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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-K



Annual Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2005



Commission file number 0-4538



Cybex
International, Inc.

(Exact name of registrant as specified in its charter)



|                                                              |  |                                         
|------------------------------------------------------------- |  | ----------------------------------------
|New York                                                      |  | 11-1731581                              
|(State or other jurisdictionof incorporation or organization) |  | (I.R.S. Employer Identification No.)    
|                                                              | 
|10 Trotter Drive, Medway, Massachusetts                       |  | 02053                                   
|(Address of principal executive office)                       |  | (Zip Code)                              
|                                                              | 
|Registrants telephone number, including area code            |  | (508) 533-4300                          
|                                                             
|Securities registered pursuant to Section 12(b) of the Act:  
|                                                              | 
|Title of Each Class                                           |  | Name of each exchangeon which registered
|Common Stock, $.10 Par Value                                  |  | American Stock Exchange                 



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



NONE



Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [    ]    No [X]



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
[    ]     No [X]



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 required 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):



|                               |  |                   |        |  |                       |    
|------------------------------ |  | ----------------- | ------ |  | --------------------- | ---
|Large accelerated filer [    ] |  | Accelerated filer | [    ] |  | Non-accelerated filer | [X]



Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [    ]    No [X]



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The aggregate market
value of the common stock held by non-affiliates of the registrant as of June 25, 2005 was $23,176,737.



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The number of shares outstanding of the
registrants classes of common stock, as of March 20, 2006

Common Stock, $.10 Par Value  15,172,810 shares



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DOCUMENTS INCORPORATED BY REFERENCE



The information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference from the registrants definitive proxy statement for
its Annual Meeting of Stockholders, to be filed with the Commission pursuant to Regulation 14A, or if such proxy statement is not filed with the Commission on or before 120 days after the end of the fiscal year covered by this Report, such
information will be included in an amendment to this Report filed no later than the end of such 120-day period.



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PART I



|ITEM 1.BUSINESS | 
|--------------- | 



General



Cybex
International, Inc. (the Company or Cybex), a New York corporation, is a manufacturer of exercise equipment and develops, manufactures and markets strength and cardiovascular fitness equipment products for the commercial and
consumer markets. The Company operates in one business segment.



Products



The Company develops, manufactures and markets high
performance, professional quality exercise equipment products for the commercial market and, to a lesser extent, the premium segment of the consumer market. These products can generally be grouped into two major categories: cardiovascular products
and strength systems.



The Companys products are of
professional quality and are believed to be among the best in the category in which they compete, featuring high performance and durability suitable for utilization in health clubs or by professional athletes. Accordingly, the majority of the
Companys products are premium priced.



The contribution
to net sales of the Companys product lines over the past three years is as follows (dollars in millions)



|                            |  |           |       |         |      |   |           |      |         |  |     |           |  |         |      |  |     |  
|--------------------------- |  | --------- | ----- | ------- | ---- | - | --------- | ---- | ------- |  | --- | --------- |  | ------- | ---- |  | --- | -
|                            |  | 2005      |       |         | 2004 |   |           | 2003 |        
|                            |  | Net Sales |       | Percent |      |   | Net Sales |      | Percent |  |     | Net Sales |  | Percent |     
|Cardiovascular products     |  | $         | 62.3  |         | 54   | % |           | $    | 48.7    |  | 47  | %         |  | $       | 38.7 |  | 43  | %
|Strength systems            |  |           | 41.1  |         | 36   | % |           |      | 43.6    |  | 42  | %         |  |         | 41.0 |  | 46  | %
|Parts                       |  |           | 5.7   |         | 5    | % |           |      | 6.3     |  | 6   | %         |  |         | 6.7  |  | 7   | %
|Freight and other sales (1) |  |           | 5.5   |         | 5    | % |           |      | 4.8     |  | 5   | %         |  |         | 4.1  |  | 4   | %
|                            |  |           |       |         |      |   |           |      |         |  |     |           |  |         |      |  |     |  
|                            |  | $         | 114.6 |         | 100  | % |           | $    | 103.4   |  | 100 | %         |  | $       | 90.5 |  | 100 | %
|                            |  |           |       |         |      |   |           |      |         |  |     |           |  |         |      |  |     |  

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|(1) | Reflects shipping and handling fees and costs included in customer invoices.
|--- | ----------------------------------------------------------------------------



Eagle, Stableflex and VR2 are registered trademarks of Cybex, and Arc Trainer, Cybex Arc
Trainer, Cyclone, Cyclone-S, FT360, LCX-425T, MG500, Pro+, Safety Sentry, Sport +, Total Body Arc Trainer, Trotter Elite,
VR and VR3 are trademarks of Cybex. Trazer is a registered trademark of Trazer Technologies, Inc., used by Cybex under license.



Cardiovascular Products.



The Companys cardiovascular equipment is designed to provide aerobic conditioning by elevating the heart rate, increasing lung capacity, endurance
and circulation, and burning body fat. The Companys cardiovascular products include treadmills, cross trainers, bikes and steppers. In addition, the Company introduced during 2005 a new three-dimensional optical tracking and measurement system
under the name Trazer. All of the Companys cardiovascular products incorporate computerized electronics which control the unit and provide feedback to the user.



Cross Trainers. The Company introduced its cross trainer, the Cybex Arc Trainer, during 2002. The Arc Trainer is
a commercial product designed to provide the user with more and varied training potential. It provides motions that vary from gliding to climbing. Its brake design provides resistance from 0  900 Watts to meet the demands ranging from the
casual user to the athlete. The control console is based on the Pro+ treadmill console, facilitating cross-use of these products. The Arc Trainers list price is $5,795. In 2004, the Company introduced a



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complimentary total body version of the Arc Trainer. This product retains all of the functionality of the original Arc Trainer and adds upper body motion to
provide for total body training. The Total Body Arc Trainers list price is $6,295.



Treadmills. The Company has three treadmill models, the Pro+, Sport+ and LCX-425T. The LCX-425T is a high-end consumer and light commercial product while the other models are for the commercial market.
Each treadmill model is motorized and incorporates computerized electronics controlling speed, incline, display functions and preset exercise programs. The electronics also provide displays to indicate speed, elevation, distance, time, pace and a
variety of other data. All of the treadmills include a complete diagnostic suite that can be accessed through the display, which is useful in the maintenance of the product. The Sport+ and Pro+ also include an innovative safety feature known as
Safety Sentry which causes the treadmill to stop once it detects inactivity with the user. All treadmills are equipped with contact heart rate monitoring and deck suspension system. The LCX-425T and Pro+ also include Polar heart rate monitoring
capabilities. The Companys treadmills have list prices ranging from $4,495 to $6,795.



Bikes. In 2004, the Company replaced the 500 and 700 series bikes with the Cyclone bike, which is available in both upright and recumbent models. These new bikes feature improved ergonomics and ease of use
as well as broad resistance capabilities and multiple resistance modes. The capabilities of these products are designed to allow any users to receive the maximum benefit in minimum time. The console design is based on that of the Arc Trainer and
Pro+ treadmill to provide a common method of operation. The list price of the upright bike is $2,995 and the recumbent bike is $3,195.



Steppers. The Company has one model of steppers targeting the commercial marketplace. The Cyclone-S Stepper replaces the prior 800S-CT model.
It features the family display common to the bikes and Total Body Arc Trainer as well as an advanced ergonomic handrail design, contact and Polar heart rate monitoring and patented drive system. The list price of the Cyclone-S is $3,395.



Trazer. The Company introduced during 2005 a three-dimensional
optical tracking and measurement system. The system is sold under the trademark Trazer and provides a three-dimensional virtual world simulation that provides exercise and objective measurement in both game-like and real world simulations. The list
price of Trazer is $6,495.



Strength Training Products.



Strength training equipment provides a physical workout
by exercising the musculo-skeletal system. The Companys strength training equipment uses weights for resistance. This product line includes selectorized single station equipment, modular multi-station units, MG500 multi-gym, the FT360,
plate-loaded equipment and free-weight equipment.



Selectorized Equipment. Selectorized single station equipment incorporates stacked weights, permitting the user to select different weight levels for a given exercise by inserting a pin at the appropriate weight level. Each
selectorized product is designed for a specific muscle group with each product line utilizing a different technology targeted to facility and user type.



The Companys selectorized equipment is sold under the trademarks VR, VR2, VR3 and Eagle. The VR line
represents a value-engineered line suitable for smaller general-purpose facilities and as an entry line in larger facilities. In 2005, the line received updates for improved ease of use in express-type facilities. The medium price point
VR2 line, which targets the average user in fitness facilities, is being phased out and is being replaced with the VR3 line. VR3 is designed for exceptional ease of use in fitness facilities and was introduced as a 14 piece line in late 2005 with
plans for a line of 23 pieces to be completed in 2006. Eagle represents the Companys premier line and features a complete scope of use; it features ease-of-use as well as patented and patent pending technologies to meet the needs of
performance oriented individuals and facilities. The Company currently sells 95 selectorized equipment products under the above lines with list prices between $2,495 and $5,525.



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Modular Multi-Station Units. This product line has the advanced design and high performance
features of the VR selectorized equipment line while being able to be configured into a multiple station design. Pricing for the multi-station units depends on configuration. The list price of a typical configuration is $9,500.



MG500 Multi-gym. The Companys multi-gym (MG500) features
over 30 biomechanically correct exercises. The multi-gym uses considerably less space than multiple selectorized single station equipment. It contains three weight stacks to meet the needs of the commercial market, especially hotels, corporate
fitness centers and other small-scale locations. This product has a list price ranging from $6,820 to $7,030.



FT360. The FT360 is a functional trainer that delivers an unlimited range of movements and exercises using arms that are capable of multiple
positioning. This unit targets the personal training and rehabilitation markets and has a $4,395 list price.



Plate Loaded Equipment. The Company manufactures and distributes a wide range of strength equipment which mimics many of the movements found
on its selectorized machines but are manually loaded with weights. These are simple products which allow varying levels of weight to be manually loaded. There are 21 plate-loaded products, ranging in price from $1,050 to $3,230.



Free-Weight Equipment. The Company also sells free-weight benches
and racks and compliments them with OEM supplied dumbbells, barbells and plates. The Company offers 25 items of free-weight equipment with list prices ranging from $300 to $1,630.



Customers and Distribution



The Company markets its products to commercial customers and to individuals interested in purchasing premium quality equipment for use in the home. A
commercial customer is defined as any purchaser who does not intend the product for home use. Management estimates that consumer sales represent less than 10% of net sales. Typical commercial customers are health clubs, corporate fitness centers,
hotels, resorts, spas, educational institutions, sports teams, sports medicine clinics, military installations and community centers. Sales to one customer, Cutler-Owens International Ltd., an independent authorized dealer, represented 15.4%, 15.9%
and 10.7% of the Companys net sales for 2005, 2004 and 2003, respectively. No other customer accounted for more than 10% of the Companys net sales for 2005, 2004 or 2003.



The Company distributes its products through independent authorized dealers, its own sales force, international distributors
and its e-commerce web site (www.cybexinternational.com). The Company services its products through independent authorized dealers, international distributors, a network of independent service providers and its own service personnel.



Independent authorized dealers operate independent stores specializing in
fitness-related products and promote home and commercial sales of the Companys products. The operations of the independent dealers are primarily local or regional in nature. In North America, the Company publishes dealer performance standards
which are designed to assure that the Company brand is properly positioned in the marketplace. In order to qualify as an authorized dealer, the dealer must, among other things, market and sell Cybex products in a defined territory, achieve sales
objectives, have qualified sales personnel, and receive on-going product and sales training. As of March 20, 2006, the Company has approximately 75 active dealers in North America. The Companys domestic sales force services this dealer
network and sells direct in regions not covered by a dealer. The domestic sales team includes 20 territory managers or reps, ten regional or national account managers and one Vice President.



The national account team focuses on major market segments such as health
clubs and gyms, hotels, resorts, the U.S. government and organizations such as YMCAs, as well as third party consultants which purchase on behalf of such national accounts. The Company has approximately 25 national accounts.



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Sales outside of North America accounted for approximately 29%, 29% and 28% of the Companys net
sales for 2005, 2004 and 2003, respectively. The international sales force consists of one Vice President, four regional sales managers and one operations manager. The Company, through its wholly-owned subsidiary, Cybex UK, directly markets and
sells Cybex products in the United Kingdom and also serves Cybex operations throughout Europe. Cybex UK has 21 employees. The Company utilizes independent distributors for the balance of its international sales. There are 62 independent distributors
in 66 countries currently representing Cybex. The Company enters into international distributor agreements with these distributors which define territories, performance standards and volume requirements.



Additional information concerning the Companys international sales and
assets located in foreign countries is located in Note 2 to the Companys consolidated financial statements.



The Company markets certain products by advertising in publications which appeal to individuals within its targeted demographic profiles. In addition, the
Company advertises in trade publications and participates in industry trade shows.



The Company offers leasing and other financing options for its commercial customers. The Company arranges financing for its dealers and direct sale customers through various third party lenders for which it may
receive a fee. Management believes that these activities produce incremental sales of the Companys products.



Warranties



The various components of the cardiovascular products are warranted for varying periods, generally one to three years for labor and parts. The various
components for strength products are warranted for varying periods of time, up to a ten-year warranty with respect to the structural frame. Warranty expense for the years ended December 31, 2005, 2004 and 2003 was $3,048,000, $2,512,000 and
$2,793,000, respectively.



Competition



The market in which the Company operates is highly competitive. Numerous
companies manufacture, sell or distribute exercise equipment. The Company currently competes primarily in the premium-performance, professional quality equipment segment of the market. The Companys competitors vary according to product line
and include companies with greater name recognition and more extensive financial and other resources than the Company.



Important competitive factors include price, product quality and performance, diversity of features, warranties and customer service. The Company follows
a policy of premium quality and differentiated features which results in products having suggested retail prices at or above those of its competitors in most cases. The Company currently focuses on the segment of the market which values quality and
is willing to pay a premium for products with performance advantages over the competition. Management believes that its reputation for producing products of high quality and dependability with differentiated features constitutes a competitive
advantage.



Product Development



Research and development expense for the years ended December 31, 2005,
2004 and 2003 was $3,982,000, $3,172,000 and $2,669,000, respectively. At December 31, 2005, the Company had the equivalent of 31 employees engaged in ongoing research and development programs. The Companys development efforts focus on
improving existing products and developing new products, with the goal of producing user-friendly, ergonomically and biomechanically correct, durable exercise equipment with competitive features. Product development is a cross functional effort of
sales, marketing, product management, engineering and manufacturing, led by the Companys Senior Vice President of Research and Development.



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Manufacturing and Supply



The Company maintains two facilities which are vertically integrated manufacturing facilities equipped to perform fabrication, machining, welding,
grinding, assembly and finishing of its products. Management believes that its facilities provide the Company with proper control over product quality, cost and delivery time.



The Company manufactures treadmill, bike and Trazer cardiovascular products in its facility located in Medway, Massachusetts
and manufactures the cross trainers and strength equipment in its facility located in Owatonna, Minnesota. Raw materials and purchased components are comprised primarily of steel, aluminum, wooden decks, electric motors, molded or extruded plastics,
milled products, circuit boards for computerized controls and upholstery. These materials are assembled, fabricated, machined, welded, powder coated and upholstered to create finished products.



The Companys stepper products are manufactured for the Company in
Taiwan and assembled in the Companys Medway facility.



The Company single sources its stepper products and certain raw materials and component parts, including drive motors, belts, running decks, molded plastic components and electronics, where it believes that sole sourcing is beneficial for
reasons such as quality control and reliability of the vendor or cost. The Company attempts to reduce the risk of sole source suppliers by maintaining varying levels of inventory. However, the loss of a significant supplier, or delays or disruptions
in the delivery of components or materials, or increases in material costs, could have a material adverse effect on the Companys operations.



The Company manufacturers most of its strength training equipment on a build-to-order basis which responds to specific sales orders. The
Company manufactures its other products generally based upon projected sales.



Backlog



Backlog historically has not been a
significant factor in the Companys business.



Patents and Trademarks



The Company owns, licenses or has applied for various
patents with respect to its products and has also registered or applied for a number of trademarks. While these patents and trademarks are of value, management does not believe that it is dependent, to any material extent, upon patent or trademark
protection.



Insurance



The Companys product liability insurance is written on a claims made
basis and provides an aggregate of $5,000,000 of coverage, with a deductible of up to $250,000 per occurrence with an annual aggregate deductible of $750,000.



Governmental Regulation



The Companys products are not subject to material governmental regulation.



The Companys operations are subject to federal, state and local laws and regulations relating to the environment. The
Company regularly monitors and reviews its operations and practices for compliance with these laws and regulations, and management believes that it is in material compliance with such environmental laws and regulations. Despite these compliance
efforts, some risk of liability is inherent in the operation of the business of the Company, as it is with other companies engaged in similar businesses, and there can be no assurance that the Company will not incur material costs in the future for
environmental compliance.



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Employees



On March 20, 2006, the Company employed 528 persons on a full-time basis. None of the Companys employees are represented by a union. The
Company considers its relations with its employees to be good.



Available
Information



The Company files reports electronically with
the Securities and Exchange Commission. Forms 10-Q, 10-K, Proxy Statements and other information can be viewed at http://www.sec.gov. This information can also be viewed without charge at the Companys own website at
http://www.cybexinternational.com. The internet website address for Cybex is included in this report for identification purposes. The information contained therein or connected thereto are not intended to be incorporated into this Annual Report on
Form 10-K.



ITEM 1A.RISK FACTORS



The risk factors identified in the cautionary statements below could cause our actual results to differ materially from those suggested in the forward-looking statements appearing elsewhere in this Annual Report on
Form 10-K. However, these risk factors are not exhaustive and new risks may also emerge from time to time. It is not possible for management to predict all risk factors or to assess the impact of all risk factors on our business or the extent to
which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results.



We depend upon our ability to successfully develop, market
and sell new or improved products. Our continued growth and ability to remain competitive will substantially depend upon our development of new or improved products. A failure to develop new or improved products on a timely basis, or which are
accepted in the marketplace, or which produce appropriate sales or margins, could adversely affect our ability to generate future revenues and earnings and have a negative impact on our business prospects, liquidity and financial condition.



Increases in raw material costs, or the unavailability of
raw materials or components, could adversely affect us.Increases in our cost of raw materials could have a material effect on our profitability. We currently source our stepper products and certain raw materials and component parts (e.g., drive
motors, belts, running decks, molded plastic components and electronics) from single suppliers. The loss of a significant supplier, or delays or disruptions in the delivery of raw materials or components, could adversely affect our ability to
generate future revenues and earnings and have a material adverse effect on our business and financial results.



We have been involved in a number of litigation matters and expect legal claims in the future.In recent years we have been involved in a number of
litigation matters, including with respect to product liability, intellectual property rights, disputes with dealers and a dispute involving a person from whom we acquired a business. A judgment of approximately $2.4 million was entered against us
in 2004 in theKirila et al v. Cybex International, Inc., et al matter and a judgment of approximately $2.7 million was entered against us in 2005 in theColassi v. Cybex International, Inc. matter. We are currently appealing both
these judgments, but if we are not successful in these appeals we will have to pay the judgments plus post-judgment interest. We expect that we will continue to be involved in litigation in the ordinary course of business. While we maintain reserves
for estimated litigation losses, one or more adverse determinations in litigation affecting us could have a material adverse effect on our business prospects, liquidity, financial condition and cash flows.



Our failure or inability to protect our intellectual property from
misappropriation or competition could adversely affect our business prospects.Our intellectual property aids us in competing in the exercise equipment industry. Despite our efforts to protect our intellectual property rights, such as through
patent, trade secret and trademark protection, unauthorized parties may try to copy our products, or obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries may not protect our rights to as great an



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extent as U.S. law. Furthermore, the patents and trademarks which we have obtained or may seek in the future may not be of a sufficient scope or strength to
provide meaningful economic or competitive value. Our rights and the additional steps we have taken to protect our intellectual property may not be adequate to deter misappropriation, and we also remain subject to the risk that our competitors or
others will independently develop non-infringing products substantially equivalent or superior to our products. We also may not be able to prevent others from claiming that our products violate their proprietary rights. If we are unable to protect
our intellectual property, or if we are sued for infringing another partys intellectual property, our business, financial condition or results of operation could be materially adversely affected.



We principally use two facilities to produce our products and a material
business disruption at either facility could significantly impact our business. Substantially all of our products are manufactured or assembled in two vertically integrated facilities located in Massachusetts and Minnesota. These facilities
house all our manufacturing operations and our executive offices. We take precautions to safeguard our facilities, including obtaining insurance, maintaining safety protocols and using off-site storage of computer data. However, a natural disaster,
such as an earthquake, fire or flood, or an act of terrorism or vandalism, could cause substantial disruption to our operations, damage or destroy our manufacturing equipment, information systems or inventory and cause us to incur substantial
additional expenses. The insurance we maintain against disasters may not cover or otherwise be adequate to meet our losses in any particular case. Any disaster which prevents operations in either of our facilities for any extended period may result
in decreased revenues and increased costs and could significantly harm our operating results, financial condition and prospects.



