TABLE OF CONTENTS




|                                                                                              |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|Item 1. 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                           
|Item 4. Submission of Matters to a Vote of Shareholders                                      
|Item 6. Exhibits and Reports on form 8-K                                                     



---



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
October 2, 1999 |  | Commission File Number   0-9318

SHOPSMITH, INC.

---



|                         |  |                                     
|------------------------ |  | ------------------------------------
|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 October 20,1999.

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

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-                                                                                          
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                                                                                        | October 2, 1999 and April 3, 1999 |                                                                |     | 3-4      |  
|                              
|                              
|                              
|                              
|                              
|                               |                                                                                               | Statements of Consolidated Operations and
Retained Earnings  Three and Six Months
October 2, 1999 and October 3, 1998 |                                   |                                                                | 5   |         
|                              
|                              
|                              
|                              
|                              
|                               |                                                                                               | Consolidated Statements of Cash Flows-                                                                                
|                              
|                              
|                              
|                              
|                               |                                                                                               |                                                                                                                        |                                   | Three and Six Months Ended October 2, 1999 and
October 3, 1998 |     |          | 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                                |                                                               

2



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##### Table of Contents



SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                               |                                                |                                              |                                               |                      |  |             |            |           |  |         |           | 
|------------------------------ | ---------------------------------------------- | -------------------------------------------- | --------------------------------------------- | -------------------- |  | ----------- | ---------- | --------- |  | ------- | --------- | 
|                               |                                                |                                              |                                               |                      |  | October 2,  |            | April 3, 
|                               |                                                |                                              |                                               |                      |  | 1999        |            | 1999     
|                               |                                                |                                              |                                               |                      |  |             |            |          
|                               |                                                |                                              |                                               |                      |  | (Unaudited)
|                               |                                                |                                              |                                               | ASSETS              
|                              
|                              
|                              
|                              
|Current Assets:               
|                              
|                              
|                              
|                              
|                               | Cash                                           |                                              | $                                             | 347,083              |  |             | $          | 1,005,371 | 
|                              
|                              
|                              
|                              
|                               | Restricted cash                                |                                              |                                               | 104,189              |  |             |            | 101,249   | 
|                              
|                              
|                              
|                              
|                               | Short-term investments                         |                                              |                                               |                     |  |             |            | 989,122   | 
|                              
|                              
|                              
|                              
|                               | Accounts receivable:                          
|                              
|                              
|                              
|                              
|                               |                                                | Trade, less allowance for doubtful accounts:
|                              
|                              
|                              
|                              
|                               |                                                |                                              | $458,733 on October 2 and $450,677 on April 3 |                      |  | 527,603     |            |           |  | 758,548 |          
|                              
|                              
|                              
|                              
|                               | Inventories                                    |                                              |                                               | 2,544,781            |  |             |            | 2,410,908 | 
|                              
|                              
|                              
|                              
|                               | Deferred income taxes (Note 2)                 |                                              |                                               | 473,000              |  |             |            | 475,000   | 
|                              
|                              
|                              
|                              
|                               | Prepaid expenses                               |                                              |                                               | 532,791              |  |             |            | 225,157   | 
|                               |                                                |                                              |                                               |                      |  |             |            |          
|                               |                                                |                                              |                                               | Total current assets |  |             | 4,529,447  |           |  |         | 5,965,355 | 
|                               |                                                |                                              |                                               |                      |  |             |            |          
|Properties:                   
|                              
|                              
|                              
|                              
|                               | Land, building and improvements                |                                              |                                               | 3,161,199            |  |             |            | 3,151,407 | 
|                              
|                              
|                              
|                              
|                               | Machinery, equipment and tooling               |                                              |                                               | 6,571,176            |  |             |            | 6,505,258 | 
|                               |                                                |                                              |                                               |                      |  |             |            |          
|                               |                                                |                                              |                                               | Total cost           |  |             | 9,732,375  |           |  |         | 9,656,665 | 
|                              
|                              
|                              
|                              
|                               | Less accumulated depreciation and
amortization |                                              |                                               | 6,334,445            |  |             |            | 6,200,696 | 
|                               |                                                |                                              |                                               |                      |  |             |            |          
|                              
|                              
|                              
|                              
|                               |                                                |                                              |                                               | Net properties       |  |             | 3,397,930  |           |  |         | 3,455,969 | 
|                               |                                                |                                              |                                               |                      |  |             |            |          
|                              
|                              
|                              
|                              
|Deferred income taxes (Note 2) |                                                |                                              | 822,000                                       |                      |  |             | 584,000    |          
|                               |                                                |                                              |                                               |                      |  |             |            |          
|Other assets                   |                                                |                                              | 19,311                                        |                      |  |             | 19,308     |          
|                               |                                                |                                              |                                               |                      |  |             |            |          
|Total assets                   |                                                | $                                            | 8,768,688                                     |                      |  | $           | 10,024,632 |          
|                               |                                                |                                              |                                               |                      |  |             |            |          

