##### Table of Contents

---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q



Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934



---



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



for the quarterly period ended September 24, 2005.



or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



for the transition period from
 to
.



Commission file number 0-4538



Cybex International, Inc.

(Exact
name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|New York                                                       |  | 11-1731581                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                        |  |           
|--------------------------------------- |  | ----------
|10 Trotter Drive, Medway, Massachusetts |  | 02053     
|(Address of principal executive office) |  | (Zip Code)



(508) 533-4300

Registrants telephone number, including area code



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ̈No x



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



On November 7, 2005, the Registrant had outstanding 15,131,117 shares of Common Stock, par value $0.10 per share, which is the Registrants only class of Common
Stock.



---



---

##### Table of Contents

CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



INDEX



|           |  |                       |  |                                                                                                                        |  |     
|---------- |  | --------------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                       |  |                                                                                                                        |  | Page
|PART I.    |  | FINANCIAL INFORMATION |  |                                                                                                                       
|           |  |                       | 
|           |  | Item 1.               |  | Financial Statements (unaudited)                                                                                       |  |     
|           |  |                       | 
|           |  |                       |  | Condensed Consolidated Statements of Operations Three and nine months ended September 24, 2005 and September 25, 2004 |  | 3   
|           |  |                       | 
|           |  |                       |  | Condensed Consolidated Balance Sheets  September 24, 2005 and December 31, 2004                                       |  | 4   
|           |  |                       | 
|           |  |                       |  | Condensed Consolidated Statements of Cash Flows Nine months ended September 24, 2005 and September 25, 2004           |  | 5   
|           |  |                       | 
|           |  |                       |  | Notes to Condensed Consolidated Financial Statements                                                                   |  | 6   
|           |  |                       | 
|           |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                  |  | 15  
|           |  |                       | 
|           |  | Item 3.               |  | Quantitative and Qualitative Disclosures about Market Risk                                                             |  | 20  
|           |  |                       | 
|           |  | Item 4.               |  | Controls and Procedures                                                                                                |  | 20  
|           |  |                      
|PART II.   |  | OTHER INFORMATION     |  |                                                                                                                       
|           |  |                       | 
|           |  | Item 1.               |  | Legal Proceedings                                                                                                      |  | 21  
|           |  |                       | 
|           |  | Item 2.               |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                            |  | 21  
|           |  |                       | 
|           |  | Item 3.               |  | Defaults Upon Senior Securities                                                                                        |  | 21  
|           |  |                       | 
|           |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                                                    |  | 21  
|           |  |                       | 
|           |  | Item 5.               |  | Other Information                                                                                                      |  | 21  
|           |  |                       | 
|           |  | Item 6.               |  | Exhibits                                                                                                               |  | 21  
|           |  |                       | 
|Signatures |  |                       |  |                                                                                                                        |  | 22  



2



---

##### Table of Contents

CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                                      |  |                    |        |                   |                   |   |                   |  |   |                   |   |  |   |       
|----------------------------------------------------- |  | ------------------ | ------ | ----------------- | ----------------- | - | ----------------- |  | - | ----------------- | - |  | - | ------
|                                                      |  | Three Months Ended |        | Nine Months Ended
|                                                      |  | September 24,2005  |        |                   | September 25,2004 |   | September 24,2005 |  |   | September 25,2004
|Net sales                                             |  | $                  | 26,690 |                   |                   | $ | 25,038            |  | $ | 78,646            |   |  | $ | 73,531
|Cost of sales                                         |  |                    | 17,143 |                   |                   |   | 16,206            |  |   | 50,593            |   |  |   | 46,227
|                                                      |  |                    |        |                   |                   |   |                   |  |   |                   |   |  |   |       
|Gross profit                                          |  |                    | 9,547  |                   |                   |   | 8,832             |  |   | 28,053            |   |  |   | 27,304
|Selling, general and administrative expenses          |  |                    | 8,276  |                   |                   |   | 7,386             |  |   | 24,325            |   |  |   | 22,759
|Litigation charges                                    |  |                    | 4,101  |                   |                   |   |                  |  |   | 4,101             |   |  |   |      
|                                                      |  |                    |        |                   |                   |   |                   |  |   |                   |   |  |   |       
|Operating income (loss)                               |  |                    | (2,830 | )                 |                   |   | 1,446             |  |   | (373              | ) |  |   | 4,545 
|Interest expense, net                                 |  |                    | 679    |                   |                   |   | 1,007             |  |   | 1,894             |   |  |   | 2,888 
|                                                      |  |                    |        |                   |                   |   |                   |  |   |                   |   |  |   |       
|Income (loss) before income taxes                     |  |                    | (3,509 | )                 |                   |   | 439               |  |   | (2,267            | ) |  |   | 1,657 
|Income taxes                                          |  |                    | 26     |                   |                   |   | 29                |  |   | 111               |   |  |   | 39    
|                                                      |  |                    |        |                   |                   |   |                   |  |   |                   |   |  |   |       
|Net income (loss)                                     |  |                    | (3,535 | )                 |                   |   | 410               |  |   | (2,378            | ) |  |   | 1,618 
|Preferred stock dividends                             |  |                    |       |                   |                   |   | 32                |  |   |                  |   |  |   | 276   
|                                                      |  |                    |        |                   |                   |   |                   |  |   |                   |   |  |   |       
|Net income (loss) attributable to common stockholders |  | $                  | (3,535 | )                 |                   | $ | 378               |  | $ | (2,378            | ) |  | $ | 1,342 
|                                                      |  |                    |        |                   |                   |   |                   |  |   |                   |   |  |   |       
|Basic net income (loss) per share                     |  | $                  | (.23   | )                 |                   | $ | .03               |  | $ | (.16              | ) |  | $ | .13   
|                                                      |  |                    |        |                   |                   |   |                   |  |   |                   |   |  |   |       
|Diluted net income (loss) per share                   |  | $                  | (.23   | )                 |                   | $ | .03               |  | $ | (.16              | ) |  | $ | .12   
|                                                      |  |                    |        |                   |                   |   |                   |  |   |                   |   |  |   |       



See notes to condensed
consolidated financial statements.



