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

Revenue is recognized as product is shipped and related services are performed in accordance with all applicable revenue recognition criteria. For these transactions the Company applies the provisions of SEC Staff Accounting Bulletin No. 104 "Revenue Recognition." The Company recognizes revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title generally transfers upon shipment of goods from the Company's warehouse. The Company does not have an obligation or policy of replacing customer products damaged or lost in transit. In some instances, the Company ships product directly from its suppliers to the customers. In these cases, the Company recognizes revenue when the product is accepted by the customer's representative. For certain products, the Company offers preseason early-order programs that carry extended terms whereby customers may order and take delivery of products prior to the selling season. Products sold under preseason programs have no right of return.

The Company applies the provisions of Emerging Issues Task Force ("EITF") Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent." The Company's application of EITF 99-19 includes evaluation of its terms with each major customer relative to a number of criteria that management considers in making its determination with respect to gross versus net reporting of revenue for transactions with its customers. Management's criteria for making these judgments place particular emphasis on determining the primary obligor in a transaction and which party bears general inventory risk. The Company records all shipping and handling fees billed to customers as revenue, and related costs as cost of sales, when incurred, in accordance with EITF 00-10, "Accounting for Shipping and Handling Fees and Costs."

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

In addition to various incentive programs, from time to time, the Company is required to provide mark-down funds to certain of its mass retail customers to assist them in clearing slow-moving inventory. These mark-down funds are accrued as a reduction of revenue at the time that the related revenues are recorded.

The Company is also required to provide for the cost of labor associated with resetting store displays. Resets involve removing slow-moving inventory and replacing it with new products. Although reset costs are paid to third parties who perform the services, they are considered an incentive to our mass merchandise customers. For existing products that are replaced, the Company accrues an estimate for the cost as in increase to cost of goods sold in advance of the reset at the time that the related revenues are recorded. The Company bases its estimates on a number of factors, including information obtained from our customers about their future plans. The cost for any new products or space that is gained is expensed as incurred as an increase to cost of goods sold.

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

The Company's inventories are primarily composed of finished goods and are recorded at the lower of cost or market using the average cost method. For inventory shipped out of the Woodard facility in Owosso, Michigan, inventories are stated at the lower of cost, determined principally by the use of the standard cost method which approximates first-in, first-out ("FIFO"), or market. The Company provides estimated inventory allowances for excess, slow-moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. These reserves are based on current assessments about future demands, market conditions and related management initiatives. If market conditions and actual demands are less favorable than those projected by management, additional inventory write-downs may be required.

The Company assesses the carrying values of goodwill annually as of June 30 or when circumstances dictate that the carrying value might be impaired. Impairment testing for goodwill is analyzed at the reporting unit level, which for Craftmade has been defined as Mass and Specialty. An impairment loss generally would be recognized when the carrying amount of the reporting unit's net assets exceeds the estimated fair value of the reporting unit. In the event that an impairment is determined to have occurred, the Company will reduce the carrying value of the asset in that period.

The estimated fair value of reporting unit as of June 30, 2009 was determined using a combination of the income approach (discounted cash flow or "DCF" analysis) and the market approach (application of relevant revenue or income multiples, based on comparable companies).

The discounted cash flow method calculates the present value of future cash flows of each reporting unit. In order to determine the present value of these future cash flows for each reporting unit, it was necessary to forecast future revenues, cost of revenues, other operating expenses and capital expenditures. Management based these forecasts on current information and expectations about our operations, activities and strategies, as well as the impact of the economic environment and actions or our suppliers, customers and competitors. It should be noted that any such forecasts are subjective and inherently uncertain. Each DCF was prepared on an invested capital basis. Invested capital refers to the aggregate of all classes of debt and equity invested in the business. In preparing a DCF analysis on an invested capital basis, forecasted debt-free cash flow is discounted to present value at the reporting unit's respective weighted average cost of capital ("WACC"). Interest expense is excluded from the forecast as debt-free cash flow represents an economic benefit that is available to all capital holders of an enterprise. The result of this analysis is to develop a measure of invested capital value.

