TABLE OF CONTENTS




|                                                                                              |                                            |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  |  | 
|Item 1. Financial Statements                                                                 
|                                                                                              | Consolidated Balance Sheets               
|                                                                                              | Consolidated Statements of Operations     
|                                                                                              | Consolidated Statements of Cash Flow      
|                                                                                              | Notes to Consolidated Financial Statements
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|Item 3. Quantitative and qualitative disclosures about market risk.                          
|Part II. Other Information                                                                   
|Item 6.                                                                                      



---



FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

For the quarter ended              Commission File Number 0-9318
January 1, 2000

SHOPSMITH, INC.

(Name of Registrant)

|                                         |  |                                     
|---------------------------------------- |  | ------------------------------------
|Ohio                                     |  | 31-0811466                          
|                                         |  |                                     
|(State of Incorporation)                 |  | (IRS Employer Identification Number)
|                                        
|                                        
|                                        
|                                        
|6530 Poe Avenue
Dayton, Ohio             |  | 45414                               
|                                         |  |                                     
|(Address of Principal
Executive Offices) |  | (Zip Code)                          

Registrants Telephone 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 the number of shares outstanding of each of the registrants classes of
common stock as of January 20, 2000.

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

Page 1



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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-                               
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                             |                                                                 | January 1, 2000 and April 3, 1999                               |     |          | 3-4 | 
|                              
|                              
|                              
|                              
|                               |                                                                                               | Statements of Consolidated Operations and Retained Earnings
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                             | Three and Nine Months Ended January 1, 2000 and January 2, 1999 |                                                                 |     | 5        |    
|                              
|                              
|                              
|                              
|                               |                                                                                               | Consolidated Statements of Cash Flows-                     
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                             |                                                                 | Three and Nine Months Ended January 1, 2000 and January 2, 1999 |     |          | 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                            |                                                             |                                                                 | 10                                                              |    
|                              
|                              
|                              
|                              
|Part II. Other Information     |                                                                                               |                                                             | 11                                                              |                                                                

Page 2



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##### Table of Contents






SHOPSMITH INC. AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS

|                               |                                                |                                              |                                               |                      |  |             |            |           |  |         |           | 
|------------------------------ | ---------------------------------------------- | -------------------------------------------- | --------------------------------------------- | -------------------- |  | ----------- | ---------- | --------- |  | ------- | --------- | 
|                               |                                                |                                              |                                               |                      |  | January 1,  |            | April 3, 
|                               |                                                |                                              |                                               |                      |  | 2000        |            | 1999     
|                               |                                                |                                              |                                               |                      |  |             |            |          
|                               |                                                |                                              |                                               |                      |  | (Unaudited)
|                               |                                                |                                              |                                               | ASSETS              
|                              
|                              
|                              
|                              
|Current Assets:               
|                              
|                              
|                              
|                              
|                               | Cash                                           |                                              | $                                             | 513,229              |  |             | $          | 1,005,371 | 
|                              
|                              
|                              
|                              
|                               | Restricted cash                                |                                              |                                               | 111,664              |  |             |            | 101,249   | 
|                              
|                              
|                              
|                              
|                               | Short-term investments                         |                                              |                                               |                     |  |             |            | 989,122   | 
|                              
|                              
|                              
|                              
|                               | Accounts receivable:                          
|                              
|                              
|                              
|                              
|                               |                                                | Trade, less allowance for doubtful accounts:
|                              
|                              
|                              
|                              
|                               |                                                |                                              | $333,783 on January 1 and $450,677 on April 3 |                      |  | 619,696     |            |           |  | 758,548 |          
|                              
|                              
|                              
|                              
|                               | Inventories                                    |                                              |                                               | 2,829,515            |  |             |            | 2,410,908 | 
|                              
|                              
|                              
|                              
|                               | Deferred income taxes (Note 2)                 |                                              |                                               | 450,000              |  |             |            | 475,000   | 
|                              
|                              
|                              
|                              
|                               | Prepaid expenses                               |                                              |                                               | 444,852              |  |             |            | 225,157   | 
|                               |                                                |                                              |                                               |                      |  |             |            |          
|                               |                                                |                                              |                                               | Total current assets |  |             | 4,968,956  |           |  |         | 5,965,355 | 
|                               |                                                |                                              |                                               |                      |  |             |            |          
|Properties:                   
|                              
|                              
|                              
|                              
|                               | Land, building and improvements                |                                              |                                               | 3,161,199            |  |             |            | 3,151,407 | 
|                              
|                              
|                              
|                              
|                               | Machinery, equipment and tooling               |                                              |                                               | 6,595,337            |  |             |            | 6,505,258 | 
|                               |                                                |                                              |                                               |                      |  |             |            |          
|                               |                                                |                                              |                                               | Total cost           |  |             | 9,756,536  |           |  |         | 9,656,665 | 
|                              
|                              
|                              
|                              
|                               | Less accumulated depreciation and
amortization |                                              |                                               | 6,409,664            |  |             |            | 6,200,696 | 
|                               |                                                |                                              |                                               |                      |  |             |            |          
|                               |                                                |                                              |                                               | Net properties       |  |             | 3,346,872  |           |  |         | 3,455,969 | 
|                               |                                                |                                              |                                               |                      |  |             |            |          
|Deferred income taxes (Note 2) |                                                |                                              | 827,000                                       |                      |  |             | 584,000    |          
|                               |                                                |                                              |                                               |                      |  |             |            |          
|Other assets                   |                                                |                                              | 19,311                                        |                      |  |             | 19,308     |          
|                               |                                                |                                              |                                               |                      |  |             |            |          
|Total assets                   |                                                | $                                            | 9,162,139                                     |                      |  | $           | 10,024,632 |          
|                               |                                                |                                              |                                               |                      |  |             |            |          