We rely on third party dealers and distributors to sell and service a significant portion of our products. In 2005, over 50% of our total net sales
were to our independent authorized dealers in North America and to independent distributors internationally. These third party dealers and distributors may terminate their relationships with us, or fail to commit the necessary resources to sell or
service our products to the level of our expectations. If current or future third party dealers or distributors do not perform adequately, or if we fail to maintain our existing relationships with them or fail to recruit and retain dealers or
distributors in particular markets or geographic areas, our revenues may be adversely affected and our operating results could suffer.



We have a history of losses in fiscal years prior to 2004. Although we were profitable in fiscal 2004 and marginally profitable in fiscal 2005, we
incurred losses in each fiscal year from 2000 through 2003. If we are unable to maintain our profitability and we incur losses in the future, any such losses could have a material adverse effect on our business prospects, liquidity, financial
condition and cash flows.



Our major stockholders may
exercise control over us.John Aglialoro, Joan Carter and UM Holdings Ltd., who are related parties, collectively own a majority of our outstanding common stock. Such stockholders may have the ability to significantly influence (i) the
election of our Board of Directors, and thus our future direction and (ii) the outcome of all other matters submitted to our stockholders, including mergers, consolidations and the sale of all or substantially all of our assets.



We face strong competition.The fitness equipment industry is highly
competitive. Numerous companies manufacture, sell or distribute exercise equipment. Our competitors include companies with strong name recognition and more extensive financial and other resources than us.



We carry debt.We are indebted to several lenders. This leverage may
have several important consequences, including the need to meet debt service requirements and vulnerability to changes in interest rates. This leverage may also limit our ability to raise additional capital, withstand adverse economic or business
conditions and competitive pressures, and take advantage of significant business opportunities that may arise. In particular, the incurrence of losses in the future could result in the inability to meet the financial covenants pertaining to our
indebtedness or to service our debt.



Warranty claims may
exceed the related reserves.We warrant our products for varying periods of up to ten years. While we maintain reserves for warranty claims, it could have a material adverse effect on our business



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prospects, liquidity, financial condition and cash flows if warranty claims were to materially exceed anticipated levels.



We may have a contingent liability related to the arrangement of third
party financing.We offer to our customers leasing and other financing of products by third party providers, for which we may receive a fee. While most of these financings are without recourse, in certain cases we may offer a guaranty or other
recourse provisions. At December 31, 2005, our maximum contingent liability under all recourse provisions was approximately $4,260,000. While we maintain a reserve for estimated losses under these recourse provisions, it could have a material
adverse effect on our business prospects, liquidity, financial condition and cash flows if actual losses were to materially exceed the related reserve.



Unfavorable international political or economic changes and/or currency fluctuations could negatively impact us.Approximately 29% of our sales in
2005 and 2004 were derived from outside North America. Political or economic changes and/or currency fluctuations in countries in which we do business could negatively impact our business and financial results, including decreases in our revenues
and profitability.



We may not be able to attract and retain
key employees and the loss of any member of our senior management could negatively affect our business.We compete for the services of qualified personnel. Our future success will depend upon, to a significant degree, the performance and
contribution of the members of senior management and upon our ability to attract, motivate and retain other highly qualified employees with technical, management, marketing, sales, product development, creative and other skills. Although we do have
employment agreements with our executive officers, there can be no assurance that such officers will continue to perform under those contracts. Our business, financial condition and results of operations could be materially and adversely affected if
we lost the services of members of our senior management team or key technical or creative employees or if we failed to attract additional highly qualified employees.



Future issuances of preferred stock may adversely affect the holders of our common stock.Our Board has the ability
to issue, without approval by the common stockholders, shares of one or more series of preferred stock, with the new series having such rights and preferences as the Board may determine in its sole discretion. Any series of preferred stock may have
rights, including cumulative dividend, liquidation and conversion rights, senior to our common stock, which could adversely affect the holders of the common stock, as well as the economic value of the common stock.



A variety of factors may discourage potential take-over attempts.John
Aglialoro, Joan Carter and UM Holdings Ltd., who are related parties, collectively own a majority of the outstanding shares of our common stock. In addition, our Certificate of Incorporation requires an affirmative super-majority stockholder vote
before we can enter into certain defined business combinations, except for combinations that meet certain specified conditions; provides for staggered three-year terms for members of the Board of Directors; and authorizes the Board of Directors to
issue preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions of such preferred stock without any further vote or action by our stockholders. Each of these factors could have the effect of discouraging
potential take-over attempts and may make attempts by stockholders to change our management more difficult.



In the event we are unable to satisfy regulatory requirements relating to internal control over financial reporting, or if these internal controls are
not effective, our business and financial results may suffer.The Sarbanes-Oxley Act of 2002 and related rules and regulations of the Securities and Exchange Commission and the American Stock Exchange impose new duties on us and our executives,
directors, attorneys and independent registered public accounting firm. In order to comply with the Sarbanes-Oxley Act and such rules and regulations, we are evaluating our internal control over financial reporting to allow management to report on,
and our independent registered public accounting firm to attest to, our internal control over financial reporting. These reports will be required as of December 31, 2006, if we qualify as an accelerated filer as of the end of the
second quarter of 2006, or as of December 31, 2007 if we are not an accelerated filer at such time. We are



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currently performing the system and process evaluation and testing (and any necessary remediation) required in an effort to comply with the management
certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. As a result, we expect to incur additional expenses and diversion of managements time, which could materially increase our operating expenses and
accordingly reduce our net income. While we anticipate being able to fully implement the requirements relating to internal control over financial reporting and all other aspects of Section 404 in a timely fashion, we cannot be certain as to the
outcome of our testing and resulting remediation. If our independent registered public accounting firm is not satisfied with our internal control over financial reporting or the level at which these controls are documented, designed, operated or
reviewed, or if the independent registered public accounting firms interpretation of the requirements, rules or regulations are different than ours, then they may decline to attest to managements assessment or issue an adverse opinion on
managements assessment and/or our internal control over financial reporting. This could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which
ultimately could negatively impact the market price of our common stock.



|ITEM 1B.UNRESOLVED | STAFF COMMENTS
|------------------ | --------------



None.



|ITEM 2.PROPERTIES | 
|----------------- | 



The Company occupies approximately 120,000 square feet of space in Medway, Massachusetts and approximately 210,000 square feet of space in Owatonna,
Minnesota for administrative offices, manufacturing, assembly and warehousing. The Medway facility is owned by the Company and is subject to a mortgage securing the Companys credit facilities. The Owatonna facility is leased. The Company also
utilizes outside warehousing.



Cybex UK, the Companys
wholly-owned United Kingdom subsidiary, leases approximately 728 square feet of space in Measham, England. This space is utilized for the subsidiarys direct sales and service efforts in the United Kingdom, which serves Cybexs operations
throughout Europe.



The Companys manufacturing facilities
are equipped to perform fabrication, machining, welding, grinding, assembly and powder coating of its products. Management believes that its facilities provide adequate capacity for its operations for at least the next twelve months, and the
facilities are well maintained and kept in good repair.



Additional information concerning the financing of the Companys owned and leased facilities are described in Notes 7 and 12 to the Companys consolidated financial statements.



ITEM 3.LEGAL PROCEEDINGS



As a manufacturer of fitness products, the Company is inherently subject to
the hazards of product liability litigation; however, the Company has maintained, and expects to continue to maintain, insurance coverage which management believes is adequate to protect against these risks. Reserves for self insured retention are
included in accrued expenses.



The Company is also involved in
certain legal actions and claims arising in the ordinary course of business. At December 31, 2005, an aggregate reserve of $6,185,000 is included in accrued expenses for estimated losses to be incurred related to those matters for which it is
probable that a loss has been incurred.



Kirila et al v. Cybex
International, Inc., et al



This action was commenced
in the Court of Common Pleas of Mercer County, Pennsylvania in May 1997 against the Company, the Companys wholly-owned subsidiary, Trotter, and certain officers, directors and affiliates of the Company. The plaintiffs include companies that
sold to Trotter a strength equipment company in



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##### Table of Contents

1993, a principal of the corporate plaintiffs who was employed by Trotter following the acquisition, and a company that leased to Trotter a plant located in
Sharpsville, Pennsylvania. The complaint, among other things, alleged wrongful closure of the Sharpsville facility, wrongful termination of the individual plaintiffs employment and nonpayment of compensation, breach of the lease agreement and
the asset purchase agreement, tortious interference with business relationships, fraud, negligent misrepresentation, unjust enrichment, breach of the covenant of good faith and fair dealing, conversion, unfair competition and violation of the
Pennsylvania Wage Payment and Collection Law. The complaint also sought specific performance of the lease, the employment agreement and the indemnification provisions of the asset purchase agreement, and an unspecified amount of compensatory and
punitive damages and expenses. The Company filed an answer to the complaint denying the material allegations of the complaint and denying liability and it further asserted counterclaims against the plaintiffs, including for repayment of
over-allocations of expenses under the lease and certain excess incentive compensation payments that were made to the individual plaintiff.



A jury verdict was rendered in this litigation in February 2002. While the jury found in favor of the Company with respect to the majority of the
plaintiffs claims, it also found that the Company owed certain incentive compensation payments and rent, plus interest. In December 2002, plaintiff Kirila Realty and the Company agreed to enter judgment in favor of Kirila Realty for $48,750 on
the claims related to lease issues. Such amount represented the approximate $38,000 jury verdict together with an agreed amount of interest due and was paid by the Company in 2002.



In March 2004,a $2,452,783 judgment was entered with respect to the incentive compensation portion of the jury
verdict. This judgment was composed of the original jury verdict amount of $872,000, prejudgment interest on the judgment of $369,000, a statutory penalty under the Pennsylvania Wage Payment and Collection Law of $218,000 and attorneys fees of
$993,783. Cybex filed an appeal of this judgment, which required that Cybex post a letter of credit for $2,945,722. In January 2006, the Superior Court of Pennsylvania affirmed the judgment, and Cybex has filed a petition for Allowance of Appeal
with the Pennsylvania Supreme Court. The ultimate resolution of this matter could be material to the Companys financial position, results of operations and cash flows; however, management believes that the recorded reserve is adequate.



Colassi v. Cybex International, Inc.



This action was filed in the United States District Court for the District
of Massachusetts. The plaintiff alleged that certain of the Companys treadmill products infringed a patent allegedly owned by the plaintiff. The plaintiff sought injunctive relief and monetary damages. The Company filed an answer to the
complaint denying the material allegations of the complaint and asserting counterclaims. A jury verdict was rendered in this litigation in August 2005. The jury determined that the deck system of certain of the Companys treadmill products
infringes plaintiffs patent and awarded $2,700,000 in damages and interest. A six month stay of a permanent injunction against sale of these treadmill products was entered in September 2005, and the Company has instituted a redesign of its
deck system. The Company has filed an appeal of the judgment entered by the trial court on the jury verdict, which required that Cybex post a letter of credit for $2,888,025. The ultimate resolution of this matter could be material to the
Companys financial position, results of operations and cash flows; however, management believes that the recorded reserve is adequate.



Free Motion Fitness v. Cybex International, Inc.



In December 2001, Free Motion Fitness (f.k.a. Ground Zero Design Corporation) filed in the United States District Court for the District of Utah an action
for patent infringement against the Company alleging that the Companys FT360 Functional Trainer infringed plaintiffs patent. The Company filed an answer denying the material allegations of the complaint and including claims which
management believes could invalidate the Free Motion Fitness patent; the Company also filed a counterclaim against Free Motion Fitness seeking damages. In September 2003, this case was combined with a separate matter also in the United States
District Court, Division of Utah in which Free Motion Fitness had sued the Nautilus Group for infringement of the same patent at issue in



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##### Table of Contents

the Cybex case. In May 2004, the Court ruled in favor of the Companys motion for summary judgment, dismissing all of the claims of the plaintiff
against the Company and Nautilus and also dismissing the Companys counterclaims against the plaintiff. The plaintiff appealed the grant of summary judgment and in September 2005 the Court of Appeals for the Federal Circuit reversed the lower
court ruling, with the result that this case has been returned to the trial court level.



Other Litigation and Contingencies



The Company is involved in certain other legal actions, contingencies and claims arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a
material adverse effect on the Companys consolidated financial position or results of operations. Legal fees related to these matters are charged to expense as incurred.



ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



No matters were submitted to a vote of the Companys security holders
during the fourth quarter of 2005.



SPECIAL
ITEM.EXECUTIVE OFFICERS OF REGISTRANT



Officers are elected by the Board of Directors and serve at the pleasure of the Board. The executive officers of the Company as of March 20, 2006 were as follows:



|                     |  |     |  |                                                                               
|-------------------- |  | --- |  | ------------------------------------------------------------------------------
|Name                 |  | Age |  | Position                                                                      
|John Aglialoro       |  | 62  |  | Chairman and Chief Executive Officer                                          
|Arthur W. Hicks, Jr. |  | 47  |  | Executive Vice President  Chief Operating Officer and Chief Financial Officer
|Edward Kurzontkowski |  | 42  |  | Senior Vice President of Manufacturing                                        
|Raymond Giannelli    |  | 52  |  | Senior Vice President of Research and Development                             
|Paul G. Horgan       |  | 49  |  | Corporate Controller                                                          



Mr. Aglialoro has
served as Cybexs Chief Executive Officer since 2000. Mr. Aglialoro is also the Chairman of UM Holdings Ltd., which he co-founded in 1973. UM Holdings Ltd. is the Companys principal stockholder. He served as a Director and Chairman
of Trotter Inc. from 1983 until Trotters merger with Cybex in 1997, from which time he has served as the Chairman of the Companys Board of Directors.



Mr. Hicks has served as the Companys Chief Operating Officer since January 1, 2006 and its Chief Financial
Officer since 2002. Prior to 2006, he served Cybex through a service agreement between the Company and UM Holdings Ltd. where he was employed as Chief Financial Officer since 1988. Since January 1, 2006, Mr. Hicks has been a full-time
employee of the Company. Mr. Hicks is a certified public accountant. He was a director of Trotter from 1994 to 1997 and has served as a director of Cybex since 1997.



Mr. Kurzontkowski has served as the Companys Senior Vice President of Manufacturing since 2003. He joined Trotter
in 1981 and has served the Company in a variety of capacities, including Vice President of Operations  Owatonna from November 2000 to October 2001, Senior Vice President of Manufacturing from October 2001 to May 2002 and Executive Vice
President of Operations from May 2002 to August 2003.



Mr. Giannelli has served as the Companys Senior Vice President of Research and Development since 2003. He first joined Cybex in 1975 and served in various positions including Vice President of Research and Development. In 1991
Mr. Giannelli left Cybex and joined Trotter as the Vice President of Research and Development and continued to maintain that position after the merger of Trotter with Cybex in 1997. In 1999, Mr. Giannelli left Cybex to act as the Executive
Vice President of Values.com, a cause related marketing firm. He then returned to assist in Cybexs research and development effort in February 2001 as the Chairman of the Cybex Institute.



Mr. Horgan has served as the Companys Corporate Controller since
2000. From 1997 to 2000, he was Senior Manager of Accounting Operations at Stone & Webster, a publicly traded engineering and construction company. From 1984 to 1997 he held various management positions at Etonic, a privately held footwear
company, most recently as Corporate Controller.



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##### Table of Contents

PART II



|ITEM 5. | MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ----------------------------------------------------------------------------------------------------------------



The Companys common shares are traded on the American Stock Exchange
(Amex). The Companys Amex symbol is CYB.



The following
table shows the high and low market prices as reported by Amex:



|               |  |      |      |      |   |      |  |     |      |  |   |     
|-------------- |  | ---- | ---- | ---- | - | ---- |  | --- | ---- |  | - | ----
|               |  | 2005 |      | 2004
|Calendar       |  | High |      | Low  |   | High |  | Low
|First Quarter  |  | $    | 4.63 |      | $ | 3.30 |  | $   | 3.65 |  | $ | 1.10
|Second Quarter |  |      | 4.30 |      |   | 2.80 |  |     | 4.48 |  |   | 2.51
|Third Quarter  |  |      | 4.35 |      |   | 2.71 |  |     | 4.75 |  |   | 3.36
|Fourth Quarter |  |      | 3.77 |      |   | 3.10 |  |     | 5.00 |  |   | 3.64



As of March 20,
2006, there were approximately 514 common stockholders of record. This figure does not include stockholders with shares held under beneficial ownership in nominee name.



Under the Companys credit agreements, the Company currently does not have the ability to pay dividends. The present
policy of the Company is to retain any future earnings to provide funds for the operation and expansion of its business.



The following table summarizes securities authorized for issuance under equity compensation plans at December 31, 2005:



Equity Compensation Plan Information



|                                                           |  |                                                                                        |  |                                                                          |      |                                                                                          |           |    
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ---- | ---------------------------------------------------------------------------------------- | --------- | ---
|Plan category                                              |  | Number ofsecurities to beissued upon exerciseof outstandingoptions, warrantsand rights |  | Weighted-averageexercise price ofoutstanding options,warrants and rights |      | Number ofsecurities remainingavailable for futureissuance under equitycompensation plans |          
|Equity compensation plans approved by security holders     |  | 766,100                                                                                |  | $                                                                        | 1.87 |                                                                                          | 1,057,281 | (1)
|Equity compensation plans not approved by security holders |  |                                                                                       |  |                                                                          |     |                                                                                          |          |    
|                                                           |  |                                                                                        |  |                                                                          |      |                                                                                          |           |    
|Total                                                      |  | 766,100                                                                                |  | $                                                                        | 1.87 |                                                                                          | 1,057,281 |    
|                                                           |  |                                                                                        |  |                                                                          |      |                                                                                          |           |    

---

|(1) | Includes 1,000,000 shares available for issuance under the Companys 2005 Omnibus Incentive Plan and 57,281 shares available for issuance under the Companys 2002 Stock
Retainer Plan for Nonemployee Directors. See Note 8 to the Companys consolidated financial statements for a description of these plans.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------



The following information has been extracted from the Companys consolidated financial statements for the five years ended December 31, 2005.
This selected consolidated financial data should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and the Companys consolidated financial statements and notes
thereto included elsewhere in this report.



|                                                                          |  |                                       |         |     |      |   |         |      |  |   |        |   |  |      |         |      |  |   |        |     
|------------------------------------------------------------------------- |  | ------------------------------------- | ------- | --- | ---- | - | ------- | ---- |  | - | ------ | - |  | ---- | ------- | ---- |  | - | ------ | ----
|                                                                          |  | Year Ended December 31                |        
|                                                                          |  | 2005                                  |         |     | 2004 |   |         | 2003 |  |   | 2002   |   |  | 2001 |        
|                                                                          |  | (in thousands, except per share data) |        
|Statement of Operations Data:                                             |  |                                       |         |     |      |   |         |      |  |   |        |   |  |      |         |      |  |   |        |     
|Net sales                                                                 |  | $                                     | 114,646 |     |      | $ | 103,421 |      |  | $ | 90,480 |   |  | $    | 81,744  |      |  | $ | 85,268 |     
|Cost of sales                                                             |  |                                       | 73,169  |     |      |   | 65,640  |      |  |   | 59,321 |   |  |      | 51,919  |      |  |   | 54,722 |     
|                                                                          |  |                                       |         |     |      |   |         |      |  |   |        |   |  |      |         |      |  |   |        |     
|Gross profit                                                              |  |                                       | 41,477  |     |      |   | 37,781  |      |  |   | 31,159 |   |  |      | 29,825  |      |  |   | 30,546 |     
|Selling, general and administrative expenses (including bad debt expense) |  |                                       | 33,908  |     |      |   | 30,900  |      |  |   | 29,367 |   |  |      | 26,733  |      |  |   | 25,280 |     
|Litigation charges                                                        |  |                                       | 4,605   | (a) |      |   |        |      |  |   |       |   |  |      |        |      |  |   | 2,200  | (c) 
|                                                                          |  |                                       |         |     |      |   |         |      |  |   |        |   |  |      |         |      |  |   |        |     
|Operating income                                                          |  |                                       | 2,964   |     |      |   | 6,881   |      |  |   | 1,792  |   |  |      | 3,092   |      |  |   | 3,066  |     
|Interest income                                                           |  |                                       | 5       |     |      |   | 14      |      |  |   | 12     |   |  |      | 30      |      |  |   | 136    |     
|Interest expense                                                          |  |                                       | (2,657  | )   |      |   | (3,539  | )    |  |   | (3,643 | ) |  |      | (3,549  | )    |  |   | (3,683 | )   
|Other income (expense), net                                               |  |                                       |        |     |      |   |        |      |  |   | 27     |   |  |      | 126     |      |  |   | (246   | )   
|                                                                          |  |                                       |         |     |      |   |         |      |  |   |        |   |  |      |         |      |  |   |        |     
|Income (loss) before income taxes                                         |  |                                       | 312     |     |      |   | 3,356   |      |  |   | (1,812 | ) |  |      | (301    | )    |  |   | (727   | )   
|Income tax provision (benefit)                                            |  |                                       | 251     |     |      |   | 131     |      |  |   | (51    | ) |  |      | 20,723  | (b)  |  |   | (51    | )   
|                                                                          |  |                                       |         |     |      |   |         |      |  |   |        |   |  |      |         |      |  |   |        |     
|Net income (loss)                                                         |  |                                       | 61      |     |      |   | 3,225   |      |  |   | (1,761 | ) |  |      | (21,024 | )    |  |   | (676   | )   
|Preferred stock dividends                                                 |  |                                       |        |     |      |   | (276    | )    |  |   | (244   | ) |  |      |        |      |  |   |       |     
|                                                                          |  |                                       |         |     |      |   |         |      |  |   |        |   |  |      |         |      |  |   |        |     
|Net income (loss) attributable to common stockholders                     |  | $                                     | 61      |     |      | $ | 2,949   |      |  | $ | (2,005 | ) |  | $    | (21,024 | )(b) |  | $ | (676   | )(c)
|                                                                          |  |                                       |         |     |      |   |         |      |  |   |        |   |  |      |         |      |  |   |        |     
|Basic earnings (loss) per share                                           |  | $                                     | .00     |     |      | $ | .26     |      |  | $ | (.23   | ) |  | $    | (2.39   | )(b) |  | $ | (.08   | )(c)
|                                                                          |  |                                       |         |     |      |   |         |      |  |   |        |   |  |      |         |      |  |   |        |     
|Diluted earnings (loss) per share                                         |  | $                                     | .00     |     |      | $ | .24     |      |  | $ | (.23   | ) |  | $    | (2.39   | )(b) |  | $ | (.08   | )(c)
|                                                                          |  |                                       |         |     |      |   |         |      |  |   |        |   |  |      |         |      |  |   |        |     

