe’s program; however, participation in line reviews could also result in a partial or complete reduction of either subsidiary’s existing SKUs in the product lines currently offered to Lowe’s.

Management believes that the future growth of the TSI segment is contingent upon the success of the Company’s ongoing efforts to introduce new products, product lines and marketing concepts to existing customers and the expansion of the business to new customers.

Gross Profit. Gross profit of the Company as a percentage of net sales decreased 0.7% to 31.4% for the quarter ended December 31, 2007, compared to 32.1% for the quarter ended December 31, 2006.

Gross profit as a percentage of net sales of the Craftmade segment increased 0.9% to 36.5% for the quarter ended December 31, 2007, compared to 35.6% in the quarter ended December 31, 2006. The increase resulted from lower product costs partially offset by higher returns and allowances.

For fiscal year 2008, we expect gross profit as a percentage of net sales of the Craftmade segment to slightly improve from the results generated in the fiscal year ended June 30, 2007, as Craftmade continues to realize the benefits obtained from its competitive sourcing efforts in China.

Gross profit as a percentage of net sales of the TSI segment decreased 4.3% to 24.0% of net sales for the quarter ended December 31, 2007, compared to 28.3% of net sales in the same prior year period, as summarized in the following table:

Gross Profit as a Percentage of Net Sales of TSI

		Trade				Design				Segment
Three Months Ended		Source				Trends				Total
December 31, 2007			22.5	%			25.4	%			24.0	%
December 31, 2006			28.2	%			28.5	%			28.3	%
Percent increase/(decrease)			(5.7	%)			(3.1	%)			(4.3	%)

Gross profit as a percentage of net sales at Trade Source decreased as a result of the benefits obtained in the prior year from lower costs associated with markdowns and product resets primarily as a result of the loss of the indoor and outdoor lighting product orders by Lowe’s. Similarly, gross profit as a percentage of net sales at Design Trends decreased as a result of the benefits obtained in the prior year from lower costs associated with product resets.

For fiscal year 2008, gross profit as a percentage of net sales of the TSI segment is expected to remain consistent with the fiscal year ended June 30, 2007, provided that the segment maintains a sales mix, customer concentration and level of vendor program commitment similar to that maintained during fiscal year 2007.

Selling, General and Administrative Expenses. Total selling, general and administrative (“SG&A”) expenses of the Company decreased $158,000 to $4,977,000 or 23.9% of net sales for the quarter ended December 31, 2007, compared to $5,135,000 or 19.3% of net sales for the same period last year.

Selling, General and Administrative Expenses
(Dollars in thousands)

										Increase/
		Three Months Ended								(Decrease)
		December 31,				December 31,				Over Prior
		2007				2006				Year Period
Commissions		$	649			$	785			$	(136	)
Accounting, legal and consulting			509				601				(92	)
Group health claims			230				148				82
Other			3,589				3,601				(12	)
		$	4,977			$	5,135			$	(158	)

Commissions decreased as a result of the decline in net sales. Accounting, legal and consulting decreased as a result of the timing of audit work. Group health claims increased as a result of higher medical claims during the quarter.

Management anticipates that based on current market conditions, SG&A expenses for fiscal year 2008 will be relatively consistent with results generated in fiscal year 2007, due to the fixed nature of SG&A expenses and before the effects of the Woodard acquisition.

Interest Expense. Net interest expense of the Company decreased $95,000 to $298,000 for the quarter ended December 31, 2007, compared to $393,000 for the quarter ended December 31, 2006. This decrease was primarily the result of lower average outstanding balances on the Company’s sources of debt.

Minority interest. Minority interest expense decreased $209,000 to $304,000 for the quarter ended December 31, 2007, compared to $513,000 for the same period in the previous quarter. The decrease in minority interest resulted from lower profits at Design Trends as a result of the decline in net sales.

Provision for Income Taxes. The provision for income tax was $260,000 or 35.0% of income before income taxes for the quarter ended December 31, 2007, compared to $782,000 or 34.3% of income before taxes for the quarter ended December 31, 2006. See Note 6 in the Notes to the Unaudited Condensed Consolidated Financial Statements for additional detail.

