##### Table of Contents



FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Quarterly Report Pursuant To Section 13 or 15 (d)
Of the Securities Exchange Act of 1934

|                                              |  |                               |  | 
|--------------------------------------------- |  | ----------------------------- |  | 
|For the quarterly period
ended

July 5, 2003 |  | Commission File Number 0-9318 | 

SHOPSMITH, INC.
(Exact Name of Registrant as specified in its charter)

|                         |  |                                  
|------------------------ |  | ---------------------------------
|Ohio                     |  | 31-0811466                       
|                         |  |                                  
|(State of Incorporation) |  | (IRS Employer Identification No.)

|                                         |  |  |            | 
|---------------------------------------- |  |  | ---------- | 
|6530 Poe Avenue
Dayton, Ohio             |  |  | 45414      | 
|                                         |  |  |            | 
|(Address of Principal
Executive Offices) |  |  | (Zip Code)

Registrants Telephone Number 937-898-6070

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

Yes X   No

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

Yes
   NoX

Indicate the number of shares outstanding of each of the registrants classes
of common stock as of July 21,2003.

Common shares, without par value: 2,605,233 shares.

Page 1



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TABLE OF CONTENTS



|                               |  |  |  |  |  |  |  | 
|------------------------------ |  |  |  |  |  |  |  | 
|Part I  Financial Information
|PART II. OTHER INFORMATION    
|EX-4.15 First Loan Amendement 
|EX-31.1 302 Certification     
|EX-31.2 302 Certification     
|EX-32.1 906 Certification     
|EX-32.2 906 Certification     



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##### Table of Contents



SHOPSMITH, INC. AND SUBSIDIARIES

INDEX

|                               |                                                                                               |                                                                                                                           |       |      |          |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ----- | ---- | -------- |  | 
|                               |                                                                                               |                                                                                                                           |       |      | Page No.
|                               |                                                                                               |                                                                                                                           |       |      |         
|Part I. Financial Information: |                                                                                               |                                                                                                                           |       |     
|                              
|                              
|                              
|                              
|                               | Item 1. Financial Statements                                                                  |                                                                                                                           |       |      |         
|                              
|                              
|                              
|                              
|                               |                                                                                               | Consolidated Balance Sheets-
July 5, 2003 and April 5, 2003                                                               |       |      | 3-4      | 
|                              
|                              
|                              
|                              
|                               |                                                                                               | Consolidated Statements of Operations and
Retained Earnings (Deficit)  Three Months
Ended July 5, 2003 and June 29, 2002 |       |      | 5        | 
|                              
|                              
|                              
|                              
|                               |                                                                                               | Consolidated Statements of Cash Flows-
Three Months Ended July 5, 2003 and June 29, 2002                                  |       |      | 6        | 
|                              
|                              
|                              
|                              
|                               |                                                                                               | Notes to Consolidated Financial Statements                                                                                |       |      | 7-8      | 
|                              
|                              
|                              
|                              
|                               | Item 2. Managements Discussion and Analysis
of Financial Condition and Results
of Operations |                                                                                                                           |       | 9-10 |         
|                              
|                              
|                              
|                              
|                               | Item 3. Quantitative and qualitative disclosures
about market risk                            |                                                                                                                           |       | 11   |         
|                              
|                              
|                              
|                              
|                               | Item 4. Controls and procedures                                                               |                                                                                                                           |       | 11   |         
|                              
|                              
|                              
|                              
|Part II. Other Information     |                                                                                               |                                                                                                                           |       |     
|                              
|                              
|                              
|                              
|                               | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                           |       | 12   |         
|                              
|                              
|                              
|                              
|Signatures                     |                                                                                               |                                                                                                                           | 12    |     
|                              
|                              
|                              
|                              
|Exhibits                       |                                                                                               |                                                                                                                           | 13-25 |     

