UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

WASHINGTON, D.C. 20549

FORM 10-Q

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended December 31, 2002
		For the quarterly period ended September 30, 2003
		-OR-
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to
		For the transition period from __________________ to __________________;

Commission file number 1-3552

SCOPE INDUSTRIES (Exact name of Registrant as specified in its charter)

(Exact name of Registrant as specified in its charter)


California (State or other jurisdiction of incorporation or organization)		95-1240976 (I.R.S. Employer Identification No.)

233 Wilshire Boulevard, Suite 310
Santa Monica, California 90401-1206
(Address of principal executive office, zip code)

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

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x[ X ] Yes o[ ] No

~~The~~Indicate ~~number~~by ofcheck ~~shares~~mark ofwhether the registrant’s ~~common~~is ~~stock~~an ~~outstanding~~acceerated atfiler ~~February~~(as defined in Rule 6,12b-2 ~~2003~~of ~~was~~the ~~1,018,609.~~Exchange Act)

[ ] Yes [ X ] No

The number of shares of registrant’s common stock outstanding at November 1, 2003 was 998,691.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
	Item 3. Quantitative and Qualitative Disclosures About Market Risk:
	Item 4. Controls and Procedures:
PART II. OTHER INFORMATION
	Item 2. Increases and Decreases in Outstanding Securities and Indebtedness.
	Item 4. Submission of Matters to a Vote of Security Holders.
	Item 5. Other Information.
	Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
Exhibit 99.1
EXHIBIT 31.1
Exhibit 99.2
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

SCOPE INDUSTRIES AND SUBSIDIARIES

INDEX

					~~Page~~	Page
Part I. Financial Information:
	Item 1. Financial Statements
		Item 1.		Financial Statements (Unaudited)
		Consolidated Balance Sheets - December 31, 2002 and June 30, 2002				3
				Consolidated Balance Sheets - September 30, 2003 and June 30, 2003		3
		Consolidated Statements of Operations - Three Months Ended December 31, 2002 and 2001				4
				Consolidated Statements of Operations - Three Months Ended September 30, 2003 and 2002		4
		Consolidated Statements of Operations - Six Months Ended December 31, 2002 and 2001				5
				Consolidated Statements of Cash Flows - Three Months Ended September 30, 2003 and 2002		5
		Consolidated Statements of Cash Flows - Six Months Ended December 31, 2002 and 2001				6
				Notes to Consolidated Financial Statements		6-9
		Notes to Consolidated Financial Statements				7 - 9
		Item 2.		Management’s Discussion and Analysis of Results of Operations and Financial Condition		10-11
		Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition				10 – 13
		Item 3.		Qualitative and Qualitative Disclosures About Market Risk		12
		Item 3. Quantitative and Qualitative Disclosures about Market Risk				14
		Item 4.		Controls and Procedures		12
		Item 4. Disclosure Controls and Procedures				14
Part II. Other Information:
Part II. Other Information:
		Item 4.		Submission of Matters to a Vote of Security Holders		13
		Item 2. Increases and Decreases in Outstanding Securities and Indebtedness				15
		Item 5.		Other Information		13
		Item 5. Other Information				15
		Item 6.		Exhibits and Reports on Form 8-K		13
		Item 6. Exhibits and Reports on Form 8-K				15
				Signatures		14
			Signatures			16

PART I. FINANCIAL INFORMATION ~~SCOPE INDUSTRIES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS~~

			December 31,		June 30,
			2002		2002
			(Unaudited)
ASSETS
Current Assets:
	Cash and cash equivalents		$	3,144,895	$	7,023,393
	Treasury bills			10,487,393		14,522,074
	Accounts and notes receivable, less allowance for
		doubtful accounts of $635,228 at December 31, 2002
		and $646,285 at June 30, 2002		5,931,434		4,319,091
	Inventories			688,256		792,561
	Deferred income taxes			761,200		827,000
	Prepaid expenses and other current assets			2,266,713		1,415,388
		Total current assets		23,279,891		28,899,507
Notes Receivable				569,142		753,217
Land, buildings and improvements held-for-sale (net)				985,996		—
Property and Equipment:
	Machinery and equipment			54,640,393		49,162,282
	Land, buildings and improvements			20,311,986		20,627,439
				74,952,379		69,789,721
	Less accumulated depreciation and amortization			36,222,739		33,705,132
				38,729,640		36,084,589
Collection Routes and Contracts, less accumulated
		amortization of $8,532,105 at December 31, 2002
		and $7,433,705 at June 30, 2002		1,097,361		1,818,588
Other Assets:
	Long-term treasury notes			1,985,549		3,968,148
	Deferred charges and other assets			656,538		460,348
	Deferred income taxes			843,600		926,000
	Investments available for sale-at fair value			7,741,413		1,053,652
	Other equity investments-at cost			6,853,946		6,771,420
				18,081,046		13,179,568
			$	82,743,076	$	80,735,469
LIABILITIES AND SHAREOWNERS’ EQUITY
Current Liabilities:
	Accounts payable		$	6,455,340	$	5,337,862
	Current portion of Industrial Revenue Bond			—		600,000
	Dividends payable			1,023,167		—
	Other accrued liabilities			2,546,980		2,344,802
	Accrued payroll and related employee benefits			1,245,591		1,187,766
	Income taxes payable			—		772,000
		Total current liabilities		11,271,078		10,242,430
Long-term debt				5,400,000		5,400,000
				16,671,078		15,642,430
Shareowners’ Equity:
	Common stock, no par value, 5,000,000 shares authorized,
		shares issued and outstanding at December 31, 2002-
		1,019,609 and June 30, 2002-1,029,267		4,576,050		4,576,050
	Retained earnings			60,773,548		60,199,674
	Accumulated other comprehensive income			722,400		317,315
				66,071,998		65,093,039
			$	82,743,076	$	80,735,469

SCOPE INDUSTRIES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


			September 30,		June 30,
			2003		2003

*ASSETS*
Current Assets:
	Cash and cash equivalents		$	12,068,841	$	7,132,957
	Treasury bills available for sale-at fair value			1,994,737		6,495,054
	Accounts and notes receivable, less allowance for doubtful accounts of $545,081 at September 30, 2003 and $525,540 at June 30, 2003			5,233,616		5,049,924
	Inventories			1,133,065		853,613
	Deferred income taxes			588,800		737,000
	Prepaid expenses and other current assets			1,285,711		1,570,669

		Total current assets		22,304,770		21,839,217

Notes Receivable				558,622		553,794

Assets Held for Sale, net				797,660		805,480

Property and Equipment:
	Machinery and equipment			62,026,100		59,243,580
	Land, buildings and improvements			20,923,974		20,604,736

				82,950,074		79,848,316
	Less accumulated depreciation and amortization			41,212,429		39,636,554

				41,737,645		40,211,762

Collection Routes and Contracts, less accumulated amortization of $9,144,435 at September 30, 2003 and $9,093,007 at June 30, 2003				502,858		554,286

Other Assets:
	Deferred charges and other assets			334,452		346,617
	Deferred income taxes			517,700		648,000
	Investments available for sale-at fair value			8,339,141		8,076,728
	Other equity investments-at cost			6,277,300		6,177,300

				15,468,593		15,248,645

			$	81,370,148	$	79,213,184

*LIABILITIES AND SHAREOWNERS’ EQUITY*
Current Liabilities:
	Accounts payable		$	5,881,446	$	5,313,767
	Other accrued liabilities			2,035,885		1,973,554
	Accrued payroll and related employee benefits			1,276,844		1,171,646

		Total current liabilities		9,194,175		8,458,967
Long-term debt				5,000,000		5,000,000

				14,194,175		13,458,967

Shareowners’ Equity:
	Common stock, no par value, 5,000,000 shares authorized, shares issued and outstanding at September 30, 2003 and June 30, 2003 - 998,691			4,576,050		4,576,050
	Retained earnings			61,494,923		60,241,067
	Accumulated other comprehensive income			1,105,000		937,100