Six Months Ended December 31, 2007 Compared to Six Months Ended December 31, 2006

An unaudited, condensed overview of results for the six months ended December 31, 2007 and the corresponding prior year period is summarized as follows:

Summary Income Statement by Segment
(Dollars in thousands)

		Six Months Ended												Six Months Ended
		December 31, 2007												December 31, 2006
		Craftmade				TSI				Total				Craftmade				TSI				Total
Net sales		$	26,580			$	16,970			$	43,550			$	30,229			$	24,460			$	54,689
Cost of goods sold			(17,085	)			(12,421	)			(29,506	)			(19,572	)			(17,811	)			(37,383	)
Gross profit			9,495				4,549				14,044				10,657				6,649				17,306
As a % of net sales			35.7	%			26.8	%			32.2	%			35.3	%			27.2	%			31.6	%
Selling, general and administrative			(7,306	)			(3,212	)			(10,518	)			(7,065	)			(3,154	)			(10,219	)
As a % of net sales			27.5	%			18.9	%			24.2	%			23.4	%			12.9	%			18.7	%
Depreciation and amortization			(287	)			(131	)			(418	)			(279	)			(122	)			(401	)
Total operating expenses			(7,593	)			(3,343	)			(10,936	)			(7,344	)			(3,276	)			(10,620	)
Income from operations		$	1,902			$	1,206				3,108			$	3,313			$	3,373				6,686
Interest expense, net											(620	)											(761	)
Income before income taxes and minority interest											2,488												5,925
Income taxes											(586	)											(1,763	)
Income before minority interest											1,902												4,162
Minority interest											(802	)											(778	)
Net income										$	1,100											$	3,384

Net Sales. Net sales for the Company decreased $11,139,000 or 20.4% to $43,550,000 for the six months ended December 31, 2007, compared to $54,689,000 for the six months ended December 31, 2006, from a decline in net sales of both segments.

Net sales from the Craftmade segment decreased $3,649,000 or 12.1% to $26,580,000 for the six months ended December 31, 2007, compared to $30,229,000 for the six months ended December 31, 2006. The decline was primarily due to a continued decrease in demand for decorative ceiling fans and Accolade lighting products as a result of the weak overall housing market.

Management continues to focus on introducing new lighting products that the Company has introduced, expanding Teiber accounts and developing new accounts for the Durocraft product lines to offset the weak housing market. Management believes that long-term growth will be favorably affected by more competitive product sourcing and additional product offerings through enhanced product development efforts. Along these lines, the Company introduced the largest number of new products that we ever have at our semi-annual lighting market in January 2008. Management believes that these new product lines were well received by our customers.

Net sales of the TSI segment declined $7,490,000 or 30.6% to $16,970,000 for the six months ended December 31, 2007, compared to $24,460,000 for the six months ended December 31, 2006, as summarized in the following table:

Net Sales of TSI Segment
(Dollars in thousands)

		Trade				Design				Segment
Six Months Ended		Source				Trends				Total
December 31, 2007		$	8,488			$	8,482			$	16,970
December 31, 2006			14,484				9,976				24,460
Dollar decrease		$	(5,996	)		$	(1,494	)		$	(7,490	)
Percent decrease			(41.4	%)			(15.0	%)			(30.6	%)

The decrease in net sales of Trade Source was primarily the result of a decline in orders from Lowe’s related to indoor lighting, outdoor lighting and fan accessories. In November 2006, Lowe’s notified Trade Source that it will no longer source the 14 indoor and outdoor lighting SKUs previously sold to Lowe’s via direct import. Additional information is detailed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007.

The decline in Design Trends’ net sales was primarily due to the benefit obtained last year from the rollout of the mix and match portable lamps to the four additional Lowe’s regional distribution centers that Design Trends had not been supplying since the quarter ended September 30, 2005. Currently, Design Trends supplies mix and match portable lamps to all 13 Lowe’s regional distribution centers.

Based on the most recent annual line review, management believes that Lowe’s remains committed to the respective programs for Design Trends and PHI, a subsidiary of Trade Source. Management believes that, based on the amount of product currently shipped to Lowe’s, Design Trends and PHI continue to be a primary vendors for Lowe’s mix and match portable lamp and fan accessory/ceiling medallion programs, respectively. Design Trends and PHI have been invited to participate in each of Lowe’s scheduled line reviews for its existing and new product lines. The line reviews occur on an annual basis for each product category throughout the year for each product category and give both Design Trends and PHI the potential to add new SKUs to the Lowe’s program; however, participation in line reviews could

also result in a partial or complete reduction of either subsidiary’s existing SKUs in the product lines currently offered to Lowe’s.