Page 2



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##### Table of Contents






Part I  Financial Information

SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                                                                      |                                                 |                                                        |                                                          |                      |         |             |           |           |         |           |           | 
|------------------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------------------------ | -------------------------------------------------------- | -------------------- | ------- | ----------- | --------- | --------- | ------- | --------- | --------- | 
|                                                                                      |                                                 |                                                        |                                                          |                      |         | July 5,     |           | April 5, 
|                                                                                      |                                                 |                                                        |                                                          |                      |         | 2003        |           | 2003     
|                                                                                      |                                                 |                                                        |                                                          |                      |         |             |           |          
|                                                                                      |                                                 |                                                        |                                                          |                      |         | (Unaudited) |           |           |         |          
|                                                                                      |                                                 |                                                        |                                                          | ASSETS               |         |             |           |           |         |           |           | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Current assets:                                                                       |                                                 |                                                        |                                                          |                      |         |             |           |          
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Cash and cash equivalents                       |                                                        | $                                                        | 825                  |         |             | $         | 250,316   |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Accounts receivable:                            |                                                        |                                                          |                      |         |             |           |           |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      |                                                 |                                                        | Trade, less allowance for doubtful accounts:             |                      |         |             |           |           |         |           |          
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      |                                                 |                                                        | $1,054,307 on July 5, 2003 and $915,489 on April 5, 2003 |                      |         | 1,438,619   |           |           |         | 1,395,660 |          
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Inventories:                                    |                                                        |                                                          |                      |         |             |           |           |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      |                                                 |                                                        | Finished products                                        |                      |         | 930,258     |           |           |         | 856,629   |          
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      |                                                 |                                                        | Raw materials and work in process                        |                      |         | 1,244,738   |           |           |         | 1,098,679 |          
|                                                                                      |                                                 |                                                        |                                                          |                      |         |             |           |          
|                                                                                      |                                                 |                                                        |                                                          | Total inventories    |         |             | 2,174,996 |           |         |           | 1,955,308 | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Prepaid expenses                                |                                                        |                                                          | 293,558              |         |             |           | 209,072   |        
|                                                                                      |                                                 |                                                        |                                                          |                      |         |             |           |          
|                                                                                      |                                                 |                                                        |                                                          | Total current assets |         |             | 3,907,998 |           |         |           | 3,810,356 | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Properties:                                                                           |                                                 |                                                        |                                                          |                      |         |             |           |          
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Land, building and improvements                 |                                                        |                                                          | 3,148,348            |         |             |           | 3,148,348 |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Machinery, equipment and tooling                |                                                        |                                                          | 6,737,106            |         |             |           | 6,723,950 |        
|                                                                                      |                                                 |                                                        |                                                          |                      |         |             |           |          
|                                                                                      |                                                 |                                                        |                                                          | Total cost           |         |             | 9,885,454 |           |         |           | 9,872,298 | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Less, accumulated depreciation and amortization |                                                        |                                                          | 7,253,537            |         |             |           | 7,213,852 |        
|                                                                                      |                                                 |                                                        |                                                          |                      |         |             |           |          
|                                                                                      |                                                 |                                                        |                                                          | Net properties       |         |             | 2,631,917 |           |         |           | 2,658,446 | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Long-term portion of accounts receivable
trade, less allowance for doubtful accounts: |                                                 |                                                        |                                                          |                      |         |             |           |          
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      |                                                 | $212,117 on July 5, 2003 and $205,709 on April 5, 2003 |                                                          |                      | 538,553 |             |           |           | 577,080 |          
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Other assets                                                                          |                                                 |                                                        | 3,128                                                    |                      |         |             | 3,128     |          
|                                                                                      |                                                 |                                                        |                                                          |                      |         |             |           |          
|Total assets                                                                          |                                                 | $                                                      | 7,081,596                                                |                      |         | $           | 7,049,010 |          
|                                                                                      |                                                 |                                                        |                                                          |                      |         |             |           |          