3



---

##### Table of Contents

CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)



|                                                                                        |  |                   |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                        |  | September 24,2005 |         |   | December 31,2004 |  
|ASSETS                                                                                  |  |                   |         |   |                  |   |         |  
|Current Assets:                                                                         |  |                   |         |   |                  |   |         |  
|Cash                                                                                    |  | $                 | 495     |   |                  | $ | 1,826   |  
|Accounts receivable, net of allowance of $681 and $887                                  |  |                   | 14,067  |   |                  |   | 15,891  |  
|Inventories                                                                             |  |                   | 9,637   |   |                  |   | 8,014   |  
|Prepaid expenses and other                                                              |  |                   | 2,327   |   |                  |   | 1,684   |  
|                                                                                        |  |                   |         |   |                  |   |         |  
|Total current assets                                                                    |  |                   | 26,526  |   |                  |   | 27,415  |  
|Property, plant and equipment, net                                                      |  |                   | 14,444  |   |                  |   | 13,544  |  
|Goodwill                                                                                |  |                   | 11,247  |   |                  |   | 11,247  |  
|Other assets                                                                            |  |                   | 1,606   |   |                  |   | 2,280   |  
|                                                                                        |  |                   |         |   |                  |   |         |  
|                                                                                        |  | $                 | 53,823  |   |                  | $ | 54,486  |  
|                                                                                        |  |                   |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                    |  |                   |         |   |                  |   |         |  
|Current Liabilities:                                                                    |  |                   |         |   |                  |   |         |  
|Current maturities of long-term debt                                                    |  | $                 | 2,684   |   |                  | $ | 9,116   |  
|Current portion of capital leases                                                       |  |                   | 500     |   |                  |   | 408     |  
|Accounts payable                                                                        |  |                   | 4,786   |   |                  |   | 5,377   |  
|Accrued expenses                                                                        |  |                   | 15,126  |   |                  |   | 9,196   |  
|                                                                                        |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                               |  |                   | 23,096  |   |                  |   | 24,097  |  
|Long-term debt                                                                          |  |                   | 10,791  |   |                  |   | 11,489  |  
|Capital leases                                                                          |  |                   | 443     |   |                  |   | 648     |  
|Other liabilities                                                                       |  |                   | 5,811   |   |                  |   | 2,466   |  
|                                                                                        |  |                   |         |   |                  |   |         |  
|Total liabilities                                                                       |  |                   | 40,141  |   |                  |   | 38,700  |  
|                                                                                        |  |                   |         |   |                  |   |         |  
|Contingencies (Note 8)                                                                  |  |                   |         |   |                  |   |         |  
|Stockholders Equity:                                                                   |  |                   |         |   |                  |   |         |  
|Common stock, $.10 par value, 30,000 shares authorized, 15,340 and 15,303 shares issued |  |                   | 1,534   |   |                  |   | 1,530   |  
|Additional paid-in capital                                                              |  |                   | 57,565  |   |                  |   | 57,464  |  
|Treasury stock, at cost (209 shares)                                                    |  |                   | (2,251  | ) |                  |   | (2,251  | )
|Accumulated deficit                                                                     |  |                   | (42,969 | ) |                  |   | (40,591 | )
|Accumulated other comprehensive loss                                                    |  |                   | (197    | ) |                  |   | (366    | )
|                                                                                        |  |                   |         |   |                  |   |         |  
|Total stockholders equity                                                              |  |                   | 13,682  |   |                  |   | 15,786  |  
|                                                                                        |  |                   |         |   |                  |   |         |  
|                                                                                        |  | $                 | 53,823  |   |                  | $ | 54,486  |  
|                                                                                        |  |                   |         |   |                  |   |         |  



See notes to condensed
consolidated financial statements.



4



---

##### Table of Contents

CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                                                 |  |                   |              |   |                   |   |                 |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------------ | - | ----------------- | - | --------------- | -
|                                                                                                                 |  | Nine Months Ended |             
|                                                                                                                 |  | September 24,2005 |              |   | September 25,2004 |  
|OPERATING ACTIVITIES:                                                                                            |  |                   |              |   |                   |   |                 |  
|Net income (loss)                                                                                                |  | $                 | (2,378       | ) |                   | $ | 1,618           |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities:                         |  |                   |              |   |                   |   |                 |  
|Depreciation and amortization                                                                                    |  |                   | 2,629        |   |                   |   | 2,737           |  
|Amortization of deferred financing costs                                                                         |  |                   | 412          |   |                   |   | 887             |  
|Provision for doubtful accounts                                                                                  |  |                   | 303          |   |                   |   | 271             |  
|Change in fair value of foreign currency contract                                                                |  |                   | (111         | ) |                   |   |                |  
|Increase to litigation reserve                                                                                   |  |                   | 4,101        |   |                   |   |                |  
|Net change in other operating assets and liabilities                                                             |  |                   | 857          |   |                   |   | (3,107          | )
|                                                                                                                 |  |                   |              |   |                   |   |                 |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                                        |  |                   | 5,813        |   |                   |   | 2,406           |  
|                                                                                                                 |  |                   |              |   |                   |   |                 |  
|INVESTING ACTIVITIES:                                                                                            |  |                   |              |   |                   |   |                 |  
|Purchases of property, plant and equipment                                                                       |  |                   | (3,046       | ) |                   |   | (1,073          | )
|Deposits related to equipment purchases                                                                          |  |                   | (24          | ) |                   |   | (37             | )
|                                                                                                                 |  |                   |              |   |                   |   |                 |  
|NET CASH USED IN INVESTING ACTIVITIES                                                                            |  |                   | (3,070       | ) |                   |   | (1,110          | )
|                                                                                                                 |  |                   |              |   |                   |   |                 |  
|FINANCING ACTIVITIES:                                                                                            |  |                   |              |   |                   |   |                 |  
|Borrowings under term loans                                                                                      |  |                   | 4,654        |   |                   |   | 15,000          |  
|Repayments of term loans                                                                                         |  |                   | (4,341       | ) |                   |   | (17,144         | )
|Net repayments under revolving loan                                                                              |  |                   | (7,443       | ) |                   |   | (5,319          | )
|Proceeds from real estate financing                                                                              |  |                   | 3,600        |   |                   |   |                |  
|Principal payments on capital leases                                                                             |  |                   | (417         | ) |                   |   | (374            | )
|Deferred financing costs                                                                                         |  |                   | (151         | ) |                   |   | (297            | )
|Proceeds from exercise of stock options                                                                          |  |                   | 24           |   |                   |   | 5               |  
|Proceeds from issuance of common stock, net of costs                                                             |  |                   |             |   |                   |   | 7,199           |  
|Dividends paid to related party                                                                                  |  |                   |             |   |                   |   | (522            | )
|                                                                                                                 |  |                   |              |   |                   |   |                 |  
|NET CASH USED IN FINANCING ACTIVITIES                                                                            |  |                   | (4,074       | ) |                   |   | (1,452          | )
|                                                                                                                 |  |                   |              |   |                   |   |                 |  
|DECREASE IN CASH                                                                                                 |  |                   | (1,331       | ) |                   |   | (156            | )
|                                                                                                                 |  |                  
|CASH, beginning of period                                                                                        |  |                   | 1,826        |   |                   |   | 749             |  
|                                                                                                                 |  |                   |              |   |                   |   |                 |  
|CASH, end of period                                                                                              |  | $                 | 495          |   |                   | $ | 593             |  
|                                                                                                                 |  |                   |              |   |                   |   |                 |  
|SUPPLEMENTAL CASH FLOW DISCLOSURE                                                                                |  |                   |              |   |                   |   |                 |  
|Cash paid for interest Cash paid for income taxes Capital leases Conversion of preferred stock into common stock |  | $                 | 1,162182304 |   |                   | $ | 1,927394584,900 |  



See notes to condensed
consolidated financial statements.



5



---

##### Table of Contents

CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 1  BASIS OF PRESENTATION



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



The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and,
therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S generally accepted accounting principles. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 24, 2005 are not necessarily indicative of the results
that may be expected for the entire year.



It is recommended that these
condensed consolidated financial statements be read in conjunction with the financial statements and other information included in the Companys reports filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K
for the year ended December 31, 2004, this Report on Form 10-Q, its Current Reports on Form 8-K, and its proxy statement dated April 6, 2005.