Continued

3



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##### Table of Contents



SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                            |                                                                |                                                                                        |                                      |         |             |           |            |           |           |           | 
|------------------------------------------- | -------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------------------------------------ | ------- | ----------- | --------- | ---------- | --------- | --------- | --------- | 
|                                            |                                                                |                                                                                        |                                      |         | October 3,  |           | April 3,  
|                                            |                                                                |                                                                                        |                                      |         | 1999        |           | 1999      
|                                            |                                                                |                                                                                        |                                      |         |             |           |           
|                                            |                                                                |                                                                                        |                                      |         | (Unaudited)
|                                            |                                                                |                                                                                        | LIABILITIES AND SHAREHOLDERS EQUITY
|                                           
|                                           
|                                           
|                                           
|Current Liabilities:                       
|                                           
|                                           
|                                           
|                                           
|                                            | Accounts payable                                               |                                                                                        | $                                    | 748,759 |             |           | $          | 1,342,957 |          
|                                           
|                                           
|                                           
|                                           
|                                            | Current portion of long-term debt and
capital lease obligation |                                                                                        |                                      | 81,219  |             |           |            | 81,219    |          
|                                           
|                                           
|                                           
|                                           
|                                            | Customer advances                                              |                                                                                        |                                      | 16,422  |             |           |            | 25,788    |          
|                                           
|                                           
|                                           
|                                           
|                                            | Accrued liabilities:                                          
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                | Compensation, employee benefits and
payroll taxes                                      |                                      |         | 266,130     |           |            |           | 377,453   |          
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                | Sales taxes payable                                                                    |                                      |         | 98,049      |           |            |           | 187,020   |          
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                | Accrued recourse liability                                                             |                                      |         | 408,835     |           |            |           | 333,265   |          
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                | Accrued expenses                                                                       |                                      |         | 292,660     |           |            |           | 309,000   |          
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                | Other                                                                                  |                                      |         | 181,367     |           |            |           | 158,356   |          
|                                            |                                                                |                                                                                        |                                      |         |             |           |            |          
|                                            |                                                                |                                                                                        | Total current liabilities            |         |             | 2,093,441 |            |           |           | 2,815,058 | 
|                                           
|                                           
|                                           
|                                           
|Long-term debt and capital lease obligation |                                                                |                                                                                        | 2,781,685                            |         |             |           | 2,816,809  |          
|                                            |                                                                |                                                                                        |                                      |         |             |           |            |          
|                                            |                                                                |                                                                                        | Total liabilities                    |         |             | 4,875,126 |            |           |           | 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 October 3 and April 3 |                                      |         | 2,806,482   |           |            |           | 2,806,482 |          
|                                           
|                                           
|                                           
|                                           
|Retained earnings                           |                                                                |                                                                                        | 1,087,080                            |         |             |           | 1,586,283  |          
|                                            |                                                                |                                                                                        |                                      |         |             |           |            |          
|                                            |                                                                |                                                                                        | Total shareholders equity           |         |             | 3,893,562 |            |           |           | 4,392,765 | 
|                                            |                                                                |                                                                                        |                                      |         |             |           |            |          
|Total Liabilities and Shareholders Equity  |                                                                | $                                                                                      | 8,768,688                            |         |             | $         | 10,024,632 |          
|                                            |                                                                |                                                                                        |                                      |         |             |           |            |          

See notes to consolidated financial statements.

