##### 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
December 28, 2002 |  | 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    |  | (Zip Code)                       
|Executive Offices)       |  |                                  

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 the number of shares outstanding of each of the registrants classes
of common stock as of January 17, 2003.

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

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TABLE OF CONTENTS



|                                                                                                 |                                  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------------------ | -------------------------------- |  |  |  |  |  |  | 
|CONSOLIDATED BALANCE SHEETS                                                                     
|CONSOLIDATED BALANCE SHEETS                                                                     
|CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)                           
|SHOPSMITH INC. AND SUBSIDIARIES                      CONSOLIDATED STATEMENTS OF CASH FLOWS      
|SHOPSMITH, INC. AND SUBSIDIARIES                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations   
|                                                                                                 | Results of Operations           
|                                                                                                 | Liquidity and Financial Position
|                                                                                                 | Forward Looking Statements      
|Item 3. Quantitative and qualitative disclosures about market risk.                             
|Item 4. Controls and Procedures.                                                                
|PART II. OTHER INFORMATION                                                                      
|Item 6. Exhibits and Reports on Form 8-K                                                        
|SIGNATURES                                                                                      
|Exhibit 4.14 Promissory Note                                                                    
|Exhibit 99.2 Certification                                                                      
|Exhibit 99.3 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-
December 28, 2002 and March 30, 2002                                                                                  |       |      | 3-4 | 
|                               |                                                                                               |                                                                                                                                                    |       |     
|                               |                                                                                               | Consolidated Statements of Operations and
Retained Earnings (Deficit)  Three Months and Nine Months
Ended December 28, 2002 and December 29, 2001 |       |      | 5   | 
|                               |                                                                                               |                                                                                                                                                    |       |     
|                               |                                                                                               | Consolidated Statements of Cash Flows-
Nine Months Ended December 28, 2002 and December 29, 2001                                                   |       |      | 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    |     
|                               |                                                                                               |                                                                                                                                                    |       |     
|Certifications                 |                                                                                               |                                                                                                                                                    | 13-14 |     

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##### Table of Contents






SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                                                                      |                                                    |                                                    |           |                      |           |              |           |           |           |  |           | 
|------------------------------------------------------------------------------------- | -------------------------------------------------- | -------------------------------------------------- | --------- | -------------------- | --------- | ------------ | --------- | --------- | --------- |  | --------- | 
|                                                                                      |                                                    |                                                    |           |                      |           | December 28, |           | March 30,
|                                                                                      |                                                    |                                                    |           |                      |           | 2002         |           | 2002     
|                                                                                      |                                                    |                                                    |           |                      |           |              |           |          
|                                                                                      |                                                    |                                                    |           |                      |           | (Unaudited)  |           |           |           | 
|ASSETS                                                                                |                                                    |                                                    |           |                      |           |              |           |          
|Current Assets:                                                                       |                                                    |                                                    |           |                      |           |              |           |          
|                                                                                      | Cash and equivalents                               |                                                    | $         | 825                  |           |              | $         | 76,324    |          
|                                                                                      | Restricted cash                                    |                                                    |           | 24,940               |           |              |           | 151,585   |          
|                                                                                      | Accounts receivable:                               |                                                    |           |                      |           |              |           |           |          
|                                                                                      |                                                    | Trade, less allowance for doubtful accounts:       |           |                      |           |              |           |           |           | 
|                                                                                      |                                                    | $909,539 on December 28, and $774,708 on March 30, |           |                      | 1,680,879 |              |           |           | 1,642,366 | 
|                                                                                      | Inventories                                        |                                                    |           |                      |           |              |           |           |          
|                                                                                      |                                                    | Finished products                                  |           |                      | 986,856   |              |           |           | 875,888   | 
|                                                                                      |                                                    | Raw materials and work in process                  |           |                      | 1,352,930 |              |           |           | 1,427,369 | 
|                                                                                      |                                                    |                                                    |           |                      |           |              |           |          
|                                                                                      |                                                    |                                                    |           | Total inventories    |           |              | 2,339,786 |           |           |  | 2,303,257 | 
|                                                                                      | Prepaid expenses                                   |                                                    |           | 177,175              |           |              |           | 218,660   |          
|                                                                                      |                                                    |                                                    |           |                      |           |              |           |          
|                                                                                      |                                                    |                                                    |           | Total current assets |           |              | 4,223,605 |           |           |  | 4,392,192 | 
|Properties:                                                                           |                                                    |                                                    |           |                      |           |              |           |          
|                                                                                      | Land, building and improvements                    |                                                    |           | 3,148,348            |           |              |           | 3,143,908 |          
|                                                                                      | Machinery, equipment and tooling                   |                                                    |           | 6,722,321            |           |              |           | 6,714,886 |          
|                                                                                      |                                                    |                                                    |           |                      |           |              |           |          
|                                                                                      |                                                    |                                                    |           | Total cost           |           |              | 9,870,669 |           |           |  | 9,858,794 | 
|                                                                                      | Less accumulated depreciation and amortization     |                                                    |           | 7,174,414            |           |              |           | 7,029,128 |          
|                                                                                      |                                                    |                                                    |           |                      |           |              |           |          
|                                                                                      |                                                    |                                                    |           | Net properties       |           |              | 2,696,255 |           |           |  | 2,829,666 | 
|Long-term portion of accounts receivable
trade, less allowance for doubtful accounts: |                                                    |                                                    |           |                      |           |              |           |          
|                                                                                      | $186,248 on December 28, and $116,432 on March 30, |                                                    |           | 529,692              |           |              |           | 215,476   |          
|Other assets                                                                          |                                                    |                                                    | 2,303     |                      |           |              | 2,303     |          
|                                                                                      |                                                    |                                                    |           |                      |           |              |           |          
|Total assets                                                                          |                                                    | $                                                  | 7,451,855 |                      |           | $            | 7,439,637 |          
|                                                                                      |                                                    |                                                    |           |                      |           |              |           |          

