FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

SHOPSMITH, INC.
(Name of Registrant)

Registrant’s Telephone 937-898-6070

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes _X_ No ___

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of July 20,2000.

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

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SHOPSMITH, INC. AND SUBSIDIARIES

INDEX

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SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

Continued

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SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

      See notes to consolidated financial statements.

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SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

      See notes to consolidated financial statements.

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SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW

                  See notes to consolidated financial statements.

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SHOPSMITH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.		In the opinion of management, all adjustments (consisting of only normal and recurring adjustments) have been made as of July 1, 2000 and July 3, 1999 to present the financial statements fairly. However, the results of operations for the three months then ended are not necessarily indicative of results for the fiscal year. The financial statements and notes are presented as permitted by Form 10-Q, and do not contain certain information included in the annual financial statements. The financial statements accompanying this report should be read in conjunction with the financial statements and notes thereto included in the Annual Report to Shareholders for the year ended April 1, 2000.
2.		The provision for income taxes is as follows:

		The Company has deferred tax assets amounting to $1,326,000 at July 1, 2000 and April 1, 2000 which reflect the impact of temporary differences between the amount of assets and liabilities recorded for financial reporting purposes and such amounts as measured by tax laws and regulations. The Company believes that it is more likely than not that these assets are realizable and represent its best estimate based on the available evidence as prescribed in SFAS 109. For the quarter ended July 1, 2000, the Company has reduced its provision for recoverable income taxes by a $159,000 valuation allowance because of the uncertainty of realizing its benefit.
3.		Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if stock options had been converted into common stock. The following reconciles amounts reported in the financial statements:

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		There were no additional dilutive shares included in the computation at July 1, 2000 and July 3, 1999 because the stock options were anti-dilutive.
4.		A revolving credit agreement has been renewed to expire on July 31, 2001. The agreement provides for maximum short-term borrowing of $500,000 with interest charged at one percent over the Bank’s prime rate. The agreement requires compliance with certain minimum net worth, working capital and other miscellaneous covenants. Substantially all tangible assets except for land and building are pledged as collateral.

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

Results of Operations

First quarter sales declined to $3,669,000 or 1.6% from $3,727,000 generated a year ago. This decrease in volume is primarily in our demonstration sales channel.

Gross margin rates declined by one percentage point compared to last year. Operating expenses were reduced to $2,367,000 in the current fiscal year from $2,568,000 last year.

Provisions for recoverable Federal income taxes ($0 in FY 2001 and $196,000 in FY 2000) are based on estimated annual effective rates, less a valuation reserve in FY2001.

Because of the factors above, a net loss of $483,000 or $.19 per diluted share was experienced in the quarter ended July 1, 2000 compared to a net loss of $384,000 or $.15 per diluted share for the same period of last year.

Liquidity and Financial Position

Cash used in operations totaled $1,166,000 in the current year compared with $1,282,000 for the first quarter of the preceding year. Net losses of $483,000, together with liquidation of current liabilities, were the main reasons for the cash usage in the current quarter.

The Company’s assets include $1,326,000 of deferred income tax assets at July 1, 2000. Presently, the Company believes that these assets are realizable and represent management’s best estimate based on the weight of available evidence as prescribed in SFAS 109. For the quarter ended July 1, 2000, the Company has reduced its provision for recoverable income taxes by a $159,000 valuation allowance because of the uncertainty of realizing its benefit. Management will continue to evaluate these assets and the need for additional valuation allowances based on near-term operating results and longer-term projections. If the Company is unable to generate sufficient operating income in the future, the valuation allowance will have to be increased by means of a charge against operating results.

The current ratio was 1.85 to 1 at July 1, 2000 compared to 1.73 to 1 at the beginning of the current fiscal year. The debt to equity ratio improved slightly to 1.52 to 1 from 1.57 to 1 at April 1, 2000.

The Company has now experienced operating losses in the last two fiscal years as well as the current quarter. Continuation of operating losses will negatively affect the Company’s liquidity both (a) as a result of negative cash flow caused by the losses, and (b) by putting the Company in the position of failing to satisfy the conditions applicable to drawing under the Company’s line of credit.

Forward Looking Statements

The foregoing discussion and the Company’s consolidated financial statements contain certain forward-looking statements that involve risks and uncertainties, including but not limited to the following: (a) the adequacy of operating cash flows together with currently available working capital to finance the operating needs of the Company and (b) generation of future taxable income to utilize existing deferred tax assets.

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Item 3. Quantitative and qualitative disclosures about market risk.

      Not applicable.

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PART II. OTHER INFORMATION

Item 6.

(a) Exhibits:

(4.12) Ninth Amendment to Loan and Security Agreement dated July 31, 2000 between Huntington National Bank and Shopsmith, Inc.

(27) Financial Data Schedule for the period ended July 1, 2000

(b) Reports on Form 8-K:

      None

SIGNATURES

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

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