UNITED STATES SECURITIES AND EXCHANGE COMMISSION

~~SECURITIES~~Washington, ~~AND~~D.C. ~~EXCHANGE COMMISSION~~20549

WASHINGTON, D.C. 20549

FORM 10-Q

~~Quarterly Report Pursuant To Section 13 or 15~~ (dMark One) ~~of the Securities Exchange Act of 1934~~

~~For~~[X] ~~the~~QUARTERLY ~~quarterly~~REPORT ~~period~~PURSUANT ~~ended—~~TO ~~October~~SECTION 4,13 ~~2003~~OR ~~Commission~~15(d) ~~File~~OF ~~Number~~THE ~~0-9318~~SECURITIES EXCHANGE ACT OF 1934

~~SHOPSMITH,~~For ~~INC. (Exact~~the ~~Name~~quarterly ofperiod ~~Registrant~~ended asJuly 3, ~~specified in its charter)~~2004

Ohio		31-0811466
(State of Incorporation)		(IRS Employer Identification No.)
6530 Poe Avenue
Dayton, Ohio		45414
(Address of Principal		(Zip Code)
Executive Offices)

~~Registrant’s~~[ ] ~~Telephone~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ~~Number 937-898-6070~~

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

~~Yes X No~~ Commission File Number 0-9318

SHOPSMITH, INC.

(Exact name of registrant as specified in its charter)


Ohio		31-0811466

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


6530 Poe Avenue, Dayton, Ohio		45414

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (937) 898-6070

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No

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

[ ] Yes No [X ] No

Indicate the number of shares outstanding of each of the ~~registrant~~issuer’s classes of common stock as of ~~October 21,~~the ~~2003~~latest practicable date.

Common shares, without par value: 2,605,233 shares as of July 21, 2004.

Page 1

TABLE OF CONTENTS

CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 4. Controls and Procedures.
PART II. OTHER INFORMATION
	Item 2. Changes in Securities and Use of Proceeds
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

SHOPSMITH, INC. AND SUBSIDIARIES

INDEX

	Page No.		~~Page No.~~
Part I Financial Information:
Part I. Financial Information:
Item 1. Financial Statements	~~Item 1. Financial Statements~~
	Consolidated Balance Sheets- October 4, 2003 and April 5, 2003		3 - 4
Consolidated Balance Sheets - July 3, 2004 and April 3, 2004		3 - 4
	Consolidated Statements of Operations and Retained Earnings (Deficit) - Three Months and Six Months Ended October 4, 2003 and September 28, 2002		5
Consolidated Statements of Operations and Deficit - Three Months Ended July 3, 2004 and July 5, 2003		5
	Consolidated Statements of Cash Flows- Six Months Ended October 4, 2003 and September 28, 2002		6
Consolidated Statements of Cash Flows - Three Months Ended July 3, 2004 and July 5, 2003		6
Notes to Consolidated Financial Statements	~~Notes to Consolidated Financial Statements~~	7 - 8	~~7 - 8~~
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations~~	9 - 11	~~9 - 10~~
	Item 4. Controls and procedures		11
Item 4. Controls and Procedures		12
Part II Other Information
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds	~~Item 2. Changes in Securities and Use of Proceeds~~	13	12
	Item 4. Submission of Matters to a Vote of Security Holders		12
Item 6. Exhibits and Reports on Form 8-K		13
	Item 6. Exhibits and Reports on Form 8-K		12
Signatures		13
Signatures			13
Exhibits		14 - 52
Exhibits			14 - 17
Exhibit 4.16
Exhibit 4.17
EX-4.18
EX-4.19
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Page 2

~~SHOPSMITH,~~Part ~~INC.~~I ~~AND~~– ~~SUBSIDIARIES~~FINANCIAL INFORMATION ~~CONSOLIDATED BALANCE SHEETS~~

					October 4,		April 5,
					2003		2003
					(Unaudited)
				ASSETS
Current assets:
	Cash and cash equivalents				$	800	$	250,316
	Accounts receivable:
		Trade, less allowance for doubtful accounts:
		$353,520 on October 4, 2003 and $915,489 on April 5, 2003				768,082		1,395,660
	Inventories:
		Finished products				895,279		856,629
		Raw materials and work in process				1,249,025		1,098,679
			Total inventories			2,144,304		1,955,308
	Prepaid expenses					246,326		209,072
			Total current assets			3,159,512		3,810,356
Properties:
	Land, building and improvements					3,150,298		3,148,348
	Machinery, equipment and tooling					6,755,488		6,723,950
			Total cost			9,905,786		9,872,298
	Less, accumulated depreciation and amortization					7,293,228		7,213,852
			Net properties			2,612,558		2,658,446
Long-term portion of accounts receivable trade, less allowance for doubtful accounts:
	$228,739 on October 4, 2003 and $205,709 on April 5, 2003					698,727		577,080
Other assets						3,128		3,128
Total assets					$	6,473,925	$	7,049,010