Continued

Page 3



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##### Table of Contents



SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                            |                                                                                                                                                               |                                                   |                                      |                            |         |             |           |           |         |  |           | 
|------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------------------ | -------------------------- | ------- | ----------- | --------- | --------- | ------- |  | --------- | 
|                                            |                                                                                                                                                               |                                                   |                                      |                            |         | July 5,     |           | April 5, 
|                                            |                                                                                                                                                               |                                                   |                                      |                            |         | 2003        |           | 2003     
|                                            |                                                                                                                                                               |                                                   |                                      |                            |         |             |           |          
|                                            |                                                                                                                                                               |                                                   |                                      |                            |         | (Unaudited) |           |           |         | 
|                                            |                                                                                                                                                               |                                                   | LIABILITIES AND SHAREHOLDERS EQUITY |                            |         |             |           |           |         |  |          
|                                           
|                                           
|                                           
|                                           
|Current liabilities:                        |                                                                                                                                                               |                                                   |                                      |                            |         |             |           |          
|                                           
|                                           
|                                           
|                                           
|                                            | Accounts payable                                                                                                                                              |                                                   | $                                    | 1,144,491                  |         |             | $         | 949,801   |        
|                                           
|                                           
|                                           
|                                           
|                                            | Revolving line of credit                                                                                                                                      |                                                   |                                      | 251,595                    |         |             |           |          |        
|                                           
|                                           
|                                           
|                                           
|                                            | Note payable                                                                                                                                                  |                                                   |                                      | 300,000                    |         |             |           | 400,000   |        
|                                           
|                                           
|                                           
|                                           
|                                            | Current portion of long-term debt and capital lease obligation                                                                                                |                                                   |                                      | 104,726                    |         |             |           | 105,458   |        
|                                           
|                                           
|                                           
|                                           
|                                            | Customer advances                                                                                                                                             |                                                   |                                      | 57,991                     |         |             |           | 65,489    |        
|                                           
|                                           
|                                           
|                                           
|                                            | Accrued liabilities:                                                                                                                                          |                                                   |                                      |                            |         |             |           |           |        
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                                                                                                               | Compensation, employee benefits and payroll taxes |                                      |                            | 256,304 |             |           |           | 396,573 | 
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                                                                                                               | Sales taxes payable                               |                                      |                            | 58,871  |             |           |           | 64,177  | 
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                                                                                                               | Accrued recourse liability                        |                                      |                            | 324,334 |             |           |           | 351,055 | 
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                                                                                                               | Accrued expenses                                  |                                      |                            | 292,217 |             |           |           | 273,605 | 
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                                                                                                               | Other                                             |                                      |                            | 72,016  |             |           |           | 72,921  | 
|                                            |                                                                                                                                                               |                                                   |                                      |                            |         |             |           |          
|                                            |                                                                                                                                                               |                                                   |                                      | Total current liabilities  |         |             | 2,862,545 |           |         |  | 2,679,079 | 
|                                           
|                                           
|                                           
|                                           
|Long-term debt and capital lease obligation |                                                                                                                                                               |                                                   | 2,347,417                            |                            |         |             | 2,374,220 |          
|                                            |                                                                                                                                                               |                                                   |                                      |                            |         |             |           |          
|                                            |                                                                                                                                                               |                                                   |                                      | Total liabilities          |         |             | 5,209,962 |           |         |  | 5,053,299 | 
|                                           
|                                           
|                                           
|                                           
|Shareholders equity:                       |                                                                                                                                                               |                                                   |                                      |                            |         |             |           |          
|                                           
|                                           
|                                           
|                                           
|                                            | Preferred shares- without par value;
authorized 500,000; none issued
Common shares- without par value;
authorized 5,000,000; issued and outstanding 2,605,233 |                                                   |                                      | 2,806,482                  |         |             |           | 2,806,482 |        
|                                           
|                                           
|                                           
|                                           
|                                            | Deficit                                                                                                                                                       |                                                   |                                      | (934,848                   | )       |             |           | (810,771  | )      
|                                            |                                                                                                                                                               |                                                   |                                      |                            |         |             |           |          
|                                            |                                                                                                                                                               |                                                   |                                      | Total shareholders equity |         |             | 1,871,634 |           |         |  | 1,995,711 | 
|                                            |                                                                                                                                                               |                                                   |                                      |                            |         |             |           |          
|Total liabilities and shareholders equity  |                                                                                                                                                               | $                                                 | 7,081,596                            |                            |         | $           | 7,049,010 |          
|                                            |                                                                                                                                                               |                                                   |                                      |                            |         |             |           |          

See notes to consolidated financial statements.

