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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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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 25, 2004.



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



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Cybex International, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)                          



Registrants
telephone number, including area code (508) 533-4300



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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



On November 2, 2004, the Registrant had outstanding 15,055,934 shares of
Common Stock, par value $0.10 per share, which is the Registrants only class of Common Stock.



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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 25, 2004 and September 27, 2003 |  | 3   
|           |  |                       | 
|           |  |                       |  | Condensed Consolidated Balance Sheets  September 25, 2004 and December 31, 2003                                      |  | 4   
|           |  |                       | 
|           |  |                       |  | Condensed Consolidated Statements of Cash FlowsNine months ended September 25, 2004 and September 27, 2003            |  | 5   
|           |  |                       | 
|           |  |                       |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                       |  | 6   
|           |  |                       | 
|           |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                  |  | 14  
|           |  |                       | 
|           |  | Item 3.               |  | Quantitative and Qualitative Disclosures about Market Risk                                                             |  | 19  
|           |  |                       | 
|           |  | Item 4.               |  | Controls and Procedures                                                                                                |  | 19  
|           |  |                      
|PART II.   |  | OTHER INFORMATION     |  |                                                                                                                       
|           |  |                       | 
|           |  | Item 1.               |  | Legal Proceedings                                                                                                      |  | 20  
|           |  |                       | 
|           |  | 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                                                                                                      |  | 22  
|           |  |                       | 
|           |  | Item 6.               |  | Exhibits                                                                                                               |  | 22  
|           | 
|Signatures |  | 23                   



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                                      |  |                    |        |   |                    |   |        |                    |  |   |                    |   |  |   |        |  
|----------------------------------------------------- |  | ------------------ | ------ | - | ------------------ | - | ------ | ------------------ |  | - | ------------------ | - |  | - | ------ | -
|                                                      |  | Three Months Ended |        |   | Nine Months Ended  |  
|                                                      |  | September 25, 2004 |        |   | September 27, 2003 |   |        | September 25, 2004 |  |   | September 27, 2003 |  
|Net sales                                             |  | $                  | 24,909 |   |                    | $ | 21,886 |                    |  | $ | 73,220             |   |  | $ | 63,608 |  
|Cost of sales                                         |  |                    | 16,285 |   |                    |   | 14,877 |                    |  |   | 46,444             |   |  |   | 42,682 |  
|                                                      |  |                    |        |   |                    |   |        |                    |  |   |                    |   |  |   |        |  
|Gross profit                                          |  |                    | 8,624  |   |                    |   | 7,009  |                    |  |   | 26,776             |   |  |   | 20,926 |  
|                                                      |  |                    |        |  
|Selling, general and administrative expenses          |  |                    | 7,178  |   |                    |   | 7,000  |                    |  |   | 22,231             |   |  |   | 20,914 |  
|                                                      |  |                    |        |   |                    |   |        |                    |  |   |                    |   |  |   |        |  
|Operating income                                      |  |                    | 1,446  |   |                    |   | 9      |                    |  |   | 4,545              |   |  |   | 12     |  
|                                                      |  |                    |        |  
|Interest expense, net                                 |  |                    | (667   | ) |                    |   | (936   | )                  |  |   | (2,548             | ) |  |   | (2,669 | )
|Other income (expense), net                           |  |                    | (340   | ) |                    |   | (20    | )                  |  |   | (340               | ) |  |   | 49     |  
|                                                      |  |                    |        |   |                    |   |        |                    |  |   |                    |   |  |   |        |  
|Income (loss) before income taxes                     |  |                    | 439    |   |                    |   | (947   | )                  |  |   | 1,657              |   |  |   | (2,608 | )
|Income tax expense (benefit)                          |  |                    | 29     |   |                    |   | 6      |                    |  |   | 39                 |   |  |   | (51    | )
|                                                      |  |                    |        |   |                    |   |        |                    |  |   |                    |   |  |   |        |  
|Net income (loss)                                     |  |                    | 410    |   |                    |   | (953   | )                  |  |   | 1,618              |   |  |   | (2,557 | )
|                                                      |  |                    |        |  
|Preferred stock dividends                             |  |                    | (32    | ) |                    |   | (122   | )                  |  |   | (276               | ) |  |   | (122   | )
|                                                      |  |                    |        |   |                    |   |        |                    |  |   |                    |   |  |   |        |  
|Net income (loss) attributable to common stockholders |  | $                  | 378    |   |                    | $ | (1,075 | )                  |  | $ | 1,342              |   |  | $ | (2,679 | )
|                                                      |  |                    |        |   |                    |   |        |                    |  |   |                    |   |  |   |        |  
|Basic net income (loss) per share                     |  | $                  | .03    |   |                    | $ | (.12   | )                  |  | $ | .13                |   |  | $ | (.30   | )
|                                                      |  |                    |        |   |                    |   |        |                    |  |   |                    |   |  |   |        |  
|Diluted net income (loss) per share                   |  | $                  | .03    |   |                    | $ | (.12   | )                  |  | $ | .12                |   |  | $ | (.30   | )
|                                                      |  |                    |        |   |                    |   |        |                    |  |   |                    |   |  |   |        |  



See notes to condensed consolidated
financial statements.