Item 1. Financial Statements

SHOPSMITH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	July 3,		April 3,
	2004		2004
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	800	$	800
Accounts receivable:
Trade, less allowance for doubtful accounts: $408,134 on July 3, 2004 and $391,871 on April 3, 2004		788,105		1,144,245
Inventories:
Finished products		1,122,707		912,318
Raw materials and work in process		1,016,551		1,210,122

Total inventories		2,139,258		2,122,440
Prepaid expenses		246,265		143,569

Total current assets		3,174,428		3,411,054
Properties:
Land, building and improvements		3,157,054		3,157,054
Machinery, equipment and tooling		6,828,762		6,806,070

Total cost		9,985,816		9,963,124
Less, accumulated depreciation and amortization		7,408,903		7,370,470

Net properties		2,576,913		2,592,654
Long-term portion of accounts receivable trade, less allowance for doubtful accounts: $279,567 on July 3, 2004 and $278,120 on April 3, 2004		661,583		698,087
Other assets		3,128		3,128

Total assets	$	6,416,052	$	6,704,923

Continued

Page 3

SHOPSMITH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

October 4,

April 5,

July 3,

April 3,

2003

2004

(Unaudited)

~~(Unaudited)~~

LIABILITIES AND SHAREHOLDERS’ EQUITY

~~LIABILITIES AND SHAREHOLDERS’ EQUITY~~

Current liabilities:

Accounts payable

~~Accounts payable~~

1,108,905

~~998~~1,~~434~~049,694

~~949,801~~

Note payable

—

400,000

Revolving line of credit

614,754

—

Current portion of long-term debt and capital lease obligation

~~Current portion of long-term debt and capital lease obligation~~

97,824

~~105~~107,~~249~~555

~~105,458~~

Customer advances

~~Customer advances~~

64,281

7374,~~627~~031

~~65,489~~

Accrued liabilities:

~~Accrued liabilities:~~

Compensation, employee benefits and payroll taxes

~~Compensation, employee benefits and payroll taxes~~

288,979

~~259~~410,~~623~~603

~~396,573~~

Sales taxes payable

~~Sales taxes payable~~

48,121

7955,~~598~~696

~~64,177~~

Accrued recourse liability

~~Accrued recourse liability~~

311,768

~~302~~311,~~819~~768

~~351,055~~

Accrued expenses

~~Accrued expenses~~

255,934

~~268~~249,~~414~~482

~~273,605~~

Other

~~Other~~

54,118

7554,~~202~~118

~~72,921~~

Total current liabilities

~~Total current liabilities~~2,844,684

2,~~162~~312,~~966~~947

~~2,679,079~~

Long-term debt and capital lease obligation

2,320,818

2,374,220

Long-term debt and capital lease obligation, less current portion

1,902,572

2,266,665

Total liabilities

~~Total liabilities~~4,747,256

4,~~483~~579,~~784~~612

~~5,053,299~~

Shareholders’ equity:

Preferred shares- without par value; authorized 500,000; none issued

~~Preferred shares- without par value; authorized 500,000; none issued~~

Common shares- without par value; authorized 5,000,000; issued and outstanding 2,605,233

~~Common shares- without par value; authorized 5,000,000; issued and outstanding 2,605,233~~

2,806,482

~~2,806,482~~

Deficit

~~Deficit~~

(1,137,686

)

(~~816~~681,~~341~~171

)

~~(810,771~~

)

Total shareholders’ equity

~~Total shareholders’ equity~~1,668,796

12,~~990~~125,~~141~~311

~~1,995,711~~

Total liabilities and shareholders’ equity

6,416,052

6,~~473~~704,~~925~~923

~~7,049,010~~

See notes to consolidated financial statements.

Page 4

SHOPSMITH, INC. AND SUBSIDIARIES ~~CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)~~

			Three Months Ended						Six Months Ended
			October 4,			September 28,			October 4,			September 28,
			2003			2002			2003			2002
			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Net sales			$	3,174,334		$	3,206,760		$	6,286,838		$	6,621,772
Cost of products sold				1,513,085			1,535,284			3,094,994			3,153,189
Gross margin				1,661,249			1,671,476			3,191,844			3,468,583
Selling expenses				1,097,947			1,223,368			2,285,274			2,472,780
Administrative expenses				419,824			350,750			864,230			775,860
	Total operating expenses			1,517,771			1,574,118			3,149,504			3,248,640
Income before other income and expense				143,478			97,358			42,340			219,943
Interest income				43,518			26,814			87,161			50,244
Interest expense				64,913			87,414			133,019			172,817
Other income (expense), net				1,305			(486	)		2,829			2,630
Income (loss) before income taxes				123,388			36,272			(689	)		100,000
Income tax expense				4,881			—			4,881			—
Net income (loss)				118,507			36,272			(5,570	)		100,000
Retained deficit:
		Beginning		(934,848	)		(847,043	)		(810,771	)		(910,771	)
		Ending	$	(816,341	)	$	(810,771	)	$	(816,341	)	$	(810,771	)
Net income (loss) per common share
(Note 3)
	Basic		$	0.05		$	0.01		$	(0.00	)	$	0.04
	Diluted		$	0.05		$	0.01		$	(0.00	)	$	0.04

CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT


	Three Months Ended
	July 3,			July 5,
	2004			2003
	(Unaudited)			(Unaudited)
Net sales	$	2,787,436		$	3,112,504
Cost of products sold		1,395,440			1,581,909

Gross margin		1,391,996			1,530,595
Selling expenses		1,384,268			1,187,327
Administrative expenses		455,978			444,406

Total operating expenses		1,840,246			1,631,733
Loss before other income and expense		(448,250	)		(101,138	)
Interest income		44,538			43,643
Interest expense		(53,698	)		(68,106	)
Other income, net		895			1,524

Loss before income taxes		(456,515	)		(124,077	)
Income tax expense		—			—

Net loss		(456,515	)		(124,077	)
Deficit:
Beginning		(681,171	)		(810,771	)

Ending	$	(1,137,686	)	$	(934,848	)

Net loss per common share (Note 3)
Basic	$	(0.18	)	$	(0.05	)

Diluted	$	(0.18	)	$	(0.05	)

See notes to consolidated financial statements.

Page 5

SHOPSMITH, INC. AND SUBSIDIARIES ~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

				Six Months Ended
				October 4,			September 28,
				2003			2002
				(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net income (loss)				$	(5,570	)	$	100,000
		Adjustments to reconcile net income (loss) to cash from operating activities:
		Depreciation and amortization			79,376			106,057
		Provision for doubtful accounts			145,929			101,342
		Changes in operating assets and liabilities:
			Restricted cash		—			126,585
			Accounts receivable		360,002			257,244
			Inventories		(188,996	)		(81,271	)
			Other assets		(37,254	)		(49,907	)
			Accounts payable and customer advances		56,771			(536,828	)
			Other current liabilities		(172,675	)		(41,496	)
Cash provided from (used in) operating activities					237,583			(18,274	)
Cash flows from investing activities:
	Property additions				(33,488	)		(10,275	)
Cash (used in) investing activities					(33,488	)		(10,275	)
Cash flows from financing activities:
	Payments on note payable				(400,000	)		—
	Payments on long-term debt and capital lease obligation				(53,611	)		(28,379	)
Cash (used in) financing activities					(453,611	)		(28,379	)
Net decrease in cash					(249,516	)		(56,928	)
Cash and cash equivalents:
	At beginning of period				250,316			76,324
	At end of period			$	800		$	19,396

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended
	July 3,			July 5,
	2004			2003
	(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net loss	$	(456,515	)	$	(124,077	)
Adjustments to reconcile net loss to cash (used in) operating activities
Depreciation and amortization		38,433			39,685
Provision for doubtful accounts		47,887			76,972
Changes in operating assets and liabilities:
Accounts receivable		344,757			(81,404	)
Inventories		(16,818	)		(219,688	)
Prepaid expenses		(102,696	)		(84,486	)
Accounts payable and customer advances		49,461			187,192
Other current liabilities		(122,747	)		(154,589	)

Cash (used in) operating activities		(218,238	)		(360,395	)

Cash flows from investing activities:
Property additions		(22,692	)		(13,156	)

Cash (used in) investing activities		(22,692	)		(13,156	)

Cash flows from financing activities:
Payments on note payable		—			(100,000	)
Net borrowings on revolving line of credit		614,754			251,595
Payments on long-term debt and capital lease obligation		(373,824	)		(27,535	)

Cash provided from financing activities		240,930			124,060

Net decrease in cash		—			(249,491	)
Cash and cash equivalents:
At beginning of period		800			250,316

At end of period	$	800		$	825

See notes to consolidated financial statements.

Page 6

SHOPSMITH, INC. AND SUBSIDIARIES ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

1.NOTES InTO ~~the~~CONSOLIDATED ~~opinion~~FINANCIAL of management, all adjustments (consisting of only normal and recurring adjustments) have been made as of October 4, 2003 and September 28, 2002 to present the financial statements fairly. However, the results of operations for the six months then ended are not necessarily indicative of results for the full fiscal year. The financial statements and notes are presented as permitted by Form 10-Q, and do not contain certain information included in the annual financial statements. The financial statements accompanying this report should be read in conjunction with the financial statements and notes thereto included in the Annual Report to Shareholders for the year ended April 5, 2003. 2. Taxable income for the three months ended October 4, 2003 and for the three and six months ended September 28, 2002 was offset by a net operating loss carryforward. The tax expense shown for the three and six months ended October 4, 2003 relates to a provision for alternative minimum tax. 3. Basic income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted income per share reflects per share amounts that would have resulted if stock options had been converted into common stock. The following reconciles amounts reported in the financial statements:STATEMENTS

	Three Months Ended				Six Months Ended
	October 4,		September 28,		October 4,			September 28,
	2003		2002		2003			2002
Net income (loss)	$	118,507	$	36,272	$	(5,570	)	$	100,000
Weighted average shares		2,605,233		2,605,233		2,605,233			2,605,233
Additional dilutive shares		375		—		188			—
Total dilutive shares		2,605,608		2,605,233		2,605,421			2,605,233
Basic income (loss) per share	$	0.05	$	0.01	$	(0.00	)	$	0.04
Diluted income (loss) per share	$	0.05	$	0.01	$	(0.00	)	$	0.04

1.		In the opinion of management, all adjustments (consisting of only normal and recurring adjustments) have been made as of July 3, 2004 and July 5, 2003 to present the financial statements fairly. However, the results of operations for the three months then ended are not necessarily indicative of results for the full fiscal year. The financial statements and notes are presented as permitted by Form 10-Q, and do not contain certain information included in the annual financial statements. The financial statements accompanying this report should be read in conjunction with the financial statements and notes thereto included in the Annual Report to Shareholders for the year ended April 3, 2004.

