SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission File No. 1-7521

FRIEDMAN INDUSTRIES, INCORPORATED

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (713) 672-9433

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

     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 and (2) has been subject to the filing requirements for the past 90 days.

Yes   X       No             

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

         X                   

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes                  No   X  

     The aggregate market value of the Common Stock held by non-affiliates of the registrant as of September 30, 2004 (computed by reference to the closing price on such date), was approximately $30,977,000.

     The number of shares of the registrant’s Common Stock outstanding at June 11, 2005 was 7,139,747 shares.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Annual Report to Shareholders of Friedman Industries, Incorporated for the fiscal year ended March 31, 2005 — Part II.

      Proxy Statement for the 2005 Annual Meeting of Shareholders — Part III.

PART I

Item 1. Business

      Friedman Industries, Incorporated (the “Company”), a Texas corporation incorporated in 1965, is engaged in pipe manufacturing and processing, steel processing and steel and pipe distribution.

      The Company has two product groups: coil and tubular products. Significant financial information relating to the Company’s product groups for the last three years is contained in Note 7 of the Consolidated Financial Statements included in the Company’s Annual Report to Shareholders for the fiscal year ended March 31, 2005, which financial statements are incorporated herein by reference in Item 8 hereof.

  Coil Products

      The Company purchases hot-rolled steel coils, processes the coils into flat, finished sheet and plate and sells these products on a wholesale, rapid-delivery basis in competition with steel mills, importers and steel service centers. The Company also processes customer-owned coils on a fee basis. The Company has coil processing plants located at Lone Star, Texas and Hickman, Arkansas. At each plant, the steel coils are processed through a cut-to-length line which levels the steel and cuts it to prescribed lengths. The Company’s processing machinery is heavy, mill-type equipment capable of processing steel coils weighing up to 25 tons. Coils are processed to the specifications required for a particular order. Shipments are made via unaffiliated truckers or by rail and, in times of normal supply and market conditions, can generally be made within 48 hours of receipt of the customer’s order.

      At its Lone Star facility, the Company purchases hot-rolled steel coils primarily from Lone Star Steel Company (“LSS”), which is located approximately four miles from the Company’s Lone Star plant. The Lone Star plant purchases its supply of steel from LSS and other suppliers at competitive prices determined at the time of purchase. Loss of LSS as a source of coil supply could have an adverse effect on the Company’s business.

      At the Company’s Hickman facility, the Company warehouses and processes hot-rolled steel coils which are purchased primarily from Nucor Steel Company (“NSC”), which is located approximately one-half mile from the Hickman facility. In addition, the Company’s XSCP Division located in Hickman purchases and markets non-standard hot-rolled coils received from NSC. Loss of NSC as a source of coil supply could have a material adverse effect on the Company’s business.

      At the Lone Star facility, the Company maintains three cut-to-length lines and a coil-to-coil 2-Hi temper pass mill. This equipment is capable of processing steel up to 72 inches wide and up to one-half inch thick. The Hickman facility operates a cut-to-length line which has 72 inch wide and one-half inch thick capability. The Company also operates a 2-Hi temper pass mill at the Hickman facility that is capable of processing steel up to 72 inches wide and one-half inch thick in a coil-to-coil mode or directly from coil to cut-to-length processing.

  Tubular Products

      Through its Texas Tubular Products Division (“TTP”) in Lone Star, Texas, the Company manufactures, purchases, processes and markets tubular products.

      TTP operates two pipe mills that are capable of producing pipe from 2³/8 inches to 8⁵/8 inches in outside diameter. One pipe mill is API-licensed to manufacture line and oil country pipe and also manufactures pipe for structural and piling purposes that meets recognized industry standards. The second pipe mill began operation in April 2004 and generally produces pipe ranging from 2³/8 inches

to 2⁷/8 inches in outside diameter. TTP employs various pipe processing equipment including threading and beveling machines, pipe handling equipment and other related machinery. This machinery can process pipe up to 13³/8 inches in outside diameter.

      The Company currently manufactures and sells substantially all of its line and oil country pipe to LSS pursuant to orders received from LSS. In addition, the Company purchases from LSS and markets to others pipe for structural applications for some sizes of pipe that exceed the capability of the TTP pipe mills.