Management believes that the future growth of the TSI segment is contingent upon the success of the Company’s ongoing efforts to introduce new products, product lines and marketing concepts to existing customers and the expansion of the business to new customers.

Gross Profit. Gross profit of the Company as a percentage of net sales increased 0.6% to 32.2% for the six months ended December 31, 2007, compared to 31.6% for the six months ended December 31, 2006.

Gross profit as a percentage of net sales of the Craftmade segment increased 0.5% to 35.7% for the six months ended December 31, 2007, compared to 35.3% in the six months ended December 31, 2006. The increase resulted from lower product costs partially offset by higher returns and allowances.

For fiscal year 2008, we expect gross profit as a percentage of net sales of the Craftmade segment to slightly improve from the results generated in the fiscal year ended June 30, 2007, as Craftmade continues to realize the benefits obtained from its competitive sourcing efforts in China.

Gross profit as a percentage of net sales of the TSI segment decreased 0.4% to 26.8% of net sales for the six months ended December 31, 2007, compared to 27.2% of net sales in the same prior year period, as summarized in the following table:

Gross Profit as a Percentage of Net Sales of TSI

		Trade				Design				Segment
Six Months Ended		Source				Trends				Total
December 31, 2007			23.8	%			29.8	%			26.8	%
December 31, 2006			28.3	%			25.6	%			27.2	%
Percent increase/(decrease)			(4.5	%)			4.2	%			(0.4	%)

Gross profit as a percentage of net sales at Trade Source decreased as a result of the benefits obtained in the prior year from lower costs associated with markdowns and product resets primarily as a result of the loss of the indoor and outdoor lighting product orders by Lowe’s. On the other hand, Design Trends benefited from reduced markdowns and lower product reset costs in the current period.

For fiscal year 2008, gross profit as a percentage of net sales of the TSI segment is expected to remain consistent with the fiscal year ended June 30, 2007, provided that the segment maintains a sales mix, customer concentration and level of vendor program commitment similar to that maintained during fiscal year 2007.

Selling, General and Administrative Expenses. Total selling, general and administrative (“SG&A”) expenses of the Company increased $299,000 to $10,518,000 or 24.2% of net sales for the six months ended December 31, 2007, compared to $10,219,000 or 18.7% of net sales for the same period last year.

Selling, General and Administrative Expenses
(Dollars in thousands)

										Increase/
		Six Months Ended								(Decrease)
		December 31,				December 31,				Over Prior
		2007				2006				Year Period
Commissions		$	1,410			$	1,684			$	(274	)
Group health claims			605				317				288
Accounting, legal and consulting			1,247				1,066				181
Salaries and wages			3,620				3,486				134
Other			3,636				3,666				(30	)
		$	10,518			$	10,219			$	299

Commissions decreased as a result of the decline in net sales. Group health claims increased as a result of higher medical claims. Accounting, legal and consulting fees increased as a result of increased legal and consulting fees from the Company’s exploration of strategic alternatives. Salaries and wages increased as a result of severance paid to employees who were terminated.

Management anticipates that based on current market conditions, SG&A expenses for fiscal year 2008 will be relatively consistent with results generated in fiscal year 2007, due to the fixed nature of SG&A expenses and before the effects of the acquisition of Woodard.

Interest Expense. Net interest expense of the Company decreased $141,000 to $620,000 for the six months ended December 31, 2007, compared to $761,000 for the six months ended December 31, 2006. This decrease was primarily the result of lower average outstanding balances on the Company’s sources of debt.

Minority interest. Minority interest expense increased $24,000 to $802,000 for the six months ended December 31, 2007, compared to $778,000 for the same period in the previous six months. The increase in minority interest resulted from increased profits at Design Trends as a result reduced markdowns and lower product reset costs.