2.		There was no tax benefit in the quarters ended July 3, 2004 and July 5, 2003, as it was offset by a change in valuation allowance.

3.		Basic income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted income per share reflects per share amounts that would have resulted if dilutive stock options had been converted into common stock. The following reconciles amounts reported in the financial statements:

There were no additional dilutive shares included in the computation for the periods ended September 28, 2002 because the stock options were anti-dilutive.


	Three Months Ended
	July 3,			July 5,
	2004			2003
Net loss	$	(456,515	)	$	(124,077	)

Weighted average shares		2,605,233			2,605,233
Additional dilutive shares		—			—

Total dilutive shares		2,605,233			2,605,233

Basic loss per share	$	(0.18	)	$	(0.05	)

Diluted loss per share	$	(0.18	)	$	(0.05	)

		There were no additional dilutive shares included in the computation for the periods ended July 3, 2004 and July 5, 2003 because the stock options were anti-dilutive.

4.		On December 31, 2002, Shopsmith entered into a line of credit agreement with Provident Bank which allows the Company to borrow up to the lesser of $750,000 or 80% of eligible receivables due from Lowes Companies, Inc., with interest charged at one and one-half percent over the bank’s prime rate. On June 29, 2004, this agreement was amended to allow borrowings up to $1,000,000, down from $1,400,000 available from the previous amendment.

On June 29, 2004, the Company refinanced a mortgage note on its building with a balance of $2,356,000 with a mortgage note from Provident Bank in the amount of $2,000,000 with interest at one-quarter percent over the bank’s prime rate. The note requires monthly payments of interest and from $8,000 to $10,000 of the principal. In August 2009, the remaining balance of approximately $1,477,000 will become due.

Both agreements require compliance with certain net income, net worth, and miscellaneous covenants. Substantially all personal property is pledged as collateral. As of July 3, 2004, the Company was not in compliance with the net worth and fixed charge coverage covenants of these agreements. The Company has reached agreement with the Provident Bank to waive the covenant violations and to amend the covenants going forward. The Company expects to remain in compliance with its amended covenants through the remainder of fiscal 2005 as well as through June 2005.

		At July 3, 2004, there was $2,000,000 and $614,754 outstanding under the building mortgage agreement and line of credit agreement, respectively.

5.		A major retailer represented 44% and 43% of net sales for the quarters ended July 3, 2004 and July 5, 2003, respectively. This retailer also represented 32% and 41% of trade accounts receivable at July 3, 2004 and April 3, 2004, respectively.

6.		The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” and, accordingly, accounts for its stock option plans using the intrinsic value method of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”

Page 7

~~4. During fiscal 2002, Shopsmith entered into an arrangement with John R. Folkerth, the Company’s CEO, which allows the Company to borrow up to $500,000 with interest at twelve percent.~~ The maximum authorized borrowing was increased to $600,000 in July 2002. Substantially all personal property except for certain receivables are pledged as collateral. Interest is due monthly and the note is payable on demand. At July 5, 2003 there was $300,000 outstanding and at April 5, 2003 there was $400,000 outstanding under this arrangement. Borrowings from Mr. Folkerth are subject to Mr. Folkerth’s approval and are payable upon demand by Mr. Folkerth. The note payable was paid in full on July 31, 2003. 5. On December 31, 2002, Shopsmith entered into a loan agreement with Provident Bank which allows the Company to borrow up to the lesser of $750,000 or 80% of eligible receivables due from Lowes Companies, Inc., with interest charged at one and one-half percent over the bank’s prime rate. On July 17, 2003, this agreement was amended to allow borrowings up to $1,400,000. The agreement requires compliance with certain net income, net worth, and miscellaneous covenants. Substantially all personal property is pledged as collateral. At October 4, 2003, there was no amount outstanding under this agreement. 6. A major retailer represented 24% and 26% of net sales for the quarters ended October 4, 2003 and September 28, 2002, respectively. This retailer also represented 34% and 42% of trade accounts receivable at October 4, 2003 and April 5, 2003, respectively. 7. In May 2002, Shopsmith had implemented an employee salary reduction plan. Reductions under this plan continued through December 2002. As part of this plan, fiscal 2003 pre-tax income above $100,000 was used to return the amount of the reduction to the employees and if income had permitted, to pay an additional incentive equal to the amount of the reduction. Fiscal 2003 income levels permitted approximately $70,000 or 76% of the reduction to be returned. This amount was paid during the quarter ended July 5, 2003, and no further liabilities exist under the plan. 8. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” and, accordingly, accounts for its stock option plans using the intrinsic value method of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” The following table illustrates the effect on net ~~income~~loss and ~~earnings~~net loss per share if compensation expense was measured using the fair value recognition provisions of SFAS No. 123.