				67,175,973		65,754,217

			$	81,370,148	$	79,213,184

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

SCOPE INDUSTRIES AND SUBSIDIARIES ~~CONSOLIDATED STATEMENTS OF OPERATIONS~~ ~~(Unaudited)~~

		Three Months Ended
		December 31,
		2002			2001
Revenues:
	Sales	$	19,379,194		$	14,889,861
	Vocational school revenues		1,716,419			1,468,543
			21,095,613			16,358,404
Operating Costs and Expenses:
	Cost of sales		14,051,609			11,592,692
	Vocational school expenses		1,187,155			1,127,947
	Depreciation and amortization		2,395,129			1,733,810
	General and administrative		2,593,473			2,256,129
			20,227,366			16,710,578
			868,247			(352,174	)
Other income and expense:
	Investment and other income		1,402,634			122,165
	Interest expense		(61,996	)		(50,560	)
			1,340,638			71,605
Income (loss) before income taxes			2,208,885			(280,569	)
(Provision) benefit for income taxes			(810,000	)		98,000
Net Income (Loss)		$	1,398,885		$	(182,569	)
Net Income (Loss) Per Share – Basic and Diluted		$	1.37		$	(0.18	)
Average shares outstanding – Basic and Diluted			1,023,167			1,029,267

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


		Three Months Ended
		September 30,

		2003			2002

Revenues:
	Sales	$	18,636,787		$	19,268,638
	Vocational school revenues		1,749,370			1,769,089

			20,386,157			21,037,727

Operating Costs and Expenses:
	Cost of sales		13,240,591			14,018,166
	Vocational school expenses		1,236,929			1,204,729
	Depreciation and amortization		2,010,633			2,192,992
	General and administrative		2,226,268			2,306,916

			18,714,421			19,722,803

			1,671,736			1,314,924

Other income and expense:
Investment and other income			155,189			63,303
Interest expense			(36,069	)		(70,900	)

			119,120			(7,597	)

Income before income taxes			1,790,856			1,307,327
Provision for income taxes			537,000			495,000

Net Income		$	1,253,856		$	812,327

Net Income Per Share — Basic and Diluted		$	1.26		$	0.79
Average shares outstanding — Basic and Diluted			998,691			1,026,692

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

SCOPE INDUSTRIES AND SUBSIDIARIES ~~CONSOLIDATED STATEMENTS OF OPERATIONS~~ ~~(Unaudited)~~

		Six Months Ended
		December 31,
		2002			2001
Revenues:
	Sales	$	38,647,832		$	30,176,357
	Vocational school revenues		3,485,508			2,866,020
			42,133,340			33,042,377
Operating Costs and Expenses:
	Cost of sales		28,069,775			23,241,923
	Vocational school expenses		2,391,884			2,251,044
	Depreciation and amortization		4,588,121			3,425,377
	General and administrative		4,900,389			4,235,321
			39,950,169			33,153,665
			2,183,171			(111,288	)
Other income and expense:
	Investment and other income		1,465,937			1,404,387
	Interest expense		(132,896	)		(105,761	)
			1,333,041			1,298,626
Income before income taxes			3,516,212			1,187,338
Provision for income taxes			(1,305,000	)		(448,000	)
Net Income		$	2,211,212		$	739,338
Net Income Per Share – Basic and Diluted		$	2.16		$	0.72
Average shares outstanding – Basic and Diluted			1,024,673			1,029,267

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


			Three Months Ended
			September 30,

			2003			2002

*Cash Flows from Operating Activities:*
Net income			$	1,253,856		$	812,327
Adjustments to reconcile net income to net cash flows from operating activities:
		Depreciation and amortization		1,959,205			1,592,378
		Amortization of routes and contracts		51,428			600,616
		Losses on sale of property and equipment		3,577			5,516
		Deferred income taxes		183,987			(164,200	)
		Unrealized loss in equity investment		150,000			150,000
Changes in operating assets and liabilities:
		Accounts and notes receivable		(188,520	)		(1,834,223	)
		Inventories		(279,452	)		(272,542	)
		Prepaid expenses and other current assets		284,958			75,931
		Accounts payable and accrued liabilities		735,208			2,222,984
		Income taxes payable/receivable		—			(312,000	)
		Tax benefit applied to purchase of routes and contracts		—			140,000
		Other assets		12,165			86,842

Net cash flows from operating activities				4,166,412			3,103,629

*Cash Flows from Investing Activities:*
Purchase of U.S. Treasury bills				—			(7,069,859	)
Maturities of U.S. Treasury bills				4,500,317			13,100,828
Purchase of property and equipment				(3,490,776	)		(1,890,608	)
Purchase of waste recycling assets and routes and contracts				—			(3,500,000	)
Proceeds from disposition of property and equipment				9,931			2,250
Purchase of investments available for sale				—			(6,045,308	)
Purchase of other equity investments				(250,000	)		(93,526	)

Net cash flows from (used in) investing activities				769,472			(5,496,223	)

*Cash Flows from Financing Activities:*
Proceeds from long-term bank borrowing				—			5,400,000
Redemption of Industrial Revenue Bonds				—			(6,000,000	)
Proceeds from short-term bank line of credit				—			2,000,000
Repayment of short-term bank line of credit				—			(1,000,000	)
Repurchases of common stock				—			(365,997	)

Net cash flows from financing activities				—			34,003

Net increase (decrease) in cash and cash equivalents				4,935,884			(2,358,591	)
Cash and cash equivalents at beginning of period				7,132,957			7,023,393

Cash and cash equivalents at end of period			$	12,068,841		$	4,664,802

Supplemental Disclosures:
Cash paid during the quarter for:
	Interest		$	36,069		$	66,397
	Income taxes		$	14,735		$	804,340

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

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

			Six Months Ended
			December 31,
			2002			2001
Cash Flows from Operating Activities:
Net income			$	2,211,212		$	739,338
Adjustments to reconcile net income to net cash flows
	from operating activities:
		Depreciation and amortization		3,386,894			2,243,672
		Amortization of contracts and routes		1,201,227			1,181,705
		Gains on investments available for sale		—			(762,868	)
		Gains on sales of property and equipment		(1,385,637	)		(514,091	)
		Deferred income taxes		(79,710	)		116,003
		Unrealized loss in equity investment		311,000			148,752
Changes in operating assets and liabilities:
		Accounts and notes receivable		(1,428,268	)		(444,983	)
		Inventories		104,305			209,680
		Prepaid expenses and other current assets		(851,325	)		383,316
		Accounts payable and accrued liabilities		1,377,481			(906,496	)
		Income taxes payable		(772,000	)		—
		Tax benefit applied to purchase of routes and contracts		280,000			280,000
		Other assets		128,811			54,475
Net cash flows from operating activities				4,483,990			2,728,503
Cash Flows from Investing Activities:
Purchase of U.S. Treasury bills				(13,156,548	)		(5,056,638	)
Maturities of U.S. Treasury bills				19,173,828			10,000,000
Purchase of property and equipment				(4,654,998	)		(8,090,357	)
Proceeds from disposition of property and equipment				1,437,694			660,681
Purchase of waste recycling assets and routes and contracts				(3,500,000	)		—
Purchase of investments available for sale				(6,054,766	)		—
Proceeds from disposition of investments available for sale				—			1,346,936
Purchase of other equity investments				(393,526	)		—
Non-appropriated bond fund proceeds held by Trustee				—			1,732,488
Net cash flows (used in) from investing activities				(7,148,316	)		593,110
Cash Flows from Financing Activities:
Proceeds from bank borrowings				7,400,000			—
Redemption of Industrial Revenue Bonds				(6,000,000	)		—
Repayment of bank borrowings				(2,000,000	)		—
Repurchases of common stock				(614,172	)		—
Net cash flows used in financing activities				(1,214,172	)		—
Net (decrease) increase in cash and cash equivalents				(3,878,498	)		3,321,613
Cash and cash equivalents at beginning of period				7,023,393			563,234
Cash and cash equivalents at end of period			$	3,144,895		$	3,884,847
Supplemental Disclosures:
Cash paid during the six months for:
	Interest		$	132,896		$	72,148
	Income taxes		$	1,886,590		$	78,536

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~Cash dividends of $1,023,167 and $1,029,267 were declared and unpaid at~~(Unaudited) ~~December~~September 3130, ~~2002 and December 31, 2001.~~ 2003

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

SCOPE INDUSTRIES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) December 31, 2002

Note 1. Basis of Financial Statement Preparation

The accompanying consolidated financial information of Scope Industries and its subsidiaries (“Scope” or the “Company”) should be read in conjunction with the Notes to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K to the Securities and Exchange Commission for the year ended June 30, ~~2002~~2003. The accompanying financial information includes all subsidiaries on a consolidated basis and all normal recurring adjustments that are considered necessary by the Company’s management for a fair presentation of the financial position, results of operations and cash flows for the periods presented. However, these results are not necessarily indicative of results for a full fiscal year. Certain prior year balances have been reclassified to conform to current period presentation.