Continued

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##### Table of Contents






SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                            |                                                                                                                                                                                                    |                                                   |                            |                                      |         |              |           |           |         |           |  | 
|------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | -------------------------- | ------------------------------------ | ------- | ------------ | --------- | --------- | ------- | --------- |  | 
|                                            |                                                                                                                                                                                                    |                                                   |                            |                                      |         | December 28, |           | March 30,
|                                            |                                                                                                                                                                                                    |                                                   |                            |                                      |         | 2002         |           | 2002     
|                                            |                                                                                                                                                                                                    |                                                   |                            |                                      |         |              |           |          
|                                            |                                                                                                                                                                                                    |                                                   |                            |                                      |         | (Unaudited)  |           |           |         |          
|                                            |                                                                                                                                                                                                    |                                                   |                            | LIABILITIES AND SHAREHOLDERS EQUITY |         |              |           |           |         |           |  | 
|Current liabilities:                        |                                                                                                                                                                                                    |                                                   |                            |                                      |         |              |           |          
|                                            | Accounts payable                                                                                                                                                                                   |                                                   | $                          | 1,529,211                            |         |              | $         | 1,582,636 |        
|                                            | Note payable                                                                                                                                                                                       |                                                   |                            | 400,000                              |         |              |           | 400,000   |        
|                                            | Current portion of long-term debt and capital lease obligation                                                                                                                                     |                                                   |                            | 106,235                              |         |              |           | 104,836   |        
|                                            | Customer advances                                                                                                                                                                                  |                                                   |                            | 84,582                               |         |              |           | 126,181   |        
|                                            | Accrued liabilities:                                                                                                                                                                               |                                                   |                            |                                      |         |              |           |           |        
|                                            |                                                                                                                                                                                                    | Compensation, employee benefits and payroll taxes |                            |                                      | 399,737 |              |           |           | 289,559 |          
|                                            |                                                                                                                                                                                                    | Sales taxes payable                               |                            |                                      | 56,136  |              |           |           | 80,570  |          
|                                            |                                                                                                                                                                                                    | Accrued recourse liability                        |                            |                                      | 131,444 |              |           |           | 147,786 |          
|                                            |                                                                                                                                                                                                    | Accrued expenses                                  |                            |                                      | 277,427 |              |           |           | 257,544 |          
|                                            |                                                                                                                                                                                                    | Other                                             |                            |                                      | 70,940  |              |           |           | 75,470  |          
|                                            |                                                                                                                                                                                                    |                                                   |                            |                                      |         |              |           |          
|                                            |                                                                                                                                                                                                    |                                                   | Total current liabilities  |                                      |         | 3,055,712    |           |           |         | 3,064,582 | 
|Long-term debt and capital lease obligation |                                                                                                                                                                                                    |                                                   | 2,400,432                  |                                      |         |              | 2,479,344 |          
|                                            |                                                                                                                                                                                                    |                                                   |                            |                                      |         |              |           |          
|                                            |                                                                                                                                                                                                    |                                                   | Total liabilities          |                                      |         | 5,456,144    |           |           |         | 5,543,926 | 
|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 December 28, and March 30, |                                                   |                            | 2,806,482                            |         |              |           | 2,806,482 |        
|                                            | Deficit                                                                                                                                                                                            |                                                   |                            | (810,771                             | )       |              |           | (910,771  | )      
|                                            |                                                                                                                                                                                                    |                                                   |                            |                                      |         |              |           |          
|                                            |                                                                                                                                                                                                    |                                                   | Total shareholders equity |                                      |         | 1,995,711    |           |           |         | 1,895,711 | 
|                                            |                                                                                                                                                                                                    |                                                   |                            |                                      |         |              |           |          
|Total liabilities and shareholders equity  |                                                                                                                                                                                                    | $                                                 | 7,451,855                  |                                      |         | $            | 7,439,637 |          
|                                            |                                                                                                                                                                                                    |                                                   |                            |                                      |         |              |           |          