4



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##### Table of Contents



SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

|                                            |                          |   |                    |           |                  |   |             |           |             |   |           |           |   |   |           |           |  
|------------------------------------------- | ------------------------ | - | ------------------ | --------- | ---------------- | - | ----------- | --------- | ----------- | - | --------- | --------- | - | - | --------- | --------- | -
|                                            |                          |   | Three Months Ended |           | Six Months Ended
|                                            |                          |   |                    |           |                 
|                                            |                          |   | October 2,         |           | October 3,       |   | October 2,  |           | October 3, 
|                                            |                          |   | 1999               |           | 1998             |   | 1999        |           | 1998       
|                                            |                          |   |                    |           |                  |   |             |           |            
|                                            |                          |   | (Unaudited)        |           | (Unaudited)      |   | (Unaudited) |           | (Unaudited)
|                                            |                          |   |                    |           |                  |   |             |           |            
|Net sales                                   |                          | $ | 4,036,953          |           |                  | $ | 3,607,126   |           |             | $ | 7,763,999 |           |   | $ | 6,949,043 |          
|                                           
|                                           
|                                           
|                                           
|Cost of products sold                       |                          |   | 1,835,698          |           |                  |   | 1,745,194   |           |             |   | 3,532,367 |           |   |   | 3,237,101 |          
|                                            |                          |   |                    |           |                  |   |             |           |             |   |           |           |   |   |           |          
|Gross margin                                |                          |   | 2,201,255          |           |                  |   | 1,861,932   |           |             |   | 4,231,632 |           |   |   | 3,711,942 |          
|                                           
|                                           
|                                           
|                                           
|                                           
|Selling expenses                            |                          |   | 1,844,804          |           |                  |   | 1,451,401   |           |             |   | 3,864,984 |           |   |   | 2,971,141 |          
|                                           
|                                           
|                                           
|                                           
|Administrative expenses                     |                          |   | 452,193            |           |                  |   | 528,121     |           |             |   | 1,000,248 |           |   |   | 937,829   |          
|                                            |                          |   |                    |           |                  |   |             |           |             |   |           |           |   |   |           |          
|                                            | Total operating expenses |   |                    | 2,296,997 |                  |   |             | 1,979,522 |             |   |           | 4,865,232 |   |   |           | 3,908,970 |  
|                                           
|                                           
|                                           
|                                           
|Income (loss) from operations               |                          |   | (95,742            | )         |                  |   | (117,590    | )         |             |   | (633,600  | )         |   |   | (197,028  | )        
|                                           
|                                           
|                                           
|                                           
|Interest income                             |                          |   | 5,970              |           |                  |   | 20,091      |           |             |   | 26,125    |           |   |   | 59,367    |          
|                                           
|                                           
|                                           
|                                           
|Interest expense                            |                          |   | (68,130            | )         |                  |   |            |           |             |   | (134,750  | )         |   |   |          |          
|                                           
|                                           
|                                           
|                                           
|Other income, net                           |                          |   | 2,748              |           |                  |   | 5,975       |           |             |   | 7,022     |           |   |   | 9,759     |          
|                                            |                          |   |                    |           |                  |   |             |           |             |   |           |           |   |   |           |          
|Income (loss) before income taxes           |                          |   | (155,154           | )         |                  |   | (91,524     | )         |             |   | (735,203  | )         |   |   | (127,902  | )        
|                                           
|                                           
|                                           
|                                           
|Income tax benefit                          |                          |   | 40,000             |           |                  |   | 31,758      |           |             |   | 236,000   |           |   |   | 44,382    |          
|                                            |                          |   |                    |           |                  |   |             |           |             |   |           |           |   |   |           |          
|Net income (loss)                           |                          |   | (115,154           | )         |                  |   | (59,766     | )         |             |   | (499,203  | )         |   |   | (83,520   | )        
|                                           
|                                           
|                                           
|                                           
|Retained earnings:                         
|                                           
|                                           
|                                           
|                                           
|                                            | Beginning                |   |                    | 1,202,234 |                  |   |             | 2,275,598 |             |   |           | 1,586,283 |   |   |           | 2,299,352 |  
|                                            |                          |   |                    |           |                  |   |             |           |             |   |           |           |   |   |           |          
|                                            | Ending                   |   | $                  | 1,087,080 |                  |   | $           | 2,215,832 |             |   | $         | 1,087,080 |   |   | $         | 2,215,832 |  
|                                            |                          |   |                    |           |                  |   |             |           |             |   |           |           |   |   |           |          
|Net income (loss) per common share
(Note 3)
|                                            | Basic                    |   | $                  | (0.04     | )                |   | $           | (0.02     | )           |   | $         | (0.19     | ) |   | $         | (0.03     | )
|                                            |                          |   |                    |           |                  |   |             |           |             |   |           |           |   |   |           |          
|                                            | Diluted                  |   | $                  | (0.04     | )                |   | $           | (0.02     | )           |   | $         | (0.19     | ) |   | $         | (0.03     | )
|                                            |                          |   |                    |           |                  |   |             |           |             |   |           |           |   |   |           |          