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##### Table of Contents



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

|                                              |                          |           |           |                    |          |          |           |           |          |  
|--------------------------------------------- | ------------------------ | --------- | --------- | ------------------ | -------- | -------- | --------- | --------- | -------- | -
|                                              |                          |           |           | Three Months Ended
|                                              |                          |           |           |                   
|                                              |                          |           |           | July 5,            |          | June 29,
|                                              |                          |           |           | 2003               |          | 2002    
|                                              |                          |           |           |                    |          |         
|Net sales                                     |                          | $         | 3,112,504 |                    |          | $        | 3,415,012 |          
|                                             
|                                             
|                                             
|                                             
|Cost of products sold                         |                          |           | 1,581,909 |                    |          |          | 1,617,905 |          
|                                              |                          |           |           |                    |          |          |           |          
|Gross margin                                  |                          |           | 1,530,595 |                    |          |          | 1,797,107 |          
|                                             
|                                             
|                                             
|                                             
|Selling expenses                              |                          |           | 1,187,327 |                    |          |          | 1,249,412 |          
|                                             
|                                             
|                                             
|                                             
|Administrative expenses                       |                          |           | 444,406   |                    |          |          | 425,110   |          
|                                              |                          |           |           |                    |          |          |           |          
|                                              | Total operating expenses |           |           | 1,631,733          |          |          |           | 1,674,522 |         
|                                             
|                                             
|                                             
|                                             
|Income (loss) before
other income and expense |                          |           | (101,138  | )                  |          |          | 122,585   |          
|                                             
|                                             
|                                             
|                                             
|Interest income                               |                          |           | 43,643    |                    |          |          | 23,430    |          
|                                             
|                                             
|                                             
|                                             
|Interest expense                              |                          |           | 68,106    |                    |          |          | 85,403    |          
|                                             
|                                             
|                                             
|                                             
|Other income, net                             |                          |           | 1,524     |                    |          |          | 3,116     |          
|                                              |                          |           |           |                    |          |          |           |          
|Net income (loss)                             |                          |           | (124,077  | )                  |          |          | 63,728    |          
|                                             
|                                             
|                                             
|                                             
|Retained earnings:                            |                          |           |           |                    |          |          |           |          
|                                             
|                                             
|                                             
|                                             
|                                              |                          | Beginning |           |                    | (810,771 | )        |           |           | (910,771 | )
|                                              |                          |           |           |                    |          |          |           |          
|                                              |                          | Ending    |           | $                  | (934,848 | )        |           | $         | (847,043 | )
|                                              |                          |           |           |                    |          |          |           |          
|Net income (loss) per common share
(Note 3)   |                          |           |           |                    |          |          |           |          
|                                             
|                                             
|                                             
|                                             
|                                              | Basic                    |           | $         | (0.05              | )        |          | $         | 0.02      |         
|                                              |                          |           |           |                    |          |          |           |          
|                                              | Diluted                  |           | $         | (0.05              | )        |          | $         | 0.02      |         
|                                              |                          |           |           |                    |          |          |           |          

See notes to consolidated financial statements.