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 |           | Nine Months Ended
|                                                             |                          |   |                    |           |                  
|                                                             |                          |   | December 28,       |           | December 29,      |   | December 28, |           | December 29,
|                                                             |                          |   | 2002               |           | 2001              |   | 2002         |           | 2001        
|                                                             |                          |   |                    |           |                   |   |              |           |             
|                                                             |                          |   | (Unaudited)        |           | (Unaudited)       |   | (Unaudited)  |           | (Unaudited) 
|Net sales                                                    |                          | $ | 3,986,866          |           |                   | $ | 4,617,061    |           |              | $ | 10,608,638 |           |   | $ | 10,943,202 |          
|Cost of products sold                                        |                          |   | 2,039,175          |           |                   |   | 2,387,571    |           |              |   | 5,192,364  |           |   |   | 5,362,391  |          
|                                                             |                          |   |                    |           |                   |   |              |           |              |   |            |           |   |   |            |          
|Gross margin                                                 |                          |   | 1,947,691          |           |                   |   | 2,229,490    |           |              |   | 5,416,274  |           |   |   | 5,580,811  |          
|Selling expenses                                             |                          |   | 1,446,248          |           |                   |   | 1,901,997    |           |              |   | 3,919,028  |           |   |   | 4,969,104  |          
|Administrative expenses                                      |                          |   | 456,423            |           |                   |   | 404,047      |           |              |   | 1,327,745  |           |   |   | 1,324,924  |          
|                                                             |                          |   |                    |           |                   |   |              |           |              |   |            |           |   |   |            |          
|                                                             | Total operating expenses |   |                    | 1,902,671 |                   |   |              | 2,306,044 |              |   |            | 5,246,773 |   |   |            | 6,294,028 |  
|Income (loss) from operations                                |                          |   | 45,020             |           |                   |   | (76,554      | )         |              |   | 169,501    |           |   |   | (713,217   | )        
|Non-recurring gain from demutualization
of insurance company |                          |   |                   |           |                   |   | 153,381      |           |              |   | 95,462     |           |   |   | 153,381    |          
|Interest income                                              |                          |   | 35,658             |           |                   |   | 20,218       |           |              |   | 85,902     |           |   |   | 53,996     |          
|Interest expense                                             |                          |   | 82,664             |           |                   |   | 65,645       |           |              |   | 255,481    |           |   |   | 189,911    |          
|Other income, net                                            |                          |   | 1,986              |           |                   |   | 2,029        |           |              |   | 4,616      |           |   |   | 8,784      |          
|                                                             |                          |   |                    |           |                   |   |              |           |              |   |            |           |   |   |            |          
|Income (loss) before taxes                                   |                          |   |                   |           |                   |   | 33,429       |           |              |   | 100,000    |           |   |   | (686,967   | )        
|Income tax expense                                           |                          |   |                   |           |                   |   |             |           |              |   |           |           |   |   |           |          
|                                                             |                          |   |                    |           |                   |   |              |           |              |   |            |           |   |   |            |          
|Net income (loss)                                            |                          |   |                   |           |                   |   | 33,429       |           |              |   | 100,000    |           |   |   | (686,967   | )        
|Retained earnings:                                           |                          |   |                    |           |                   |   |              |           |              |   |            |           |   |   |            |          
|                                                             | Beginning                |   |                    | (810,771  | )                 |   |              | 159,106   |              |   |            | (910,771  | ) |   |            | 879,502   |  
|                                                             |                          |   |                    |           |                   |   |              |           |              |   |            |           |   |   |            |          
|                                                             | Ending                   |   | $                  | (810,771  | )                 |   | $            | 192,535   |              |   | $          | (810,771  | ) |   | $          | 192,535   |  
|                                                             |                          |   |                    |           |                   |   |              |           |              |   |            |           |   |   |            |          
|Net income (loss) per common share
(Note 3)                  |                          |   |                    |           |                   |   |              |           |              |   |            |           |   |   |            |          
|                                                             | Basic                    |   | $                  |          |                   |   | $            | 0.01      |              |   | $          | 0.04      |   |   | $          | (0.26     | )
|                                                             |                          |   |                    |           |                   |   |              |           |              |   |            |           |   |   |            |          
|                                                             | Diluted                  |   | $                  |          |                   |   | $            | 0.01      |              |   | $          | 0.04      |   |   | $          | (0.26     | )
|                                                             |                          |   |                    |           |                   |   |              |           |              |   |            |           |   |   |            |          

