Summary of CRAFTMADE INTERNATIONAL INC

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 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, 2008, filed with the SEC on September 26, 2008. 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, 2008, as filed with the SEC on September 26, 2008.

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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.
This discussion and analysis includes references to historical Craftmade. Historical Craftmade consists of ceiling fans, lighting, door chimes and pushbutton sales and related operations that have historically comprised the Company's operations prior to the acquisition of certain net assets of Woodard, LLC.
Three Months Ended December 31, 2008 Compared to Three Months Ended December 31, 2007
An unaudited, condensed overview of results for the three months ended December 31, 2008, 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, 2008                                    December 31, 2007
                                           Specialty           Mass             Total           Specialty          Mass             Total
Net sales                                 $  15,958         $  21,304         $  37,262         $ 12,297         $  8,515         $  20,812
Cost of goods sold                          (10,996 )         (18,560 )         (29,556 )         (7,810 )         (6,468 )         (14,278 )

Gross profit                                  4,962             2,744             7,706            4,487            2,047             6,534
As a % of net sales                           31.1%             12.9%             20.7%            36.5%            24.0%             31.4%

Selling, general and administrative          (4,381 )          (3,252 )          (7,633 )         (3,344 )         (1,633 )          (4,977 )
As a % of net sales                           27.5%             15.3%             20.5%            27.2%            19.2%             23.9%

Depreciation and amortization                  (197 )             (65 )            (262 )           (147 )            (66 )            (213 )

Total operating expenses                     (4,578 )          (3,317 )          (7,895 )         (3,491 )         (1,699 )          (5,190 )


Income (loss) from operations             $     384         $    (573 )            (189 )       $    996         $    348             1,344


Interest expense, net                                                              (417 )                                              (298 )
Other expense                                                                        (4 )                                               -


Income (loss) before income taxes
and minority interest                                                              (610 )                                             1,046
Income taxes (expense) / benefit                                                    257                                                (260 )


Income before minority interest                                                    (353 )                                               786
Minority interest                                                                  (192 )                                              (304 )


Net income (loss)                                                             $    (545 )                                         $     482

Net Sales. Net sales for the Company increased $16,450,000 or 79% to $37,262,000 for the quarter ended December 31, 2008, from $20,812,000 for the quarter ended December 31, 2007. The increase is due to the acquisition of certain assets of Woodard, LLC, offset by declines in sales in both segments.

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Management believes that the decline in the housing market and the overall economic downturn will continue to negatively impact the sales of the Company's various product lines in both the Specialty and Mass segments. The Company continues to pursue its strategic growth plans, while increasingly focusing on developing and implementing more immediate plans to mitigate the impact of the current economic downturn.
Net sales from the Specialty segment increased $3,661,000 or 30% to $15,958,000 for the quarter ended December 31, 2008, compared to $12,297,000 for the quarter ended December 31, 2007, as summarized in the following table.

Net Sales of the Speciality Segment (Dollars in thousands)

                                            Fans          Woodard
                                         Lighting &       Outdoor       Segment
              Three Months Ended         Accessories     Furniture       Total
          December 31, 2008              $    9,135      $  6,823      $ 15,958
          December 31, 2007                  12,297           -          12,297

          Dollar increase (decrease)     $   (3,162 )    $  6,823      $  3,661

          Percent increase (decrease)           (26%)          100%           30%

While the sales of fans and lighting related products continue to be affected by the extremely weak overall housing market, overall segment sales increased due to the addition of outdoor furniture sales.
Management continues to focus on introducing new products and expanding accounts to offset the weak housing market and economic downturn. Management believes that long-term growth will be favorably affected by additional product offerings through enhanced product development efforts, as well as cross-selling outdoor furniture products to lighting showrooms and outdoor lighting and ceiling fans to patio dealers, and focusing efforts on the hospitality markets. The first and second quarter net sales of Woodard outdoor furniture were expected to decline versus the third and fourth quarters of the prior fiscal year given Woodard seasonality. Historically, sales of outdoor furniture to patio dealers are seasonally higher during the third and fourth quarters of the Company's fiscal year, with the first and second quarter being considered the off-season for outdoor furniture sales.
Net sales of the Mass segment increased $12,789,000 or 150% to $21,304,000 for the quarter ended December 31, 2008, from $8,515,000 for the quarter ended December 31, 2007, as summarized in the following table:

