UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
		OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

OR

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

For the transition period from to

Commission file number 0-13875

LANCER CORPORATION

(Exact name of registrant as specified in its charter)

Texas		74-1591073
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

6655 LANCER BLVD.

SAN ANTONIO, TEXAS

(Address of principal executive offices)

(210) 310-7000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No ý

The number of shares of registrant’s common stock outstanding as of July 27, 2005 was 9,503,028.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

LANCER CORPORATION

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

ASSETS

	June 30,			December 31,
	2005			2004
	(Unaudited)

Current assets:
Cash	$	5,123		$	5,196
Receivables:
Trade accounts and notes	19,414			16,733
Other	705			801
	20,119			17,534
Less allowance for doubtful accounts	(260		)	(420		)

Net receivables	19,859			17,114

Inventories, net	25,984			24,495
Prepaid expenses	866			406
Deferred tax asset	829			824

Total current assets	52,661			48,035

Net property, plant and equipment	30,154			29,999
Investment in joint ventures	2,698			2,388
Goodwill	1,879			1,879
Intangibles and other assets, at cost, less accumulated amortization	3,494			3,186

	$	90,886		$	85,487

See accompanying notes to consolidated financial statements.

LANCER CORPORATION

CONSOLIDATED BALANCE SHEETS (continued)

(Amounts in thousands, except share data)

LIABILITIES AND SHAREHOLDERS’ EQUITY

	June 30,			December 31,
	2005			2004
	(Unaudited)

Current liabilities:
Accounts payable	$	7,968		$	7,555
Current maturities of long-term debt	1,350			1,345
Deferred licensing and maintenance fees	329			451
Progress billings	134			—
Accrued expenses and other liabilities	7,068			8,029
Income taxes payable	1,177			286
Total current liabilities	18,026			17,666

Deferred tax liability	3,115			3,401
Long-term debt, excluding current maturities	54			132
Deferred licensing and maintenance fees	1,354			1,273

Total liabilities	22,549			22,472

Commitments and contingencies

Shareholders’ equity:
Preferred stock, without par value 5,000,000 shares authorized; none issued	—			—

Common stock, $.01 par value: 50,000,000 shares authorized; 9,566,254 issued and 9,502,028 outstanding in 2005, and 9,522,054 issued and 9,457,828 outstanding in 2004	95			95

Additional paid-in capital	13,450			13,208

Accumulated other comprehensive income	14			523

Deferred compensation	—			(18		)

Retained earnings	55,138			49,567

Less common stock in treasury, at cost; 64,226 shares in 2005 and 2004	(360		)	(360		)

Total shareholders’ equity	68,337			63,015

	$	90,886		$	85,487

See accompanying notes to consolidated financial statements.

LANCER CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except share data)

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2005			2004			2005			2004

Net sales	$	35,362		$	31,696		$	66,985		$	61,203
Cost of sales	23,862			21,499			45,305			42,405
Gross profit	11,500			10,197			21,680			18,798

Selling, general and administrative expenses	7,252			7,880			14,199			15,392
Other operating expense (income)	81			—			(176		)	(327		)
Operating income	4,167			2,317			7,657			3,733

Other income (expense):
Interest expense	(31		)	(144		)	(60		)	(253		)
Income from joint ventures	405			100			659			253
Other income (expense), net	20			(34		)	245			(8		)
	394			(78		)	844			(8		)
Income before income taxes	4,561			2,239			8,501			3,725

Income tax expense (benefit):
Current	1,625			953			3,214			1,557
Deferred	(83		)	(136		)	(286		)	(199		)
	1,542			817			2,928			1,358

Net income	$	3,019		$	1,422		$	5,573		$	2,367

Common Shares Outstanding:
Basic	9,491,181			9,367,895			9,477,308			9,367,664
Diluted	9,688,332			9,460,051			9,675,850			9,465,304

Earnings Per Share:
Basic earnings	$	0.32		$	0.15		$	0.59		$	0.25
Diluted earnings	$	0.31		$	0.15		$	0.58		$	0.25

See accompanying notes to consolidated financial statements.

LANCER CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)

	Six Months Ended
	June 30,			June 30,
	2005			2004
Cash flow from operating activities:
Net income	$	5,573		$	2,367
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities
Depreciation and amortization	1,829			2,371
Deferred licensing and maintenance fees	143			(312		)
Deferred revenue	134			—
Inventory and receivable reserves	144			(80		)
Deferred income taxes	(301		)	(190		)
Gain on sale and disposal of assets	(176		)	(327		)
(Income) loss from joint ventures	(659		)	(253		)
Stock-based compensation expense	18			40
Changes in assets and liabilities:
Receivables	(2,527		)	(3,199		)
Prepaid expenses	(464		)	(880		)
Income taxes receivable	—			225
Inventories	(2,026		)	(749		)
Intangibles and other assets	(411		)	(126		)
Accounts payable	514			2,714
Accrued expenses and other liabilities	(901		)	979
Income taxes payable	938			838
Net cash provided by operating activities	1,828			3,418
Cash flow from investing activities:
Proceeds from sale of assets	755			467
Acquisition of property, plant and equipment	(2,988		)	(1,123		)
Investment in joint ventures	(569		)	(155		)
Distributions from joint ventures	917			—
Net cash used in investing activities	(1,885		)	(811		)
Cash flow from financing activities:
Borrowings under line of credit	—			4,300
Repayments under line of credit	—			(2,300		)
Retirement of long-term debt	(73		)	(768		)
Net proceeds from exercise of stock options	242			30
Net cash provided by financing activities	169			1,262
Effect of exchange rate changes on cash	(185		)	(309		)
Net increase (decrease) in cash	(73		)	3,560
Cash at beginning of period	5,196			1,129
Cash at end of period	$	5,123		$	4,689

Supplemental cash flow informaton:
Cash paid for interest	$	53		$	221
Cash paid for income taxes	1,679			—

See accompanying notes to consolidated financial statements.

LANCER CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Basis of Presentation.

We design, engineer, manufacture and market fountain soft drink, beer and citrus beverage dispensing systems, and other equipment for use in the food service and beverage industry. We also market frozen beverage dispensers manufactured by Lancer FBD Partnership, Ltd., a partnership in which we own a 50% partnership interest. Our products are sold by our personnel and through independent distributors and agents principally to major soft drink companies (primarily The Coca-Cola Company), bottlers, equipment distributors, beer breweries, restaurants and convenience stores for use in various food and beverage operations. We are a vertically integrated manufacturer with tooling, production, assembly and testing capabilities that enable us to fabricate a substantial portion of the components used in our products. In addition, we are an innovator of new products in the beverage dispensing industry. We have a large technical staff supported by state-of-the-art engineering facilities to develop new products and to enhance our existing product lines in response to changing industry requirements and specific customer demands.

Our accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In our opinion, these financial statements contain all adjustments, consisting of normal recurring accruals unless otherwise disclosed, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated. Our significant accounting policies were disclosed in the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2004, and no material changes have occurred with respect to these policies. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The consolidated results of operations for the periods reported are not necessarily indicative of the results to be experienced for the entire current year.

Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to the current year’s presentation. We have revised our previously reported results of operations for the three and six months ended June 30, 2004 to reclassify one item from non-operating to operating expense. This item consists of a $327,000 gain on the sale and disposal of assets. Previously, this item was presented as non-operating expenses in “Other Income (Expense)”. As noted in the following reconciliation, the reclassification increased the amount of our previously reported operating income for the six months ended June 30, 2004, but did not affect our previously reported net earnings, earnings per share, financial position, or cash flows.

(Amounts in 000s)	Three Months June 30, 2004		Six Months June 30, 2004
Operating income as previously reported	$	2,317	$	3,406
Gain on sale and disposal of assets	—		327
Operating income after reclassifications	$	2,317	$	3,733

2. New Accounting Pronouncements.

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs”, an amendment of ARB No. 43, Chapter 4. The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The pronouncement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. We currently recognize as period costs any abnormal amounts of idle facility expense, freight, handling costs and wasted materials, and allocate fixed production overhead to inventory based on the normal capacity of the production facilities. We do not believe that

the adoption of this pronouncement will have a significant impact on our results of operations or financial position. We will adopt this pronouncement beginning January 1, 2006.

In December 2004, the FASB issued SFAS No. 123(R) – Share-Based Payment, which replaces SFAS No. 123 – Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25 – Accounting for Stock Issued to Employees. In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 – Share-Based Payment, which provides interpretive guidance related to SFAS No. 123(R). SFAS No. 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost is measured based on the grant-date fair value of the equity or liability instruments issued. SFAS No. 123(R) requires liability awards to be remeasured each reporting period and compensation costs to be recognized over the period that an employee provides service in exchange for the award. In April 2005, the SEC delayed the effective date of SFAS No. 123(R) to the beginning of the annual reporting period that begins after June 15, 2005. We are currently evaluating the effect that adoption of this statement will have on our financial position and results of operations.

On December 21, 2004, the FASB issued “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004”, a FASB Staff Position (FSP) that provides guidance on the application of SFAS No. 109 to the tax deduction on qualified production activities provided by the American Jobs Creation Act of 2004. FSP FAS 109-1 states that the qualified production activities deduction should be accounted for as a special deduction in accordance with SFAS No. 109, whereby the deduction is contingent upon the future performance of specific activities, including wage levels. The FASB also concluded that the special deductions should be considered with measuring deferred taxes and assessing a valuation allowance. The impact on our results of operations or financial position of FSP FAS 109-1 lowered our effective tax rate in the first six months of 2005 to 34.4% compared to 36.4% in the first half of 2004.

In May 2005, the Financial Accounting Standards Board issued FASB Statement No. 154, “Accounting Changes and Error Corrections,” a replacement of APB Opinion No. 20 and FASB Statement No. 3. The Statement provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. This Statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

At the June 2005 meeting, the Emerging Issues Task Force reached a consensus on EITF 05-6,”Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or acquired in a Business Combination.” The consensus reached is that the leasehold improvements, whether acquired in a business combination or placed in service significantly after and not contemplated at or near the beginning of the lease term, should be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured. The consensus in this issue, which is to be applied to leasehold improvements that are purchased or acquired in reporting periods beginning after June 29, 2005, will not have a material impact on our financial statements.

3. Supplemental Balance Sheet and Income Statement Information.

Balance Sheet Information:

Inventory: We state inventories at the lower of cost (on a first-in, first-out basis for finished goods and work in process, and an average cost basis for raw materials and supplies) or market. Our inventory components consist of the following items (amounts in thousands):

	June 30, 2005		December 31, 2004
Finished goods	$	10,415	$	11,143
Work in process	6,532		5,593
Raw material and supplies	9,037		7,759
	$	25,984	$	24,495

Property, Plant and Equipment: Our net property, plant and equipment consist of the following items (amounts in thousands):

	June 30,			December 31,
	2005			2004

Land	$	1,082		$	1,082
Buildings	22,070			22,056
Machinery and equipment	19,058			19,633
Tools and dies	10,701			10,775
Leaseholds, office equipment and vehicles	8,755			8,542
Assets in progress	3,109			1,365
Assets available for sale	—			780
	64,775			64,233
Less accumulated depreciation	(34,621		)	(34,234		)
Net property, plant and equipment	$	30,154		$	29,999

Intangibles and Other Assets: Our net intangibles and other assets consist of the following items (amounts in thousands):

	June 30, 2005			December 31, 2004

Patents	$	4,251		$	3,848
Accumulated amortization of patents	(869		)	(774		)
Net intangibles	3,382			3,074
Deposits	112			112
Net intangibles and other assets	$	3,494		$	3,186

Accrued Expenses: Our accrued expenses consist of the following items (amounts in thousands):

	June 30, 2005		December 31, 2004

Payroll and related expenses	$	3,683	$	4,159
Commissions	569		328
Health and workers’ compensation	242		303
Property taxes	284		226
Interest	186		189
Warranty	1,200		1,257
Other taxes	291		505
Other accrued expenses	613		1,062
	$	7,068	$	8,029

Income Statement Information.

Other Operating Income: Our other operating income consists of the following items (amounts in thousands):

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,			June 30,
	2005		2004		2005			2004

(Gain) loss on sale and disposal of assets	$	81	$	—	$	(176	)	$	(327	)
	$	81	$	—	$	(176	)	$	(327	)

Other Income (Expense): Our other income (expenses) consist of the following items (amounts in thousands):

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2005			2004			2005			2004

Interest income	$	34		$	7		$	62		$	7
Bank charges	(45		)	(42		)	(83		)	(82		)
Royalties income - net	2			32			44			84
Exchange gains (losses)	21			(57		)	56			(36		)
Gain from sale of non operating asset	—			—			72			—
Extinguishment of guarantee of joint venture debt	—			—			33			—
Miscellaneous	8			26			61			19
Total	$	20		$	(34	)	$	245		$	(8	)

4. Earnings Per Share.

Basic earnings per share is calculated using the weighted average number of common shares outstanding and diluted earnings per share is calculated assuming the issuance of common shares for all potential dilutive common shares outstanding during the reporting period. The dilutive effect of stock options approximated 197,150 and 92,156 shares for the three months ended June 30, 2005 and 2004, respectively. The dilutive effect of stock options approximated 198,542 and 97,640 for the six months ended June 30, 2005 and 2004, respectively.

5. Stock Compensation Plans.

We utilize the intrinsic value method, as permitted under provisions of APB Opinion No. 25 and related interpretations, in measuring stock-based compensation for employees. If we had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123R, net earnings and net earnings per share would have been adjusted to the pro forma amounts indicated in the table below (amounts in thousands, except share data):

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2005			2004			2005			2004
Net earnings - as reported	$	3,019		$	1,422		$	5,573		$	2,367
Add: Total stock-based compensation expense determined under the intrinsic value method, net of tax	6			10			12			27
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of tax	(181		)	(25		)	(355		)	(53		)
Net earnings - pro forma	$	2,844		$	1,407		$	5,230		$	2,341
Net earnings per basic share-as reported	$	0.32		$	0.15		$	0.59		$	0.25
Net earnings per basic share-pro forma	$	0.30		$	0.15		$	0.55		$	0.25

Net earnings per diluted share-as reported	$	0.31		$	0.15		$	0.58		$	0.25
Net earnings per diluted share-pro forma	$	0.29		$	0.15		$	0.54		$	0.25

Weighted-average fair value of options, granted during the period	$	8.33		$	—	(1)	$	8.33		$	—	(1)

The fair value of each option granted in the three and six months ended June 30, 2005 and 2004, respectively, is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2005		2004		2005		2004

Expected life (years)	7		—	(1)	7		—	(1)
Interest rate	4.0	%	—	(1)	4.0	%	—	(1)
Volatility	48.0	%	—	(1)	48.0	%	—	(1)
Dividend yield	None		None		None		None

(1) No options were granted during the three and six months ended June 30, 2004.