See notes to consolidated financial statements.

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##### Table of Contents






SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                  |                                                                                        |                                        |         |                   |          |              |          |          |          |  
|------------------------------------------------- | -------------------------------------------------------------------------------------- | -------------------------------------- | ------- | ----------------- | -------- | ------------ | -------- | -------- | -------- | -
|                                                  |                                                                                        |                                        |         | Nine Months Ended
|                                                  |                                                                                        |                                        |         |                  
|                                                  |                                                                                        |                                        |         | December 28,      |          | December 29,
|                                                  |                                                                                        |                                        |         | 2002              |          | 2001        
|                                                  |                                                                                        |                                        |         |                   |          |             
|                                                  |                                                                                        |                                        |         | (Unaudited)       |          | (Unaudited) 
|                                                  |                                                                                        |                                        |         |                   |          |             
|Cash flows from operating activities:             |                                                                                        |                                        |         |                   |          |              |          |         
|Net income (loss)                                 |                                                                                        | $                                      | 100,000 |                   |          | $            | (686,967 | )       
|                                                  | Adjustments to reconcile net income (loss)
to cash provided from operating activities: |                                        |         |                   |          |              |          |          |         
|                                                  | Depreciation and amortization                                                          |                                        |         | 145,286           |          |              |          | 187,678  |         
|                                                  | Stock proceeds from Insurance Demutualization                                          |                                        |         |                  |          |              |          | (153,381 | )       
|                                                  | Provision for doubtful accounts                                                        |                                        |         | 189,813           |          |              |          | 195,027  |         
|                                                  | Cash provided from (required for) changes in assets and liabilities:                   |                                        |         |                   |          |              |          |          |         
|                                                  |                                                                                        | Restricted cash                        |         |                   | 126,645  |              |          |          | 174,718  |  
|                                                  |                                                                                        | Accounts receivable                    |         |                   | (542,542 | )            |          |          | (824,655 | )
|                                                  |                                                                                        | Inventories                            |         |                   | (36,529  | )            |          |          | (501,064 | )
|                                                  |                                                                                        | Other assets                           |         |                   | 41,485   |              |          |          | 170,020  |  
|                                                  |                                                                                        | Accounts payable and customer advances |         |                   | (95,024  | )            |          |          | 860,805  |  
|                                                  |                                                                                        | Other current liabilities              |         |                   | 84,755   |              |          |          | (43,884  | )
|                                                  |                                                                                        |                                        |         |                   |          |              |          |         
|Cash provided from (used in) operating activities |                                                                                        |                                        | 13,889  |                   |          |              | (621,703 | )       
|Cash flows from investing activities:             |                                                                                        |                                        |         |                   |          |              |          |         
|                                                  | Property additions                                                                     |                                        |         | (11,875           | )        |              |          | (69,069  | )       
|                                                  |                                                                                        |                                        |         |                   |          |              |          |         
|Cash used in investing activities                 |                                                                                        |                                        | (11,875 | )                 |          |              | (69,069  | )       
|Cash flows from financing activities:             |                                                                                        |                                        |         |                   |          |              |          |         
|                                                  | Increase in revolving loan                                                             |                                        |         |                  |          |              |          | 400,000  |         
|                                                  | Payments on long-term debt and capital lease obligation                                |                                        |         | (77,513           | )        |              |          | (44,265  | )       
|                                                  |                                                                                        |                                        |         |                   |          |              |          |         
|Cash provided from (used in) financing activities |                                                                                        |                                        | (77,513 | )                 |          |              | 355,735  |         
|                                                  |                                                                                        |                                        |         |                   |          |              |          |         
|Net decrease in cash                              |                                                                                        |                                        | (75,499 | )                 |          |              | (335,037 | )       
|Cash:                                             |                                                                                        |                                        |         |                   |          |              |          |         
|                                                  | At beginning of period                                                                 |                                        |         | 76,324            |          |              |          | 651,530  |         
|                                                  |                                                                                        |                                        |         |                   |          |              |          |         
|                                                  | At end of period                                                                       |                                        | $       | 825               |          |              | $        | 316,493  |         
|                                                  |                                                                                        |                                        |         |                   |          |              |          |         