---

|(a) | Consists of $4,605 pre-tax charges relating primarily to the Colassi and Kirila litigation matters.
|--- | ---------------------------------------------------------------------------------------------------

|(b) | Includes a charge of $20,773 to establish a valuation allowance for deferred income taxes in accordance with Statement of Financial Accounting Standards No. 109.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Consists of $2,200 pre-tax charge relating primarily to the Kirila litigation.
|--- | ------------------------------------------------------------------------------



|                                           |  |                |        |      |   |        |  |   |        |   |  |      |         |   |  |   |        |  
|------------------------------------------ |  | -------------- | ------ | ---- | - | ------ |  | - | ------ | - |  | ---- | ------- | - |  | - | ------ | -
|                                           |  | December 31    |       
|                                           |  | 2005           |        | 2004 |   | 2003   |  |   | 2002   |   |  | 2001 |        
|                                           |  | (in thousands) |       
|Balance Sheet Data:                        |  |                |        |      |   |        |  |   |        |   |  |      |         |   |  |   |        |  
|Working capital                            |  | $              | 4,478  |      | $ | 3,318  |  | $ | (4,882 | ) |  | $    | (21,439 | ) |  | $ | (3,735 | )
|Total assets                               |  |                | 55,672 |      |   | 54,486 |  |   | 53,388 |   |  |      | 53,361  |   |  |   | 77,577 |  
|Long-term debt (including current portion) |  |                | 13,659 |      |   | 20,605 |  |   | 27,086 |   |  |      | 29,010  |   |  |   | 30,490 |  
|Capital leases (including current portion) |  |                | 813    |      |   | 1,056  |  |   | 1,023  |   |  |      | 406     |   |  |   | 131    |  



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##### Table of Contents

|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



CAUTIONARY STATEMENT FOR FORWARD LOOKING INFORMATION



Statements included in this Managements Discussion and Analysis of
Financial Condition and Results of Operations may contain forward-looking statements. There are a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by the statements made below. These
include, but are not limited to, competitive factors, technological and product developments, market demand, economic conditions, the resolution of litigation involving the Company, and the ability of the Company to comply with the terms of its
credit facilities. Further information on these and other factors which could affect the Companys financial results can be found in the Companys Reports filed with the Securities and Exchange Commission, including Part 1 of this Form
10-K.



OVERVIEW



Cybex International, Inc. (the Company or Cybex), a
New York corporation, is a manufacturer of exercise equipment and develops, manufactures and markets strength and cardiovascular fitness equipment products for the commercial and, to a lesser extent, consumer markets.



RESULTS OF OPERATIONS



The following table sets forth selected items from the Consolidated Statements of Operations as a percentage of net sales.



|                                                                         |  |                        |   |  |      |   |  |      |   
|------------------------------------------------------------------------ |  | ---------------------- | - |  | ---- | - |  | ---- | --
|                                                                         |  | Year Ended December 31 |  
|                                                                         |  | 2005                   |   |  | 2004 |   |  | 2003 |   
|Net sales                                                                |  | 100                    | % |  | 100  | % |  | 100  | % 
|Cost of sales                                                            |  | 64                     |   |  | 63   |   |  | 66   |   
|                                                                         |  |                        |   |  |      |   |  |      |   
|Gross profit                                                             |  | 36                     |   |  | 37   |   |  | 34   |   
|Selling, general and administrative expenses, including bad debt expense |  | 30                     |   |  | 30   |   |  | 32   |   
|Litigation charges                                                       |  | 4                      |   |  |     |   |  |     |   
|                                                                         |  |                        |   |  |      |   |  |      |   
|Operating income                                                         |  | 2                      |   |  | 7    |   |  | 2    |   
|Interest expense, net                                                    |  | (2                     | ) |  | (4   | ) |  | (4   | ) 
|                                                                         |  |                        |   |  |      |   |  |      |   
|Income (loss) before income taxes                                        |  |                       | % |  | 3    | % |  | (2   | )%
|                                                                         |  |                        |   |  |      |   |  |      |   



NET SALES



Cybexs net sales increased $11,225,000, or 11%, to $114,646,000 in
2005 compared with a $12,941,000, or 14%, increase in 2004 compared to 2003. The increase in 2005 was attributable to an increase in sales of the Companys cardiovascular products of $13,598,000, or 28%, to $62,334,000, increased freight and
other revenue of $808,000, or 17%, to $5,558,000, partially offset by decreased sales of strength training products of $2,569,000, or 6%, to $41,058,000 and decreased parts sales of $612,000, or 10%, to $5,696,000. Of the increase in sales of
cardiovascular products, 74% was due to the Arc Trainer, sales for which increased 44% in 2005. The Arc Trainer is a product category first introduced during 2002. Treadmill and bike sales also increased in 2005. The Company introduced a new
strength line in late 2005 which it believes will improve strength sales.



The increase in net sales in 2004 was attributable to an increase in sales of the Companys cardiovascular products of $10,000,000, or 26%, to $48,736,000, increased sales of strength training products of
$2,663,000, or 7%, to $43,627,000, increased freight and other revenue of $693,000, or 17%, to $4,750,000, partially offset by decreased parts sales of $415,000, or 6%, to $6,308,000. The increase in sales of cardiovascular products was due to the
Arc Trainer which accounted for 74% of the increase.



15



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##### Table of Contents

Sales outside of North America represented 29%, 29% and 28% of consolidated net sales in 2005, 2004 and
2003, respectively.



GROSS MARGIN



Gross margin was 36.2% in 2005, compared with 36.5% in 2004 and 34.4% in
2003. Margins decreased slightly in 2005 due to higher steel costs (.6%), higher freight costs (.3%) and higher warranty provisions from product mix (.2%), partially offset by higher selling prices. The improvement in margin from 2003 to 2004 was
due to improved warranty experience (.7%), leveraging of overhead costs due to higher volumes (.7%), and improved product mix (3.2%), partially offset by increased steel costs (2.5%).



During 2004 and 2005, the Company experienced increases in the price of steel, a major component of the Companys
products. In 2004, in response to these price increases, the Company instituted product surcharges and price increases. While steel prices had a favorable impact on margins in the fourth quarter of 2005 compared to 2004, the negative impact of steel
prices in 2005 compared to 2004 was approximately .6%. Management does not expect steel prices to have a substantial impact on margins in 2006 compared to 2005.



SELLING, GENERAL AND ADMINISTRATIVE EXPENSES



Selling, general and administrative expenses, including bad debt expense, increased by $3,008,000, or 10%, in 2005 to $33,908,000 compared to an increase
of $1,533,000, or 5%, in 2004. As a percentage of net sales, these expenses were 30%, 30% and 32% in 2005, 2004 and 2003, respectively. The 2005 increase in selling, general and administrative expenses was predominantly due to an increase in the
direct sales force ($1,149,000), increased sales and marketing expenses ($860,000) and an increase in product development costs ($809,000).



The 2004 increase in selling, general and administrative expenses was predominantly due to an increase in the direct sales force ($623,000), increased
sales and marketing expenses ($465,000), increased leasing costs ($223,000) and an increase in product development costs ($616,000). These increases for 2004 were partially offset by decreased legal costs ($504,000).



LITIGATION CHARGES



Litigation charges for the year ended December 31, 2005 relate to a $4,605,000 increase in legal reserves recorded in
2005. This increase in reserves primarily relates to the Colassi and Kirila litigation matters, both of which are being appealed.



NET INTEREST EXPENSE AND OTHER



Net interest expense and other decreased by $873,000, or 25%, in 2005 to $2,652,000 compared to a decrease of $79,000, or 2%, in 2004. The decrease in
2005 was due to lower interest rates following the July 2004 refinancing, lower principal balances and lower deferred financing cost amortization due to a $340,000 write-off of deferred financing costs in 2004 upon the retirement of the Hilco
facility, partially offset by interest expense of $200,000 associated with the August 2005 Owatonna real estate transaction, which was treated as a financing for financial accounting purposes. The decrease in 2004 was due to lower interest rates
following the July 2004 refinancing and lower principal balances, partially offset by higher amortization of deferred financing costs (including $340,000 of deferred financing costs related to the retirement of the Hilco facility). Management
expects that interest expense will decline in 2006 compared to 2005, due to the recharacterization of the Owatonna real estate transaction, after December 23, 2005, from a financing (lease payments being classified as interest expense) to a
sale and leaseback (lease payments to be classified as rent expense) based on modifications of the lease terms, including the elimination of a repurchase option. In addition, management expects lower deferred financing cost amortization during the
second half of 2006 as certain deferred financing costs will be fully amortized by that time.



16



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##### Table of Contents

INCOME TAXES



In a prior year, the Company established a valuation allowance for all deferred taxes in accordance with SFAS No. 109, Accounting for Income
Taxes. At December 31, 2005, the valuation allowance was $21,960,000 and reduced deferred tax assets to zero. As of December 31, 2005, U.S. federal operating loss carryforwards of approximately $27,786,000 were available to the
Company to offset future taxable income. In addition, as of December 31, 2005, the Company had foreign net operating losses of $2,703,000, which have an unlimited life, federal alternative minimum tax credit carryforwards of $461,000, which do
not expire, and a federal research and development tax credit carryforward of $129,000, which expires in 2008. Management will re-evaluate the need for the deferred tax valuation reserve in future periods. The amounts recorded for income tax expense
(benefit) for the years ended December 31, 2005, 2004 and 2003 relate to state taxes and federal alternative minimum tax.



PREFERRED STOCK DIVIDENDS



The Companys Series B Convertible Cumulative Preferred Stock (the Preferred Stock) was issued in July 2003 and was converted by the
holder thereof into shares of common stock in August 2004. The holder of the Preferred Stock was entitled to receive cumulative dividends of $14.90, or 10% of the issuance price, per share per year when and if declared by the Board of Directors.
Such dividends decreased the net income or increased the net loss attributable to common stockholders for purposes of computing income or loss per share. In accordance with the terms of the Preferred Stock, all accrued dividends on the Preferred
Stock, in the amount of $522,000, were paid at the time of conversion in 2004.



FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES



As of December 31, 2005, the Company had working capital of $4,478,000, compared to $3,318,000 at December 31, 2004. The increase in working capital is primarily due to a $6,181,000 decrease in the current maturities of debt
largely resulting from an amendment to the CIT Amended Financing Agreement and the prepayment of a portion of the GMAC term loan from the proceeds of the sale/leaseback transaction plus a $2,429,000 increase in accounts receivable, reflecting higher
sales volume. These changes were offset by an increase of $7,090,000 in accrued expenses due to an increase in the litigation reserves, increased warranty reserves associated with higher sales levels and the use of cash to fund equipment purchases
and product development expenditures.



For the year ended
December 31, 2005, cash provided by operating activities was $7,198,000 compared to cash provided by operating activities of $4,452,000 for the year ended December 31, 2004. The increase in cash provided by operating activities from 2004
to 2005 was primarily due to the increases in accrued expenses ($7,090,000), including increases to warranty and litigation reserves, which offset the $3,164,000 decrease in net income.



Cash used in investing activities of $732,000 in 2005 consisted of purchases and deposits on manufacturing tooling and
equipment of $3,149,000 and computer hardware and infrastructure of $1,071,000, which was partially offset by proceeds of $3,488,000 from the sale/leaseback transaction related to the Owatonna building. Cash used in investing activities of
$2,772,000 in 2004 primarily consisted of purchases of and deposits for manufacturing tooling and equipment of $2,575,000 and computer hardware and infrastructure of $197,000. Projected capital expenditures for 2006 relate mostly to manufacturing
tooling and equipment and computer hardware and infrastructure and are expected to be somewhat lower than the 2005 levels.



For the year ended December 31, 2005, cash used in financing activities of $7,485,000 consisted primarily of term and revolver payments of
$11,600,000 and payments on capital leases of $547,000, partially offset by proceeds from borrowings under term loans of $4,654,000. For the year ended December 31, 2004, cash used in financing activities of $603,000 consisted primarily of term
and revolver payments of $21,481,000, dividends paid to a related party of $522,000 and payments on capital leases of $503,000, partially offset by proceeds from



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term loans under the new financing agreements of $15,000,000 and net proceeds received in the private placement of common stock of $7,199,000.



On August 5, 2004, the Company consummated the private placement of
2,430,000 shares of common stock to accredited (primarily institutional) investors. The Company received net cash proceeds, after commissions and offering expenses, of $7,199,000. Such net cash proceeds were used to prepay the GMAC term loan
discussed below by $3,067,000, retire a $1,200,000 industrial revenue bond and pay $875,000 in accrued interest and preferred dividends, with the remaining balance used for working capital purposes.



The Company has credit facilities with GMAC Commercial Finance, LLC
(GMAC) and with The CIT Group/Business Credit, Inc. (CIT). The Companys Amended and Restated Credit Agreement with GMAC provides for term loans and was amended in January 2006 to include a $5,000,000 credit line that
will be available to December 15, 2006 to finance machinery and equipment purchases. The Companys Amended Financing Agreement with CIT provides for working capital revolving loans in amounts up to the lesser of $14,000,000 or an amount
determined by reference to a borrowing base and a term loan. The GMAC loans are secured by the Companys real estate, fixtures and equipment, and mature on August 1, 2009. The CIT loans are secured by substantially all other assets of the
Company and mature on June 30, 2008.



At December 31,
2005, there was outstanding $1,339,000 in working capital revolving loans and $12,320,000 of term loans. Availability under the revolving loan fluctuates daily. At December 31, 2005, there was $7,453,000 in unused availability under the
revolving loan.



In August 2005, the Company sold its Owatonna,
Minnesota manufacturing, warehouse and office facility for approximately $3,600,000, of which $3,067,000 was used to prepay a portion of the GMAC term loan and $400,000 was used to prepay a portion of the CIT term loan. Simultaneously with this
sale, the Company and the purchaser entered into a lease of the Owatonna facility. The lease contains renewal options as well as options to terminate the lease if the Company elects to relocate. Due to the option to repurchase the facility, the
transaction was treated for financial accounting purposes as a financing transaction whereby payments made of $200,000 through December, 2005 were recorded as interest expense. On December 23, 2005, the lease was amended to eliminate the
Companys option to repurchase the building in exchange for certain services to be provided by the landlord. Accordingly, the transaction has been accounted for as a sale/leaseback subsequent to December 23, 2005, resulting in a deferred
gain of $811,000 at December 31, 2005, of which $177,000 is included in accrued expenses and $634,000 is included in other long-term liabilities and will be amortized over 55 months.



The Company has posted letters of credit of $2,945,722 and $2,888,025, respectively, in connection with its appeals of the
judgments in Kirila et al v. Cybex International, Inc., et al, and Colassi v. Cybex International, Inc. No cash payments to the plaintiffs will be required with respect to either item of litigation until the end of the respective appeal processes.
The ultimate resolution of these matters could be material to the Companys financial position, results of operations and cash flows; however, management believes that the recorded reserves are adequate. Management also believes it will have
adequate liquidity to satisfy these judgments if its appeals are ultimately unsuccessful.



The Company relies upon cash flows from its operations and borrowings under its credit facilities to fund its working capital and capital expenditure requirements. A decline in sales or margins or a failure to remain
in compliance with the terms of its credit facilities could result in the Company having insufficient funds for such purposes. Management believes that the Companys cash flows and the availability under its credit facilities are sufficient to
fund its general working capital and capital expenditure needs for at least the next 12 months.



As of December 31, 2005, the Company had approximately $30,489,000 in net operating loss carryforwards, substantially all of which will be available
to offset 2006 taxable income.



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CONTRACTUAL OBLIGATIONS



The following is an aggregated summary of the Companys obligations and commitments to make future payments under various agreements:



|                              |  |       |            |                   |   |                   |  |                   |            |                 |   |           |  |   |        
|----------------------------- |  | ----- | ---------- | ----------------- | - | ----------------- |  | ----------------- | ---------- | --------------- | - | --------- |  | - | -------
|                              |  | TOTAL |            | Less ThanOne Year |   | One to ThreeYears |  | Four to FiveYears |            | After FiveYears
|Contractual obligations:      |  |       |            |                   |   |                   |  |                   |            |                 |   |           |  |   |        
|Debt                          |  | $     | 13,659,000 |                   | $ | 3,929,000         |  | $                 | 5,749,000  |                 | $ | 3,981,000 |  | $ |       
|Royalty agreement             |  |       | 2,570,000  |                   |   | 440,000           |  |                   | 720,000    |                 |   | 720,000   |  |   | 690,000
|Capital lease obligations (a) |  |       | 887,000    |                   |   | 532,000           |  |                   | 333,000    |                 |   | 22,000    |  |   |       
|Operating lease commitments   |  |       | 3,771,000  |                   |   | 1,111,000         |  |                   | 1,740,000  |                 |   | 920,000   |  |   |       
|Purchase obligations          |  |       | 12,166,000 |                   |   | 9,267,000         |  |                   | 2,899,000  |                 |   |          |  |   |       
|                              |  |       |            |                   |   |                   |  |                   |            |                 |   |           |  |   |        
|                              |  | $     | 33,053,000 |                   | $ | 15,279,000        |  | $                 | 11,441,000 |                 | $ | 5,643,000 |  | $ | 690,000
|                              |  |       |            |                   |   |                   |  |                   |            |                 |   |           |  |   |        

---

|(a) | Includes future interest obligation.
|--- | ------------------------------------



OFF-BALANCE SHEET ARRANGEMENTS



The Company has a lease financing program, whereby it arranges equipment leases and other financing for certain commercial customers for selected
products. These leases are accounted for as sales-type leases and are generally for terms of three to five years, at which time title transfers to the lessee. While most of these financings are without recourse, in certain cases the Company may
offer a guaranty or other recourse provisions. At December 31, 2005, the maximum contingent liability under all recourse provisions was $4,260,000. A reserve for estimated losses under recourse provisions of $289,000 has been recorded based
upon historical and industry experience, and is included in accrued liabilities at December 31, 2005.



NEW ACCOUNTING PRONOUNCEMENTS



In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payments (SFAS No. 123R), which replaces SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values beginning with the first annual period beginning after June 15, 2005 (fiscal 2006 for the Company). The pro forma disclosures previously permitted under SFAS
No. 123 no longer will be an alternative to financial statement recognition. Under SFAS No. 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for
compensation costs and the transition method to be used at the date of adoption. The transition methods include the modified prospective and modified retrospective methods. The Company plans to use the modified prospective method, which requires
that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS No. 123R. The Company is evaluating the requirements of SFAS No. 123R and expects that the
adoption of SFAS No. 123R will result in an estimated charge of $67,000 for 2006, $43,000 for 2007 and $4,000 for 2008 relating to options issued prior to the date of adoption of SFAS No. 123R. The Companys assessment of estimated
compensation charges relating to options issued prior to the date of adoption of SFAS No. 123R is affected by forfeitures and modifications, if any. Stock-based compensation in 2006 will also be affected by any grants in 2006.



In December 2004, the FASB issued SFAS No. 151, Inventory
Costs, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). Under SFAS No. 151, such items will be recognized as current period charges. In addition, SFAS
No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the



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production facilities. SFAS No. 151 will be effective for the Company for inventory costs incurred on or after January 1, 2006. The Company does
not expect the implementation of SFAS No. 151 to have a material impact on its consolidated results of operations and financial condition.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which eliminates an exception in APB Opinion
No. 29, Accounting for Nonmonetary Transactions for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS
No. 153 will be effective for the Company for nonmonetary asset exchanges occurring on or after January 1, 2006.