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)



|                                                                                       |  |                    |         |   |                   |   |         |  
|-------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                       |  | September 25, 2004 |         |   | December 31, 2003 |  
|ASSETS                                                                                 |  |                    |         |   |                   |   |         |  
|Current Assets:                                                                        |  |                    |         |   |                   |   |         |  
|Cash and cash equivalents                                                              |  | $                  | 593     |   |                   | $ | 749     |  
|Accounts receivable, net of allowance of $1,052 and $982                               |  |                    | 14,431  |   |                   |   | 13,755  |  
|Inventories                                                                            |  |                    | 8,624   |   |                   |   | 7,910   |  
|Prepaid expenses and other                                                             |  |                    | 2,526   |   |                   |   | 2,081   |  
|                                                                                       |  |                    |         |   |                   |   |         |  
|Total current assets                                                                   |  |                    | 26,174  |   |                   |   | 24,495  |  
|Property, plant and equipment, net                                                     |  |                    | 13,373  |   |                   |   | 14,472  |  
|Goodwill                                                                               |  |                    | 11,247  |   |                   |   | 11,247  |  
|Other assets                                                                           |  |                    | 1,861   |   |                   |   | 3,174   |  
|                                                                                       |  |                    |         |   |                   |   |         |  
|                                                                                       |  | $                  | 52,655  |   |                   | $ | 53,388  |  
|                                                                                       |  |                    |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                   |  |                    |         |   |                   |   |         |  
|Current Liabilities:                                                                   |  |                    |         |   |                   |   |         |  
|Current maturities of long-term debt                                                   |  | $                  | 7,450   |   |                   | $ | 12,261  |  
|Accounts payable                                                                       |  |                    | 5,904   |   |                   |   | 7,200   |  
|Accrued expenses                                                                       |  |                    | 9,720   |   |                   |   | 9,916   |  
|                                                                                       |  |                    |         |   |                   |   |         |  
|Total current liabilities                                                              |  |                    | 23,074  |   |                   |   | 29,377  |  
|Long-term debt                                                                         |  |                    | 12,172  |   |                   |   | 14,825  |  
|Other liabilities                                                                      |  |                    | 3,160   |   |                   |   | 3,168   |  
|                                                                                       |  |                    |         |   |                   |   |         |  
|Total liabilities                                                                      |  |                    | 38,406  |   |                   |   | 47,370  |  
|                                                                                       |  |                    |         |   |                   |   |         |  
|Contingencies (Note 8)                                                                 |  |                    |         |   |                   |   |         |  
|Stockholders Equity:                                                                  |  |                    |         |   |                   |   |         |  
|Common stock, $.10 par value, 20,000 shares authorized, 15,012 and 9,077 shares issued |  |                    | 1,501   |   |                   |   | 907     |  
|Preferred stock, $1.00 par value, 100 shares authorized, zero and 33 shares issued     |  |                    |        |   |                   |   | 4,900   |  
|Additional paid-in capital                                                             |  |                    | 57,481  |   |                   |   | 45,960  |  
|Treasury stock, at cost (209 shares)                                                   |  |                    | (2,251  | ) |                   |   | (2,251  | )
|Accumulated deficit                                                                    |  |                    | (42,198 | ) |                   |   | (43,294 | )
|Accumulated other comprehensive loss                                                   |  |                    | (284    | ) |                   |   | (204    | )
|                                                                                       |  |                    |         |   |                   |   |         |  
|Total stockholders equity                                                             |  |                    | 14,249  |   |                   |   | 6,018   |  
|                                                                                       |  |                    |         |   |                   |   |         |  
|                                                                                       |  | $                  | 52,655  |   |                   | $ | 53,388  |  
|                                                                                       |  |                    |         |   |                   |   |         |  



See notes to condensed consolidated
financial statements.



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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                         |  |                    |         |   |                    |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ------------------ | - | ------- | -
|                                                                                         |  | Nine Months Ended  |        
|                                                                                         |  | September 25, 2004 |         |   | September 27, 2003 |  
|OPERATING ACTIVITIES:                                                                    |  |                    |         |   |                    |   |         |  
|Net income (loss)                                                                        |  | $                  | 1,618   |   |                    | $ | (2,557  | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                    |         |   |                    |   |         |  
|Depreciation and amortization                                                            |  |                    | 2,737   |   |                    |   | 2,808   |  
|Amortization of deferred financing costs                                                 |  |                    | 887     |   |                    |   | 498     |  
|Provision for doubtful accounts                                                          |  |                    | 271     |   |                    |   | 128     |  
|Net change in other operating assets and liabilities                                     |  |                    | (2,717  | ) |                    |   | 329     |  
|                                                                                         |  |                    |         |   |                    |   |         |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                |  |                    | 2,796   |   |                    |   | 1,206   |  
|                                                                                         |  |                    |         |   |                    |   |         |  
|INVESTING ACTIVITIES:                                                                    |  |                    |         |   |                    |   |         |  
|Purchases of property, plant and equipment                                               |  |                    | (1,531  | ) |                    |   | (790    | )
|                                                                                         |  |                    |         |   |                    |   |         |  
|NET CASH USED IN INVESTING ACTIVITIES                                                    |  |                    | (1,531  | ) |                    |   | (790    | )
|                                                                                         |  |                    |         |   |                    |   |         |  
|FINANCING ACTIVITIES:                                                                    |  |                    |         |   |                    |   |         |  
|Repayments of term loans                                                                 |  |                    | (17,144 | ) |                    |   | (17,459 | )
|Proceeds from issuance of term loans                                                     |  |                    | 15,000  |   |                    |   | 16,000  |  
|Net borrowings (repayments) under revolving loan                                         |  |                    | (5,319  | ) |                    |   | 80      |  
|Deferred financing costs                                                                 |  |                    | (297    | ) |                    |   | (2,003  | )
|Proceeds from issuance of common stock, net of costs                                     |  |                    | 7,230   |   |                    |   |        |  
|Proceeds from exercise of stock options                                                  |  |                    | 5       |   |                    |   |        |  
|Dividends paid to related party                                                          |  |                    | (522    | ) |                    |   |        |  
|Proceeds from related party loans                                                        |  |                    |        |   |                    |   | 3,900   |  
|Principal payments on capital leases                                                     |  |                    | (374    | ) |                    |   | (240    | )
|                                                                                         |  |                    |         |   |                    |   |         |  
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                      |  |                    | (1,421  | ) |                    |   | 278     |  
|                                                                                         |  |                    |         |   |                    |   |         |  
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                         |  |                    | (156    | ) |                    |   | 694     |  
|CASH AND CASH EQUIVALENTS, beginning of period                                           |  |                    | 749     |   |                    |   | 216     |  
|                                                                                         |  |                    |         |   |                    |   |         |  
|CASH AND CASH EQUIVALENTS, end of period                                                 |  | $                  | 593     |   |                    | $ | 910     |  
|                                                                                         |  |                    |         |   |                    |   |         |  