Page 5



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##### Table of Contents



SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                        |                                                         |                                                                               |                                        |          |                    |          |          |         |        |          |  
|--------------------------------------- | ------------------------------------------------------- | ----------------------------------------------------------------------------- | -------------------------------------- | -------- | ------------------ | -------- | -------- | ------- | ------ | -------- | -
|                                        |                                                         |                                                                               |                                        |          | Three Months Ended
|                                        |                                                         |                                                                               |                                        |          |                   
|                                        |                                                         |                                                                               |                                        |          | July 5,            |          | June 29,
|                                        |                                                         |                                                                               |                                        |          | 2003               |          | 2002    
|                                        |                                                         |                                                                               |                                        |          |                    |          |         
|Cash flows from operating activities:   |                                                         |                                                                               |                                        |          |                    |          |          |        
|                                       
|                                       
|                                       
|                                       
|Net income (loss)                       |                                                         | $                                                                             | (124,077                               | )        |                    | $        | 63,728   |        
|                                       
|                                       
|                                       
|                                       
|                                        |                                                         | Adjustments to reconcile net income (loss) to
cash from operating activities: |                                        |          |                    |          |          |         |        |         
|                                       
|                                       
|                                       
|                                       
|                                        |                                                         | Depreciation and amortization                                                 |                                        |          | 39,685             |          |          |         | 56,324 |         
|                                       
|                                       
|                                       
|                                       
|                                        |                                                         | Provision for doubtful accounts                                               |                                        |          | 76,972             |          |          |         | 26,794 |         
|                                       
|                                       
|                                       
|                                       
|                                        |                                                         | Changes in operating assets and liabilities:                                  |                                        |          |                    |          |          |         |        |         
|                                       
|                                       
|                                       
|                                       
|                                        |                                                         |                                                                               | Restricted cash                        |          |                    |         |          |         |        | (46,985  | )
|                                       
|                                       
|                                       
|                                       
|                                        |                                                         |                                                                               | Accounts receivable                    |          |                    | (81,404  | )        |         |        | 672,320  |  
|                                       
|                                       
|                                       
|                                       
|                                        |                                                         |                                                                               | Inventories                            |          |                    | (219,688 | )        |         |        | 104,204  |  
|                                       
|                                       
|                                       
|                                       
|                                        |                                                         |                                                                               | Other assets                           |          |                    | (84,486  | )        |         |        | (55,976  | )
|                                       
|                                       
|                                       
|                                       
|                                        |                                                         |                                                                               | Accounts payable and customer advances |          |                    | 187,192  |          |         |        | (775,457 | )
|                                       
|                                       
|                                       
|                                       
|                                        |                                                         |                                                                               | Other current liabilities              |          |                    | (154,589 | )        |         |        | (136,249 | )
|                                        |                                                         |                                                                               |                                        |          |                    |          |          |        
|Cash (used in) operating activities     |                                                         |                                                                               | (360,395                               | )        |                    |          | (91,297  | )      
|                                       
|                                       
|                                       
|                                       
|Cash flows from investing activities:   |                                                         |                                                                               |                                        |          |                    |          |          |        
|                                       
|                                       
|                                       
|                                       
|                                        | Property additions                                      |                                                                               |                                        | (13,156  | )                  |          |          | (10,433 | )     
|                                        |                                                         |                                                                               |                                        |          |                    |          |          |        
|Cash (used in) investing activities     |                                                         |                                                                               | (13,156                                | )        |                    |          | (10,433  | )      
|                                       
|                                       
|                                       
|                                       
|Cash flows from financing activities:   |                                                         |                                                                               |                                        |          |                    |          |          |        
|                                       
|                                       
|                                       
|                                       
|                                        | Payments on note payable                                |                                                                               |                                        | (100,000 | )                  |          |          |        |       
|                                       
|                                       
|                                       
|                                       
|                                        | Net borrowings on revolving line of credit              |                                                                               |                                        | 251,595  |                    |          |          |         |       
|                                       
|                                       
|                                       
|                                       
|                                        | Payments on long-term debt and capital lease obligation |                                                                               |                                        | (27,535  | )                  |          |          | 26,631  |       
|                                        |                                                         |                                                                               |                                        |          |                    |          |          |        
|Cash provided from financing activities |                                                         |                                                                               | 124,060                                |          |                    |          | 26,631   |        
|                                        |                                                         |                                                                               |                                        |          |                    |          |          |        
|Net decrease in cash                    |                                                         |                                                                               | (249,491                               | )        |                    |          | (75,099  | )      
|                                       
|                                       
|                                       
|                                       
|Cash and cash equivalents:              |                                                         |                                                                               |                                        |          |                    |          |          |        
|                                       
|                                       
|                                       
|                                       
|                                        | At beginning of period                                  |                                                                               |                                        | 250,316  |                    |          |          | 76,324  |       
|                                        |                                                         |                                                                               |                                        |          |                    |          |          |        
|                                        | At end of period                                        |                                                                               | $                                      | 825      |                    |          | $        | 1,225   |       
|                                        |                                                         |                                                                               |                                        |          |                    |          |          |        

See notes to consolidated financial statements.