6. Other Comprehensive Income.

The line item, “Accumulated other comprehensive income” on the accompanying consolidated balance sheets includes foreign currency gains and unrealized gain (loss) on investment.

The following are the components of comprehensive income (amounts in thousands):

	Cumulative Translation Adjustment			Unrealized Loss on Investments			Total
Balance at December 31, 2003	$	—		$	6		$	6
Current period change	523			(6		)	517
Balance at December 31, 2004	$	523		$	—		$	523
Current period change	(509		)	—			(509		)
Balance at June 30, 2005	$	14		$	—		$	14

Disclosure of related tax effects allocated to each component of Accumulated Other Comprehensive Income

	Before-tax amount			Tax (expense) benefit		Net of tax amount
2004
Cumulative translation adjustments	$	523		$	—	$	523
Reclassifiaction adjustment for realized loss	(6		)	—		(6		)
Total Other Comprehensive income	$	517		$	—	$	517

2005
Cumulative translation adjustments	$	(509	)	$	—	$	(509	)
Total Other Comprehensive income	$	(509	)	$	—	$	(509	)

7. Investment in Joint Ventures.

At June 30, 2005 our long-term investments consisted of the following:

	June 30,		December 31,
	2005		2004

Investment in Lancer FBD Partnership Ltd.	$	1,994	$	2,046
Investment in Moo Technologies, LLC	704		342
Total long-term investments	$	2,698	$	2,388

Our 50% share of net earnings from both joint ventures, after elimination of profit in ending inventory, is included in other income.

We own 50% of Lancer FBD Partnership, Ltd., a manufacturer of frozen beverage equipment. Lancer FBD pays us a commission on sales of Lancer FBD products that we generate through our sales force. Lancer FBD paid us sales commissions of $0.2 million and $0.1 million for the three-month periods ended June 30, 2005 and 2004, and $0.3

million and $0.1 million for the six months ended June 30, 2005 and 2004, respectively. Our portion of Lancer FBD’s income was $0.5 million and $0.2 million for the three months ended June 30, 2005 and 2004, and $0.9 million and $0.4 million for the six months ended June 30, 2005 and 2004, respectively. Lancer FBD’s purchases from us were $0.4 million and $0.3 million for the three months ended June 30, 2005 and 2004, and $0.7 million and $0.6 million for the six months ended June 30, 2005 and 2004, respectively. Lancer FBD had a balance due to us of $0.4 million on June 30, 2005, and $0.2 million on December 31, 2004.

We own 50% of Moo Technologies, LLC, a developmental stage limited liability company engaged in the commercialization of concentrated shelf-stable milk products. Our portion of Moo Technology’s loss was $0.1 million for both of the three months ended June 30, 2005 and 2004, and $0.2 million for both of the six months ended June 30, 2005 and 2004, respectively. We have invested $1.3 million in Moo Technologies since its inception, including $0.6 million during the first six months of 2005, bringing our investment net of losses in the company to $0.7 million as of June 30, 2005. We expect Moo Technologies to continue to incur losses through at least 2005, and we expect to continue to fund Moo Technologies in a manner consistent with our past funding practices.

8. Segment and Geographic Information.

We are engaged in the manufacture and distribution of beverage dispensing equipment and related parts and components. We manage our business by geographic region and have four main geographical region segments. Sales are attributed to a region based on the ordering location of the customer.

	North		Latin			Asia/
(amounts in thousands)	America		America			Pacific		Europe			Corporate			Total

Three months ended June 30, 2005
Total revenues	$	22,902	$	2,232		$	6,620	$	3,608		$	—		$	35,362
Depreciation and amortization	729		50			106		11			—			896
Operating income (loss)	6,368		428			457		545			(3,631		)	4,167
Long-lived assets	27,656		3,426			1,712		168						32,962
Goodwill, net	—		—			1,879		—			—			1,879
Capital expenditures	2,185		—			88		(1		)				2,272

Three months ended June 30, 2004
Total revenues	$	20,618	$	1,381		$	6,203	$	3,494		$	—		$	31,696
Depreciation and amortization	1,007		67			96		9			—			1,179
Operating income (loss)	5,601		(145		)	425		447			(4,011		)	2,317
Long-lived assets	28,998		4,148			1,651		125			—			34,922
Goodwill, net	—		50			1,879		—			—			1,929
Capital expenditures	362		99			136		—			—			597

Six months ended June 30, 2005
Total revenues	$	43,297	$	4,051		$	12,331	$	7,306		$	—		$	66,985
Depreciation and amortization	1,487		111			210		21			—			1,829
Operating income (loss)	12,082		866			574		1,124			(6,989		)	7,657
Long-lived assets	27,656		3,426			1,712		168			—			32,962
Goodwill, net	—		—			1,879		—			—			1,879
Capital expenditures	2,690		—			247		51			—			2,988

Six months ended June 30, 2004
Total revenues	$	38,954	$	2,475		$	12,823	$	6,951		$	—		$	61,203
Depreciation and amortization	2,029		115			207		20			—			2,371
Operating income (loss)	9,729		(308		)	1,139		1,036			(7,863		)	3,733
Long-lived assets	28,998		4,148			1,651		125			—			34,922
Goodwill, net	—		50			1,879		—			—			1,929
Capital expenditures	711		206			198		8			—			1,123

All intercompany revenues are eliminated in computing revenues and operating income. Corporate administration and engineering expenses are included in a Corporate segment rather than allocated among our geographic region segments.

9. Product Warranties.

We generally warrant our products against certain manufacturing and other defects. These product warranties are provided for specific periods of time from the date of sale. As of June 30, 2005 and December 31, 2004, we had accrued $1.2 million and $1.3 million, respectively, for estimated product warranty claims. The accrued product warranty costs are based primarily on actual warranty claims as well as current information on repair costs. Warranty claims expense was $0.12 million and $0.09 million for the three months ended June 30, 2005 and 2004,

respectively. Warranty claims expense was $0.23 million and $0.25 million for the six months ended June 30, 2005 and 2004, respectively.

The following chart sets forth our product warranty costs for the periods ending June 30, 2005 and 2004

(amounts in thousands):	2005			2004

Accrued product warranty costs as of January 1	$	1,257		$	586
Liabilities accrued for warranties issued during the period	87			654
Warranty claims paid during the period	(144		)	(246		)
Accrued product warranty costs as of June 30	$	1,200		$	994

10. Other Guaranties.

During 2003, Lancer FBD obtained a $1.5 million revolving credit facility from a bank. We entered into a Continuing Guarantee Agreement with the lender pursuant to which we guaranteed the repayment of the partnership’s debt, which expired annually. In accordance with FASB Interpretation (“FIN”) No. 45, we recorded a liability of $22,500, which represents the estimated value of the guaranty. See “Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Guaranties”. The Lancer FBD credit facility, by its terms, expired during the first quarter of 2005 and was not renewed, and the lender released us from our guaranty of the FBD facility. We reversed the liability associated with the guaranty, resulting in income of $22,500 during the first quarter of 2005.

On March 5, 2003, Moo Technologies obtained a $0.75 million revolving credit facility from a bank. We entered into a Commercial Guarantee with the lender pursuant to which we guaranteed the repayment of the Moo Technologies, LLC debt. We recorded a liability of $11,250 in 2003, which represents the estimated value of the guaranty. See “Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Guaranties”. During the first quarter of 2005, Moo Technologies repaid all amounts due under its revolving credit facility and terminated the facility, and the lender released us from our guaranty of the facility. We reversed the liability associated with the guaranty, resulting in income of $11,250 during the first quarter of 2005.

11. Other Matters.

Audit Committee Investigation. In June 2003, our Audit Committee began conducting an internal investigation. The investigation was related to allegations raised by a lawsuit against The Coca-Cola Company by a former Coca-Cola employee, Matthew Whitley. Although we were not a defendant to the lawsuit, certain allegations contained in the lawsuit specifically involved us. The investigation was later expanded to include allegations raised in certain press articles.

During the investigation, we were unable to file our quarterly reports for the second and third quarters of 2003 with the Securities and Exchange Commission. On December 5, 2003, we provided financial information for the second and third quarters of 2003 in exhibits to a Form 8-K, in order to provide information to the investing public while the investigation continued.

Our inability to file our quarterly report for the second quarter of 2003 with the SEC on a timely basis violated the American Stock Exchange (AMEX) continued listing standards, specifically Section 1003(d) of the AMEX Company Guide. We submitted a formal action plan to regain compliance with AMEX on September 30, 2003 and AMEX accepted the plan on October 8, 2003. After the initial acceptance, we revised the plan with the approval of AMEX in order to accommodate new developments, including our inability to file our annual report on Form 10-K for 2003 and our quarterly report on Form 10-Q for the first quarter 2004.

On January 30, 2004, we announced that the Audit Committee investigation had concluded and the Audit Committee had released a general summary of the investigation findings. On July 1, 2004, we filed all past due and current periodic reports with the Securities and Exchange Commission and regained compliance with the AMEX listing standards.

US Attorney and Securities and Exchange Commission Investigations. In August 2003, the US Attorney’s Office informed us that it was conducting an investigation arising from allegations raised in a lawsuit against The Coca-Cola Company by a former Coca-Cola employee, Matthew Whitley, and requested certain information, which we supplied. On January 13, 2004, we received written notice that the Securities and Exchange Commission had issued a formal order of investigation, dated December 2, 2003, that appeared to concern matters which were the subject of our prior Audit Committee investigation (which concluded in January 2004) including certain allegations relating to us that were contained in the Whitley lawsuit against The Coca-Cola Company. We have cooperated, and intend to cooperate in any continuing investigations of the US Attorney’s Office or the Securities and Exchange Commission. We have not had substantive contact relating to these investigations with either the US Attorney’s Office or the Securities and Exchange Commission since July 2004.

On April 18, 2005, The Coca-Cola Company announced that the Justice Department had closed its investigation of allegations raised in the Matthew Whitley lawsuit and that they had reached a settlement with the Securities and Exchange Commission regarding their investigation relating to certain allegations set forth in the Matthew Whitley lawsuit. The settlement between The Coca-Cola Company and the Securities and Exchange Commission, as described in the Security and Exchange Commission’s Order Instituting Cease-and-Desist Proceedings, Making Findings and Imposing a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, In the Matter of The Coca-Cola Company, dated April 18, 2005, did not relate to the business dealings between Lancer and The Coca-Cola Company or any of the allegations from the Matthew Whitley lawsuit that involved Lancer.

We have not been advised by the US Attorney’s Office that their investigation of matters relating to Lancer has been closed, nor have we been advised by the Securities and Exchange Commission of the status of their investigation of Lancer as described under their formal order of investigation or what, if any, effect The Coca-Cola Company’s settlement with the Securities and Exchange Commission had or will have on either investigation. Therefore, we are unable at this point to predict the scope or outcome of any ongoing Justice Department or Securities and Exchange Commission investigations, and note that, if the investigations are in fact continuing, they could still result in the institution of administrative, civil injunctive or criminal proceedings, the imposition of fines and penalties, and/or other remedies and sanctions.

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

This report contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 and we are including this statement for the expressed purpose of availing ourselves of the protection of the safe harbor with respect to all of such forward-looking statements. These forward-looking statements describe future plans or strategies and include our expectations of future financial results and often include words such as “may,” “will,” “should,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “predict,” “plan,” “potential,” and “continue,” and the negatives of these terms and variations of them or similar terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from results expressed or implied by the forward-looking statements. Factors that could affect actual results include but are not limited to:

• general economic trends;

• ability to service our debt;

• availability of capital sources;

• currency fluctuations;

• fluctuations in our operating costs;

• competitive practices in the industry in which we compete;

• changes in our labor conditions;

• our capital expenditure requirements;

• technological changes and innovations;

• legislative or regulatory requirements;

• operating changes and product needs of our main customer, The Coca-Cola Company;

• losses from litigation; and

• all other factors described herein under “Risk Factors.”

These and other factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements.

We do not undertake and specifically disclaim any obligation to update any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

The following discussion should be read in connection with our Consolidated Financial Statements, related notes and other financial information included elsewhere in this document.

Overview

General. We design, engineer, manufacture and market fountain soft drink, beer and citrus beverage dispensing systems, and other equipment for use in the food service and beverage industry. We also market frozen beverage dispensers manufactured by Lancer FBD, a partnership in which we own a 50% partnership interest. Our products are sold by our employees and through independent distributors and agents predominantly to major soft drink companies (primarily The Coca-Cola Company, which influences substantially more than half of our sales), bottlers, equipment distributors, beer breweries, restaurants and convenience stores for use in various food and beverage operations. We are a vertically integrated manufacturer with tooling, production, assembly and testing capabilities that enable us to fabricate a substantial portion of the components used in our products. Our primary manufacturing and administrative facility is located in San Antonio, Texas. We have sales employees, distributors, and/or licensees in Latin America, Europe, Africa and Asia. We manufacture products in Australia and Piedras Negras, Mexico, and operate warehouses in Australia, Belgium, Mexico, New Zealand, and the United Kingdom.

Our products can be divided into four major categories: (i) fountain soft drink, citrus, and frozen beverage dispensers, which includes a broad range of mechanically cooled and ice cooled soft drink and citrus dispensing systems; (ii) post-mix dispensing valves, which mix syrup and carbonated water at a preset ratio; (iii) beer dispensing systems and related accessories; and (iv) other products and services, which includes various dispensing systems and replacement parts in connection with the remanufacturing process.

Critical Accounting Policies

The Consolidated Financial Statements and Notes to Consolidated Financial Statements contain information that is important to management’s discussion and analysis. The preparation of financial statements in conformity with generally accepted accounting principles 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.

Critical accounting policies are those that reflect significant judgments and uncertainties and may result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies, see “Note 1 - Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.

Revenue Recognition

We recognize revenue in accordance with the following methods:

(a) At the time of shipment for all products except for those sold under agreements described in (b). We require a purchase order for all sales. At the time of the shipment, risk of ownership and title passes to

our customer. The goods are completely assembled and packaged and we have no further performance obligations.

(b) On a percentage of completion basis for installation contracts exceeding 90 days in length.

(c) We have entered into an agreement with The Coca-Cola Company to receive partial reimbursement for design and development. The reimbursement is offset against cost on a percentage of completion basis.

(d) Prior to 2003, we had agreed to provide exclusive rights for use of certain tools to The Coca-Cola Company. These tools are included in fixed assets and are depreciated over the life of the asset. The corresponding license and maintenance fees are recorded as deferred income and recognized over the life of the agreement, which approximates the life of the corresponding asset. After 2002, the Company has agreed to maintain certain tools that are the property of The Coca-Cola Company. The corresponding maintenance fees are recorded as deferred licensing and maintenance fees and recognized over the life of the corresponding tool.

Reserve for Slow Moving and Obsolete Inventory

We provide for slow moving inventory based on an analysis of the aging and utility of the inventory. Obsolete inventory is 100% reserved at the time the product is deemed obsolete due to technological advances and discontinuation of products. In addition, management’s evaluation of the specific items also influences the reserve. We believe that the reserve as of June 30, 2005 is adequate to provide for expected losses.

Medical Costs and Worker’s Compensation Accrual

We maintain a self-insurance program for major medical and hospitalization coverage for employees in the United States and their dependents, which is partially funded by payroll deductions. The estimate of the accrual necessary for claims is based on our estimate of claims incurred as of the end of the quarter. We use detail lag reports provided by the insurance administrator to determine an appropriate reserve balance at year end. In addition to detail lag reports provided by the insurance administrator, we use an outside actuary report on an annual basis at year-end in determining an appropriate accrual balance. We have provided for both reported medical costs and incurred but not reported medical costs in the accompanying consolidated financial statements. We have a maximum liability of $100,000 per participant per policy year. Amounts in excess of the stated maximum are covered under a separate policy provided by an insurance company.

We are self-insured for all workers’ compensation claims submitted by Texas employees for on-the-job injuries. The estimate of the accrual necessary for claims is based on our estimate of claims incurred as of June 30, 2005. In addition to detail lag reports provided by the insurance administrator, we use an injury report to determine an appropriate reserve balance. We have provided for both reported costs and incurred but not reported costs of workers’ compensation coverage in the consolidated financial statements. In an effort to provide for catastrophic events, we carry an excess indemnity policy for workers’ compensation claims. All claims paid under the policy are subject to an annual deductible of $500,000 per claim to be paid by us. Based upon our past experience, management believes that we have adequately provided for potential losses. However, multiple occurrences of serious injuries to our employees could have a material adverse effect on our financial position or our results of operations.

Classification of Costs

Cost of sales generally includes costs relating to the procurement, manufacture, and handling of inventory to the point of sale. Cost of sales includes inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and other costs of distributing product to our customers, internal or external. Gross margins may not be comparable to those of other entities, since some entities include all of the costs related to their distribution network in cost of sales. We include compensation, warehousing expenses, office expenses, and other costs relating to maintaining our distribution subsidiaries in selling, general and administrative expenses. These expenses from distributor subsidiaries included in selling, general and administrative expenses were $1.3 million and $1.6 million in the three-month periods ended June 30, 2005 and 2004, respectively and $2.6 million and $2.9 million in the six month periods ended June 30, 2005 and 2004, respectively. Corporate expenses relating to product development, accounting, human resources, and information technology are included in selling, general and administrative expenses.

Goodwill

We account for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill and certain indefinite-lived assets no longer be amortized, but instead be evaluated at least annually for impairment. We adopted the provisions of SFAS 142 on January 1, 2002.

The determination of the value of goodwill and other intangibles requires us to make estimates and assumptions about future business trends and growth. If an event occurs which would cause us to revise our estimates and assumptions used in analyzing the value of our goodwill or other intangibles, such revision could result in an impairment charge that could have a material adverse impact on our results of operations for the period in which the impairment is recognized.

Goodwill is tested for impairment annually as of September 30 or whenever an event occurs or circumstances change that may reduce the fair value of the reporting unit below its book value. The impairment test is conducted for each reporting unit in which goodwill is recorded by comparing the fair value of the reporting unit with its carrying value. Fair value is determined primarily by computing the future discounted cash flows expected to be generated by the reporting unit. If the carrying value exceeds the fair value, goodwill may be impaired. If this occurs, the fair value of the reporting unit is then allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the goodwill of the reporting unit. The implied fair value is then compared with the carrying amount of the goodwill of the reporting unit, and, if it is less, we would then recognize an impairment loss.

Other intangible assets with definite useful lives are recorded on the basis of cost in accordance with SFAS No. 142 and are amortized on a straight-line basis over their estimated useful lives, which range from eighteen months to fifteen years. In accordance with SFAS No. 142, we subjected these assets to tests of impairment and we determined that certain patents we hold no longer have value due to technological changes and obsolescence.

Allowance for Doubtful Accounts

We maintain our allowance for doubtful accounts at a balance adequate to reduce accounts receivable to the amount of cash expected to be realized on collection. The methodology used to determine the allowance is based on our prior collection experience. Specific customers’ financial strength and circumstance also influence the balance of our allowance for doubtful accounts. Accounts that are determined to be uncollectible are written-off in the period in which they are determined to be uncollectible.

Guaranties

We have guaranteed the debt of certain of our joint venture investments in the past and may do so in the future. At the time we enter into the guaranty, we record a liability in the amount of the estimated value of the guaranty. The guaranty value is assumed to equal the cost of obtaining a standby letter of credit in favor of the lender. We reverse the liability when the guaranty is cancelled.

Segments. We manage our business by geographic region, and have four main geographical region segments: North America, Latin America, Asia/Pacific, and Europe. Corporate administrative and engineering expenses are included in the Corporate segment, rather than allocated among our geographic region segments. Each of the geographic regions contains sales and distribution related operations. Additionally, the North America and Asia/Pacific regions include manufacturing operations. (We consider our maquiladora in Piedras Negras, Mexico to be part of our North America operations, although our sales and distribution related operations in Mexico are included in our Latin America region.) A large portion of the costs associated with the manufacturing operations is fixed, making gross margin in North America and Asia/Pacific sensitive to changes in sales volume. Because most costs in our other regions are variable, gross margin in those regions is not as sensitive to changes in sales volume. Most of our sales and manufacturing activity occurs in the North America region. Additionally, our corporate headquarters are physically located in North America, though corporate expenses are included in the Corporate segment.

Results of Operations

Comparison of the Three-Month Periods Ended June 30, 2005 and 2004

Revenues.

Revenues by Geographic Segment

(Amounts in thousands)

					% Change
	Quarter Ended June 30,				Second Quarter
	2005		2004		2005 vs 2004
North America region	$	22,902	$	20,618	11	%
Latin America region	2,232		1,381		62	%
Asia/Pacific region	6,620		6,203		7	%
Europe region	3,608		3,494		3	%
	$	35,362	$	31,696	12	%

Net sales for the three months ended June 30, 2005 were $35.4 million, up 12% from $31.7 million in the same period of 2004. Currency exchange rate fluctuations had a positive impact of 2% on second quarter sales in 2005. Quarterly sales rose 11% in the North America region, largely because of improved sales of recently developed products to chain account customers. Sales improved by 62% in the Latin America region, primarily because of increased purchases by our customers in Mexico. Sales rose 7% in the Asia/Pacific region, reflecting the positive effect of 7% from exchange rate fluctuations. The 3% sales increase in the Europe region was due to the positive impact from currency exchange rate fluctuations of 4%.

Gross Margin.

Gross Margin by Geographic Segment

(Amounts in thousands)

	Quarter Ended June 30,
	2005		2004
North America region	34.4	%	33.9	%
Latin America region	27.0	%	26.5	%
Asia/Pacific region	27.1	%	27.0	%
Europe region	33.8	%	33.5	%
	32.5	%	32.2	%

Gross margin was 32.5% in the second quarter of 2005, compared to 32.2% in the second quarter of 2004. Margin improved in the North America region, where higher factory output to support increased sales levels aided gross margin. Higher manufacturing volume tends to have a positive impact on gross margin because a significant portion of our manufacturing costs is fixed.

Operating Expenses.

Selling, General and Administrative Expenses by Segment

(Amounts in thousands)

	Quarter Ended June 30,
	2005		2004
North America region	$	1,520	$	1,523
Latin America region	175		376
Asia/Pacific region	1,252		1,247
Europe region	674		723
Corporate	3,631		4,011
	$	7,252	$	7,880

Selling, general and administrative expenses were $7.3 million in the second quarter of 2005, compared to $7.9 million in the same period of 2004. Spending declined in the Latin America region due to a consolidation involving the closure of four sales offices and a reduction in employment. Additionally, we incurred $0.1 million of bad debt expense in the second quarter of 2004 that did not recur this year. In the Corporate segment, compliance costs associated with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 were $0.4 million in the second quarter of 2005. Although we are unable to predict the exact cost of continuing compliance with the Sarbanes-Oxley Act with any certainty, we currently expect to spend an additional $0.4 million during the remainder of 2005. During the second quarter of 2004, we incurred $1.1 million of audit-related expenses and costs associated with the investigations conducted by our Audit Committee, the Securities and Exchange Commission and the US Attorney’s Office. We incurred $43 thousand of audit expense in the second quarter of 2005.

Other operating income of $0.1 million in the second quarter of 2005 consisted primarily of loss on the disposal of assets.

Non-Operating Income/Expenses. The following information relates to certain of our non-operating income and expenses during the three-month periods ended June 30, 2005 and 2004:

• Income from joint ventures was $0.4 million in the second quarter of 2005, compared to $0.1 million in the same period of 2004. The improvement in 2005 was driven by the profitability of Lancer FBD. Moo Technologies LLC is a developmental stage company in which we own 50% of the outstanding equity. Our portion of Moo Technologies’ net loss was $0.1 million in the second quarter of both 2005 and 2004. We expect Moo Technologies to continue to incur losses for the remainder of 2005.

• The effective tax rate in the second quarter of 2005 was 33.8%, compared to 36.5% in the second quarter of 2004. Tax credits from the American Jobs Creation Act lowered our effective tax rate in the 2005 period.

Net Earnings/Loss. Net earnings were $3.0 million in the second quarter of 2005, compared to $1.4 million in the second quarter of 2004. Higher sales and gross margin, plus lower operating expenses, caused most of the improvement in profitability.

Comparison of the Six-Month Periods Ended June 30, 2005 and 2004

Revenues.

Revenues by Geographic Segment

(Amounts in thousands)

					% Change
	Six Months Ended June 30,				First Six Months
	2005		2004		2005 vs 2004
North America region	$	43,297	$	38,954	11	%
Latin America region	4,051		2,475		64	%
Asia/Pacific region	12,331		12,823		-4	%
Europe region	7,306		6,951		5	%
	$	66,985	$	61,203	9	%

Net sales for the six months ended June 30, 2005 were $67.0 million, up 9% from $61.2 million in the same period of 2004. Currency exchange rate fluctuations had a positive impact of 1% on sales in the 2005 period. Sales rose 11% in the North America region, largely because of improved sales of recently developed products to chain account customers. Sales rose 64% in the Latin America region. The improvement in Latin America was centered in Mexico, and included $0.4 million from the sale of equipment that we had previously rented to our customers. Sales declined 4% in the Asia/Pacific region, despite the positive effect of 5% from exchange rate fluctuations. We experienced lower demand for both fountain and beer systems in Australia, our largest market in the Asia/Pacific region. A 5% sales increase in the Europe region was primarily due to the 4% positive impact from currency exchange rate fluctuations.

Gross Margin.

Gross Margin by Geographic Segment

(Amounts in thousands)

	Six Months Ended June 30,
	2005		2004
North America region	34.6	%	31.3	%
Latin America region	29.2	%	25.8	%
Asia/Pacific region	25.0	%	28.7	%
Europe region	33.1	%	32.6	%
	32.4	%	30.7	%

Gross margin was 32.4% in the first half of 2005, compared to 30.7% in the first half of 2004. Much of the improvement came in the North America region, where higher factory output to support increased sales levels aided gross margin. Higher manufacturing volume tends to have a positive impact on gross margin because a significant portion of our manufacturing costs is fixed. Gross margin increased in the Latin America region due largely to margin associated with the sale of equipment that we had previously rented to our customers. In the Asia/Pacific region, gross margin declined in the first half of 2005 because of lower factory output at our manufacturing facility in Australia, and $0.2 million of factory relocation expense.

Operating Expenses.

Selling, General and Administrative Expenses by Segment

(Amounts in thousands)

	Six Months Ended June 30,
	2005		2004
North America region	$	2,928	$	2,944
Latin America region	318		811
Asia/Pacific region	2,410		2,541
Europe region	1,297		1,233
Corporate	7,246		7,863
	$	14,199	$	15,392

Selling, general and administrative expenses were $14.2 million in the first half of 2005, compared to $15.4 million in the same period of 2004. Spending declined in the Latin America region due to a consolidation involving the closure of four sales offices and a reduction in employment. Additionally, improved credit quality of our accounts receivable in the Latin America region allowed us to reverse $0.1 million of bad debt reserve in the first half of 2005, while we incurred $0.1 million of bad debt expense in the region in the 2004 period. In the Corporate segment, compliance costs associated with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 were $0.6 million in the first half of 2005. Although we are unable to predict the exact cost of continuing compliance with the Sarbanes-Oxley Act with any certainty, we currently expect to spend an additional $0.4 million during the remaining two quarters of 2005. During the first half of 2004, we incurred $2.1 million of audit-related expenses and costs associated with the investigations conducted by our Audit Committee, the Securities and Exchange Commission and the US Attorney’s Office. We incurred $0.2 million of audit expense in the first half of 2005.

Other operating income in the second quarter of 2005 consisted primarily of a $0.3 million gain on the sale of land and improvements located in Bee County, Texas. See “Liquidity and Capital Resources – Cash Provided by Operations and Capital Expenditures” below. In the 2004 period, other operating income consisted primarily of a $0.4 million gain relating to insurance proceeds from a claim of damages from a fire that occurred in 2003.

Non-Operating Income/Expenses. The following information relates to certain of our non-operating income and expenses during the six-month periods ended June 30, 2005 and 2004:

• Income from joint ventures was $0.7 million in the first half of 2005, compared to $0.3 million in the same period of 2004. The improvement in 2005 was driven by the profitability of Lancer FBD. Moo Technologies LLC is a developmental stage company in which we own 50% of the outstanding equity. Our portion of Moo Technologies’ net loss was $0.1 million in the first half of 2005, and $0.2 million in the same period of 2004. We expect Moo Technologies to continue to incur losses for the remainder of 2005.

• The effective tax rate in the first six months of 2005 was 34.4%, compared to 36.4% in the first half of 2004. Tax credits from the American Jobs Creation Act lowered our effective tax rate in the 2005 period.

Net Earnings/Loss. Net earnings were $5.6 million in the first half of 2005, compared to $2.4 million in the first half of 2004. Higher sales and gross margin, plus lower operating expenses, caused most of the improvement in profitability.

Liquidity and Capital Resources

General. Our principal sources of liquidity are cash flows from operations and amounts available under our lines of credit. We have met, and currently expect that we will continue to meet, substantially all of our working capital and capital expenditure requirements, as well as our debt service requirements, with funds provided by operations and borrowings under our credit facility.

Cash Provided by Operations and Capital Expenditures.

Cash provided by operating activities was $1.8 million in the first half of 2005, down from $3.4 million in the first half of 2004. During the 2005 period, inventory growth and lower accrued expenses more than offset higher net earnings, causing the negative comparison to the prior year. We made capital expenditures of $3.0 million and $1.1 million during the first half of 2005 and 2004, respectively. Most of the capital spending in both periods was for production equipment and tooling.

During the first quarter of 2005, we completed the sale of 546.65 acres of land and improvements, located in Bee and Karnes Counties, Texas, to Schroeder Land and Cattle Company, Incorporated (SLCC). The purchase price of $0.7 million approximates the average of two independent third party appraisals on the property. SLCC is owned by the children of Alfred A. Schroeder and George F. Schroeder. Both Alfred A. Schroeder and George F. Schroeder are our employees, members of our Board, and significant shareholders of our stock. Lance M. Schroeder, son of Alfred A. Schroeder, is our Vice President of Corporate Development and is a 25% owner of SLCC. We had previously used the property, commonly known as the Monteola Ranch, for entertaining customers and other business associates. We realized a gain of $257 thousand on the transaction in the first quarter of 2005.

Credit Facility. As of June 30, 2005, there were no amounts outstanding under our $15.0 million revolving credit facility, and $15.0 million was available for borrowing. Also as of June 30, 2005, we were in compliance with all of the covenants of the credit facility.

Disputed Debt. We have a $1.196 million principal amount of disputed debt payable in relation to our discontinued Brazilian operations that was due on December 31, 2001. We have recorded the balance of the disputed debt plus interest in the amount of $0.16 million accrued through June 30, 2005 in our financial statements. During the second quarter of 2003, the payee demanded payment of the debt, and we made a settlement offer. We have had no discussions with the payee since 2003. We may not be successful in negotiating a settlement of this disputed debt, in which case the total amount would remain due and payable. If that were to occur, we would have to determine what other options are available to us, including litigation. If we determined that the debt should simply be paid at that time, we believe that we would likely have sufficient funding available, through our cash reserves and/or our available capacity under our credit facility, to pay the disputed debt.

At June 30, 2005 and December 31, 2004, long-term obligations consisted of the following:

	June 30,		December 31,
(amounts in thousands)	2005		2004

Credit facility	$	—	$	—
Disputed debt	1,196		1,196
Capital lease obligation	208		281
Total long-term obligations	1,404		1,477
Less: Current maturities	1,350		1,345
Long-term obligations, net	$	54	$	132

Off-Balance Sheet Arrangements

We own 50% of Lancer FBD, a manufacturer of frozen beverage dispensing equipment. We guaranteed repayment of Lancer FBD’s $1.5 million credit facility with a bank until the facility’s expiration on March 3, 2005. After the expiration of the facility, the bank released our guarantee. Accordingly, we reversed an accrual for the value of the guaranty, resulting in income of $22,500 during the first quarter of 2005. Lancer’s portion of Lancer FBD’s net income in 2004 was $1.4 million, and its share of Lancer FBD’s net income in the six months ended June 30, 2005 was $0.9 million.

We own 50% of Moo Technologies, a developmental stage limited liability company engaged in the commercialization of concentrated shelf-stable milk products. Until recently, we guaranteed Moo Technologies’ $0.75 million revolving credit facility with a bank. During the first quarter of 2005, Moo Technologies repaid all amounts outstanding under the revolving credit facility and terminated the facility, and the lender released us from our guaranty. Our portion of Moo Technology’s loss was $0.3 million in 2004, and $0.2 million during the first half of 2005. We have invested $1.4 million in Moo Technologies since its inception, including $0.6 million during the first half of 2005, bringing our net investment in the company to $0.7 million as of June 30, 2005. We expect Moo Technologies to be unprofitable through at least 2005, and we expect to continue to fund Moo Technologies in a manner consistent with what we have done in the past.

Risk Factors

Risks Relating to Our Business

Our success is reliant upon our relationship with The Coca-Cola Company.

Substantially more than half of our sales are derived from, or influenced by, The Coca-Cola Company. Direct sales to The Coca-Cola Company, our largest customer, accounted for approximately 23%, 28% and 35% of our net sales for the years ended December 31, 2004, 2003 and 2002, respectively. We do not have a long-term supply contract with The Coca-Cola Company or any of our other customers. As a result, The Coca-Cola Company has the ability to adversely affect, directly or indirectly, the volume and price of the products sold by us. While we do not anticipate the loss or reduction in this business or the imposition of significant price constraints based upon our past experience and current relations with The Coca Cola Company, any such occurrence would have a material adverse effect on us and our results of operation.

Our business is subject to rapidly changing technologies and is highly competitive.

The business of manufacturing and marketing beverage dispensing systems and other related equipment is characterized by rapidly changing technology and is highly competitive. In addition, we frequently compete with companies having substantially greater financial resources than ours. Although we have been able to compete successfully in the past, if we were to lose any or all of our competitive advantages or if our competitors were able to provide product suitability and reliability, price, product warranty, technical expertise and delivery time, in a manner superior to ours, we would likely lose our market share and demand for our products would decline. In addition, if our existing long standing relationships with certain of our customers, including The Coca-Cola Company, were to be disrupted or become unfriendly, our competitors may be afforded an opportunity to provide their products to our customers and begin to develop their own strong relationships with our customers. Since these relationships have become so important in our industry, these events would make our ability to continue to provide our products much more difficult and in turn, the newly formed relationships would become more difficult barriers to overcome as time progressed.

We are subject to a formal Securities and Exchange Commission inquiry and an investigation by the US Attorney.

the Securities and Exchange Commission had issued a formal order of investigation that appeared to concern matters which were the subject of the Investigation. We have fully cooperated, and intend to fully cooperate with any continuing investigation by the US Attorney’s Office or the Securities and Exchange Commission. See Note 12 to the “Notes to the Consolidated Financial Statements” for more information relating to these investigations. Although we are unable at this point to predict the scope or outcome of these investigations, it is possible that they could result in the institution of administrative, civil injunctive or criminal proceedings, the imposition of fines and penalties, and/or other remedies and sanctions. The conduct of these type of proceedings could adversely affect our business. We may incur further expenses associated with responding to these agencies, regardless of the outcome, and the efforts and attention of our management team may be diverted from normal business operations which could, in turn, adversely affect our business, financial condition, operating results, and cash flow.

In addition, under the terms of our new credit facility, certain governmentally imposed fines or cease and desist orders are an event of default and could result in the termination of the loan commitments and acceleration of the outstanding debt thereunder. If we did not have sufficient cash to pay the accelerated amount, we would need to find alternate funding sources, sell assets, or find other ways to raise the cash, none of which we can guarantee we would be able to do on commercially reasonable terms or at all.

Finally, our future success depends in large part on the support of our suppliers and customers, who may react adversely to the investigations by the Securities and Exchange Commission and US Attorney. Negative publicity about us may cause some of our potential customers to defer purchases of our products. Our vendors and suppliers may re-examine their willingness to do business with us if they lose confidence in our ability to fulfill our commitments.

We have been the target of securities litigation and may again be the target of further actions, which may be costly and time consuming to defend.

We have been the target of securities class action litigation in the past. Securities class action litigation is often brought against a company following a decline in the market price of its securities. Certain factors, including the uncertainty of the Securities and Exchange Commission and US Attorney’s Office investigations could lead to more volatility in our stock price, which could in turn cause us to be the target of future securities class action claims. If we were to become a target of future class action claims, it would likely require significant commitment of our financial and management resources and time, subverting resources and time away from our other business needs, which may materially and adversely affect our business, financial condition and results of operations.

Our directors and executive officers have substantial voting power, giving them the ability to influence corporate actions.

Our directors and executive officers beneficially own approximately 40% of the outstanding shares of our common stock. As a result, our directors and executive officers will have the ability to affect the vote of our shareholders on significant corporate actions requiring shareholder approval, including mergers, share exchanges and sales of all or substantially all of our assets. With such voting power, our directors and executive officers may also have the ability to delay or prevent a change in control of our company.

Our investment in Moo Technologies may not provide us with any investment return or could result in a total loss of the investment.

We own a 50% interest in Moo Technologies, a developmental stage limited liability company engaged in the commercialization of milk products. Our net investment was $0.7 million at June 30, 2005, including $0.6 million that we invested in the first half of 2005. Moo Technologies’ inability to generate material revenues and/or profits in the future could lead to the impairment of some or all of our investment and such investment could be permanently lost.

Doing business in foreign countries creates certain risks not found in doing business in the United States.

Doing business in foreign countries carries with it certain risks that are not found in doing business in the United States. We currently derive a portion of our revenues from international sales of our products and services and intend to look for ways to expand our international operations. The risks of doing business in foreign countries that could result in losses against which we are not insured include:

• exposure to local economic conditions;

• potential adverse changes in the diplomatic relations of foreign countries with the United States;

• hostility from local populations;

• the adverse effect of currency exchange controls;

• restrictions on the withdrawal of foreign investment and earnings;

• government policies against businesses owned by foreigners;

• investment restrictions or requirements;

• expropriations of property;

• the potential instability of foreign governments;

• the risk of insurrections;

• foreign exchange restrictions;

• withholding and other taxes on remittances and other payments by subsidiaries; and

• changes in taxation structure.

Foreign exchange rates may cause future losses in our international operations.

Because we own assets overseas and derive revenues from our international operations, we may incur currency translation losses due to changes in the values of foreign currencies and in the value of the U.S. dollar. We cannot predict the effect of exchange rate fluctuations upon future operating results.

Provisions in our Certificate of Incorporation and Bylaws and Texas law could delay or discourage a takeover which could adversely affect the price of our common stock.

Our Board has the authority to issue up to 5 million shares of preferred stock and to determine the price, rights, preferences, privileges, and restrictions, including voting rights, of those shares without any further vote or action by holders of our common stock. If preferred stock is issued, the voting and other rights of the holders of our common stock may be subject to, and may be adversely affected by, the rights of the holders of our preferred stock. The issuance of preferred stock may have the effect of delaying or preventing a change of control that could have been at a premium price to our stockholders.

Certain provisions of our certificate of incorporation and bylaws could discourage potential takeover attempts and make attempts to change management by stockholders difficult. Our Board has the authority to impose various procedural and other requirements that could make it more difficult for our stockholders to effect certain corporate actions. Any vacancy on our Board may be filled by a vote of the majority of directors then in office.

In addition, certain provisions of Texas law could have the effect of delaying or preventing a change in control of our company. Section 13.03 of the Texas Business Corporation Act, for example, prohibits a Texas corporation from engaging in any business combination with any affiliated shareholder for a period of three years from the date the person became an affiliated shareholder unless certain conditions are met.

Risks Relating to Our Common Stock

The trading price of our common stock has been, and is expected to continue to be, volatile.

The American Stock Exchange, where our stock trades, and stock markets in general, have historically experienced extreme price and volume fluctuations that have affected companies unrelated to their individual operating performance. The trading price of our common stock has been and is likely to continue to be volatile due to such factors as:

• variations in quarterly results of our operations;

• announcements of new products or acquisitions by our competitors;

• governmental regulatory action;

• resolution of pending or unasserted litigation;

• final resolution of the Securities and Exchange Commission or US Attorney investigations of which we are a subject; and

• general trends in our industry and overall market conditions.

Movements in prices of equity securities in general may also affect the market price of our common stock.

We have no history of paying dividends on our common stock.

Since our inception, we have not paid, and we have no current plan to pay, cash dividends on our common stock. We currently intend to retain all earnings to support our operations and future growth. The payment of any future dividends will be determined by the Board based upon our earnings, financial condition and cash requirements, restrictions in financing agreements, business conditions and other factors the Board may deem relevant.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes in the Company’s market risk factors since December 31, 2004.

Item 4 – Controls and Procedures

The Company’s principal executive and financial officers have concluded, based on their evaluation as of the end of the period covered by this Form 10-Q, that Lancer’s disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, are effective to ensure that information the Company is required to disclose in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during Lancer’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, Lancer’s internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1 - Legal Proceedings

In August 2003, the US Attorney’s Office informed us that it was conducting an investigation arising from allegations raised in a lawsuit against The Coca-Cola Company by a former Coca-Cola employee, Matthew Whitley, and requested certain information, which we supplied. On January 13, 2004, we received written notice that the Securities and Exchange Commission had issued a formal order of investigation, dated December 2, 2003, that appeared to concern matters which were the subject of our prior Audit Committee investigation (which concluded in January 2004) including certain allegations relating to us that were contained in the Whitley lawsuit against The Coca-Cola Company. We have cooperated, and intend to cooperate in any continuing investigations of the US Attorney’s Office or the Securities and Exchange Commission. We have not had substantive contact relating to these investigations with either the US Attorney’s Office or the Securities and Exchange Commission since July 2004.

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

Not Applicable

Item 3. Defaults Upon Senior Securities.

Not Applicable

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

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits

Exhibits: See Exhibit Index on Page 30.

SIGNATURES

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

Date:	LANCER CORPORATION
	(Registrant)


August 12, 2005	By:	/s/ CHRISTOPHER D. HUGHES
		Christopher D. Hughes
		Chief Executive Officer

August 12, 2005	By:	/s/ MARK L. FREITAS
		Mark L. Freitas
		Chief Financial Officer

INDEX TO EXHIBITS

Exhibit		Description

31.1		Certification of Chief Executive Officer of Lancer Corporation pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

31.2		Certification of Chief Financial Officer of Lancer Corporation pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

32.1		Certification of Chief Executive Officer of Lancer Corporation Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer of Lancer Corporation Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.