	Three Months Ended						~~Six Months Ended~~
	October 4,			September 28,			October 4,			September 28,
	July 3,			July 5,
	2003			2002			2003			2002
	2004			2003
Net income (loss) — as reported	$	118,507		$	36,272		$	(5,570	)	$	100,000
Net loss - as reported	$	(456,515	)	$	(124,077	)
Net income (loss) — pro forma	$	117,847		$	17,272		$	(6,230	)	$	81,000
Net loss - pro forma	$	(456,515	)	$	(124,077	)
Diluted earnings (loss) per share — as reported	$	0.05		$	0.01		$	(0.00	)	$	0.04
Diluted loss per share - as reported	$	(0.18	)	$	(0.05	)
Diluted earnings (loss) per share — pro forma	$	0.05		$	0.01		$	(0.00	)	$	0.03
Diluted loss per share - pro forma	$	(0.18	)	$	(0.05	)

9. New Accounting Pronouncements — In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have an impact on the Company’s consolidated financial statements. In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities”. This standard clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, and addresses consolidation by business enterprises of variable interest entities. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risk among the parties involved. FIN 46 also enhances the disclosure requirements related to variable interest entities. This statement is effective immediately for variable interest entities created or in which an enterprise obtains an interest after January 31, 2003. FIN 46 was effective for the Company beginning July 1, 2003 for all interest in variable interest entities acquired before February 1, 2003. The adoption of this statement did not have an impact on the Company’s consolidated financial statements.

Page 8

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

~~General~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~Shopsmith manufactures and sells woodworking products. Our core product, the~~GENERAL ~~Mark V, is sold directly to consumers through demonstration sales events and~~ ~~indirectly to consumers through distributors (primarily Lowe’s where Shopsmith~~ also conducts sales demonstrations), along with smaller amounts through other efforts. Mark V sales demonstrations are performed in shopping malls, at home shows, and at state fairs. Other woodworking products and accessories are sold through mail and Internet channels. Shopsmith recognizes revenue for these orders at the time of product shipment.

~~Critical~~Shopsmith ~~Accounting~~manufactures ~~Policies~~and ~~And~~sells ~~Estimates~~woodworking products. Our core product, the Mark V, is sold directly to consumers through demonstration sales events and indirectly to consumers through distributors (primarily Lowe’s where Shopsmith also conducts sales demonstrations) along with smaller amounts through other efforts. Mark V sales demonstrations are performed in shopping malls, at home shows, and at state fairs. Other woodworking products and accessories are sold through mail and internet channels. Shopsmith recognizes revenue for these orders at the time of product shipment.

~~The~~CRITICAL ~~financial~~ACCOUNTING ~~condition~~POLICIES ~~and~~AND ~~results of operations for Shopsmith presented in the~~ESTIMATES ~~Consolidated Financial Statements, accompanying notes , selected financial data~~ ~~appearing elsewhere within this report, and management’s discussion and analysis~~ are dependent upon the Company’s accounting policies. The selection and application of these accounting policies involve judgements, estimates, and uncertainties that are susceptible to change. In management’s opinion, the Company’s critical accounting policies include the allowance for doubtful accounts and accrued recourse liability.

The financial condition and results of operations for Shopsmith presented in the Consolidated Financial Statements, accompanying notes , and management’s discussion and analysis are dependent upon the Company’s accounting policies. The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change. The Company’s significant accounting policies are discussed in Note 2 of the notes to the Consolidated Financial Statements included in the Company’s annual report to shareholders for the year ended April 3, 2004. In management’s opinion, the Company’s critical accounting policies include the allowance for doubtful accounts, accrued recourse liability and deferred tax valuation allowance.

Allowance For Doubtful Accounts

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Customer accounts are stratified by type of account, original credit rating, ~~and~~ and recent payment history. Estimated loss rates are then applied to these groups. Deterioration of our customers’ ability to make payments could require ~~additions~~ additions to the allowance.

Accounts repurchased under the recourse provision, discussed below, are carried in trade accounts receivable, net of an allowance for doubtful accounts, while ~~the~~ the Company attempts to collect them. ~~An allowance also exists for estimated future~~ ~~losses on accounts not yet repurchased as discussed below in Accrued Recourse~~ ~~Liability. Since these accounts are not classified as trade accounts receivable~~ ~~until the repurchase occurs, the allowance percentage of doubtful accounts to~~ ~~total receivables is unusually high compared to other receivable arrangements.~~

Accrued Recourse Liability

Certain retail installment contracts sold to financial institutions through the fiscal year ended March 31, 2001 included a recourse provision. Under this recourse provision, Shopsmith is obligated to purchase the installment contract if the customer defaults on ~~his~~their obligation to the financial institution. The Company’s liability for future recourse obligations has been estimated using factors based on the value and rate of change of the value of the outstanding accounts, the rate and changes in the rate of repurchases required under the recourse provision, as well as estimates of amounts collectable after the accounts are repurchased. If these factors would deteriorate, additional accruals would be necessary and would affect future operating results. The Company will be required to adopt Statement of Position 03-03 in April 2006. At that time, purchase of loans under a recourse provision will be recorded at fair value at repurchase date, instead of gross less an allowance for doubtful accounts.