See notes to condensed consolidated
financial statements.



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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 accounting principles generally accepted in the United States. 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 25, 2004 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, 2003, the Companys Quarterly Reports on Form 10-Q for the periods ended March 27, 2004 and June 26, 2004, its Current Reports on Form 8-K, and its proxy statement dated March 29, 2004.



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 25, 2004, the maximum contingent liability under all recourse and guarantee provisions was
approximately $4,915,000. A reserve for estimated losses under recourse provisions of $84,000 has been recorded based on historical and industry experience and is included in accrued expenses at September 25, 2004. At September 25, 2004, in
accordance with Interpretation No. 45 (FIN45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, the Company also has a net liability of $77,000 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.



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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 25, 2004:



|                                      |  |   |            |  
|------------------------------------- |  | - | ---------- | -
|Balance as of January 1, 2004         |  | $ | 1,759,000  |  
|Payments made under warranty          |  |   | (1,457,000 | )
|Accrual for product warranties issued |  |   | 1,780,000  |  
|                                      |  |   |            |  
|Balance as of September 25, 2004      |  | $ | 2,082,000  |  
|                                      |  |   |            |  



NOTE 3 STOCK-BASED
COMPENSATION



SFAS No. 148, Accounting for Stock-Based Compensation
 Transition and Disclosure, amends 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.
The disclosure provisions of SFAS No. 148 are incorporated below. 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 (loss) and income (loss) per share disclosures for employee stock option grants 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 provide the pro forma disclosures for its stock option plans in accordance with the provisions of SFAS No. 123
and SFAS No. 148.



|                                                                                                                    |  |                    |         |   |                    |   |            |                    |  |   |                    |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ------------------ | - | ---------- | ------------------ |  | - | ------------------ | - |  | - | ---------- | -
|                                                                                                                    |  | Three Months Ended |         |   | Nine Months Ended  |  
|                                                                                                                    |  | September 25, 2004 |         |   | September 27, 2003 |   |            | September 25, 2004 |  |   | September 27, 2003 |  
|Net income (loss) attributable to common stockholders                                                               |  | $                  | 378,000 |   |                    | $ | (1,075,000 | )                  |  | $ | 1,342,000          |   |  | $ | (2,679,000 | )
|Deduct: Total stock-based employee compensation expense determined under the fair-value based method for all awards |  |                    | (27,000 | ) |                    |   | (26,000    | )                  |  |   | (75,000            | ) |  |   | (79,000    | )
|                                                                                                                    |  |                    |         |   |                    |   |            |                    |  |   |                    |   |  |   |            |  
|Pro forma net income (loss) attributable to common stockholders                                                     |  | $                  | 351,000 |   |                    | $ | (1,101,000 | )                  |  | $ | 1,267,000          |   |  | $ | (2,758,000 | )
|                                                                                                                    |  |                    |         |   |                    |   |            |                    |  |   |                    |   |  |   |            |  
|Basic net income (loss) per share:                                                                                  |  |                    |         |   |                    |   |            |                    |  |   |                    |   |  |   |            |  
|As reported                                                                                                         |  | $                  | .03     |   |                    | $ | (.12       | )                  |  | $ | .13                |   |  | $ | (.30       | )
|                                                                                                                    |  |                    |         |   |                    |   |            |                    |  |   |                    |   |  |   |            |  
|Pro forma                                                                                                           |  | $                  | .03     |   |                    | $ | (.12       | )                  |  | $ | .13                |   |  | $ | (.31       | )
|                                                                                                                    |  |                    |         |   |                    |   |            |                    |  |   |                    |   |  |   |            |  
|Diluted net income (loss) per share:                                                                                |  |                    |         |   |                    |   |            |                    |  |   |                    |   |  |   |            |  
|As reported                                                                                                         |  | $                  | .03     |   |                    | $ | (.12       | )                  |  | $ | .12                |   |  | $ | (.30       | )
|                                                                                                                    |  |                    |         |   |                    |   |            |                    |  |   |                    |   |  |   |            |  
|Pro forma                                                                                                           |  | $                  | .03     |   |                    | $ | (.12       | )                  |  | $ | .12                |   |  | $ | (.31       | )
|                                                                                                                    |  |                    |         |   |                    |   |            |                    |  |   |                    |   |  |   |            |  



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NOTE 4  INVENTORIES



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



|                |  |                    |           |                   |   |          
|--------------- |  | ------------------ | --------- | ----------------- | - | ---------
|                |  | September 25, 2004 |           | December 31, 2003
|Raw materials   |  | $                  | 4,066,000 |                   | $ | 3,937,000
|Work in process |  |                    | 2,135,000 |                   |   | 1,963,000
|Finished goods  |  |                    | 2,423,000 |                   |   | 2,010,000
|                |  |                    |           |                   |   |          
|                |  | $                  | 8,624,000 |                   | $ | 7,910,000
|                |  |                    |           |                   |   |          