See notes to consolidated financial statements.





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##### Table of Contents



|                                          |  |                    |   |                   |  |              |        |              |  |   |         |  |  |   |          |  
|----------------------------------------- |  | ------------------ | - | ----------------- |  | ------------ | ------ | ------------ |  | - | ------- |  |  | - | -------- | -
|                                          |  | Three Months Ended |   | Nine Months Ended
|                                          |  |                    |   |                  
|                                          |  | December 28,       |   | December 29,      |  | December 28, |        | December 29,
|                                          |  | 2002               |   | 2001              |  | 2002         |        | 2001        
|                                          |  |                    |   |                   |  |              |        |             
|Income (loss) before income taxes         |  | $                  |  |                   |  | $            | 33,429 |              |  | $ | 100,000 |  |  | $ | (686,967 | )
|                                          |  |                    |   |                   |  |              |        |              |  |   |         |  |  |   |          |  
|Provision for (recoverable) income taxes: |  |                    |   |                   |  |              |        |              |  |   |         |  |  |   |          |  
|Income tax benefit (expense)              |  | $                  |  |                   |  | $            |       |              |  | $ |        |  |  | $ |         |  
|                                          |  |                    |   |                   |  |              |        |              |  |   |         |  |  |   |          |  





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##### Table of Contents



|                                |  |                    |           |                   |  |              |           |              |  |   |           |  |  |   |           |  
|------------------------------- |  | ------------------ | --------- | ----------------- |  | ------------ | --------- | ------------ |  | - | --------- |  |  | - | --------- | -
|                                |  | Three Months Ended |           | Nine Months Ended
|                                |  | December 28,       |           | December 29,      |  | December 28, |           | December 29,
|                                |  | 2002               |           | 2001              |  | 2002         |           | 2001        
|                                |  |                    |           |                   |  |              |           |             
|Net income (loss)               |  | $                  |          |                   |  | $            | 33,429    |              |  | $ | 100,000   |  |  | $ | (686,967  | )
|                                |  |                    |           |                   |  |              |           |              |  |   |           |  |  |   |           |  
|Weighted average shares         |  |                    | 2,605,233 |                   |  |              | 2,605,233 |              |  |   | 2,605,233 |  |  |   | 2,605,233 |  
|Additional dilutive shares      |  |                    |          |                   |  |              | 8,400     |              |  |   |          |  |  |   |          |  
|                                |  |                    |           |                   |  |              |           |              |  |   |           |  |  |   |           |  
|Total dilutive shares           |  |                    | 2,605,233 |                   |  |              | 2,613,633 |              |  |   | 2,605,233 |  |  |   | 2,605,233 |  
|                                |  |                    |           |                   |  |              |           |              |  |   |           |  |  |   |           |  
|Basic income (loss) per share   |  | $                  |          |                   |  | $            | 0.01      |              |  | $ | 0.04      |  |  | $ | (0.26     | )
|                                |  |                    |           |                   |  |              |           |              |  |   |           |  |  |   |           |  
|Diluted income (loss) per share |  | $                  |          |                   |  | $            | 0.01      |              |  | $ | 0.04      |  |  | $ | (0.26     | )
|                                |  |                    |           |                   |  |              |           |              |  |   |           |  |  |   |           |  