~~Results~~Deferred ofTax ~~Operations~~Valuation Allowance

~~Fiscal~~The ~~2004~~Company ~~second~~has ~~quarter~~recorded ~~sales~~a ~~decreased~~full tovaluation ~~$3,174,000,~~allowance oragainst ~~1.0%~~its ~~from~~net deferred ~~$3,207,000~~tax ~~generated~~assets ~~during~~based ~~the~~on ~~same~~its ~~period~~evaluation aof ~~year~~the ~~ago.~~realizability ~~Fiscal~~of ~~2004 year-to-date sales~~the ~~decreased~~future totax benefits ~~$6,287,000,~~of ordeferred ~~5.1%~~tax ~~from $6,622,000 last year~~assets. The ~~decreases occurred~~effect ~~primarily~~of inthe ~~our~~allowance ~~catalog~~is ~~and~~to ~~distributor~~reduce ~~sales. Demonstration sales of~~to zero the ~~Mark~~carrying Vvalue ~~increased~~of atthe ~~high~~potential ~~traffic~~tax ~~events,~~benefit ~~such~~arising asfrom ~~state fairs. This was~~the ~~partially~~possibility ~~offset~~of byoffsetting ~~decreases~~the inCompany’s ~~Mark~~cumulative Voperating ~~sales~~losses ~~within~~against future ~~Lowe’s~~taxable ~~stores~~income.

Gross margin rates decreased by 0.2 percentage points compared to the same period last year. On a year-to-date basis, gross margin rates decreased by 1.6 percentage points due to the increased proportion of sales through distributors. Operating expenses were reduced by $56,000 to $1,518,000 in the fiscal 2004 second quarter from $1,574,000 in last year’s second quarter. This reduction was due to continued improvement in expense controls on Mark V sales events. Administrative costs were higher than the same period for last year because of a $60,000 favorable agreement on finance participation rebates that occurred in last year’s second quarter. For fiscal 2004 year-to-date, operating costs decreased by $99,000 to $3,150,000 from $3,249,000 in the prior year.

Provisions for recoverable federal income taxes are based on estimated annual effective rates, less a valuation reserve. Taxable income for the quarters ended October 4, 2003 and September 28, 2002 was offset by the utilization of net operating loss carryforwards. Tax expense recorded in the second quarter of fiscal 2004 reflected alternative minimum tax payments.

With the reduction in operating expenses, the Company recorded net income of $119,000 or $.05 per diluted share in the quarter ended October 4, 2003 compared to net income of $36,000 or $.01 per diluted share for the same period of last year. For

Page 9

~~fiscal~~Results ~~2004 year-to-date, a net loss~~ of ~~$6,000 or $.00 per diluted share was~~Operations ~~incurred, compared to net income of $100,000 or $.04 per diluted share for the~~ ~~same period last year.~~

Fiscal 2005 first quarter sales decreased to $2,787,000, or 10.5%, from $3,113,000 during the same period a year ago. This decrease in the first quarter occurred primarily in our demonstration event Mark V sales.

Gross margin rates for the fiscal 2005 first quarter increased by 0.75 percentage points compared to the same period last year. Operating expenses increased by $208,000 to $1,840,000 in the fiscal 2005 first quarter from $1,632,000 in last year’s first quarter. The most significant reason for the increase in operating expenses was an increased expenditure on sales representative training costs. Training was done to both increase the number of Mark V sales representatives, as well as to increase the effectiveness of existing sales representatives.

Provisions for recoverable federal income taxes are based on estimated annual effective rates, less a valuation allowance. No tax benefit is reported for the quarters ended July 3, 2004 and July 5, 2003, as it was offset by a change in valuation allowance.

With the reduction in sales and increased operating expenses, the Company recorded a net loss of $457,000, or $.18 per diluted share, in the quarter ended July 3, 2004, compared to a net loss of $124,000, or $.05 per diluted share, for the same period of last year.

Liquidity and Financial Position

Cash ~~provided~~used ~~from~~in operations totaled $~~238~~218,000 for the ~~six~~quarter ~~months~~ ended ~~October 4~~July 3, ~~2003~~2004, compared with ~~a usage of~~ $18360,000 for the same period of the preceding year. ~~Payments~~On ofJune 29, 2004,the Company refinanced a mortgage note on its building with a balance of $~~400~~2,356,000 onwith a mortgage note ~~payable~~from ~~and~~Provident ~~decreases~~Bank in ~~receivables~~the amount of $~~360~~2,000,000. ~~were~~$615,000 was also borrowed on the ~~primary~~Company’s ~~factors~~revolving ~~affecting~~line ~~cash~~of credit ~~for~~during the ~~period~~first quarter of fiscal 2005, of which $356,000 was used to reduce the above note prior to refinancing. Interest on this new mortgage note is at one-quarter percent over the bank’s prime rate. The note requires monthly payment of interest and from $8,000 to $10,000 of principal. In August 2009, the remaining balance of approximately $1,477,000 will become due.