The market approach involves gathering information about comparable publicly traded guideline
companies. Guideline companies provide a reasonable basis for comparison to the relative investment characteristics of the entity being valued. For our analysis, we were able to select representative publicly traded companies that operate in similar industries as Craftmade. We analyzed the latest financials and operating statistics of each of these publicly traded companies. We calculated the high, low, mean, and median for the invested capital to revenue and the invested capital to EBITDA multiples. From this analysis, we selected the appropriate multiple and applied it to Craftmade's reporting unit's associated figure. We then weighted the resulting values based on our assessment of the credibility and appropriateness of the given multiple, resulting in a market based measure of invested capital.

We believe that both of these approaches have strengths and drawbacks. The DCF analysis captures Management's best estimates of earnings potential for the Company's reporting units from a detail level although numerous educated estimates are required throughout the process, which come with an inherent level of uncertainty. The market approach incorporates results of operations for several comparable companies in determining the Revenue and EBITDA multiples applicable, but it can be difficult to find appropriate comparable companies and this approach ignores specific information about future strategies and actions that can be explicitly factored into the DCF approach. Our final valuation took into consideration both approaches, although we placed more weight on the DCF analysis versus the publicly traded guideline approach. We also applied a working capital adjustment to the concluded present value of invested capital for each reporting unit to normalize the surpluses or deficits in working capital at the reporting unit level.

In order to assess whether or not goodwill was impaired at the reporting unit level, the values developed in this process were compared with the book value of total equity of each reporting unit. If the reporting unit's fair value of total equity is greater than the book value of total equity, then goodwill is not impaired and no further undertakings are required.

The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, all expected future events other than enactments of changes in the tax law or rates are considered. Deferred income taxes have been provided on unremitted earnings from foreign investees. The Company reviews its deferred tax assets for ultimate realization and will record a valuation allowance to reduce the deferred tax asset if it is more likely than not that some portion, or all, of these deferred tax assets will not be realized. Tax authorities may not always agree with the tax positions taken by the Company. The Company believes it has adequate reserves in the event that a taxing authority differs with positions taken; however, there can be no assurance that the Company's results will not be affected adversely. See "Note 2 - Summary of Significant Accounting Policies" in the notes to the consolidated financial statements for additional information.

Variable interest entities ("VIEs") are primarily entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

The Company has a 50% ownership interest in Design Trends, a limited liability company. In connection with the adoption of FIN 46R, the Company concluded that Design Trends is a VIE and that the Company is the primary beneficiary. Pursuant to the provisions of FIN 46R, the Company consolidates Design Trends.

Prior to the acquisition of Marketing Impressions, which became effective on July 1, 2006, the Company had a 50% ownership interest in PHI. The Company also concluded that PHI was a VIE and that the Company was the primary beneficiary. Pursuant to the provisions of FIN 46R, the Company consolidated PHI. Accordingly, the results of operations of PHI have historically been included in the consolidated income before minority interest of the Company. Prior to the acquisition, the minority interest in PHI income was excluded from the Company's consolidated net income. Since the effective date of the acquisition on July 1, 2006, no minority interest exists in PHI, and accordingly, the consolidated net income includes the full amount of PHI results from this date.

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. A condensed overview of results for the fiscal year ended June 30, 2009, and the corresponding prior year period is summarized in the table that follows (in thousands, except percentage data).

Fiscal year ended June 30, 2009 compared to fiscal year ended June 30, 2008

                          Income Statement by Segment
                             (Dollars in thousands)

                                            Fiscal Year Ended                           Fiscal Year Ended
                                              June 30, 2009                               June 30, 2008
                                 Specialty        Mass          Total        Specialty        Mass          Total
Net sales                        $   68,951     $  80,741     $  149,692     $   74,878     $  62,712     $  137,590
Cost of goods sold                  (47,688 )   $ (69,784 )     (117,472 )      (51,203 )     (51,474 )     (102,677 )

Gross profit                         21,263     $  10,957         32,220         23,675        11,238         34,913
Gross profit as a % of net
sales                                  30.8 %        13.6 %         21.5 %         31.6 %        17.9 %         25.4 %