Provision for Income Taxes. The provision for income tax was $586,000 or 34.8% of income before income taxes for the six months ended December 31, 2007, compared to $1,763,000 or 34.3% of income before taxes for the six months ended December 31, 2006. See Note 6 in the Notes to the Unaudited Condensed Consolidated Financial Statements for additional detail.

Liquidity and Capital Resources

     The Company’s cash decreased $752,000 from $928,000 at June 30, 2007 to $176,000 at December 31, 2007. Net cash provided by the Company’s operating activities increased $2,435,000 to $3,271,000 for the six months ended December 31, 2007, compared to $836,000 for the same period last year. The increase in cash flow from operations resulted primarily from lower accounts receivable and inventory balances, offset by lower net income and accounts payable.

     The $574,000 of cash used in investing activities was primarily related to contingent payments from the acquisition of Marketing Impressions and the purchase of computer equipment.

     Cash used in financing activities primarily resulted from net proceeds of $10,777,000 from refinancing the Company’s warehouse. These proceeds were used to pay down the Company’s lines of credit. Net payments on the lines of credit totaled $11,933,000. In addition, there were cash dividends of $1,249,000 and distributions to our minority interest member totaling $1,225,000.

     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 its projected growth over the next twelve months.

     Management anticipates that future cash flows will be used primarily to retire existing debt, pay dividends, fund potential acquisitions, repurchase Company common stock or fund other investments that will enhance long-term shareholder value and distribute earnings to its minority interest member. The Company remains committed to its business strategy of creating long-term earnings growth, maximizing stockholder value through internal improvements, making selective acquisitions and dispositions of assets, focusing on cash flow and retaining quality personnel.

Recent Accounting Pronouncements

     In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141R, Business Combinations. SFAS 141R requires most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at full fair value. The Statement applies to all business combinations, including combinations among mutual entities and combinations by contract alone. Under SFAS 141R, all business combinations will be accounted for by applying the acquisition method. SFAS 141R is effective for periods beginning on or after December 15, 2008 and will be effective for us beginning in the second quarter of fiscal 2009 for business combinations occurring after the effective date.

     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. SFAS 160 will require noncontrolling interests (previously referred to as minority interests) to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. The Statement applies to the accounting for noncontrolling interests and transactions with noncontrolling interest holders in consolidated financial statements. SFAS 160 is effective for periods beginning on or after December 15, 2008 and is effective for us beginning in the second quarter of fiscal 2009. We do not expect that SFAS 160 will have a material impact on our financial statements.

     In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. Companies should report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently assessing the potential impact, if any, that the adoption of SFAS 159 will have on its consolidated financial statements.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). This statement defines fair value, establishes a framework for measuring fair value in generally accepted

accounting principles and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the potential impact, if any, that the adoption of SFAS 157 will have on its consolidated financial statements.

Long-Term Obligations

The Company’s long-term obligations are summarized in the following table:

Summary of Long-Term Obligations
At December 31, 2007
(Dollars in thousands)

						Outstanding
		Commitment				Balance				Interest Rate				Maturity
Revolving lines of credit		$	50,000			$	6,892			LIBOR plus1.5		%		December 31, 2009
Note payable — facility							11,000				6.5	%		December 10, 2017
Capital lease obligation							134							November 5, 2010
Sub-total							18,026
Less: current amounts due							(491	)
Long-term obligations						$	17,535

     On December 31, 2007, Craftmade entered into a Third Amended and Restated Loan Agreement (the “Loan Agreement”) with The Frost National Bank. The Loan Agreement amends the Second Amended and Restated Loan Agreement dated September 18, 2006, between Craftmade and Frost. Also, on December 31, 2007, Craftmade executed (i) a Revolving Promissory Note (the “Frost Note”) payable to the order of Frost, in the principal amount of $20,000,000, (ii) a Revolving Promissory Note (the “Whitney Note”) payable to the order of Whitney National Bank, in the principal amount of $20,000,000 and (iii) a Revolving Promissory Note (the “Commerce Note” and, together with the Frost Note and the Whitney Note, the “Notes”) payable to the order Commerce Bank, N.A. in the principal amount of $10,000,000. Each Note bears an interest rate equal to the London Interbank Offered Rate (“LIBOR”) plus 1.5%. All Notes will mature on December 31, 2009. The Notes replace the Promissory Note in the principal amount of $30,000,000, payable to the order of Frost dated September 18, 2006. As a result of this transaction, total credit lines available to Craftmade and its subsidiaries have increased from $30,000,000 to $50,000,000. There was $12,411,000 available to borrow under the Notes at December 31, 2007.