CRITICAL ACCOUNTING POLICIES



The Companys significant accounting policies are described in Note 2 to the consolidated financial statements included in Item 8 of this Form
10-K. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related
to the allowance for doubtful accounts, realizability of inventory, reserves for warranty obligations, reserves for legal matters and product liability, recoverability of goodwill and valuation of deferred tax assets. Management bases its estimates
and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, which could materially impact the Companys results of operations and financial position. These critical accounting
policies and estimates have been discussed with the Companys audit committee.



Allowance for doubtful accounts. Management performs ongoing credit evaluations of customers and adjusts credit limits based upon payment history and the customers current credit worthiness, as
determined by a review of their current credit information. Management continuously monitors collections and payments from customers and maintains a reserve for estimated credit losses based upon historical experience and any specific customer
collection issues that have been identified. If the financial condition of a specific customer or the Companys general customer base were to deteriorate, resulting in an impairment of their ability to make payments, additional reserves may be
required.



Realizability of inventory. The Company
values inventory at the lower of cost or market. Management regularly reviews inventory quantities on-hand and records a provision for excess and obsolete inventory based primarily on estimated forecasts of product demand and historical usage, after
considering the impact of new products. If actual market conditions and product demand are less favorable than projected, additional inventory write-downs may be required.



Warranty reserve. All products are warranted for up to three years for labor and up to ten years for structural
frames. Warranty periods for parts range from one to three years depending on the part and the type of equipment. A warranty liability is recorded at the time of product sale based on estimates that are developed from historical information and
certain assumptions about future events. Future warranty obligations are affected by product failure rates, usage and service costs incurred in addressing warranty claims. These factors are impacted by the level of new product introductions and the
mix of equipment sold to the commercial and consumer markets. If actual warranty costs differ from managements estimates, adjustments to the warranty liability would be required.



Legal matters. The Company has recorded a reserve related to certain legal matters for which it is probable that
a loss has been incurred and the range of such loss can be determined. With respect to other matters, management has concluded that a loss is only possible or remote and, therefore, no loss is recorded. As



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additional information becomes available, the Company will continue to assess whether losses from legal matters are probable, possible or remote and the
adequacy of accruals for probable loss contingencies.



Product liability reserve.Due to the nature of its products, the Company is involved in certain pending product liability claims and lawsuits. The Company maintains product liability insurance coverage subject to deductibles.
Reserves for self-insured retention, including claims incurred but not yet reported, are included in accrued liabilities in the accompanying consolidated balance sheets, based on managements review of outstanding claims and claims history and
consultation with its third-party claims administrators. If actual results vary from managements estimates, adjustments to the reserve would be required.



Recoverability of goodwill. In assessing the recoverability of goodwill, management is required to make assumptions regarding estimated
future cash flows and other factors to determine whether the fair value of the business supports the carrying value of goodwill and net operating assets. This analysis includes assumptions and estimates about future sales, costs, working capital,
capital expenditures and cost of capital. If these assumptions and estimates change in the future, the Company may be required to record an impairment charge related to goodwill.



Valuation of deferred tax assets. At December 31, 2005, there is a valuation allowance of $21,960,000
against the carrying value of the Companys deferred tax assets. Approximately $56,307,000 of future taxable income is needed to fully realize the Companys deferred tax assets. If the estimates and related assumptions relating to the
likely utilization of the deferred tax asset change in the future, the valuation allowance may change accordingly.



ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK



Interest Rate Risk



The Companys debt portfolio as of December 31, 2005 is comprised of variable rate debt denominated in U.S.
dollars. Changes in interest rates have an impact on the variable portion of the Companys debt portfolio. A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows but does not impact
the Companys consolidated balance sheet.



At
December 31, 2005, the Company had variable rate debt with a carrying value of $13,659,000. A 100 basis point change in interest rates would have impacted interest expense by $176,000 for the year ended December 31, 2005.



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ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE



|                                                                                                                                           |  |    
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ---
|Report of Independent Registered Public Accounting Firm                                                                                    |  | F-1
|                                                                                                                                           | 
|Consolidated Financial Statements:                                                                                                         |  |    
|                                                                                                                                           | 
|Consolidated Balance Sheets as of December 31, 2005 and 2004                                                                               |  | F-2
|                                                                                                                                           | 
|Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003                                                 |  | F-3
|                                                                                                                                           | 
|Consolidated Statements of Stockholders Equity and Other Comprehensive Income (Loss) for the years ended December 31, 2005, 2004 and 2003 |  | F-4
|                                                                                                                                           | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003                                                 |  | F-5
|                                                                                                                                           | 
|Notes to Consolidated Financial Statements                                                                                                 |  | F-6
|                                                                                                                                           | 
|Financial Statement Schedule:                                                                                                              |  |    
|                                                                                                                                           | 
|II. Valuation and Qualifying Accounts for the years ended December 31, 2005, 2004 and 2003                                                 |  | S-1



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



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Report of Independent Registered Public Accounting Firm



The Board of Directors and Stockholders

Cybex International, Inc.:



We
have audited the consolidated financial statements of Cybex International, Inc. and subsidiaries (the Company) as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cybex International, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information set forth therein.



/s/ KPMG LLP



Philadelphia, Pennsylvania

February 8, 2006



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)



|                                                                                        |  |              |         |   |      |   |         |  
|--------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                                                        |  | December 31, |        
|                                                                                        |  | 2005         |         |   | 2004 |  
|ASSETS                                                                                  |  |              |         |   |      |   |         |  
|Current Assets:                                                                         |  |              |         |   |      |   |         |  
|Cash                                                                                    |  | $            | 807     |   |      | $ | 1,826   |  
|Accounts receivable, net of allowance of $689 and $887                                  |  |              | 18,320  |   |      |   | 15,891  |  
|Inventories                                                                             |  |              | 9,258   |   |      |   | 8,014   |  
|Prepaid expenses and other                                                              |  |              | 2,707   |   |      |   | 1,684   |  
|                                                                                        |  |              |         |   |      |   |         |  
|Total current assets                                                                    |  |              | 31,092  |   |      |   | 27,415  |  
|Property, plant and equipment, net                                                      |  |              | 12,124  |   |      |   | 13,544  |  
|Goodwill                                                                                |  |              | 11,247  |   |      |   | 11,247  |  
|Other assets                                                                            |  |              | 1,209   |   |      |   | 2,280   |  
|                                                                                        |  |              |         |   |      |   |         |  
|                                                                                        |  | $            | 55,672  |   |      | $ | 54,486  |  
|                                                                                        |  |              |         |   |      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                    |  |              |         |   |      |   |         |  
|Current Liabilities:                                                                    |  |              |         |   |      |   |         |  
|Current maturities of long-term debt                                                    |  | $            | 3,929   |   |      | $ | 9,116   |  
|Current portion of capital leases                                                       |  |              | 481     |   |      |   | 408     |  
|Accounts payable                                                                        |  |              | 5,918   |   |      |   | 5,377   |  
|Accrued expenses                                                                        |  |              | 16,286  |   |      |   | 9,196   |  
|                                                                                        |  |              |         |   |      |   |         |  
|Total current liabilities                                                               |  |              | 26,614  |   |      |   | 24,097  |  
|Long-term debt                                                                          |  |              | 9,730   |   |      |   | 11,489  |  
|Capital leases                                                                          |  |              | 332     |   |      |   | 648     |  
|Accrued warranty obligation                                                             |  |              | 510     |   |      |   | 627     |  
|Other liabilities                                                                       |  |              | 2,298   |   |      |   | 1,839   |  
|                                                                                        |  |              |         |   |      |   |         |  
|Total liabilities                                                                       |  |              | 39,484  |   |      |   | 38,700  |  
|                                                                                        |  |              |         |   |      |   |         |  
|Commitments and contingencies (Notes 11 and 12)                                         |  |              |         |   |      |   |         |  
|Stockholders Equity:                                                                   |  |              |         |   |      |   |         |  
|Common stock, $.10 par value, 30,000 shares authorized, 15,340 and 15,303 shares issued |  |              | 1,534   |   |      |   | 1,530   |  
|Additional paid-in capital                                                              |  |              | 57,565  |   |      |   | 57,464  |  
|Treasury stock, at cost (209 shares)                                                    |  |              | (2,251  | ) |      |   | (2,251  | )
|Accumulated deficit                                                                     |  |              | (40,530 | ) |      |   | (40,591 | )
|Accumulated other comprehensive loss                                                    |  |              | (130    | ) |      |   | (366    | )
|                                                                                        |  |              |         |   |      |   |         |  
|Total stockholders equity                                                              |  |              | 16,188  |   |      |   | 15,786  |  
|                                                                                        |  |              |         |   |      |   |         |  
|                                                                                        |  | $            | 55,672  |   |      | $ | 54,486  |  
|                                                                                        |  |              |         |   |      |   |         |  



The accompanying notes
are an integral part of these statements.



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



|                                                      |  |                         |         |   |      |   |         |      |  |   |        |  
|----------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                      |  | Year Ended December 31, |        
|                                                      |  | 2005                    |         |   | 2004 |   |         | 2003 | 
|Net sales                                             |  | $                       | 114,646 |   |      | $ | 103,421 |      |  | $ | 90,480 |  
|Cost of sales                                         |  |                         | 73,169  |   |      |   | 65,640  |      |  |   | 59,321 |  
|                                                      |  |                         |         |   |      |   |         |      |  |   |        |  
|Gross profit                                          |  |                         | 41,477  |   |      |   | 37,781  |      |  |   | 31,159 |  
|Selling, general and administrative expenses          |  |                         | 33,525  |   |      |   | 30,510  |      |  |   | 29,019 |  
|Litigation charges                                    |  |                         | 4,605   |   |      |   |        |      |  |   |       |  
|Bad debt expense                                      |  |                         | 383     |   |      |   | 390     |      |  |   | 348    |  
|                                                      |  |                         |         |   |      |   |         |      |  |   |        |  
|Total operating expenses                              |  |                         | 38,513  |   |      |   | 30,900  |      |  |   | 29,367 |  
|                                                      |  |                         |         |   |      |   |         |      |  |   |        |  
|Operating income                                      |  |                         | 2,964   |   |      |   | 6,881   |      |  |   | 1,792  |  
|Interest income                                       |  |                         | 5       |   |      |   | 14      |      |  |   | 12     |  
|Interest expense                                      |  |                         | (2,657  | ) |      |   | (3,539  | )    |  |   | (3,643 | )
|Other income, net                                     |  |                         |        |   |      |   |        |      |  |   | 27     |  
|                                                      |  |                         |         |   |      |   |         |      |  |   |        |  
|Income (loss) before income taxes                     |  |                         | 312     |   |      |   | 3,356   |      |  |   | (1,812 | )
|Income tax provision (benefit)                        |  |                         | 251     |   |      |   | 131     |      |  |   | (51    | )
|                                                      |  |                         |         |   |      |   |         |      |  |   |        |  
|Net income (loss)                                     |  |                         | 61      |   |      |   | 3,225   |      |  |   | (1,761 | )
|Preferred stock dividends                             |  |                         |        |   |      |   | (276    | )    |  |   | (244   | )
|                                                      |  |                         |         |   |      |   |         |      |  |   |        |  
|Net income (loss) attributable to common stockholders |  | $                       | 61      |   |      | $ | 2,949   |      |  | $ | (2,005 | )
|                                                      |  |                         |         |   |      |   |         |      |  |   |        |  
|Basic net income (loss) per share                     |  | $                       | .00     |   |      | $ | .26     |      |  | $ | (.23   | )
|                                                      |  |                         |         |   |      |   |         |      |  |   |        |  
|Diluted net income (loss) per share                   |  | $                       | .00     |   |      | $ | .24     |      |  | $ | (.23   | )
|                                                      |  |                         |         |   |      |   |         |      |  |   |        |  





The accompanying notes are an integral part of these statements.



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS)

(in thousands)



|                                                |  |              |  |                 |       |        |                           |   |        |                |        |   |                     |   |        |                                    |  |   |                           |   |  |   |         |   |  |   |      |        |   |   |        |  
|----------------------------------------------- |  | ------------ |  | --------------- | ----- | ------ | ------------------------- | - | ------ | -------------- | ------ | - | ------------------- | - | ------ | ---------------------------------- |  | - | ------------------------- | - |  | - | ------- | - |  | - | ---- | ------ | - | - | ------ | -
|                                                |  | Common Stock |  | Preferred Stock |       |        | AdditionalPaid-in Capital |   |        | Treasury Stock |        |   | Accumulated Deficit |   |        | AccumulatedOtherComprehensive Loss |  |   | TotalStockholders Equity |  
|                                                |  | Shares       |  | Amount          |       | Shares |                           |   | Amount |                |        |   |                     |   |       
|Balance, January 1, 2003                        |  | 9,044        |  | $               | 904   |        |                          |   |        | $              |       |   |                     | $ | 45,296 |                                    |  | $ | (2,257                    | ) |  | $ | (41,533 | ) |  | $ | (5   | )      |   | $ | 2,405  |  
|Issuance of preferred stock                     |  |             |  |                 |      |        | 33                        |   |        |                | 4,900  |   |                     |   |       |                                    |  |   |                          |   |  |   |        |   |  |   |     |        |   |   | 4,900  |  
|Common stock issued to Directors                |  | 33           |  |                 | 3     |        |                          |   |        |                |       |   |                     |   | 36     |                                    |  |   | 6                         |   |  |   |        |   |  |   |     |        |   |   | 45     |  
|Issuance of warrants                            |  |             |  |                 |      |        |                          |   |        |                |       |   |                     |   | 268    |                                    |  |   |                          |   |  |   |        |   |  |   |     |        |   |   | 268    |  
|Forgiveness of related party payable            |  |             |  |                 |      |        |                          |   |        |                |       |   |                     |   | 252    |                                    |  |   |                          |   |  |   |        |   |  |   |     |        |   |   | 252    |  
|Comprehensive loss:                             |  |              |  |                 |       |        |                           |   |        |                |        |   |                     |   |        |                                    |  |   |                           |   |  |   |         |   |  |   |      |        |   |   |        |  
|Reclassification adjustment                     |  |             |  |                 |      |        |                          |   |        |                |       |   |                     |   |       |                                    |  |   |                          |   |  |   |        |   |  |   | 81   |        |   |   | 81     |  
|Cumulative translation adjustment               |  |             |  |                 |      |        |                          |   |        |                |       |   |                     |   |       |                                    |  |   |                          |   |  |   |        |   |  |   | (172 | )      |   |   | (172   | )
|Net loss                                        |  |             |  |                 |      |        |                          |   |        |                |       |   |                     |   |       |                                    |  |   |                          |   |  |   | (1,761  | ) |  |   |     |        |   |   | (1,761 | )
|                                                |  |              |  |                 |       |        |                           |   |        |                |        |   |                     |   |        |                                    |  |   |                           |   |  |   |         |   |  |   |      |        |   |   |        |  
|Comprehensive loss                              |  |              |  |                 |       |        |                           |   |        |                |        |   |                     |   |        |                                    |  |   |                           |   |  |   |         |   |  |   |      | (1,852 | )
|                                                |  |              |  |                 |       |        |                           |   |        |                |        |   |                     |   |        |                                    |  |   |                           |   |  |   |         |   |  |   |      |        |   |   |        |  
|Balance, December 31, 2003                      |  | 9,077        |  |                 | 907   |        | 33                        |   |        |                | 4,900  |   |                     |   | 45,852 |                                    |  |   | (2,251                    | ) |  |   | (43,294 | ) |  |   | (96  | )      |   |   | 6,018  |  
|Conversion of preferred stock to common         |  | 3,289        |  |                 | 329   |        | (33                       | ) |        |                | (4,900 | ) |                     |   | 4,571  |                                    |  |   |                          |   |  |   |        |   |  |   |     |        |   |   |       |  
|Issuance of common stock                        |  | 2,430        |  |                 | 243   |        |                          |   |        |                |       |   |                     |   | 6,956  |                                    |  |   |                          |   |  |   |        |   |  |   |     |        |   |   | 7,199  |  
|Exercise of warrants/options                    |  | 470          |  |                 | 47    |        |                          |   |        |                |       |   |                     |   | (40    | )                                  |  |   |                          |   |  |   |        |   |  |   |     |        |   |   | 7      |  
|Dividend paid to related party                  |  |             |  |                 |      |        |                          |   |        |                |       |   |                     |   |       |                                    |  |   |                          |   |  |   | (522    | ) |  |   |     |        |   |   | (522   | )
|Common stock issued to Directors                |  | 37           |  |                 | 4     |        |                          |   |        |                |       |   |                     |   | 125    |                                    |  |   |                          |   |  |   |        |   |  |   |     |        |   |   | 129    |  
|Comprehensive income:                           |  |              |  |                 |       |        |                           |   |        |                |        |   |                     |   |        |                                    |  |   |                           |   |  |   |         |   |  |   |      |        |   |   |        |  
|Cumulative translation adjustment               |  |             |  |                 |      |        |                          |   |        |                |       |   |                     |   |       |                                    |  |   |                          |   |  |   |        |   |  |   | (270 | )      |   |   | (270   | )
|Net income                                      |  |             |  |                 |      |        |                          |   |        |                |       |   |                     |   |       |                                    |  |   |                          |   |  |   | 3,225   |   |  |   |     |        |   |   | 3,225  |  
|                                                |  |              |  |                 |       |        |                           |   |        |                |        |   |                     |   |        |                                    |  |   |                           |   |  |   |         |   |  |   |      |        |   |   |        |  
|Comprehensive income                            |  |              |  |                 |       |        |                           |   |        |                |        |   |                     |   |        |                                    |  |   |                           |   |  |   |         |   |  |   |      |        |   |   | 2,955  |  
|                                                |  |              |  |                 |       |        |                           |   |        |                |        |   |                     |   |        |                                    |  |   |                           |   |  |   |         |   |  |   |      |        |   |   |        |  
|Balance, December 31, 2004                      |  | 15,303       |  |                 | 1,530 |        |                          |   |        |                |       |   |                     |   | 57,464 |                                    |  |   | (2,251                    | ) |  |   | (40,591 | ) |  |   | (366 | )      |   |   | 15,786 |  
|Exercise of options                             |  | 17           |  |                 | 2     |        |                          |   |        |                |       |   |                     |   | 23     |                                    |  |   |                          |   |  |   |        |   |  |   |     |        |   |   | 25     |  
|Common stock issued to Directors and management |  | 20           |  |                 | 2     |        |                          |   |        |                |       |   |                     |   | 78     |                                    |  |   |                          |   |  |   |        |   |  |   |     |        |   |   | 80     |  
|Comprehensive income:                           |  |              |  |                 |       |        |                           |   |        |                |        |   |                     |   |        |                                    |  |   |                           |   |  |   |         |   |  |   |      |        |   |   |        |  
|Cumulative translation adjustment               |  |             |  |                 |      |        |                          |   |        |                |       |   |                     |   |       |                                    |  |   |                          |   |  |   |        |   |  |   | 133  |        |   |   | 133    |  
|Change in fair value of hedge                   |  |             |  |                 |      |        |                          |   |        |                |       |   |                     |   |       |                                    |  |   |                          |   |  |   |        |   |  |   | 103  |        |   |   | 103    |  
|Net income                                      |  |             |  |                 |      |        |                          |   |        |                |       |   |                     |   |       |                                    |  |   |                          |   |  |   | 61      |   |  |   |     |        |   |   | 61     |  
|                                                |  |              |  |                 |       |        |                           |   |        |                |        |   |                     |   |        |                                    |  |   |                           |   |  |   |         |   |  |   |      |        |   |   |        |  
|Comprehensive income                            |  |              |  |                 |       |        |                           |   |        |                |        |   |                     |   |        |                                    |  |   |                           |   |  |   |         |   |  |   |      |        |   |   | 297    |  
|                                                |  |              |  |                 |       |        |                           |   |        |                |        |   |                     |   |        |                                    |  |   |                           |   |  |   |         |   |  |   |      |        |   |   |        |  
|Balance, December 31, 2005                      |  | 15,340       |  | $               | 1,534 |        |                          |   |        | $              |       |   |                     | $ | 57,565 |                                    |  | $ | (2,251                    | ) |  | $ | (40,530 | ) |  | $ | (130 | )      |   | $ | 16,188 |  
|                                                |  |              |  |                 |       |        |                           |   |        |                |        |   |                     |   |        |                                    |  |   |                           |   |  |   |         |   |  |   |      |        |   |   |        |  



The accompanying notes
are an integral part of these statements.