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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 December 28, 2002 and
December 29, 2001 to present the financial statements fairly. However,
the results of operations for the nine 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 March 30, 2002.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | The provision for income taxes is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

<Insert TaxProv tab here>



|   |  | Taxable income for the nine months ended December 28, 2002 was offset by a
net operating loss carry forward (The remaining net operating loss carry
forward asset of $1,376,000 was not shown as an asset because of a valuation
allowance against the Companys ability to realize the tax benefit).                                                                   
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|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:

<Insert EPS tab here>



| |  | There were no additional dilutive shares included in the computation for the
periods ended December 28, 2002 and for the quarter ended December 29, 2001
because the stock options were anti-dilutive.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|4. |  | During fiscal 2002, 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
December 28, 2002 and March 30, 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.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|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. The agreement requires compliance with certain net income, net
worth, and miscellaneous covenants. Substantially all personal property is
pledged as collateral.                                                                                                                                                                
|  
|6. |  | One customer exceeded the 10% level of consolidated net sales. A major
retailer represented 37% of net sales for the quarter ended December 28,
2002 and 33% of net sales for the nine months ended December 28, 2002.                                                                                                                                                                                                                                                                                                                                                                                                         

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##### Table of Contents






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




Results of Operations

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 done 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.

Third quarter sales decreased to $3,987,000 or 13.6% from $4,617,000 generated
a year ago. This decrease occurred primarily in our demonstration sales of the
Mark V, other than demonstrations done at Lowes stores. Year to date sales
decreased to $10,609,000 or 3.1% from $10,943,000 last year.

Gross margin rates increased by one half of a percentage point compared to the
same quarter last year, and by 0.1% on a year to date basis. Operating expenses
were reduced by $403,000 to $1,903,000 in the third quarter from $2,306,000 in
last years third quarter. On a year to date basis, operating expenses dropped
by $1,143,000 to $5,151,000 from $6,294,000 the prior year. Operating expenses
were reduced by improved expense control on Mark V sales events, as well as
through reductions in compensation costs. Employee benefit costs were reduced
by $95,000 year to date, due to proceeds from the Anthem insurance
demutualization.

During the fiscal year ending March 2003, Shopsmith has implemented a employee
salary reduction plan. The plan took effect May 19, 2002 and continued until
December 28, 2002. Salary reductions of participants (officers, managers and
certain key employees) aggregated $38,000 and $91,000 during the three and nine
months ended December 28, 2002, respectively. As part of this plan, fiscal 2003
pre-tax income above $100,000 will be used to return the amount of the
reduction and to pay an additional incentive equal to the amount of the
reduction, as income permits. The salary reductions were restored at the end
of the Companys third quarter. An expense of $147,000 has been accrued based
on year to date results before the offsetting accrual for exceeding $100,000.
The next $35,000 of additional earnings in the fourth quarter of fiscal 2003
will be offset by increases to the accrual for payment returning the salary
reduction and paying the incentive amounts. If the plan had not been in effect
for the three and nine months ended December 28, 2002, results would have been
$73,000 and $156,000, respectively.

Provisions for recoverable Federal income taxes ($0 in both FY2003 and FY 2002)
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 the net
loss carryforwards.