     Pursuant to the Loan Agreement, the financial covenants require Craftmade to maintain a ratio of total liabilities (excluding any subordinated debt) to tangible net worth of not greater than 2.5 to 1.0 for the quarters ending June, 30, September 30 and December 31 and not greater than 3.25 to 1.0 for the quarter ending March 31. The financial covenants require a Fixed Charge Coverage Ratio (as defined in the Loan Agreement) of not less than 1.25 to 1.0, tested quarterly. We are in compliance with our covenants at December 31, 2007. Management does not anticipate that the covenants and other restrictions contained in its line of credit and loan agreement will limit the Company’s current operations.

     All wholly-owned subsidiaries of Craftmade and Design Trends LLC, a 50% owned subsidiary of Craftmade, have agreed to be guarantors of the Loan Agreement (the “Guarantors”). Each of Craftmade and the Guarantors has granted a security interest to Frost in each of their accounts and inventory. Further information regarding this Loan Agreement and Notes is detailed in the Form 8-K as filed with the SEC on January 7, 2008.

     On November 14, 2007, the Company entered into a term loan to refinance its home office and warehouse with an original principal balance of $11,000,000. The loan is payable in equal monthly installments of principal and interest of $95,822. The loan bears an interest rate of 6.5% per year. The loan is collateralized by the building and land. The loan is scheduled to mature on December 10, 2017. Further information regarding this loan is detailed in the Form 8-K as filed with the SEC on November 20, 2007.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risks at December 31, 2007 have not changed significantly from those discussed in Item 7A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2007, as filed with the SEC on September 13, 2007.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

Changes in Internal Controls

There was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II
OTHER INFORMATION

Item 1. Legal Proceedings

Not Applicable

Item 1A. Risk Factors

There have been no material changes in the Company’s risk factors since those published in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007, as filed with the SEC on September 13, 2007.

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

Not Applicable

Item 3. Defaults Upon Senior Securities

Not Applicable

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

The Company held its annual meeting of stockholders on November 27, 2007. With respect to the election of directors, the shares were voted as follows:

		Number of Votes
		of Common Stock
Nominee		For				Withheld
James R. Ridings			3,816,934				995,519
William E. Bucek			3,826,041				986,412
L. Dale Griggs			3,828,809				983,644
A. Paul Knuckley			3,816,734				995,719
R. Don Morris			3,829,009				983,444
Lary C. Snodgrass			3,829,234				983,219

With respect to the ratification of BDO Seidman, LLP as the Company’s independent auditors for 2008, the votes were as follows:

Number of Votes		Number of Votes
Voted For		Voted Against				Abstentions
4,717,283			92,783				2,387

Item 5. Other Information

Not Applicable

Item 6. Exhibits

Exhibit
Number		Description
2.1		Asset Purchase Agreement dated as of December 18, 2007, by and among Woodard, LLC, Henry Crown and Company d/b/a CC Industries, Inc. and Craftmade International, Inc., previously filed as Exhibit 2.1 to Form 8-K on January 4, 2008 (File No. 000-26667), and incorporated by reference herein.
		Pursuant to Item 601(b)(2) of Regulation S-K, the Company has not filed herewith the schedules and exhibits to the foregoing exhibit and agrees to furnish supplementally to the Securities and Exchange Commission, upon request, any omitted schedules or similar attachments to the foregoing exhibit.