Selling, general and
administrative expenses             (19,316 )     (11,024 )      (30,340 )      (19,539 )      (8,578 )      (28,117 )
As a % of net sales                    28.0 %        13.7 %         20.3 %         26.1 %        13.7 %         20.4 %

Depreciation and amortization          (815 )        (261 )       (1,076 )         (600 )        (269 )         (869 )

Total operating expenses            (20,131 )     (11,285 )      (31,416 )      (20,139 )      (8,847 )      (28,986 )


Income (loss) from operations         1,132          (328 )          804          3,536         2,391          5,927

Interest expense, net                                             (1,438 )                                    (1,489 )
Other income (expenses)                                             (142 )                                       140


Income (loss) before income
taxes and minority interests                                        (776 )                                     4,578
Provision for income tax
(expense) / benefit                                                  409                                      (1,174 )


Income (loss) before minority
interests                                                           (367 )                                     3,404
Minority interests                                                  (721 )                                    (1,292 )

Net income (loss)                                             $   (1,088 )                                $    2,112

Net Sales. Net sales for the Company increased $12,102,000 or 8.8% to $149,692,000 for the fiscal year ended June 30, 2009, compared to $137,590,000 for the fiscal year ended June 30, 2008, primarily from the inclusion of two additional quarters of outdoor furniture sales stemming from the Woodard Asset Acquisition. Due to the timing of the acquisition, fiscal 2008 only included two quarters of Woodard furniture sales, while fiscal 2009 included four quarters. This increase is partially offset by declines in sales of ceiling fans, lighting and accessories.

Management believes that the decline in the housing market and the overall economic downturn will continue to create a difficult sales environment, particularly in the Specialty segment, which more closely correlates to new home starts. The Company continues to pursue its strategic growth plans, while also focusing on developing and implementing more immediate plans to mitigate the impact of the current economic downturn.

Net sales from the Specialty segment decreased $5,927,000 or 7.9% to $68,951,000 for the fiscal year ended June 30, 2009, compared to $74,878,000 for the fiscal year ended June 30, 2008, as summarized in the following table. The inclusion of two additional quarters of outdoor furniture sales was more than offset by a decrease in fans, lighting and accessories.

                         Net Sales of Specialty Segment
                             (Dollars in thousands)

                                          Fans            Woodard
                                       Lighting &         Outdoor       Segment
        Fiscal Year Ended             Accessories        Furniture       Total
        June 30, 2009                 $     38,156      $    30,795     $ 68,951
        June 30, 2008                 $     50,768      $    24,110     $ 74,878

        Dollar increase (decrease)    $    (12,612 )    $     6,685     $ (5,927 )

        Percent increase (decrease)          (24.8 %)          27.7 %       (7.9 %)

The sales of all Specialty products continue to be affected by the extremely weak overall economy, reduced consumer spending and a historically low housing market. Specialty retailers tend to be small independent businesses, and have suffered disproportionately as cash strapped consumers cut spending and alter their buying habits. Many of these Specialty retailers are economically distressed and a small but growing number have either shut their doors or sought protection under federal bankruptcy laws since the beginning of the broad economic downturn.

Management continues to focus on introducing new products, expanding accounts and developing cross-selling opportunities for its various product lines to offset the weak housing market. Management believes that long-term growth will be favorably affected by additional product offerings through enhanced product development efforts, as well as selling outdoor furniture products to lighting showrooms and selling outdoor lighting and ceiling fans to patio dealers, and focusing efforts on the hospitality markets.

Net sales of the Mass segment increased $18,029,000 or 28.7% to $80,741,000 for the fiscal year ended June 30, 2009, compared to $62,712,000 for the fiscal year ended June 30, 2008, primarily from the inclusion of two additional quarters of outdoor furniture sales related to the Woodard Asset Acquisition. Net sales from the Mass segment are summarized in the following table:

                           Net Sales of Mass Segment
                             (Dollars in thousands)

                                                           Woodard
                                        Lighting &         Outdoor       Segment
         Fiscal Year Ended             Accessories        Furniture       Total
         June 30, 2009                 $     25,135      $    55,606     $ 80,741
         June 30, 2008                       31,461           31,251       62,712

         Dollar increase (decrease)    $     (6,326 )    $    24,355     $ 18,029

         Percent increase (decrease)          (20.1 %)          77.9 %       28.7 %

Sales of lighting products and fan and lamp accessories to the Mass segment are primarily from the Company's TSI and Design Trends subsidiaries, both of which experienced declines in the fiscal year ended June 30, 2009. The decrease in net sales of lighting and accessories was primarily the result of: (i) a decline in orders from Lowe's related to indoor lighting; (ii) lower sales of non-core drop shipped products; and
(iii) lower sales of fan accessories.