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



NOTE 2  ACCOUNTING FOR GUARANTEES



From time to time, the Company, through Cybex Capital Corporation, a wholly-owned subsidiary, arranges for leases or other financing sources to enable certain of its
customers to purchase the Companys equipment, as well as other equipment sold by third parties. While most of these financings are without recourse, in certain cases the Company provides a guaranty or other recourse provisions to the
independent finance company of all or a portion of the lease payments in order to facilitate the sale of the equipment. In such situations, the Company ensures that the transaction between the independent leasing company and the end user customer
represents a sales-type lease. The Company monitors the payment status of the lessee under these arrangements and provides a reserve under Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies, in
situations when collection of the lease payments is not probable. At September 24, 2005, the maximum contingent liability under all recourse and guarantee provisions was approximately $4,459,000. A reserve for estimated losses under recourse
provisions of $210,000 has been recorded based on historical and industry experience and is included in accrued expenses at September 24, 2005. At September 24, 2005, in accordance with Financial Accounting Standards Board (FASB)
Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, the Company also has a net liability of $67,000 for the estimated fair
value of the Companys guarantees issued after January 1, 2003. The fair value of the guarantees was determined based on the estimated cost for a customer to obtain a letter of credit from a bank or similar institution. This liability is
being reduced on a straight-line basis over the term of each respective guarantee. In most cases, if the Company is required to fulfill its obligations under the guarantee, it has the right to repossess the equipment from the customer. It is not
practicable to estimate the approximate amount of proceeds that would be generated from the sale of these assets in such situations.



6



---

##### Table of Contents

Additionally, FIN 45 requires disclosure about the Companys obligations under other guarantees that it has issued,
including warranties. The Company provides a warranty on its products for up to three years for labor and up to ten years for structural frames. Warranty periods for parts range from one to three years depending on the type of equipment. The accrued
warranty obligation is provided at the time of product sale based on management estimates which are developed from historical information and certain assumptions about future events, which are subject to change. The following table sets forth the
change in the liability for product warranties during the nine months ended September 24, 2005:



|                                      |  |   |            |  
|------------------------------------- |  | - | ---------- | -
|Balance as of January 1, 2005         |  | $ | 2,235,000  |  
|Payments made under warranty          |  |   | (1,749,000 | )
|Accrual for product warranties issued |  |   | 2,107,000  |  
|                                      |  |   |            |  
|Balance as of September 24, 2005      |  | $ | 2,593,000  |  
|                                      |  |   |            |  



NOTE 3  STOCK-BASED
COMPENSATION



In December 2002, SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, was issued. SFAS No. 148 amended SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the
fair-value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 related to the disclosure about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No. 123, as amended by SFAS No. 148, permits companies to (i) recognize as expense the fair value of stock-based awards, or (ii) continue to apply the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and provide pro forma net income and net income per share disclosures for stock-based
compensation as if the fair-value based method defined in SFAS No. 123 had been applied. The Company continues to apply the provisions of APB Opinion No. 25 and provides the pro forma disclosures for its stock-based compensation in
accordance with the provisions of SFAS No. 123 and SFAS No. 148.



|                                                                                                                    |  |                    |            |   |                   |   |          |                   |  |   |                   |   |  |   |           |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ----------------- | - | -------- | ----------------- |  | - | ----------------- | - |  | - | --------- | -
|                                                                                                                    |  | Three Months Ended |            |   | Nine Months Ended |  
|                                                                                                                    |  | September 24,2005  |            |   | September 25,2004 |   |          | September 24,2005 |  |   | September 25,2004 |  
|Net income (loss) attributable to common stockholders                                                               |  | $                  | (3,535,000 | ) |                   | $ | 378,000  |                   |  | $ | (2,378,000        | ) |  | $ | 1,342,000 |  
|Stock-based compensation included in net income (loss)                                                              |  |                    | 14,000     |   |                   |   | 100,000  |                   |  |   | 43,000            |   |  |   | 140,000   |  
|Deduct: Total stock-based employee compensation expense determined under the fair-value based method for all awards |  |                    | (53,000    | ) |                   |   | (127,000 | )                 |  |   | (157,000          | ) |  |   | (215,000  | )
|                                                                                                                    |  |                    |            |   |                   |   |          |                   |  |   |                   |   |  |   |           |  
|Pro forma net income (loss) attributable to common stockholders                                                     |  | $                  | (3,574,000 | ) |                   | $ | 351,000  |                   |  | $ | (2,492,000        | ) |  | $ | 1,267,000 |  
|                                                                                                                    |  |                    |            |   |                   |   |          |                   |  |   |                   |   |  |   |           |  
|Basic net income (loss) per share:                                                                                  |  |                    |            |   |                   |   |          |                   |  |   |                   |   |  |   |           |  
|As reported                                                                                                         |  | $                  | (.23       | ) |                   | $ | .03      |                   |  | $ | (.16              | ) |  | $ | .13       |  
|                                                                                                                    |  |                    |            |   |                   |   |          |                   |  |   |                   |   |  |   |           |  
|Pro forma                                                                                                           |  | $                  | (.24       | ) |                   | $ | .03      |                   |  | $ | (.16              | ) |  | $ | .13       |  
|                                                                                                                    |  |                    |            |   |                   |   |          |                   |  |   |                   |   |  |   |           |  
|Diluted net income (loss) per share:                                                                                |  |                    |            |   |                   |   |          |                   |  |   |                   |   |  |   |           |  
|As reported                                                                                                         |  | $                  | (.23       | ) |                   | $ | .03      |                   |  | $ | (.16              | ) |  | $ | .12       |  
|                                                                                                                    |  |                    |            |   |                   |   |          |                   |  |   |                   |   |  |   |           |  
|Pro forma                                                                                                           |  | $                  | (.24       | ) |                   | $ | .03      |                   |  | $ | (.16              | ) |  | $ | .12       |  
|                                                                                                                    |  |                    |            |   |                   |   |          |                   |  |   |                   |   |  |   |           |  



7



---

##### Table of Contents

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R),
which replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair
values beginning with the first annual period beginning after June 15, 2005 (fiscal 2006 for the Company). The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement
recognition. Under SFAS No. 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation costs and the transition method to be used at date of adoption.
The transition methods include the modified prospective and modified retrospective methods. The Company is evaluating the requirements of SFAS No. 123R and expects that the adoption of SFAS No. 123R will result in an estimated charge of
$123,000 for 2006, $99,000 for 2007 and $46,000 for 2008 relating to options issued prior to the date of adoption of SFAS No. 123R. Options granted after September 24, 2005 will result in additional charges and forfeitures could reduce the
charges.