Page 6



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##### Table of Contents



SHOPSMITH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | In the opinion of management, all adjustments (consisting of only normal
and recurring adjustments) have been made as of July 5, 2003 and June 29,
2002 to present the financial statements fairly. However, the results of
operations for the three months then ended are not necessarily indicative
of results for the full fiscal year. The financial statements and notes
are presented as permitted by Form 10-Q, and do not contain certain
information included in the annual financial statements. The financial
statements accompanying this report should be read in conjunction with the
financial statements and notes thereto included in the Annual Report to
Shareholders for the year ended April 5, 2003.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | The provision for income taxes is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                                          |  |                    |          |          |  |   |        | 
|----------------------------------------- |  | ------------------ | -------- | -------- |  | - | ------ | 
|                                          |  | Three Months Ended
|                                          |  |                   
|                                          |  | July 5,            |          | June 29,
|                                          |  | 2003               |          | 2002    
|                                          |  |                    |          |         
|Income (loss) before income taxes         |  | $                  | (124,077 | )        |  | $ | 63,728 | 
|                                          |  |                    |          |          |  |   |        | 
|Provision for (recoverable) income taxes: |  |                    |          |          |  |   |        | 
|                                         
|                                         
|                                         
|                                         
|Income tax benefit (expense)              |  | $                  |         |          |  | $ |       | 
|                                          |  |                    |          |          |  |   |        | 



|   |  | Taxable income for the three months ended June 29, 2002 was offset by a net
operating loss carryforward. There is no tax benefit in the quarter ended
July 5, 2003, as it was offset by a change in valuation allowance.                                                                                                                                                
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|3. |  | Basic income (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during the
period. Diluted income (loss) per share reflects per share amounts that
would have resulted if stock options had been converted into common stock.
The following reconciles amounts reported in the financial statements:

|                                |  |                    |           |          |  |   |           | 
|------------------------------- |  | ------------------ | --------- | -------- |  | - | --------- | 
|                                |  | Three Months Ended
|                                |  |                   
|                                |  | July 5,            |           | June 29,
|                                |  | 2003               |           | 2002    
|                                |  |                    |           |         
|Net income (loss)               |  | $                  | (124,077  | )        |  | $ | 63,728    | 
|                                |  |                    |           |          |  |   |           | 
|Weighted average shares         |  |                    | 2,605,233 |          |  |   | 2,605,233 | 
|                               
|                               
|                               
|                               
|Additional dilutive shares      |  |                    |          |          |  |   |          | 
|                                |  |                    |           |          |  |   |           | 
|Total dilutive shares           |  |                    | 2,605,233 |          |  |   | 2,605,233 | 
|                                |  |                    |           |          |  |   |           | 
|Basic income (loss) per share   |  | $                  | (0.05     | )        |  | $ | 0.02      | 
|                                |  |                    |           |          |  |   |           | 
|Diluted income (loss) per share |  | $                  | (0.05     | )        |  | $ | 0.02      | 
|                                |  |                    |           |          |  |   |           | 



| |  | There were no additional dilutive shares included in the computation for the
periods ended July 5, 2003 and June 29, 2002 because the stock options were
anti-dilutive.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents





|4. |  | During fiscal 2002, Shopsmith entered into an arrangement with John R.
Folkerth, the Companys CEO, which allows the Company to borrow up to
$500,000 with interest at twelve percent. The maximum authorized
borrowing was increased to $600,000 in July 2002. Substantially all
personal property except for certain receivables are pledged as
collateral. Interest is due monthly and the note is payable on demand. At
July 5, 2003 there was $300,000 outstanding and at June 29, 2002 there was
$400,000 outstanding under this arrangement. Borrowings from Mr. Folkerth
are subject to Mr. Folkerths approval and are payable upon demand by Mr.
Folkerth. The note payable of $300,000 was paid in full on July 31, 2003.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|5. |  | On December 31, 2002, Shopsmith entered into a loan agreement with
Provident Bank which allows the Company to borrow up to the lesser of
$750,000 or 80% of eligible receivables due from Lowes Companies, Inc.,
with interest charged at one and one-half percent over the banks prime
rate. On July 17, 2003, this agreement was amended to allow borrowings up
to $1,400,000. The agreement requires compliance with certain net income,
net worth, and miscellaneous covenants. Substantially all personal
property is pledged as collateral. At July 5, 2003 approximately $252,000
was outstanding under this agreement.                                                                                                     
|  
|6. |  | A major retailer represented 43% and 34% of net sales for the quarters
ended July 5, 2003 and June 29, 2002, respectively. This retailer also
represented 43% and 42% of trade accounts receivable at July 5, 2003 and
April 5, 2003, respectively                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|7. |  | In May 2002, Shopsmith had implemented an employee salary reduction plan.
Reductions under this plan continued through December 2002. As part of
this plan, fiscal 2003 pre-tax income above $100,000 was used to return
the amount of the reduction to the employees and if income had permitted,
to pay an additional incentive equal to the amount of the reduction.
Fiscal 2003 income levels permitted approximately $70,000 or 76% of the
reduction to be returned. This amount was paid during the quarter ended
July 5, 2003, and no further liabilities exist under the plan.                                                                                                                                              
|  
|8. |  | The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, and, accordingly,
accounts for its stock option plans using the intrinsic value method of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees.                                                                                                                                                                                                                                                                             
|  
|   |  | The following table illustrates the effect on net income and earnings per
share if compensation expense was measured using the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                                |  |                    |          |          |  |   |        | 
|----------------------------------------------- |  | ------------------ | -------- | -------- |  | - | ------ | 
|                                                |  | Three Months Ended
|                                                |  |                   
|                                                |  | July 5,            |          | June 29,
|                                                |  | 2003               |          | 2002    
|                                                |  |                    |          |         
|Net income (loss)  as reported                 |  | $                  | (124,077 | )        |  | $ | 63,728 | 
|                                               
|                                               
|                                               
|                                               
|Net income (loss)  pro forma                   |  | $                  | (124,077 | )        |  | $ | 63,728 | 
|                                               
|                                               
|                                               
|                                               
|Diluted earnings (loss) per share  as reported |  | $                  | (0.05    | )        |  | $ | 0.02   | 
|                                               
|                                               
|                                               
|                                               
|Diluted earnings (loss) per share  pro forma   |  | $                  | (0.05    | )        |  | $ | 0.02   | 

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

General

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

Critical Accounting Policies And Estimates

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

Allowance For Doubtful Accounts

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

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

Accrued Recourse Liability

Certain retail installment contracts sold to financial institutions through the
fiscal year ended March 31, 2001 included a recourse provision. Under this
recourse provision, Shopsmith is obligated to purchase the installment contract
if the customer defaults on his obligation to the financial institution. The
Companys liability for future recourse obligations has been estimated using
factors based on the value and rate of change of the value of the outstanding
accounts, the rate and changes in the rate of repurchases required under the
recourse provision, as well as estimates of amounts collectable after the
accounts are repurchased. If these factors would deteriorate, additional
accruals would be necessary and would affect future operating results.

Results of Operations

First quarter sales decreased to $3,113,000, or 9.1% from $3,415,000 generated
during the same period a year ago. This decrease occurred primarily in our
catalog and distributor sales .

Gross margin rates decreased by 3.4 percentage points compared to the same
quarter last year due to the increased proportion of sales through
distributors. Operating expenses were reduced by $43,000 to $1,632,000 in the
fiscal first quarter from $1,675,000 in last years first quarter.