      The Company purchases a substantial portion of its annual supply of pipe and coil material used in pipe production from LSS. The Company can make no assurances as to the amounts of pipe and coil material that will be available from LSS in the future. Loss of LSS as a source of supply or as a customer could have a material adverse effect on the Company’s business.

  Marketing

      The following table sets forth the approximate percentage of total sales contributed by each group of products and services during each of the Company’s last three fiscal years:

      Coil Products. The Company sells coil products to approximately 250 customers located primarily in the midwestern, southwestern and southeastern sections of the United States. The Company’s principal customers for these products and services are steel distributors and customers fabricating steel products such as storage tanks, steel buildings, farm machinery and equipment, construction equipment, transportation equipment, conveyors and other similar products. During each of the fiscal years ended March 31, 2005, 2004 and 2003, seven, six and six customers, respectively, accounted for approximately 25% of the Company’s sales of coil products. Except for Trinity Industries, Inc., no coil product customer accounted for as much as 10% of the Company’s total sales during those years. Trinity Industries, Inc. accounted for approximately 11% of total sales in fiscal 2005.

      The Company sells substantially all of its coil products through its own sales force. At March 31, 2005, the sales force was comprised of a vice president and three professional sales personnel under the direction of the Senior Vice President — Sales and Marketing. Salesmen are paid on a salary and commission basis.

      Shipments of particular products are made from the facility offering the product desired. If the product is available at more than one facility, other factors such as location of the customer, productive capacity of the facility and activity of the facility enter into the decision regarding shipments. The Company regularly contracts on a quarterly basis with many of its larger customers to supply minimum quantities of steel.

      Tubular Products. The Company sells its tubular products nationally to approximately 260 customers. The Company’s principal customers of these products are steel and pipe distributors, piling contractors and LSS. Sales of pipe to LSS accounted for approximately 16% of the Company’s total sales in fiscal 2005.

      The Company sells its tubular products through its own sales force comprised of five professional sales personnel under the direction of the Senior Vice President — Sales and Marketing. Salesmen are paid on a salary and commission basis.

  Competition

      The Company is engaged in a non-seasonal, highly-competitive business. The Company competes with steel mills, importers and steel service centers. The steel industry, in general, is characterized by a small number of extremely large companies dominating the bulk of the market and a large number of relatively small companies, such as the Company, competing for a limited share of such market.

      The Company believes that in times of normal supply and market conditions its ability to compete is dependent upon its ability to offer products at prices competitive with or below those of other steel suppliers, as well as its ability to provide products meeting customer specifications on a rapid-delivery basis.

  Employees

      At March 31, 2005, the Company had approximately 140 full-time employees.

  Executive Officers of the Company

      The following table sets forth as of March 31, 2005, the name, age, officer positions and family relationships, if any, of each executive officer of the Company and period during which each officer has served in such capacity:

Item 2. Properties

      The principal properties of the Company are described in the following table:

Item 3. Legal Proceedings

      The Company is not a party to, nor is its property the subject of, any material pending legal proceedings.

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

      None.

PART II

      The Company’s Common Stock is traded principally on the American Stock Exchange (Symbol: FRD).

      Reference is hereby made to the sections of the Company’s Annual Report to Shareholders for the fiscal year ended March 31, 2005, entitled “Description of Business — Range of High and Low Sales Prices of Common Stock” and “Description of Business — Cash Dividends Declared Per Share of Common Stock”, which sections are hereby incorporated herein by reference.

      The approximate number of shareholders of record of Common Stock of the Company as of May 27, 2005 was 450.

Item 6. Selected Financial Data

      Information with respect to Item 6 is hereby incorporated herein by reference from the section of the Company’s Annual Report to Shareholders for the fiscal year ended March 31, 2005, entitled “Selected Financial Data”.

      Information with respect to Item 7 is hereby incorporated herein by reference from the section of the Company’s Annual Report to Shareholders for the fiscal year ended March 31, 2005, entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

      In the normal course of business the Company is exposed to market risk primarily from changes in the cost of steel in inventory and in interest rates. The Company closely monitors exposure to market risks and develops appropriate strategies to manage risk. With respect to steel purchases, there is no recognized market to purchase derivative financial instruments to reduce the inventory exposure risk on changing commodity prices. The exposure to market risk associated with interest rates relates primarily to debt. Recent debt balances are minimal and, as a result, direct exposure to interest rates changes is not significant.