Exhibit
Number		Description
2.2		Stock Purchase Agreement between Craftmade International, Inc., Trade Source International, Inc., and Robert W. Lackey, dated September 15, 2006, previously filed as Exhibit 10.1 to Form 8-K dated September 15, 2006 (File No. 000-26667), and incorporated by reference herein.
		Pursuant to Item 601(b)(2) of Regulation S-K, the Company has not filed herewith the schedules and exhibits to the foregoing exhibit and agrees to furnish supplementally to the Securities and Exchange Commission, upon request, any omitted schedules or similar attachments to the foregoing exhibit.
2.3		Agreement for the Purchase and Sale of Personal Goodwill between Trade Source International, Inc. and Robert Lackey, dated September 15, 2006, previously filed as Exhibit 10.2 to Form 8-K dated September 15, 2006 (File No. 000-26667), and incorporated by reference herein.
2.4		Agreement for the Purchase and Sale of Personal Goodwill between Trade Source International, Inc. and Robert Lackey, Jr., dated September 15, 2006, previously filed as Exhibit 10.3 to Form 8-K dated September 15, 2006 (File No. 000-26667), and incorporated by reference herein.
2.5		Intellectual Property Assignment by and between Trade Source International, Inc., Robert W. Lackey, Robert W. Lackey, Jr., RWL Incorporated f/k/a Robert W. Lackey Corporation and R.L. Products Corporation, dated September 15, 2006, previously filed as Exhibit 10.4 to Form 8-K dated September 15, 2006 (File No. 000-26667), and incorporated by reference herein.
2.6		Non-Competition Agreement between Trade Source International, Inc. and Robert W. Lackey, dated September 15, 2006, previously filed as Exhibit 10.5 to Form 8-K dated September 15, 2006 (File No. 000-26667), and incorporated by reference herein.
2.7		Non-Competition Agreement between Trade Source International and Robert W. Lackey, Jr., dated September 15, 2006, previously filed as Exhibit 10.6 to Form 8-K dated September 15, 2006 (File No. 000-26667), and incorporated by reference herein.
2.8		Consulting Agreement by and between Craftmade International, Inc., Trade Source International, Inc. and Imagine One Resources, LLC, dated September 15, 2006, previously filed as Exhibit 10.7 to Form 8-K dated September 15, 2006 (File No. 000-26667), and incorporated by reference herein.
2.9		Partially Subordinate Security Agreement among Trade Source International, Inc., Marketing Impressions, Inc., Prime Home Impressions, LLC, and Robert Lackey, (“Lackey”), as collateral agent for Lackey, Robert W. Lackey, Jr., Imagine One Resources, LLC, RWL Corporation and R.L. Products Corporation, dated September 15, 2006, previously filed as Exhibit 10.8 to Form 8-K dated September 15, 2006 (File No. 000-26667), and incorporated by reference herein.
2.10		Subordination Agreement by and among Robert W. Lackey (“Lackey”), as collateral agent for Lackey, Robert W. Lackey, Jr., Imagine One Resources, LLC, RWL Corporation, R.L. Products Corporation, and The Frost National Bank, Trade Source

Exhibit
Number		Description
		International, Inc., Marketing Impressions, Inc., Prime/Home Impressions, LLC and Craftmade International, Inc., dated September 15, 2006, previously filed as Exhibit 10.9 to Form 8-K dated September 15, 2006 (File No. 000-26667), and incorporated by reference herein.
2.11		Agreement and Plan of Merger by and among Craftmade International, Inc., Bill Teiber Co., Inc., Teiber Lighting Products, Inc., Todd Teiber and Edward Oberstein dated March 1, 2005, previously filed as Exhibit 10.1 to Form 8-K dated March 1, 2005 (File No. 000-26667), and incorporated by reference herein.
2.12		Agreement and Plan of Merger, dated as of July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc. a Delaware corporation, Neall and Leslie Humphrey, John DeBlois, the Wiley Family Trust, James Bezzerides, the Bezzco Inc. Employee Retirement Trust and Trade Source International, Inc, a California corporation, filed as Exhibit 2.1 to Form 8-K filed July 15, 1998 (File No. 33-33594-FW) and incorporated by reference herein.
3.1		Certificate of Incorporation of the Company, filed as Exhibit 3(a)(2) to the Company’s Post Effective Amendment No. 1 to Form S-8 (File No. 33-33594-FW), and incorporated by reference herein.
3.2		Certificate of Amendment of Certificate of Incorporation of the Company, dated March 24, 1992, and filed as Exhibit 4.2 to the Company’s Form S-8 (File No. 333-44337), and incorporated by reference herein.
3.3		Amended and Restated Bylaws of the Company, filed as Exhibit 3(b)(2) to the Company’s Post Effective Amendment No. 1 to Form S-8 (File No. 33-33594-FW), and incorporated by reference herein.
4.1		Specimen Common Stock Certificate, filed as Exhibit 4.4 to the Company’s registration statement on Form S-3 (File No. 333-70823), and incorporated by reference herein.
4.2		Rights Agreement, dated as of June 23, 1999, between Craftmade International, Inc. and Harris Trust and Savings Bank, as Rights Agent, previously filed as Exhibit 4 to Form 8-K dated July 9, 1999 (File No. 000-26667), and incorporated by reference herein.
10.1		Promissory Note dated November 14, 2007, in the original principal amount of $11,000,000 payable to the order of Allianz Life Insurance Company of North America and executed by CM Real Estate, LLC., previously filed as Exhibit 10.1 to Form 8-K on November 20, 2007 (File No. 000-26667), and incorporated by reference herein.
10.2		Deed of Trust, Mortgage and Security Agreement by CM Real Estate, LLC, effective November 14, 2007, previously filed as Exhibit 10.2 to Form 8-K on November 20, 2007 (File No. 000-26667), and incorporated by reference herein.
10.3		Guaranty Agreement dated November 14, 2007, by Craftmade International, Inc. in favor of Allianz Life Insurance Company of North America, previously filed as Exhibit 10.3 to Form 8-K on November 20, 2007 (File No. 000-26667), and incorporated by reference herein.