See notes to consolidated financial statements.

5



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##### Table of Contents



SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                  |                                                         |                                                                                        |                                                                      |          |                  |          |             |           |         |          |  
|------------------------------------------------- | ------------------------------------------------------- | -------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | -------- | ---------------- | -------- | ----------- | --------- | ------- | -------- | -
|                                                  |                                                         |                                                                                        |                                                                      |          | Six Months Ended
|                                                  |                                                         |                                                                                        |                                                                      |          |                 
|                                                  |                                                         |                                                                                        |                                                                      |          | October 2,       |          | October 3, 
|                                                  |                                                         |                                                                                        |                                                                      |          | 1999             |          | 1998       
|                                                  |                                                         |                                                                                        |                                                                      |          |                  |          |            
|                                                  |                                                         |                                                                                        |                                                                      |          | (Unaudited)      |          | (Unaudited)
|                                                  |                                                         |                                                                                        |                                                                      |          |                  |          |            
|Cash flows from operating activities:            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Net income (loss)                                       |                                                                                        | $                                                                    | (499,203 | )                |          | $           | (83,520   | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         | Adjustments to reconcile net income (loss) to
cash provided from operating activities:
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Depreciation and amortization                                        |          |                  | 133,749  |             |           |         | 97,997   |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Provision for doubtful accounts                                      |          |                  | 79,069   |             |           |         | 75,388   |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Deferred income taxes                                                |          |                  | (236,000 | )           |           |         | (8,000   | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Cash provided from (required for) changes
in assets and liabilities:
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Restricted cash                                                      |          |                  | (2,940   | )           |           |         | 116,333  |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Accounts receivable                                                  |          |                  | 222,443  |             |           |         | (291,106 | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Inventories                                                          |          |                  | (133,873 | )           |           |         | (797,020 | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Other assets                                                         |          |                  | (307,637 | )           |           |         | (168,023 | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Accounts payable and customer advances                               |          |                  | (603,564 | )           |           |         | (205,656 | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         |                                                                                        | Other current liabilities                                            |          |                  | (188,620 | )           |           |         | (569,304 | )
|                                                  |                                                         |                                                                                        |                                                                      |          |                  |          |             |          
|Cash provided from (used in) operating activities |                                                         |                                                                                        | (1,536,576                                                           | )        |                  |          | (1,832,911  | )        
|                                                  |                                                         |                                                                                        |                                                                      |          |                  |          |             |          
|Cash flows from investing activities:            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Maturity of short-term investments                      |                                                                                        |                                                                      | 989,122  |                  |          |             | 1,842,662 |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Property additions                                      |                                                                                        |                                                                      | (75,710  | )                |          |             | (114,262  | )      
|                                                  |                                                         |                                                                                        |                                                                      |          |                  |          |             |          
|Cash provided from (used in) investing activities |                                                         |                                                                                        | 913,412                                                              |          |                  |          | 1,728,400   |          
|                                                  |                                                         |                                                                                        |                                                                      |          |                  |          |             |          
|Cash flows from financing activities:            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Common shares repurchased                               |                                                                                        |                                                                      |         |                  |          |             | 4,594     |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Payments on long-term debt and capital lease obligation |                                                                                        |                                                                      | (35,124  | )                |          |             | (67,787   | )      
|                                                  |                                                         |                                                                                        |                                                                      |          |                  |          |             |          
|Cash provided from (used in) financing activities |                                                         |                                                                                        | (35,124                                                              | )        |                  |          | (63,193     | )        
|                                                  |                                                         |                                                                                        |                                                                      |          |                  |          |             |          
|Net increase (decrease) in cash                   |                                                         |                                                                                        | (658,288                                                             | )        |                  |          | (167,704    | )        
|                                                 
|                                                 
|                                                 
|                                                 
|Cash:                                            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                         | Beginning                                                                              |                                                                      |          | 1,005,371        |          |             |           | 316,669 |         
|                                                  |                                                         |                                                                                        |                                                                      |          |                  |          |             |          
|                                                  |                                                         | Ending                                                                                 |                                                                      | $        | 347,083          |          |             | $         | 148,965 |         
|                                                  |                                                         |                                                                                        |                                                                      |          |                  |          |             |          