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

InCollection ~~April~~routes ~~2002,~~represent the ~~Financial~~value ~~Accounting~~assigned ~~Standards~~upon ~~Board~~purchase ~~(“FASB”),~~for ~~issued Statement~~a group of ~~Financial~~suppliers ~~Accounting Standards (“SFAS”) No. 145, “Rescission~~ of ~~FASB~~ ~~Statements~~raw ~~No. 4,~~materials ~~44,~~in ~~and~~a ~~64,~~similar ~~Amendment~~geographic ofarea ~~FASB~~from ~~Statement~~which ~~No. 13, and~~the ~~Technical~~Company ~~Corrections”,~~will ~~that~~derive ~~addresses~~a ~~reporting~~dependable ~~classification~~source of ~~certain early~~raw ~~extinguishments~~materials. ofCollection ~~debt~~routes are ~~and~~amortized ~~amends~~over ~~Statement~~3 13 to ~~require~~5 years ~~sale~~using the straight-~~leaseback accounting~~line ~~for~~method. ~~certain~~Certain ~~lease~~tax deductions ~~modifications~~for ~~that~~tax ~~have~~goodwill ~~economic~~amortization ~~effects~~require that ~~are similar~~the toincome ~~sale-leaseback~~tax ~~transactions.~~benefit realized Infrom ~~June 2002,~~ the ~~FASB~~tax ~~issued~~goodwill ~~SFAS~~amortization ~~No. 146~~first ~~“Accounting~~reduce ~~for~~the ~~Costs~~carrying ~~Associated~~value ~~with~~of collection ~~Exit or Disposal Activities"~~routes, ~~that applies~~related to ~~costs~~the ~~associated~~tax ~~with~~goodwill, anuntil ~~exit~~fully ~~activity that does not involve an~~amortized. ~~entity~~Contracts ~~newly~~represent ~~acquired~~non-compete inagreements athat ~~business~~are ~~combination~~recorded orat ~~with~~cost aand ~~disposal activity~~are ~~covered~~amortized byover ~~FASB~~3 ~~Statement~~to ~~No.~~7 ~~144.~~years ~~The~~using ~~statements~~the ~~are~~straight-line ~~effective~~method. ~~for~~Both ~~this~~collection ~~fiscal~~routes ~~year~~ and ~~the~~contracts ~~adoption~~represent ofbusinesses ~~SFAS~~that ~~No. 145~~were ~~and~~acquired ~~146~~from ~~did not have a material~~former ~~impact on the Company’s consolidated financial statements~~competitors. InAmortization ~~December~~expense ~~2002,~~ for the ~~FASB~~quarter ~~issued~~ended ~~SFAS No.~~September ~~148~~30, ~~“Accounting~~2003 ~~for Stock-Based~~and ~~Compensation-Transition~~2002 ~~and~~was ~~Disclosure”~~approximately ~~which~~$51,428 ~~amends~~and ~~SFAS~~$600,616, Norespectively. ~~123~~ ~~“Accounting~~Amortization ~~for~~expense ~~Stock-Based Compensation” and provides alternative methods of transition~~ for ~~a voluntary change to~~ the ~~fair~~current ~~value~~year ~~based~~and ~~method~~next offour ~~accounting~~years ~~for stock-based employee compensation. The statement~~ is ~~effective~~estimated ~~for~~to ~~fiscal~~be ~~years~~$205,700, ~~ending~~$205,700, ~~after~~$35,700, ~~December 15~~$35,700 ~~2002.~~and ~~The Company does not believe that the adoption of the standard will have a significant impact on the Company’s financial statements~~$35,700.

InThe ~~July~~Company ~~2001,~~accounts for its stock option plan in accordance with the provisions ~~FASB~~of ~~issued~~Accounting ~~SFAS~~Principles Board (“APB”) Opinion No. ~~142~~25, ~~“Goodwill~~Accounting for Stock Issued to Employees, and ~~Other~~related ~~Intangible Assets”~~interpretations. ~~For~~As ~~the~~such, compensation ~~three~~expense ~~months~~is ~~ended~~recorded ~~December 31,~~on ~~2002~~the ~~and~~date ~~2001,~~of ~~amortization~~grant only if the current ~~expense~~market price of ~~routes~~the ~~and~~underlying ~~contracts~~stock ~~was~~exceeds ~~$600,611~~the ~~and~~exercise ~~$590,853,~~price. ~~respectively~~Statement of Financial Accounting Standards (“SFAS”) No. 123, ~~For~~Accounting for ~~the~~Stock-Based ~~six~~Compensation, ~~months~~as ~~ended~~amended ~~December~~by SFAS No. 31148, ~~2002~~Accounting for Stock Based Compensation-Transition and ~~2001~~Disclosure, ~~amortization~~permits ~~expense~~entities ofto ~~routes~~recognize as ~~and~~expense, ~~contracts~~over ~~was~~the $1vesting period,~~201,227~~ ~~and~~the $1fair value of all stock-based awards on the date of grant. Alternatively,~~181,705,~~ ~~respectively~~SFAS No. 123 ~~Estimated~~allows entities to continue to ~~amortization~~apply ~~expense~~the provisions of ~~routes~~APB ~~and~~Opinion ~~contracts~~No. 25 ~~for~~and ~~the~~provide ~~twelve~~pro ~~months~~forma ~~ended~~net ~~June~~income and 30pro isforma asearnings ~~follows:~~per ~~2003,~~share ~~$1,744,300;~~disclosures ~~2004,~~for ~~$205,700;~~employee ~~2005,~~stock ~~$205,700;~~option ~~2006,~~grants as if ~~$35,700~~the ~~and~~fair-value ~~2007,~~based ~~$35,700~~method defined in SFAS No. 123 had been applied.

~~Note~~ The 2.following ~~Purchase~~table ofillustrates ~~Business~~the ~~Assets~~effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123.

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


		Quarter Ended September 30,

		2003			2002

Net income as reported		$	1,253,856		$	812,327
Deduct: Total stock-based employee compensation expense determined under a fair value based method for all awards, net of related tax effects			(19,000	)		(15,000	)

Pro forma net income		$	1,234,856		$	797,327

Net income per share:
	Basic and diluted — as reported	$	1.26		$	0.79
	Basic and diluted — pro forma	$	1.24		$	0.78

Plant equipment	$	2,414,500
Routes and contracts		760,000
Other assets		325,500
Purchase price	$	3,500,000

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. The interpretation applies immediately to variable interest in variable interest entities created after January 31, 2003, and to variable interest in variable interest entities obtained after January 31, 2003. For variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003, this interpretation applies to the first fiscal year or interim period ending after December 15, 2003. The Company does not believe that the application of this interpretation will have an impact on the Company’s consolidated financial statements.

~~The results of operation of the new plants since July 1, 2002 are included~~6 ~~in the accompanying consolidated statements of operations. Had the Company~~ ~~purchased the plants on July 1, 2001, waste material recycling revenues for the~~ ~~second quarter and six months ended December 31, 2001, would have increased by~~ ~~approximately $2,000,000 and $3,800,000 and the operating loss would have increased by approximately $18,000 and $38,000, respectively.~~

In connection with the purchase the Company also entered into a long-term lease for the two plant facilities with an option to purchase them at a later date for $2,250,000.