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##### Table of Contents

CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                         |  |                         |          |   |      |   |          |      |  |   |         |  
|---------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                         |  | Year Ended December 31, |         
|                                                                                         |  | 2005                    |          |   | 2004 |   |          | 2003 | 
|OPERATING ACTIVITIES:                                                                    |  |                         |          |   |      |   |          |      |  |   |         |  
|Net income (loss)                                                                        |  | $                       | 61       |   |      | $ | 3,225    |      |  | $ | (1,761  | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                         |          |   |      |   |          |      |  |   |         |  
|Depreciation and amortization                                                            |  |                         | 3,412    |   |      |   | 3,704    |      |  |   | 3,710   |  
|Amortization of deferred financing costs                                                 |  |                         | 560      |   |      |   | 1,021    |      |  |   | 710     |  
|Stock-based compensation                                                                 |  |                         | 55       |   |      |   | 129      |      |  |   | 45      |  
|Provisions for losses on accounts receivables                                            |  |                         | 383      |   |      |   | 390      |      |  |   | 348     |  
|Change in fair value of foreign currency contract                                        |  |                         | (72      | ) |      |   |         |      |  |   |        |  
|Change in fair value of hedging instruments                                              |  |                         |         |   |      |   |         |      |  |   | (27     | )
|Increase to litigation reserve                                                           |  |                         | 4,605    |   |      |   |         |      |  |   |        |  
|Changes in operating assets and liabilities:                                             |  |                         |          |   |      |   |          |      |  |   |         |  
|Accounts receivable                                                                      |  |                         | (2,812   | ) |      |   | (2,526   | )    |  |   | (475    | )
|Inventories                                                                              |  |                         | (1,244   | ) |      |   | (104     | )    |  |   | 579     |  
|Prepaid expenses and other                                                               |  |                         | (430     | ) |      |   | 1,193    |      |  |   | (47     | )
|Accounts payable, accrued liabilities and other liabilities                              |  |                         | 2,680    |   |      |   | (2,580   | )    |  |   | (2,287  | )
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |         |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                |  |                         | 7,198    |   |      |   | 4,452    |      |  |   | 795     |  
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |         |  
|INVESTING ACTIVITIES:                                                                    |  |                         |          |   |      |   |          |      |  |   |         |  
|Purchases of property, plant and equipment                                               |  |                         | (4,220   | ) |      |   | (2,147   | )    |  |   | (572    | )
|Proceeds from disposition of building                                                    |  |                         | 3,488    |   |      |   |         |      |  |   |        |  
|Deposits related to equipment purchases                                                  |  |                         |         |   |      |   | (625     | )    |  |   | (253    | )
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |         |  
|NET CASH USED IN INVESTING ACTIVITIES                                                    |  |                         | (732     | ) |      |   | (2,772   | )    |  |   | (825    | )
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |         |  
|FINANCING ACTIVITIES:                                                                    |  |                         |          |   |      |   |          |      |  |   |         |  
|Repayments of term loans                                                                 |  |                         | (5,496   | ) |      |   | (19,088  | )    |  |   | (17,809 | )
|Repayments of revolving loans                                                            |  |                         | (115,225 | ) |      |   | (105,710 | )    |  |   | (43,976 | )
|Borrowings under revolving loans                                                         |  |                         | 109,121  |   |      |   | 103,317  |      |  |   | 44,861  |  
|Borrowings under term loans                                                              |  |                         | 4,654    |   |      |   | 15,000   |      |  |   | 16,000  |  
|Deferred financing costs                                                                 |  |                         | (17      | ) |      |   | (303     | )    |  |   | (2,023  | )
|Proceeds from issuance of common stock, net of costs                                     |  |                         |         |   |      |   | 7,199    |      |  |   |        |  
|Proceeds from exercise of stock options                                                  |  |                         | 25       |   |      |   | 7        |      |  |   |        |  
|Dividends paid to related party                                                          |  |                         |         |   |      |   | (522     | )    |  |   |        |  
|Principal payments on capital leases                                                     |  |                         | (547     | ) |      |   | (503     | )    |  |   | (390    | )
|Proceeds from related party loans                                                        |  |                         |         |   |      |   |         |      |  |   | 3,900   |  
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |         |  
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                      |  |                         | (7,485   | ) |      |   | (603     | )    |  |   | 563     |  
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |         |  
|NET INCREASE (DECREASE) IN CASH                                                          |  |                         | (1,019   | ) |      |   | 1,077    |      |  |   | 533     |  
|CASH, beginning of year                                                                  |  |                         | 1,826    |   |      |   | 749      |      |  |   | 216     |  
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |         |  
|CASH, end of year                                                                        |  | $                       | 807      |   |      | $ | 1,826    |      |  | $ | 749     |  
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |         |  
|SUPPLEMENTAL CASH FLOW DISCLOSURE:                                                       |  |                         |          |   |      |   |          |      |  |   |         |  
|Cash paid for interest                                                                   |  | $                       | 1,542    |   |      | $ | 2,349    |      |  | $ | 2,701   |  
|Cash paid for income taxes                                                               |  |                         | 223      |   |      |   | 39       |      |  |   | 15      |  
|Issuance of warrants to bank                                                             |  |                         |         |   |      |   |         |      |  |   | 268     |  
|Conversion of related party loans to preferred stock                                     |  |                         |         |   |      |   |         |      |  |   | 4,900   |  
|Capital leases                                                                           |  |                         | 304      |   |      |   | 536      |      |  |   | 1,010   |  
|Forgiveness of payable to related party                                                  |  |                         |         |   |      |   |         |      |  |   | 252     |  
|Conversion of preferred stock to common stock                                            |  |                         |         |   |      |   | 4,900    |      |  |   |        |  



The accompanying notes
are an integral part of these statements.



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##### Table of Contents

CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
1BACKGROUND



Cybex International, Inc. (the
Company or Cybex), a New York corporation, is a manufacturer of exercise equipment and develops, manufactures and markets strength and cardiovascular fitness equipment products for the commercial and, to a lesser extent,
consumer markets. Currently, most of the Companys products are sold under the brand name Cybex. The Company operates in one business segment.



NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Principles of Consolidation



The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.



Use of Estimates



The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for doubtful
accounts, inventory reserve, warranty reserve, reserves for legal and product liability matters, recoverability of goodwill and valuation of deferred tax assets are the items that are most susceptible to estimates.



Cash Equivalents



The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. There are no cash equivalents at December 31, 2005 or 2004.



Trade Accounts Receivable



Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is managements best
estimate of the amount of probable credit losses in the Companys existing accounts receivable. Management determines the allowance based on historical write-off experience and a specific review of past due balances over a specified amount.
Management reviews the Companys allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.



Inventories



Inventories are valued at the lower of cost (first in, first out) or market.
Cost includes materials, labor and manufacturing overhead.



Property, Plant and Equipment



Property, plant
and equipment are recorded at cost. Betterments and improvements are capitalized while repairs and maintenance costs are charged to expense as incurred. Depreciation is recorded using the straight-line method based on estimated useful lives for
financial reporting purposes and various prescribed methods for tax purposes. The estimated useful lives for financial reporting purposes are 25 years for buildings and improvements and three to ten years for equipment and furniture.



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##### Table of Contents

CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   (continued)



Internal Use Software Costs



Under the provisions of AICPA Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, the Company capitalizes certain costs associated with software for internal use. Capitalization of qualified costs incurred during the application
development stage begins when the preliminary project stage is complete and ceases when the project is substantially complete and ready for its intended purpose. Capitalized costs include hardware, software and services and payroll and
payroll-related expenses for employees who were directly associated with developing and implementing internal use software primarily associated with the Companys Enterprise Resource Planning system. Such costs are included within property,
plant and equipment and are being amortized over seven years. As of December 31, 2005 and 2004, the net carrying value of internal use software was $1,808,000 and $1,677,000, respectively. In 2005, the Company capitalized $70,000 in payroll and
payroll related expenses relating to internal use software. No such costs were capitalized during the years ended December 31, 2004 and 2003.



Impairment of Long-Lived Assets



The Company follows the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, and, accordingly, long-lived assets, including property, plant and equipment and amortizable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value of the assets to the undiscounted cash flows estimated to be generated by those assets. All long-lived assets
are accounted for as entity level assets under SFAS No. 144 because there are no asset groups with identifiable cash flows that are largely independent of the cash flows of other assets. If a write down was necessary, an impairment charge would
be recognized equal to the amount by which the carrying amount of the assets exceeds their fair value, as determined based upon quoted market prices or discounted cash flows. Management believes that no long-lived assets were impaired as of
December 31, 2005 and 2004.



Goodwill



Goodwill represents the excess of costs over the fair value of the net
assets of businesses acquired. The Company follows the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. Pursuant to SFAS No. 142, goodwill is not amortized, but instead is tested annually for impairment, or
more frequently if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, such as a significant adverse change in business climate, unanticipated competition or a
loss of key personnel. The Company operates in one reporting unit. To the extent that the carrying amount of the reporting unit exceeds the fair value of the reporting unit, management would be required to perform the second step of the impairment
test. Under the second step of the impairment test, management would compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. The implied fair value of goodwill would be determined by
allocating the fair value of the reporting unit to all of the assets and liabilities (recognized and unrecognized) of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, Business
Combinations. The residual fair value after this allocation would be the implied fair value of the reporting unit goodwill. Management determines the fair value of its reporting unit based on an average of (i) a discounted cash flow
analysis; (ii) private sale comparables; and (iii) market capitalization, as adjusted for a control premium. Management determined that goodwill is not impaired at December 31, 2005 and 2004.



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued)



Accrued Warranty Obligations



All products are warranted for up to three years for labor and up to ten
years for structural frames. Warranty periods for parts range from one to three years depending on the part and the type of equipment. Warranty expense was $3,048,000, $2,512,000 and $2,793,000 for the years ended December 31, 2005, 2004 and
2003, respectively. The accrued warranty obligation is recorded at the time of product sale based on management estimates, which are developed from historical information and certain assumptions about future events and are subject to change.



The following table sets forth the changes in the liability
for product warranties for the years ended December 31, 2005 and 2004:



|                                      |  |                         |            |   |      |   |            |  
|------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | -
|                                      |  | Year Ended December 31, |           
|                                      |  | 2005                    |            |   | 2004 |  
|Balance as of January 1               |  | $                       | 2,235,000  |   |      | $ | 1,759,000  |  
|Payments made under warranty          |  |                         | (2,408,000 | ) |      |   | (2,036,000 | )
|Accrual for product warranties issued |  |                         | 3,048,000  |   |      |   | 2,512,000  |  
|                                      |  |                         |            |   |      |   |            |  
|Balance as of December 31             |  | $                       | 2,875,000  |   |      | $ | 2,235,000  |  
|                                      |  |                         |            |   |      |   |            |  



Derivatives



The Company follows SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities to account for derivatives.



At December 31, 2005, derivative instruments include two interest rate
caps, which are both considered cash flow hedges in accordance with SFAS No. 133. Also, derivative instruments include 13 forward contracts, of which three remain outstanding at December 31, 2005, that hedge the foreign currency exposure
of sales made in the UK in British Sterling. The forward contracts are not considered eligible for hedge accounting in accordance with SFAS No. 133 (see Note 7).



Translation of Foreign Currencies



Assets and liabilities of the Companys foreign subsidiary, whose functional currency is their local currency, is
translated at year-end exchange rates. Income and expense items are translated at the average rates of exchange prevailing during the year. The adjustment resulting from translating the financial statements of such foreign subsidiary is reflected in
accumulated other comprehensive loss within stockholders equity.



Fair Value of Financial Instruments



The
Companys financial instruments consist primarily of cash, accounts receivable, accounts payable, capital leases and long-term debt. The carrying values of cash, accounts receivable and accounts payable are considered to be representative of
their respective fair values because of the short maturity of these instruments. Based on the terms of the Companys debt instruments (including the capital leases) that are outstanding as of December 31, 2005, the carrying values are
considered to approximate their respective fair values. See Note 7 for the terms and carrying values of the Companys various debt instruments.



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##### Table of Contents

CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued)



Revenue Recognition



Revenue is recorded when products are shipped and the Company has no
significant remaining obligations, persuasive evidence of an arrangement exists, the price to the buyer is fixed or determinable, and collectibility is probable. The Company does not offer its customers a right of return, price protection or
inventory rotation programs. In accordance with Emerging Issues Task Force (EITF) Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs, the Company classifies amounts billed to customers for shipping and
handling as sales. Direct shipping and handling costs are classified as cost of sales. Internal salaries and overhead related to shipping and handling are classified as selling, general and administrative expense.



Concentration of Risk, Geographic Segment Data and Enterprise-Wide
Disclosures



More than half of the Companys net
sales are through specialty fitness dealers and distributors. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. Sales to one customer in 2005, 2004 and 2003
were 15.4%, 15.9% and 10.7% of net sales, respectively. No other single customer accounted for more than 10% of the Companys net sales in any of those years.



There was no single geographic area of significant concentration other than the U.S. Sales outside of North America
accounted for approximately 29%, 29% and 28% of total net sales for the years ended December 31, 2005, 2004 and 2003, respectively. Long-lived assets located in foreign countries totaled $92,000 and $103,000 at December 31, 2005 and 2004,
respectively.



The Company single sources its stepper products
and certain raw materials and component parts, including drive motors, belts, running decks, molded plastic components and electronics, where it believes that sole sourcing is beneficial for reasons such as quality control and reliability of the
vendor or cost. The Company attempts to reduce the risk of sole source suppliers by maintaining varying levels of inventory. However, the loss of a significant supplier, or delays or disruptions in the delivery of components or materials, or
increases in material costs, could have a material adverse effect on the Companys operations.



The following table summarizes net sales over the past three years (in millions):



|                          |  |                         |       |      |   |       |  |   |     
|------------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | ----
|                          |  | Year Ended December 31,
|                          |  | 2005                    |       | 2004 |   | 2003 
|Cardiovascular products   |  | $                       | 62.3  |      | $ | 48.7  |  | $ | 38.7
|Strength systems          |  |                         | 41.1  |      |   | 43.6  |  |   | 41.0
|Parts                     |  |                         | 5.7   |      |   | 6.3   |  |   | 6.7 
|Freight and other revenue |  |                         | 5.5   |      |   | 4.8   |  |   | 4.1 
|                          |  |                         |       |      |   |       |  |   |     
|                          |  | $                       | 114.6 |      | $ | 103.4 |  | $ | 90.5
|                          |  |                         |       |      |   |       |  |   |     



Advertising Costs



The Company charges advertising costs to expense as
incurred. For the years ended December 31, 2005, 2004 and 2003, advertising expense was $2,142,000, $1,556,000 and $1,472,000, respectively, and is included in selling, general and administrative expenses.



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued)



Research and Development Costs



Research and development costs are charged to expense as incurred. Such
costs were $3,982,000, $3,172,000 and $2,669,000 for the years ended December 31, 2005, 2004 and 2003, respectively, and are included in selling, general and administrative expenses.



Income Taxes



The asset and liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating
loss and tax credit carryforwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.



Net Income (Loss) per Common Share



The table below sets forth the reconciliation of the basic and diluted
income (loss) per share computations:



|                                                             |  |                         |            |      |   |            |  |   |            |  
|------------------------------------------------------------ |  | ----------------------- | ---------- | ---- | - | ---------- |  | - | ---------- | -
|                                                             |  | Year Ended December 31, |           
|                                                             |  | 2005                    |            | 2004 |   | 2003       | 
|Net income (loss) attributable to common stockholders        |  | $                       | 61,000     |      | $ | 2,949,000  |  | $ | (2,005,000 | )
|                                                             |  |                         |            |      |   |            |  |   |            |  
|Shares used in computing basic net income (loss) per share   |  |                         | 15,122,000 |      |   | 11,359,000 |  |   | 8,831,000  |  
|Dilutive effect of options and warrants                      |  |                         | 586,000    |      |   | 708,000    |  |   |           |  
|Dilutive effect of preferred stock                           |  |                         |           |      |   | 288,000    |  |   |           |  
|                                                             |  |                         |            |      |   |            |  |   |            |  
|Shares used in computing diluted net income (loss) per share |  |                         | 15,708,000 |      |   | 12,355,000 |  |   | 8,831,000  |  
|                                                             |  |                         |            |      |   |            |  |   |            |  



For purposes of
presenting diluted net income per share in 2004, the Company assumed the conversion of the convertible preferred stock as of the earliest possible conversion date, which was June 30, 2004.



For the years ended December 31, 2005, 2004 and 2003, options to
purchase 62,000, 73,000 and 336,500 shares of common stock at exercise prices ranging from $3.70 to $4.32, $3.70 to $11.75, and $1.30 to $11.75 per share were outstanding, respectively, but were not included in the computation of diluted net income
(loss) per share as the result would be anti-dilutive.



Stock-Based Compensation



In December 2002,
SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, was issued. SFAS No. 148 amended SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 related to the disclosure about the method
of accounting for stock-based employee compensation



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued)



and the effect of the method used on reported results. SFAS No. 123, as amended by SFAS No. 148, permits companies to (i) recognize as expense
the fair value of stock-based awards, or (ii) continue to apply the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and provide
pro forma net income (loss) and net income (loss) per share disclosures for stock based compensation as if the fair-value based method defined in SFAS No. 123 had been applied. Through 2005, the Company has applied the provisions of APB Opinion
No. 25 and provides the pro forma disclosures for its stock option plans in accordance with the provisions of SFAS No. 123 and SFAS No. 148, as follows:



|                                                                                                                    |  |                         |          |   |      |   |           |      |  |   |            |  
|------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | --------- | ---- |  | - | ---------- | -
|                                                                                                                    |  | Year Ended December 31, |         
|                                                                                                                    |  | 2005                    |          |   | 2004 |   |           | 2003 | 
|Net income (loss) attributable to common stockholders:                                                              |  |                         |          |   |      |   |           |      |  |   |            |  
|As reported                                                                                                         |  | $                       | 61,000   |   |      | $ | 2,949,000 |      |  | $ | (2,005,000 | )
|Add: Stock-based compensation included in net income (loss)                                                         |  |                         | 55,000   |   |      |   | 129,000   |      |  |   | 45,000     |  
|Deduct: Total stock-based employee compensation expense determined under the fair-value based method for all awards |  |                         | (358,000 | ) |      |   | (246,000  | )    |  |   | (140,000   | )
|                                                                                                                    |  |                         |          |   |      |   |           |      |  |   |            |  
|Pro forma net income (loss) attributable to common stockholders                                                     |  | $                       | (242,000 | ) |      | $ | 2,832,000 |      |  | $ | (2,100,000 | )
|                                                                                                                    |  |                         |          |   |      |   |           |      |  |   |            |  
|Basic net income (loss) per share:                                                                                  |  |                         |          |   |      |   |           |      |  |   |            |  
|As reported                                                                                                         |  | $                       | 0.00     |   |      | $ | .26       |      |  | $ | (.23       | )
|                                                                                                                    |  |                         |          |   |      |   |           |      |  |   |            |  
|Pro forma                                                                                                           |  | $                       | (0.02    | ) |      | $ | .25       |      |  | $ | (.24       | )
|                                                                                                                    |  |                         |          |   |      |   |           |      |  |   |            |  
|Diluted net income (loss) per share:                                                                                |  |                         |          |   |      |   |           |      |  |   |            |  
|As reported                                                                                                         |  | $                       | 0.00     |   |      | $ | .24       |      |  | $ | (.23       | )
|                                                                                                                    |  |                         |          |   |      |   |           |      |  |   |            |  
|Pro forma                                                                                                           |  | $                       | (0.02    | ) |      | $ | .23       |      |  | $ | (.24       | )
|                                                                                                                    |  |                         |          |   |      |   |           |      |  |   |            |  



In December
2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payments (SFAS No. 123R), which replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS
No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first annual period beginning after June 15,
2005 (fiscal 2006 for the Company). The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. Under SFAS No. 123R, the Company must determine the appropriate fair
value model to be used for valuing share-based payments, the amortization method for compensation costs and the transition method to be used at the date of adoption. The transition methods include the modified prospective and modified retrospective
methods. The Company plans to use the modified prospective method, which requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFASNo. 123R. The Company is evaluating the requirements of SFAS No. 123R and expects that the adoption ofSFAS No. 123R will result in an estimated charge of $67,000 for 2006, $43,000 for 2007 and $4,000 for 2008relating to options issued prior to the date of adoption of SFAS No. 123R. The Companys assessment of estimated compensation charges relating to options issued prior to the date of adoption of SFAS No. 123R isaffected by
forfeitures and modifications, if any. Stock-based compensation in 2006 will also be affected by any grants in 2006.



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued)



The weighted average fair value of each stock option granted
during the years ended December 31, 2004 and 2003 was $.81 and $.40, respectively. No grants were issued in 2005. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:



|                        |  |                         |  |        
|----------------------- |  | ----------------------- |  | -------
|                        |  | Year Ended December 31,
|                        |  | 2004                    |  | 2003   
|Risk free interest rate |  | 3.9%                    |  | 3.4%   
|Expected dividend yield |  |                        |  |       
|Expected life           |  | 7 years                 |  | 7 years
|Expected volatility     |  | 50%                     |  | 20%    



Reclassifications



Certain reclassifications to prior period amounts have been made to
conform to the current presentation.



New Accounting Pronouncements



In December 2004, the FASB issued SFAS No. 151,
Inventory Costs, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Under SFAS No. 151, such items will be recognized as current period charges. In
addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for the Company for inventory costs
incurred on or after January 1, 2006. The Company does not expect the implementation of SFAS No. 151 to have a material impact on its consolidated results of operations and financial position.