See notes to consolidated financial statements.

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 October 2, 1999 and October
3, 1998 to present the financial statements fairly. However, the results of
operations for the three months and six months then ended are not
necessarily indicative of results for the fiscal year. The financial
statements and notes are presented as permitted by Form 10-Q, and do not
contain certain information included in the annual financial statements.
The financial statements accompanying this report should be read in
conjunction with the financial statements and notes thereto included in the
Annual Report to Shareholders for the year ended April 3, 1999.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. | The provision for income taxes is as
follows:
|-- | ---------------------------------------------

|                              |       |   |                    |        |                  |   |         |        |         |   |         |         |  |   |        |        | 
|----------------------------- | ----- | - | ------------------ | ------ | ---------------- | - | ------- | ------ | ------- | - | ------- | ------- |  | - | ------ | ------ | 
|                              |       |   | Three Months Ended |        | Six Months Ended
|                              |       |   |                    |        |                 
|                              |       |   | 10/2/99            |        | 10/3/98          |   | 10/2/99 |        | 10/3/98
|                              |       |   |                    |        |                  |   |         |        |        
|Income tax benefit:          
|                             
|                             
|                             
|                             
|Current                       |       | $ |                   |        |                  | $ | 11,758  |        |         | $ |        |         |  | $ | 36,382 |       
|                             
|                             
|                             
|                             
|Deferred                      |       |   | 40,000             |        |                  |   | 20,000  |        |         |   | 236,000 |         |  |   | 8,000  |       
|                             
|                             
|                             
|                             
|Change in valuation allowance |       |   |                   |        |                  |   |        |        |         |   |        |         |  |   |       |       
|                              |       |   |                    |        |                  |   |         |        |         |   |         |         |  |   |        |       
|                              | Total |   | $                  | 40,000 |                  |   | $       | 31,758 |         |   | $       | 236,000 |  |   | $      | 44,382 | 
|                              |       |   |                    |        |                  |   |         |        |         |   |         |         |  |   |        |       