Continued

Page 3



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##### Table of Contents



SHOPSMITH INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                         |                                                                      |                                                   |                                      |                            |         |             |            |           |         |  |           | 
|------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------- | ------------------------------------------------- | ------------------------------------ | -------------------------- | ------- | ----------- | ---------- | --------- | ------- |  | --------- | 
|                                                                                                                         |                                                                      |                                                   |                                      |                            |         | January 1,  |            | April 3, 
|                                                                                                                         |                                                                      |                                                   |                                      |                            |         | 2000        |            | 1999     
|                                                                                                                         |                                                                      |                                                   |                                      |                            |         |             |            |          
|                                                                                                                         |                                                                      |                                                   |                                      |                            |         | (Unaudited)
|                                                                                                                         |                                                                      |                                                   | LIABILITIES AND SHAREHOLDERS EQUITY
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|Current Liabilities:                                                                                                    
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                         | Accounts payable                                                     |                                                   | $                                    | 1,019,421                  |         |             | $          | 1,342,957 |        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                         | Current portion of long-term debt and
capital lease obligation       |                                                   |                                      | 92,452                     |         |             |            | 81,219    |        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                         | Customer advances                                                    |                                                   |                                      | 13,296                     |         |             |            | 25,788    |        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                         | Accrued liabilities:                                                
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                         |                                                                      | Compensation, employee benefits and
payroll taxes |                                      |                            | 325,468 |             |            |           | 377,453 | 
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                         |                                                                      | Sales taxes payable                               |                                      |                            | 126,532 |             |            |           | 187,020 | 
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                         |                                                                      | Accrued recourse liability                        |                                      |                            | 449,837 |             |            |           | 333,265 | 
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                         |                                                                      | Accrued expenses                                  |                                      |                            | 311,107 |             |            |           | 309,000 | 
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                         |                                                                      | Other                                             |                                      |                            | 164,088 |             |            |           | 158,356 | 
|                                                                                                                         |                                                                      |                                                   |                                      |                            |         |             |            |          
|                                                                                                                         |                                                                      |                                                   |                                      | Total current liabilities  |         |             | 2,502,201  |           |         |  | 2,815,058 | 
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|Long-term debt and capital lease obligation                                                                              |                                                                      |                                                   | 2,753,134                            |                            |         |             | 2,816,809  |          
|                                                                                                                         |                                                                      |                                                   |                                      |                            |         |             |            |          
|                                                                                                                         |                                                                      |                                                   |                                      | Total liabilities          |         |             | 5,255,335  |           |         |  | 5,631,867 | 
|                                                                                                                         |                                                                      |                                                   |                                      |                            |         |             |            |          
|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 shares on January 1 and April 3 |                                                                      |                                                   | 2,806,482                            |                            |         |             | 2,806,482  |          
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|                                                                                                                        
|Retained earnings                                                                                                        |                                                                      |                                                   | 1,100,322                            |                            |         |             | 1,586,283  |          
|                                                                                                                         |                                                                      |                                                   |                                      |                            |         |             |            |          
|                                                                                                                         |                                                                      |                                                   |                                      | Total shareholders equity |         |             | 3,906,804  |           |         |  | 4,392,765 | 
|                                                                                                                         |                                                                      |                                                   |                                      |                            |         |             |            |          
|Total Liabilities and Shareholders Equity                                                                               |                                                                      | $                                                 | 9,162,139                            |                            |         | $           | 10,024,632 |          
|                                                                                                                         |                                                                      |                                                   |                                      |                            |         |             |            |          