Exhibit
Number		Description
10.4		Lease Agreement dated as of November 14, 2007, between CM Real Estate, LLC and Craftmade International, Inc., previously filed as Exhibit 10.4 to Form 8-K on November 20, 2007 (File No. 000-26667), and incorporated by reference herein.
10.5		Third Amended and Restated Loan Agreement Among Craftmade International, Inc., the Frost National Bank, As Administrative Agent, and the Other Lenders Party Hereto, dated December 31, 2007, previously filed as Exhibit 10.1 to Form 8-K on January 7, 2008 (File No. 000-26667), and incorporated by reference herein.
10.6		Revolving Promissory Note Between Craftmade International, Inc., and The Frost National Bank, dated December 31,2007, previously filed as Exhibit 10.2 to Form 8-K on January 7, 2008 (File No. 000-26667), and incorporated by reference herein.
10.7		Revolving Promissory Note Between Craftmade International, Inc., and Whitney National Bank, dated December 31, 2007, previously filed as Exhibit 10.3 to Form 8-K on January 7, 2008 (File No. 000-26667), and incorporated by reference herein.
10.8		Revolving Promissory Note Between Craftmade International, Inc., and Commerce Bank, N.A., dated December 31, 2007, previously filed as Exhibit 10.4 to Form 8-K on January 7, 2008 (File No. 000-26667), and incorporated by reference herein.
10.9		Craftmade International, Inc. 2006 Long-Term Incentive Plan, previously filed as Exhibit 10.1 to Form 8-K dated November 28, 2006 (File No. 000-26667), and incorporated by reference herein.
10.10		Incentive Stock Option Agreement, previously filed as Exhibit 10.2 to Form 8-K dated November 28, 2006 (File No. 000-26667), and incorporated by reference herein.
10.11		Non-qualified Stock Option Agreement, previously filed as Exhibit 10.3 to Form 8-K dated November 28, 2006 (File No. 000-26667), and incorporated by reference herein.
10.12		Stock Appreciation Rights Agreement, previously filed as Exhibit 10.4 to Form 8-K dated November 28, 2006 (File No. 000-26667), and incorporated by reference herein.
10.13		Restricted Stock Award Agreement, previously filed as Exhibit 10.5 to Form 8-K dated November 28, 2006 (File No. 000-26667), and incorporated by reference herein.
31.1*		Certification of James R. Ridings, Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of J. Marcus Scrudder, Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of James R. Ridings, Chairman of the Board, President and Chief Executive Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of J. Marcus Scrudder, Chief Financial Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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

		CRAFTMADE INTERNATIONAL, INC. (Registrant)
Date: February 6, 2008		/s/ James R. Ridings
		JAMES R. RIDINGS
		Chairman of the Board and
		Chief Executive Officer
Date: February 6, 2008		/s/ J. Marcus Scrudder
		J. MARCUS SCRUDDER
		Chief Financial Officer