| | Provisions for recoverable income taxes have been computed at statutory
rates. Resulting deferred tax assets amounting to $1,295,000 at October 2,
1999 and $1,059,000 at April 3, 1999 reflect temporary differences in
accounting for assets and liabilities for financial reporting and tax
purposes and the accumulation of tax benefits arising from the carryforward
of operating losses and tax credits. 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 |   | Six months ended
|                                  |  |   |                    |   |                 
|                                  |  |   | 10/2/99            |   | 10/3/98          |   | 10/2/99   |   | 10/3/98
|                                  |  |   |                    |   |                  |   |           |   |        
|Net income (loss)                 |  | $ | (115,154           | ) |                  | $ | (59,766   | ) |         | $ | (499,203  | ) |  | $ | (83,520   | )
|                                  |  |   |                    |   |                  |   |           |   |         |   |           |   |  |   |           |  
|Weighted average shares           |  |   | 2,605,233          |   |                  |   | 2,602,970 |   |         |   | 2,605,233 |   |  |   | 2,600,661 |  
|                                 
|                                 
|                                 
|                                 
|Additional dilutive shares        |  |   |                   |   |                  |   |          |   |         |   |          |   |  |   |          |  
|                                  |  |   |                    |   |                  |   |           |   |         |   |           |   |  |   |           |  
|Total dilutive shares             |  |   | 2,605,233          |   |                  |   | 2,602,970 |   |         |   | 2,605,233 |   |  |   | 2,600,661 |  
|                                  |  |   |                    |   |                  |   |           |   |         |   |           |   |  |   |           |  
|Basic earnings (loss) per share   |  | $ | (0.04              | ) |                  | $ | (0.02     | ) |         | $ | (0.19     | ) |  | $ | (0.03     | )
|                                  |  |   |                    |   |                  |   |           |   |         |   |           |   |  |   |           |  
|Diluted earnings (loss) per share |  | $ | (0.04              | ) |                  | $ | (0.02     | ) |         | $ | (0.19     | ) |  | $ | (0.03     | )
|                                  |  |   |                    |   |                  |   |           |   |         |   |           |   |  |   |           |  



| | There were no additional dilutive shares included in the computation at
October 2, 1999 and October 3, 1998 because the effects of related stock
options were anti-dilutive.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7



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##### Table of Contents





|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 subject to a mortgage agreement, are pledged as
collateral.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents









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

Results of Operations

Net sales increased in the second quarter of the current year to $4,037,000, up
by 12% from $3,607,000 reported a year ago. On a year- to -date basis sales have
improved by $815,000 since last year to $7,764,000. Such increases are mostly
the result of expanded demonstration sales efforts. Gross margins improved on
the higher volume in the quarter to $2,201,000 and $4,231,000 year-to-date
resulting in improvements of $339,000 and $520,000 respectively over last year.

Total operating expenses increased by $317,000 in the current quarter to
$2,297,000 and by $956,000 to $4,865,000 for the six months reflecting
managements stepped up selling and promotional efforts primarily in its
demonstration sales channel. Net interest costs rose in the year 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 in the first half of fiscal 2000.

Provisions for recoverable income taxes ($40,000 and $236,000 for the quarter
and six months of FY2000 compared to $32,999 and $44,000 in FY1999) are based on
estimated annual effective tax rates.

As a result of the above factors, net losses of $115,000 and $499,000 ($.04 and
$.19 per basic share) were incurred in the quarter and six months ended October
2, 1999 compared with net losses of $60,000 and $84,000 ($.02 and $.03 per basic
share) the year before.

Liquidity and Financial Position

Cash used in operations for the first six months of the current fiscal year
totaled $1,537,000 compared to $1,833,000 last year. The net loss of $499,000
coupled with liquidation of current liabilities were the main reasons for the
cash usage in the current year. Expansion of accounts receivable; increased
inventories and liquidation of current liabilities were the main uses of cash
for the preceding year. Maturing short-term investments of $989,000 and
$1,842,000 were utilized in fiscal 2000 and 1999 respectively to fund operating
cash requirements.

The Companys assets include $1,295,000 of deferred income tax assets at October
2, 1999. 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 2.16 to 1 at October 2, 1999 compared to 2.12 to 1 at the
beginning of the fiscal year. The debt to equity ratio improved slightly to 1.25
to 1 from 1.28 to 1 during that same period.