NOTE 4  INVENTORIES



Inventories are valued at the lower of cost (first-in, first-out) or market and consist of
the following:



|                |  |                    |           |                   |   |          
|--------------- |  | ------------------ | --------- | ----------------- | - | ---------
|                |  | September 24, 2005 |           | December 31, 2004
|Raw materials   |  | $                  | 4,756,000 |                   | $ | 3,703,000
|Work in process |  |                    | 1,882,000 |                   |   | 2,080,000
|Finished goods  |  |                    | 2,999,000 |                   |   | 2,231,000
|                |  |                    |           |                   |   |          
|                |  | $                  | 9,637,000 |                   | $ | 8,014,000
|                |  |                    |           |                   |   |          



NOTE 5  LONG-TERM DEBT



Long-term debt consists of the following:



|                           |  |                    |            |   |                   |   |            |  
|-------------------------- |  | ------------------ | ---------- | - | ----------------- | - | ---------- | -
|                           |  | September 24, 2005 |            |   | December 31, 2004 |  
|CIT working capital loans  |  | $                  |           |   |                   | $ | 7,443,000  |  
|CIT term loan              |  |                    | 5,850,000  |   |                   |   | 3,500,000  |  
|GMAC real estate term loan |  |                    | 6,105,000  |   |                   |   | 9,662,000  |  
|GMAC equipment credit line |  |                    | 1,520,000  |   |                   |   |           |  
|                           |  |                    |            |   |                   |   |            |  
|                           |  |                    | 13,475,000 |   |                   |   | 20,605,000 |  
|Less  current portion     |  |                    | (2,684,000 | ) |                   |   | (9,116,000 | )
|                           |  |                    |            |   |                   |   |            |  
|                           |  | $                  | 10,791,000 |   |                   | $ | 11,489,000 |  
|                           |  |                    |            |   |                   |   |            |  



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



8



---

##### Table of Contents

On July 13, 2004, the Company entered into a credit agreement with GMAC Commercial Finance, LLC (GMAC)
(the GMAC Credit Agreement) and entered into an amendment of the CIT Financing Agreement (as amended, the CIT Amended Financing Agreement). The GMAC Credit Agreement provided for a $13,000,000 term loan, the proceeds of which
were used to retire in full the $11,000,000 term loan under the Hilco Financing Agreement, repay a $1,600,000 term loan from CIT and pay financing costs. The unamortized balance of the deferred financing costs under the Hilco Financing Agreement of
approximately $340,000 was charged to expense in the third quarter of 2004 upon the repayment of the Hilco loan. The Company prepaid $3,000,000 of the GMAC term loan in September 2004 with the proceeds from its common stock private placement. On
February 1, 2005, the Company entered into an amendment and restatement of the GMAC Credit Agreement (as amended, the GMAC Amended Credit Agreement) that provides for a new $3,000,000 equipment credit line. Under this equipment
credit line, the Company may from time-to-time borrow up to $3,000,000 to finance equipment and machinery purchases. Borrowings under the equipment credit line have the same maturity date, are secured by the same collateral and bear interest at the
same rates as the existing GMAC term loan, which continues without change. All other terms of the original GMAC Credit Agreement remain materially the same. In August 2005, the Company utilized a portion of the proceeds from the real estate
financing transaction described below to prepay $3,067,000 of the GMAC term loan. The GMAC loans are secured by the Companys real estate, fixtures and equipment.



The CIT Amended Financing Agreement provided for a term loan of $4,000,000 and continued the working capital revolving loans with the same
maximum limitation. On May 21, 2005, the Company entered into an amendment to the CIT Amended Financing Agreement which increased the term loan to $6,250,000. In August 2005, the Company utilized a portion of the proceeds from the real estate
financing described below to prepay $400,000 of the CIT term loan. The CIT loans are secured by substantially all assets of the Company other than real estate, fixtures and equipment.



At September 24, 2005, there were outstanding $13,475,000 of term loans with no working capital loans outstanding. Availability under
the revolving loan fluctuates daily. At September 24, 2005, there was $8,320,000 in unused availability under the working capital revolving loan.



The CIT loans bear interest at rates ranging between LIBOR plus 2.5% to 3.25% or the prime rate less .25% to plus .50% based on a performance grid (6.50% at
September 24, 2005), except for (a) prior to July 13, 2004, a term loan which bore interest at the prime rate plus 5%, with a minimum rate of 10% and (b) after July 13, 2004, the term loan which bears interest at the prime
rate plus 3%, with a minimum of 7% (9.75% at September 24, 2005). The $6,250,000 CIT term loan, as amended, is due in equal quarterly principal installments of $390,625, with the balance of $1,553,125 due at maturity on June 30, 2008.
Interest is payable monthly. The GMAC real estate term loan bears interest, payable monthly, at LIBOR plus 4% or the prime rate plus 1% (prior to September 1, 2004, LIBOR plus 5% or the prime rate plus 2%). The GMAC real estate term loan is due
in equal monthly principal payments of $61,000 with the balance of $3,294,000 due at maturity on August 1, 2009. Each advance under the GMAC equipment credit line will be retired with equal principal installments payable monthly through July
2009, with any remaining unpaid principal due at maturity on August 1, 2009. The prime rate was 6.50% and LIBOR was 3.69% at September 24, 2005. The Hilco loan bore interest at the prime rate plus 11.5%, with a minimum of 15.5%.



The GMAC Amended Credit Agreement and the CIT Amended Financing Agreement
require the Company to maintain certain financial covenants including maintaining a minimum fixed charge ratio, a leverage ratio and a limitation on annual capital expenditures. The Company was in compliance with these covenants as of
September 24, 2005. The CIT Amended Financing Agreement also restricts the ability of the Company to pay cash dividends. The CIT Amended Financing Agreement and the GMAC Amended Credit Agreement each contains a cross default provision to the
other.



Pursuant to the CIT Financing Agreement, the Company issued, in July
2003, a warrant to CIT to purchase 176,619 shares of common stock, at an exercise price of $1.35 per share. Pursuant to the Hilco Financing Agreement, the Company issued, in July 2003, a warrant to Hilco to purchase 189,640



9



---

##### Table of Contents

shares of common stock, at an exercise price of $.10 per share. The warrants issued to CIT and Hilco have a term of five years, are exercisable immediately,
and had a fair value of $42,000 and $226,000, respectively, at the date of grant. These amounts were recorded as deferred financing costs in 2003. The fair value of these warrants was determined using the Black-Scholes pricing model using an
expected volatility of 16%, the contractual term of the warrants, and a risk-free interest rate of 2.87%. The CIT warrant was exercised during 2004.



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



UM
provided the collateral to support a $2,945,722 letter of credit in the Companys appeal of the judgment in the litigation, Kirila et al v. Cybex International, Inc., et al (see Note 8). This letter of credit was replaced during the
second quarter of 2005 by a letter of credit issued under the CIT Amended Financing Agreement. A $2,888,025 letter of credit has also been issued under the CIT Amended Financing Agreement in connection with the Companys appeal of the judgment
in the litigation, Colassi v. Cybex International, Inc. (see Note 8). Letters of credit outstanding under the CIT Amended Financing Agreement reduce availability under the CIT revolving loan facility.