Item 8. Financial Statements and Supplementary Data

      The following financial statements and notes thereto of the Company included in the Company’s Annual Report to Shareholders for the fiscal year ended March 31, 2005, are hereby incorporated herein by reference:

      Information with respect to supplementary financial information relating to the Company appears in Note 8 — Summary of Quarterly Results of Operations (Unaudited) of the Notes to Consolidated Financial Statements incorporated herein by reference above in this Item 8 from the Company’s Annual Report to Shareholders for the fiscal year ended March 31, 2005.

      The following supplementary schedule for the Company for the year ended March 31, 2005, is included elsewhere in this report.

      Schedule II — Valuation and Qualifying Accounts

      All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.

      None

Item 9A. Controls and Procedures

     Evaluation of Disclosure Controls and Procedures

      The Company’s management, with the participation of the Company’s principal executive officer (CEO) and principal financial officer (CFO), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended ( the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the CEO and CFO have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective to ensure that information that is required to be disclosed by the Company in the reports 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.

     Changes in Internal Controls

      There were no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

      None

PART III

Item 10. Directors and Executive Officers of the Registrant

      Except as otherwise set forth below, information with respect to Item 10 is hereby incorporated herein by reference from the Company’s proxy statement in respect of the 2005 Annual Meeting of Shareholders, definitive copies of which are expected to be filed with the Securities and Exchange Commission on or before 120 days after the end of the Company’s 2005 fiscal year.

      Information with respect to Item 10 regarding executive officers is hereby incorporated by reference from the information set forth under the caption “Executive Officers of the Company” in Item 1 of this report.

      The Company has adopted the Friedman Industries, Incorporated Code of Conduct and Ethics (the “Code”) which applies to the Company’s employees, directors and officers, including its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the Code is filed as an exhibit hereto.

Item 11. Executive Compensation

      Information with respect to Item 11 is hereby incorporated herein by reference from the Company’s proxy statement in respect of the 2005 Annual Meeting of Shareholders, definitive copies of which are expected to be filed with the Securities and Exchange Commission on or before 120 days after the end of the Company’s 2005 fiscal year.

      The following table sets forth certain equity compensation plan information for the Company as of March 31, 2005:

Equity Compensation Plan Information

      The additional information with respect to Item 12 regarding the security ownership of certain beneficial owners and management, and related matters, is hereby incorporated herein by reference from the Company’s proxy statement in respect to the 2005 Annual Meeting of Shareholders, definitive copies of which are expected to be filed with the Securities and Exchange Commission on or before 120 days after the end of the Company’s 2005 fiscal year.

Item 13. Certain Relationships and Related Transactions

      Information with respect to Item 13 is hereby incorporated herein by reference from the Company’s proxy statement in respect of the 2005 Annual Meeting of Shareholders, definitive copies of which are expected to be filed with the Securities and Exchange Commission on or before 120 days after the end of the Company’s 2005 fiscal year.

      Information with respect to Item 14 is hereby incorporated herein by reference from the Company’s proxy statement in respect of the 2005 Annual Meeting of Shareholders, definitive copies of which are expected to be filed with the Securities and Exchange Commission on or before 120 days after the end of the Company’s 2005 fiscal year.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

      (a) Documents included in this report

      1. Financial Statements

      The following financial statements and notes thereto of the Company are included in the Company’s Annual Report to Shareholders for the fiscal year ended March 31, 2005, which is incorporated herein by reference.

      2. Financial Statement Schedules

      The following financial statement schedule of the Company is included in this report at page S-1.

      All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.

      3. Exhibits

      Copies of exhibits filed as a part of this Annual Report on Form 10-K may be obtained by shareholders of record at a charge of $.10 per page. Direct inquiries to: Benny Harper, Senior Vice President — Finance, Friedman Industries, Incorporated, P. O. Box 21147, Houston, Texas 77226.

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Friedman Industries, Incorporated has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, and State of Texas, this 28th day of June, 2005.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated on behalf of Friedman Industries, Incorporated in the City of Houston, and State of Texas.

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

FRIEDMAN INDUSTRIES, INCORPORATED

EXHIBIT INDEX

      Copies of exhibits filed as a part of this Annual Report on Form 10-K may be obtained by shareholders of record at a charge of $.10 per page. Direct inquiries to: Benny Harper, Senior Vice President — Finance, Friedman Industries, Incorporated, P. O. Box 21147, Houston, Texas 77226.