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                           Net Sales of Mass Segment
                             (Dollars in thousands)

                                            Fans          Woodard
                                         Lighting &       Outdoor       Segment
              Three Months Ended         Accessories     Furniture       Total
          December 31, 2008              $    6,633      $ 14,671      $ 21,304
          December 31, 2007                   8,515           -           8,515

          Dollar increase (decrease)     $   (1,882 )    $ 14,671      $ 12,789

          Percent increase (decrease)           (22%)          100%          150%

The decrease in net sales of fans, lighting and accessories was primarily the result of a decline in: (i) orders from Lowe's related to indoor lighting and outdoor lighting; (ii) non-core drop shipped products; (iii) sales of fan accessories; and (iv) sales of the mix and match portable lamps through Lowe's. Woodard sales were primarily comprised of sales to its various mass merchant customers. Most of its products are shipped directly from China. Due to the seasonal nature of outdoor furniture, the majority of sales to mass merchants occur from December to April each year.
Based on the most recent annual product line reviews, management believes that Lowe's plans to continue the respective programs it currently has with the Company. Management believes that, based on the amount of product currently shipped to Lowe's, the Company remains a primary vendor for Lowe's mix and match portable lamp and fan accessory/ceiling medallion programs. Management has no reason not to believe that the Company will continue to be invited to participate in each of Lowe's scheduled reviews for its existing and new product lines. The line reviews occur on an annual basis for each product category throughout the year and give us 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 the existing SKUs in the product lines currently offered to by the Company to Lowe's.
While competitive pricing is essential in the Mass segment, management believes that future growth is contingent upon the success of the Company's ongoing efforts to introduce new products, styles 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 10.7% to 20.7% for the quarter ended December 31, 2008, from 31.4% for the quarter ended December 31, 2007, primarily due to consolidated sales of Woodard products that carry a lower gross profit percentage than the Company's historical operations.
Gross profit as a percentage of net sales of the Specialty segment decreased 5.4% to 31.1% for the quarter ended December 31, 2008, from 36.5% in the quarter ended December 31, 2007. The decrease is summarized in the following table.

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         Gross Profit as a Percentage of Net Sales of Specialty Segment

                                      Fans            Woodard
                                   Lighting &         Outdoor        Segment
            Three Months Ended     Accessories       Furniture        Total
            December 31, 2008             34.3%           26.8%          31.1%
            December 31, 2007             36.5%            -             36.5%

            Percent decrease             (2.2%)            -            (5.4%)

Decreases in gross margin for ceiling fans and lighting is primarily due to changes in sales mix to items that carry a lower margin, as well as the sell-through of higher cost inventory on hand from earlier inflationary periods. For fiscal year 2009, we expect gross profit as a percentage of net sales of ceiling fans and lighting in the Specialty segment to be down slightly versus the results generated in the fiscal year ended June 30, 2008, as the current economic downturn makes it more difficult for the Company to increase pricing to its customers. Gross profit as a percentage of net sales of Woodard outdoor furniture is expected to increase slightly over fiscal 2008, as the Company has implemented higher pricing for the 2009 season, to offset cost of goods increases from its suppliers.
Gross profit as a percentage of net sales of the Mass segment decreased 11.1% to 12.9% of net sales for the quarter ended December 31, 2008, from 24.0% of net sales in the same prior year period, as summarized in the following table:
Gross Profit as a Percentage of Net Sales of Mass

                                       Fans          Woodard
                                    Lighting &       Outdoor        Segment
              Three Months Ended    Accessories     Furniture        Total
              December 31, 2008          21.8%           8.8%         12.9%
              December 31, 2007          24.0%            -           24.0%