On August 2, 2005, the Company sold its manufacturing, warehouse and office facility
located in Owatonna, Minnesota for approximately $3,600,000, of which $3,067,000 was used to prepay a portion of the GMAC term loan, $123,000 was used to pay a prepayment fee in connection therewith and $400,000 was used to prepay a portion of the
CIT term loan. Simultaneously with the sale of the Owatonna facility, the Company and the purchaser entered into a lease of the Owatonna facility with an initial term of five years at a rental rate of $40,000 per month plus operating costs. The
lease contains renewal options as well as options to terminate the lease if the Company elects to relocate or to repurchase the facility if it elects not to relocate. Due to the option to repurchase the facility, this arrangement has been treated
for financial accounting purposes as a financing arrangement. Accordingly, in the Companys financial statements the building continues to be included in property, plant and equipment and continues to be depreciated and the proceeds from the
transaction are treated as indebtedness and included as Other Liabilities on the Companys consolidated balance sheets, with the monthly rental payments recorded as interest expense.



In 1992, borrowings under an industrial development revenue bond provided the funds to
purchase, expand and equip the manufacturing and administrative facility in Medway, Massachusetts. The bond was retired during the fourth quarter of 2004.



On September 8, 2004, Cybex entered into two interest rate caps with a financial intermediary to lock in 1-month LIBOR at a maximum of 3% for the two-year period
ending September 8, 2006 related to the Companys GMAC term debt facility and CIT revolving credit facility. The cost of the interest rate caps was approximately $97,000. The interest rate caps are accounted for as cash flow hedges and the
cost of the interest rate caps is being amortized on a straight-line basis over two years, which approximates the period during which the individual caplets related to each forecasted interest payment expire. Changes in the fair value of the
interest rate caps are recorded within accumulated other comprehensive loss. The change in the fair value of the interest rate caps for the three and nine months ended September 24, 2005 was an increase of $33,000 and an increase of $83,000,
respectively.



10



---

##### Table of Contents

Cybex entered into a series of 13 forward contracts on February 28, 2005 whereby Cybex pays a bank 140,211.64
British Sterling and the bank pays Cybex $265,000 each month. The purpose of these transactions is to hedge the foreign currency exposure of sales made in the UK in British Sterling. The Companys UKs subsidiary sales are in British
Sterling while its purchases of inventory from the parent Company are paid in US dollars. The above transaction is not considered eligible for hedge accounting based on guidance in SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended. Accordingly, changes in the fair value of the hedge are recorded within operating expenses. For the nine months ended September 24, 2005, the change in fair value of the hedge resulted in a gain of
$111,000.



NOTE 6  STOCKHOLDERS EQUITY



Common Stock:



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



On August 5, 2004, the Company consummated a private placement to accredited investors of 2,430,000 shares of common stock, at a price of $3.30 per share. The net proceeds to the Company in this offering, after commissions and offering
expenses, were approximately $7,199,000. Additionally, in connection with the private placement, the Company issued to the placement agent and its affiliates warrants to purchase 25,000 shares of the Companys common stock at an exercise price
of $0.10 per share. The warrants have a term of five years.



Warrants:



On September 20, 2004, a warrant holder exercised in full its warrant to
purchase 335,816 shares of the common stock of the Company. Pursuant to the net exercise provisions of this warrant, the Company issued to the warrant holder 214,000 shares of its common stock.



On October 21, 2004, a warrant holder exercised in full its warrant to purchase 191,898
shares of common stock of the Company. Pursuant to the net exercise provisions of this warrant, the Company issued to the warrant holder 133,217 shares of its common stock.



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



At September 24, 2005, warrants to purchase 189,640 and 25,000 shares of common stock at $.10 per share are outstanding and expire on July 16, 2008 and
August 4, 2009, respectively.



Comprehensive Income (loss):



Comprehensive income (loss) is the change in equity of a business enterprise from
transactions and other events and circumstances from non-owner sources. Excluding net income (loss), the components of comprehensive income (loss) are from foreign currency translation adjustments and changes in the fair value of hedging
instruments.



The following summarizes the components of comprehensive income
(loss):



|                                        |  |                    |            |   |                   |   |         |                    |  |   |                   |   |  |   |          
|--------------------------------------- |  | ------------------ | ---------- | - | ----------------- | - | ------- | ------------------ |  | - | ----------------- | - |  | - | ---------
|                                        |  | Three Months Ended |            |   | Nine Months Ended
|                                        |  | September 24, 2005 |            |   | September 25,2004 |   |         | September 24, 2005 |  |   | September 25,2004
|Net income (loss)                       |  | $                  | (3,535,000 | ) |                   | $ | 410,000 |                    |  | $ | (2,378,000        | ) |  | $ | 1,618,000
|Other comprehensive income (loss):      |  |                    |            |   |                   |   |         |                    |  |   |                   |   |  |   |          
|Foreign currency translation adjustment |  |                    | 10,000     |   |                   |   | (3,000  | )                  |  |   | 86,000            |   |  |   | 284,000  
|Change in fair value of hedge           |  |                    | 33,000     |   |                   |   |        |                    |  |   | 83,000            |   |  |   |         
|                                        |  |                    |            |   |                   |   |         |                    |  |   |                   |   |  |   |          
|Comprehensive income (loss)             |  | $                  | (3,492,000 | ) |                   | $ | 407,000 |                    |  | $ | (2,209,000        | ) |  | $ | 1,902,000
|                                        |  |                    |            |   |                   |   |         |                    |  |   |                   |   |  |   |          



11



---

##### Table of Contents

NOTE 7  NET INCOME (LOSS) PER SHARE



The table below sets forth a reconciliation of the shares used in the basic and diluted net income (loss) per share computations:



|                                                             |  |                    |  |                   |  |                    |  |                  
|------------------------------------------------------------ |  | ------------------ |  | ----------------- |  | ------------------ |  | -----------------
|                                                             |  | Three Months Ended |  | Nine Months Ended
|                                                             |  | September 24, 2005 |  | September 25,2004 |  | September 24, 2005 |  | September 25,2004
|Shares used in computing basic net income (loss) per share   |  | 15,130,000         |  | 12,337,000        |  | 15,119,000         |  | 10,042,000       
|Dilutive effect of options and warrants                      |  |                   |  | 1,072,000         |  |                   |  | 699,000          
|Dilutive effect of preferred stock                           |  |                   |  | 1,157,000         |  |                   |  | 391,000          
|                                                             |  |                    |  |                   |  |                    |  |                  
|Shares used in computing diluted net income (loss) per share |  | 15,130,000         |  | 14,566,000        |  | 15,119,000         |  | 11,132,000       
|                                                             |  |                    |  |                   |  |                    |  |                  



For the three and nine months ended
September 24, 2005, options to purchase 767,100 of the Companys common stock at exercise prices ranging from $1.22 to $4.32 per share were outstanding but were not included in the calculation of diluted net income (loss) per share since
the result would be anti-dilutive. For the three and nine months ended September 25, 2004, options to purchase 63,000 and 68,000 shares, respectively, of the Companys common stock at exercise prices ranging from $4.06 to $11.75 and $3.00
to $11.75 per share, respectively, were outstanding but were not included in the calculation of diluted net income per share since the result would be anti-dilutive. For the three and nine months ended September 25, 2004, diluted net income per
share was computed assuming the conversion of the preferred stock as of the earliest possible conversion date, which was June 30, 2004.