NOTE 5  LONG-TERM DEBT



Long-term debt consists of the following:



|                                    |  |                   |            |   |                   |   |             |  
|----------------------------------- |  | ----------------- | ---------- | - | ----------------- | - | ----------- | -
|                                    |  | September 25,2004 |            |   | December 31, 2003 |  
|Working capital loans               |  | $                 | 4,517,000  |   |                   | $ | 9,836,000   |  
|Bank term loans                     |  |                   | 13,905,000 |   |                   |   | 15,650,000  |  
|Industrial development revenue bond |  |                   | 1,200,000  |   |                   |   | 1,600,000   |  
|                                    |  |                   |            |   |                   |   |             |  
|                                    |  |                   | 19,622,000 |   |                   |   | 27,086,000  |  
|Less  current portion              |  |                   | (7,450,000 | ) |                   |   | (12,261,000 | )
|                                    |  |                   |            |   |                   |   |             |  
|                                    |  | $                 | 12,172,000 |   |                   | $ | 14,825,000  |  
|                                    |  |                   |            |   |                   |   |             |  



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 plus a letter of credit of $1,500,000. The proceeds of the CIT and Hilco Financing Agreements were used to repay, in full, all
outstanding borrowings under a prior bank agreement.



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 provides for a $13,000,000 term loan (the GMAC 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 $400,000 of financing costs. The unamortized balance of the deferred financing costs under the Hilco Financing Agreement of approximately $340,000 was expensed in the third quarter of 2004 upon the repayment of the Hilco loan.
The Company prepaid $3,000,000 of the GMAC Loan in September 2004.



The CIT
Amended Financing Agreement provides for a term loan of $4,000,000 and continues the working capital revolving loans with the same maximum limitation. At September 25, 2004, the unused availability under the working capital loan was $9,483,000. The
GMAC Loan is secured by the Companys real estate, fixtures and equipment, and matures on August 1, 2009. The CIT loans are secured by substantially all other assets of the Company and mature on June 29, 2007.



The CIT loans currently bear interest at rates ranging between LIBOR plus 2.5% to 3.25% or
the prime



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rate less .25% to plus .50% based on a performance grid (4.75% at September 25, 2004), except for (a) prior to July 13,
2004, a $3,000,000 term loan, which bore interest at the prime rate plus 5%, with a minimum rate of 10% (10% at June 26, 2004) and (b) after July 13, 2004, the $4,000,000 term loan which bears interest at the prime rate plus 3%, with a minimum of 7%
(7.75% at September 25, 2004). The $4,000,000 CIT term loan is due in equal quarterly principal installments of $250,000, with the balance of $1,250,000 due at maturity on June 29, 2007. Interest is payable monthly. The GMAC 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 Loan is due in equal monthly payments of $61,000 with the balance of $6,361,000 due at maturity on August 1,
2009. The Hilco loan bore interest at the prime rate plus 11.5% (15.5% at June 26, 2004), with a minimum of 15.5%. The prime rate was 4.75% and LIBOR was 1.84% at September 25, 2004.



The GMAC 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 25, 2004. The CIT Amended Financing Agreement also restricts the ability
of the Company to pay cash dividends. The CIT Amended Financing Agreement and the GMAC 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 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 $41,427 and $226,309, 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 after the end of the third quarter 2004.



During 2002 and 2003, UM Holdings Ltd. (UM), a principal stockholder of the
Company, lent to the Company, on a subordinated basis, $4,900,000, which bore interest at 10% and was to mature on January 1, 2004. 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.



As part of the CIT and Hilco Financing Agreements, UM provided additional collateral of
$3,100,000 in the form of a guarantee of certain letters of credit, which as of September 25, 2004 had been reduced to $1,200,000. In the event that UM suffered a loss with respect to this collateral, the Companys reimbursement obligation was
to be satisfied by issuance of additional shares of Preferred Stock. Subsequent to the end of the third quarter of 2004, the last of these letters of credit was retired in full. UM has also provided the collateral to support the required $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). The Company will be required to reimburse UM if it suffers a loss with respect to this collateral.



In 1992, an industrial development revenue bond provided the funds to
purchase, expand and equip the manufacturing and administrative facility in Medway, Massachusetts. The bond bore interest at a rate that reset weekly (1.54% at September 25, 2004) with interest payable monthly and principal payable annually through
May 2007. This bond was retired subsequent to the end of the third quarter of 2004 and, accordingly, the entire balance is classified within current maturities of long-term debt at September 25, 2004.



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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 Series B Convertible Cumulative Preferred Stock
of its right to convert all such outstanding preferred shares into Common Stock.



The Company consummated on August 5, 2004 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 $7,230,000. Additionally, the Company issued in connection with the private placement 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 become exercisable upon shareholder approval of the same and 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 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.



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 25, 2004 |  | September 27, 2003 |  | September 25, 2004 |  | September 27, 2003
|Shares used in computing basic net income (loss) per share   |  | 12,337,000         |  | 8,831,000          |  | 10,042,000         |  | 8,831,000         
|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 |  | 14,566,000         |  | 8,831,000          |  | 11,132,000         |  | 8,831,000         
|                                                             |  |                    |  |                    |  |                    |  |                   



For purposes of presenting diluted net
income per share, the Company assumes the conversion of the convertible preferred stock as of the earliest possible conversion date, which was June 30, 2004. For the three and nine months ended September 25, 2004, options to purchase 63,000 and
73,000 shares, respectively, of the Companys common stock at exercise prices ranging from $4.06 to $11.75 and $3.70 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 27, 2003, options to purchase 339,000 of the Companys common stock at exercise prices ranging from $1.30 to $11.75 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.