See notes to consolidated financial statements.

Page 4



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##### Table of Contents



SHOPSMITH INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF OPERATIONS

|                                            |                          |   |                    |                   |             |   |             |           |             |   |            |           |   |   |            |           |  
|------------------------------------------- | ------------------------ | - | ------------------ | ----------------- | ----------- | - | ----------- | --------- | ----------- | - | ---------- | --------- | - | - | ---------- | --------- | -
|                                            |                          |   | Three Months Ended | Nine Months Ended
|                                            |                          |   |                    |                   |            
|                                            |                          |   | January 1,         |                   | January 2,  |   | January 1,  |           | January 2, 
|                                            |                          |   | 2000               |                   | 1999        |   | 2000        |           | 1999       
|                                            |                          |   |                    |                   |             |   |             |           |            
|                                            |                          |   | (Unaudited)        |                   | (Unaudited) |   | (Unaudited) |           | (Unaudited)
|                                           
|                                           
|                                           
|                                           
|                                           
|                                           
|                                           
|                                           
|Net sales                                   |                          | $ | 4,954,240          |                   |             | $ | 4,025,426   |           |             | $ | 12,718,239 |           |   | $ | 10,974,469 |          
|                                           
|                                           
|                                           
|                                           
|Cost of products sold                       |                          |   | 2,225,453          |                   |             |   | 2,052,951   |           |             |   | 5,757,820  |           |   |   | 5,290,052  |          
|                                            |                          |   |                    |                   |             |   |             |           |             |   |            |           |   |   |            |          
|Gross margin                                |                          |   | 2,728,787          |                   |             |   | 1,972,475   |           |             |   | 6,960,419  |           |   |   | 5,684,417  |          
|                                           
|                                           
|                                           
|                                           
|Selling expenses                            |                          |   | 2,212,452          |                   |             |   | 1,980,885   |           |             |   | 6,077,436  |           |   |   | 4,952,026  |          
|                                           
|                                           
|                                           
|                                           
|Administrative expenses                     |                          |   | 429,632            |                   |             |   | 475,860     |           |             |   | 1,429,880  |           |   |   | 1,413,689  |          
|                                            |                          |   |                    |                   |             |   |             |           |             |   |            |           |   |   |            |          
|                                            | Total operating expenses |   |                    | 2,642,084         |             |   |             | 2,456,745 |             |   |            | 7,507,316 |   |   |            | 6,365,715 |  
|                                           
|                                           
|                                           
|                                           
|Income (loss) from operations               |                          |   | 86,703             |                   |             |   | (484,270    | )         |             |   | (546,897   | )         |   |   | (681,298   | )        
|                                           
|                                           
|                                           
|                                           
|Interest income                             |                          |   | 8,600              |                   |             |   | 22,669      |           |             |   | 34,725     |           |   |   | 82,036     |          
|                                           
|                                           
|                                           
|                                           
|Interest expense                            |                          |   | (67,553            | )                 |             |   |            |           |             |   | (202,303   | )         |   |   |           |          
|                                           
|                                           
|                                           
|                                           
|Other income, net                           |                          |   | 3,492              |                   |             |   | 1,060       |           |             |   | 10,514     |           |   |   | 10,819     |          
|                                            |                          |   |                    |                   |             |   |             |           |             |   |            |           |   |   |            |          
|Income (loss) before income taxes           |                          |   | 31,242             |                   |             |   | (460,541    | )         |             |   | (703,961   | )         |   |   | (588,443   | )        
|                                           
|                                           
|                                           
|                                           
|Income tax expense ( benefit)               |                          |   | 18,000             |                   |             |   | (142,708    | )         |             |   | (218,000   | )         |   |   | (187,090   | )        
|                                            |                          |   |                    |                   |             |   |             |           |             |   |            |           |   |   |            |          
|Net income (loss)                           |                          |   | 13,242             |                   |             |   | (317,833    | )         |             |   | (485,961   | )         |   |   | (401,353   | )        
|                                           
|                                           
|                                           
|                                           
|Retained earnings:                         
|                                           
|                                           
|                                           
|                                           
|                                            | Beginning                |   |                    | 1,087,080         |             |   |             | 2,215,832 |             |   |            | 1,586,283 |   |   |            | 2,299,352 |  
|                                            |                          |   |                    |                   |             |   |             |           |             |   |            |           |   |   |            |          
|                                            | Ending                   |   | $                  | 1,100,322         |             |   | $           | 1,897,999 |             |   | $          | 1,100,322 |   |   | $          | 1,897,999 |  
|                                            |                          |   |                    |                   |             |   |             |           |             |   |            |           |   |   |            |          
|Net income (loss) per common share
(Note 3)
|                                            | Basic                    |   | $                  | 0.01              |             |   | $           | (0.12     | )           |   | $          | (0.19     | ) |   | $          | (0.15     | )
|                                            |                          |   |                    |                   |             |   |             |           |             |   |            |           |   |   |            |          
|                                            | Diluted                  |   | $                  | 0.01              |             |   | $           | (0.12     | )           |   | $          | (0.19     | ) |   | $          | (0.15     | )
|                                            |                          |   |                    |                   |             |   |             |           |             |   |            |           |   |   |            |          