NOTE 8  CONTINGENCIES



The Company is involved in certain legal actions and claims arising in the ordinary course of business, including product liability claims and disputes, patent disputes,
a dispute with the seller of an acquired business and disputes pertaining to distributor agreements. At September 24, 2005, a reserve of $5,457,000 is included in accrued expenses for estimated losses to be incurred related to those matters for
which it is probable that a loss has been incurred. Included with the legal reserve is a third quarter 2005 litigation charge of $4,101,000 related primarily to the jury verdict and associated costs in the Colassi patent infringement case, which the
Company is appealing.



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



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



12



---

##### Table of Contents

amount of compensatory and punitive damages and expenses. The Company filed an answer to the complaint denying the material allegations of the complaint and
denying liability and it further asserted counterclaims against the plaintiffs, including for repayment of over-allocations of expenses under the lease and certain excess incentive compensation payments that were made to the individual plaintiff.



A jury verdict was rendered in this litigation on February 2, 2002. While
the jury found in favor of the Company with respect to the majority of the plaintiffs claims, it also found that the Company owed certain incentive compensation payments and rent, plus interest. In December 2002, plaintiff Kirila Realty and
the Company agreed to enter judgment in favor of Kirila Realty for $48,750 on the claims related to lease issues. Such amount represented the approximate $38,000 jury verdict together with an agreed amount of interest due and was paid by the Company
in 2002.



On March 31, 2004,a $2,452,783 judgment was entered with
respect to the incentive compensation portion of the jury verdict. This judgment was composed of the original jury verdict amount of $872,000, prejudgment interest on the judgment of $369,000, a statutory penalty under the Pennsylvania Wage Payment
and Collection Law of $218,000 and attorneys fees of $993,783. Cybex has filed an appeal of this judgment, which required that Cybex post a letter of credit for $2,945,722 (see Note 5). Cybex intends to vigorously pursue this appeal. The
ultimate resolution of this matter could be material to the Companys financial position, results of operations and cash flows; however, management believes that the recorded reserve of $1,866,000 is adequate.



Colassi v. Cybex International, Inc.



This action was filed in the United States District Court for the District of Massachusetts.
The plaintiff alleged that certain of the Companys treadmill products infringe a patent allegedly owned by the plaintiff. The plaintiff sought injunctive relief and monetary damages. The Company filed an answer to the complaint denying the
material allegations of the complaint and asserting counterclaims. A jury verdict was rendered in this litigation in August 2005. The jury determined that the deck system of certain of the Companys treadmill products infringes plaintiffs
patent and awarded $2,500,000 in damages. A six month stay of a permanent injunction against sale of treadmill products incorporating this deck system was entered in September 2005. The Company is appealing the judgment entered by the trial court on
the jury verdict. The ultimate resolution of this matter could be material to the Companys financial position, results of operations and cash flows; however, management believes that the recorded reserve is adequate.



Free Motion Fitness v. Cybex International, Inc.



On December 3, 2001, Free Motion Fitness (f.k.a. Ground Zero Design Corporation) filed
in the United States District Court for the District of Utah an action for patent infringement against the Company alleging that the Companys FT360 Functional Trainer infringed two of the plaintiffs patents. The Company filed an answer
and counterclaim denying the material allegations of the complaint and including claims which management believes could invalidate the Free Motion Fitness patents. In September 2003, this case was combined with a separate matter also in the United
States District Court, Division of Utah in which Free Motion Fitness had sued the Nautilus Group for infringement of the same patents at issue in the Cybex case. In December 2003, the Court issued its Memorandum Opinion and Order regarding the
various summary judgment motions of Cybex, Free Motion Fitness and Nautilus. In its opinion, the Court denied Free Motion Fitnesss summary judgment request, granted Cybexs motion for summary judgment with regard to literal infringement
but denied Cybexs motion for summary judgment under the doctrine of equivalents, and granted Nautilus summary judgment request on literal infringement. The Company subsequently filed a motion with the Court for complete summary judgment
of nonfringement literally and under the doctrine of equivalents. In May 2004 the Court ruled in favor of the Companys motion for summary judgment, dismissing with prejudice all of the claims of the plaintiff against the Company and Nautilus.
The plaintiff appealed the grant of summary judgment and in September 2005 the Court of Appeals for the Federal Circuit reversed the lower court ruling. The Company has asked the Court of Appeals to reconsider this decision. If the Court of Appeals
does not



13



---

##### Table of Contents

reconsider its decision, or if it reconsiders and affirms its decision, the case will be returned to the trial court level.



Cybex International, Inc. v. Biosig Instruments, Inc.



On August 24, 2004, the Company commenced a declaratory judgment action in the United
States District Court for the District of Massachusetts against Biosig Instruments, Inc., of Canada, seeking a declaration of non-infringement with respect to certain of Biosigs patents and a declaration that Biosigs patents are invalid.
The Company then commenced a parallel action in the Federal Court of Canada, seeking the same relief with respect to Biosigs Canadian patents. In response to the lawsuit in Massachusetts, on August 26, 2004, Biosig commenced an action in
the Southern District of New York alleging that the Company had infringed Biosigs patents and that the Company had breached certain provisions of a confidentiality agreement that the Company entered into with Biosig. Biosigs complaint
sought compensatory damages of not less than $5,000,000.



The Company has
reached a confidential settlement of these actions pursuant to which the Company has received a license under Biosigs patents permitting past and future sales of products.



NOTE 9  NEW ACCOUNTING PRONOUNCEMENTS



In December 2004, the FASB issued SFAS No. 151, Inventory Costs, which clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials (spoilage). Under SFAS No. 151, such items will be recognized as current period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for the Company for inventory costs incurred on or after January 1, 2006.



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



14



---

##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



CAUTIONARY STATEMENT FOR FORWARD LOOKING INFORMATION



Statements included in this Managements Discussion and Analysis of Financial Condition and Results of Operations may contain
forward-looking statements. There are a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by the statements made below. These include, but are not limited to, competitive factors,
technological and product developments, market demand, economic conditions, the resolution of litigation involving the Company, and the ability of the Company to comply with the terms of its credit facilities. Further information on these and other
factors which could affect the Companys financial results can be found in the Companys reports filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K, including Part I thereof, its Current Reports on
Form 8-K, this Form 10-Q and its proxy statement dated April 6, 2005.



OVERVIEW



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



RESULTS OF OPERATIONS



NET SALES



Cybexs net sales increased $1,652,000, or 7%, to $26,690,000 for the third quarter ended September 24, 2005 from $25,038,000 for the third quarter ended
September 25, 2004. For the nine months ended September 24, 2005, net sales increased $5,115,000, or 7%, to $78,646,000 from $73,531,000 compared to the same period in 2004. For the third quarter of 2005, sales of cardiovascular products
increased $2,251,000, or 19%, to $14,023,000 and sales of strength products decreased $460,000, or 4%, to $10,030,000. For the nine months ended September 24, 2005, sales of cardiovascular products increased $8,277,000, or 24%, to $42,461,000
and sales of strength products decreased $2,648,000, or 9%, to $28,442,000. The increase in sales of cardiovascular products was predominately driven by an increase in ArcTrainer sales which accounted for 68% of the increase in the third quarter and
92% of the increase for the nine months ended September 24, 2005. Sales of the ArcTrainer increased 26% in the third quarter and 47% for the nine months ended September 24, 2005 compared to the same periods in 2004. The decrease in sales
of strength products for the quarter and the nine months ended September 24, 2005 is believed to be partially caused by customers waiting for a new product line, which is scheduled to be introduced during the fourth quarter of 2005. Freight,
parts and other revenue decreased $139,000, or 5%, to $2,637,000 in the third quarter of 2005 and decreased $514,000, or 6%, to $7,743,000 for the nine months ended September 24, 2005.