              Percent decrease          (2.2%)            -         (11.1%)

Gross profit as a percentage of net sales for the Mass segment decreased due to higher material costs experienced in our Design Trends subsidiary. Mass gross profit as a percent of net sales for Woodard outdoor furniture is low relative to other channels as all sales are direct import.
For fiscal year 2009, gross profit as a percentage of net sales of fans, lighting and accessories are expected to remain consistent with the fiscal year ended June 30, 2008, provided that the segment maintains a sales mix, customer concentration and level of vendor program commitment similar to that maintained during fiscal year 2008.
Selling, General and Administrative Expenses. Total selling, general and administrative ("SG&A") expenses of the Company increased $2,656,000 to $7,633,000 or 20.5% of net sales for the quarter ended December 31, 2008, from $4,977,000 or 23.9% of net sales for the same period last year.

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                  Selling, General and Administrative Expenses
                             (Dollars in thousands)

                                                                      Increase/
                                        Three Months Ended           (Decrease)
                                   December 31,     December 31,     Over Prior
                                       2008             2007         Year Period
           Historical Craftmade    $     4,922      $     4,977      $      (55 )
           Woodard Incremental           2,711              -             2,711

                                   $     7,633      $     4,977      $    2,656

The decrease in historical Craftmade expenses was primarily due to lower commissions and a reduction in advertising spending offset by an increase in bad debt expense, incremental bank charges and an increase in contract labor related to the integration of Woodard. These variances are summarized below:

Historical Craftmade Selling, General and Administrative Expenses
(Dollars in thousands)

                                                                   Increase/
                                     Three Months Ended           (Decrease)
                                December 31,     December 31,     Over Prior
                                    2008             2007         Year Period
              Advertising       $       297      $       487      $     (190 )
              Commissions               562              649             (87 )
              Bad Debt                   80               20              60
              Bank Charges               95               41              54
              Contract Labor            267              181              86
              Other                   3,621            3,599              22

                                $     4,922      $     4,977      $      (55 )

Management is focused on reducing SG&A expenses and anticipates that SG&A expenses for the second half of fiscal year 2009 will decrease versus results generated in the first half. The integration of the Woodard business is nearing completion, with most corporate functions having been relocated from Chicago, Illinois and integrated into the Coppell, Texas location. As of early February the former Woodard, LLC offices in Chicago have been closed, with the few remaining Chicago-based personnel moving into a much smaller office space, generating significant savings. The Company has also implemented a company-wide reorganization and reduction in force, impacting all locations and functions and resulting in over 5% decrease in the number of employees. Management anticipates that these actions will significantly reduce SG&A in future quarters. Interest Expense. Net interest expense of the Company increased $119,000 to $417,000 for the quarter ended December 31, 2008, from $298,000 for the quarter ended December 31, 2007. This increase is primarily due to increased working capital associated with the acquisition of certain assets of Woodard, LLC, partially offset by lower interest rates in effect as compared to the previous year.
Minority Interest. Minority interest expense decreased $112,000 to $192,000 for the quarter ended December 31, 2008, from $304,000 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.

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Provision for Income Taxes. The income tax benefit was $257,000 or 32.0% of loss before income taxes for the quarter ended December 31, 2008, compared to an income tax provision of $260,000 or 35.0% of income before income taxes for the quarter ended December 31, 2007. The effective income tax rate for the current quarter was different from the prior year quarter primarily due to the weighted average tax effect of operating losses in certain legal entities of the Company. See Note 6 in the Notes to the Unaudited Condensed Consolidated Financial Statements for additional detail regarding the Company's policy for determining the provision for income taxes.
Six Months Ended December 31, 2008 Compared to Six Months Ended December 31, 2007
An unaudited, condensed overview of results for the six months ended December 31, 2008, 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, 2008                                     December 31, 2007
                            Specialty            Mass             Total           Specialty            Mass             Total
Net sales                   $  36,429         $  30,998         $  67,427         $  26,580         $  16,970         $  43,550
Cost of goods sold            (24,811 )         (26,440 )         (51,251 )         (17,085 )         (12,421 )         (29,506 )