See notes to consolidated financial statements.

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##### Table of Contents



SHOPSMITH INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF CASH FLOW

|                                                  |                                                         |                                                                                        |                                                                      |          |                   |          |             |            |         |          |  
|------------------------------------------------- | ------------------------------------------------------- | -------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | -------- | ----------------- | -------- | ----------- | ---------- | ------- | -------- | -
|                                                  |                                                         |                                                                                        |                                                                      |          | Nine Months Ended
|                                                  |                                                         |                                                                                        |                                                                      |          |                  
|                                                  |                                                         |                                                                                        |                                                                      |          | January 1,        |          | January 2, 
|                                                  |                                                         |                                                                                        |                                                                      |          | 2000              |          | 1999       
|                                                  |                                                         |                                                                                        |                                                                      |          |                   |          |            
|                                                  |                                                         |                                                                                        |                                                                      |          | (Unaudited)       |          | (Unaudited)
|Cash flows from operating activities:            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Net income (loss)                                       |                                                                                        | $                                                                    | (485,961 | )                 |          | $           | (401,353   | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         | Adjustments to reconcile net income (loss) to
cash provided from operating activities:
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Depreciation and amortization                                        |          |                   | 208,968  |             |            |         | 147,800  |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Provision for doubtful accounts                                      |          |                   | 128,572  |             |            |         | 119,802  |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Deferred income taxes                                                |          |                   | (218,000 | )           |            |         | (182,971 | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Cash provided from (required for) changes
in assets and liabilities:
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Restricted cash                                                      |          |                   | (10,415  | )           |            |         | 164,580  |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Accounts receivable                                                  |          |                   | 126,849  |             |            |         | (50,078  | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Inventories                                                          |          |                   | (418,607 | )           |            |         | (512,156 | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Other assets                                                         |          |                   | (219,698 | )           |            |         | (43,626  | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Accounts payable and customer advances                               |          |                   | (336,028 | )           |            |         | (136,918 | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Other current liabilities                                            |          |                   | (104,631 | )           |            |         | (516,025 | )
|                                                  |                                                         |                                                                                        |                                                                      |          |                   |          |             |           
|Cash provided from (used in) operating activities |                                                         |                                                                                        | (1,328,951                                                           | )        |                   |          | (1,410,945  | )         
|                                                  |                                                         |                                                                                        |                                                                      |          |                   |          |             |           
|Cash flows from investing activities:            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Maturity of short-term investments                      |                                                                                        |                                                                      | 989,122  |                   |          |             | 1,828,911  |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Property additions                                      |                                                                                        |                                                                      | (99,871  | )                 |          |             | (3,134,050 | )      
|                                                  |                                                         |                                                                                        |                                                                      |          |                   |          |             |           
|Cash provided from (used in) investing activities |                                                         |                                                                                        | 889,251                                                              |          |                   |          | (1,305,139  | )         