GROSS MARGIN



Gross margin increased to 35.8% in the third quarter of 2005 from 35.3% in the prior year third quarter predominantly due to efficiencies
achieved as a result of capital expenditures made over the last year (.6%) and absorption of overhead from higher volumes (.3%). These improvements were offset by higher warranty costs due mainly to product mix (.4%).



Gross margin for the nine months ended September 24, 2005 decreased to 35.7% from 37.1%
for the same period in 2004 predominantly due to higher steel prices (1.1%) and higher warranty costs (.3%) mainly due to product mix.



15



---

##### Table of Contents

During 2004 and 2005, the Company has experienced increases in the price of steel, a major component of the
Companys products. In 2004, in response to these price increases, the Company instituted product surcharges and price increases. While steel prices did not have a material impact on margins in the third quarter 2005 compared to third quarter
2004, the negative impact on gross margins from the steel price increases for the first nine months of 2005 compared to the corresponding 2004 period was approximately 1.1 percentage points. Management expects that gross margins will continue to be
negatively impacted by steel prices throughout 2005. Additionally, customer reaction to price increases and surcharges instituted in response to these cost increases could negatively impact net sales.



SELLING, GENERAL AND ADMINISTRATIVE EXPENSES



Selling, general and administrative expenses increased by $890,000, or 12%, to $8,276,000 in
the third quarter of 2005 compared to $7,386,000 in the third quarter of 2004, predominantly due to an increase in sales and marketing expenses ($490,000) including an increase in the size of the direct sales force and an increase in product
development costs ($185,000). For the nine months ended September 24, 2005, selling, general and administrative expenses increased by $1,566,000, or 7%, predominantly due to increased sales and marketing expenses ($1,132,000) including an
increase in the direct sales force and an increase in product development costs ($576,000).



LITIGATION CHARGES



Litigation charges
for the quarter and nine months ended September 24, 2005 relate to a $4,101,000 increase in legal reserves recorded in the third quarter 2005. This increase in reserves primarily relates to the jury verdict and associated costs in the Colassi
patent infringement case, which the Company is appealing.



NET INTEREST
EXPENSE



Net interest expense decreased by $328,000 in the third quarter
of 2005 compared to the corresponding period of 2004. For the nine months ended September 24, 2005, net interest expense decreased by $994,000. The decreases in 2005 were due to lower interest rates following the July 2004 refinancing and lower
principal balances, partially offset by interest associated with the August 2005 real estate transaction. In addition, 2004 interest expense includes $340,000 of deferred financing costs charged to expense in the third quarter of 2004 in connection
with the retirement of the Hilco facility.



PREFERRED STOCK DIVIDENDS



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



INCOME TAXES



In a prior year, the Company established a valuation allowance for all deferred taxes in accordance with SFAS No. 109, Accounting for Income Taxes. At December 31, 2004, the valuation
allowance was $21,787,000 and reduced deferred tax assets to zero. As of December 31, 2004, U.S federal operating loss carryforwards of approximately $34,797,000 were available to the Company to offset future taxable income. In addition, as of
December 31, 2004, the Company had foreign net operating losses of $1,875,000, which have an unlimited life, federal alternative minimum tax credit carryforwards of



16



---

##### Table of Contents

$345,000, which do not expire, and a federal research and development tax credit carryforward of $129,000, which expires in 2008. Management will re-evaluate
the need for the deferred tax valuation reserve in future periods. Management does not expect to recognize a significant tax provision until after a substantial portion of the net operating losses are utilized. The amounts recorded for income tax
expense for the three and nine months ended September 24, 2005 and September 25, 2004 relate to state taxes and federal alternative minimum tax.



FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES



As of September 24, 2005, the Company had working capital of $3,430,000 compared to $3,318,000 of working capital at December 31, 2004. The change in working
capital is primarily due to a $6,432,000 decrease in the current maturities of debt largely resulting from a recharacterization of debt from current to long-term due to the change to the CIT Amended Financing Agreement and the prepayment of a
portion of the GMAC term loan. These changes were offset by an increase in accrued expenses due to an increase in the litigation reserves and increased warranty reserves associated with higher sales levels and the use of cash to fund equipment
purchases and product development expenditures.



For the nine months ended
September 24, 2005, the Company generated $5,813,000 of cash from operating activities compared to $2,406,000 for the nine months ended September 25, 2004. The increase in cash provided by operating activities is primarily due to a
decrease in accounts receivable resulting from better collections and an increase in accrued expenses, including an increase to warranty reserves. These amounts were reduced by increases in inventory, partially due to the introduction of new
products.



Cash used in investing activities of $3,070,000 during the nine
months ended September 24, 2005 consisted of purchases and deposits on manufacturing tooling and equipment of $2,235,000, primarily for efficiency-enhancing manufacturing equipment and tooling for new products, and computer hardware and
infrastructure of $835,000. Cash used in investing activities of $1,110,000 during the nine months ended September 25, 2004 relates primarily to purchases and deposits on equipment and tooling for the manufacturing of new products and
improvements to the Companys computer network.



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



On July 13, 2004, the Company entered into a credit agreement
with GMAC Commercial Finance, LLC (GMAC) (the GMAC Credit Agreement) and entered into an amendment of its 2003 financing agreement with The CIT Group/Business Credit, Inc. (CIT) (as amended, the CIT Amended
Financing Agreement). The GMAC Credit Agreement provided for a $13,000,000 term loan, the proceeds of which were used to retire in full the $11,000,000 term loan from Hilco Capital, repay a $1,600,000 term loan from CIT and pay financing
costs. The CIT Amended Financing Agreement provided for a term loan of $4,000,000 and continued the working capital revolving loans that provide for up to the lesser of $14,000,000 or an amount determined by reference to a borrowing base. On
May 21, 2005, the Company entered into an amendment to the CIT Amended Financing Agreement which increased the term loan to $6,250,000. The GMAC Credit Agreement was amended and restated on February 1, 2005 to include a $3,000,000 credit
line that is available to finance machinery and equipment. The GMAC loans are secured by the Companys real estate, fixtures and equipment, and mature on August 1, 2009. The CIT loans are secured by substantially all other assets of the
Company and mature on June 30, 2008.



17



---

##### Table of Contents

At September 24, 2005, there were outstanding $13,475,000 of term loans, with no working capital loans outstanding.
Availability under the revolving loan fluctuates daily, and is reduced by outstanding letters of credit. At September 24, 2005, there was $8,320,000 in unused availability under the revolving loan.