EXHIBIT 13.1

THE COMPANY’S ANNUAL

REPORT TO SHAREHOLDERS FOR

THE FISCAL YEAR ENDED MARCH 31, 2005

FRIEDMAN

INDUSTRIES

INCORPORATED

2005

ANNUAL REPORT

FINANCIAL HIGHLIGHTS

TO OUR SHAREHOLDERS:

          As can be seen in the above financial highlights, the Company experienced an outstanding year in fiscal 2005. Strong demand for the Company’s products and services throughout the year generated record sales and earnings.

      Currently, management is sensing some weakness in the market for steel products. As volume has remained generally stable, selling prices and cost of material have decreased since March 31, 2005. It is difficult to determine if this weakness is temporary. However, management is focused on the markets and continues its efforts to maintain assets and liabilities at levels commensurate with operations.

      You are cordially invited to attend the Annual Meeting of Shareholders to be held on September 8, 2005. The meeting will be held at 11:00 a.m. in the offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas.

FRIEDMAN INDUSTRIES, INCORPORATED

OFFICERS

Jack Friedman

Chairman of the Board and

Chief Executive Officer

William E. Crow

President and Chief Operating Officer

Benny B. Harper

Senior Vice President — Finance

and Secretary/Treasurer

Thomas N. Thompson

Senior Vice President — Sales and Marketing

Ronald L. Burgerson

Vice President

Dale Ray

Vice President

Howard Henderson

Vice President of Operations — Texas Tubular Division

Robert Sparkman

Vice President of Sales — Coil Divisions

Charles W. Hall

Assistant Secretary

COMPANY OFFICES AND WEB SITE

  CORPORATE OFFICE

  4001 Homestead Road

  Houston, Texas 77028

  713-672-9433

  SALES OFFICE — COIL PRODUCTS

  1121 Judson Road

  Longview, Texas 75606

  903-758-3431

  SALES OFFICE — TUBULAR PRODUCTS

  P.O. Box 0388

  Lone Star, Texas 75668

  903-639-2511

  WEB SITE

  www.friedmanindustries.com

COUNSEL

Fulbright & Jaworski L.L.P.

Fulbright Tower

1301 McKinney, Suite 5100

Houston, Texas 77010

AUDITORS

Ernst & Young LLP

1401 McKinney, Suite 1200

Houston, Texas 77010

TRANSFER AGENT AND REGISTRAR

American Stock Transfer & Trust Company

59 Maiden Lane

New York, New York 10007

DIRECTORS

Jack Friedman

Chairman of the Board and

Chief Executive Officer

William E. Crow

President and Chief Operating Officer

Harold Friedman

Former Vice Chairman of the Board

Houston, Texas

Charles W. Hall

Fulbright & Jaworski L.L.P. (law firm)

Houston, Texas

Alan M. Rauch

President, Ener-Tex

International, Inc.

(oilfield equipment sales)

Houston, Texas

Hershel M. Rich

Private investor and

business consultant

Houston, Texas

Kirk K. Weaver

President, FXI Corporation

(technology support services)

Houston, Texas

Joe L. Williams

Managing Director,

Acordia of Texas, Inc.

(insurance and risk management)

Houston, Texas

ANNUAL REPORT ON FORM 10-K

Shareholders may obtain without charge a copy of the Company’s Annual Report on Form 10-K for the year ended March 31, 2005 as filed with the Securities and Exchange Commission. Written requests should be addressed to: Benny B. Harper, Senior Vice President, Friedman Industries, Incorporated, P.O. Box 21147, Houston, Texas 77226.

FRIEDMAN INDUSTRIES, INCORPORATED

DESCRIPTION OF BUSINESS

      Friedman Industries, Incorporated is engaged in pipe manufacturing and processing, steel processing and steel and pipe distribution.

      At its facilities in Lone Star, Texas, and Hickman, Arkansas, the Company processes hot-rolled steel coils into flat, finished sheet and plate and sells these products on a wholesale, rapid-delivery basis in competition with steel mills, importers and steel service centers. The Company also processes customer-owned coils on a fee basis. In addition, through its XSCP Division located in Hickman, Arkansas, the Company purchases and markets non-standard hot-rolled coils received from Nucor Steel Company (“NSC”). The Company purchases a substantial amount of its annual coil tonnage from Lone Star Steel Company (“LSS”) and NSC. Loss of LSS or NSC as a source of coil supply could have a material adverse effect on the Company’s business.