The decline in lighting net sales was primarily due to reduced retail sales of the mix and match portable lamp program through Lowe's. Currently, Design Trends supplies mix and match portable lamps to all 13 Lowe's regional distribution centers.

Woodard sales were primarily composed of direct import sales to its various mass merchant customers. Most of its products are shipped directly from China. Due to the seasonal nature of outdoor furniture sales, most sales to mass merchants occur from January to April each year.

Management believes that sales to Lowe's will increase in the coming fiscal year. Based on various line reviews, management believes that it will continue to be a primary vendor for Lowe's mix and match portable lamps through Design Trends, and for Lowe's lamp accessory/ceiling medallion programs through PHI, although based on feedback from Lowe's the Company expects to see a reduction in the number of fan accessory SKUs it provides. Based on the number of outdoor furniture SKUs the Company has placed with Lowe's for the upcoming year, the Company expects to see growth in this segment.

The Company believes that it will continue to be invited to participate in each of Lowe's scheduled line reviews for its existing and new product lines. The line reviews occur on approximately 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 either subsidiary's existing SKUs in the product lines currently offered to Lowe's.

Management believes that the future growth of the Mass segment 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 3.9% to 21.5% for the fiscal year ended June 30, 2009, compared to 25.4% for the fiscal year ended June 30, 2008 primarily due to the inclusion of two additional quarters of sales of Woodard products that carry a lower gross profit, as well as decreased margins in the traditional fan and lighting business in the Specialty segment.

Gross profit as a percentage of net sales of the Specialty segment decreased 0.7% to 30.9% for the fiscal year ended June 30, 2009, compared to 31.6% for the fiscal year ended June 30, 2008. The decrease is summarized in the following table:

         Gross Profit as a Percentage of Net Sales of Specialty Segment

                                     Fans           Woodard
                                  Lighting &        Outdoor        Segment
             Fiscal Year Ended   Accessories       Furniture        Total
             June 30, 2009               33.8 %          27.2 %        30.8 %
             June 30, 2008               35.2 %          24.2 %        31.6 %

             Percent decrease            (1.4 %)          3.0 %        (0.8 %)

The decrease is due to the inclusion of an additional two quarters of the lower margin outdoor furniture lines that carry lower gross profit than lighting and furniture, as well as a decrease in margins realized on the traditional fan and lighting business. Fan and lighting margins in the Specialty segment were down from the results generated in the fiscal year ended June 30, 2008, as the economic downturn made it difficult for the Company to pass all cost increases to its customers. Gross profit as a percent of net sales on the outdoor furniture business increased year over year, as higher pricing was locked in prior to the onset of the broader economic slump late in 2008.

Gross profit as a percentage of net sales of the Mass segment decreased 4.4% to 13.5% of net sales for the fiscal year ended June 30, 2009, compared to 17.9% 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 Segment

                                                    Woodard
                                  Lighting &        Outdoor         Segment
             Fiscal Year Ended   Accessories       Furniture         Total
             June 30, 2009               22.8 %           9.4 %         13.6 %
             June 30, 2008               26.2 %           9.6 %         17.9 %

             Percent decrease            (3.4 %)         (0.2 %)        (4.3 %)

Gross profit as a percentage of net sales for lighting products and ceiling fan accessories in the Mass segment decreased as a result of changes in vendor programs. Outdoor furniture gross profit as a percent of net sales in the Mass segment is traditionally low as all sales are direct import, and remained relatively flat to those achieved in fiscal 2008.

For fiscal year 2010, gross profit as a percentage of net sales of lighting products and ceiling fan accessories in the Mass segment is expected to increase over the fiscal year ended June 30, 2009, as the . . .