On August 2, 2005, the Company sold its Owatonna, Minnesota manufacturing, warehouse and
office facility for approximately $3,600,000, of which $3,067,000 was used to prepay a portion of the GMAC term loan and $400,000 was used to prepay a portion of the CIT term loan. Simultaneously with this sale, the Company and the purchaser entered
into a lease of the Owatonna facility. The lease contains renewal options as well as options to terminate the lease if the Company elects to relocate or to repurchase the facility if it elects not to relocate. Due to the option to repurchase the
facility, this transaction has been treated for financial accounting purposes as a financing arrangement.



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



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



CONTRACTUAL OBLIGATIONS



The following is an aggregated summary of the Companys obligations and commitments to make future payments under debt, royalty and lease agreements as of September 24, 2005:



|                              |  |       |            |                   |   |                    |  |                    |            |                  |   |           |  |   |        
|----------------------------- |  | ----- | ---------- | ----------------- | - | ------------------ |  | ------------------ | ---------- | ---------------- | - | --------- |  | - | -------
|                              |  | TOTAL |            | Less ThanOne Year |   | One to Three Years |  | Four to Five Years |            | After Five Years
|Contractual obligations:      |  |       |            |                   |   |                    |  |                    |            |                  |   |           |  |   |        
|Debt                          |  | $     | 13,475,000 |                   | $ | 2,684,000          |  | $                  | 6,530,000  |                  | $ | 4,261,000 |  | $ |       
|Royalty agreement             |  |       | 2,660,000  |                   |   | 440,000            |  |                    | 720,000    |                  |   | 720,000   |  |   | 780,000
|Capital lease obligations (a) |  |       | 1,039,000  |                   |   | 559,000            |  |                    | 441,000    |                  |   | 39,000    |  |   |       
|Operating lease commitments   |  |       | 1,565,000  |                   |   | 598,000            |  |                    | 771,000    |                  |   | 196,000   |  |   |       
|Real estate financing         |  |       | 3,600,000  |                   |   |                   |  |                    | 3,600,000  |                  |   |          |  |   |       
|Purchase obligations          |  |       | 14,641,000 |                   |   | 9,568,000          |  |                    | 5,073,000  |                  |   |          |  |   |       
|                              |  |       |            |                   |   |                    |  |                    |            |                  |   |           |  |   |        
|TOTAL                         |  | $     | 36,980,000 |                   | $ | 13,849,000         |  | $                  | 17,135,000 |                  | $ | 5,216,000 |  | $ | 780,000
|                              |  |       |            |                   |   |                    |  |                    |            |                  |   |           |  |   |        



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



OFF-BALANCE SHEET ARRANGEMENTS



The Company has a lease financing program, through its wholly-owned subsidiary, whereby it arranges equipment leases and other financing for certain commercial customers
for selected products. These leases are accounted for as sales-type leases and are generally for terms of three to five years, at which time title transfers to the lessee. While most of these financings are without recourse, in certain cases the
Company may offer a guaranty or other recourse provisions. At September 24, 2005, the maximum contingent liability under all recourse provisions was approximately $4,459,000. A reserve for estimated losses under recourse provisions of $210,000
has been recorded based upon historical and industry experience, and is included in accrued liabilities at September 24, 2005.



18



---

##### Table of Contents

CRITICAL ACCOUNTING POLICIES



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



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



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



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



Legal matters. The Company
has recorded a reserve related to certain legal matters for which it is probable that a loss has been incurred and the range of such loss can be determined. With respect to other matters, management has concluded that a loss is only possible or
remote and, therefore, no loss is recorded. In addition, there are certain gain contingencies for which the Company has not recorded an asset because realization is not considered highly likely as of the balance sheet date. As additional information
becomes available, the Company will continue to assess whether losses from legal matters are probable, possible, or remote, the adequacy of accruals for probable loss contingencies and the status of gain contingencies.



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



19



---

##### Table of Contents

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



Valuation of deferred tax assets. At December 31, 2004, there was a valuation
allowance of $21,787,000 against the carrying value of the Companys deferred income tax assets. Approximately $55,840,000 of future taxable income is needed to fully realize the Companys net deferred tax assets. If the estimates and
related assumptions relating to the likely utilization of the deferred tax asset change in the future, the valuation allowance may change accordingly.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------



There have been no material changes in market risks from the disclosure within the Companys Report on Form 10-K for the year ended December 31, 2004.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------



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



20



---

##### Table of Contents

PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------



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



See Part 1 Item 3 of the Companys Report on Form 10-K for the year ended December 31, 2004 for a description of these proceedings.



Free Motion Fitness v. Cybex International,
Inc.



See Part 1 Item 3 of the Companys
Report on Form 10-K for the year ended December 31, 2004 for a description of these proceedings. In September 2005 the Court of Appeals for the Federal Circuit reversed the lower courts grant of summary judgment in favor the Company. The
Company has asked the Court of Appeals to reconsider this decision. If the Court of Appeals does not reconsider its decision, or if it reconsiders and affirms its decision, the case will be returned to the trial court level.



Colassi v. Cybex International, Inc.



See Part 1 Item 3 of the Companys Report on Form 10-K for the
year ended December 31, 2004 for a description of these proceedings. A jury verdict was rendered in this litigation in August 2005. The jury determined that the deck system of certain of the Companys treadmill products infringes
plaintiffs patent and awarded $2,500,000 in damages. A six month stay of a permanent injunction against sale of treadmill products incorporating the deck system was entered in September 2005. The Company has appealed the judgment entered by
the trial court on the jury verdict.



Cybex
International, Inc. v. Biosig Instruments, Inc.



See
Part 1 Item 3 of the Companys Report on Form 10-K for the year ended December 31, 2004 and Part II Item 1 of the Companys Report on Form 10-Q for the period ended June 25, 2005 for a description of these proceedings.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------



None



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------



None



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



None



|ITEM 5. | OTHER INFORMATION
|------- | -----------------



None



|ITEM 6. | EXHIBITS
|------- | --------



Exhibit

10.1 

Purchase and Sale Agreement, dated July 25, 2005, between the Company and Doug Hughes Properties, LLC.Exhibit

10.2 

Lease for Commercial Land and Building, dated July 25, 2005, between the Company and Doug Hughes Properties, LLC.Exhibit

31.1 

Certification of Chief Executive Officer.Exhibit

31.2 

Certification of Chief Financial Officer.Exhibit

32.1 

Statement of Chief Executive Officer.Exhibit

32.2 

Statement of Chief Financial Officer.




21



---

##### Table of Contents

SIGNATURES



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



| |  |                  |  |                           |  |     |  |                                     
| |  | ---------------- |  | ------------------------- |  | --- |  | ------------------------------------
| |  |                  |  | Cybex International, Inc.
| |  |                  |  |                          
| |  |                  |  |                           |  | By: |  | /S/    JOHN
AGLIALORO               
| |  | November 7, 2005 |  |                           |  |     |  | John Aglialoro                      
| |  |                  |  |                           |  |     |  | Chairman and Chief Executive Officer
| |  |                  |  |                          
| |  |                  |  |                          
| |  |                  |  |                           |  | By: |  | /S/    ARTHUR W. HICKS,
JR.         
| |  | November 7, 2005 |  |                           |  |     |  | Arthur W. Hicks, Jr.                
| |  |                  |  |                           |  |     |  | Chief Financial Officer             



22