      The Company sells its coil products and processing services directly through the Company’s own sales force to approximately 250 customers located primarily in the midwestern, southwestern and southeastern sections of the United States. These products and services are sold principally to steel distributors and to customers fabricating steel products such as storage tanks, steel buildings, farm machinery and equipment, construction equipment, transportation equipment, conveyors and other similar products.

      The Company, through its Texas Tubular Products Division located in Lone Star, Texas, manufactures, purchases, processes and markets tubular products (“pipe”). The Company sells pipe nationally to approximately 260 customers and sells a substantial amount of manufactured pipe to LSS. The Company purchases a substantial portion of its annual supply of pipe and coil material used in pipe production from LSS. Loss of LSS as a source of such pipe and coil material supply or as a customer of manufactured pipe could have a material adverse effect on the Company’s business.

      Significant financial information relating to the Company’s two product groups, coil and tubular products, is contained in Note 7 of Notes to the Company’s Consolidated Financial Statements appearing herein.

RANGE OF HIGH AND LOW SALES PRICES OF COMMON STOCK

CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK

      The Company’s Common Stock is traded principally on the American Stock Exchange (trading symbol FRD).

      The approximate number of shareholders of record of the Company as of May 27, 2005 was 450.

FRIEDMAN INDUSTRIES, INCORPORATED

CONSOLIDATED BALANCE SHEETS

ASSETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

See accompanying notes.

FRIEDMAN INDUSTRIES, INCORPORATED

CONSOLIDATED STATEMENTS OF EARNINGS

CONSOLIDATED STATEMENTS OF

STOCKHOLDERS’ EQUITY

See accompanying notes.

FRIEDMAN INDUSTRIES, INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

FRIEDMAN INDUSTRIES, INCORPORATED

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

March 31, 2005

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      BASIS OF CONSOLIDATION:  The consolidated financial statements include the accounts of Friedman Industries, Incorporated, and its subsidiary (collectively, the “Company”). All material intercompany amounts and transactions have been eliminated.

      REVENUE RECOGNITION:  Revenues are recognized upon shipment of products. The terms of shipments made by the Company are free on board shipping point.

      TRADE RECEIVABLES:  The Company’s receivables are recorded when billed, advanced or accrued and represent claims against third parties that will be settled in cash. The carrying value of the Company’s receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. The Company estimates its allowance for doubtful accounts based on historical collection trends, the age of outstanding receivables and existing economic conditions. Past-due receivable balances are written-off when the Company’s internal collection efforts have been unsuccessful in collecting the amount due.

      CASH AND CASH EQUIVALENTS:  The Company considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents.

      INVENTORIES:  Inventories consist of prime coil, non-standard coil and tubular materials. Prime coil inventory consists primarily of raw materials, non-standard coil inventory consists primarily of finished goods and tubular inventory consists of both raw materials and finished goods. Inventories are valued at the lower of cost or replacement market. Cost for prime coil inventory is determined under the last-in, first-out (“LIFO”) method. During the year ended March 31, 2004 earnings before income taxes include a benefit of approximately $950,000 from the liquidation of LIFO inventory quantities carried at lower costs prevailing in prior year as compared to respective current costs of purchases. At March 31, 2005, March 31, 2004 and March 31, 2003, replacement cost exceeded LIFO cost by approximately $8,200,000, $4,320,000 and $990,000, respectively. Cost for non-standard coil inventory is determined using the specific identification method. Cost for tubular inventory is determined using the weighted average method.

      The following is a summary of inventory by product group:

      PROPERTY, PLANT, AND EQUIPMENT:  On April 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). That statement requires that assets held-for-sale be recorded at the lower of their carrying amount or their fair value less cost to sell. Held-for-sale assets are not depreciated. Assets are classified as held-for-sale only if (i) management commits to a plan to sell the asset, (ii) the asset is available for immediate sale, (iii) the asset is actively being marketed for sale at a price that is reasonable in relation to its current fair value and (iv) management believes the sale of the asset is probable and expects transfer within one year. No assets met the definition of held-for-sale at March 31, 2005 and 2004. Property, plant, and equipment are stated at cost.