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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 25, 2004, a reserve of $1,867,000 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.



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 which 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 which leased to Trotter a plant located in Sharpsville,
Pennsylvania. In accordance with Pennsylvania practice, the complaint in this matter was not served upon the defendants until the second quarter of 1998. 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 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 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 which 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, the Company believes that the recorded reserves of $1,732,000 are adequate.



Hot New Products v. Cybex International, Inc., et al



This action is in the United States District Court for the Northern District of Alabama. The
plaintiff in this action is a terminated dealer of Trotter. Shortly after the termination, plaintiff filed a State action against Trotter and Cybex, alleging fraud, breach of contract, unjust enrichment and recoupment. The plaintiff also sued
another Cybex dealer alleging intentional interference with business relations. In July 1998, the plaintiff filed this antitrust complaint in federal court, alleging price discrimination and price and territory conspiracy violations. The State court
case was dismissed with the State court claims refiled as part of this federal action. The plaintiff is seeking approximately $3,500,000 in compensatory damages,



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plus treble damages for the antitrust claims and punitive damages. The Company has filed an answer to the complaint
denying the material allegations of the complaint and denying liability and has filed a counterclaim for fraud, promissory estoppel and intentional interference with business relations. On August 14, 2003, the Court issued a ruling dismissing most
of the plaintiffs causes of action as well as all of the counterclaims asserted by Cybex. The Court allowed two of the plaintiffs claims, one Federal claim and one State claim, to proceed to trial. Trial began on this matter on January
20, 2004. Immediately prior to trial, the plaintiff dismissed their State claim and elected to proceed to trial only on the Federal claim. On January 29, 2004 the jury returned a verdict in favor of Cybex. On February 13, 2004, the plaintiff filed a
motion for a new trial, which was denied by the court on September 3, 2004. After plaintiff filed its notice to appeal the jury verdict on October 4, 2004, the parties reached an agreement in principle on October 14, 2004, pursuant to which the
Company will pay $45,000 to the plaintiff in exchange for the plaintiffs dismissal of the lawsuit and release of all claims.



Colassi v. Cybex International, Inc.



This action is in the United States District Court for the District of Massachusetts. The plaintiff alleges that certain of the Companys treadmill products infringe
a patent allegedly owned by the plaintiff. The plaintiff seeks injunctive relief and monetary damages. The Company has filed an answer to the complaint denying the material allegations of the complaint and has asserted counterclaims. In October
2003, the Court held a preliminary hearing regarding the scope of the claims in this matter. In early March 2004, the Court issued its ruling regarding the construction of claims in this matter. The Company argued its motion for summary judgment
based on the Courts construction of claims on June 15, 2004. On August 3, 2004, the Court clarified its construction of the claims in this matter. The Company subsequently filed a supplemental memorandum in further support of its motion for
summary judgment on September 10, 2004, and awaits a decision from the Court on that motion. The Company intends to vigorously defend this litigation and prosecute its counterclaims.



Free Motion Fitness v. Cybex International, Inc.



On December 31, 2001, Free Motion Fitness (f.k.a. Ground Zero Design Corporation) filed an action for patent infringement against the
Company alleging that the Companys FT 360 Functional Trainer infringed U.S. Patent No. 6,238,323, allegedly owned by Free Motion Fitness. The Company did not receive service on this matter until April 2, 2002. The action was filed in the
United States District Court for the District of Utah. The Company has filed an answer that includes claims which the Company believes could invalidate the Free Motion Fitness patent and has also filed a counterclaim against Free Motion Fitness
seeking damages. On September 27, 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 patent at issue in
the Cybex case. Since that time, additional summary judgment motions have been filed by Cybex, Free Motion Fitness and Nautilus Group. On December 31, 2003, the Court issued its Memorandum Opinion and Order regarding the various summary judgment
motions of Cybex, Free Motion and Nautilus. In its opinion, the Court denied Free Motion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. On February 4, 2004, the Company filed a motion with the Court for complete summary judgment of nonfringement literally and
under the doctrine of equivalents. On March 31, 2004, the Court denied Free Motion Fitness motion for reconsideration of its earlier judgment granting of summary judgment as to literal infringement. On that same date the Court also denied the
Companys motion for summary judgment on the issue of literal infringement pending oral arguments on the matter. A hearing and oral arguments were held on May 7, 2004, at which time the Court ruled in favor of the Companys motion for
summary judgment. The Court issued its order on that ruling on September 1, 2004 not only dismissing all of the claims of the plaintiff against the Company and Nautilus, but also dismissing the Companys counterclaims against the plaintiff. On
September 27, 2004, the plaintiff filed its notice of appeal. Subsequently, the Court on October 4, 2004, modified its judgment to award the Company $12,400 in costs. The Company has agreed to suspend collection of this judgment from plaintiff
pending the resolution of plaintiffs appeal, provided plaintiff posts a proper bond for the amount of the judgment.



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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 has since 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. The Company has filed a motion
to dismiss the Southern District of New York action, or, in the alternative, to transfer it to the District of Massachusetts. If the transfer occurs, counsel expects the lawsuit commenced by Biosig to be consolidated with the lawsuit originally
commenced by the Company in Massachusetts. Biosigs complaint seeks compensatory damages of not less than $5,000,000. The Company intends to vigorously prosecute its affirmative litigation in Massachusetts and defend Biosigs affirmative
litigation in New York. In addition, the Company has placed its third party suppliers of heart rate monitors on notice of its right to seek indemnification from them with regard to the patent infringement claims by Biosig.



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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, 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 March 29, 2004.