In December 2004, the FASB issued SFAS No. 153, Exchanges of
Nonmonetary Assets, which eliminates an exception in APB Opinion No. 29, Accounting for Nonmonetary Transactions, for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. SFAS No. 153 will be effective for the Company for nonmonetary asset exchanges occurring on or after January 1, 2006.



NOTE 3INVENTORIES



Inventories consist of the following:



|                |  |              |           |      |   |          
|--------------- |  | ------------ | --------- | ---- | - | ---------
|                |  | December 31,
|                |  | 2005         |           | 2004
|Raw materials   |  | $            | 4,989,000 |      | $ | 3,703,000
|Work in process |  |              | 2,110,000 |      |   | 2,080,000
|Finished goods  |  |              | 2,159,000 |      |   | 2,231,000
|                |  |              |           |      |   |          
|                |  | $            | 9,258,000 |      | $ | 8,014,000
|                |  |              |           |      |   |          



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 4PROPERTY, PLANT AND EQUIPMENT



Property, plant and equipment consist of the following:



|                                             |  |              |             |   |      |   |             |  
|-------------------------------------------- |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                                             |  | December 31, |            
|                                             |  | 2005         |             |   | 2004 |  
|Land, building and improvements              |  | $            | 5,554,000   |   |      | $ | 10,884,000  |  
|Equipment, computers, software and furniture |  |              | 26,816,000  |   |      |   | 26,326,000  |  
|                                             |  |              |             |   |      |   |             |  
|                                             |  |              | 32,370,000  |   |      |   | 37,210,000  |  
|Less-accumulated depreciation                |  |              | (20,246,000 | ) |      |   | (23,666,000 | )
|                                             |  |              |             |   |      |   |             |  
|                                             |  | $            | 12,124,000  |   |      | $ | 13,544,000  |  
|                                             |  |              |             |   |      |   |             |  



Depreciation expense
was $3,275,000, $3,567,000 and $3,572,000 for the years ended December 31, 2005, 2004 and 2003, respectively.



NOTE 5OTHER ASSETS



Other assets consist of the following:



|                                   |  |              |           |      |   |          
|---------------------------------- |  | ------------ | --------- | ---- | - | ---------
|                                   |  | December 31,
|                                   |  | 2005         |           | 2004
|Deferred financing costs, net      |  | $            | 439,000   |      | $ | 970,000  
|Other amortizable intangibles, net |  |              | 71,000    |      |   | 208,000  
|Other assets                       |  |              | 699,000   |      |   | 1,102,000
|                                   |  |              |           |      |   |          
|                                   |  | $            | 1,209,000 |      | $ | 2,280,000
|                                   |  |              |           |      |   |          



Amortization expense
of other intangibles was $137,000, $137,000 and $138,000 for the years ended December 31, 2005, 2004 and 2003, respectively. The remaining balance of other amortizable intangibles of $71,000 at December 31, 2005 will be amortized in 2006.



In connection with the financings described in Note 7, the
Company incurred debt issuance costs consisting of brokerage fees, warrants and legal fees, which are included within other assets at December 31, 2005, net of accumulated amortization. The Company is amortizing these costs on a straight-line
basis, which approximates the effective interest rate method, over the term of the related debt. The unamortized balance of the deferred financing costs under the Hilco Financing Agreement of approximately $340,000 was charged to expense in the
third quarter of 2004 upon the repayment of the Hilco loan (see Note 7). Amortization expense related to all deferred financing costs was $560,000, $1,021,000 and $710,000 for the years ended December 31, 2005, 2004 and 2003, respectively.



NOTE 6ACCRUED LIABILITIES



Accrued liabilities consist of the following:



|                                         |  |              |            |      |   |          
|---------------------------------------- |  | ------------ | ---------- | ---- | - | ---------
|                                         |  | December 31,
|                                         |  | 2005         |            | 2004
|Current portion of warranty reserves     |  | $            | 2,365,000  |      | $ | 1,608,000
|Self insurance reserves                  |  |              | 1,769,000  |      |   | 1,815,000
|Litigation reserve and professional fees |  |              | 6,488,000  |      |   | 2,072,000
|Payroll related and other                |  |              | 5,664,000  |      |   | 3,701,000
|                                         |  |              |            |      |   |          
|                                         |  | $            | 16,286,000 |      | $ | 9,196,000
|                                         |  |              |            |      |   |          



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 7LONG-TERM DEBT, RELATED PARTY LOAN AND DERIVATIVES



Long-Term Debt



Long-term debt consists of the following:



|                           |  |              |            |   |      |   |            |  
|-------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                           |  | December 31, |           
|                           |  | 2005         |            |   | 2004 |  
|CIT working capital loan   |  | $            | 1,339,000  |   |      | $ | 7,443,000  |  
|CIT term loan              |  |              | 5,069,000  |   |      |   | 3,500,000  |  
|GMAC real estate term loan |  |              | 5,860,000  |   |      |   | 9,662,000  |  
|GMAC equipment term loan   |  |              | 1,391,000  |   |      |   |           |  
|                           |  |              |            |   |      |   |            |  
|                           |  |              | 13,659,000 |   |      |   | 20,605,000 |  
|Lesscurrent portion       |  |              | (3,929,000 | ) |      |   | (9,116,000 | )
|                           |  |              |            |   |      |   |            |  
|                           |  | $            | 9,730,000  |   |      | $ | 11,489,000 |  
|                           |  |              |            |   |      |   |            |  



On July 16, 2003, the
Company entered into a financing agreement with The CIT Group/Business Credit, Inc. (CIT) (the CIT Financing Agreement) and a financing agreement with Hilco Capital LP (Hilco) (the Hilco Financing
Agreement). The CIT Financing Agreement provided for term loans of $5,000,000 and working capital revolving loans of up to the lesser of $14,000,000 or an amount determined by reference to a borrowing base. The Hilco Financing Agreement
provided for a mortgage loan of $11,000,000. Both the CIT loans and the Hilco loan were secured by substantially all of the assets of the Company plus a letter of credit in the amount of $1,500,000. The proceeds of the CIT and Hilco Financing
Agreements were used to repay, in full, all outstanding borrowings under a prior bank agreement.



In July 2004, the Company entered into a credit agreement with GMAC Commercial Finance, LLC (GMAC) (the GMAC Credit Agreement) and
entered into an amendment of the CIT Financing Agreement with CIT (as amended, the CIT Amended Financing Agreement). The GMAC Credit Agreement provided for a $13,000,000 term loan, the proceeds of which were used to retire in full the
$11,000,000 term loan under a financing agreement with Hilco Capital LP (Hilco), repay a $1,600,000 term loan from CIT and pay financing costs. The unamortized balance of the deferred financing costs under the Hilco Financing Agreement
of approximately $340,000 was charged to expense in the third quarter of 2004 upon the repayment of the Hilco loan. The Company prepaid $3,000,000 of the GMAC term loan in September 2004 with the proceeds from its common stock private placement. On
February 1, 2005, the Company entered into an amendment and restatement of the GMAC Credit Agreement that provided for a new equipment credit line, pursuant to which the Company received aggregate advances of $1,654,000 to finance equipment and
machinery purchases, which advances are represented by a term note. In August 2005, the Company utilized a portion of the proceeds from the sale/leaseback transaction described below to prepay $3,067,000 of the GMAC term loan. The GMAC Credit
Agreement was further amended and restated in January 2006 (as amended, the GMAC Amended Credit Agreement) to include a $5,000,000 credit line that will be available to December 15, 2006 to finance machinery and equipment. The GMAC
loans are secured by the Companys real estate, fixtures and equipment.



The CIT Amended Financing Agreement provided for a term loan with an original balance of $4,000,000 and working capital revolving loans of up to the lesser of $14,000,000 or an amount determined by reference to a
borrowing base. In May 2005, the Company entered into an amendment to the CIT Amended Financing Agreement which increased the outstanding term loan from $3,250,000 to $6,250,000. The CIT loans are secured by substantially all assets of the Company
other than real estate, fixtures and equipment.



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 7LONG-TERM DEBT, RELATED PARTY LOAN AND DERIVATIVES  (continued)



At December 31, 2005, there was outstanding $1,339,000 in working
capital loans and $12,320,000 of term loans. Availability under the revolving loan fluctuates daily. At December 31, 2005, there was $7,453,000 in unused availability under the working capital revolving loan.



The CIT working capital loan bears interest at rates ranging between LIBOR
plus 2.5% to 3.25% or the prime rate less .25% to plus .50% based on a performance grid (7% at December 31, 2005). The CIT term loan bears interest at the prime rate plus 3%, with a minimum of 7% (10% at December 31, 2005) (prior to
July 13, 2004, a $3,000,000 CIT term loan bore interest at the prime rate plus 5% with a minimum rate of 10%). The $6,250,000 CIT term loan, as amended, is due in equal quarterly principal installments of $390,625, with the balance of
$1,553,125 due at maturity on June 30, 2008. Interest is payable monthly. The GMAC term loans bear interest, payable monthly, at LIBOR plus 4% or the prime rate plus 1% (prior to September 1, 2004, LIBOR plus 5% or the prime rate plus 2%)
and the advances under the equipment line bear interest at LIBOR plus 3.25% or the prime rate plus 1%. The GMAC term loans are due in equal monthly principal payments of $93,000 with the balance of $3,294,000 due at maturity on August 1, 2009.
Each advance under the GMAC equipment credit line will be retired with equal principal installments payable monthly through July 2009, with any remaining unpaid principal due at maturity on August 1, 2009. The prime rate was 7% and LIBOR was
4.8% at December 31, 2005. The Hilco loan bore interest at the prime rate plus 11.5%, with a minimum of 15.5%.



The average outstanding working capital loan balance during 2005 and 2004 was approximately $2,211,000 and $7,658,000, respectively, and the weighted
average interest rate in 2005 and 2004 was 5.94% and 4.40%, respectively. Interest expense on the working capital loan was $188,000 and $395,000 for the years ended December 31, 2005 and 2004, respectively. Interest expense on the CIT term
loans was $453,000 and $319,000 for the years ended December 31, 2005 and 2004, respectively. Interest expense on the GMAC term loans was $688,000 and $333,000 for the years ended December 31, 2005 and 2004, respectively. The average
outstanding balance under the prior credit facility in 2003 was $7,723,000 and the weighted average interest rate was 6.25%. Interest expense on the revolver and term loans under the prior credit facility was $257,000 and $753,000, respectively, for
the year ended December 31, 2003.



The GMAC Amended Credit
Agreement and the CIT Amended Financing Agreement require the Company to maintain certain financial covenants including maintaining a minimum fixed charge ratio, a leverage ratio and a limitation on annual capital expenditures. The Company was in
compliance with these covenants as of December 31, 2005. The CIT Amended Financing Agreement also restricts the ability of the Company to pay cash dividends. The CIT Amended Financing Agreement and the GMAC Amended Credit Agreement each
contains a cross default provision to the other.



At
December 31, 2005, long-term debt maturities are as follows:



|                                       |  |   |            |  
|-------------------------------------- |  | - | ---------- | -
|2006                                   |  | $ | 3,929,000  |  
|2007                                   |  |   | 2,684,000  |  
|2008                                   |  |   | 3,065,000  |  
|2009                                   |  |   | 3,981,000  |  
|                                       |  |   |            |  
|                                       |  |   | 13,659,000 |  
|Less current portion of long-term debt |  |   | (3,929,000 | )
|                                       |  |   |            |  
|                                       |  | $ | 9,730,000  |  
|                                       |  |   |            |  



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 7LONG-TERM DEBT, RELATED PARTY LOAN AND DERIVATIVES  (continued)



On August 2, 2005, the Company sold its manufacturing, warehouse and
office facility located in Owatonna, Minnesota for approximately $3,600,000, of which $3,067,000 was used to prepay a portion of the GMAC term loan, $123,000 was used to pay a prepayment fee in connection therewith and $400,000 was used to prepay a
portion of the CIT term loan. Simultaneously with the sale of the Owatonna facility, the Company and the purchaser entered into a lease of the Owatonna facility with an initial term of five years at a rental rate of $40,000 per month, plus operating
costs. The lease contains renewal options as well as options to terminate the lease if the Company elects to relocate. Due to the option to repurchase the facility, the transaction was treated for financial accounting purposes as a financing
transaction whereby payments made of $200,000 through December 2005 were recorded as interest expense. On December 23, 2005, the lease was amended to eliminate the Companys option to repurchase the building in exchange for certain
services to be provided by the landlord. Accordingly, the transaction has been accounted for as a sale/leaseback subsequent to December 23, 2005 resulting in a deferred gain of $811,000 at December 31, 2005, of which $177,000 is included
in accrued expenses and $634,000 is included in other long-term liabilities and will be amortized over 55 months.



Related Party Loan



During 2003 and 2002, UM Holdings Ltd. (UM), a principal stockholder of the Company, lent to the Company, on a subordinated basis, $4,900,000.
On July 16, 2003, as part of the 2003 refinancing of the Companys prior bank facility, $4,900,000 of subordinated notes held by UM were cancelled and converted into 32,886 shares of a newly created class of preferred stock, the Series B
Convertible Cumulative Preferred Stock (the Preferred Stock). On August 2, 2004, UM exercised its right, in accordance with the terms of the Preferred Stock, to convert the outstanding shares of Preferred Stock into 3,288,600 shares
of common stock. The Preferred Stock accrued cumulative dividends at the rate of $14.90, or 10% of the issuance price, per share per year when and if declared by the Board of Directors. The Company paid to UM accrued dividends of $522,000 and
interest of $353,000 at the time of conversion of the Preferred Stock into common stock.



UM provided the collateral to support a $2,945,722 letter of credit in the Companys appeal of the judgment in the litigation, Kirila et al v. Cybex International, Inc., et al (see Note 12). This letter of
credit was replaced during the second quarter of 2005 by a letter of credit issued under the CIT Amended Financing Agreement. A $2,888,025 letter of credit has also been issued under the CIT Amended Financing Agreement in connection with the
Companys appeal of the judgment in the litigation, Colassi v. Cybex International, Inc. (see Note 12). Letters of credit outstanding under the CIT Amended Financing Agreement reduce availability under the CIT working capital revolving
loan facility.



Derivatives



On September 8, 2004, Cybex entered into two interest rate caps with a
financial intermediary to lock in one-month LIBOR at a maximum of 3% for the two-year period ending September 8, 2006 related to the Companys GMAC term debt facility and CIT working capital revolving credit facility. The cost of the
interest rate caps was approximately $97,000. The interest rate caps are accounted for as cash flow hedges and the cost of the interest rate caps is being amortized on a straight-line basis over two years, which approximates the period during which
the individual caplets related to each forecasted interest payment expire. Changes in the fair value of the interest rate caps are recorded within accumulated other comprehensive loss. For the year ended December 31, 2005, the change in fair
value of the interest rate caps was an increase of $103,000. At December 31, 2004, the change in the fair value of the interest rate caps was not materially different than their amortized cost.



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 7LONG-TERM DEBT, RELATED PARTY LOAN AND DERIVATIVES  (continued)



Cybex entered into a series of 13 forward contracts on February 28,
2005, of which three remain outstanding at December 31, 2005, whereby Cybex pays a bank 140,212 British Sterling and a bank pays Cybex $265,000 each month. In February 2006, the Company entered into a series of 12 monthly forward contracts, that
begin on April 1, 2006, whereby Cybex pays a bank 150,000 British Sterling and a bank pays Cybex $265,000 each month. The purpose of these transactions is to hedge the foreign currency exposure on sales made in the UK in British Sterling. Cybex
UKs sales are in British Sterling while its purchases of inventory from the Company are paid in U.S. dollars. The above transaction is not considered eligible for hedge accounting based on guidance in SFAS No. 133, as amended. The change
in fair value of the hedge resulted in a gain of $72,000 for the year ended December 31, 2005.



NOTE 8STOCKHOLDERS EQUITY



Preferred Stock



The Companys Board has the ability to issue, without approval by the common stockholders, up to 500,000 shares of Preferred Stock having rights and
preferences as the Board may determine in its sole discretion.



Common
Stock



On August 2, 2004, the Company issued
3,288,600 shares of common stock upon exercise by the holder of the Companys Preferred Stock of its rights to convert all such outstanding preferred shares into common stock.



On August 5, 2004 the Company consummated a private placement to accredited investors of 2,430,000 shares of common
stock, at a price of $3.30 per share. The net proceeds to the Company in this offering, after commissions and offering expenses, were approximately $7,199,000. Additionally, in connection with the private placement, the Company issued to the
placement agent and its affiliates warrants to purchase 25,000 shares of the Companys common stock at an exercise price of $.10 per share. The warrants have a term of five years.



At December 31, 2005, there are 1,980,740 shares of common stock reserved for future issuance pursuant to the exercise or
issuance of stock options and warrants.



Warrants



On September 20, 2004, a warrant holder exercised in full its warrant
to purchase 335,816 shares of the common stock of the Company. Pursuant to the net exercise provisions of this warrant, the Company issued 214,058 shares of its common stock to the warrant holder. This warrant was issued in connection with an
earlier debt arrangement in 2001 and 2002.



On October 21,
2004, a warrant holder exercised in full its warrant to purchase 191,898 shares of common stock of the Company. Pursuant to the net exercise provisions of this warrant, the Company issued 133,217 shares of its common stock to the warrant holder.
This warrant was issued in connection with an earlier debt arrangement in 2001 and 2002.



On October 28, 2004, a warrant holder exercised in full its warrant to purchase 176,619 shares of the common stock of the Company. Pursuant to the net exercise provisions of this warrant, the Company issued to
the warrant holder 119,302 shares of its common stock. This warrant was issued in connection with a debt arrangement in 2003.



At December 31, 2005, warrants to purchase 189,640 and 25,000 shares of common stock at $.10 per share are outstanding and expire on July 16,
2008 and August 4, 2009, respectively.



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 8STOCKHOLDERS EQUITY  (continued)



Stock Options



2005 Omnibus Incentive Plan



Cybexs 2005 Omnibus Incentive Plan (Omnibus Plan) is designed to provide incentives that will attract and retain individuals key to
the success of the Company through direct or indirect ownership of the Companys common stock. The Omnibus Plan provides for the granting of stock options, stock appreciation rights, stock awards, performance awards and bonus stock purchase
awards. The Company has reserved 1,000,000 shares of common stock for issuance pursuant to the Omnibus Plan. The terms and conditions of each award are determined by a committee of the Board of Directors of the Company. Under the Omnibus Plan, the
committee may grant either qualified or nonqualified stock options with a term not to exceed ten years from the grant date and at an exercise price per share that the committee may determine (which in the case of incentive stock options may not be
less than the fair market value of a share of the Companys common stock on the date of grant).



1995 Omnibus Incentive Plan



The terms and conditions of grants of stock options under the 1995 Omnibus Incentive Plan were determined by a committee of the Board of Directors.
Options outstanding under this Plan were granted at exercise prices which were not less than the fair market value of a share of the Companys common stock on the date of grant and were generally exercisable over a period not to exceed ten
years from the original date of grant. No future grant may be made under this plan.



1987 Stock Option Plan



The terms and conditions of grants of stock options under the 1987 Stock Option Plan were determined by a committee of the Board of Directors. Options outstanding under this plan were granted at exercise prices which were not less than the
fair market value of a share of the Companys common stock on the date of grant and were generally exercisable over a period not to exceed ten years from the original date of grant. No future grants may be made under this plan.