Provisions for recoverable Federal income taxes ($0 in both FY2004 and FY 2003)
are based on estimated annual effective rates, less a valuation reserve. The
zero Federal income tax amount in FY2003 was due to the utilization of net
operating loss carryforwards offset by a change in valuation allowance. There
is no tax benefit in the quarter ended July 5, 2003, as it was offset by a
change in valuation allowance.

With the reduced level of sales, the Company recorded a net loss of $124,000 or
$.05 per diluted share in the quarter ended July 5, 2003 compared to net income
of $64,000 or $.02 per diluted share for the same period of last year.

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Liquidity and Financial Position

Cash used in operations totaled $360,000 during the first quarter of fiscal
2004, compared with a usage of $91,000 for the same period of the preceding
year. Increases in inventories of $220,000 and the net loss of $124,000, along
with the changes in other current liabilities explain the change in cash for
the period. The reduction in other current liabilities included the payment of
$70,000 that had been accrued in fiscal 2003 for payments under the employee
salary reduction plan.

The current ratio was 1.37 to 1 at July 5, 2003 compared to 1.42 to 1 at the
beginning of the current fiscal year. The debt to equity ratio increased to
2.78 to 1 from 2.53 to 1 at April 5, 2003.

During fiscal 2002, Shopsmith entered into an arrangement with John R.
Folkerth, the Companys CEO, which allows the Company to borrow up to $500,000
with interest at twelve percent. The maximum authorized borrowing was
increased to $600,000 in July 2002. Substantially all personal property except
for certain receivables are pledged as collateral. Interest is due monthly and
the note is payable on demand. At July 5, 2003, there was $300,000 outstanding
under this arrangement. Borrowings from Mr. Folkerth are subject to Mr.
Folkerths approval and are payable upon demand by Mr. Folkerth. The note
payable of $300,000 was paid in full on July 31, 2003.

On December 31, 2002, Shopsmith entered into a loan agreement with Provident
Bank which allows the Company to borrow up to the lesser of $750,000 or 80% of
eligible receivables due from Lowes Companies, Inc., with interest charged at
one and one-half percent over the Banks prime rate. On July 17, 2003, this
agreement was amended to allow borrowings up to $1,400,000. The agreement
requires compliance with certain net income, net worth, and miscellaneous
covenants. Substantially all personal property is pledged as collateral. At
July 5, 2003, $252,000 was outstanding under this agreement.

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

Forward Looking Statements

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

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Item 3. Quantitative and qualitative disclosures about market risk.



| |                
| | ---------------
| | Not applicable.

Item 4. Controls and Procedures.



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

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PART II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds



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

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

|     |  |                                                                                                                                                                                     
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.15 |  | First amendment to loan agreement, promissory note,
and security agreement with Provident Bank dated July 17, 2003.                                                                 
|    
|    
|    
|    
|     |  |                                                                                                                                                                                     
|    
|    
|    
|    
|31.1 |  | Certification of the Chief Executive Officer pursuant
to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|    
|    
|    
|    
|     |  |                                                                                                                                                                                     
|    
|    
|    
|    
|31.2 |  | Certification of the Chief Financial Officer pursuant
to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|    
|    
|    
|    
|     |  |                                                                                                                                                                                     
|    
|    
|    
|    
|32.1 |  | Certification of the Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.                              
|    
|    
|    
|    
|     |  |                                                                                                                                                                                     
|    
|    
|    
|    
|32.2 |  | Certification of the Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.                              

(b) Reports on Form 8-K:

None

SIGNATURES

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

| |  |  |                   |                                                                       
| |  |  | ----------------- | ----------------------------------------------------------------------
| |  |  | SHOPSMITH, INC.  
|
| |  |  | By /s/ Mark A May
|
| |  |  |                   | Mark A. May                                                           
|
| |  |  |                   | Vice President of Finance (Principal
Financial and Accounting Officer)
|
| |  |  |                   |                                                                       

Date: August 14, 2003

Page 12