OVERVIEW



Cybex International, Inc. (the Company or Cybex), a New York corporation, is a leading manufacturer of exercise
equipment and develops, manufactures and markets premium performance, professional quality strength and cardiovascular fitness equipment products for the commercial and, to a lessor extent, the consumer markets. Cybex is comprised of three formerly
independent companies, Cybex, Trotter Inc. (Trotter) and Tectrix Fitness Equipment, Inc. (Tectrix).



RESULTS OF OPERATIONS



NET SALES



Cybexs net sales
increased $3,023,000, or 14%, to $24,909,000 for the third quarter ended September 25, 2004 from $21,886,000 for the third quarter ended September 27, 2003. For the nine months ended September 25, 2004, net sales increased $9,612,000, or 15%, to
$73,220,000 from $63,608,000 compared to the same period in 2003. For the third quarter of 2004, sales of cardiovascular products increased $2,469,000, or 27%, to $11,772,000 and sales of strength products increased $385,000, or 4%, to $10,490,000.
For the nine months ended September 25, 2004, sales of cardiovascular products increased $6,805,000, or 25%, to $34,184,000 and sales of strength products increased $2,633,000, or 9%, to $31,090,000. The sales increase of cardiovascular products was
predominately driven by an increase in ArcTrainer sales and, for the nine-month period, treadmill sales to a lesser extent. Sales of the ArcTrainer increased 55% in the third quarter and 42% for the nine months ended September 25, 2004 compared to
the same periods in 2003. The sales increase of strength products for the quarter related to sales of various types of strength products and for the nine-month period the increase was largely attributable to increased selectorized equipment sales.
Freight, parts and other revenue increased $169,000, or 7%, to $2,647,000 in the third quarter of 2004 and increased $174,000 or 2%, to $7,946,000 for the nine months ended September 25, 2004.



GROSS MARGIN



Gross margin increased to 34.6% in the third quarter of 2004 from 32.0% in the prior year third quarter predominantly due to lower warranty
costs (1.4%), overhead absorption from higher volume (.8%) and an overall combination of material cost reduction and labor efficiencies due to new manufacturing equipment and better management of selling prices (.4%), net of the increase in steel
prices described below.



Gross margin for the nine months ended September 25,
2004 increased to 36.6% from 32.9% for the same period in 2003 predominantly due to overhead absorption from higher volume (1.1%), improved freight management (.5%), lower warranty costs (.7%) and overall efficiencies and better management of
selling prices (1.4%), net of the increase in steel prices described below.



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The Company throughout 2004 has experienced increases in the price of steel, a major component of the Companys
products. In response to these price increases, the Company instituted, for orders received from April 1, 2004 to August 1, 2004, a surcharge to customers. This surcharge was replaced by selected product price increases in August 2004. The price of
steel has continued to be volatile and, in response to further price increases, the Company is evaluating various pricing options to offset such steel cost increases. The negative impact on gross margins from the steel price increases, after taking
into account the effect of the surcharges and price increases, was 1.7% and 1.2% for the three and nine months ended September 25, 2004, respectively. The Company expects that gross margins will continue to be negatively impacted by steel prices for
at least the balance of the year. Additionally, customer reaction to price increases or surcharges instituted in response to these cost increases could negatively impact net sales for the fourth quarter 2004.



SELLING, GENERAL AND ADMINISTRATIVE EXPENSES



Selling, general and administrative expenses increased by $178,000, or 3%, to $7,178,000 in
the third quarter of 2004 compared to $7,000,000 in the third quarter of 2003, predominantly due to increased sales and marketing expenses ($234,000), and an increase in product development costs ($101,000). These increases for the third quarter of
2004 were partially offset by decreased legal costs ($100,000). For the nine months ended September 25, 2004, selling, general and administrative expenses increased by $1,317,000, or 6%, predominantly due to an increase in the direct sales force in
the latter part of 2003 ($528,000), increased sales and marketing expenses ($515,000), increased bad debt and leasing costs ($356,000) and an increase in product development costs ($340,000). These increases for the nine months ended September 25,
2004, were partially offset by decreased legal costs ($448,000).



NET INTEREST EXPENSE AND OTHER



Net interest expense and other
increased by $51,000 in the third quarter of 2004 compared to the corresponding period of 2003. For the nine months ended September 25, 2004, net interest expense and other income increased by $268,000. The increases in 2004 were due to a higher
interest rate on the Hilco term loan (which was outstanding from July 2003 to July 2004) and higher amortization of deferred financing costs (including the expensing of $340,000 of deferred financing costs related to the retirement of the Hilco
facility) offset by lower interest rates following the July 2004 refinancing.



The July 2004 refinancing, discussed in Financial Condition, Liquidity and Capital Resources below, is expected to result in annualized interest savings of approximately $1,000,000.



INCOME TAXES



In a prior year, the Company established a valuation allowance for all deferred taxes in accordance with SFAS No. 109. As of December 31,
2003, deferred tax assets of approximately $21,399,000 were available to the Company to offset future taxable income. Management will re-evaluate the need for the valuation reserve in future periods. The Company 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 (benefit) for the three and nine months ended September 25, 2004 and September 27, 2003 relate to state
taxes.



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 decrease the net income or increase the net loss attributable to common stockholders for purposes of computing income or loss 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.



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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES



As of September 25, 2004, the Company had working capital of $3,100,000 compared to
$4,882,000 of negative working capital at December 31, 2003. The change in working capital is primarily due to a $4,811,000 decrease in the current maturities of debt and a $1,296,000 reduction in accounts payable, primarily resulting from the July
2004 refinancing and the August 2004 common stock private placement discussed below.