Gross profit                   11,618             4,558            16,176             9,495             4,549            14,044
As a % of net sales             31.9%             14.7%             24.0%             35.7%             26.8%             32.2%

Selling, general and
administrative                (10,423 )          (5,107 )         (15,530 )          (7,306 )          (3,212 )         (10,518 )
As a % of net sales             28.6%             16.5%             23.0%             27.5%             18.9%             24.2%

Depreciation and
amortization                     (369 )            (131 )            (500 )            (287 )            (131 )            (418 )

Total operating
expenses                      (10,792 )          (5,238 )         (16,030 )          (7,593 )          (3,343 )         (10,936 )


Income (loss) from
operations                  $     826         $    (680 )             146         $   1,902         $   1,206             3,108


Interest expense, net                                                (776 )                                                (620 )
Other income                                                            1                                                   -


Income (loss) before
income taxes
and minority interest                                                (629 )                                               2,488
Income taxes
(expense) / benefit                                                   308                                                  (586 )


Income before
minority interest                                                    (321 )                                               1,902
Minority interest                                                    (353 )                                                (802 )


Net income (loss)                                               $    (674 )                                           $   1,100

Net Sales. Net sales for the Company increased $23,877,000 or 55% to $67,427,000 for the six months ended December 31, 2008, from $43,550,000 for the six months ended December 31, 2007. The increase is due to the acquisition of certain assets of Woodard, LLC, offset by declines in sales in both segments. Net sales from the Specialty segment increased $9,849,000 or 37% to $36,429,000 for the six months ended December 31, 2008, from $26,580,000 for the six months ended December 31, 2007, as summarized in the following table.

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                      Net Sales of the Speciality Segment
                             (Dollars in thousands)

                                            Fans          Woodard
                                         Lighting &       Outdoor       Segment
               Six Months Ended          Accessories     Furniture       Total
          December 31, 2008                $ 21,495      $ 14,934      $ 36,429
          December 31, 2007                  26,580          -           26,580

          Dollar increase (decrease)       $ (5,085 )    $ 14,934      $  9,849

          Percent increase (decrease)          (19% )        100%           37%

While the sales of fans and lighting related products continue to be affected by the extremely weak overall housing market, overall segment sales increased due to the addition of outdoor furniture sales.
Management continues to focus on introducing new products and expanding accounts to offset the weak housing market and economic downturn. Management believes that long-term growth will be favorably affected by additional product offerings through enhanced product development efforts, as well as cross-selling outdoor furniture products to lighting showrooms and outdoor lighting and ceiling fans to patio dealers, and focusing efforts on the hospitality markets. The first and second quarter net sales of Woodard outdoor furniture were expected to decline versus the third and fourth quarters of the prior fiscal year given Woodard seasonality. Historically, sales of outdoor furniture to patio dealers are seasonally higher during the third and fourth quarters of the Company's fiscal year, with the first and second quarter being considered the off-season for outdoor furniture sales.
Net sales of the Mass segment increased $14,028,000 or 83% to $30,998,000 for the six months ended December 31, 2008, from $16,970,000 for the six months ended December 31, 2007, as summarized in the following table:

                           Net Sales of Mass Segment
                             (Dollars in thousands)

                                            Fans          Woodard
                                         Lighting &       Outdoor       Segment
               Six Months Ended          Accessories     Furniture       Total
          December 31, 2008                $ 13,992      $ 17,006      $ 30,998
          December 31, 2007                  16,970          -           16,970

          Dollar increase (decrease)       $ (2,978 )    $ 17,006      $ 14,028

          Percent increase (decrease)          (18% )        100%           83%

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Woodard sales were primarily comprised of sales to its various mass merchant customers. Most of its products are shipped directly from China. Due to the seasonal nature of outdoor furniture, the majority of sales to mass merchants occur from December to April each year.
Based on the most recent annual product line reviews, management believes that Lowe's plans to continue the respective programs it currently has with the . . .