Information with respect to options under the Companys plans is as
follows:



|                                 |  |                 |   |  |                        |             |                              |   |     
|-------------------------------- |  | --------------- | - |  | ---------------------- | ----------- | ---------------------------- | - | ----
|                                 |  | Numberof Shares |   |  | Range of ExercisePrice |             | WeightedAverageExercisePrice
|Outstanding at December 31, 2002 |  | 325,500         |   |  | $                      | 1.30-11.75  |                              | $ | 2.29
|Granted                          |  | 25,000          |   |  |                        | 1.30        |                              |   | 1.30
|Forfeited                        |  | (14,000         | ) |  |                        | 1.51-4.06   |                              |   | 2.48
|                                 |  |                 |   |  |                        |             |                              |   |     
|Outstanding at December 31, 2003 |  | 336,500         |   |  |                        | 1.30-11.75  |                              |   | 2.21
|Granted                          |  | 496,500         |   |  |                        | 1.22-3.43   |                              |   | 1.72
|Exercised                        |  | (4,150          | ) |  |                        | 1.51-1.75   |                              |   | 1.71
|Forfeited                        |  | (9,250          | ) |  |                        | 1.51-1.75   |                              |   | 1.67
|                                 |  |                 |   |  |                        |             |                              |   |     
|Outstanding at December 31, 2004 |  | 819,600         |   |  |                        | 1.22-11.75  |                              |   | 1.92
|Exercised                        |  | (17,000         | ) |  |                        | 1.22-1.75   |                              |   | 1.42
|Forfeited                        |  | (36,500         | ) |  |                        | 1.22-11.75  |                              |   | 3.20
|                                 |  |                 |   |  |                        |             |                              |   |     
|Outstanding at December 31, 2005 |  | 766,100         |   |  | $                      | 1.22-4.3125 |                              | $ | 1.87
|                                 |  |                 |   |  |                        |             |                              |   |     



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 8STOCKHOLDERS EQUITY  (continued)



The options generally vest over a three to five year period (with some
subject to cliff vesting). At December 31, 2005, there are 1,000,000 shares available for future issuance pursuant to the 2005 Omnibus Incentive Plan.



|                         |  |             |  |                              |      |                                                 |      |        |         |                              |   |     
|------------------------ |  | ----------- |  | ---------------------------- | ---- | ----------------------------------------------- | ---- | ------ | ------- | ---------------------------- | - | ----
|                         |  | Outstanding |  | Exercisable                 
|Range of exercise prices |  | Shares      |  | Weightedaverageexerciseprice |      | Weightedaverageremainingcontractuallife (years) |      | Shares |         | Weightedaverageexerciseprice
|$1.22$1.51              |  | 473,000     |  | $                            | 1.28 |                                                 | 7.72 |        | 168,375 |                              | $ | 1.33
|1.701.90                |  | 126,100     |  |                              | 1.75 |                                                 | 5.81 |        | 117,600 |                              |   | 1.75
|3.003.70                |  | 115,000     |  |                              | 3.43 |                                                 | 4.17 |        | 107,500 |                              |   | 3.42
|4.064.31                |  | 52,000      |  |                              | 4.07 |                                                 | 3.84 |        | 52,000  |                              |   | 4.07
|                         |  |             |  |                              |      |                                                 |      |        |         |                              |   |     
|                         |  | 766,100     |  |                              | 1.87 |                                                 | 6.61 |        | 445,475 |                              |   | 2.27
|                         |  |             |  |                              |      |                                                 |      |        |         |                              |   |     



Stock Retainer Plan
for Nonemployee Directors



The Companys 2002 Stock
Retainer Plan for Nonemployee Directors (2002 Plan) provides that each nonemployee director will receive 50% of his annual retainer in shares of common stock of the Company. Up to 150,000 shares of common stock may be issued under the
2002 Plan. The issuance of shares as partial payment of annual retainers results in expense based on the fair market value of such shares. At December 31, 2005, there are 57,281 shares available for future issuance pursuant to the 2002 Plan.
The Company recorded stock-based compensation expense of $55,000, $129,000 and $45,000 for the years ended December 31, 2005, 2004 and 2003, respectively, related to the issuance of common stock to directors.



NOTE 9INCOME TAXES



Income (loss) before income taxes consists of the following:



|         |  |                         |           |   |      |   |           |      |  |   |            |  
|-------- |  | ----------------------- | --------- | - | ---- | - | --------- | ---- |  | - | ---------- | -
|         |  | Year Ended December 31, |          
|         |  | 2005                    |           |   | 2004 |   |           | 2003 | 
|Domestic |  | $                       | 1,139,000 |   |      | $ | 4,023,000 |      |  | $ | (1,390,000 | )
|Foreign  |  |                         | (827,000  | ) |      |   | (667,000  | )    |  |   | (422,000   | )
|         |  |                         |           |   |      |   |           |      |  |   |            |  
|         |  | $                       | 312,000   |   |      | $ | 3,356,000 |      |  | $ | (1,812,000 | )
|         |  |                         |           |   |      |   |           |      |  |   |            |  



The income tax
provision (benefit) consists of the following:



|          |  |                         |         |      |   |         |  |   |         |  
|--------- |  | ----------------------- | ------- | ---- | - | ------- |  | - | ------- | -
|          |  | Year Ended December 31, |        
|          |  | 2005                    |         | 2004 |   | 2003    | 
|Current : |  |                         |         |      |   |         |  |   |         |  
|Federal   |  | $                       | 136,000 |      | $ | 66,000  |  | $ |        |  
|State     |  |                         | 115,000 |      |   | 65,000  |  |   | (51,000 | )
|          |  |                         |         |      |   |         |  |   |         |  
|          |  | $                       | 251,000 |      | $ | 131,000 |  | $ | (51,000 | )
|          |  |                         |         |      |   |         |  |   |         |  



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 9INCOME TAXES  (continued)



The reconciliation between income taxes at the federal statutory rate and the amount recorded in the accompanying
consolidated financial statements is as follows:



|                                                               |  |                         |          |   |      |   |            |      |  |   |          |  
|-------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | ---------- | ---- |  | - | -------- | -
|                                                               |  | Year Ended December 31, |         
|                                                               |  | 2005                    |          |   | 2004 |   |            | 2003 | 
|Tax at statutory rate                                          |  | $                       | 106,000  |   |      | $ | 1,141,000  |      |  | $ | (616,000 | )
|Federal alternative minimum tax                                |  |                         | 136,000  |   |      |   | 66,000     |      |  |   |         |  
|Impact of foreign taxes                                        |  |                         | 33,000   |   |      |   | 27,000     |      |  |   |         |  
|State income taxes, net                                        |  |                         | 179,000  |   |      |   | 274,000    |      |  |   | (104,000 | )
|Other permanent differences, primarily meals and entertainment |  |                         | 44,000   |   |      |   | 52,000     |      |  |   | 43,000   |  
|Change in valuation allowance                                  |  |                         | (247,000 | ) |      |   | (1,429,000 | )    |  |   | 626,000  |  
|                                                               |  |                         |          |   |      |   |            |      |  |   |          |  
|                                                               |  | $                       | 251,000  |   |      | $ | 131,000    |      |  | $ | (51,000  | )
|                                                               |  |                         |          |   |      |   |            |      |  |   |          |  



The significant
components of the Companys net deferred tax assets (liabilities) are as follows:



|                                                     |  |              |             |   |      |   |             |  
|---------------------------------------------------- |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                                                     |  | December 31, |            
|                                                     |  | 2005         |             |   | 2004 |  
|Deferred tax assets (liabilities):                   |  |              |             |   |      |   |             |  
|Net operating, credit and capital loss carryforwards |  | $            | 12,254,000  |   |      | $ | 14,614,000  |  
|Warranty reserves                                    |  |              | 1,129,000   |   |      |   | 833,000     |  
|Other accruals and reserves                          |  |              | 4,912,000   |   |      |   | 3,065,000   |  
|Bad debt and lease reserves                          |  |              | 463,000     |   |      |   | 508,000     |  
|Goodwill                                             |  |              | 3,788,000   |   |      |   | 4,272,000   |  
|Other  net                                          |  |              | 171,000     |   |      |   | 168,000     |  
|                                                     |  |              |             |   |      |   |             |  
|Total deferred tax assets                            |  |              | 22,717,000  |   |      |   | 23,460,000  |  
|Valuation allowance                                  |  |              | (21,960,000 | ) |      |   | (21,787,000 | )
|Depreciation                                         |  |              | (757,000    | ) |      |   | (1,673,000  | )
|                                                     |  |              |             |   |      |   |             |  
|                                                     |  | $            |            |   |      | $ |            |  
|                                                     |  |              |             |   |      |   |             |  



At December 31,
2005, the Company had U.S. federal net operating loss carryforwards, which are scheduled to expire as follows:



|                    |  |   |           
|------------------- |  | - | ----------
|2012                |  | $ | 5,870,000 
|2019                |  |   | 3,637,000 
|2020                |  |   | 6,481,000 
|2021                |  |   | 5,528,000 
|2022 and thereafter |  |   | 6,270,000 
|                    |  |   |           
|                    |  | $ | 27,786,000
|                    |  |   |           



In addition, the
Company has foreign net operating losses of $2,703,000, which have an unlimited life, federal alternative minimum tax credit carryforwards of $461,000, which do not expire, and a federal research and development tax credit carryforward of $129,000,
which expires in 2008.



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 9INCOME TAXES  (continued)



Due to the uncertainty of the Companys ability to realize the benefit of the deferred tax assets, the Company has a
valuation allowance of $21,960,000 and $21,787,000, at December 31, 2005 and 2004, respectively, as a reserve against its deferred tax assets. As of December 31, 2005, approximately $56,307,000 of taxable income is needed to fully realize
deferred tax assets.



NOTE 10RELATED PARTY TRANSACTIONS



For the years ended December 31, 2005, 2004 and
2003, the Company paid $291,000, $342,000 and $163,000, respectively, to a law firm of which one of the directors of the Company is a member.



The Companys Chairman, who is a principal stockholder of the Company, has served as Chief Executive Officer of the Company since November 2000, and
is expected to serve in this capacity for an indefinite period of time. He received salaries of $390,000, $368,000 and $360,000 for 2005, 2004 and 2003, respectively.



From February 2002 to December 31, 2005, the Companys Chief Financial Officer was employed by and provided
through a services agreement with UM, a principal stockholder of the Company. Expenses related to these services totaled $216,000, $192,000 and $144,000 for 2005, 2004 and 2003, respectively. UMs General Counsel served as General Counsel for
the Company from September 2003 to February 2005 through a services agreement with UM. Expenses related to these services totaled $30,000, $120,000 and $40,000 for 2005, 2004 and 2003, respectively. UM provides certain office support services for
which the Company reimbursed UM at the rate of $28,500 during 2005. The total amount owed to UM for these services totaled $24,000 and $11,000 at December 31, 2005 and 2004, respectively.



During 2004, UM agreed to pay Cybex $250,000, representing the full cost of a
sports stadium luxury box rented by Cybex, in return for use of the box. UM owed $144,000 with respect to this obligation at December 31, 2004.



During 2003, UM lent to the Company, on a subordinated basis, $4,900,000, which bore interest at 10% and was to mature on January 1, 2004. On
July 16, 2003, as part of the 2003 refinancing of the Companys prior bank facility, the subordinated notes held by UM were cancelled and converted into 32,886 shares of Preferred Stock. A fee of $120,000 was paid in 2003 to UM relating to
the issuance of the Preferred Stock. On August 2, 2004, UM exercised its right, in accordance with the terms of the Preferred Stock, to convert the outstanding shares of Preferred Stock into 3,288,600 shares of common stock. The Preferred Stock
accrued cumulative dividends at the rate of $14.90, or 10% of the issuance price, per share per year when and if declared by the Board of Directors. The Company paid to UM accrued dividends of $522,000 and interest of $353,000 at the time of
conversion of the Preferred Stock into common stock.



UM
provided the collateral to support a $2,945,722 letter of credit in the Companys appeal of the judgment in the litigation, Kirila et al v. Cybex International, Inc., et al (see Note 12). This letter of credit was replaced during the
second quarter of 2005 by a letter of credit issued under the CIT Amended Financing Agreement. A fee of $39,000 per quarter was paid to UM in 2005 for the use of this collateral. Additionally, as part of the 2003 CIT and Hilco Financing Agreements
(Note 7), UM provided additional collateral of $3,100,000 in the form of a guarantee of certain letters of credit, which was retired in full during 2004.



NOTE 11COMMERCIAL LEASING



The Company arranges equipment leases and other financings for its customers. While most of these financings are without recourse, in certain cases the
Company may offer a guaranty or other recourse provisions. In such situations, the Company ensures that the transaction between the independent leasing company and the



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 11COMMERCIAL LEASING  (continued)



end user customer represents a sales-type lease. The Company monitors the payment status of the lessee under these arrangements and provides a reserve under
SFAS No. 5, Accounting for Contingencies, in situations when collection of the lease payments is not probable. At December 31, 2005, the maximum contingent liability under all recourse and guarantee provisions was approximately
$4,260,000 A reserve for estimated losses under recourse provisions of $289,000 and $114,000 has been recorded based on historical and industry experience and is included in accrued expenses at December 31, 2005 and 2004, respectively.



In November 2002, the FASB issued Interpretation No. 45
(FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability
for the fair value of the obligation undertaken in issuing such guarantees. FIN 45 also requires additional disclosure about the guarantors obligations under certain guarantees that it has issued. The initial recognition and measurement
provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective after December 15, 2002. The Company has recorded a net
liability of $74,000 at December 31, 2005 and 2004, in accordance with FIN 45 for the estimated fair value of the Companys guarantees issued after January 1, 2003. The fair value of the guarantees was determined based on the
estimated cost for a customer to obtain a letter of credit from a bank or similar institution. This liability is reduced on a straight-line basis over the term of each respective guarantee. In most cases, if the Company is required to fulfill its
obligations under the guarantee then it has the right to repossess the equipment from the customer. It is not practicable to estimate the approximate amount of proceeds that would be generated from the sale of these assets in such situations.



NOTE 12COMMITMENTS AND CONTINGENCIES



Lease Commitments



The Company has lease commitments expiring at various dates through 2010 for
equipment and property under noncancelable operating and capital leases. Future minimum payments under these leases at December 31, 2005 are as follows:



|                                   |  |           |           |         |   |          |  
|---------------------------------- |  | --------- | --------- | ------- | - | -------- | -
|                                   |  | Operating |           | Capital |  
|2006                               |  | $         | 1,111,000 |         | $ | 532,000  |  
|2007                               |  |           | 1,018,000 |         |   | 268,000  |  
|2008                               |  |           | 722,000   |         |   | 65,000   |  
|2009                               |  |           | 627,000   |         |   | 22,000   |  
|2010                               |  |           | 293,000   |         |   |         |  
|                                   |  |           |           |         |   |          |  
|                                   |  |           | 3,771,000 |         |   | 887,000  |  
|Less: amount representing interest |  |           |          |         |   | (74,000  | )
|                                   |  |           |           |         |   |          |  
|                                   |  | $         | 3,771,000 |         |   | 813,000  |  
|                                   |  |           |           |         |   |          |  
|Less: current portion              |  |           |           |         |   | (481,000 | )
|                                   |  |           |           |         |   |          |  
|                                   |  |           |           |         | $ | 332,000  |  
|                                   |  |           |           |         |   |          |  



Rent expense under all
operating leases for the years ended December 31, 2005, 2004 and 2003 was $622,000, $366,000 and $319,000, respectively. Interest expense related to capital leases was $85,000, $95,000 and $69,000 for the years ended December 31, 2005,
2004 and 2003, respectively. Assets subject to capital leases had a cost of $1,517,000 and $1,546,000 and accumulated depreciation of $522,000 and $290,000 at December 31, 2005 and 2004, respectively.



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 12COMMITMENTS AND CONTINGENCIES  (continued)



Royalty Agreement



In connection with the settlement of a license dispute, the Company is
required to make minimum royalty payments through November 2012. Future minimum payments included in accrued expenses (current portion) and other liabilities (long-term portion) under this arrangement are as follows at December 31, 2005:



|                             |  |   |           |  
|---------------------------- |  | - | --------- | -
|2006                         |  | $ | 440,000   |  
|2007                         |  |   | 360,000   |  
|2008                         |  |   | 360,000   |  
|2009                         |  |   | 360,000   |  
|2010                         |  |   | 360,000   |  
|Thereafter                   |  |   | 690,000   |  
|                             |  |   |           |  
|                             |  |   | 2,570,000 |  
|Amount representing interest |  |   | (728,000  | )
|                             |  |   |           |  
|                             |  | $ | 1,842,000 |  
|                             |  |   |           |  



Interest expense
related to this obligation was $190,000, $206,000 and $221,000 for the years ended December 31, 2005, 2004 and 2003, respectively.



Purchase Obligations



The Company is required to make purchases of goods and services that are legally binding as follows as of December 31, 2005:



|     |  |   |           
|---- |  | - | ----------
|2006 |  | $ | 9,267,000 
|2007 |  |   | 2,899,000 
|     |  |   |           
|     |  | $ | 12,166,000
|     |  |   |           



Product Liability



Due to the nature of its products, the Company is involved in certain
pending product liability claims and lawsuits. The Company maintains product liability insurance coverage subject to deductibles. Management believes that the outcome of known product liability claims will not have a material effect on the
Companys financial position, results of operations or cash flows. The Companys product liability insurance is written on a claims made basis and provides an aggregate of $5,000,000 of coverage, with a deductible of up to $250,000 per
occurrence with an annual aggregate deductible of $750,000. The Company has excess primary coverage on a per-claim and aggregate basis beyond the deductible levels and also maintains umbrella policies to supplement the primary liability coverage.
Reserves for self-insured retention, including claims incurred but not yet reported, are included in accrued liabilities in the accompanying consolidated balance sheets, based on managements review of outstanding claims and claims history and
consultation with its third-party claims administrators. Actual results may vary from managements estimates.



The Company is involved in certain legal actions and claims arising in the ordinary course of business. At December 31, 2005, a reserve of $6,185,000
is included in accrued expenses for estimated losses to be incurred related to those matters for which it is probable that a loss has been incurred. Included within this reserve are



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 12COMMITMENTS AND CONTINGENCIES  (continued)



litigation charges recorded in the third and fourth quarters of 2005, primarily related to the Kirila and Colassi matters noted below.



Kirila et al v. Cybex International, Inc., et al



This action was commenced in the Court of Common Pleas of Mercer County,
Pennsylvania in May 1997 against the Company, the Companys wholly-owned subsidiary, Trotter, and certain officers, directors and affiliates of the Company. The plaintiffs include companies that sold to Trotter a strength equipment company in
1993, a principal of the corporate plaintiffs who was employed by Trotter following the acquisition, and a company that leased to Trotter a plant located in Sharpsville, Pennsylvania. The complaint, among other things, alleged wrongful closure of
the Sharpsville facility, wrongful termination of the individual plaintiffs employment and nonpayment of compensation, breach of the lease agreement and the asset purchase agreement, tortious interference with business relationships, fraud,
negligent misrepresentation, unjust enrichment, breach of the covenant of good faith and fair dealing, conversion, unfair competition and violation of the Pennsylvania Wage Payment and Collection Law. The complaint also sought specific performance
of the lease, the employment agreement and the indemnification provisions of the asset purchase agreement, and an unspecified amount of compensatory and punitive damages and expenses. The Company filed an answer to the complaint denying the material
allegations of the complaint and denying liability and it further asserted counterclaims against the plaintiffs, including for repayment of over-allocations of expenses under the lease and certain excess incentive compensation payments that were
made to the individual plaintiff.



A jury verdict was rendered
in this litigation in February 2002. While the jury found in favor of the Company with respect to the majority of the plaintiffs claims, it also found that the Company owed certain incentive compensation payments and rent, plus interest. In
December 2002, plaintiff Kirila Realty and the Company agreed to enter judgment in favor of Kirila Realty for $48,750 on the claims related to lease issues. Such amount represented the approximate $38,000 jury verdict together with an agreed amount
of interest due and was paid by the Company in 2002.



In March
2004,a $2,452,783 judgment was entered with respect to the incentive compensation portion of the jury verdict. This judgment was composed of the original jury verdict amount of $872,000, prejudgment interest on the judgment of $369,000, a
statutory penalty under the Pennsylvania Wage Payment and Collection Law of $218,000 and attorneys fees of $993,783. Cybex filed an appeal of this judgment, which required that Cybex post a letter of credit for $2,945,722 (see Note 7). In
January 2006, the Superior Court of Pennsylvania affirmed the judgment, and Cybex has filed a petition for Allowance of Appeal with the Pennsylvania Supreme Court. The ultimate resolution of this matter could be material to the Companys
financial position, results of operations and cash flows; however, management believes that the recorded reserve is adequate.



Colassi v. Cybex International, Inc.



This action was filed in the United States District Court for the District of Massachusetts. The plaintiff alleged that certain of the Companys
treadmill products infringed a patent allegedly owned by the plaintiff. The plaintiff sought injunctive relief and monetary damages. The Company filed an answer to the complaint denying the material allegations of the complaint and asserting
counterclaims. A jury verdict was rendered in this litigation in August 2005. The jury determined that the deck system of certain of the Companys treadmill products infringes plaintiffs patent and awarded $2,700,000 in damages and
interest. A six month stay of a permanent injunction against sale of these treadmill products was entered in September 2005, and the Company has instituted a redesign of its deck system. The Company has filed an appeal of the judgment entered by the
trial



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##### Table of Contents

CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 12COMMITMENTS AND CONTINGENCIES  (continued)



court on the jury verdict, which required that Cybex post a letter of credit for $2,888,025 (see Note 7). The ultimate resolution of this matter could be
material to the Companys financial position, results of operations and cash flows; however, management believes that the recorded reserve is adequate.



Free Motion Fitness v. Cybex International, Inc.



In December 2001, Free Motion Fitness (f.k.a. Ground Zero Design Corporation) filed in the United States District Court for the District of Utah an action
for patent infringement against the Company alleging that the Companys FT360 Functional Trainer infringed plaintiffs patent. The Company filed an answer denying the material allegations of the complaint and including claims which
management believes could invalidate the Free Motion Fitness patent; the Company also filed a counterclaim against Free Motion Fitness seeking damages. In September 2003, this case was combined with a separate matter also in the United States
District Court, Division of Utah in which Free Motion Fitness had sued the Nautilus Group for infringement of the same patent at issue in the Cybex case. In May 2004, the Court ruled in favor of the Companys motion for summary judgment,
dismissing all of the claims of the plaintiff against the Company and Nautilus and also dismissing the Companys counterclaims against the plaintiff. The plaintiff appealed the grant of summary judgment and in September 2005, the Court of
Appeals for the Federal Circuit reversed the lower court ruling, with the result that this case has been returned to the trial court level.