For the nine months ended September 25, 2004, the Company generated $2,796,000 of cash from operating activities compared to $1,206,000 for the nine months ended September 27, 2003. The increase in cash provided by operating activities is
primarily due to the increase of $4,175,000 in the net income for the nine months ended September 25, 2004 compared to the same period in 2003 offset by a $3,046,000 net change in operating assets and liabilities in the nine months ended September
25, 2004 compared to the corresponding period of 2003, primarily as a result of the decrease in accounts payable from more prompt payment of vendor invoices with available cash from the debt and equity financing transactions and the increase in
accounts receivable and inventory during the nine months ended September 25, 2004 resulting from the increase in sales activity.



Cash used in investing activities of $1,531,000 during the nine months ended September 25, 2004 consisted of purchases of manufacturing tooling and equipment of
$1,225,000, primarily for new products, and computer hardware and infrastructure of $283,000. Cash used in investing activities of $790,000 during the nine months ended September 27, 2003 relates primarily to manufacturing equipment, equipment and
tooling for the manufacturing of new products and improvements to the Companys computer network. The Company plans capital expenditures in the fourth quarter of 2004 of between $2,000,000 to $2,400,000, predominantly for new manufacturing
equipment. The Company intends to seek an additional term loan to fund these expenditures. If such a term loan is not available on acceptable terms to the Company, it will utilize the proceeds from the private placement discussed
below.



The Company consummated on August 5, 2004 the private
placement of 2,430,000 shares of Common Stock to accredited (primarily institutional) investors. The Company received in the offering net cash proceeds, after commissions and offering expenses, of approximately $7,230,000. Such net cash proceeds
have been used to prepay the GMAC term loan discussed below by $3,000,000, retire the Companys $1,200,000 industrial revenue bond discussed below and pay $875,000 in accrued interest and preferred dividends. The Company anticipates using the
balance of the net proceeds to fund capital expenditures and 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 CIT Group/Business Credit, Inc. (CIT) (as amended, the CIT Amended Financing Agreement). The GMAC Credit Agreement provides 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 $400,000 of financing costs. The CIT Amended Financing Agreement provides for a term loan of $4,000,000 and continues 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. The GMAC loan is secured by the Companys real estate, fixtures and equipment, and matures on August 1, 2009. The CIT loans are secured by substantially all
other assets of the Company and mature on June 29, 2007.



At September 25,
2004, there was outstanding $4,517,000 in working capital loans and $13,905,000 of term loans. Availability under the revolving loan fluctuates daily. At September 25, 2004, there was $9,483,000 in unused availability under the revolving loan.



The Company at September 25, 2004 was also indebted on an industrial revenue
bond which had a principal balance of $1,200,000. This bond was retired after the end of the third quarter 2004.



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As part of the Companys 2003 refinancing, $4,900,000 of subordinated notes (related party loans) held by the
Companys principal stockholder, UM Holdings Ltd. (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 to convert the outstanding Preferred Stock into 3,288,600 shares of Common Stock.



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 in the amount of $2,945,722. The collateral to support this letter of credit has been provided by UM. The Company will be required to reimburse UM for any loss it suffers with respect to this collateral support. No cash payments to the
plaintiffs will be required with respect to this judgment until the end of the appeal process, which may take between 12 to 24 months of the date of the judgment (March 31, 2004). The ultimate resolution of this matter could be material to the
Companys financial position, results of operations and cash flows; however, the Company believes that the recorded reserves of $1,732,000 are adequate. The Company also believes it will have adequate liquidity to satisfy this judgment if its
appeal is 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 25, 2004:



|                            |  |       |            |                    |   |                    |  |                    |            |                  |   |           |  |   |          
|--------------------------- |  | ----- | ---------- | ------------------ | - | ------------------ |  | ------------------ | ---------- | ---------------- | - | --------- |  | - | ---------
|                            |  | TOTAL |            | Less Than One Year |   | One to Three Years |  | Four to Five Years |            | After Five Years
|Contractual obligations:    |  |       |            |                    |   |                    |  |                    |            |                  |   |           |  |   |          
|Debt                        |  | $     | 19,622,000 |                    | $ | 7,450,000          |  | $                  | 4,467,000  |                  | $ | 7,705,000 |  | $ |         
|Royalty agreement           |  |       | 3,020,000  |                    |   | 440,000            |  |                    | 720,000    |                  |   | 720,000   |  |   | 1,140,000
|Capital lease obligations   |  |       | 1,274,000  |                    |   | 495,000            |  |                    | 650,000    |                  |   | 129,000   |  |   |         
|Operating lease commitments |  |       | 332,000    |                    |   | 202,000            |  |                    | 126,000    |                  |   | 4,000     |  |   |         
|Purchase obligations        |  |       | 13,135,000 |                    |   | 7,429,000          |  |                    | 4,325,000  |                  |   | 536,000   |  |   | 845,000  
|                            |  |       |            |                    |   |                    |  |                    |            |                  |   |           |  |   |          
|TOTAL                       |  | $     | 37,383,000 |                    | $ | 16,016,000         |  | $                  | 10,288,000 |                  | $ | 9,094,000 |  | $ | 1,985,000
|                            |  |       |            |                    |   |                    |  |                    |            |                  |   |           |  |   |          



OFF-BALANCE SHEET ARRANGEMENTS



The Company has a lease financing program, through its wholly-owned
subsidiary, 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. In 2001, the Company changed its
practice whereby it now arranges equipment leases and other financing and no longer originates and holds leases. While most of these financings are without recourse, in certain cases the Company may offer a guaranty or other recourse provisions. At
September 25, 2004, the maximum contingent liability under all recourse provisions was approximately $4,915,000. A reserve for estimated losses under recourse provisions has been recorded based upon historical and industry experience, and is
included in accrued liabilities at September 25, 2004 and December 31, 2003.