SCOPE INDUSTRIES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ~~December~~September 3130, ~~2002~~2003 ~~(continued)~~

Note 1. Basis of Financial Statement Preparation (continued)

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

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

Note 2. Purchase of Business


Plant equipment	$	2,697,420
Routes and contracts		760,000
Other assets		42,580

Purchase price	$	3,500,000

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

Note 3. Treasury Securities

		December 31,		June 30,
Treasury securities consisted of the following:		2002		2002
Short-term treasury bills:
	At adjusted cost which approximates fair value	$	10,487,393	$	14,522,074
	At par value		10,499,000		14,508,000
Long-term treasury notes:
	At adjusted cost which approximates fair value	$	1,985,549	$	3,968,148
	At par value		2,000,000		4,000,000
Treasury note matures in February 2004

Treasury securities consisted of the following:


	September 30,		June 30,
	2003		2003

Short-term:
At adjusted cost which approximates fair value	$	1,994,737	$	6,495,054
At par value	$	2,000,000	$	6,506,000

At September 30, 2003, the Treasury securities are pledged as collateral for the $10,000,000 line of credit. The Company expects to replace the Treasury securities as collateral in the near future with real estate.

Note 4. Inventories

	December 31,		June 30,
Inventories consisted of the following:	2002		2002
Finished products	$	213,178	$	318,657
Raw materials		296,346		302,734
Operating supplies		178,732		171,170
	$	688,256	$	792,561

Inventories consisted of the following:

Note 5. Land, Buildings and Improvements Held for Sale


	September 30,		June 30,
	2003		2003

Finished products	$	478,313	$	377,485
Raw materials		474,703		303,967
Operating supplies		180,049		172,161

	$	1,133,065	$	853,613

~~The Company has vacant land and idled processing facilities for sale.~~7 ~~During the current quarter an idled processing facility was~~ ~~sold for a gain of approximately $1,387,500.~~

NoteTable 6.of Investments Contents

				Gross Unrealized Gains
				Before Provision For
Investments consisted of the following:		Cost		Income Taxes		Fair Value
At December 31, 2002:
	Equity securities — available for sale	$	612,613	$	1,113,572	$	1,726,185	(a)
	Short-term tax exempt mutual fund		6,000,000		15,228		6,015,228	(b)
	Other equity securities		6,853,946				6,853,946	(c)

SCOPE INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2003

				Gross Unrealized Gains
				Before Provision For
Investments consisted of the following:		Cost		Income Taxes		Fair Value
At June 30, 2002:
	Equity securities — available for sale	$	557,845	$	495,807	$	1,053,652	(a)
	Other equity securities		6,771,420				6,771,420	(c)

Note 5. Investments

~~(a)~~ Investments Fair values for “Equity securities” available for sale are based upon quoted market prices at the reporting date. (b) The investment in the short-term tax-exempt mutual fund is pledged to the bank as collateral for the long-term bank debt consisted of ~~$5,400,000; interest earned from~~ the fund is paid to the Company. Fair value is based upon quoted market prices at the reporting date. (c) The Company holds shares and warrants in Chromagen, Inc., shares in Stamet, Inc., MetaProbe, Inc., Myricom, Inc. and Holl Technologies, Inc. that are classified as “Other equity securities”. The shares and warrants are not publicly traded and are carried at cost or adjusted cost. Certain of these securities are adjusted based on the equity method of accounting or based on management’s estimates reflecting reductions in value that are other than temporary. No quoted market prices are available for these securities.following:


				Gross Unrealized Gains
				Before Provision For
		Cost		Income Taxes		Fair Value

At September 30, 2003:
	Equity securities — available for sale	$	612,613	$	1,715,107	$	2,327,720	(a)
	Short-term tax exempt mutual fund		6,000,000		11,421		6,011,421	(b)
	Other equity securities	$	6,277,300			$	6,277,300	(c)

Investments consisted of the following:


				Gross Unrealized Gains
				Before Provision For
		Cost		Income Taxes		Fair Value

At June 30, 2003:
	Equity securities — available for sale	$	612,613	$	1,448,887	$	2,061,500	(a)
	Short-term tax exempt mutual fund		6,000,000		15,228		6,015,228	(b)
	Other equity securities		6,177,300				6,177,300	(c)

(a)		Fair values for “Equity securities” available for sale are based upon quoted market prices, where available, at the reporting date.




(b)		Short-term tax-exempt mutual fund is pledged to the bank as collateral for the long-term bank debt of $5,000,000; interest earned from the fund is paid to the Company.




(c)		The Company holds shares and warrants in Chromagen, Inc., shares in Holl Technologies, Inc., Stamet, Inc., MetaProbe, Inc. and Myricom, Inc. that are classified as “Other equity securities”. The shares and warrants are not publicly traded and are carried at cost or adjusted cost, adjusted by the equity method of accounting for investments or management’s estimated value reflecting other than temporary losses. No quoted market prices are available for these securities.

Note 6. Debt

Short-term The Company has a $3,000,000 line of credit with its bank that expires in January 2004. Interest on the line of credit is LIBOR plus 2% or Prime minus .25%. At September 30, 2003 and June 30, 2003 there was no outstanding balance against the short-term line of credit agreement. The Company has issued stand-by letters of credit ($1,100,000) against its short-term line of credit to three state workers’ compensation self-insurance funds guaranteeing payment to the state in the event the Company defaulted on its payment for insurance claims.

Long-term The Company has a long-term note payable to a bank. The note bears interest, payable monthly, at LIBOR plus 1.125%. The Company entered into a one-year LIBOR contract at 1.250% on August 1, 2003. The note is due on July 31, 2007 and there are no prepayment penalties. The loan is collateralized by a $6,000,000 investment in a short-term tax-exempt mutual fund and the balance outstanding at September 30, 2003 and June 30, 2003 was $5,000,000.

Line of Credit The Company has a $10,000,000 line of credit with a financial institution that expires on October 31, 2004. The line of credit will be used to support standby letters of credit for the issuance of tax-exempt Industrial Revenue Bonds (“IRB”) financing in New Jersey and Texas where the company is building new facilities for its waste recycling operations. Liquid assets collateralize obligations outstanding under the line of credit. The Company expects to subsitute certain real estate for collateral releasing the liquid assets in the near future.

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

SCOPE INDUSTRIES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ~~December~~September 3130, ~~2002~~2003 ~~(continued)~~

Note 7. ~~Debt~~Comprehensive income

On August 1, 2002, the Company redeemed its $6,000,000 tax exempt Industrial Revenue Bond (“IRB”). In connection with the redemption of the IRB, the Company entered into a $5,400,000 note with its bank. The five-year note is collateralized by a $6,000,000 investment in a short-term tax-exempt municipal fund. The note bears interest, payable monthly, at LIBOR plus 1.125%. The Company entered into a one-year LIBOR contract at 2.90%. The financing agreement requires that the value of the mutual fund be at least 91% of the outstanding balance. The note is payable on July 31, 2007 and there are no prepayment penalties.


		Three Months Ended
		September 30,

		2003		2002

Comprehensive income consisted of the following:
	Net income	$	1,253,856	$	812,327

Unrealized holding gains on securities available for sale arising during the period, net of income taxes			167,900		22,285

Other comprehensive income			167,900		22,285

Comprehensive income		$	1,421,756	$	834,612

OnNote July 2, 2002, the Company borrowed $2,000,000 from its bank against the short-term line of credit agreement to help finance the $3,500,000 purchase of business assets and routes and contracts of two bakery waste-recycling facilities located in California8. OnIncome ~~September 30, 2002, the Company repaid~~Taxes ~~$1,000,000 of the outstanding balance and the remaining outstanding balance of~~ $1,000,000 was paid off on October 4, 2002. There were no borrowings outstanding against the short-term line of credit at December 31, 2002. The short-term line of credit agreement expires in February 2003 and is in process of being renewed with the bank for another year.