Other Litigation and Contingencies



The Company is involved in certain other legal actions, contingencies and claims arising in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters will not have a material adverse effect on the Companys consolidated financial position or results of operations. Legal fees related to these matters are charged to expense as incurred.



Employment Agreements



The Company has entered into employment agreements with its executive
officers. Under these agreements, the employment may be terminated with or without cause at any time. In the event that the Company terminates the officers employment other than for cause, the Company is obligated to continue
normal salary payments for periods generally varying from six months to two years. The employment agreements generally provide that upon a change of control, as defined, the officer may in certain events resign and receive the severance which would
have been payable upon a non-cause termination. The maximum aggregate exposure under these agreements is $1,332,000 as of December 31, 2005.



NOTE 13BENEFIT PLANS



The Company has a 401(k) defined contribution retirement plan. The Company currently matches 50% of the first 4% of the employees eligible
compensation contributions. Matching contributions by the Company to the plan were $288,000 for the year ended December 31, 2005. No matching contributions were made in the years ended December 31, 2004 and 2003. Additionally, the Company
may make discretionary contributions to the plan. No discretionary contributions were made for the years ended December 31, 2005, 2004 or 2003.



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##### Table of Contents

CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 14QUARTERLY DATA (unaudited)



The following table presents unaudited quarterly financial information for the years ended December 31, 2005 and 2004:



|                                               |  |                    |            |   |         |   |            |              |  |   |             |      |  |   |            |    
|---------------------------------------------- |  | ------------------ | ---------- | - | ------- | - | ---------- | ------------ |  | - | ----------- | ---- |  | - | ---------- | ---
|                                               |  | 2005 Quarter Ended |           
|                                               |  | March 26           |            |   | June 25 |   |            | September 24 |  |   | December 31 |     
|Sales                                          |  | $                  | 24,759,000 |   |         | $ | 27,197,000 |              |  | $ | 26,690,000  |      |  | $ | 36,000,000 |    
|Gross profit                                   |  |                    | 8,855,000  |   |         |   | 9,651,000  |              |  |   | 9,547,000   |      |  |   | 13,424,000 |    
|Net income (loss)                              |  |                    | 119,000    |   |         |   | 1,038,000  |              |  |   | (3,535,000  | )(a) |  |   | 2,439,000  | (a)
|Basic net income (loss) per share              |  |                    | .01        |   |         |   | .07        |              |  |   | (.23        | )(a) |  |   | .16        | (a)
|Diluted net income (loss) per share            |  |                    | .01        |   |         |   | .07        |              |  |   | (.23        | )(a) |  |   | .16        | (a)
|                                               | 
|                                               |  | 2004 Quarter Ended |           
|                                               |  | March 27           |            |   | June 26 |   |            | September 25 |  |   | December 31 |     
|Sales                                          |  | $                  | 24,420,000 |   |         | $ | 24,073,000 |              |  | $ | 25,038,000  |      |  | $ | 29,890,000 |    
|Gross profit                                   |  |                    | 9,255,000  |   |         |   | 9,217,000  |              |  |   | 8,832,000   |      |  |   | 10,477,000 |    
|Net income                                     |  |                    | 375,000    |   |         |   | 833,000    |              |  |   | 410,000     |      |  |   | 1,607,000  |    
|Preferred stock dividends                      |  |                    | (122,000   | ) |         |   | (122,000   | )            |  |   | (32,000     | )    |  |   |           |    
|Net income attributable to common stockholders |  |                    | 253,000    |   |         |   | 711,000    |              |  |   | 378,000     |      |  |   | 1,607,000  |    
|Basic net income per share                     |  |                    | .03        |   |         |   | .08        |              |  |   | .03         |      |  |   | .11        |    
|Diluted net income per share                   |  |                    | .03        |   |         |   | .08        |              |  |   | .03         |      |  |   | .10        |    

---

|(a) | Includes a third quarter charge of $4,101,000 ($.27 per share) and fourth quarter charge of $504,000 ($.03 per share) relating primarily to the Colassi and Kirila litigation
matters.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS



SCHEDULE II



|                                     |  |                              |           |           |   |            |  |                          |         |  |   |        
|------------------------------------ |  | ---------------------------- | --------- | --------- | - | ---------- |  | ------------------------ | ------- |  | - | -------
|Description                          |  | Balance atBeginning ofPeriod |           | Additions |   | Write-offs |  | Balance at End of Period
|For the year ended December 31, 2005 |  |                              |           |           |   |            |  |                          |         |  |   |        
|Allowance for doubtful accounts      |  | $                            | 887,000   |           | $ | 383,000    |  | $                        | 581,000 |  | $ | 689,000
|                                     |  |                              |           |           |   |            |  |                          |         |  |   |        
|For the year ended December 31, 2004 |  |                              |           |           |   |            |  |                          |         |  |   |        
|Allowance for doubtful accounts      |  | $                            | 982,000   |           | $ | 390,000    |  | $                        | 485,000 |  | $ | 887,000
|                                     |  |                              |           |           |   |            |  |                          |         |  |   |        
|For the year ended December 31, 2003 |  |                              |           |           |   |            |  |                          |         |  |   |        
|Allowance for doubtful accounts      |  | $                            | 1,393,000 |           | $ | 348,000    |  | $                        | 759,000 |  | $ | 982,000
|                                     |  |                              |           |           |   |            |  |                          |         |  |   |        



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##### Table of Contents

|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------



None.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------



The Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Companys controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective to insure that information required to be disclosed by the Company (including its consolidated subsidiaries)
in its periodic filings with the Securities and Exchange Commission is recorded, processed, summarized and reported, within the time periods specified in the Commissions rules and forms. There has been no change in the Companys internal
control over financial reporting during the last fiscal quarter in the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------



The Lease for Commercial Land and Building dated July 21, 2005 with Doug Hughes Properties LCC, relating to the Companys Owatonna facility, was
amended on December 23, 2005 eliminating an option to repurchase the building in exchange for certain services to be provided by the landlord. All other terms of the lease remain materially the same.



PART III



|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
|-------- | --------------------------------------------------



Information regarding the Directors of the Company, compliance with Section 16(a) of the Securities Exchange Act of 1934 and the Companys Code
of Ethics is incorporated herein by reference from the sections captioned Election of Directors and Security Ownership of Certain Beneficial Owners and ManagementSection 16(a) Beneficial Ownership Reporting Compliance
in the Companys definitive Proxy Statement for its 2006 Annual Meeting of Shareholders (the Proxy Statement). For information concerning the executive officers of the Company, see Executive Officers of the Registrant in
Part I of this report.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------



The information set forth under the caption Executive Compensation and Election of DirectorsCompensation of Directors in the
Proxy Statement is incorporated herein by reference.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------



The information set forth under the caption Security Ownership of
Certain Beneficial Owners and Management in the Proxy Statement is incorporated herein by reference. For information on securities authorized for issuance under equity compensation plans, see Item 5 of Part II of this Report.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------



The information set forth under the caption Election of Directors in the Proxy Statement is incorporated herein by reference.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------



The information set forth under the caption Independent Registered Public Accounting FirmAudit Fees in the Proxy Statement is
incorporated herein by reference.



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##### Table of Contents

PART IV



|ITEM 15.EXHIBITS, | FINANCIAL STATEMENTS AND SCHEDULES
|----------------- | ----------------------------------



|    |  |                     |  |                                                                                                                                                                                                                                                                                                       
|--- |  | ------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                     |  | The following documents are filed or incorporated by reference as a part of this report:                                                                                                                                                                                                              
|    |  | FinancialStatements |  |                                                                                                                                                                                                                                                                                                       
|(a) |  |                     |  | Consolidated Financial Statements of the Company are set forth on Page F-1, Part II, Item 8 hereof and are incorporated by reference herein.                                                                                                                                                          
|    |  | Exhibits            |  |                                                                                                                                                                                                                                                                                                       
|    |  |                    
|    |  | 3(a)(1)             |  | Restated Certificate of Incorporation of the Company, dated May 20, 1988, incorporated by reference to Exhibit 3(a)(1) to the Quarterly Report on Form 10-Q for the quarter ended June 30,
1996 (the June 1996 10-Q).                                                                               
|    |  |                    
|    |  | 3(a)(2)             |  | Certificate of Amendment of the Certificate of Incorporation of the Company, dated May 30, 1988, incorporated by reference to Exhibit 3(a)(2) to the June 1996 10-Q.                                                                                                                                  
|    |  |                    
|    |  | 3(a)(3)             |  | Certificate of Amendment of the Certificate of Incorporation of the Company, dated August 7, 1996, incorporated by reference to Exhibit 3(a)(3) to the June 1996 10-Q.                                                                                                                                
|    |  |                    
|    |  | 3(a)(4)             |  | Certificate of Amendment of the Certificate of Incorporation of the Company, dated May 27, 1997, incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 (the June 1997 10-Q).                                                            
|    |  |                    
|    |  | 3(a)(5)             |  | Certificate of Amendment to the Certificate of Incorporation of the Company, filed July 8, 2003, incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for the quarter
ended June 28, 2003 (the June 2003 10-Q).                                                            
|    |  |                    
|    |  | 3(a)(6)             |  | Certificate of Amendment to the Certificate of Incorporation of the Company, dated May 4, 2005, incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter
ended June 25, 2005 (the June 2005 10-Q).                                                            
|    |  |                    
|    |  | 3(b)                |  | By-Laws of the Company, as amended, incorporated by reference to Exhibit 3(b) to the Annual Report on Form 10-K for the year ended December 31, 1987.                                                                                                                                                 
|    |  |                    
|    |  | 4(a)                |  | Common Stock Purchase Warrant to purchase 189,640 shares of Common Stock, issued to Hilco Capital LP, incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q for the
quarter ended September 27, 2003 (the September 2003 10-Q).                                            
|    |  |                    
|    |  | 4(b)                |  | Form of Warrant to Purchase Common Stock issued to Oppenheimer & Co. and affiliates, each dated August 5, 2004, for an aggregate of 25,000 shares, incorporated by reference to Exhibit 4.1 to
the Quarterly Report on Form 10-Q for the quarter ended September 25, 2004 (the September 2004 10-Q).
|    |  |                    
|    |  | 10(a)               |  | Lumex, Inc. Amended and Restated 1987 Stock Option Plan, incorporated by reference to Exhibit 28 to the Registration Statement on Form S-8 (No. 33-48124), filed May 26, 1992.*                                                                                                                       
|    |  |                    
|    |  | 10(b)               |  | Ultimate Net Loss Vendor Agreement with Portfolio Purchase, dated December 30, 1994, among the Company, Cybex Financial Corp. and C.I.T., incorporated by reference to Exhibit 10(x) to the Annual
Report on Form 10-K for the year ended December 31, 1994.                                          
|    |  |                    
|    |  | 10(c)               |  | 1995 Omnibus Incentive Plan, as amended, incorporated by reference to Exhibit 10(f) to the Annual Report on Form 10-K for the year ended December 31, 2001 (the 2001
10-K).*                                                                                                                        



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##### Table of Contents

| |  |          |  |                                                                                                                                                                                                                                                                        
| |  | -------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |         
| |  | 10(d)    |  | 2005 Omnibus Incentive Plan, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on May 6, 2005.*                                                                                                                                        
| |  |         
| |  | 10(d)(1) |  | 2002 Stock Retainer Plan for Non-employee Directors, incorporated by reference to Exhibit 10(k) to the 2001 10-K.*                                                                                                                                                     
| |  |         
| |  | 10(d)(2) |  | Amendment to 2002 Stock Retainer Plan for Non-employee Directors, incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed February 18, 2005 (the February 18, 2005
Form 8-K).*                                                             
| |  |         
| |  | 10(e)    |  | Employment Agreement dated April 8, 2003, between the Company and John Aglialoro, incorporated by reference to Exhibit 10.4 to the June 2003 10-Q.*                                                                                                                    
| |  |         
| |  | 10(f)(1) |  | Financing Agreement dated July 16, 2003, between the Company and The CIT Group/Business Credit, Inc., incorporated by reference to Exhibit 10.2 to the September 2003 10-Q.                                                                                            
| |  |         
| |  | 10(f)(2) |  | First Amendment to Financing Agreement dated as of May 4, 2004, between the Company and The CIT Group/Business Credit, Inc., incorporated by reference to Exhibit 10.3 to the Quarterly Report on
Form 10-Q for the quarter ended June 26, 2004 (the June 2004 10-Q).
| |  |         
| |  | 10(f)(3) |  | Second Amendment to Financing Agreement dated as of July 13, 2004, between the Company and The CIT Group/Business Credit, Inc., incorporated by reference to Exhibit 10.2 to the September 2004
10-Q.                                                                  
| |  |         
| |  | 10(f)(4) |  | Third Amendment to Financing Agreement and Consent, dated as of September 30, 2004, between the Company and The CIT Group/Business Credit, Inc., incorporated by reference to Exhibit 10.2 to the
June 2005 10-Q.                                                      
| |  |         
| |  | 10(f)(5) |  | Fourth Amendment to Financing Agreement and Waiver, dated as of May 27, 2005, between the Company and The CIT Group/Business Credit, Inc., incorporated by reference to Exhibit 10.3 to the June
2005 10-Q.                                                            
| |  |         
| |  | 10(g)    |  | Warrantholders Rights Agreement dated as of July 16, 2003 among the Company, certain stockholders of the Company and Hilco Capital LP, incorporated by reference to Exhibit 10.7 to the September
2003 10-Q.                                                           
| |  |         
| |  | 10(h)(1) |  | Credit Agreement dated as of July 13, 2004, between the Company and GMAC Commercial Finance, LLC, incorporated by reference to Exhibit 10.1 to the September 2004 10-Q.                                                                                                
| |  |         
| |  | 10(h)(2) |  | Amended and Restated Credit Agreement dated as of February 1, 2005, between the Company and GMAC Commercial Finance, LLC, incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K filed on February 4, 2005.                                       
| |  |         
| |  | 10(h)(3) |  | Second Amended and Restated Credit Agreement dated January 31, 2006, between the Company and GMAC Commercial Finance, LLC, incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K filed on January 31, 2006.                                      
| |  |         
| |  | 10(i)(1) |  | Management Employment Agreement dated September 30, 2004, between the Company and Ray Giannelli, incorporated by reference to Exhibit 10.3 to the September 2004 10-Q.*(1)                                                                                             
| |  |         
| |  | 10(i)(2) |  | Amended and Restated Management Employment Agreement dated as of January 1, 2006 between the Company and Ray Giannelli, incorporated by referenced to the Current Report on Form 8-K filed
February 27, 2006 (the February 27, 2006 Form 8-K).*                      



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##### Table of Contents

| |  |          |  |                                                                                                                                                                                                                                           
| |  | -------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |         
| |  | 10(j)    |  | Reimbursement Agreement dated as of April 28, 2004, between the Company and UM Holdings Ltd., incorporated by reference to Exhibit 10.1 to the June 2004 10-Q.                                                                            
| |  |         
| |  | 10(k)    |  | Form of Securities Purchase Agreement dated as of August 2, 2004, between the Company and prospective investors, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
August 6, 2004.                        
| |  |         
| |  | 10(l)    |  | Services Agreement dated February 16, 2005 between the Company and UM Holdings Ltd., incorporated by reference to Exhibit 10.5 to the February 18, 2005 Form 8-K.                                                                         
| |  |         
| |  | 10(m)    |  | Form of Incentive Stock Option Agreement issued pursuant to the 1995 Omnibus Incentive Plan as Amended, incorporated by reference to Exhibit 10.4 to the September 2004 10-Q.*                                                            
| |  |         
| |  | 10(n)    |  | Form of Incentive Stock Option Agreement issued pursuant to the 1995 Omnibus Incentive Plan as Amended, incorporated by reference to Exhibit 10.5 to the September 2004 10-Q.*                                                            
| |  |         
| |  | 10(o)    |  | Form of Notification of Participation in the 2005 Management Incentive Compensation Bonus Program for Named Executive Officers, incorporated by reference to Exhibit 10.2 to the February 18, 2005
Form 8-K.*                             
| |  |         
| |  | 10(p)    |  | Form of Notification of Participation in the 2005 Management Incentive Compensation Bonus Program for Non-Named Executive Officers, incorporated by reference to Exhibit 10.3 to the February 18,
2005 Form 8-K.*                         
| |  |         
| |  | 10(q)    |  | Form of Restricted Stock Award Agreement, incorporated by reference to Exhibit 10.1 to the February 18, 2005 Form 8-K.*                                                                                                                   
| |  |         
| |  | 10(r)    |  | Services Agreement dated as of January 1, 2006 between the Company and UM Holdings Ltd., incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed January 4,
2006.                                               
| |  |         
| |  | 10(s)    |  | Form of Notification of Participation in the 2006 Management Incentive Compensation Bonus Program for Named Executive Officers, incorporated by reference to Exhibit 10.2 to the February 27, 2006
Form 8-K.*                             
| |  |         
| |  | 10(t)    |  | Form of Notification of Participation in the 2006 Management Incentive Compensation Bonus Program for Non-Named Executive Officers, incorporated by reference to Exhibit 10.3 to the February 27,
2006 Form 8-K.*                         
| |  |         
| |  | 10(u)(1) |  | Lease for Commercial Land and Building, dated July 25, 2005, between the Company and Doug Hughes Properties, LLC, incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the quarter ended September 24, 2005.
| |  |         
| |  | 10(u)(2) |  | Amendment to Lease for Commercial Land and Building dated December 23, 2005 between the Company and Doug Hughes Properties, LLC (Filed herewith).                                                                                         
| |  |         
| |  | 10(v)(1) |  | Manufacturing and Distribution License Agreement dated May 30, 2005, among Impulse Technology, Ltd., the Company and Trazer Technologies, Inc., incorporated by reference to Exhibit 10.4 to the
June 2005 10-Q.                          
| |  |         
| |  | 10(v)(2) |  | Amendment to Manufacturing and Distribution License Agreement, dated December 22, 2005, among Impulse Technology, Ltd., the Company and Trazer Technologies, Inc. (Filed
herewith).                                                       
| |  |         
| |  | 10(w)    |  | Management Employment Agreement, effective as of January 1, 2006, between the Company and Arthur W. Hicks, Jr., incorporated by reference to Exhibit 10.3 to the February 27, 2006 Form
8-K.*                                             



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##### Table of Contents

| |  |       |  |                                                                                    
| |  | ----- |  | -----------------------------------------------------------------------------------
| |  |      
| |  | 21    |  | Subsidiaries of the Registrant (Filed herewith).                                   
| |  |      
| |  | 23    |  | Consent of Independent Registered Public Accounting FirmKPMG LLP (Filed herewith).
| |  |      
| |  | 31(a) |  | Certification of Chief Executive Officer (Filed herewith).                         
| |  |      
| |  | 31(b) |  | Certification of Chief Financial Officer (Filed herewith).                         
| |  |      
| |  | 32(a) |  | Statement of Chief Executive Officer pursuant to Section 1350 (Furnished herewith).
| |  |      
| |  | 32(b) |  | Statement of Chief Financial Officer pursuant to Section 1350 (Furnished herewith).

---

|* | Executive compensation plans and arrangements
|- | ---------------------------------------------

|(1) | Portions omitted due to a request for confidential treatment
|--- | ------------------------------------------------------------



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##### Table of Contents

SIGNATURES



Pursuant to the requirements of Section 13 or 15 (d) 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.



CYBEX INTERNATIONAL, INC. (Registrant)By:

/s/    JOHN AGLIALOROJohn Aglialoro Chairman




March 31, 2006



Pursuant to the requirements of
the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                                                 |  |                                                                                                            |  |               
|------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                        |  | Title                                                                                                      |  | Date          
|                                                 |  |                                                                                                           
|/s/    JOHN AGLIALOROJohn Aglialoro              |  | Chairman and Chief Executive Officer (principal executive officer)                                         |  | March 31, 2006
|                                                 |  |                                                                                                           
|/s/    ARTHUR W. HICKS,
JR.Arthur W. Hicks,
Jr.  |  | Director, Chief Operating Officer and Chief Financial Officer (principal financial and accounting officer) |  | March 31, 2006
|                                                 |  |                                                                                                           
|/s/    JAMES H. CARLLJames H. Carll              |  | Director                                                                                                   |  | March 31, 2006
|                                                 |  |                                                                                                           
|/s/    JOAN CARTERJoan Carter                    |  | Director                                                                                                   |  | March 31, 2006
|                                                 |  |                                                                                                           
|/s/    DAVID FERRARIDavid Ferrari                |  | Director                                                                                                   |  | March 31, 2006
|                                                 |  |                                                                                                           
|/s/    JERRY LEEJerry Lee                        |  | Director                                                                                                   |  | March 31, 2006
|                                                 |  |                                                                                                           
|/s/    MILTON
LEONTIADESMilton Leontiades,
Ph.D. |  | Director                                                                                                   |  | March 31, 2006
|                                                 |  |                                                                                                           
|/s/    HARVEY MORGANHarvey Morgan                |  | Director                                                                                                   |  | March 31, 2006



II-6