Because of the factors above, a net income of $0 or $.00 per diluted share was
earned in the quarter ended December 28, 2002 compared to a net income of
$33,000 or $.01 per diluted share for the same period of last year. For the
year to date, net income was $100,000 or $.04 per diluted share compared to a
net loss of $687,000 or $.26 per diluted share for the same period last year.




Liquidity and Financial Position

Cash provided from operations totaled $14,000 in the current year compared with
a usage of $622,000 for the same period of the preceding year. The year to
date income of $100,000 along with the adjustments for non-cash items, such as
depreciation and the provision for doubtful accounts, offset by an increase in
receivables explain the change in cash for the period.

The current ratio was 1.38 to 1 at December 28, 2002 compared to 1.43 to 1 at
the beginning of the current fiscal year. The debt to equity ratio decreased
to 2.73 to 1 from 2.92 to 1 at March 30, 2002.

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 December 28, 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.

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. The agreement requires
compliance with certain net income, net worth, and miscellaneous covenants.
Substantially all personal property is pledged as collateral.

In 1999, the Company purchased the building it had been leasing. The seller
financed the building purchase. The financing agreement provided for a $100,000
down payment and a secured mortgage note for $2,800,000 at an 8.75% interest
rate. The note was payable in monthly

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##### Table of Contents



installments of $25,785 with the balance being due and payable in full on January 1,
2003. In March 2002, the agreement was amended to continue the $25,785 monthly
payments of principal and interest until January 1, 2006 at which time the
scheduled balance of approximately $2,180,000 will become due and payable.




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) the demand loan extended to
the Company by Mr. John R. Folkerth (as described above) could be called prior
to the Company being in a position to repay or refinance the loan; and (iii)
cancellation by Lowes of the in-store sales program.

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##### Table of Contents






Item 3. Quantitative and qualitative disclosures about market risk.



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




Item 4. 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 systems 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.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents






PART II. OTHER INFORMATION




Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:



| |                                                                             
| | ----------------------------------------------------------------------------
| | 4. Instruments Defining the Rights of Security Holders,
Including Indentures



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | 4.14     Promissory Note and Loan Agreement with Provident
Bank dated December 31, 2002



| |                        
| | -----------------------
| | 99. Additional Exhibits



| |                                                                                
| | -------------------------------------------------------------------------------
| | 99.2     Certification of the form 10-Q by John R. Folkerth,
the Companys CEO.
|
| | 99.3     Certification of the form 10-Q by Mark A. May, the
Companys CFO.     

(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: February 10, 2003

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##### Table of Contents



I, John R. Folkerth, certify that:



| |  | 1. I have reviewed this quarterly report on Form 10-Q of Shopsmith, Inc.;                                                                                                                                                                                                                                                       
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 2. Based on my knowledge, this quarterly report does not contain any
untrue statements of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
|
| |  | 3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for the periods presented in the
quarterly report;                    
|
| |  | 4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                    



| |  |  | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | b) evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| |  |  | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



| |  | 5. The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        



| |  | 6. The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |       |                                                                            |  | 
| | ----- | -------------------------------------------------------------------------- |  | 
| | Date: | February 10, 2003                                                         
| |       |                                                                            |  | 
| | By:   | /s/ John
R. Folkerth
John R. Folkerth
Chairman and Chief Executive Officer

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##### Table of Contents





| |  | I, Mark A. May, certify that:                                                                                                                                                                                                                                                                                                   
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 1. I have reviewed this quarterly report on Form 10-Q of Shopsmith, Inc.;                                                                                                                                                                                                                                                       
|
| |  | 2. Based on my knowledge, this quarterly report does not contain any
untrue statements of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
|
| |  | 3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for the periods presented in the
quarterly report;                    
|
| |  | 4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                    



| |  |  | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | b) evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| |  |  | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



| |  | 5. The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        



| |  | 6. The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |       |  |                             | 
| | ----- |  | --------------------------- | 
| | Date: |  | February 10, 2003          
| |       |  |                             | 
| | By:   |  | /s/ Mark A. May
Mark A. May

Vice President of Finance and Treasurer

Page 14