|                                                  |                                                         |                                                                                        |                                                                      |          |                   |          |             |           
|Cash flows from financing activities:            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from long-term debt                            |                                                                                        |                                                                      |         |                   |          |             | 2,862,125  |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Common shares repurchased                               |                                                                                        |                                                                      |         |                   |          |             | 4,594      |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Payments on long-term debt and capital lease obligation |                                                                                        |                                                                      | (52,442  | )                 |          |             | (67,787    | )      
|                                                  |                                                         |                                                                                        |                                                                      |          |                   |          |             |           
|Cash provided from (used in) financing activities |                                                         |                                                                                        | (52,442                                                              | )        |                   |          | 2,798,932   |           
|                                                  |                                                         |                                                                                        |                                                                      |          |                   |          |             |           
|Net increase (decrease) in cash                   |                                                         |                                                                                        | (492,142                                                             | )        |                   |          | 82,848      |           
|                                                 
|                                                 
|                                                 
|                                                 
|Cash:                                            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         | Beginning                                                                              |                                                                      |          | 1,005,371         |          |             |            | 316,669 |         
|                                                  |                                                         |                                                                                        |                                                                      |          |                   |          |             |           
|                                                  |                                                         | Ending                                                                                 |                                                                      | $        | 513,229           |          |             | $          | 399,517 |         
|                                                  |                                                         |                                                                                        |                                                                      |          |                   |          |             |           

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 January 1, 2000 and January
2, 1999 to present the financial statements fairly. However, the results of
operations for the three months and nine months then ended are not
necessarily indicative of results for the fiscal years. The financial
statements and notes are presented as permitted by Form 10-Q, and do not
contain certain information included in the annual financial statements.
The financial statements accompanying this report should be read in
conjunction with the financial statements and notes thereto included in the
Annual Report to Shareholders for the year ended April 3, 1999.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | The provision for income taxes is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                              |       |   |                    |        |                   |   |          |          |        |   |          |          |   |   |          |          |  
|----------------------------- | ----- | - | ------------------ | ------ | ----------------- | - | -------- | -------- | ------ | - | -------- | -------- | - | - | -------- | -------- | -
|                              |       |   | Three Months Ended |        | Nine Months Ended
|                              |       |   |                    |        |                  
|                              |       |   | 1/1/00             |        | 1/2/99            |   | 1/1/00   |          | 1/2/99
|                              |       |   |                    |        |                   |   |          |          |       
|Income tax expense (benefit):
|                             
|                             
|                             
|                             
|Current                       |       | $ |                   |        |                   | $ |         |          |        | $ |         |          |   | $ |         |         
|                             
|                             
|                             
|                             
|Deferred                      |       |   | 18,000             |        |                   |   | (159,708 | )        |        |   | (218,000 | )        |   |   | (204,090 | )       
|                             
|                             
|                             
|                             
|Change in valuation allowance |       |   |                   |        |                   |   | 17,000   |          |        |   |         |          |   |   | 17,000   |         
|                              |       |   |                    |        |                   |   |          |          |        |   |          |          |   |   |          |         
|                              | Total |   | $                  | 18,000 |                   |   | $        | (142,708 | )      |   | $        | (218,000 | ) |   | $        | (187,090 | )
|                              |       |   |                    |        |                   |   |          |          |        |   |          |          |   |   |          |         