The Company has now experienced operating losses for six consecutive quarters.
Continuation of operating losses will negatively affect the Companys liquidity
both (a) as a result of negative cash flow caused by the losses, and (b) by
putting the Company in the position of failing to satisfy the conditions
applicable to drawing under the Companys line of credit.

Year 2000 Impact

The year 2000 issue is 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 that have date sensitive software may
cause system failures or generate incorrect data.

The Company has identified and acted upon information technology applications
requiring modification to ensure year 2000 compliance. Evaluation and testing of
on-going programs has been completed. Also, replacement of certain of these
systems has been effected. Non-information technology systems have been
evaluated and known deficiencies have been addressed. While no formal
contingency plan has been adopted, the Company believes that it will be able to
address Year 2000 issues as they arise without material disruption of its
business.

9



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##### Table of Contents



The Company has communicated with its major suppliers and financial institutions
to assess the impact on the Companys operations should they fail to achieve
Year 2000 compliance. Based on responses to date, many of these third parties
indicate that compliance programs are in place without specific confirmation of
year 2000 compliance.

Costs incurred to date for year 2000 activities have not been material to the
Company. Also, the Company believes that, based on current estimates, the total
costs of compliance will not have a material adverse impact on results of
operations or financial condition.

Achievement of year 2000 compliance is subject to a variety of risks beyond the
Companys control, including continued availability of personnel and
preparedness of third parties. The failure of the Company, its customers,
vendors and governmental authorities to achieve year 2000 readiness could
adversely affect the Companys operations and/or financial condition. Year 2000
failures could adversely affect aspects of the business such as procurement of
materials, scheduling of selling events, processing of sales orders and
functioning of the Companys Internet web pages.

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, (b) generation of future taxable income to utilize
existing deferred tax assets, (c) successful implementation of Year 2000
compliance by the Company and its suppliers and (d) the Companys ability to
effectively address any other Year 2000 issues.







Item 3. Quantitative and qualitative disclosures about market risk

Not applicable.

10



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##### Table of Contents



PART II. OTHER INFORMATION







Item 4. Submission of Matters to a Vote of Shareholders

The Company held its Annual Meeting of Shareholders on July 28, 1999.
At the meeting, shareholders (a) elected messrs. Robert L. Folkerth and
Brady L. Skinner as directors of the Company and (b) approved the
appointment of Crowe, Chizek and Company LLP as independent public
accountants for the Company. Votes were tabulated as follows:

|                       |                               |     |  |           |  |          |  |           |  |  |  |        |  |  |        |   | 
|---------------------- | ----------------------------- | --- |  | --------- |  | -------- |  | --------- |  |  |  | ------ |  |  | ------ | - | 
|                       |                               |     |  |           |  |          |  |           |  |  |  |        |  |  | Broker
|Issue                  |                               | For |  | Against   |  | Withheld |  | Non votes
|Election of Directors:
|                      
|                      
|                      
|                      
|                       | Robert L. Folkerth            |     |  | 2,058,763 |  |          |  | 173,328   |  |  |  | 0      |  |  |        | 0 | 
|                      
|                      
|                      
|                      
|                       | Brady L. Skinner              |     |  | 2,123,830 |  |          |  | 108,261   |  |  |  | 0      |  |  |        | 0 | 
|                      
|                      
|                      
|                      
|Appointment:          
|                      
|                      
|                      
|                      
|                       | Crowe, Chizek and Company LLP |     |  | 2,204,455 |  |          |  | 12,656    |  |  |  | 14,980 |  |  |        | 0 | 

Directors continuing in office were John L. Folkerth, J. Michael Herr and Edward A. Nicholson.







Item 6. Exhibits and Reports on form 8-K

(a) Exhibits:

(27) Financial Data Schedule for the period ended October 2, 1999

(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 L. Folkerth                                    
| |                                                            
| | John L. Folkerth                                           
| | Chairman of the Board
President and Chief Executive Officer
|
| | By /s/ Mark A. May                                         
| |                                                            
| | Mark A. May                                                
| | Principal Financial and Accounting Officer                 

Date: November 11, 1999

11