~~The~~On ~~current~~December 31, ~~ratio~~2002, ~~was~~Shopsmith ~~1.46~~entered tointo 1a atline ~~October~~of credit agreement with Provident Bank. On June 429, ~~2003~~2004, ~~compared~~this agreement was amended to ~~1.42~~allow borrowings up to $1,000,000, atdown ~~the beginning~~from of$1,400,000 ~~the~~available ~~current~~from ~~fiscal~~the ~~year~~previous amendment. The ~~debt~~agreement torequires ~~equity~~compliance ~~ratio~~with ~~decreased~~certain tonet 2income, net worth, and miscellaneous covenants.25 Substantially all personal toproperty 1is ~~from~~pledged 2as collateral.53 toAt 1July 3, at2004, ~~April 5~~$615,000 ~~2003~~was outstanding under this agreement.

~~During~~Both ~~fiscal~~the ~~2002,~~mortgage ~~Shopsmith~~agreement ~~entered~~and ~~into~~the anCompany’s ~~arrangement~~line of credit agreement with Provident ~~John~~Bank R.require ~~Folkerth~~compliance with certain net income, ~~the~~ ~~Company’s~~net ~~CEO~~worth, ~~which~~and miscellaneous ~~allowed~~covenants. As of July 3, 2004, the Company towas ~~borrow~~not upin tocompliance with ~~$500,000~~the ~~with interest~~net atworth ~~twelve~~and ~~percent~~fixed charge covenants of these agreements. The covenants ~~maximum~~required ~~authorized~~a ~~borrowing~~consolidated ~~was~~tangible ~~increased~~net toworth of not less than $~~600~~1,800,000 inand ~~July~~a ~~2002.~~fixed ~~Substantially~~charge coverage ratio at all ~~personal~~times ~~property~~greater ~~except~~than ~~for~~1.2:1 ~~certain~~on ~~receivables~~a ~~was~~rolling ~~pledged~~twelve asmonth ~~collateral~~basis. ~~Interest~~At ~~was~~July 3, ~~due~~2004, ~~monthly~~the ~~and~~Company ~~the~~has ~~note~~a ~~was~~consolidated ~~payable~~tangible onnet ~~demand.~~worth Atof ~~July 5~~$1, ~~2003~~668,796 ~~there~~and ~~was~~a ~~$300,000~~fixed ~~outstanding~~charge ~~under~~coverage ~~this~~ratio of 0.6:1. ~~arrangement~~The ~~all~~Company has reached agreement with Provident Bank to waive the violation of the ~~which~~covenants ~~was~~and ~~paid~~to inamend ~~full~~the oncovenants ~~July 31~~going forward. The amended covenants require a consolidated tangible net worth of not less than $1,450,000 ~~2003~~and a fixed charge coverage ratio of 1.1:1 ~~Borrowings~~on ~~from~~a Mrquarterly basis. ~~Folkerth~~ ~~were~~The ~~subject~~Company expects to ~~Mr. Folkerth’s~~remain ~~approval~~in ~~and~~compliance ~~were~~with ~~payable~~its ~~upon~~amended ~~demand~~covenants bythrough the remainder of ~~Mr.~~fiscal 2005 as well as through June ~~Folkerth~~2005.

OnThe ~~December 31,~~current ~~2002,~~ratio ~~Shopsmith~~was ~~entered~~1.16 ~~into a loan agreement with Provident Bank which allows the Company~~ to ~~borrow~~1 upat ~~to the lesser of $750~~July 3,~~000~~ or2004 ~~80%~~and ~~of eligible receivables due from Lowes Companies, Inc~~1.,47 ~~with~~to ~~interest~~1 ~~charged~~ at ~~one~~ ~~and one-half percent over the Bank’s prime rate. On July~~April 173, ~~2003, this~~2004. ~~agreement~~The ~~was~~debt ~~amended~~ to ~~allow~~equity ~~borrowings~~ratio upincreased to ~~$1,400,000~~2.84 ~~The~~to ~~agreement requires~~1 ~~compliance~~from ~~with certain net income, net worth, and miscellaneous covenants~~2.15 ~~Substantially~~to ~~all~~1 ~~personal~~at ~~property is pledged as collateral. At October~~April 43, ~~2003, there were no amounts outstanding under this agreement~~ 2004.

~~With the increased borrowing allowed under the amended agreement with Provident Bank, the Company believes that adequate liquidity is available for the current fiscal year.~~ The Company believes that ~~continued~~ profitability is critical to ensuring adequate liquidity in both the current and future fiscal years.