|   |  | Provisions for recoverable income taxes have been computed at statutory
rates. In the periods ending January 2, 1999 the recoverable tax provision
was reduced by a valuation allowance $17,000 for tax credits expiring in
1999. Resulting deferred tax assets amounting to $1,277,000 at January 1,
2000 and $1,059,000 at April 3, 1999 reflect the impact of temporary
differences between the amount of assets and liabilities recorded for
financial reporting purposes and such amounts as measured by tax laws and
regulations. The Company believes that it is more likely than not that
these assets are realizable and represent its best estimate based on the
available evidence as prescribed in SFAS 109. If the Company is unable to
generate sufficient income in the future through operating results, an
increase in the valuation allowance will be required through a charge to
expense.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|3. |  | Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share reflect 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 |           | Nine months ended
|                                  |  |                    |           |                  
|                                  |  | 1/1/00             |           | 1/2/99            |  | 1/1/00 |           | 1/2/99
|                                  |  |                    |           |                   |  |        |           |       
|Net income (loss)                 |  | $                  | 13,242    |                   |  | $      | (317,833  | )      |  | $ | (485,961  | ) |  | $ | (401,353  | )
|                                  |  |                    |           |                   |  |        |           |        |  |   |           |   |  |   |           |  
|Weighted average shares           |  |                    | 2,605,233 |                   |  |        | 2,602,970 |        |  |   | 2,605,233 |   |  |   | 2,600,661 |  
|                                 
|                                 
|                                 
|                                 
|Additional dilutive shares        |  |                    | 2,826     |                   |  |        |          |        |  |   |          |   |  |   |          |  
|                                  |  |                    |           |                   |  |        |           |        |  |   |           |   |  |   |           |  
|Total dilutive shares             |  |                    | 2,608,059 |                   |  |        | 2,602,970 |        |  |   | 2,605,233 |   |  |   | 2,600,661 |  
|                                  |  |                    |           |                   |  |        |           |        |  |   |           |   |  |   |           |  
|Basic earnings (loss) per share   |  | $                  | 0.01      |                   |  | $      | (0.12     | )      |  | $ | (0.19     | ) |  | $ | (0.15     | )
|                                  |  |                    |           |                   |  |        |           |        |  |   |           |   |  |   |           |  
|Diluted earnings (loss) per share |  | $                  | 0.01      |                   |  | $      | (0.12     | )      |  | $ | (0.19     | ) |  | $ | (0.15     | )
|                                  |  |                    |           |                   |  |        |           |        |  |   |           |   |  |   |           |  

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|4. |  | The Company is utilizing SFAS No. 130, Reporting Comprehensive Income.
This Statement establishes standards for reporting and displaying
comprehensive income and its components. Components of comprehensive
income, as it applies to the Company, would include the write-up or
write-down of securities held for sale to market value. The effects of such
adjustments to comprehensive income for fiscal 2000 and 1999 are not
material and do not affect the Companys reported results of operations or
financial position.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|5. |  | A revolving credit agreement expires on July 31, 2000. The agreement
provides for maximum short-term borrowing of $500,000 with interest charged
at one-half of one percent over the Banks prime rate. The agreement
requires compliance with certain minimum net worth, working capital and
other miscellaneous covenants. Substantially all tangible assets except for
land and building are pledged as collateral.                                                                                                             

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

Results of Operations

The Company earned $13,000 or $ .01 per diluted share in the most recent quarter
compared to a $318,000 loss ($.12 per diluted share) for the three months ended
January 2, 1999. Over the nine months ending on January 1, 2000 and January 2,
1999, the Company experienced net losses of $486,000 and $401,000 or $.19 and
$.15 per diluted share respectively.