~~Note~~ For 8the three month period ended September 30, 2003, the effective rate for income taxes is 30% of the income before taxes and for the comparable three-month period last year the effective rate for income taxes is 38% of the income before taxes. ~~Comprehensive~~The ~~Income~~Company currently recognizes tax deductions for tax goodwill amortization in the tax provision, wherein last year the tax benefit related to the tax goodwill reduced the carrying value of collection routes. The determination of the income tax or benefit for income tax considers certain permanent differences between taxable income or loss and income or loss as reported using accounting methods generally accepted in the United States of America. Those differences sometimes cause distortions in the relationships between income or loss before income taxes and the provision or benefit for income taxes.

	Three Months Ended					Six Months Ended
	December 31,					December 31,
	2002		2001			2002		2001
Comprehensive income consisted of the following:
Net income (loss)	$	1,398,885	$	(182,569	)	$	2,211,212	$	739,338
Unrealized holding gains on securities available for sale
arising during the period, net of income taxes		382,800		6,365,378			405,085		9,245,727
Reclassify gains realized from securities available for sale
and included in net income, net of income taxes		—		(52,486	)		—		(488,236	)
Other comprehensive income		382,800		5,877,142			405,085		8,757,491
Comprehensive income	$	1,781,685	$	5,694,573		$	2,626,297	$	9,496,829

Note 9. Business Segment Information

Note 9. Income Taxes


		Three Months Ended
		September 30,

		2003			2002

Revenues:
	Waste Material Recycling	$	18,511,295		$	19,186,114
	Vocational School Group		1,749,370			1,769,089
	Other		125,492			82,524

		$	20,386,157		$	21,037,727

Pre-tax Income:
	Waste Material Recycling	$	1,608,076		$	1,289,954
	Vocational School Group		171,290			198,078
	Other		62,686			3,386
	Corporate general and administrative expenses		(170,316	)		(176,494	)
	Other income and (expense)		119,120			(7,597	)

		$	1,790,856		$	1,307,327

~~For the six-month periods ended December 31, 2002 and December 31, 2001, the effective rate for income taxes is 37% and 38%, respectively, of the income before taxes.~~ The ~~determination~~majority of ~~the~~other income ~~tax or benefit for income tax considers certain permanent differences between taxable income or loss~~ and ~~income~~ orexpense ~~loss~~is asrelated ~~reported~~to ~~using~~corporate ~~accounting principles generally accepted in~~level ~~the~~investment ~~United States of America~~activities. ~~Those differences sometimes cause distortions in~~ ~~the relationships between income and loss before income taxes and the provision~~ ~~or benefit for income taxes.~~

Note 10. Business Segment Information

		Three Months Ended						Six Months Ended
		December 31,						December 31,
		2002			2001			2002			2001
Revenues:
	Waste Material Recycling	$	19,277,819		$	14,765,408		$	38,463,933		$	29,896,177
	Vocational School Group		1,716,419			1,468,543			3,485,508			2,866,020
	Other		101,375			124,453			183,899			280,180
		$	21,095,613		$	16,358,404		$	42,133,340		$	33,042,377
Pre-tax Income (loss):
	Waste Material Recycling	$	1,393,519		$	(249,476	)	$	2,683,473		$	(15,894	)
	Vocational School Group		139,932			22,606			338,010			(4,558	)
	Other		28,206			38,684			31,592			114,035
	Corporate general and administrative expenses		(693,410	)		(163,988	)		(869,904	)		(204,871	)
	Other income and expense		1,340,638			71,605			1,333,041			1,298,626
		$	2,208,885		$	(280,569	)	$	3,516,212		$	1,187,338

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

SCOPE INDUSTRIES AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION September 30, 2003

RESULTS OF OPERATIONS

~~Three~~ The ~~Months~~Company ~~Ended~~recorded ~~December~~net income of $1,253,856, or $1.26 per share, for the quarter ended September 3130, ~~2002~~2003, compared to the prior year’s first quarter net income of $812,327, or $0.79 per share. Total Company revenues for the first quarter ended September 30, 2003 were $20,386,157 compared to $21,037,727 for the comparable quarter last year. The 3% decrease in revenues for the current first quarter over the prior year’s comparable quarter was attributable to both the Waste Material Recycling and ~~2001:~~Beauty School segments.

~~The~~Waste ~~Company~~Material ~~had~~Recycling ~~net~~segment ~~income~~revenues offor the current quarter of $118,~~398~~511,~~885~~295 decreased $674,819 or $14% from the comparable quarter last year.37 The ~~per~~decrease ~~share,~~was ~~for~~due primarily to a 7% decrease in volume that was offset by a 3% increase in the average selling price of recycled dried bakery products. ~~second~~The ~~quarter~~decrease ~~ended~~in ~~December 31,~~volume ~~2002,~~is ~~compared~~due primarily to reduced raw material supplies from our vendors. The is the ~~prior~~result ~~year’s~~of ~~second~~the consolidation within the bakery industry ~~quarter~~that ~~net~~has ~~loss~~reduced the number of ~~$(182,569),~~available orvendors ~~$(0~~and the vendors have been able to extend their products shelf life with additional preservatives.~~18)~~ ~~per~~The increase ~~share~~in the average selling price is attributed to the volatility in the commodity market. ~~Total~~The ~~Company~~selling ~~revenues~~price held relatively steady even though the ~~for~~average price of corn decreased during the ~~second~~quarter compared to the comparable quarter ~~ended~~last ~~December 31,~~year. ~~2002~~Corn ~~were~~is a substitute feed supplement that competes directly with our dried bakery product. The average price of corn for the current quarter was approximately $212.15 per bushel,~~095~~ or a 12% decrease,~~613~~ when compared to $~~16,358,404~~2.43 per bushel for the comparable quarter last year. ~~The~~and ~~29%~~$2.37 ~~increase~~per inbushel ~~revenues~~ for the ~~second~~ quarter ~~over~~ended ~~the~~June 30, ~~prior~~2003. ~~year’s~~The ~~comparable~~Waste ~~quarter~~Material ~~was~~Recycling segment ~~attributable~~generated topre-tax income before other income and expense in both the ~~Waste~~current quarter ~~Material~~and ~~Recycling~~the ~~and~~comparable ~~Vocational~~quarter ~~School segments~~last year.

~~Waste~~Vocational ~~Material~~School ~~Recycling~~Group segment ~~sales~~revenues for the current quarter ~~increased~~of ~~approximately~~ $41,~~512~~749,~~400~~370 ordecreased ~~31% over the comparable quarter last year. A portion of the increase was due to an increase of 12% in volume or approximately~~ $219,~~000,000~~719 ~~resulting~~or ~~from the purchase of the bakery waste recycling businesses on July~~ 1~~, 2002, and to a 15~~% ~~increase~~from in the ~~average selling~~comparable ~~price of recycled dried bakery products. Sales volume for the segment for the current~~ quarter, ~~excluding the two new plants, was slightly below~~ last ~~year’s~~ ~~volume~~year. The ~~increase in the average selling price is attributed to the~~ ~~volatility~~decrease inwas ~~the commodity market~~ due toprimarily ~~early reductions in the estimated volume of future corn crops compared~~ to record corn crops produced during the past three years. Corn is an alternate substitute feed supplement that competes directly with our dried bakery product. The average price of corn for the current quarter was approximately $2.36 per bushel, or a ~~24% increase when compared to $1.90 per bushel for the comparable quarter last year and a~~ slight decrease ~~when~~in ~~compared~~enrollment toat the ~~first quarter ended September 30, 2002 of approximately $2~~schools.~~43 per bushel.~~ The ~~Waste~~Vocational ~~Material~~School ~~Recycling~~Group segment generated pre-tax income before ~~Investment~~other income and ~~other~~expense ~~income~~ in the current quarter ~~due primarily to higher average selling prices on increased volume, reduced raw material costs~~ and ~~improved~~the ~~production~~comparable ~~efficiencies~~quarter ~~from~~last ~~new capital equipment~~year.