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CRITICAL ACCOUNTING POLICIES



The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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, reserve for warranty obligations, legal matters,
impairment 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.



Impairment 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.



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Valuation of deferred tax assets. At September 25, 2004, there is a valuation allowance of $21,399,000 against the
carrying value of the Companys deferred income tax assets. Approximately $57,835,000 of future taxable income is needed prior to the expiration of the net operating losses 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 December 31, 2003 Form 10-K.



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 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.



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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, 2003 and Part 2 Item 1 of the Companys Report on Form 10-Q for the period ended March 27, 2004 for a description of
these proceedings.



Hot New Products 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, 2003 for a description of these proceedings. The plaintiffs motion for a new trial in this matter was denied by the Court on September 3, 2004. After plaintiff filed its notice
to appeal the jury verdict, the parties reached an agreement in principle on October 14, 2004, pursuant to which the Company will pay $45,000 to the plaintiff in exchange for the plaintiffs dismissal of the lawsuit and release of all claims.



Creighton 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, 2003 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, 2003 for a description of these proceedings. The Court on
September 1, 2004 dismissed all of the claims of the plaintiff against the Company and Nautilus, and also dismissed the Companys counterclaims against the plaintiff. The Court subsequently modified its judgment to award the Company $12,400 in
costs. The plaintiff has filed its notice of appeal. The Company has agreed to suspend collection of its judgment pending the resolution of plaintiffs appeal, provided plaintiff posts a proper bond.



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, 2003 for a description of these proceedings.



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 has since 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 seeks compensatory damages of not less than $5,000,000. The Company has filed a motion to dismiss the Southern District of
New York action, or, in the alternative, to transfer it to the District of Massachusetts. If the transfer occurs, counsel expects the lawsuit commenced by Biosig to be consolidated with the lawsuit originally commenced by the Company in
Massachusetts. The Company intends to vigorously prosecute its affirmative litigation in Massachusetts and defend Biosigs affirmative litigation in New York.



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



On August 2, 2004, UM Holdings Ltd. exercised its right to convert 32,886 shares of the Companys Series B Convertible Cumulative Preferred Stock into 3,288,600 shares of Common Stock. In issuing the shares of
Common Stock, the Company relied upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the Securities Act), in that the transaction did not involve a public offering.



On August 5, 2004, the Company sold 2,430,000 shares of its Common Stock in
a private placement in which Oppenheimer & Co. served as placement agent. In issuing the shares of Common Stock, the Company relied upon the exemption from registration provided by Section 4(2) of the Securities Act, in that the transaction did
not involve a public offering. The purchasers of the Common Stock and the number of shares acquired by each are as follows:



|                                                                           |  |              
|-------------------------------------------------------------------------- |  | -------------
|Purchaser                                                                  |  | No. of Shares
|Capital Ventures International, Inc.                                       |  | 125,000      
|Pequot Scout Fund, L.P.                                                    |  | 562,480      
|Pequot Navigator Onshore Fund, L.P.                                        |  | 312,520      
|Galleon Healthcare Partners, L.P.                                          |  | 33,250       
|Galleon Healthcare Offshore, Ltd.                                          |  | 266,750      
|Iroquois Capital, L.P.                                                     |  | 250,000      
|Jon D. Gruber and Linda W. Gruber                                          |  | 25,000       
|J. Patterson McBaine                                                       |  | 25,000       
|Lagunitas Partners, L.P.                                                   |  | 200,000      
|Gruber & McBaine International                                             |  | 50,000       
|Frost National Bank FBO US Special Opportunities Trust PLC                 |  | 290,000      
|Frost National Bank FBO Renaissance US Growth Investment Trust PLC         |  | 145,000      
|Frost National Bank FBO Renaissance Capital Growth & Income Fund III, Inc. |  | 145,000      



In connection with
the private placement, and also on August 5, 2004, the Company issued to the placement agent and its affiliates warrants to purchase an aggregate of 25,000 shares of the Companys Common Stock. The warrants become exercisable upon shareholder
approval of same, have an exercise price (subject to standard anti-dilution provisions) of $0.10 per share, and expire on August 4, 2009. The issuance of the warrants did not involve a public offering and accordingly was exempt from registration
pursuant to Section 4(2) of the Securities Act.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



None



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



None



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ITEM 5. OTHER INFORMATION



None



ITEM 6. EXHIBITS



| | (a) | Exhibit 4.1  Form of Warrant to Purchase Common Stock issued to Oppenheimer & Co. and affiliates, each dated August 5, 2004 and for an aggregate of 25,000 shares.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



Exhibit 10.1  Credit Agreement between
the Company and GMAC Commercial Finance, LLC, dated as of July 13, 2004.



Exhibit 10.2  Second Amendment to Financing Agreement, dated as of July 13, 2004, between the Company and CIT Group/Business Credit, Inc., which Restated Financing Agreement is attached.



Exhibit 10.3  Management Employment Agreement between the Company and
Ray Giannelli. [A portion of this exhibit has been omitted pursuant to a request to the Securities and Exchange Commission for confidential treatment.]



Exhibit 10.4  Form of Incentive Stock Option Agreement



Exhibit 10.5  Form of Non-Qualified Stock Option Agreement



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.



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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 2, 2004 |  |                           |  | John Aglialoro Chairman and Chief Executive Officer
|                 |  |                          
|                 |  | By:                       |  | /s/ Arthur W. Hicks, Jr.                           
|November 2, 2004 |  |                           |  | Arthur W. Hicks, Jr. Chief Financial Officer       



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