Third quarter sales increased by 23% to $4,954,000 from $4,025,000 reported for
the same quarter in 1999. Sales moved upward on a nine-month basis to
$12,718,000  up by $1,744,000 or 16% from $10,974,000 of sales last year. These
increases relate to the Companys promotions and were achieved through expanded
demonstration sales efforts. Gross margins improved by $756,000 or 38% to
$2,729,000 for the most recent three months and to $6,960,000 from $5,684,000
experienced for the first nine months of last year. Such margin improvements
were the result of increased sales and improved profitable mix of products sold
in fiscal 2000 and also because of inventory loss provisions in 1999.

The Company continued to expand its promotional efforts in the third quarter as
total operating expenses increased by 8% to $2,642,000. Such expenses increased
by 18% for the year to date to $7,507,000 from $6,366,000 in the same nine
months of 1999. Net interest cost rose for the quarter and year to date due to
financing costs associated with the December 31, 1998 purchase of the Companys
6530 Poe Avenue facility. In addition, fewer idle funds were available for
investment during the third quarter and year to date.

Provisions for income taxes are based on anticipated annual effective tax rates.
A provision for Federal tax expense of $18,000 was recorded in the third quarter
of the current fiscal year compared to $143,000 of recoverable taxes in the
preceding year. For the years to date, a recoverable tax of $218,000 was
provided in the current fiscal year compared to $187,000 in fiscal 1999.

Liquidity and Financial Position

Cash used in operations for the nine months ended January 1, 2000 totaled
$1,329,000 compared to $1,411,000 a year ago. Net losses of $486,000 and $402,000 together with increases in inventory levels to meet additional product
demand and liquidation of current liabilities were the main reasons for cash
usage in both years. Maturing short-term investments of $989,000 and $1,829,000
were utilized in the current and past year respectively to fund the operating
cash requirements.

The Companys assets include $1,277,000 of deferred income tax assets at January
1, 2000. Presently, the Company believes that these assets are realizable and
represent managements best estimate based on the weight of available evidence
as prescribed in SFAS 109. Management will continue to evaluate these assets and
the need for additional valuation allowances based on near-term operating
results and longer-term projections. If the Company is unable to generate
sufficient operating income in the future, the valuation allowance will have to
be increased by means of a charge against operating results.

The current ratio was 1.99 to 1 at January 1, 2000 compared to 2.12 to 1 at the
beginning of the fiscal year. The debt to equity ratio increased slightly to
1.35 to 1 from 1.28 to 1 during that same period.

The Company returned to profitability in the third quarter of fiscal 2000 after
experiencing operating losses for the previous six quarters. Low profitability
or further losses will negatively affect the Companys liquidity both (a) as a
result of negative cash flow, and (b) by putting the Company in the position of
failing to satisfy the conditions applicable to drawing under the line of
credit.

Year 2000 Impact

The year 2000 issue was related to computer software utilizing two digits rather
than four to define the year. As a result, any of the Companys computer
programs or any of the Companys suppliers having date sensitive software could
have caused system failures or generation of incorrect data. No significant year
2000 issues have occurred through the current date.

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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: (a) the adequacy of operating cash
flows together with currently available working capital to finance the operating
needs of the Company and (b) generation of future taxable income to utilize
existing deferred tax assets.




Item 3. Quantitative and qualitative disclosures about market risk.

Not applicable.

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PART II. OTHER INFORMATION

Item 6.






|(a)  |  | Exhibits:                                                   
|---- |  | ------------------------------------------------------------
|    
|(27) |  | Financial Data Schedule for the period ended January 1, 2000
|    
|(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/ John R. Folkerth

John R. Folkerth
Chairman of the Board
President and Chief Executive Officer
| | ----------------------------------------------------------------------------------------------------------------



| | By /s/ Mark A. May

Mark A. May
Principal Financial and Accounting Officer
| | -------------------------------------------------------------------------------------

Date: February 11, 2000

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