FRIEDMAN INDUSTRIES, INCORPORATED

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Depreciation is calculated primarily by the straight-line method over the estimated useful lives of the various classes of assets as follows:

      Interest costs incurred during construction projects are capitalized as part of the cost of such assets. No interest was capitalized for the years presented. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. No impairments were necessary at March 31, 2005 or 2004.

      Maintenance and repairs are expensed as incurred.

      SUPPLEMENTAL CASH FLOW INFORMATION:  The Company paid interest of approximately $15,700 in 2005, $35,300 in 2004, and $87,307 in 2003. The Company paid income taxes, net of refunds, of $4,891,061 in 2005, $1,065,000 in 2004, and $617,000 in 2003.

      USE OF ESTIMATES:  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

      FINANCIAL INSTRUMENTS:  Since the Company’s financial instruments are short term in nature, the carrying value approximates fair value.

      RECLASSIFICATIONS:  Certain reclassifications have been made to prior period amounts to conform with the current year presentation.

      STOCK BASED COMPENSATION:  The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), for its employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

      The following schedule reflects the impact on net income and earnings per common share if the Company had applied the fair value recognition provisions of Statements of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation to stock based employee compensation for the years ended March 31:

FRIEDMAN INDUSTRIES, INCORPORATED

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      The fair value of options granted in fiscal 2003 was estimated using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 3.0%, a dividend yield of 3.4%, volatility factor of the expected market price of the Company’s common stock of 0.42, and a weighted average expected life of the option of four years. There were no options granted in fiscal 2005 and 2004.

      The Company also grants stock awards to outside directors and records these grants as expense.

      ECONOMIC RELATIONSHIP:  Lone Star Steel Company (“LSS”) and Nucor Steel Company supply a significant amount of steel products to the Company. Loss of either of these mills as a source of supply could have a material adverse effect on the Company. Additionally, the Company derives revenue by selling a substantial amount of its manufactured pipe to LSS. Total sales to LSS were approximately 16%, 15% and 11% of total company sales in 2005, 2004, and 2003, respectively. Loss of LSS as a customer could have a material adverse effect on the Company’s business. Other than LSS, no customer accounted for 10% of total sales in the three years ended March 31, 2005, except Trinity Industries, Inc. which accounted for approximately 11% of total sales in fiscal 2005.

      The Company’s sales are concentrated primarily in the midwestern, southwestern, and southeastern sections of the United States, and are primarily to customers in the steel distributing and fabricating industries. The Company performs periodic credit evaluations of the financial conditions of its customers and generally does not require collateral. Generally, receivables are due within 30 days.

      NEW ACCOUNTING PRONOUNCEMENT:  In December 2004, the Financial Accounting Standards Board (FASB) issued Statement Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)). Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. The SEC has deferred the implementation date and the Company is now required to adopt SFAS 123(R) no later than April 1, 2006. SFAS 123(R) permits adoption using one of two methods, a modified prospective method (“Prospective Method”) or a modified retrospective method (“Retrospective Method”). With the Prospective Method, costs are recognized beginning with the effective date based on the requirements of SFAS 123(R) for (i) all share-based payments granted after the effective date of SFAS 123(R), and (ii) all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date. The Retrospective Method applies the requirements of the Prospective Method but further permits entities to restate all prior periods presented based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures. The Company has currently not determined which method it will use and therefore, the impact of the adoption of SFAS 123(R) cannot be reasonably estimated at this time. The effect of expensing stock options using the Black-Scholes model is presented in the pro forma disclosure above.

2. STOCK OPTIONS AND CAPITAL STOCK

      Under the Company’s 1989 and 1996 Stock Option Plans, options were granted to certain officers and key employees to purchase common stock of the Company. Pursuant to the terms of the plans, 16,314 additional options may be granted. All options have ten-year terms and become

FRIEDMAN INDUSTRIES, INCORPORATED

2. CAPITAL STOCK AND STOCK OPTIONS (Continued)

fully exercisable at the end of six months of continued employment. The following is a summary of activity relative to options outstanding during the years ended March 31:

      Outstanding and exercisable stock options at March 31, 2005, were as follows:

      The Company has 1,000,000 authorized shares of Cumulative Preferred Stock with a par value of $1 per share. The stock may be issued in one or more series, and the Board of Directors is authorized to fix the designations, preferences, rights, qualifications, limitations, and restrictions of each series, except that any series must provide for cumulative dividends and must be convertible into common stock.