~~Vocational~~General ~~School~~and ~~Group~~administrative ~~revenues~~expenses ~~increased~~for ~~17% from~~ the ~~comparable~~Company ~~quarter last~~decreased ~~year~~(3%) ~~due~~for ~~primarily~~the quarter toended anSeptember 30, ~~overall~~2003, ~~increase~~as incompared ~~enrollment~~to at the ~~schools~~prior ~~and an~~year ~~increase~~quarter. inThe decrease ~~tuition~~is ~~fees~~due ~~charged~~primarily to ~~new~~lower ~~students.~~expenses ~~The~~for ~~Vocational~~workers’ ~~School~~compensation insurance ~~Group~~due ~~had~~to ~~pre~~self-~~tax~~insuring ~~income~~in ~~for~~various ~~the~~states, ~~current~~slightly ~~quarter~~lower ~~compared~~payroll tocosts aand ~~pre-tax loss for~~lower ~~the~~outside ~~comparable~~professional ~~quarter last year~~services.

~~General~~Investment and ~~administrative~~other ~~expenses~~income for the ~~Company increased 15% for the~~ quarter ended ~~December~~September 3130, ~~2002~~2003, aswas $155,189 compared to $63,303 for the ~~prior~~comparable quarter last year. ~~quarter~~Interest income of $93,295 from U.S. ~~The~~Treasury bills and money market accounts in the ~~increase~~current isquarter ~~due~~decreased from $151,437 for the comparable quarter last year primarily due to a ~~$300,000~~lower ~~bonus~~interest ~~paid~~rates tobeing ~~executive~~earned ~~management~~on the investment ~~based~~portfolio. ~~upon~~During the ~~company’s~~current ~~financial~~quarter ~~performance,~~the ~~additional~~Company ~~costs~~received a dividend of approximately $79139,000 ~~associated~~from ~~with~~one ~~the~~of ~~bakery~~its ~~waste~~non-publicly ~~recycling~~traded ~~plants~~equity investments. ~~acquired~~Offsetting oninvestment ~~July 1, 2002~~ and toother ~~increases~~income in ~~employee~~both ~~health~~the ~~benefit~~current ~~costs, workers’~~year ~~compensation insurance~~ and ~~auto~~prior ~~liability insurance. The remaining~~year ~~increases~~were ~~and~~losses ~~decreases~~of in$150,000 ~~expenses~~recognized ~~are~~on ~~not~~an ~~significant~~investment ~~when~~accounted ~~viewed individually~~for ~~compared~~by to the ~~comparable~~equity method ~~quarter~~of ~~last year~~accounting.

~~Investment~~Interest ~~and~~expense ~~other income~~ for the ~~quarter~~three months ended ~~December~~September 3130, ~~2002~~2003, was $136,~~402,634~~069 compared to $~~122~~70,~~165~~900 for the comparable quarter last year. InThe ~~the~~decrease ~~current~~in ~~quarter~~interest ~~the~~expense ~~Company~~is ~~recognized~~related ato ~~gain~~lower ofoutstanding ~~approximately~~debt ~~$1,387,500~~and ~~from the~~lower ~~sale of idle property no longer being utilized in the Waste Material~~interest ~~Recycling~~rates ~~operations.~~during ~~Interest income of $151,437 from U.S. Treasury bills in~~ the current quarter ~~increased~~compared ~~from~~to ~~$120,838 for~~ the comparable quarter last year. Additionally, ~~primarily~~certain ~~due~~deferred tocosts arelated ~~larger~~to ~~investment~~the ~~portfolio.~~redeemed ~~Offsetting~~IRB ~~the~~were ~~above~~written ~~investment~~off ~~and~~in ~~other~~the ~~income~~prior ~~were~~year. ~~losses~~The ofCompany’s ~~$161,000~~outstanding ~~recognized~~debt onat anSeptember 30, ~~investment~~2003 ~~accounted~~was ~~for~~$5,000,000 bycompared ~~the~~to ~~equity~~$6,400,000 ~~method~~at ofSeptember 30, ~~accounting~~2002.

~~Interest~~LIQUIDITY ~~expense~~AND ~~for~~CAPITAL ~~the three months ended December 31, 2002, was $61,996~~RESOURCES ~~compared to $55,201 for the comparable quarter last year. The increase in~~ interest expense is related to both short-term and long-term bank financing. The Company incurred new short-term LIBOR debt of $2,000,000 to help finance the $3,500,000 asset acquisition. The Company also redeemed its $6,000,000 IRB financing and entered into a $5,400,000 secured bank loan.

The Company used its cash principally to fund the purchases of capital equipment and investments and for working capital needs. The Company funded the cash requirements from both operations and investing activities. Subsequent to the end of the current quarter, the Company, through the New Jersey Economic Development Authority issued $5,000,000 in tax-exempt Industrial Revenue Bonds to help finance the construction of a new plant facility in that state. The Company is currently in process of applying within the state of Texas to issue $5,000,000 in tax-exempt Industrial Revenue Bonds to help finance construction of a new plant facility in that state. During the quarter the Company expended $3,490,776 for capital projects primarily within the Waste Material Recycling segment. Our working capital ratio of 2.4 to 1 at September 30, 2003 decreased when compared to the June 30, 2003 ratio of 2.6 to 1. The change in components of working capital is mainly attributed to the increases in Cash and cash equivalents, other current assets offset by the increases in current liabilities.

SCOPE INDUSTRIES AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION September 30, 2003

~~RESULTS~~LIQUIDITY OFAND ~~OPERATIONS~~CAPITAL RESOURCES (continued)

~~Six~~Capital ~~Months~~expenditures ~~Ended~~for ~~December 31~~fiscal 2004 are currently estimated at $9,000,000 ~~2002~~to $12,000,000 depending upon when some of the capital projects are started and ~~2001:~~completed. The majority of capital expenditures are primarily for the Waste Material Recycling segment for new plant facilities in Texas and in New Jersey. The total cost of each new facility is estimated between $6,000,000 and $8,000,000. The Company believes that the combination of cash on hand, cash flow expected to be generated from operations and debt borrowings will be sufficient to fund planned investments and working capital requirements through fiscal 2005.

The Company had net income of $2,211,212, or $2.16 per share, for the six months ended December 31, 2002, compared to the previous year’s six months net income of $739,338, or $0.72 per share. Total Company revenues for the six months ended December 31, 2002 were $42,133,340 compared to $33,042,377 for the comparable period last year. The 28% increase in revenues for the current six months over the prior year’s comparable period was attributable to both the Waste Material Recycling and Vocational School segments.

Waste Material Recycling segment sales for the current six months increased approximately $8,567,800 or 29% over the comparable period last year. The increase was due primarily to an increase of 14% in volume or approximately $4,100,000 resulting from the purchase of the bakery waste recycling businesses on July 1, 2002, and to a 19% increase in the average selling price of recycled dried bakery products. Sales volume for the segment for the current six months, excluding the two new plants, was slightly below last year’s volume. The increase in price is primarily attributed to the volatility in the commodity market due to early reductions in the estimated volume of future corn crops compared to record corn crops produced during the past three years. The average price of corn for the six months was approximately $2.40 per bushel compared to $1.93 per bushel for the comparable six months last year, an increase of 24%. The Waste Material Recycling segment generated operating profit in the current six months against an operating loss in the comparable six months last year due primarily to higher average selling prices on increased volume, reduced raw material costs and improved production efficiencies from new capital equipment.

Vocational School Group revenues increased 22% from the comparable six months last year due primarily to increased enrollment at the schools and increased tuition fees charged to new students. The Vocational School Group had operating income for the current six months against an operating loss for the comparable six months last year.

General and administrative expenses for the Company increased 16% for the six months ended December 31, 2002, as compared to the prior year six months. The increase is due primarily to a $300,000 bonus paid to executive management based upon the Company’s financial performance, the additional costs of approximately $149,000 associated with the acquisition of the two new bakery waste recycling plants acquired on July 1, 2002 and to the increases in employee health benefit costs, workers’ compensation insurance, auto, property, and liability insurance and professional services. The remaining increases and decreases in expenses is not significant when viewed individually compared to the comparable period last year.

Investment and other income for the six months ended December 31, 2002, was $1,465,937 compared to $1,404,387 for the comparable six months last year. Included in investment and other income for the current six months were gains of $1,493,442 from the sale of idle property and equipment in the Waste Material Recycling operations compared to the comparable period last year that included gains of $762,868 from the sale of investment securities and $514,091 from the sale of idle property and equipment in the Waste Material Recycling operations. Interest income of $283,495 from U.S. Treasury bills comprised most of the remainder of investment income in the current six months compared to $214,912 for the comparable six months last year. The increase in interest income was primarily due to a larger interest bearing investment portfolio offset by lower interest rates. Offsetting the above investment and other income during the current six months were losses of approximately $311,000 recognized on an investment accounted for by the equity method of accounting.

Interest expense for the six months ended December 31, 2002, was $132,896 compared to $105,761 for the comparable six months last year. The interest is primarily related to both the short-term and long-term bank financing compared to the lower long-term tax-exempt rates from Industrial Revenue Bond financing.

SCOPE INDUSTRIES AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)

LIQUIDITY AND CAPITAL RESOURCES

We have used our cash principally to fund our purchases of business assets, capital equipment, purchase of investment securities, purchase of treasury stock and for working capital. We funded our cash requirements principally from operations and bank borrowings. During the current six months we borrowed $7,400,000 from our bank; $2,000,000 from our short-term bank line of credit to help finance the purchase of assets and routes and contracts from two bakery waste material recyclers in California and $5,400,000 on a five-year note to help finance the redemption of the $6,000,000 Industrial Revenue Bond. We repaid the $2,000,000 short-term bank line of credit during the current six months. During the current six months we expended $4,654,998 for capital projects primarily within the Waste Material Recycling segment. Our working capital ratio of 2.1 to 1 at December 31, 2002 decreased when compared to the June 30, 2002 ratio of 2.8 to 1. The change in components of working capital is mainly attributed to the reduction in Cash and cash equivalents and Treasury securities and increases in dividends payable, accounts payable and other current liabilities. The majority of the decrease in Cash and cash equivalents and Treasury securities went from current to long-term when the Company purchased an investment of $6,000,000 in a Short-term Tax-exempt Mutual Fund that is being used as collateral on the $5,400,000 bank loan. Capital expenditures for fiscal 2003 are currently estimated at $9,000,000 to $12,000,000 depending upon when some of the capital projects are started. The majority of capital expenditures are primarily for the Waste Material Recycling segment for new plant facilities, one in Texas to replace two existing facilities and one in New Jersey replacing a leased facility. The cost of each new facility is estimated at $6,000,000. The Company believes that the combination of cash on hand, Treasury securities, investments available for sale and cash flow expected to be generated from operations will be sufficient to fund planned investments and working capital requirements through fiscal 2003. The Company is also reviewing its options to finance one or both of the new plant facilities through tax-exempt Industrial Revenue Bonds or long–term bank loans taking advantage of current low interest rates.

TAXES

For the ~~six~~three month period ended ~~December~~September 3130, ~~2002~~2003, ~~and~~ the ~~comparable~~effective rate ~~six-month~~for ~~period~~income ~~last~~taxes ~~year~~is ~~the~~approximately ~~effective~~30% ~~rate~~of ~~for~~pre-tax income ~~taxes~~compared isto ~~approximately~~a effective ~~37%~~income ~~and~~tax rate of 38% of pre-tax income for the comparable quarter last year. The Company currently recognizes deductions for tax goodwill amortization in the tax provision; wherein last year the tax benefit related to tax goodwill reduced the carrying value of the routes and contracts. The determination of the provision or benefit for income taxes considers certain permanent differences between taxable income and income as reported using accounting methods generally accepted in the United States of America. Those differences sometimes cause distortions in the relationships between income before income taxes and the provision for income taxes.

NEW ACCOUNTING STANDARDS

In April ~~2002~~2003, the ~~Financial Accounting Standards Board (“~~FASB~~”),~~ issued ~~Statement~~ ~~of Financial Accounting Standards (“~~SFAS”) No. ~~145~~149, ~~“Rescission~~Amendment of ~~FASB~~ ~~Statements~~Statement ~~No. 4,~~133 ~~44,~~on Derivative Instruments and ~~64,~~Hedging ~~Amendment~~Activities. ofSFAS ~~FASB Statement~~ No. ~~13,~~149 amends and ~~Technical~~clarifies ~~Corrections”,~~accounting ~~addresses~~for ~~reporting~~derivative ~~classification~~instruments, ofincluding certain ~~early~~derivative ~~extinguishments~~instruments ofembedded ~~debt~~in ~~and~~other ~~amends~~contracts, ~~Statement~~and 13for tohedging ~~require~~activities ~~sale-leaseback~~under SFAS ~~accounting~~No. 133. ~~for~~The ~~certain~~statement ~~lease~~requires ~~modifications~~ that ~~have~~contracts ~~economic~~with ~~effects~~comparable ~~that are~~characteristics ~~similar~~be toaccounted ~~sale-leaseback~~for ~~transactions.~~similarly Inand ~~June~~clarifies ~~2002,~~when ~~FASB~~a ~~issued~~derivative ~~SFAS~~contains ~~No. 146~~a financing ~~“Accounting~~component ~~for~~that ~~Costs~~warrants ~~Associated~~special ~~with~~reporting ~~Exit~~in orthe ~~Disposal~~statement ~~Activities",~~of ~~that applies~~cash toflows. ~~costs~~SFAS No. 149 ~~associated~~is ~~with~~effective anfor ~~exit~~contracts ~~activity~~entered ~~that~~into ~~does~~or ~~not~~modified ~~involve~~after anJune 30, ~~entity~~2003, ~~newly~~except ~~acquired~~ in acertain ~~business~~circumstances, ~~combination~~and orfor ~~with~~hedging arelationships ~~disposal activity~~designated ~~covered~~after byJune 30, ~~FASB Statement No~~2003. ~~144.~~ The ~~statements will be effective for this fiscal year and the~~ adoption of SFAS No. ~~145~~149 ~~and 146~~ did not have aan ~~material~~ impact on the Company’s consolidated financial statements.

OnIn ~~December 31,~~May ~~2002~~2003, the FASB issued SFAS No. ~~148~~150, Accounting for ~~Stock-Based~~ ~~Compensation—Transition and Disclosure, which amends SFAS No. 123,~~Certain ~~Accounting~~Financial ~~for~~Instruments ~~Stock-Based~~with ~~Compensation.~~Characteristics ~~SFAS 148 provides alternative methods~~ of ~~transition~~both ~~for~~Liabilities aand ~~voluntary change to the fair value based method of accounting for stock-based employee compensation~~Equity. ~~In addition, SFAS 148 amends~~This ~~the~~Statement ~~disclosure~~establishes ~~requirements~~standards offor ~~SFAS~~how ~~123~~an toissuer ~~require~~classifies ~~more prominent~~ and ~~more~~measures ~~frequent~~certain ~~disclosures~~financial ininstruments ~~financial~~with ~~statements~~characteristics of ~~the~~both ~~effects~~liabilities ~~of stock-based~~and ~~compensation~~equity. The ~~transition~~Statement ~~guidance~~shall ~~and~~be ~~annual~~effective ~~disclosure~~for ~~provisions~~financial ofinstruments ~~SFAS~~entered ~~148~~into ~~are~~or ~~effective~~modified ~~for fiscal years ending~~ after ~~December~~May 1531, ~~2002.~~2003, ~~The~~and ~~interim disclosure~~otherwise ~~provisions~~is ~~are~~ effective ~~for~~at ~~financial~~the beginning ~~reports~~of ~~containing~~the ~~financial statements~~first ~~for~~ interim ~~periods~~period beginning after ~~December~~June 15, ~~2002~~2003. The ~~Company~~ ~~does not believe that the~~ adoption of ~~the~~SFAS ~~standard~~No. 150 ~~will~~did not have aan ~~significant~~ impact on the Company’s ~~financials~~consolidated financial statements.

12 In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. The interpretation applies immediately to variable interest in variable interest entities created after January 31, 2003, and to variable interest in variable interest entities obtained after January 31, 2003. For variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003, this interpretation applies to the first fiscal year or interim period ending after December 15, 2003. The Company does not believe that the application of this interpretation will have an impact on the Company’s consolidated financial statements.

SCOPE INDUSTRIES AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)

FORWARD LOOKING STATEMENTS

Certain statements contained in this Management’s Discussion and Analysis of Results of Operations and Financial Condition that are not related to historical results are forward looking statements. Actual results may differ materially from those stated or implied in the forward-looking statements. Further, certain forward-looking statements are based upon assumptions of future events, which may not prove to be accurate. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, itthe Company can give no assurance that such expectations will prove to be correct. Potential risk and uncertainties include, but are not limited to, general business conditions, unusual volatility in equity and interest rate markets and in competing commodity markets, disruptions in the availability or pricing of raw materials, transportation difficulties, changing governmental educational aid policies, or disruption of operations due to unavailability of fuels or from acts of God.

1311

SCOPE INDUSTRIES AND SUBSIDIARIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND DISCLOSURE CONTROLS AND PROCEDURES September 30, 2003

Item 3. Quantitative and Qualitative Disclosures About Market Risk:

The Company’s primary market risk ~~results~~arises from the commodities market where corn is a substitute for its dried bakery products as an alternative feed supplement for animals. The Company ~~also~~ acquires its raw material sources from bakeries and other vendors typically under contract and priced to follow the corn commodities market. As a result, when corn prices are low the Company must lower its selling prices to compete with alternative feed supplements and the cost of raw material supplies typically will decrease following the lower corn prices. However, competition for raw material suppliers is often more competitive in major market areas where the cost of raw materials ~~increases~~is increased in order to maintain ~~adequate supplies of~~ materials for production. The average price of corn over the last 25 years is approximately $2.50 per bushel. During ~~our~~the past ~~four~~ five fiscal years the average price of corn was (2003) $2.37, (2002) $1.94, (2001) $1.80, (2000) $1.90 and (1999) $2.01, inrespectively. ~~2002,~~The ~~2001,~~lower ~~2000~~average ~~and~~price ~~1999,~~of corn ~~respectively,~~during the past five years is primarily due to record corn crops during those years. The average price of corn for the ~~first~~current ~~six~~quarter ~~months~~has ofdecreased from the ~~current~~average ~~year~~price ~~has~~for ~~increased~~the toquarter ended June 30, 2003 of $2.4037 to $2.15 per bushel based upon a ~~lower~~higher projected corn crop by the Department of Agriculture due to ~~drought~~good conditions in the corn producing states during the planting season. The Company maintains cash and cash equivalents and liquid securities that expose the Company to interest rate risk and market risk. The Company minimizes its risk by investing its cash primarily in short-term U.S. Treasury bill and long-term Treasury notes. Additionally, the Company invested $6,000,000 in a Short-term Tax-Exempt Mutual Fund that is pledged as collateral for a $5,400,000 bank loan. Due to the nature of the short-term tax-exempt securities held the Mutual Fund value historically does not fluctuate with the securities market retaining much from its original cost basis. The Company, with respect to interest rate risk exposure on its debt, has elected to reduce its market risk by entering into LIBOR interest rate contracts on both a short-term and long-term basis. Currently the Company has entered into a one year LIBOR contract of 2.9%, plus 1.125% for the interest on its $5,400,000 bank loan.

The Company minimizes its risk by investing its cash primarily in short-term U.S. Treasury securities and money market funds. The Company also has invested $6,000,000 in a Short-term Tax-Exempt Mutual Fund that is pledged as collateral for the $5,000,000 bank loan. Due to the nature of short-term tax-exempt securities, the value of the funds historically do not fluctuate with the securities market and retain much of their original cost basis.

The Company, with respect to interest rate risk exposure on its debt, has elected to reduce its market risk by entering into a one-year LIBOR interest rate contract. At September 30, 2003, the Company has a LIBOR contract of 1.250% plus 1.125%, on its $5,000,000 bank loan. The LIBOR contract will expire on July 31, 2004. The Company, subsequent to quarter end issued $5,000,000 in tax-exempt IRB that typically bear interest at rates lower than LIBOR or prime. At October 23, 2003, the weekly interest rate on the IRB was 1.10%.

Item 4. Controls and Procedures:

Based on their evaluation, as of a date within 90 days of the filing of this Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded the Company’s disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regards to significant deficiencies and material weaknesses.

1412

PART II. OTHER INFORMATION SCOPE INDUSTRIES AND SUBSIDIARIES

~~SCOPE~~Item 4. ~~INDUSTRIES~~Submission ~~AND~~of ~~SUBSIDIARIES~~Matters to a Vote of Security Holders.

~~Item~~ At the annual meeting of shareowners held on October 2.28, 2003, ~~Increases~~with 998,691 shares entitled to vote, 976,283 shares or 98% of those entitled to vote elected five directors to serve for the ensuing year and ~~Decreases~~until intheir ~~Outstanding~~successors ~~Securities~~have been elected and ~~Indebtedness~~qualified.

Increases and decreases in outstanding equity securities in the six months ending December 31, 2002, were as follows:


	Votes		Votes		Votes
Directors	For		Withheld		Abstained		Total

Babette Heimbuch		967,016		—		9,267		976,283
Robert Henigson		967,016		—		9,267		976,283
Meyer Luskin		967,016		—		9,267		976,283
William H. Mannon		967,016		—		9,267		976,283
Franklin Redlich		967,016		—		9,267		976,283

	Common Stock
	No Par Value
Shares outstanding June 30, 2002		1,029,267
Shares purchased and retired during the six months		(9,658	)
Shares outstanding December 31, 2002		1,019,609

A corporate resolution requires the retirement of all reacquisitions of common stock. During the six months ended December 31, 2002, the Company purchased and retired 9,658 shares of common stock at a cost of $614,172.

Item 5. Other Information.

On October 2228, ~~2002~~2003, the Company’s board of directors declared a regular dividend of $1.00 per share payable on ~~January~~ 3January 6, ~~2003~~2004, to shareowners of record at November 2221, ~~2002~~2003. ~~There~~ ~~were 1~~Additionally,~~023,167~~ ~~shares~~the board of ~~common~~directors ~~stock~~selected ~~outstanding~~the ataccounting firm of Deloitte & Touche LLP to be the ~~record~~Company’s auditors for ~~date~~the year ended June 30, 2004.

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

(A)		Exhibits:
		99.1 Certification of Chief Executive Officer
		99.2 Certification of Chief Financial Officer

(A) Exhibits:

(B) No Form 8-K was filed for the quarter ended December 31, 2002.


31.1		Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

15 (B) No Form 8-K was filed for the quarter ended September 30, 2003.

PART II. OTHER INFORMATION (continued)
SCOPE INDUSTRIES AND SUBSIDIARIES

SIGNATURES

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

SCOPE INDUSTRIES (Registrant) Dated: February 12, 2003 /s/ Eric M. Iwafuchi Eric M. Iwafuchi, Vice President Chief Financial Officer and Secretary


		SCOPE INDUSTRIES (Registrant)


Dated: November 13, 2003		/s/ Eric M. Iwafuchi

		Eric M. Iwafuchi, Vice President Chief Financial Officer and Secretary

1614

Certification

I, Meyer Luskin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Scope Industries; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a) all significant deficiencies in the design or operations of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditor any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 12, 2003 /s/ Meyer Luskin Meyer Luskin President & Chief Executive Officer

Certification

I, Eric M. Iwafuchi, certify that:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; d) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and e) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:

Date: February 12, 2003 /s/ Eric M. Iwafuchi Eric M. Iwafuchi Vice President, Chief Financial Officer & Secretary

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Filing Compare · SCOPE INDUSTRIES