Forward Looking Statements

The foregoing discussion and the Company’s consolidated financial statements contain certain forward-looking statements that involve risks and uncertainties, including but not limited to the following: (i) the operating cash flows together with currently available working capital may be inadequate to finance the operating needs of the Company; (ii) cancellation by Lowe’s of the in-store sales program; (iii) the Company may fail to comply with the financial covenants contained in its Loan Agreement dated December 31, 2002 with Provident Bank, in which event the Bank may declare all amounts owing by the Company to the Bank to be immediately due and payable; and (iv) actual losses related to doubtful accounts and recourse liability (discussed under Critical Accounting Policies and Estimates) may exceed current estimates.

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~~Item 4.~~Contractual ~~Controls and Procedures.~~Obligations

(a) Evaluation of Disclosure Controls and Procedures The Company’s Chairman and Chief Executive Officer, John R. Folkerth, and the Company’s Chief Financial Officer, Mark A. May, have evaluated the Company’s internal controls and disclosure controls systems within 90 days of the filing of this report. Messrs. Folkerth and May have concluded that the Company’s disclosure controls and procedures are functioning effectively to provide reasonable assurance that the Company can meet its disclosure obligations. The reporting process is designed to ensure that information required to be disclosed by the Company in the reports that it files or submits with the Commission is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Since Messrs. Folkerth’s and May’s most recent review of the Company’s internal controls systems, there have been no significant changes in internal controls or in other factors that could significantly affect these controls. (b) Changes in Internal Controls There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s disclosure controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actions were taken.


	Payments due by period
			Less than						More than
Contractual Obligations	Total		1 Year		1-3 Years		3-5 Years		5 Years
Revolving Line of Credit	$	614,754	$	614,754	$	—	$	—	$	—
Long-Term Debt		2,000,000		97,428		208,668		216,483		1,477,421
Capital Lease Obligations		396		396		—		—		—
Operating Leases		82,279		45,882		22,817		13,580		—
Total		2,697,429		758,460		231,485		230,063		1,477,421

Forward Looking Statements

The foregoing discussion and the Company’s consolidated financial statements contain certain forward-looking statements that involve risks and uncertainties, including but not limited to the following: (i) the operating cash flows together with currently available working capital may be inadequate to finance the operating needs of the Company; (ii) cancellation by Lowe’s of the in-store sales program; (iii) the Company may fail to meet the amended financial covenants contained in its Loan Agreements dated December 31, 2002 and June 29, 2004 with Provident Bank, in which event the bank may declare all amounts owed by the Company to the bank to be immediately due and payable; and (iv) actual losses related to doubtful accounts and recourse liabilities (discussed under Critical Accounting Policies and Estimates) may exceed current estimates.

Item 3. Defaults Upon Senior Securities.

See “Liquidity and Financial Position” in Item 2 above for a discussion of certain violations by the Company under financial covenants contained in the loan agreements to which the Company is a party. The lender has agreed to waive the violations.

Page 11

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

The Company’s Chairman and Chief Executive Officer, John R. Folkerth, and the Company’s Chief Financial Officer, Mark A. May, have evaluated the Company’s disclosure controls and procedures within 90 days of the filing of this report. Messrs. Folkerth and May have concluded that the Company’s disclosure controls and procedures are functioning effectively to provide reasonable assurance that the Company can meet its disclosure obligations. The reporting process is designed to ensure that information required to be disclosed by the Company in the reports that it files or submits with the Commission is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

(b) Changes in Internal Controls

There were no significant changes in the Company’s internal controls over financial reporting that could materially affect these controls subsequent to the date of the above reference evaluation.

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PART II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

The Loan Agreement ~~dated December 31, 2002~~ between the Company and ~~the~~ Provident Bank prohibits the payment of dividends.

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

The Company held its Annual Meeting of Shareholders on July 30, 2003. At the meeting, shareholders (a) elected Messrs. Robert L. Folkerth and Brady L. Skinner as directors of the Company and (b) approved the appointment of Crowe Chizek and Company LLC as independent public accountants for the Company. Votes were tabulated as follows:

								Broker
Issue		For		Against		Withheld		Non votes
Election of directors:
	Robert L. Folkerth		2,050,545				94,997		—
	Brady L. Skinner		2,055,750				89,792		—
Appointment
	Crowe Chizek and Company LLC		2,140,726		785		4,031		—

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

4.16		Second amendment to loan agreement, promissory note, and security agreement with The Provident Bank dated June 29, 2004.
4.17		Promissory note ($2,000,000) and mortgage dated June 29, 2004 between The Provident Bank and the Company.
4.18		Environmental Indemnity Agreement dated June 29, 2004 between The Provident Bank and the Company.
4.19		Assignment of Rents and Leases dated June 29, 2004 between The Provident Bank and the Company.
31.1		Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer 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 the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

~~None~~ During the quarter ended July 3, 2004, the Company filed the following report on Form 8-K:

~~Page~~A 12Form 8-K filed on June 21, 2004 included the text of the Company’s press release reporting the results of its operations for the year ended April 3, 2004.

SIGNATURES

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


	SHOPSMITH, INC.
	By	/s/ Mark A May

		Mark A. May Vice President of Finance (Principal Financial and Accounting Officer)

Date: ~~November~~August 1817, ~~2003~~2004

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Filing Compare · SHOPSMITH INC