3. LONG-TERM DEBT AND COMMITMENTS AND CONTINGENCIES

      The Company has a credit arrangement with a bank which provides for a revolving line of credit facility (the “revolving facility”). Pursuant to the revolving facility which expires April 1, 2006, the Company may borrow up to $6 million at the bank’s prime rate or at 1.5% over LIBOR. At March 31, 2005 and 2004, the Company did not have borrowings outstanding under the revolving facility. The Company entered into certain notes payable related to the purchase of certain pipe loading equipment. The annual principal payments required on these notes payable including the current portion thereon during the next five years are as follows:

      The Company is obligated under an operating lease for its Longview, Texas office building that expires on April 30, 2008. The following is a schedule of future minimum annual rental payments required under this operating lease as of March 31, 2005:

FRIEDMAN INDUSTRIES, INCORPORATED

3. LONG-TERM DEBT AND COMMITMENTS AND CONTINGENCIES (Continued)

      Rental expense for leased properties was $27,264, $27,264 and $131,629 during fiscal 2005, 2004 and 2003, respectively.

4. EARNINGS PER SHARE

      Basic and dilutive net income per share is computed based on the following information:

5. INCOME TAXES

      Deferred income taxes are provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for tax purposes. Significant components of the Company’s consolidated deferred tax assets (liabilities) are as follows:

FRIEDMAN INDUSTRIES, INCORPORATED

5. INCOME TAXES (Continued)

      The U.S. federal statutory income tax is reconciled to the effective rate as follows:

      Components of tax expense follows:

6. PROFIT SHARING PLAN AND OTHER POSTRETIREMENT BENEFITS

      The Company has a defined contribution plan (the “Plan”) covering substantially all employees, including officers. Company contributions, which are made at the discretion of the Board of Directors in an amount not to exceed 15% of the total compensation paid during the year to all eligible employees, were $276,000 for the year ended March 31, 2005, $280,000 for the year ended March 31, 2004, and $260,000 for the year ended March 31, 2003. The employees fully vest in the Plan upon completion of 7 years of service. Contributions, Plan earnings, and forfeitures of terminated participants’ nonvested accounts are allocated to the individual accounts of participating employees based on compensation received during the plan year and years of active service with the Company.

      Employees of the Company may participate in a 401(k) retirement plan (the “401(k) plan”). Employees are eligible to participate in the 401(k) plan when the employee has completed one year of service. Under the 401(k) plan, participating employees may defer a portion of their pretax earnings up to certain limits prescribed by the Internal Revenue Service. The Company provides matching contributions under the provisions of the 401(k) plan. Employees fully vest in the Company’s matching contributions upon the completion of 7 years of service. Contribution expense related to the 401(k) plan was approximately $40,000, $28,000 and $27,000 for the years ended March 31, 2005, 2004 and 2003, respectively.

FRIEDMAN INDUSTRIES, INCORPORATED

7. INDUSTRY SEGMENT DATA

      The Company is engaged in pipe manufacturing and processing and steel and pipe distribution business. Within the Company, there are two product groups: coil and tubular. Coil product involves converting steel coils into flat sheet and plate steel cut to customer specifications and reselling steel coils. Through its tubular operation, the Company purchases, processes, manufactures, and markets tubular products. The following is a summary of significant financial information relating to the product groups:

      Operating profit is total revenue less operating expenses, excluding general corporate expenses, interest expense, and interest and other income. General corporate expenses reflect general and administrative expenses not directly associated with segment operations and consist primarily of corporate and accounting salaries, professional fees and services, bad debts, accrued profit sharing expense, accrued quarterly incentive bonuses, corporate insurance expenses and office supplies. Corporate assets consist primarily of cash and cash equivalents, prepaid federal income taxes, deferred income taxes and the cash value of officers’ life insurance. Although inventory is transferred at cost between product groups, there are no sales between product groups.

FRIEDMAN INDUSTRIES, INCORPORATED

8. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (Unaudited)

      The following is a summary of unaudited quarterly results of operations for the years ended March 31, 2005 and 2004: