**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**Form 10-K**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 FOR THE FISCAL YEAR ENDED DECEMBER31, 2006

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from**

**Commissionfile number: 0-04041**

**ALLIED MOTION TECHNOLOGIES INC.**

(Exact name of registrantas specified in its charter)

| **Colorado**                               |   | **84-0518115**      |
|--------------------------------------------|--------|---------------------|
| (State or other jurisdiction of            |   | (I.R.S. Employer    |
| incorporation or organization)             |   | Identification No.) |
| **23  Inverness Way East, Suite 150** |   |                |
| **Englewood, Colorado**                    |   | **80112**           |
| (Address of principal executive offices)   |   | (Zip Code)          |

 

Registrant’s telephonenumber, including area code: **(303) 799-8520**

Securities registeredpursuant to Section 12(b) of the Act:**Common Stock, no par value Nasdaq Capital Market**

Securities registeredpursuant to Section 12(g) of the Act: **None**

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o  No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o  No x

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x  No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerate filer” in Rule 12b-2 of the Exchange Act. (Check one):

| Large accelerated filer o | Accelerated filer  o | Non-accelerated filer x |
|---------------------------|----------------------|-------------------------|

 

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

The aggregate market valueof voting stock held by non-affiliates of the Registrant, computed by referenceto the average bid and asked prices of such stock as of the last business dayof the Registrant’s most recently completed second fiscal quarter wasapproximately $34,000,000.

Number of shares of theonly class of Common Stock outstanding: **6,538,437 as of March 8,2007**

**DOCUMENTS INCORPORATED BY REFERENCE**

Notice and Proxy for 2007 Annual Meeting ofShareholders

 

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**Tableof Contents**

|                | ** ** | ** **                                                                                                          | ** ** | **Page** |
|----------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I.   |       |                                                                                                                |       |     |
| Item 1.        |       | Business                                                                                                            |       | 1        |
| Item 1A.       |       | Risk Factors                                                                                                        |       | 5        |
| Item 2.        |       | Properties                                                                                                          |       | 9        |
| Item 3.        |       | Legal Proceedings                                                                                                   |       | 9        |
| PART II.  |       |                                                                                                                |       |     |
| Item 5.        |       | Market for Registrant’s  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities |       | 10       |
| Item 6.        |       | Selected Financial Data                                                                                             |       | 12       |
| Item 7.        |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                         |       | 13       |
| Item 7A.       |       | Quantitative and Qualitative  Disclosures About Market Risk                                                         |       | 22       |
| Item 8.        |       | Financial Statements and  Supplementary Data                                                                        |       | 22       |
|           |       | Report of Independent  Registered Public Accounting Firm                                                            |       | 23       |
| Item 9A.       |       | Controls and Procedures                                                                                             |       | 48       |
| PART III. |       |                                                                                                                |       |     |
| Item 10.       |       | Directors, Executive  Officers and Corporate Governance                                                             |       | 48       |
| Item 11.       |       | Executive Compensation                                                                                              |       | 48       |
| Item 12.       |       | Security Ownership of  Certain Beneficial Owners and Management and Related Stockholder Matters                     |       | 48       |
| Item 13.       |       | Certain Relationships and  Related Transactions, and Director Independence                                          |       | 48       |
| Item 14.       |       | Principal Accountant Fees  and Services                                                                             |       | 48       |
| PART IV.  |       |                                                                                                                |       |     |
| Item 15.       |       | Exhibits and Financial  Statement Schedules                                                                         |       | 48       |
|           |       | Signatures                                                                                                          |       | 51       |
|           |       | Financial Statement  Schedule                                                                                       |       | 52       |

 

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*All statementscontained herein that are not statements of historical fact constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. Forward-looking statements include, without limitation, any statementthat may predict, forecast, indicate, or imply future results, performance, orachievements, and may contain the word “believe,” “anticipate,” “expect,” “project,”“intend,” “will continue,” “will likely result,” “should” or words or phrasesof similar meaning. Forward-looking statements involve known and unknown risksand uncertainties that may cause actual results of the Company to differmaterially from the forward-looking statements. The risks and uncertaintiesinclude international, national and local general business and economicconditions in the Company’s motion markets, introduction of new technologies,products and competitors, the ability to protect the Company’s intellectualproperty, the ability of the Company to sustain, manage or forecast its growthand product acceptance, success of new corporation strategies andimplementation of defined critical issues designed for growth and improvementin profits, the continued success of the Company’s customers to allow theCompany to realize revenues from its order backlog and to support the Company’sexpected delivery schedules, the continued viability of the Company’s customersand their ability to adapt to changing technology and product demand, theability of the Company to meet the technical specifications of its customers,the continued availability of parts and components, increased competition andchanges in competitor responses to the Company’s products and services, changesin government regulations, availability of financing, the ability of theCompany’s lenders and financial institutions to provide additional funds ifneeded for operations or for making future acquisitions or the ability of theCompany to obtain alternate financing if present sources of financing areterminated, the ability to attract and retain qualified personnel who candesign new applications and products for the motion industry, the ability ofthe Company to identify and consummate favorable acquisitions to supportexternal growth and new technology, the ability of the Company to establish lowcost region manufacturing and component sourcing capabilities, and the abilityof the Company to control costs for the purpose of improving profitability. TheCompany’s ability to compete in this market depends upon its capacity toanticipate the need for new products, and to continue to design and marketthose products to meet customers’ needs in a competitive world. Actual results,events and performance may differ materially. Readers are cautioned not toplace undue reliance on these forward-looking statements as a prediction ofactual results. The Company has no obligation or intent to release publicly anyrevisions to any forward looking statements, whether as a result of newinformation, future events, or otherwise.*

*New risk factors emerge from time to time and it isnot possible for management to predict all such risk factors, nor can it assessthe impact of all such risk factors on its business or the extent to which anyfactor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statements. The Company’sexpectations, beliefs and projections are expressed in good faith and arebelieved to have a reasonable basis; however, the Company makes no assurancethat expectations, beliefs or projections will be achieved.*

**PART I**

**Item 1.**                        Business.

Allied Motion Technologies Inc. (Allied Motion or theCompany) was organized under the laws of Colorado in 1962 and operatesprimarily in the United States and Europe. Allied Motion utilizes itsunderlying core “Electromagnetic Motion Technology/Know How” to providecompact, high performance products as solutions to a variety of motionapplications. The Company is engaged in the business of designing,manufacturing and selling motor, servo motion and optical encoder products.

Examples of the end products using Allied Motion’stechnology include HVAC and various actuation systems such as RV slide outs,truck tarp roll-out and lift devices for trucks, buses and off-road vehicles;anti-lock brake, fuel cell and LPG fuel pump applications for the specialtyautomotive market; wheel chairs, professional patient rehab equipment, MRIscanners, diagnostic equipment, portable medical dosage pumps and surgical handtools in the healthcare and medical market; high definition printers; 

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tunable lasers andspectrum analyzers for the fiber optic industry; processing equipment for thesemiconductor industry; commercial grade floor cleaners, polishers and materialhandling devices for factories and commercial buildings; arc-welders and cablepullers in the construction and repair and maintenance markets; andmissile/munitions control systems for the military.

Allied Motion is organized into five subsidiaries:Emoteq Corporation (Emoteq—Tulsa, OK), Computer Optical Products, Inc.(COPI—Chatsworth, CA), Motor Products Corporation (Motor Products—Owosso, MI),Stature Electric, Inc. (Stature—Watertown, NY) and Precision MotorTechnology B.V. (Premotec—Dordrecht, The Netherlands).

Emoteq designs, manufactures and markets directcurrent brushless motors, related components, and drive and control electronicsas well as a family of static frequency converters for military and aerospaceapplications and has extensive experience in power electronics design andsoftware development required for the application of specialized driveelectronics technology. Markets served include semiconductor manufacturing,industrial automation, medical equipment, and military and aerospace. Emoteqalso manufactures precision direct current fractional horsepower motors andcertain motor components and spare parts and replacement equipment forgeneral-purpose instrumentation products. Industrial equipment and militaryproducts are the major application for the motors.

COPI manufactures optical encoders. They are used tomeasure rotational and linear movements of parts in diverse applications suchas printers, sorting machinery, machine tools, robots, medical equipment,tunable lasers and spectrum analyzers. The primary markets for the opticalencoders are in the industrial, computer peripheral manufacturing, medical andtelecommunications sectors. COPI also designs, manufactures and markets fiberoptic-based encoders with special characteristics, such as immunity toradio frequency interference and high temperature tolerance, suited forindustrial, aerospace and military environments. Applications include airbornenavigational systems, anti-lock braking transducers, missile flightsurface controls and high temperature process control equipment.

Motor Products has been a motor producer for more thansixty years and is a vertically integrated manufacturer of customized, highlyengineered sub-fractional horsepower permanent magnet DC and brushless DCmotors serving a wide range of original equipment applications. The motors areused in HVAC and actuation systems in a variety of markets including trucks,buses, RV’s, off-road vehicles, health, fitness, medical and industrialequipment.

Stature Electric manufactures fractional and integralhorsepower motors, gear motors, and motor part sets. Stature’s componentproducts are sold throughout North America and in Europe, primarily to originalequipment manufacturers (OEM’S) that use them in their end products. StatureElectric excels at engineering, designing, packaging and applying integratedgearing and motor solutions for the commercial and industrial equipment,healthcare, recreation and non-automotive transportation markets.

Premotec has beenmanufacturing small precision electric motors for more than thirty years whichutilize four different motor technologies: Brushless DC, Coreless DC, Iron CoreDC, and Permanent Magnet Stepper and Synchronous motors, and also offers arange of reduction gearboxes tailored to a number of these motors. The productsare manufactured at Premotec’s facility in The Netherlands and at contractmanufacturing facilities in Eastern Europe and China. Premotec’s products aresold to OEM customers in Europe, the United States and Korea and throughdistributors to smaller OEM’s in almost all countries of the European Union. Theproducts are used in a wide variety of industrial, professional and medicalapplications, such as fuel injection systems, bar code readers, laser scanningequipment, HVAC actuators, dialysis equipment, industrial ink jet printers,waste water treatment, cash dispensers, dosing systems for the pharmaceuticalindustry, textile manufacturing, document handling equipment and studiotelevision cameras.

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***Fiscal Year End Change***

TheCompany changed its fiscal year end from June 30 to December 31effective December 31, 2002; therefore, the Company reported a six-monthtransition period ending December 31, 2002. The following table describesthe periods presented in this Form 10-K.

| **Period:**                                                               | ** ** | ** **                    | ** ** | **Referred to as:** |
|---------------------------------------------------------------------------|------------|-------------------------------|------------|---------------------|
| Audited results from  January 1, 2006 through December 31, 2006 |       | Year  2006                    |
| Audited results from  January 1, 2005 through December 31, 2005 |       | Year  2005                    |
| Audited results from  January 1, 2004 through December 31, 2004 |       | Year  2004                    |
| Audited results from  January 1, 2003 through December 31, 2003 |       | Year  2003                    |
| Audited results from  July 1, 2002 through December 31, 2002    |       | Transition  Period            |
| Unaudited results from  July 1, 2001 through December 31, 2001  |       | Six  Month Comparative Period |
| Audited results from July 1, 2001 through  June 30, 2002        |       | Fiscal Year 2002              |

 

***Product Distribution***

The Company maintains adirect sales force. In addition to its own marketing and sales force, theCompany has independent sales representatives, agents and distributors to sellits various product lines in certain markets.

***Competition***

The Company facescompetition in all of its markets, although the number of competitors variesdepending upon the product. The Company believes there are numerous competitorsin the motion control market. Competition involves primarily productperformance and price, although service and warranty are also important.

***Financial Information about Operating Segments***

The information requiredby this item is set forth in Note 8 of the Notes to Consolidated FinancialStatements contained herein.

***Availability of Raw Materials***

All parts and materialsused by the Company are in adequate supply. No significant parts or materialsare acquired from a single source or for which an alternate source is not alsoavailable.

***Patents, Trademarks, Licenses, Franchises andConcessions***

The Company holds severalpatents and trademarks regarding components used by the various subsidiariesand has several patents pending on new products recently developed, which areconsidered to be of major significance.

***Seasonality of the Business***

The Company’s business isnot of a seasonal nature; however, revenues may be influenced by customers’fiscal year ends and holiday seasons.

***Working Capital Items***

The Company currentlymaintains inventory levels adequate for its short-term needs based upon presentlevels of production. The Company considers the component parts of itsdifferent product lines to be readily available and current suppliers to bereliable and capable of satisfying anticipated needs.

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***Sales to Large Customers***

During years 2006, 2005and 2004, no single customer accounted for more than 10% of total revenues.

***Sales Backlog***

The Company’s backlog at December 31,2006 consisted of sales orders totaling approximately $28,200,000 while backlogat December 31, 2005 was $25,200,000. In our commercial motors markets,the Company continues to serve customers requesting shipments on a “pull system”whereby the Company agrees to maintain available inventory that the customer “pulls”or takes delivery as they need the products. At the time the customer pulls theproduct, the Company records the sale. There can be no assurance that theCompany’s backlog will be converted into revenue.

***Government Sales***

Approximately $256,000 ofthe Company’s backlog as of December 31, 2006 consisted of contractsdirectly with the United States Government compared to $325,000 in 2005. TheCompany’s contracts with the government contain a provision generally found ingovernment contracts that permits the government to terminate the contract atits option. When the termination is attributable to no fault of the Company,the government would, in general, have to pay the Company certain allowablecosts up to the time of termination, but there is no compensation for loss ofprofits.

***Engineering and Development Activities***

The Company’s expenditureson engineering and development for the years ended December 31, 2006, 2005and 2004 were $3,823,000, $3,526,000 and $2,896,000, respectively. Of theseexpenditures, no material amounts were charged directly to customers.

***Environmental Issues***

No significant pollutionor other types of hazardous emission result from the Company’s operations andit is not anticipated that the Company’s operations will be materially affectedby Federal, State or local provisions concerning environmental controls. However,there can be no assurance that any future regulations will not affect theCompany’s operations.

***Foreign Operations***

The information requiredby this item is set forth in Note 8 of the Notes to Consolidated FinancialStatements contained herein.

***Employees***

At December 31, 2006the Company had approximately 517 full-time employees.

***Available Information***

The Company maintains a website atwww.alliedmotion.com. The Company makes available, free of charge on or throughits website, its annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports, as soonas reasonably practicable after it electronically files or furnishes suchmaterials to the SEC.

The Company has adopted aCode of Ethics for its chief executive officer, president and senior financialofficers regarding their obligations in the conduct of Company affairs. TheCompany has also adopted a Code of Ethics and Business Conduct that isapplicable to all directors, officers and employees. The Codes are available onthe Company’s website. The Company intends to disclose on its website any 

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amendmentto, or waiver of, the Codes that would otherwise be required to be disclosedunder the rules of the SEC and the Nasdaq Capital Market. A copy of bothCodes is also available in print to any stockholder upon written requestaddressed to Allied Motion Technologies Inc., 23 Inverness Way East, Suite 150,Englewood, CO 80112-5711, Attention: Secretary.

**Item 1A.**                RiskFactors.

In addition to the otherinformation contained or incorporated by reference in this document, readersshould carefully consider the following risk factors. Any of these risks or theoccurrence of any one or more of the uncertainties described below could have a material adverseeffect on the Company’s financial condition and the performance of its business.The Company refers to itself as “we” or “our” in the following risk factors.

***Our operating results could fluctuate significantly.***

Our quarterly andannual operating results are affected by a wide variety of factors that couldmaterially adversely affect revenues and profitability, including:

·       thetiming of customer orders and the deferral or cancellation of orders previouslyreceived;

·       thelevel of orders received which can be shipped in a quarter;

·       fulfillingbacklog on a timely basis;

·       competitivepressures on selling prices;

·       changesin the mix of products sold;

·       thetiming of investments in engineering and development;

·       developmentof and response to new technologies; and

·       delaysin new product qualifications.

As a result of theforegoing and other factors, we have and may continue to experience materialfluctuations in future operating results on a quarterly or annual basis whichcould materially and adversely affect our business, financial condition,operating results and stock price.

***Our operating results depend in part on our ability tocontain or reduce costs.***

Our efforts to maintainand improve profitability depend in part on our ability to reduce the costs ofmaterials, components, supplies and labor, including establishing productioncapabilities at our low cost region subcontractors. While the failure of anysingle cost containment effort by itself would most likely not significantlyimpact our results, we cannot give any assurances that we will be successful inimplementing cost reductions and maintaining a competitive cost structure.

***There issubstantial price competition in our industry, and our success andprofitability will depend on our ability to maintain a competitive cost andprice structure.***

There is substantial pricecompetition in our industry, and our success and profitability will depend onour ability to maintain a competitive cost and price structure. We may have toreduce prices in the future to remain competitive. Also, our futureprofitability will depend in part upon our ability to continue to improve ourmanufacturing efficiencies and maintain a cost structure that will enable us tooffer competitive prices. Our inability to maintain a competitive coststructure could have a material adverse effect on our business, financialcondition and results of operations.

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***Our profits maydecline if the price of raw materials continues to rise and we cannot recoverthe increases from our customers.***

We use various rawmaterials, such as copper, steel and zinc, in our manufacturing operations. Theprices of these raw materials have been subject to volatility. As a result ofprice increases, we have implemented price surcharges to our customers; howeverwe may be unable to collect surcharges without suffering reductions in unit volume,revenue and operating income. There can be no assurance that we will be able tofully recover the price increases through surcharges in a timely manner.

***We may exploreadditional acquisitions that complement, enhance or expand our business. We maynot be able to complete these transactions, and, if completed, we mayexperience operational and financial risks in connection with our acquisitionsthat may materially adversely affect our business, financial condition andoperating results.***

Our future growth may be a function, in part, ofacquisitions. We may have difficulty finding these opportunities, or if we doidentify these opportunities, we may not be able to complete the transactionsfor reasons including a failure to secure financing.

To the extent that we areable to complete the transactions, we will face the operational and financialrisks commonly encountered with this type of a strategy. These risks includethe challenge of integrating acquired businesses while managing the ongoingoperations of each business, the challenge of combining the business culturesof each company, and the need to retain key personnel of our existing businessand the acquired business. The process of integrating operations could cause aninterruption of, or loss of momentum in, the activities of the acquiredbusiness and our existing business. Members of our senior management may berequired to devote considerable amounts of time to the integration process,which will decrease the time they will have to manage our businesses, serviceexisting customers, attract new customers and develop new products. If oursenior management is not able to effectively manage the integration process, orif any significant business activities are interrupted as a result of theintegration process, our business could be adversely affected.

***We have existing debt and refinancing risks that couldaffect our cost of operations.***

We have both fixedand variable rate indebtedness and may incur indebtedness in the future,including borrowings under our existing or new credit facilities, to financepossible acquisitions and for general corporate purposes. As a result, we areand expect to be subject to risks normally associated with debt financingincluding:

·       thatinterest rates may rise;

·       thatour cash flow will be insufficient to make required payments of principal andinterest;

·       thatany default on our debt could result in acceleration of those obligations;

·       thatwe may be unable to refinance or repay the debt as it becomes due; and

·       that any refinancing willnot be on terms as favorable as those of the existing debt.

***The following factors could affect our ability toobtain additional financing on favorable terms, or at all:***

·       ourresults of operations;

·       ourratio of debt to equity;

·       ourfinancial condition;

·       ourbusiness prospects;

·       changesin interest rates;

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·       generaleconomic conditions and conditions in our industry; and

·       theperception in the capital markets of our business.

In addition, certaincovenants relating to our existing indebtedness impose certain limitations onadditional indebtedness. If we are unable to obtain sufficient capital in thefuture, we may have to curtail our capital expenditures and other expenses. Anysuch actions could have a material adverse effect on our business, financialcondition, results of operations and liquidity.

***We may not be able to obtain the capital we need tomaintain or grow our business.***

Our ability to execute ourlong-term strategy may depend to a significant degree on our ability to obtainnew long-term debt and equity capital. We have no commitments for additionalborrowings, other than our existing credit facilities, or for sales of equity. Wemay be unable to obtain future additional financing on terms acceptable to us,or at all. If we fail to comply with certain covenants relating to ourindebtedness, we may need to refinance our indebtedness to repay it. We alsomay need to refinance our indebtedness at maturity. We may not be able toobtain additional capital on favorable terms to refinance our indebtedness.

***The market price ofour common stock has been and is likely to continue to be volatile, which maymake it difficult for shareholders to resell common stock when they want to andat prices they find attractive.***

Our common stock has beenand is likely to be highly volatile and there has been limited trading volumein the stock. The volatility could affect our stock irrespective of, ordisproportionately to, the operating performance of our Company. Thefluctuations and limited trading volume may materially adversely affect themarket price of our stock and the ability to sell the stock. Most of ouroutstanding shares are available for resale in the public market withoutrestriction. The sale of a large number of shares could adversely affect theshare price.

***We are dependent on our key personnel.***

We are dependent upon thecontinued contributions of our senior corporate management, particularlyRichard Smith, chief executive officer and chief financial officer, RichardWarzala, president and chief operating officer, and certain other key employeesof Allied Motion for our future success. If Mr. Smith, Mr. Warzala orother key employees no longer serve in their positions at Allied Motion, ourbusiness, as well as the market price of our common stock, could besubstantially adversely affected. We cannot assure you that we will be able toretain the services of Mr. Smith or Mr. Warzala or any other membersof our senior management or key employees.

***Our future successdepends in part on the continued service of our engineering and technicalpersonnel and our ability to identify, hire and retain personnel.***

There is continuedcompetition for qualified personnel in our markets. We may not be able tocontinue to attract and retain engineers or other qualified personnel necessaryfor the development and growth of our business or to replace personnel who mayleave our employ in the future. The failure to retain and recruit key technicalpersonnel could cause additional expense, potentially reduce the efficiency ofour operations and could harm our business.

***We could incur substantial costs under environmentallaws.***

Our operations are subjectto laws and regulations relating to the protection of the environment,including those governing the discharge of pollutants into the air or water,the management and disposal of hazardous substances or wastes and the cleanupof contaminated sites. Some of our operations require 

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environmentalpermits and controls to prevent and reduce air and water pollution, and these permitsare subject to modification, renewal and revocation by issuing authorities. Wecould incur substantial costs, including cleanup costs, fines and civil orcriminal sanctions and third-party claims for property damage and personalinjury as a result of violations of or liabilities under environmental laws ornon-compliance with environmental permits.

***We have pensionplan and post-retirement obligations covering some of our domestic employeeswhich could reduce cash flow and negatively impact financial condition.***

Our pension plan has a projected benefit obligation inexcess of the fair value of plan assets. Our pension plan assets consistprimarily of equity and fixed income securities. If the performance ofinvestments in the plan does not meet the Company’s assumptions, the excessobligation may increase and the Company may have to record additional costsand/or contribute additional funds to the pension plan. An increase in pensionexpenses and contributions could decrease the Company’s cash available to payits outstanding obligations and its net income.

Our post-retirement planis unfunded. We record expense as employees render the services necessary toearn the benefits. The expenses are based on estimates including health carecost increases, retirement and mortality. Actual results may vary materiallyfrom estimates which could result in an increase to our expense and decrease innet income.

***We have asignificant amount of goodwill recorded and an impairment writedown wouldresult in lower net income and a reduction in net worth.***

Under accounting standardsadopted in 2002, we are not required or allowed to amortize the goodwillreflected on our balance sheet. We are required to evaluate goodwill at leastannually to determine if there has been an impairment in the value of suchgoodwill. If we determine that the goodwill is impaired, we would be requiredto writedown a portion or all of the goodwill which would reduce net income inthe period of any writedown.

***Anti-takeoverprovisions in our corporate documents may discourage or prevent a takeover,even if the change of control would be beneficial to shareholders.***

Provisions in ourarticles of incorporation and our by-laws may have the effect of delaying orpreventing an acquisition or merger in which we are acquired or a transactionthat changes our board of directors. These provisions:

·       authorizethe board to issue preferred stock without shareholder approval;

·       prohibitcumulative voting in the election of directors;

·       limitthe persons who may call special meetings of shareholders;

·       establishadvance notice requirements for nominations for the election of directors orfor proposing matters that can be acted on by shareholders at shareholdermeetings; and

·       require that, in a vote toapprove an acquisition or merger in which the Company is acquired or atransaction that changes the board of directors, the affirmative vote of theholders of two-thirds of the Company’s outstanding shares is required, unlessthe transaction is approved by at least two-thirds of the continuing directors,in which event the provisions require that the affirmative vote of a majorityof the holders of the Company’s outstanding shares is required.

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***If we fail tomaintain an effective system of internal controls, we may not be able toaccurately report our financial results or prevent fraud.***

We believe that effectiveinternal controls are necessary to provide reliable financial reports and toassist in the effective prevention of fraud. If we are unable to detect orcorrect any issues in the design or operating effectiveness of internalcontrols over financial reporting or fail to prevent fraud, current andpotential customers and shareholders could lose confidence in our financialreporting, which could harm our business and the trading price of our stock.

**Item 2.**                        Properties.

As of December 31,2006, the Company occupies facilities as follows:

| **Description /  Use**             | ** ** | ** **                  | ** ** | **Location** | ** ** | **Approximate  Square Footage** | ** ** | **Owned  Or Leased** |
|------------------------------------|------------|-----------------------------|------------|--------------|------------|---------------------------------|------------|----------------------|
| Corporate headquarters             |       | Englewood, Colorado         |       | 3,000        |       | Leased                          |
| Office and manufacturing  facility |       | Chatsworth, California      |       | 8,500        |       | Leased                          |
| Office and manufacturing  facility |       | Tulsa, Oklahoma             |       | 25,000       |       | Leased                          |
| Office and manufacturing  facility |       | Dordrecht, The  Netherlands |       | 36,000       |       | Leased                          |
| Office and manufacturing  facility |       | Owosso, Michigan            |       | 85,000       |       | Owned                           |
| Office and manufacturing facility  |       | Watertown, New York         |       | 107,000      |       | Owned                           |

 

The Company’s managementbelieves the above-described facilities are adequate to meet the Company’scurrent and foreseeable needs. All facilities described above are operating atless than full capacity.

**Item 3.**                        LegalProceedings.

The Company is involved in certain actions that havearisen out of the ordinary course of business. Management believes thatresolution of the actions will not have a significant adverse affect on theCompany’s consolidated financial position or results of operations.

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**PART II**

**Item 5.**                        Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities.

Allied Motion’s common stock is traded on the NasdaqCapital Market System and trades under the symbol AMOT. The number of holdersof record as reported by the Company’s transfer agent of the Company’s commonstock as of the close of business on March 13, 2007 was 577. The Companydid not pay or declare any dividends during years 2006 and 2005 and the Company’slong-term financing agreement prohibits the Company from doing so without priorapproval.

Thefollowing table sets forth, for the periods indicated, the high and low pricesof the Company’s common stock on the Nasdaq Capital Market System, as reportedby Nasdaq.

| ** **                         | ** ** | **Price Range** | ** ** |
|------------------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **High**             | ** ** | **Low** | ** ** |
| **YEAR  ENDED  DECEMBER 31, 2005** |       |                 |       |   |   |
| First Quarter                      |       | $                    | 8.90       |   | $ | 6.66 |   |
| Second Quarter                     |       | 7.62                 |       | 3.65 |   |
| Third Quarter                      |       | 4.73                 |       | 3.82 |   |
| Fourth Quarter                     |       | 4.50                 |       | 3.36 |   |
| **YEAR  ENDED  DECEMBER 31, 2006** |       |                 |       |   |   |
| First Quarter                      |       | $                    | 4.50       |   | $ | 3.60 |   |
| Second Quarter                     |       | 5.99                 |       | 3.42 |   |
| Third Quarter                      |       | 5.49                 |       | 4.49 |   |
| Fourth Quarter                     |       | 7.00                 |       | 4.53 |   |

 

***Equity Compensation Plan Information***

Thefollowing table shows the equity compensation plan information of the Companyat December 31, 2006.

| **Plan category**                                  | ** ** | ** ** | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights (a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under equity  compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|---------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders |       |       | 1,245,150  |                                                                                                                                                      |       |                                                                                                        | $          | 3.68                                                                                                                                                                                                             |       |   |   | 108,768 |   |   |
|                                                         |            |            |            |                                                                                                                                                           |            |                                                                                                             |            |                                                                                                                                                                                                                  |            |  |  |  |  |  |  |  |

 

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**PERFORMANCE GRAPH**

The following performancegraph reflects change in the Company’s cumulative total stockholder return onCommon Stock as compared with the cumulative total return of the NASDAQ StockMarket Index and the NASDAQ Electrical and Industrial Apparatus Index for theperiod of five years ended December 31, 2006.

**COMPARISON OF 5YEAR CUMULATIVE RETURN***

AMONG ALLIED MOTIONTECHNOLOGIES, INC., THE NASDAQ STOCK MARKET(U.S) INDEX AND ELECTRICAL INDUSTRIAL APPARATUS

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*       $100 invested on 12/31/01 in stock orindex-including reinvestment of dividends.Fiscal year ending December 31.

| ** **                        | ** ** | **12/01** | ** ** | **12/02** | ** ** | **12/03** | ** ** | **12/04** | ** ** | **12/05** | ** ** | **12/06** | ** ** |
|-----------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
| ALLIED MOTION  TECHNOLOGIES, INC. |       |      | 100        |      |       |      | 61         |      |       |      | 136        |      |       |   | 251 |   |   |   | 145 |   |   |   | 239 |   |   |
| NASDAQ STOCK MARKET  (U.S.)       |       |      | 100        |      |       |      | 72         |      |       |      | 107        |      |       |   | 117 |   |   |   | 121 |   |   |   | 137 |   |   |
| ELECTRICAL INDUSTRIAL  APPARATUS  |       |      | 100        |      |       |      | 61         |      |       |      | 105        |      |       |   | 102 |   |   |   | 96 |   |   |   | 118 |   |   |

 

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**Item 6.**                        SelectedFinancial Data.

The following tablessummarize data from the Company’s financial statements for the fiscal years2002 through 2006 and the Transition and Comparative Periods and notes thereto;the Company’s complete annual financial statements and notes thereto for thecurrent fiscal year appear in Item 8 herein. See Management’s Discussion andAnalysis of Financial Condition and Results of Operation for discussion ofnon-recurring items that affect the comparability of results between periods.

| ** **                                           | ** ** | **For the year ended December 31,**      | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                                          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **In thousands (except per share data)** | ** ** |
| **Statements of Operations Data:**                   | ** ** | ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues from continuing  operations                 |       | $                                                                 | 82,768     |   | $ | 74,302 |   | $ | 62,738 |   | $ | 39,434 |   |
| Net income                                           |       | $                                                                 | 1,931      |   | $ | 923 |   | $ | 2,250 |   | $ | 948 |   |
| Diluted income per share  from continuing operations |       | $                                                                 | .28        |   | $ | .13 |   | $ | .36 |   | $ | 0.19 |   |

 

| ** **                                                         | ** ** | **For the Six Month  Transition Period  ended December 31,** | ** ** | **For the Six Month  Comparative Period  ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2002**                                                                                   | ** ** | **2001**                                                                                    | ** ** |
| ** **                                                         | ** ** | **In thousands (except per share data)**                          | ** ** |
| **Statements of Operations Data:**                                 | ** ** |                                                                                       | ** ** | ** **                                                                                  |       |   | ** ** | ** ** |   |
| Revenues from continuing  operations                               |       |                                                                                       | $          | 17,191                                                                                      |       |   |   | $ | 7,868 |   |   |
| Income from continuing  operations                                 |       |                                                                                       | $          | 45                                                                                          |       |   |   | $ | 60 |   |   |
| Operating (loss) from  discontinued operations                     |       |                                                                                       | (736       | )                                                                                           |       |   | (223 | ) |   |
| Gain on sale of power  and process business, net of   income taxes |       |                                                                                       | 1,019      |                                                                                        |       |   | — |   |   |
| Net income (loss)                                                  |       |                                                                                       | $          | 328                                                                                         |       |   |   | $ | (163 | ) |   |
| Diluted income per share  from continuing operations               |       |                                                                                       | $          | 0.01                                                                                        |       |   |   | $ | 0.01 |   |   |

| ** **                                                  | ** ** | **For the fiscal years ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2002**                                                              | ** ** | **2001** | ** ** |
| ** **                                                  | ** ** | **In thousands (except per share data)**     | ** ** |
| **Statements of Operations Data:**                          | ** ** |                                                                  | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Revenues from continuing  operations                        |       |                                                                  | $          | 15,723 |   |   |   | $ | 21,188 |   |   |
| (Loss) income from  continuing operations                   |       |                                                                  | $          | (45 | ) |   |   | $ | 2,024 |   |   |
| Operating (loss) from  discontinued operations              |       |                                                                  | (221       | ) |   |   | (28 | ) |   |
| Net (loss) income                                           |       |                                                                  | $          | (266 | ) |   |   | $ | 1,996 |   |   |
| Diluted (loss) income  per share from continuing operations |       |                                                                  | $          | (0.01 | ) |   |   | $ | 0.42 |   |   |

 

| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Balance Sheet Data:**           |       |                  |       |   |   |   |   |   |   |   |   |
| Total assets                      |       | $                     | 53,624     |   | $ | 53,337 |   | $ | 54,820 |   | $ | 27,497 |   | $ | 28,348 |   |
| Total current and  long-term debt |       | $                     | 9,829      |   | $ | 12,081 |   | $ | 14,407 |   | $ | 2,312 |   | $ | 4,133 |   |

 

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**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

**Overview**

Allied Motion designs, manufactures and sells motionproducts to a broad spectrum of customers throughout the world primarily forthe commercial motor, industrial motion control, and aerospace and defensemarkets. The Company’s products are used in demanding applications in medicalequipment,  HVAC systems for trucks,busses and off-road vehicles, the specialty automotive market, industrialautomation, pumps,  health-fitness,defense, aerospace, semiconductor manufacturing, fiber optic-basedtelecommunications, printing, and graphic imaging market sectors, to name afew.

Today, five companies form the core of Allied Motion. Thecompanies, Emoteq, Computer Optical Products, Motor Products, Stature Electricand Premotec offer a wide range of standard motors, encoders and drives fororiginal equipment manufacturers (OEM) and end user applications. A particularstrength of each company is its ability to design and manufacture custom motioncontrol solutions to meet the needs of its customers.

The Company has made considerable progress inimplementing its new corporate strategy, the driving force of which is “AppliedMotion Technology/Know How”. The Company’s commitment to Allied’s SystematicTools, or AST for short, is driving continuous improvement in quality,delivery, cost and growth. AST utilizes a tool kit to effect desired changesthrough well defined processes such as Strategy Deployment, Target Marketing,Value Stream Mapping, Material Planning, Standard Work and Single MinuteExchange of Dies.

One of the Company’s major challenges is to maintainand improve price competitiveness. The Company’s customers are continuallybeing challenged by their markets and competitors to be price competitive andthey are requiring their suppliers to deliver the highest quality product atthe lowest price possible. Currently, the Company is producing some of itsmotor sub-assemblies and finished products at a sub-contract manufacturingfacility in China. The Company will continue to look for opportunities whereproduction in low cost regions for certain projects are anticipated to resultin increased profits.

The Company’s products contain certain metals, and theCompany has been experiencing significant fluctuations in the costs of thesemetals, particularly copper, steel and zinc, which are both key materials inour products. The Company has reacted by aggressively sourcing material atlower cost from Asian markets, combining the sourcing of metals to benefit fromvolume purchasing and by passing on surcharges to our customers.

The Company has an aggressive motor development planfor five new standalone products and two new product lines that leverage thecombined technology base of the Allied Motion companies. The Company continuesto focus on new product designs that design-out cost, provide higherperformance and meet the needs of our served markets. Early in 2006, theCompany announced several new motor designs targeted at various markets. Eachof these motors are targeted at precision motor applications. It normally takestwelve months to get new products designed into new customer applications. Allproduct development efforts are focused on adding value for our customers inour served market segments.

Management believes thestrategy we have developed for the Company will accomplish our long term goalsof increasing shareholder value through the continued strengthening of thefoundation necessary to achieve growth in sales and profitability.

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**Operating Results**

**Year 2006 compared to 2005**

| ** **                          | ** ** | **For the year ended December 31,** | ** ** | **Increase (decrease)** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **2006**                                                     | ** ** | **2005**                     | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                          | ** ** | **(in thousands)**                                      | ** ** |
| Revenues                            |       |                                                         | $          | 82,768                       |       |   |   | $ | 74,302 |   |   |   | $ | 8,466 |   |   |   | 11 | % |   |
| Cost of products  sold              |       |                                                         | 63,207     |                         |       |   | 58,118 |   |   |   | 5,089 |   |   |   | 9 | % |   |
| Gross margin                        |       |                                                         | 19,561     |                         |       |   | 16,184 |   |   |   | 3,377 |   |   |   | 21 | % |   |
| Gross margin  percentage            |       |                                                         | 24         | %                            |       |   | 22 | % |   |   | — |   |   |   | — |   |   |
| Operating costs  and expenses:      |       |                                                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling                             |       |                                                         | 3,227      |                         |       |   | 3,265 |   |   |   | (38 | ) |   |   | (1 | )% |   |
| General and administrative          |       |                                                         | 7,782      |                         |       |   | 5,952 |   |   |   | 1,830 |   |   |   | 31 | % |   |
| Engineering and development         |       |                                                         | 3,823      |                         |       |   | 3,526 |   |   |   | 297 |   |   |   | 8 | % |   |
| Amortization of intangible assets   |       |                                                         | 1,012      |                         |       |   | 1,010 |   |   |   | 2 |   |   |   | 0 | % |   |
| Total operating  costs and expenses |       |                                                         | 15,844     |                         |       |   | 13,753 |   |   |   | 2,091 |   |   |   | 15 | % |   |
| Operating income                    |       |                                                         | 3,717      |                         |       |   | 2,431 |   |   |   | 1,286 |   |   |   | 53 | % |   |
| Other (expense)  income, net:       |       |                                                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                    |       |                                                         | (983       | )                            |       |   | (1,075 | ) |   |   | (92 | ) |   |   | (9 | )% |   |
| Other income, net                   |       |                                                         | 166        |                         |       |   | 125 |   |   |   | (41 | ) |   |   | (33 | )% |   |
| Total other  (expense) income, net  |       |                                                         | (817       | )                            |       |   | (950 | ) |   |   | (133 | ) |   |   | (14 | )% |   |
| Income before  income taxes         |       |                                                         | 2,900      |                         |       |   | 1,481 |   |   |   | 1,419 |   |   |   | 96 | % |   |
| Provision for  income taxes         |       |                                                         | 969        |                         |       |   | 558 |   |   |   | 411 |   |   |   | 74 | % |   |
| Net income                          |       |                                                         | $          | 1,931                        |       |   |   | $ | 923 |   |   |   | $ | 1,008 |   |   |   | 109 | % |   |

* *

*NET INCOME*   TheCompany achieved net income of $1,931,000 or $.28 per diluted share for 2006compared to $923,000 or $.13 per diluted share for 2005.

EBITDA EBITDA was $7,166,000 for 2006 compared to$5,785,000 for 2005. EBITDA is a non-GAAP measurement that consists of incomebefore interest expense, provision for income taxes and depreciation andamortization. See information included in “Non - GAAP Measures” below for areconciliation of net income to EBITDA.

REVENUES   Revenues were $82,768,000 in 2006compared to $74,302,000 in 2005. This 11% increase is primarily attributable toincreased sales in medical, industrial tool and electronics markets and inautomotive liquid propane fuel pump applications partially offset by decreasesin motors used in HVAC and actuation systems for vehicle markets.

GROSS MARGINS   Gross margin as a percentage ofrevenues increased to 24% for 2006 from 22% for 2005. This improvement reflectsthe increase in sales of the Company’s industrial and electronics markets whichprovide a higher gross margin from their sales, the cost reductions realizedfrom products being produced at the Company’s contract manufacturing facilityin China, and the continuous improvement in efficiencies and productivity fromimplementation of the Company’s AST tools.

SELLING EXPENSES   Selling expenses were$3,227,000 and $3,265,000 in 2006 and 2005, respectively.  Selling expense as a percentage of revenuesdecreased to 3.9% in 2006 compared to 4.4% last year. The decrease in sellingexpenses relates to a decrease in sales upon which commissions are paid andpersonnel changes.

GENERAL AND ADMINISTRATIVE EXPENSES   General andadministrative expenses were $7,782,000 in 2006 compared to $5,952,000 in 2005.Of this 31% increase, 14% related to employee 

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performance bonuses, 5%related to salaries and employee benefit expenses and 4% related to audit andprofessional fees.

ENGINEERING AND DEVELOPMENT EXPENSES   Engineeringand development expenses were $3,823,000 and $3,526,000 for 2006 and 2005,respectively. The Company continues to focus resources on new product designsand new customer applications to meet the needs of its served markets.

AMORTIZATION OF INTANGIBLE ASSETS   Amortizationof intangible assets was $1,012,000 in 2006 and $1,010,000 in 2005.

INTEREST EXPENSE   Interest expense for 2006 was$983,000 and for 2005 was $1,075,000. The decrease in interest is directlyattributed to the decrease in outstanding debt obligations partially offset byhigher interest rates.

INCOME TAXES   Theprovision for income taxes was $969,000 for year 2006 compared to $558,000 for2005. The effective rate differs from the statutory amounts primarily due tothe impact of differences in state and foreign tax rates. The effective incometax rate as a percentage of income before income taxes was 33% in 2006 and 38%in 2005. The difference in the effective tax rates between periods wasprimarily due to a greater portion of income derived from a foreignjurisdiction with a lower tax rate and a reduction in the foreign jurisdictionenacted tax rates.

**Operating Results**

**Year 2005 compared to 2004**

| ** **                          | ** ** | **For the year ended December 31,** | ** ** | **Increase (decrease)** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **2005**                                                     | ** ** | **2004**                     | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                          | ** ** | **(in thousands)**                                      | ** ** |
| Revenues                            |       |                                                         | $          | 74,302                       |       |   |   | $ | 62,738 |   |   | $ | 11,564 |   |   | 18 | % |   |
| Cost of products  sold              |       |                                                         | 58,118     |                         |       |   | 46,280 |   |   | 11,838 |   |   | 26 | % |   |
| Gross margin                        |       |                                                         | 16,184     |                         |       |   | 16,458 |   |   | (274 | ) |   | (0 | )% |   |
| Gross margin  percentage            |       |                                                         | 22         | %                            |       |   | 26 | % |   | — |   |   | — |   |   |
| Operating costs  and expenses:      |       |                                                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Selling                             |       |                                                         | 3,265      |                         |       |   | 2,557 |   |   | 708 |   |   | 28 | % |   |
| General and administrative          |       |                                                         | 5,952      |                         |       |   | 6,226 |   |   | (274 | ) |   | (4 | )% |   |
| Engineering and development         |       |                                                         | 3,526      |                         |       |   | 2,896 |   |   | 630 |   |   | 22 | % |   |
| Amortization of intangible assets   |       |                                                         | 1,010      |                         |       |   | 647 |   |   | 363 |   |   | 56 | % |   |
| Restructuring charges               |       |                                                         | —     |                         |       |   | 10 |   |   | (10 | ) |   | (100 | )% |   |
| Total operating  costs and expenses |       |                                                         | 13,753     |                         |       |   | 12,336 |   |   | 1,417 |   |   | 11 | % |   |
| Operating income                    |       |                                                         | 2,431      |                         |       |   | 4,122 |   |   | (1,691 | ) |   | (41 | )% |   |
| Other (expense)  income, net:       |       |                                                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Interest expense                    |       |                                                         | (1,075     | )                            |       |   | (696 | ) |   | 379 |   |   | 55 | % |   |
| Other income (expense), net         |       |                                                         | 125        |                         |       |   | (17 | ) |   | (142 | ) |   | (835 | )% |   |
| Total other  (expense) income, net  |       |                                                         | (950       | )                            |       |   | (713 | ) |   | 237 |   |   | 33 | % |   |
| Income before  income taxes         |       |                                                         | 1,481      |                         |       |   | 3,409 |   |   | (1,928 | ) |   | (57 | )% |   |
| Provision for  income taxes         |       |                                                         | 558        |                         |       |   | 1,159 |   |   | (601 | ) |   | (52 | )% |   |
| Net income                          |       |                                                         | $          | 923                          |       |   |   | $ | 2,250 |   |   | $ | (1,327 | ) |   | (59 | )% |   |

 

NET INCOME   The Company achieved net income of$923,000 or $.13 per diluted share for 2005 compared to $2,250,000 or $.36 perdiluted share for 2004. Included in net income are results related to StatureElectric and Premotec from the dates of acquisition on May 10, 2004 and August 23,2004, respectively. Results for both are included for all of 2005.

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EBITDA EBITDA was $5,785,000 for 2005 compared to$6,400,000 for 2004. EBITDA is a non-GAAP measurement that consists of incomebefore interest expense, provision for income taxes and depreciation andamortization. See information included in “Non - GAAP Measures” below for areconciliation of net income to EBITDA.

REVENUES   Revenues were $74,302,000 in 2005compared to $62,738,000 in 2004 or a 18% increase. The incremental revenuesachieved by the companies acquired in 2004 increased revenues by 25% which werepartially offset by a decrease in revenues from existing businesses of 7%. On aproforma basis, sales from Premotec and Stature increased 8% and consolidatedsales decreased 2%. The decrease in existing business is primarily due to revenuesrelated to certain projects last year that were not repeated this year,primarily in the Aerospace/ Defense and Electronics markets and changes incustomer buying patterns.

GROSS MARGINS   Gross margin as a percentage ofrevenues was 22% for 2005 and 26% for 2004. The decrease is due to a change insales mix (significant drop in sales of our higher margin business partiallyoffset by increased sales of lower margin business), the weighting of the lowermargins of the acquired businesses, additional costs incurred to set up lowcost manufacturing capability in China and the negative impact of the upwardtrend in the cost of purchased metal. The Company has proactively responded to the increased metal costs byaggressively sourcing materials from Asian markets, by combining the sourcingof metals for its various manufacturing operations to benefit from volumepurchasing and by passing surcharges to its customers. The Company anticipatesgross margins will improve company wide as we continue to improve manufacturingefficiencies through the implementation of lean manufacturing, by increasingoffshore sourcing of materials and from continued cost reduction efforts toreduce overhead costs and expenses. We also anticipate that we will startrealizing improved margins from products manufactured in our low costmanufacturing facilities in 2006.

SELLING EXPENSES   Selling expenses were$3,265,000 and $2,557,000 in 2005 and 2004, respectively. Of this 28% increase,selling expenses from existing businesses decreased 3% and incremental expensesfrom Stature and Premotec contributed 31% of this increase. The decrease inselling expense from existing businesses is due to cost reduction efforts andrecruiting expenses incurred in 2004 that did not repeat in 2005.

GENERAL AND ADMINISTRATIVE EXPENSES   General andadministrative expenses were $5,952,000 in 2005 compared to $6,226,000 in 2004or a decrease of 4%. Of the 4% decrease, 14% was attributed to a decrease inincentive bonus expense and 4% was attributed to a decrease from cost reductionefforts in existing businesses offset by a 14% increase from the impact ofacquiring Stature and Premotec.

ENGINEERING AND DEVELOPMENT EXPENSES   Engineeringand development expenses were $3,526,000 and $2,896,000 for 2005 and 2004,respectively. Of the 22% increase in engineering and development expenses, 20%was due to the acquisitions of Stature and Premotec and 2% was due toadditional expenditures associated with new product development.

AMORTIZATION OF INTANGIBLE ASSETS   Amortizationof intangible assets was $1,010,000 in 2005 and $647,000 in 2004. This increasewas due to the amortization costs related to the amortizable intangible assetsacquired in the Stature and Premotec acquisitions during 2004.

RESTRUCTURING CHARGE   Restructuring charges werezero and $10,000 in 2005 and 2004, respectively. The charges in 2004 relateprimarily to severance costs arising from workforce reductions from consolidationof the Company’s manufacturing facilities.

INTEREST EXPENSE   Interest expense for 2005 was$1,075,000 and for 2004 was $696,000. The increase in interest was directlyattributed to the increased outstanding balance on the borrowings related tothe financing of the acquisitions of Stature and Premotec.

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INCOME TAXES   Theprovision for income taxes was $558,000 for year 2005 compared to $1,159,000for 2004. The effective income tax rate as a percentage of income before incometaxes from continuing operations was 38% in 2005 and 34% in 2004. Thedifference in the effective tax rate between periods was primarily due toresolution of certain income tax related issues offset by less of an effect ofreduction in enacted tax rates in a foreign jurisdiction.

**Non-GAAP Measures**

EBITDA is provided for information purposes only andis not a measure of financial performance under generally accepted accountingprinciples. The Company believes EBITDA is often a useful measure of a Company’soperating performance and is a significant basis used by the Company’smanagement to measure the operating performance of the Company’s businessbecause EBITDA excludes charges for depreciation, amortization and interestexpense that have resulted from our debt financings, as well as our provisionfor income tax expense. Accordingly, the Company believes that EBITDA provideshelpful information about the operating performance of its business, apart fromthe expenses associated with its physical assets or capital structure. EBITDAis frequently used as one of the bases for comparing businesses in the Company’sindustry. EBITDA does not represent and should not be considered as analternative to net income, operating income, net cash provided by operatingactivities or any other measure for determining operating performance orliquidity that is calculated in accordance with generally accepted accountingprinciples.

TheCompany’s calculation of EBITDA for year ended December 31, 2006 and 2005is as follows (in thousands):

| ** **                                                                                              | ** ** | **For the year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2006**                                                     | ** ** | **2005** | ** ** |
| Net income                                                                                              |       |                                                         | $          | 1,931 |   |   |   | $ | 923 |   |   |
| Interest expense                                                                                        |       |                                                         | 983        |   |   |   | 1,075 |   |   |
| Provision for  income tax                                                                               |       |                                                         | 969        |   |   |   | 558 |   |   |
| Depreciation and  amortization                                                                          |       |                                                         | 3,283      |   |   |   | 3,229 |   |   |
| Income before interest  expense, provision for income taxes and depreciation and amortization  (EBITDA) |       |                                                         | $          | 7,166 |   |   |   | $ | 5,785 |   |   |

 

**Liquidity andCapital Resources**

The Company’s liquidity position as measured by cashand cash equivalents increased $45,000 during 2006 to a balance of $669,000 at December 31,2006. The increase compares to a $168,000 increase in the same period last year.During 2006, operations provided $3,634,000 in cash. Cash provided byoperations included net income of $1,931,000 plus non-cash charges fordepreciation and amortization of $3,283,000, provisions for doubtful accounts,obsolete inventory and deferred income taxes totaling $1,290,000 and othernon-cash charges of $240,000. Cash provided by operating activities includedincreases in trade receivables and inventories of $203,000 and $1,849,000,respectively. These increases are primarily due to increased business levels. Cashused in operations also included decreases in accounts payable and in accruedliabilities and other of $878,000 and $147,000, respectively.

Net cash used in investing activities was $1,422,000and $2,371,000 for 2006 and 2005, respectively. The Company paid zero and$275,000, in years 2006 and 2005, respectively, related to the acquisition ofStature. Purchases of property and equipment were $1,422,000 and $2,096,000 duringthe years 2006 and 2005, respectively.

Net cash used in financing activities was $2,174,000compared to $1,132,000 for the years 2006 and 2005, respectively. Netrepayments on lines-of-credit for the year 2006 were $88,000 compared to netborrowings for the year 2005 of $441,000. The Company repaid $2,198,000 and$2,236,000 on term loans 

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for the years 2006 and2005, respectively. The Company repaid $201,000 and $197,000 on capital leasesin 2006 and 2005, respectively. Proceeds received from capital leases were$52,000 and $50,000 for 2006 and 2005, respectively. Cash was also providedfrom stock transactions under various employee benefit stock plans of $261,000and $655,000, respectively for 2006 and 2005, and repayment on a loan to theCompany’s Employee Stock Ownership plan of $155,000 in 2005.

At December 31, 2006, the Company had $9,698,000of debt obligations representing borrowings on line-of-credit and term loans.

Under the domestic revolving line-of-credit agreement(Agreement), the Company has available the lesser of (a)$10,500,000 or (b) thesum of 85% of eligible trade accounts receivable (excluding Premotec) and 50%of eligible inventory, as defined in the Agreement. Under the Agreement, theCompany utilizes lock-box arrangements whereby remittances from customersreduce the outstanding debt, and therefore the line-of-credit balance has beenclassified as a current liability. As of December 31, 2006, the amountavailable under the domestic line-of-credit was $3,747,000.

Under the foreign line-of-credit agreement (ForeignAgreement), the Company has available the lesser of (a) EUR 1.25 million($1.65 million as of December 31, 2006), or (b) 85% of eligible tradeaccounts receivable of Premotec as defined in the Foreign Agreement. Borrowingsunder the line-of-credit bear interest at a rate equal to the bank’s base rateplus 1.75%, with a minimum of 4.75% (6.00% at December 31, 2006). Under the Foreign Agreement, remittances fromcustomers reduce the outstanding debt, therefore the balance has beenclassified as a current liability. As of December 31, 2006, the amountavailable under the foreign line-of-credit was $1,305,000.

The Company has a bank overdraft facility payable to aforeign bank with no monthly repayments required, interest due at the bank’sbase rate plus 2%, with a minimum of 5.25% (6.25% as of December 31,2006), due on demand, secured by Premotec’s inventory. As of December, 2006,the amount available under the overdraft facility was $264,000. Effective February 1,2007, the Company terminated the foreign line-of-credit agreement and increasedthe amount available under its foreign bank overdraft facility to EUR 750,000($990,000 at December 31, 2006 exchange rate). Borrowings under the newline-of-credit bear interest at a rate equal to the bank’s base rate plus 1.5%,with a minimum of 4.75%.

The Company also has various term loans obtained inconnection with its acquisitions. All borrowings are collateralized bysubstantially all assets of the Company.

The loan agreements prohibit the Company from payingdividends and require that the Company maintain compliance with certaincovenants related to tangible net worth and profitability. As of December 31,2006, the Company was in compliance with such covenants. As of December 31,2006, the amount available under the lines-of-credit and overdraft facility was$5,316,000.

The Company’s workingcapital, capital expenditure and debt service requirements are expected to befunded from cash provided by operations and amounts available under theline-of-credit facilities. The Company’s domestic line-of-credit expires in May 2007.The Company is currently in discussions with lenders regarding its global debtfinancing needs. The Company believes it will be successful in obtaining debtfinancing facilities and that such debt financing facilities and the Company’scapital currently available is sufficient to meet its currently anticipatedneeds for at least the next twelve months. If additional capital is needed inthe future, the Company would pursue additional capital via debt or equityfinancings. A key component of the Company’s liquidity relates to theavailability of amounts under its lines-of-credit. Any lack of availability ofthese facilities could have a material adverse impact on the Company’sliquidity position. There can be no assurances that such financing will beavailable to the Company on acceptable terms, or at all.

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**Price Levels andthe Impact of Inflation**

Prices of the Company’sproducts have not increased significantly as a result of inflation during thepast several years, primarily due to competition. The effect of inflation onthe Company’s costs of production has been minimized through productionefficiencies, lower costs of materials and surcharges passed on to customers.The Company anticipates that these factors will continue to minimize theeffects of any foreseeable inflation and other price pressures from theindustries in which it operates. As the Company’s manufacturing activitiesmainly utilize semi-skilled labor, which is relatively plentiful in the areassurrounding the Company’s production facilities, the Company does notanticipate substantial inflation-related increases in the wages of the majorityof its employees.

**Critical AccountingPolicies**

The Company has prepared its financial statements inconformity with accounting principles generally accepted in the United States,and these statements necessarily include some amounts that are based oninformed judgments and estimates of management. The Company’s significantaccounting policies are discussed in Note 1 to the consolidated financialstatements. The policies are reviewed on a regular basis. The Company’scritical accounting policies are subject to judgments and uncertainties whichaffect the application of such policies. The Company uses historical experienceand all available information to make these judgments and estimates. Asdiscussed below the Company’s financial position or results of operations maybe materially different when reported under different conditions or when usingdifferent assumptions in the application of such policies. In the eventestimates or assumptions prove to be different from actual amounts, adjustmentsare made in subsequent periods to reflect more current information. The Company’scritical accounting policies include:

The Company maintains allowances for doubtful accountsfor estimated losses resulting from the inability of its customers to makerequired payments. The allowance is based on historical experience andjudgments based on current economic and customer specific factors. Significantjudgments are made by management in connection with establishing the Company’scustomers’ ability to pay at the time of shipment. Despite this assessment,from time to time, the Company’s customers are unable to meet their paymentobligations. The Company continues to monitor customers’ credit worthiness, anduse judgment in establishing the estimated amounts of customer receivableswhich may not be collected. A significant change in the liquidity or financialposition of the Company’s customers could have a material adverse impact on thecollectibility of accounts receivable and future operating results.

Inventory is valued at the lower of cost or market. TheCompany monitors and forecasts expected inventory needs based on historicalusage and sales forecasts. Inventory is written down or written off when itbecomes obsolete or when it is deemed excess. These determinations involve theexercise of significant judgment by management. If actual market conditions aresignificantly different from those projected by management the recorded reservemay be adjusted, and such adjustments may have a significant impact on theCompany’s results of operations. Demand for the Company’s products canfluctuate significantly, and in the past the Company has recorded substantialcharges for inventory obsolescence and excess inventories.

The Company records deferred tax assets andliabilities for the estimated future tax effects of temporary differencesbetween the tax basis of assets and liabilities and amounts recorded in theconsolidated financial statements, and for operating loss and tax creditcarryforwards. Realization of the recorded deferred tax assets is dependentupon the Company generating sufficient taxable income in the appropriate taxjurisdiction in future years to obtain benefit from the reversal of netdeductible temporary differences and from tax credit and operating losscarryforwards. A valuation allowance is provided to the extent that management deemsit more likely than not that a portion of the net deferred tax assets will not 

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be realized. The amount ofdeferred tax assets considered realizable is subject to adjustment in futureperiods if estimates of future taxable income are changed.

The Company reviews the carrying values of itslong-lived assets, including goodwill and identifiable intangibles, inaccordance with SFAS No. 144. SFAS No. 144 provides a fair value testto evaluate goodwill and long-lived asset impairment. As part of the review,the Company estimates future cash flows. Depending upon future assessments offair value and estimated future cash flows, there could be impairment recordedrelated to goodwill and other long-lived assets.

The Company providespension and postretirement benefits for certain domestic retirees and recordsthe cost of the obligations based on estimates. The net periodic costs arerecognized as employees render the services necessary to earn the benefits. Severalassumptions are used to calculate the expense and liability related to theplans including the discount rate, the expected rate of return on plan assets,the future rate of compensation increases and health care cost increases. Thediscount rate is selected based on a bond pricing model that relates to theprojected future cash flows of benefit obligations. Actuarial assumptions usedare based on demographic factors such as retirement and mortality. Actualresults could vary materially from the Company’s actuarial assumptions, whichmay have an impact on the amount of reported expense or liability for pensionor postretirement benefits.

**Recent AccountingPronouncements**

In December 2004, the Financial Standards Board (“FASB”)issued Statement of Financial Accounting Standards No. 123 (revised 2004),*Share-Based Payment* (“SFAS 123R”), whichis a revision of Statement of Financial Accounting Standards No. 123, *Accounting for Stock-Based Compensation* (“SFAS 123”) andsupersedes APB Opinion No. 25, *Accounting for StockIssued to Employees*, and amends Statement of Financial AccountingStandards No. 95, *Statement of Cash Flows*.SFAS 123R requires measurement of all employee stock-based compensation awardsusing a fair-value method and the recording of such expense in the consolidatedfinancial statements. The Company selected the Black-Scholes option-pricingmodel as the most appropriate fair-value method for stock option awards andwill recognize compensation cost on a straight-line basis over the awards’vesting periods. The Company adopted SFAS 123R on January 1, 2006. Seenote 5 for further detail.

In November 2004, the FASB issued Statement ofFinancial Accounting Standards No. 151, *InventoryCosts* (“SFAS 151”), which amends the guidance in Accounting ResearchBulletin No. 43, Chapter 4, *Inventory Pricing*.This statement requires abnormal amounts of idle facility expense, freight,handling costs and wasted material to be excluded from inventory costing andinstead included as period expenses. In addition, this standard requires theallocation of fixed production overhead to be based on normal capacity of theproduction facilities. The Company adopted the standard on January 1, 2006and it did not have an impact on our consolidated financial statements.

In July 2006, the Financial Accounting StandardsBoard issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes.” The Interpretation requires that realization of an uncertainincome tax position must be “more likely than not” (i.e., greater than 50%likelihood of receiving a benefit) before it can be recognized in the financialstatements. Further, the Interpretation prescribes the benefit to be recordedin the financial statements as the amount most likely to be realized assuming areview by tax authorities having all relevant information and applying currentconventions. The Interpretation also clarifies the financial statementclassification of tax-related penalties and interest and sets forth newdisclosures regarding unrecognized tax benefits. The Interpretation iseffective in the first quarter 2007 for Allied Motion and the Companyplans to adopt the Interpretation when required. The Interpretation iscurrently being evaluated by Allied Motion for its full impact. At thistime, the Company believes it has properly and adequately provided for allincome tax positions and therefore expects minimal impact from adopting theInterpretation.

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In September 2006, the FASB issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS158). This statement requires recognition of the overfunded or underfundedstatus of defined benefit pension and other postretirement plans as an asset orliability in the statement of financial position and changes in that fundedstatus to be recognized in comprehensive income in the year in which thechanges occur. The recognition provisions of SFAS 158 are effective for yearsending after December 15, 2006. See note 7—Pension and PostretirementWelfare Plans for the effect of the adoption of SFAS No. 158. SFAS No. 158also prescribes the measurement date of a plan to be the date of its year-endbalance sheet effective for years ending after December 15, 2008. TheCompany will not be effected by adopting the latter component of the Standard.

In September 2006, the SEC staff issued StaffAccounting Bulletin No. 108, Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements (SAB 108). SAB 108 was issued in order to eliminate the diversity inpractice surrounding how public companies quantify financial statementmisstatements. SAB 108 requires that registrants quantify errors using both abalance sheet and income statement approach and evaluate whether eitherapproach results in a misstated amount that, when all relevant quantitative andqualitative factors are considered, is material. The Company implemented SAB 108January, 1 2006 and it did not have an impact on our consolidated financialstatements.

In September 2006,the Financial Accounting Standards Board issued FASB No. 157, “Fair ValueMeasurements.” FAS 157 is definitional and disclosure oriented and addresseshow companies should approach measuring fair value when required by GAAP; itdoes not create or modify any current GAAP requirements to apply fair valueaccounting. The Standard provides a single definition for fair value that is tobe applied consistently for all accounting applications, and also generallydescribes and prioritizes according to reliability the methods and inputs usedin valuations. FAS 157 prescribes various disclosures about financial statementcategories and amounts which are measured at fair value, if such disclosuresare not already specified elsewhere in GAAP. The new measurement and disclosurerequirements of FAS 157 are effective for Allied Motion in the firstquarter 2008. The Company expects no significant impact from adopting theStandard.

**ContractualCommitments**

Formore information on the Company’s contractual obligations on operating leasesand contractual commitments, see Notes 3 and 6 to the consolidated financialstatements. At December 31, 2006, the Company’s commitments under theseobligations were as follows (in thousands):

| **Year ending**  | ** ** | **Operating** | ** ** | **Capital** | ** ** | **Line-of-**  | ** ** | **Term**   | ** ** | **Interest on Debt** | ** ** | ** **         | ** ** |
|-----------------------|------------|---------------|------------|-------------|------------|---------------|------------|------------|------------|--------------------------------|------------|--------------------|------------|
| **December 31,** | ** ** | ** **    | ** ** | **Leases**  | ** ** | **Leases(1)** | ** ** | **Credit** | ** ** | **Loans(2)**                   | ** ** | **Obligations(3)** | ** ** | **Total** | ** ** |
| 2007                  |       |          | $          | 620         |       |          |       | $          | 115        |                           |       | $                  | 4,925      |   |   | $ | 4,034 |   |   |   | $ | 626 |   |   | $ | 10,320 |   |
| 2008                  |       |          | 623        |        |       |          | 24         |       |       | —                         |       |               | 422        |   |   |   | 46 |   |   | 1,115 |   |
| 2009                  |       |          | 522        |        |       |          | —     |       |       | —                         |       |               | 317        |   |   |   | 12 |   |   | 851 |   |
| 2010                  |       |          | 418        |        |       |          | —     |       |       | —                         |       |               | —     |   |   |   | — |   |   | 418 |   |
| 2011                  |       |          | 382        |        |       |          | —     |       |       | —                         |       |               | —     |   |   |   | — |   |   | 382 |   |
| Thereafter            |       |          | 408        |        |       |          | —     |       |       | —                         |       |               | —     |   |   |   | — |   |   | 408 |   |
|                  |       |          | $          | 2,973       |       |          |       | $          | 139        |                           |       | $                  | 4,925      |   |   | $ | 4,773 |   |   |   | $ | 684 |   |   | $ | 13,494 |   |
|                       |            |               |            |             |            |               |            |            |            |                                |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          The capital leasecommitments include amounts representing interest.

(2)          Maturities for the termloans are discussed more thoroughly in Note 3.

(3)          Theinterest rates used are the rates in effect at December 31, 2006.

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**Item 7A.**                Quantitativeand Qualitative Disclosures About Market Risk.

**Marketrisk represents the risk of loss that may impact the financial position,results of operations or cash flows of the Company due to adverse changes infinancial and commodity market prices and rates. The Company is exposed tomarket risk in the areas of changes in interest rates and changes in foreigncurrency exchange rates as measured against the United States dollar. Theseexposures are directly related to its normal operating and funding activities.**

**Interest Rate Risk**

The interest payable onthe Company’s domestic and foreign lines-of-credit and its foreign term loanare variable based on the prime rate and Euribor, and are effected by changesin market interest rates. The Company does not believe that reasonably possiblenear-term changes in interest rates will result in a material effect on futureearnings, fair values or cash flows of the Company. A change in the interest rate of 1% on the Company’s variable rate debtwould have the impact of changing interest expense by approximately $81,000annually.

**Foreign CurrencyRisk**

On August 23, 2004,the Company completed the acquisition of Premotec, located in The Netherlands. Salesfrom this operation are denominated in Euros, thereby creating exposures tochanges in exchange rates. The changes in the Euro/U.S. exchange rate maypositively or negatively affect the Company’s sales, gross margins, net incomeand retained earnings. The Company does not believe that reasonably possiblenear-term changes in exchange rates will result in a material effect on futureearnings, fair values or cash flows of the Company.

**Item8.**                        FinancialStatements and Supplementary Data.

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and StockholdersAllied Motion Technologies Inc.Denver, Colorado

We have audited the accompanying consolidated balancesheet of Allied Motion Technologies Inc. and subsidiaries (the “Company”) as ofDecember 31, 2006, and the related consolidated statements of operations,stockholders’ investment and comprehensive income, and cash flows for the yearended December 31, 2006. In connection with our audit of the consolidatedfinancial statements, we have also audited the consolidated financial statementSchedule II—Valuation and Qualifying Accounts for the year endedDecember 31, 2006. These consolidated financial statements and financialstatement schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements and financial statement schedule based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2006 consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Allied Motion Technologies Inc. and subsidiaries as ofDecember 31, 2006 and the results of their operations and their cash flowsfor the year then ended in conformity with accounting principles generallyaccepted in the United States of America. Also in our opinion, the relatedfinancial statement schedule, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

Asdiscussed in Note 1 to the Consolidated Financial Statements, the Companyadopted Statement of Financial Accounting Standards (‘‘SFAS’’) No. 123(R),‘‘Share-Based Payment’’, as of January 1, 2006, and SFAS No. 158,‘‘Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans—An Amendment of FASB Statement No. 87, 88, 106 and 132(R)’’, as ofDecember 31, 2006.

Ehrhardt KeefeSteiner & Hottman PCMarch 17, 2007

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**Report of IndependentRegistered Public Accounting Firm**

The Board of Directors and Stockholders ofAllied Motion Technologies Inc.:

We have audited the accompanying consolidated balancesheet of Allied Motion Technologies Inc. and subsidiaries as of December 31,2005, and the related consolidated statements of operations, stockholders’investment and comprehensive income, and cash flows for the years endedDecember 31, 2005 and 2004. In connection with our audits of the consolidatedfinancial statements, we have also audited the consolidated financial statementSchedule II—Valuation and Qualifying Accounts for the years ended December 31,2005 and 2004. These consolidated financial statements and financial statementschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these consolidated financial statements andfinancial statement schedule based on our audits.

We conducted our audits in accordance with theauditing standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Allied Motion Technologies Inc.and subsidiaries as of December 31, 2005, and the results of their operationsand their cash flows for the years ended December 31, 2005 and 2004, inconformity with U.S. generally accepted accounting principles. Also in ouropinion, the related financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein.

**KPMG LLP**

Denver, ColoradoMarch 20, 2006

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**ALLIED MOTION TECHNOLOGIES INC.CONSOLIDATED BALANCE SHEETS(In thousands, except per share data)**

| ** **                                                                                                                                                | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **Assets**                                                                                                                                                |       |                            |       |                            |       |   |   |   |   |   |
| Current Assets:                                                                                                                                           |       |                            |       |                            |       |   |   |   |   |   |
| Cash and cash equivalents                                                                                                                                 |       |                            | $          | 669                             |       |   |   | $ | 624 |   |   |   |
| Trade receivables, net of allowance for doubtful  accounts of $293 and $281 at December 31, 2006 and 2005,  respectively                        |       |                            | 10,225     |                            |       |   | 10,087 |   |   |   |
| Inventories, net                                                                                                                                          |       |                            | 10,807     |                            |       |   | 9,185 |   |   |   |
| Deferred income taxes                                                                                                                                     |       |                            | 778        |                            |       |   | 402 |   |   |   |
| Prepaid expenses and other                                                                                                                                |       |                            | 619        |                            |       |   | 577 |   |   |   |
| Total Current  Assets                                                                                                                                     |       |                            | 23,098     |                            |       |   | 20,875 |   |   |   |
| Property, plant  and equipment, net                                                                                                                       |       |                            | 12,173     |                            |       |   | 12,939 |   |   |   |
| Deferred income  taxes                                                                                                                                    |       |                            | 25         |                            |       |   | 582 |   |   |   |
| Goodwill and  intangible assets, net                                                                                                                      |       |                            | 18,328     |                            |       |   | 18,941 |   |   |   |
| Total Assets                                                                                                                                              |       |                            | $          | 53,624                          |       |   |   | $ | 53,337 |   |   |   |
| **Liabilities  and Stockholders’ Investment**                                                                                                        |       |                            |       |                            |       |   |   |   |   |   |
| Current Liabilities:                                                                                                                                      |       |                            |       |                            |       |   |   |   |   |   |
| Current maturities of capital lease obligations                                                                                                           |       |                            | $          | 107                             |       |   |   | $ | 180 |   |   |   |
| Debt obligations                                                                                                                                          |       |                            | 8,959      |                            |       |   | 7,155 |   |   |   |
| Accounts payable                                                                                                                                          |       |                            | 4,826      |                            |       |   | 5,543 |   |   |   |
| Accrued liabilities and other                                                                                                                             |       |                            | 4,226      |                            |       |   | 3,877 |   |   |   |
| Income taxes payable                                                                                                                                      |       |                            | 1,179      |                            |       |   | 664 |   |   |   |
| Total Current  Liabilities                                                                                                                                |       |                            | 19,297     |                            |       |   | 17,419 |   |   |   |
| Long-term capital  lease obligations, net of current portion                                                                                              |       |                            | 24         |                            |       |   | 92 |   |   |   |
| Debt obligations,  net of current portion                                                                                                                 |       |                            | 739        |                            |       |   | 4,654 |   |   |   |
| Deferred income  taxes                                                                                                                                    |       |                            | 2,330      |                            |       |   | 1,862 |   |   |   |
| Pension and  post-retirement obligations                                                                                                                  |       |                            | 1,712      |                            |       |   | 3,503 |   |   |   |
| Total Liabilities                                                                                                                                         |       |                            | 24,102     |                            |       |   | 27,530 |   |   |   |
| Commitments and  Contingencies                                                                                                                            |       |                            |       |                            |       |   |   |   |   |   |
| Stockholders’  Investment:                                                                                                                           |       |                            |       |                            |       |   |   |   |   |   |
| Preferred stock, par value $1.00 per share,  authorized 5,000 shares; no shares issued or outstanding                                                     |       |                            | —     |                            |       |   | — |   |   |   |
| Common stock, no par value, authorized 50,000  shares;   6,533 and 6,369 shares issued and outstanding at   December 31, 2006 and 2005, respectively |       |                            | 15,469     |                            |       |   | 14,991 |   |   |   |
| Retained earnings                                                                                                                                         |       |                            | 12,901     |                            |       |   | 10,970 |   |   |   |
| Other comprehensive income (loss)                                                                                                                         |       |                            | 1,152      |                            |       |   | (154 | ) |   |   |
| Total  Stockholders’ Investment                                                                                                                      |       |                            | 29,522     |                            |       |   | 25,807 |   |   |   |
| Total Liabilities and  Stockholders’ Investment                                                                                                      |       |                            | $          | 53,624                          |       |   |   | $ | 53,337 |   |   |   |

 

See accompanying notes to consolidated financial statements.

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**ALLIED MOTION TECHNOLOGIES INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)**

| ** **                              | ** ** | **For the year   ended   December 31,** | ** ** | **For the year   ended   December 31,** | ** ** | **For the year   ended   December 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                                         | ** ** | **2005**                                                         | ** ** | **2004**                                                         | ** ** |
| Revenues                                |       |                                                             | $          | 82,768                                                           |       |                                                             |       | $ | 74,302 |   |   |   | $ | 62,738 |   |   |
| Cost of products  sold                  |       |                                                             | 63,207     |                                                             |       |                                                             | 58,118     |   |   |   | 46,280 |   |   |
| Gross margin                            |       |                                                             | 19,561     |                                                             |       |                                                             | 16,184     |   |   |   | 16,458 |   |   |
| Operating costs  and expenses:          |       |                                                             |       |                                                             |       |                                                             |       |   |   |   |   |   |   |
| Selling                                 |       |                                                             | 3,227      |                                                             |       |                                                             | 3,265      |   |   |   | 2,557 |   |   |
| General and administrative              |       |                                                             | 7,782      |                                                             |       |                                                             | 5,952      |   |   |   | 6,226 |   |   |
| Engineering and development             |       |                                                             | 3,823      |                                                             |       |                                                             | 3,526      |   |   |   | 2,896 |   |   |
| Amortization of intangible assets       |       |                                                             | 1,012      |                                                             |       |                                                             | 1,010      |   |   |   | 647 |   |   |
| Restructuring charges                   |       |                                                             | —     |                                                             |       |                                                             | —     |   |   |   | 10 |   |   |
| Total operating  costs and expenses     |       |                                                             | 15,844     |                                                             |       |                                                             | 13,753     |   |   |   | 12,336 |   |   |
| Operating income                        |       |                                                             | 3,717      |                                                             |       |                                                             | 2,431      |   |   |   | 4,122 |   |   |
| Other income  (expense), net:           |       |                                                             |       |                                                             |       |                                                             |       |   |   |   |   |   |   |
| Interest expense                        |       |                                                             | (983       | )                                                                |       |                                                             | (1,075     | ) |   |   | (696 | ) |   |
| Other income (expense), net             |       |                                                             | 166        |                                                             |       |                                                             | 125        |   |   |   | (17 | ) |   |
| Total other  expense, net               |       |                                                             | (817       | )                                                                |       |                                                             | (950       | ) |   |   | (713 | ) |   |
| Income before  income taxes             |       |                                                             | 2,900      |                                                             |       |                                                             | 1,481      |   |   |   | 3,409 |   |   |
| Provision for  income taxes             |       |                                                             | 969        |                                                             |       |                                                             | 558        |   |   |   | 1,159 |   |   |
| Net income                              |       |                                                             | $          | 1,931                                                            |       |                                                             |       | $ | 923 |   |   |   | $ | 2,250 |   |   |
| Basic net income  per share:            |       |                                                             |       |                                                             |       |                                                             |       |   |   |   |   |   |   |
| Net income per share                    |       |                                                             | $          | .30                                                              |       |                                                             |       | $ | .15 |   |   |   | $ | .40 |   |   |
| Basic weighted average common shares    |       |                                                             | 6,460      |                                                             |       |                                                             | 6,245      |   |   |   | 5,581 |   |   |
| Diluted net  income per share:          |       |                                                             |       |                                                             |       |                                                             |       |   |   |   |   |   |   |
| Net income per share                    |       |                                                             | $          | .28                                                              |       |                                                             |       | $ | .13 |   |   |   | $ | .36 |   |   |
| Diluted weighted  average common shares |       |                                                             | 6,870      |                                                             |       |                                                             | 6,869      |   |   |   | 6,185 |   |   |

 

See accompanying notes to consolidated financial statements.

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**ALLIED MOTION TECHNOLOGIESINC.**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ INVESTMENT ANDCOMPREHENSIVE INCOME**

**(In thousands)**

| ** **                                                                  | ** ** | **Common Stock** | ** ** | ** ** | ** ** | **Retained** | ** ** | **Other   Comprehensive   Income** | ** ** | **Comprehensive** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|--------------|------------|----------------------------------------------|------------|-------------------|------------|
| ** **                                                                  | ** ** | **Shares**            | ** ** | **Amount** | ** ** | **Other**    | ** ** | **Earnings**                                 | ** ** | **Adjustments**   | ** ** | **Income** | ** ** |
| Balances, December 31, 2003                                            |       |                  | 5,021      |       |       |         | 8,383      |                                         |       |              | (200       | ) |   |   | 7,797 |   |   |   | 79 |   |   |   |   |   |   |
| Stock transactions under employee benefit stock plans                       |       |                  | 52         |       |       |         | 156        |                                         |       |              | 45         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of restricted stock                                                |       |                  | 198        |       |       |         | 1,000      |                                         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock compensation expense                                                  |       |                  |       |       |       |         | 13         |                                         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock issued for acquisition of Owosso Corporation                          |       |                  | 536        |       |       |         | 2,421      |                                         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock issued for acquisition of Premotec                                    |       |                  | 263        |       |       |         | 1,471      |                                         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock warrants issued for acquisition of Owosso   Corporation               |       |                  |       |       |       |         | 725        |                                         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency translation adjustment                                     |       |                  |       |       |       |         |       |                                         |       |              |       |   |   |   |   |   |   |   | 220 |   |   |   | $ | 220 |   |   |
| Net income                                                                  |       |                  |       |       |       |         |       |                                         |       |              |       |   |   |   | 2,250 |   |   |   |   |   |   |   | 2,250 |   |   |
| Comprehensive income                                                        |       |                  |       |       |       |         |       |                                         |       |              |       |   |   |   |   |   |   |   |   |   |   |   | $ | 2,470 |   |   |
| Balances, December 31, 2004                                            |       |                  | 6,070      |       |       |         | 14,169     |                                         |       |              | (155       | ) |   |   | 10,047 |   |   |   | 299 |   |   |   |   |   |   |
| Stock transactions under employee benefit stock plans  and option exercises |       |                  | 259        |       |       |         | 780        |                                         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Payment on loan to Employee Stock Ownership Plan                            |       |                  |       |       |       |         |       |                                         |       |              | 155        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of restricted stock                                                |       |                  | 40         |       |       |         | 155        |                                         |       |              | (155       | ) |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock compensation expense                                                  |       |                  |       |       |       |         | 6          |                                         |       |              | 36         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Additional minimum pension liability, net of tax                            |       |                  |       |       |       |         |       |                                         |       |              |       |   |   |   |   |   |   |   | (122 | ) |   |   | $ | (122 | ) |   |
| Foreign currency translation adjustment                                     |       |                  |       |       |       |         |       |                                         |       |              |       |   |   |   |   |   |   |   | (331 | ) |   |   | (331 | ) |   |
| Net income                                                                  |       |                  |       |       |       |         |       |                                         |       |              |       |   |   |   | 923 |   |   |   |   |   |   |   | 923 |   |   |
| Comprehensive income                                                        |       |                  |       |       |       |         |       |                                         |       |              |       |   |   |   |   |   |   |   |   |   |   |   | $ | 470 |   |   |
| Balances, December 31, 2005                                            |       |                  | 6,369      |       |       |         | $          | 15,110                                       |       |              |       | $ | (119 | ) |   |   | $ | 10,970 |   |   |   | $ | (154 | ) |   |   |   |   |   |
| Stock transactions under employee benefit stock plans  and option exercises |       |                  | 125        |       |       |         | 371        |                                         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of restricted stock                                                |       |                  | 39         |       |       |         | 159        |                                         |       |              | (159       | ) |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Restricted stock forfeitures                                                |       |                  |       |       |       |         | (8         | )                                            |       |              | 8          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock compensation expense                                                  |       |                  |       |       |       |         | 14         |                                         |       |              | 93         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Eliminate additional minimum pension liability,   net of tax                |       |                  |       |       |       |         |       |                                         |       |              |       |   |   |   |   |   |   |   | 122 |   |   |   |   |   |   |
| Amount recognized to initially apply SFAS  No. 158,   net of tax       |       |                  |       |       |       |         |       |                                         |       |              |       |   |   |   |   |   |   |   | 824 |   |   |   | $ | 946 |   |   |
| Foreign currency translation adjustment                                     |       |                  |       |       |       |         |       |                                         |       |              |       |   |   |   |   |   |   |   | 360 |   |   |   | 360 |   |   |
| Net income                                                                  |       |                  |       |       |       |         |       |                                         |       |              |       |   |   |   | 1,931 |   |   |   |   |   |   |   | 1,931 |   |   |
| Comprehensive income                                                        |       |                  |       |       |       |         |       |                                         |       |              |       |   |   |   |   |   |   |   |   |   |   |   | $ | 3,237 |   |   |
| Balances,  December 31, 2006                                           |       |                  | 6,533      |       |       |         | 15,646     |                                         |       |              | (177       | ) |   |   | 12,901 |   |   |   | 1,152 |   |   |   |   |   |   |
|                                                                             |            |                       |            |            |            |              |            |                                              |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

27

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**ALLIED MOTION TECHNOLOGIES INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

| ** **                                                                                   | ** ** | **For the  year ended  December 31,** | ** ** | **For the  year ended  December 31,** | ** ** | **For the  year ended  December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                                             | ** ** | **2005**                                             | ** ** | **2004**                                             | ** ** |
| **Cash  Flows From Operating Activities:**                                                   |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |
| Net income                                                                                   |       |                                                 | $          | 1,931                                                |       |                                                 |       | $ | 923 |   |   |   | $ | 2,250 |   |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |
| Depreciation and amortization                                                                |       |                                                 | 3,283      |                                                 |       |                                                 | 3,229      |   |   |   | 2,328 |   |   |
| Provision for doubtful accounts                                                              |       |                                                 | 250        |                                                 |       |                                                 | 146        |   |   |   | 52 |   |   |
| Provision for obsolete inventory                                                             |       |                                                 | 449        |                                                 |       |                                                 | 586        |   |   |   | 136 |   |   |
| Deferred income tax provision                                                                |       |                                                 | 591        |                                                 |       |                                                 | (130       | ) |   |   | 901 |   |   |
| Loss on disposition of assets                                                                |       |                                                 | 24         |                                                 |       |                                                 | 84         |   |   |   | 164 |   |   |
| Other                                                                                        |       |                                                 | 216        |                                                 |       |                                                 | 170        |   |   |   | 5 |   |   |
| Changes in assets and liabilities, net of effects  from acquisitions and  dispositions:      |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |
| Increase in trade receivables                                                                |       |                                                 | (203       | )                                                    |       |                                                 | (1,065     | ) |   |   | (618 | ) |   |
| Increase in inventories, net                                                                 |       |                                                 | (1,849     | )                                                    |       |                                                 | (644       | ) |   |   | (2,050 | ) |   |
| (Increase) decrease in prepaid expenses and other                                            |       |                                                 | (33        | )                                                    |       |                                                 | (69        | ) |   |   | 637 |   |   |
| (Decrease) increase in accounts payable                                                      |       |                                                 | (878       | )                                                    |       |                                                 | 1,051      |   |   |   | (203 | ) |   |
| Decrease in accrued liabilities and other                                                    |       |                                                 | (147       | )                                                    |       |                                                 | (610       | ) |   |   | (329 | ) |   |
| Net cash provided  by operating activities                                                   |       |                                                 | 3,634      |                                                 |       |                                                 | 3,671      |   |   |   | 3,273 |   |   |
| **Cash Flows From Investing Activities:**                                                    |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |
| Purchase of property and equipment                                                           |       |                                                 | (1,422     | )                                                    |       |                                                 | (2,096     | ) |   |   | (953 | ) |   |
| Proceeds from sale of Power and Process Business                                             |       |                                                 | —     |                                                 |       |                                                 | —     |   |   |   | 50 |   |   |
| Net cash paid for acquisition of Owosso Corporation                                          |       |                                                 | —     |                                                 |       |                                                 | (275       | ) |   |   | (13,563 | ) |   |
| Net cash paid for acquisition of Premotec                                                    |       |                                                 | —     |                                                 |       |                                                 | —     |   |   |   | (3,253 | ) |   |
| Net cash used in investing activities                                                        |       |                                                 | (1,422     | )                                                    |       |                                                 | (2,371     | ) |   |   | (17,719 | ) |   |
| **Cash Flows From Financing Activities:**                                                    |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |
| Borrowings (repayments) on lines-of-credit, net                                              |       |                                                 | (88        | )                                                    |       |                                                 | 441        |   |   |   | 3,736 |   |   |
| Borrowings on term loans                                                                     |       |                                                 | —     |                                                 |       |                                                 | —     |   |   |   | 10,314 |   |   |
| Repayments on term loans                                                                     |       |                                                 | (2,198     | )                                                    |       |                                                 | (2,236     | ) |   |   | (2,132 | ) |   |
| Proceeds from capital leases                                                                 |       |                                                 | 52         |                                                 |       |                                                 | 50         |   |   |   | — |   |   |
| Repayments of capital lease obligations                                                      |       |                                                 | (201       | )                                                    |       |                                                 | (197       | ) |   |   | (149 | ) |   |
| Issuance of restricted stock                                                                 |       |                                                 | —     |                                                 |       |                                                 | —     |   |   |   | 1,000 |   |   |
| Repayment on loan to Employee Stock Ownership Plan                                           |       |                                                 | —     |                                                 |       |                                                 | 155        |   |   |   | 45 |   |   |
| Stock transactions under employee benefit stock plans                                        |       |                                                 | 261        |                                                 |       |                                                 | 655        |   |   |   | 123 |   |   |
| Net cash (used in)  provided by financing activities                                         |       |                                                 | (2,174     | )                                                    |       |                                                 | (1,132     | ) |   |   | 12,937 |   |   |
| Effect of foreign  exchange rate changes on cash                                             |       |                                                 | 7          |                                                 |       |                                                 | —     |   |   |   | 5 |   |   |
| Net increase  (decrease) in cash and cash equivalents                                        |       |                                                 | 45         |                                                 |       |                                                 | 168        |   |   |   | (1,504 | ) |   |
| Cash and cash  equivalents at beginning of period                                            |       |                                                 | 624        |                                                 |       |                                                 | 456        |   |   |   | 1,960 |   |   |
| Cash and cash  equivalents at end of period                                                  |       |                                                 | $          | 669                                                  |       |                                                 |       | $ | 624 |   |   |   | $ | 456 |   |   |
| **Supplemental disclosure of cash flow  information:**                                       |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |
| Net cash paid  (received) during the period for:                                             |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |
| Interest                                                                                     |       |                                                 | $          | 990                                                  |       |                                                 |       | $ | 1,085 |   |   |   | $ | 687 |   |   |
| Income taxes                                                                                 |       |                                                 | 346        |                                                 |       |                                                 | 384        |   |   |   | 57 |   |   |
| Acquisitions                                                                                 |       |                                                 | —     |                                                 |       |                                                 | —     |   |   |   | 16,816 |   |   |
| Noncash Investing  and Financing Activities:                                                 |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |
| Capital lease  obligations                                                                   |       |                                                 | 58         |                                                 |       |                                                 | 67         |   |   |   | 74 |   |   |

 

See accompanying notes to consolidated financial statements.

28

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**                 BUSINESSAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

***Business***

Allied Motion TechnologiesInc. (Allied Motion or the Company) is engaged in the business of designing,manufacturing and selling motion control products to a broad spectrum ofcustomers throughout the world primarily for the commercial motor, industrialmotion control, and aerospace and defense markets. 

***Principles of Consolidation***

The accompanyingconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries. All significant inter-company accounts andtransactions are eliminated in consolidation.

***Cash and Cash Equivalents***

Cash and cash equivalentsinclude instruments which are readily convertible into cash (originalmaturities of three months or less) and which are not subject to significantrisk of changes in interest rates. Cash flows from foreign currencytransactions are translated using an average rate.

***Accounts Receivable***

Trade accounts receivableare recorded at the invoiced amount and do not bear interest. The allowance fordoubtful accounts is the Company’s best estimate of the amount of probablecredit losses in the Company’s existing accounts receivable; however, changesin circumstances relating to accounts receivable may result in a requirementfor additional allowances in the future.

***Inventories***

Inventoriesinclude costs of materials, direct labor and manufacturing overhead, and arestated at the lower of cost (first-in, first-out basis) or market, as follows(in thousands):

| ** **               | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Parts and raw  materials |       |                            | $          | 8,864                           |       |   |   | $ | 7,739 |   |   |
| Work-in-process          |       |                            | 1,745      |                            |       |   | 1,418 |   |   |
| Finished goods           |       |                            | 1,854      |                            |       |   | 1,710 |   |   |
|                     |       |                            | 12,463     |                            |       |   | 10,867 |   |   |
| Less reserves            |       |                            | (1,656     | )                               |       |   | (1,682 | ) |   |
|                     |       |                            | $          | 10,807                          |       |   |   | $ | 9,185 |   |   |

 

29

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Property, Plant and Equipment***

Property,plant and equipment is classified as follows (in thousands):

| ** **                            | ** ** | **Useful  lives** | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------|------------|-------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Land                                  |       |              |       |                            | $          | 332                             |       |   |   | $ | 332 |   |   |
| Building and  improvements            |       | 5-39 years        |       |                            | 4,585      |                            |       |   | 4,537 |   |   |
| Machinery,  equipment, tools and dies |       | 2-8 years         |       |                            | 16,525     |                            |       |   | 15,271 |   |   |
| Furniture,  fixtures and other        |       | 3-10 years        |       |                            | 878        |                            |       |   | 764 |   |   |
|                                  |       |              |       |                            | 22,320     |                            |       |   | 20,904 |   |   |
| Less accumulated  depreciation        |       |              |       |                            | (10,147    | )                               |       |   | (7,965 | ) |   |
|                                  |       |              |       |                            | $          | 12,173                          |       |   |   | $ | 12,939 |   |   |

 

Depreciation expense is provided using thestraight-line method over the estimated useful lives of the assets.Amortization of building improvements and leased equipment is provided usingthe straight-line method over the life of the lease term or the life of theassets, whichever is shorter. Maintenance and repair costs are charged tooperations as incurred. Major additions and improvements are capitalized. Thecost and related accumulated depreciation of retired or sold property areremoved from the accounts and the resulting gain or loss, if any, is reflectedin earnings.

Depreciation expense wasapproximately $2,271,000, $2,219,000 and $1,681,000, in 2006, 2005 and 2004,respectively.

***Goodwill***

Goodwill represents theexcess of the purchase price over the fair value of identifiable net tangible andintangible assets acquired in a business combination. Goodwill is required tobe tested for impairment annually, or more frequently if events or changes incircumstances indicate that goodwill may be impaired. The Company completed itsannual analysis of the fair value of its goodwill at October 31, 2006 anddetermined there was no indicated impairment of its goodwill. There can be noassurance that future goodwill impairments will not occur. 

***Intangible Assets***

Intangible assets, otherthan goodwill, are recorded at cost and are amortized over their estimateduseful lives using the straight-line method. 

***Impairment of Long-Lived Assets***

The Company reviews thecarrying values of its long-lived assets whenever events or changes incircumstances indicate that such carrying values may not be recoverable. UnderSFAS No. 144, long-lived assets must be carried at historical cost if theprojected cash flows from their use will recover their carrying amounts on anundiscounted basis and without considering interest. However, if projected cashflows are less than their carrying value, the long-lived assets must be reducedto their estimated fair value. Considerable judgment is required to projectsuch cash flows and, if required, estimate the fair value of the impairedlong-lived asset. No impairments of long-lived assets were recorded in 2006,2005 or 2004.

30

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Warranty***

The Company offers warranty coverage for its productsfor periods ranging from 12 to 18 months after shipment, with the majority ofits products for 12 months. The Company estimates the costs of repairingproducts under warranty based on the historical average cost of the repairs. Theassumptions used to estimate warranty accruals are reevaluated periodically inlight of actual experience and, when appropriate, the accruals are adjusted. Estimatedwarranty costs are recorded at the time of sale of the related product, and areconsidered a cost of sale. Accrued warranty costs were $276,000 and $307,000 asof December 31, 2006 and 2005, respectively.

Changesin the Company’s reserve for product warranty claims during 2006 and 2005, wereas follows (in thousands): 

| ** **                                 | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Warranty reserve  at beginning of the year |       |                        | $          | 307                         |       |   |   | $ | 375 |   |   |
| Warranty  expenditures                     |       |                        | (115       | )                           |       |   | (171 | ) |   |
| Provision                                  |       |                        | 79         |                        |       |   | 113 |   |   |
| Effect of foreign  currency translation    |       |                        | 5          |                        |       |   | (10 | ) |   |
| Warranty reserve at end  of year           |       |                        | $          | 276                         |       |   |   | $ | 307 |   |   |

 

***Accrued Liabilities***

Accruedliabilities consist of the following (in thousands):

| ** **                          | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Compensation and  fringe benefits   |       |                        | $          | 3,221                       |       |   |   | $ | 2,494 |   |   |
| Litigation and  legal fees (Note 6) |       |                        | 92         |                        |       |   | 145 |   |   |
| Warranty reserve                    |       |                        | 276        |                        |       |   | 307 |   |   |
| Other accrued  expenses             |       |                        | 637        |                        |       |   | 931 |   |   |
|                                |       |                        | $          | 4,226                       |       |   |   | $ | 3,877 |   |   |

 

***Foreign Currency Translation***

In accordance with SFAS No. 52,“Foreign Currency Translation,” the assets and liabilities of the Company’sforeign subsidiaries are translated into U.S. dollars using end of periodexchange rates. Revenue and expense transactions use an average rate prevailingduring the month of transaction. The resulting comprehensive income is recordedin the other comprehensive income translation adjustment component ofstockholders’ investment in the accompanying consolidated balance sheets. Transactiongains and losses that arise from exchange rate fluctuations on transactionsdenominated in a currency other than the functional currency are included inthe results of operations as incurred. 

***Engineering and Development Costs***

Engineering anddevelopment costs are expensed as incurred.

31

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Revenue Recognition***

The Company recognizesrevenue when products are shipped or delivered (shipping terms may be eitherFOB shipping point or destination) and title has passed to the customer,persuasive evidence of an arrangement exists, the selling price is fixed ordeterminable, and collectibility is reasonably assured.

***Basic and Diluted Income per Share from ContinuingOperations***

Basic income per share iscomputed by dividing net income or loss by the weighted average number ofshares of common stock outstanding. Diluted income per share is determined bydividing the net income or loss by the sum of (1) the weighted average numberof common shares outstanding and (2) if not anti-dilutive, the effect of stockawards determined utilizing the treasury stock method. Outstanding optionstotaling 498,000, 624,000, and 604,000 had a dilutive effect for years 2006,2005 and 2004, respectively. Stock options to purchase 213,000, 241,000 and130,000 shares of common stock, were excluded from the calculation of dilutedincome per share for years 2006, 2005 and 2004, respectively, since the resultswould have been anti-dilutive.

***Comprehensive Income***

Comprehensive income is defined as the change inequity of a business enterprise during a period from transactions and otherevents and circumstances from non-owner sources. It includes all changes inequity during a period except those resulting from investments by anddistributions to stockholders.

Thecomponents of accumulated other comprehensive income (loss) as of December 31,2006 and 2005 are as follows (in thousands):

| ** **                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Foreign currency  translation adjustment                   |       | $        | 328        |     | $          | (32 | ) |
| Amount recognized  to initially apply SFAS 158, net of tax |       | 824      |       | —   |       |
| Additional  minimum pension liability, net of tax          |       | —   |       | (122     | )          |
| Comprehensive income  (loss)                               |       | $        | 1,152      |     | $          | (154 | ) |

 

***Stock-Based Compensation***

Effective January 1, 2006, the Company implementedFASB Statement No. 123R (Statement 123R) Accounting for Share-Based Payment, anamendment of FASB Statement No. 123, adopting the modified prospective methodof implementation. Statement 123R requires recognition of the grant-date fairvalue of stock options and other equity-based compensation issued to employeesin the income statement. The cost of share based payments, using the fair valueof the options at the grant date assuming the Black-Scholes option-pricingmodel, is recognized on a straight-line basis over the vesting period. 

Prior to January 1, 2006, the Company accounted forits employee stock compensation plans as prescribed under Accounting PrinciplesBoards Opinion No. 25, Accounting for Stock Issued to Employees (APB Opinion25) as permitted under FASB Statement No. 123 (Statement 123) Accounting forStock-Based Compensation. As a result, compensation expense related to stockoptions was measured based on the intrinsic value of the stock option at thedate of grant. All options granted had an exercise price equal to the marketvalue of the underlying common stock on the date of grant and therefore nostock-based compensation cost was reflected in net income.

32

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Hadcompensation cost for the Company’s stock-based compensation plan beendetermined using the fair value of the options at the grant date, assuming theBlack-Scholes option-pricing model, the Company’s net income and income pershare would have been reduced to the pro forma amounts indicated below for theyears ended December 31, 2005 and 2004 (in thousands):

| ** **                                     | ** ** | **For the year ended** | ** ** | **For the year ended** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                     | ** ** | **December 31, 2005**       | ** ** | **December 31, 2004**       | ** ** |
| Net income:                                    |       |                                  |       |                                  |       |   |   |   |   |
| Reported net income                            |       |                                  | $          | 923                                   |       |   |   | $ | 2,250 |   |   |
| Stock-based compensation expense, net of taxes |       |                                  | $          | (130                                  | )          |   |   | $ | (1,231 | ) |   |
| Pro forma net income                           |       |                                  | $          | 793                                   |       |   |   | $ | 1,019 |   |   |
| Basic net income per share:                    |       |                                  |       |                                  |       |   |   |   |   |
| Reported basic net income per share            |       |                                  | $          | 0.15                                  |       |   |   | $ | 0.40 |   |   |
| Pro forma basic net income per share           |       |                                  | $          | 0.13                                  |       |   |   | $ | 0.18 |   |   |
| Diluted net income per share:                  |       |                                  |       |                                  |       |   |   |   |   |
| Reported diluted net income per share          |       |                                  | $          | 0.13                                  |       |   |   | $ | 0.36 |   |   |
| Pro forma diluted  net income per share        |       |                                  | $          | 0.12                                  |       |   |   | $ | 0.16 |   |   |

 

Prior to January 1, 2006, cumulative compensation costrecognized was adjusted for forfeitures by a reduction of adjusted compensationexpense in the period of forfeiture. 

There were no options granted during 2006 and 2005.For SFAS No. 123 purposes, the fair value of each option grant is estimated onthe date of grant using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions:

| ** **               | ** ** | **For the year ended** | ** ** |
|--------------------------|------------|---------------------------------------|------------|
| ** **               | ** ** | **December 31, 2004**       | ** ** |
| Risk-free  interest rate |       |                                  | 3.7        | % |   |
| Expected dividend  yield |       |                                  | 0.0        | % |   |
| Expected life            |       |                                  | 5 years    |   |   |
| Expected volatility      |       |                                  | 91.1       | % |   |

 

The weighted average fair value of options granted,assuming the Black-Scholes option-pricing model, during 2004 was $3.81. Thetotal fair value of options granted was $1,290,000. These amounts are being amortizedover the vesting periods of the options for purposes of this disclosure. Alloptions granted in 2004 were fully vested December 31, 2004. 

The weighted average fair value of shares issuedpursuant to the Employee Stock Purchase Plan is included in stock-basedcompensation expense. For SFAS No. 123 purposes, the per share fair value ofthe shares, calculated as the difference between the stock price at the date ofissuance and the employee purchase price, issued during 2005 and 2004 was $.66and $2.45, respectively.

The Black-Scholes optionvaluation model was developed for use in estimating the fair value of tradedoptions that have no vesting restrictions and are fully transferable. Inaddition, option valuation models require the input of highly subjectiveassumptions including the expected stock price volatility. Because theCompany’s employee stock options have characteristics significantly differentthan those of traded options, and because changes in the subjective inputassumptions can materially affect the fair value estimate, in 

33

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

management’sopinion, the existing models do not necessarily provide a reliable singlemeasure of the fair value of its stock options.

***Fair Values of Financial Instruments***

The carrying amountsreported in the consolidated balance sheets for cash and cash equivalents,trade receivables, accounts payable and accrued liabilities approximate fairvalue because of the immediate or short-term maturities of these financialinstruments. The carrying amount of the lines-of-credit and variable term loansapproximate their fair value because the underlying instrument is a variablerate note that reprices frequently. The carrying amount of the term loanapproximates its fair value because the fixed interest rate is a current marketinterest rate.

***Income Taxes***

The current provision forincome taxes represents actual or estimated amounts payable or refundable ontax return filings each year. Deferred tax assets and liabilities are recordedfor the estimated future tax effects of temporary differences between the taxbase of assets and liabilities and amounts reported in the accompanyingconsolidated balance sheets, and for operating loss and tax creditcarryforwards. A valuation allowance may be provided to the extent managementdeems it is more likely than not that deferred tax assets will not be realized.The change in deferred tax assets and liabilities for the period measures thedeferred tax provision or benefit for the period. Effects of changes in enactedtax laws on deferred tax assets and liabilities are reflected as adjustments tothe tax provision or benefit in the period of enactment. The ultimaterealization of net deferred tax assets is dependent upon the generation offuture taxable income, in the appropriate taxing jurisdictions, during theperiods in which temporary differences become deductible. Management believesthat it is more likely than not that the Company will realize the benefits ofthese temporary differences and operating loss and tax credit carryforwards,net of valuation allowances.

***Concentration of Credit Risk***

Trade receivables subjectthe Company to the potential for credit risk. To reduce this risk, the Companyperforms evaluations of its customers’ financial condition and creditworthinessat the time of sale, and updates those evaluations when necessary. No singlecustomer makes up more than 10% of trade receivables.

***Use of Estimates***

The preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States of America requires management to make certainestimates and assumptions. Such estimates and assumptions affect the reportedamounts of assets and liabilities as well as disclosure of contingent assetsand liabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates.

34

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**                 GOODWILLAND INTANGIBLE ASSETS

Includedin goodwill and intangible assets in the Company’s consolidated balance sheetsare the following intangible assets (in thousands):

| ** **                                | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** | **Estimated  Life** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------------|------------|
| Goodwill                                  |       |                        | $          | 13,059                      |       |                |       | $ | 12,818 |   |   |   |   |   |   |
| Amortizable  intangible assets:           |       |                        |       |                        |       |                |       |   |   |   |   |   |   |
| Customer lists                            |       |                        | 4,473      |                        |       |                | 4,371      |   |   |   | 8 years |   |   |
| Trade names                               |       |                        | 1,340      |                        |       |                | 1,340      |   |   |   | 10 years |   |   |
| Designs and technologies                  |       |                        | 2,597      |                        |       |                | 2,494      |   |   |   | 8 years |   |   |
| Accumulated amortization                  |       |                        | (3,141     | )                           |       |                | (2,082     | ) |   |   |   |   |   |
| Total net intangible assets               |       |                        | 5,269      |                        |       |                | 6,123      |   |   |   |   |   |   |
| Total goodwill and net  intangible assets |       |                        | $          | 18,328                      |       |                |       | $ | 18,941 |   |   |   |   |   |   |

 

Thechange in the carrying amount of goodwill for 2006 is as follows (inthousands):

| ** **                              | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Balance at  beginning of period         |       |                        | $          | 12,818                      |       |   |   | $ | 13,246 |   |   |
| Effect of foreign  currency translation |       |                        | 241        |                        |       |   | (326 | ) |   |
| Other                                   |       |                        | —     |                        |       |   | (102 | ) |   |
| Balance at end of period                |       |                        | $          | 13,059                      |       |   |   | $ | 12,818 |   |   |

 

Total amortization expensefor intangible assets for the years 2006, 2005, and 2004 was $1,012,000,$1,010,000 and $647,000 respectively. Estimated amortization expense for intangibleassets is $1,024,000 for each of the years ending December 31, 2007through 2009, $923,000 for 2010 and $783,000 for 2011. 

35

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**3.**                 DEBTOBLIGATIONS

Debtobligations consisted of the following (in thousands):

| ** **                                                                                                                                                                                                                                                                                           | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                           | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Domestic  revolving line-of-credit(A)                                                                                                                                                                                                                                                                |       |                  | $          | 4,925                 |       |   |   | $ | 4,434 |   |   |
| Foreign revolving  line-of-credit(B)                                                                                                                                                                                                                                                                 |       |                  | —     |                  |       |   | 547 |   |   |
| Term loan payable  to bank in monthly installments of $90 plus interest at 8.68%, due in  May 2007, secured by machinery and equipment                                                                                                                                                          |       |                  | 451        |                  |       |   | 1,535 |   |   |
| Term loan payable  to bank in monthly installments of $59 plus interest at the bank’s prime rate  plus 0.75% (9.0% as of December 31, 2006), plus balloon payment of  $2,863, due in May 2007, secured by buildings, machinery and equipment                                          |       |                  | 3,160      |                  |       |   | 3,872 |   |   |
| Term loan payable  to bank in quarterly installments of EUR 80 ($106 at December 31, 2006  exchange rate) plus interest at 6.12% until February, 2007, then at EURIBOR  plus 2.5% with a minimum of 4.75%, due in July 2009, secured by  Allied Motion Technologies, B.V. shares |       |                  | 1,162      |                  |       |   | 1,421 |   |   |
| Total                                                                                                                                                                                                                                                                                                |       |                  | 9,698      |                  |       |   | 11,809 |   |   |
| Less current  maturities                                                                                                                                                                                                                                                                             |       |                  | (8,959     | )                     |       |   | (7,155 | ) |   |
| Long-term debt  obligations                                                                                                                                                                                                                                                                          |       |                  | $          | 739                   |       |   |   | $ | 4,654 |   |   |

----

(A)       Under the domesticrevolving line-of-credit agreement (Agreement), the Company has available thelesser of (a) $10,500,000 or (b) the sum of 85% of eligible tradeaccounts receivable (excluding Premotec) and 50% of eligible inventory, asdefined in the Agreement. Under the Agreement, the Company utilizes lock-boxarrangements whereby remittances from customers reduce the outstanding debt,and therefore the line-of-credit balance has been classified as a currentliability. As of December 31, 2006, the amount available under thedomestic line-of-credit was $3,747,000. The line-of-credit expires in May 2007.The Company is in discussions with lenders regarding its global debt financingneeds.

(B)        Under the foreignline-of-credit agreement (Foreign Agreement), the Company has available thelesser of (a) EUR 1.25 million ($1.65 million as of December 31,2006), or (b) 85% of eligible trade accounts receivable of Premotec asdefined in the Foreign Agreement. Borrowings under the line-of-credit bearinterest at a rate equal to the bank’s base rate plus 1.75%, with a minimum of4.75% (6.00% at December 31, 2006). Under the Foreign Agreement,remittances from customers reduce the outstanding debt, therefore the balancehas been classified as a current liability. As of December 31, 2006, theamount available under the foreign line-of-credit was $1,305,000.

36

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The Company has a bank overdraft facility payable to aforeign bank with no monthly repayments required, interest due at the bank’sbase rate plus 2%, with a minimum of 5.25% (6.25% as of December 31,2006), due on demand, secured by Premotec’s inventory. As of December, 2006,the amount available under the overdraft facility was $264,000. EffectiveFebruary 1, 2007, the Company terminated the foreign line-of-creditagreement and increased the amount available under its foreign bank overdraftfacility to EUR 750,000 ($990,000 at December 31, 2006 exchange rate).Borrowings under the new line-of-credit bear interest at a rate equal to thebank’s base rate plus 1.5%, with a minimum of 4.75%.

Futurematurities of debt obligations are as follows as of December 31, 2006:

| 2007   |   | $   | 8,959  |   |
|--------|--------|-----|--------|--------|
| 2008   |   | 422 |   |
| 2009   |   | 317 |   |
|   |   | $   | 9,698  |   |

 

**4.**                 INCOMETAXES

Theprovision for income taxes is based on income before income taxes fromcontinuing operations as follows (in thousands):

| ** **                  | ** ** | **For the year ended  December 31,** | ** ** | **For the year ended  December 31,** | ** ** | **For the year ended  December 31,** | ** ** |
|-----------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                                 | ** ** | **2005**                                                 | ** ** | **2004**                                                 | ** ** |
| Domestic                    |       |                                                     | $          | 1,030                                                    |       |                                                     |       | $ | 782 |   |   |   | $ | 3,151 |   |   |
| Foreign                     |       |                                                     | 1,870      |                                                     |       |                                                     | 699        |   |   |   | 258 |   |   |
| Income before income  taxes |       |                                                     | $          | 2,900                                                    |       |                                                     |       | $ | 1,481 |   |   |   | $ | 3,409 |   |   |

 

Componentsof the total provision for income taxes are as follows (in thousands):

| ** **                     | ** ** | **For the year ended  December 31,** | ** ** | **For the year ended  December 31,** | ** ** | **For the year ended  December 31,** | ** ** |
|--------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                                 | ** ** | **2005**                                                 | ** ** | **2004**                                                 | ** ** |
| Current provision:             |       |                                                     |       |                                                     |       |                                                     |       |   |   |   |   |   |   |
| Domestic                       |       |                                                     | $          | 143                                                      |       |                                                     |       | $ | 73 |   |   |   | $ | 131 |   |   |
| Foreign                        |       |                                                     | 662        |                                                     |       |                                                     | 323        |   |   |   | 127 |   |   |
| Total current provision        |       |                                                     | 805        |                                                     |       |                                                     | 396        |   |   |   | 258 |   |   |
| Deferred provision  (benefit): |       |                                                     |       |                                                     |       |                                                     |       |   |   |   |   |   |   |
| Domestic                       |       |                                                     | 351        |                                                     |       |                                                     | 274        |   |   |   | 1,063 |   |   |
| Foreign                        |       |                                                     | (187       | )                                                        |       |                                                     | (112       | ) |   |   | (162 | ) |   |
| Total deferred provision       |       |                                                     | 164        |                                                     |       |                                                     | 162        |   |   |   | 901 |   |   |
| Provision for income  taxes    |       |                                                     | $          | 969                                                      |       |                                                     |       | $ | 558 |   |   |   | $ | 1,159 |   |   |

 

37

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Theprovision for income taxes differs from the amount determined by applying thefederal statutory rate as follows (in thousands):

| ** **                                 | ** ** | **For the year ended  December 31,** | ** ** | **For the year ended  December 31,** | ** ** | **For the year ended  December 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                                 | ** ** | **2005**                                                 | ** ** | **2004**                                                 | ** ** |
| Tax provision,  computed at statutory rate |       |                                                     | $          | 986                                                      |       |                                                     |       | $ | 504 |   |   |   | $ | 1,159 |   |   |
| State tax, net of  federal impact          |       |                                                     | 112        |                                                     |       |                                                     | 62         |   |   |   | 150 |   |   |
| Nondeductible  expenses                    |       |                                                     | 33         |                                                     |       |                                                     | 28         |   |   |   | 30 |   |   |
| Permanent tax  deductions                  |       |                                                     | (28        | )                                                        |       |                                                     | (24        | ) |   |   | (109 | ) |   |
| Adjustments to  prior year accruals(1)     |       |                                                     | 26         |                                                     |       |                                                     | 52         |   |   |   | — |   |   |
| Effect of foreign  tax rate differences    |       |                                                     | (82        | )                                                        |       |                                                     | (17        | ) |   |   | 1 |   |   |
| Effect of changes  in enacted tax law      |       |                                                     | (78        | )                                                        |       |                                                     | (18        | ) |   |   | (124 | ) |   |
| Expiration of tax  credits                 |       |                                                     | 97         |                                                     |       |                                                     | —     |   |   |   | 59 |   |   |
| Change in  valuation allowance             |       |                                                     | (97        | )                                                        |       |                                                     | (37        | ) |   |   | — |   |   |
| Other                                      |       |                                                     | —     |                                                     |       |                                                     | 8          |   |   |   | (7 | ) |   |
| Provision for income  taxes                |       |                                                     | $          | 969                                                      |       |                                                     |       | $ | 558 |   |   |   | $ | 1,159 |   |   |

----

(1)          Adjustments relate tothe resolution of certain prior year income tax related matters.

Thetax effects of significant temporary differences and credit and operating losscarryforwards that give rise to the net deferred tax assets are as follows (inthousands):

| ** **                        | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Deferred tax assets:              |       |                        |       |                        |       |   |   |   |   |
| Allowances and other              |       |                        | $          | 419                         |       |   |   | $ | 658 |   |   |
| Tax credit carryforwards          |       |                        | 136        |                        |       |   | 233 |   |   |
| Net operating loss  carryforwards |       |                        | 466        |                        |       |   | 408 |   |   |
| Total deferred tax  assets        |       |                        | 1,021      |                        |       |   | 1,299 |   |   |
| Valuation allowance               |       |                        | (218       | )                           |       |   | (315 | ) |   |
| Net deferred tax assets           |       |                        | 803        |                        |       |   | 984 |   |   |
| Deferred tax  liabilities:        |       |                        |       |                        |       |   |   |   |   |
| Property, plant and  equipment    |       |                        | (1,123     | )                           |       |   | (1,081 | ) |   |
| Goodwill and intangibles          |       |                        | (831       | )                           |       |   | (781 | ) |   |
| Other                             |       |                        | (376       | )                           |       |   | — |   |   |
| Total deferred tax  liabilities   |       |                        | (2,330     | )                           |       |   | (1,862 | ) |   |
| Net deferred tax liabilities      |       |                        | $          | (1,527                      | )          |   |   | $ | (878 | ) |   |

 

Thenet deferred tax liabilities are classified as follows in the accompanyingconsolidated balance sheets (in thousands):

| ** **                            | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Current deferred tax  assets          |       |                        | $          | 778                         |       |   |   | $ | 402 |   |   |
| Non- current deferred  tax assets     |       |                        | 25         |                        |       |   | 582 |   |   |
| Non-current deferred tax  liabilities |       |                        | (2,330     | )                           |       |   | (1,862 | ) |   |
| Net deferred tax liabilities          |       |                        | $          | (1,527                      | )          |   |   | $ | (878 | ) |   |

 

38

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The Company has domestic tax credit carryforwards of$136,000 expiring in 2007 and a domestic net operating loss carryforward of$1,295,000 expiring in 2023 through 2025.

Realization of the Company’sdeferred tax assets is dependent upon the Company generating sufficient taxableincome in the appropriate tax jurisdictions in future years to obtain benefitfrom the reversal of net deductible temporary differences and from utilizationof net operating losses and tax credit carryforwards. The Company has recordeda valuation allowance due to the uncertainty related to the realization ofcertain deferred tax assets existing at December 31, 2006. The amount ofdeferred tax assets considered realizable is subject to adjustment in futureperiods if estimates of future taxable income are changed. Management believesthat it is more likely than not that the Company will realize the benefits ofits deferred tax assets, net of valuation allowances as of December 31,2006.

**5.**                 STOCK-BASEDCOMPENSATION PLANS

***Allied Motion Stock Incentive Plan***

The Company’s Stock Incentive Plan provides for thegranting of stock awards, including stock options, stock appreciation rightsand restricted stock, to employees and non-employee directors of the Company.

As of December 31,2006, the Company had 108,768 shares of Common Stock available for grant underthe Year 2000 Plan.

**Stock Options**

Optionactivity during years 2004, 2005 and 2006 was as follows:

| ** **                       | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------|------------|----------------------------|------------|----------------------------------------|------------|---------------------------------|------------|
| Balance,  December 31, 2003 |       | 1,323,430                  |       |                                   | 3.00       |                            |       |   |   |
| Granted                          |       | 404,600                    |       |                                   |       |                            |       |   |   |
| Forfeited                        |       | (11,000                    | )          |                                   |       |                            |       |   |   |
| Exercised                        |       | (29,160                    | )          |                                   |       |                            |       | $ | 92,000 |   |
| Balance,  December 31, 2004 |       | 1,687,870                  |       |                                   | 3.48       |                            |       |   |   |
| Granted                          |       | —                     |       |                                   |       |                            |       |   |   |
| Forfeited                        |       | (38,317                    | )          |                                   |       |                            |       |   |   |
| Exercised                        |       | (200,903                   | )          |                                   |       |                            |       | $ | 477,000 |   |
| Balance,  December 31, 2005 |       | 1,448,650                  |       |                                   | 3.62       |                            |       |   |   |
| Granted                          |       | —                     |       |                                   |       |                            |       |   |   |
| Forfeited                        |       | (44,000                    | )          |                                   |       |                            |       |   |   |
| Exercised                        |       | (159,500                   | )          |                                   |       |                            |       | $ | 338,000 |   |
| Balance, December 31,  2006 |       | 1,245,150                  |       |                                   | 3.68       |                            |       | $ | 3,937,000 |   |

 

Under the terms of the plan, options may not begranted at less than 85% of fair value. All options granted to date have beengranted at fair value as of the date of grant. The aggregate intrinsic value iscalculated based on the difference of the fair value of the stock and theoption exercise price at the date of the grant. Options granted through December 31,2003 generally become exercisable evenly over 

39

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

three years startingone year from the date of grant and expire seven years from the date of grant. Optionsgranted in 2004 became exercisable on December 31, 2004. As of December 31,2006, all outstanding options are exercisable. Cash received from the exerciseof share options for the years ended December 31, 2006, 2005 and 2004 was$185,000, $433,000 and $48,000, respectively.

Exerciseprices for options outstanding at December 31, 2006 are as follows:

| ** **                                   | ** ** | **Range of Exercise Prices** | ** ** | **Total**                   | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|
| ** **                                   | ** ** | **$1.77 - $2.90**                 | ** ** | **$3.20 - $4.83** | ** ** | **$5.46 - $6.72** | ** ** | **$1.77 - $6.72** | ** ** |
| Options Outstanding:                         |       |                                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Number of options                            |       |                                        | 559,000    |                        |       |   | 472,900 |   |   |   | 213,250 |   |   | 1,245,150 |   |
| Weighted average exercise price              |       |                                        | $          | 2.35                        |       |   |   | $ | 4.16 |   |   |   | $ | 6.10 |   |   | $ | 3.68 |   |
| Weighted average  remaining contractual life |       |                                        | 2.8 years  |                        |       |   | 4.1 years |   |   |   | 3.5 years |   |   | 3.4 years |   |
|                                              |            |                                             |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Restricted Stock**

During 2006 and 2005, 42,000 and 47,000 shares ofnonvested restricted stock were awarded with a value of $3.80 and $3.91 pershare, respectively. The value at the date of grant is amortized tocompensation expense over the related three year vesting period. Shares ofrestricted stock are forfeited if an employee leaves the Company before thevesting date. Shares that are forfeited become available for future grant underthe Company’s Year 2000 Stock Incentive Plan.

Nonvestedrestricted stock activity during years 2005 and 2006 was as follows:

| ** **                       | ** ** | **Number of  Nonvested** | ** ** |
|----------------------------------|------------|-------------------------------|------------|
| ** **                       | ** ** | **Restricted  Shares**        | ** ** |
| Balance,  December 31, 2004 |       |                          | —     |   |   |
| Granted                          |       |                          | 47,000     |   |   |
| Forfeited                        |       |                          | (3,000     | ) |   |
| Balance,  December 31, 2005 |       |                          | 44,000     |   |   |
| Granted                          |       |                          | 42,000     |   |   |
| Forfeited                        |       |                          | (2,000     | ) |   |
| Vested                           |       |                          | (14,009    | ) |   |
| Balance,  December 31, 2006 |       |                          | 69,991     |   |   |

 

***Share-Based Compensation Expense***

**Stock Options**

During the year ended December 31,2006, the Company recognized $14,000 in compensation expense related tooutstanding stock options. As discussed in Note 1, prior to January 1,2006, no stock-based compensation cost was reflected in net income. Totalunrecognized compensation cost related to unvested stock options awards as of December 31,2006, is zero.

**Restricted Stock**

During 2006 and 2005,compensation expense net of forfeitures, of $93,000 and $36,000 was recorded,respectively. As of December 31, 2006, there was $194,000 of totalunrecognized compensation expense 

40

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

relatedto restricted stock awards which is expected to be recognized over a weightedaverage period of 1.9 years.

***Allied Motion Employee Stock Ownership Plan***

The Company sponsors an Employee Stock Ownership Plan(ESOP) that covers all U.S. employees who work over 1,000 hours per year. Theterms of the ESOP require the Company to make an annual contribution equal tothe greater of i) the Board established percentage of pretax income before thecontribution (5% in 2006, 2005 and 2004) or ii) the annual interest payable onany loan outstanding to the Company. Company contributions to the Plan were$153,000, $78,000 and $181,000 accrued for 2006, 2005 and 2004, respectively. Contributionswere used to acquire newly issued shares of the Company and/or repay the loanas discussed below. During 2006 and 2005, contributions were used to acquire18,000 and 2,000 shares, respectively.

During 2003, the Companyloaned $200,000 to the ESOP so that the ESOP could acquire 130,719 newly issuedshares of the Company’s common stock. The shares issued to the ESOP werepledged as collateral for the debt. During years when there is an outstandingloan, Company contribution amounts are used in the following year to repay theloan. During 2005 and 2004, accrued contributions used to repay the loanbalance were $155,000 and $45,000, respectively. During 2005, the loan balancewas repaid in full. As the debt was repaid, shares were released fromcollateral and allocated to active employees, based on the proportion of debtservice paid in the year compared to the total debt service estimated for thecurrent and future years.

***Allied Motion Employee Stock Purchase Plan***

Until December 31,2005, the Employee Stock Purchase Plan (ESPP) provided for the issuance ofshares of capital stock through payroll deductions. Employees who chose to participatein the ESPP received an option to purchase capital stock at a discount equal tothe lower of 85 percent of the fair market value of the capital stock on thefirst or last day of an offering period. Employees purchased 58,000 and 29,000shares under the ESPP during 2005 and 2004, respectively. The ESPP terminatedon December 31, 2005.

***Allied Motion Employee Stock Repurchase Program***

Until December 31,2005, the Company offered a stock repurchase program whereby up to $125,000 peryear could be used to repurchase shares of common stock from employees at fairvalue. The Company repurchased 2,000 and 6,000 shares during 2005 and 2004,respectively. This program ended December 31, 2005.

**6.**                 COMMITMENTSAND CONTINGENCIES

***Operating Leases***

At December 31,2006, the Company maintains leases for certain facilities and equipment. TheCompany has entered into facility agreements, some of which contain provisionsfor future rent increases. The total amount of rental payments due over thelease term is being charged to rent expense on the straight-line method overthe term of the lease. The difference between rent expense recorded and theamount paid is credited or charged to “Deferred rent obligation,” which isincluded in “Accrued liabilities 

41

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

and other” in the accompanying Balance Sheet. Minimumfuture rental commitments under all non-cancelable operating leases are asfollows (in thousands):

| ** **                         | ** ** | **Total**  | ** ** |
|------------------------------------|------------|------------|------------|
| **Year  ending December 31,** | ** ** | ** ** | ** ** |
| 2007                               |       | $          | 620        |   |
| 2008                               |       | 623        |       |
| 2009                               |       | 522        |       |
| 2010                               |       | 418        |       |
| 2011                               |       | 382        |       |
| Thereafter                         |       | 408        |       |
|                               |       | $          | 2,973      |   |

 

Rental expense was$693,000, $715,000, and $551,000 in Years 2006, 2005 and 2004, respectively.

***Capital Leases***

The Company leases certain machinery and equipmentunder agreements that are classified as capital leases. The cost of equipmentunder capital leases included in the accompanying consolidated balance sheetsas property, plant and equipment was $583,000 and $680,000 at December 31,2006 and 2005, respectively. Accumulated amortization of the leased equipmentat December 31, 2006 and December 31, 2005 was $289,000 and $229,000,respectively. Amortization of assets under capital leases is included indepreciation expense.

Thefuture minimum lease payments required under the capital leases and the presentvalue of the net minimum lease payments as of December 31, 2006, are asfollows (in thousands):

| **Year  ending December 31,**                     | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------|------------|
| 2007                                                   |       | $          | 115        |   |
| 2008                                                   |       | 24         |       |
| Total minimum  lease payments                          |       | 139        |       |
| Less: amount  representing interest and other          |       | (8         | )          |
| Present value of  net minimum lease payments           |       | 131        |       |
| Less: Current  maturities of capital lease obligations |       | (107       | )          |
| Long-term capital lease  obligations                   |       | $          | 24         |   |

 

***Severance Benefit Agreements***

The Company has enteredinto annually renewable severance benefit agreements with six key employeeswhich, among other things, provide inducement to the employees to continue towork for the Company during and after any period of a potential change incontrol of the Company. The agreements provide the employees with specifiedbenefits upon the subsequent severance of employment in the event of change incontrol of the Company and are effective for 24 months thereafter. The amountof severance payments that could be required to be paid under these contracts,if such events occur, totaled approximately $2,714,000 and $3,298,000,respectively as of December 31, 2006 and 2005. In addition, severancebenefits include, for some employees, a gross-up payment for excise taxes.

42

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Litigation***

The Company is involved incertain actions that have arisen out of the ordinary course of business.Management believes that resolution of the actions will not have a significantadverse affect on the Company’s consolidated financial position or results ofoperations.

**7.   PENSIONAND POSTRETIREMENT WELFARE PLANS**

***Pension Plan***

Motor Products has a defined benefit pension plancovering substantially all of its hourly union employees hired prior to April 10,2002. The benefits are based on years of service, the employee’s compensationduring the last three years of employment, and accumulated employeecontributions.

Thefollowing tables provide a reconciliation of the change in benefit obligation,the change in plan assets and the net amount recognized in the ConsolidatedBalance Sheet at December 31, 2006 and December 31, 2005 (inthousands):

| ** **                                           | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Change in projected  benefit obligation:             |       |                        |       |                        |       |   |   |   |   |
| Projected benefit  obligation at beginning of period |       |                        | $          | 4,096                       |       |   |   | $ | 3,882 |   |   |
| Service cost                                         |       |                        | 128        |                        |       |   | 113 |   |   |
| Employee  contributions                              |       |                        | 13         |                        |       |   | 14 |   |   |
| Interest cost                                        |       |                        | 222        |                        |       |   | 214 |   |   |
| Actuarial (gain)  loss                               |       |                        | (205       | )                           |       |   | 74 |   |   |
| Benefits paid                                        |       |                        | (189       | )                           |       |   | (201 | ) |   |
| Projected benefit  obligation at end of period       |       |                        | $          | 4,065                       |       |   |   | $ | 4,096 |   |   |
| Change in plan  assets:                              |       |                        |       |                        |       |   |   |   |   |
| Fair value of  plan assets at beginning of period    |       |                        | $          | 3,219                       |       |   |   | $ | 3,238 |   |   |
| Actual return on  plan assets                        |       |                        | 395        |                        |       |   | 168 |   |   |
| Employee  contributions                              |       |                        | 13         |                        |       |   | 14 |   |   |
| Employer  contributions                              |       |                        | 130        |                        |       |   | — |   |   |
| Benefits and  expenses paid                          |       |                        | (189       | )                           |       |   | (201 | ) |   |
| Fair value of plan  assets at end of period          |       |                        | $          | 3,568                       |       |   |   | $ | 3,219 |   |   |

 

| ** **                                                             | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Excess of  projected benefit obligation over fair value of plan assets |       |                        | $          | 497                         |       |   |   | $ | 877 |   |   |
| Unrecognized gain  (loss)                                              |       |                        | 57         |                        |       |   | (263 | ) |   |
| Accrued pension  cost                                                  |       |                        | $          | 554                         |       |   |   | $ | 614 |   |   |
| Additional  minimum liability                                          |       |                        | —     |                        |       |   | 191 |   |   |
| Amount recognized  to initially apply SFAS No. 158                |       |                        | (57        | )                           |       |   | — |   |   |
| Accrued pension cost at  end of period                                 |       |                        | $          | 497                         |       |   |   | $ | 805 |   |   |

 

The accumulated benefit obligation for the pensionplan was $3,976,000 at December 31, 2006 and $4,024,000 at December 31,2005.

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Componentsof net periodic pension expense included in the consolidated statements ofoperations for years 2006, 2005 and 2004 are as follows (in thousands):

| ** **                                     | ** ** | **For the year  ended  December 31,** | ** ** | **For the year  ended  December 31,** | ** ** | **For the year  ended  December 31,** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                             | ** ** | **2005**                                             | ** ** | **2004**                                             | ** ** |
| Service cost                                   |       |                                                 | $          | 128                                                  |       |                                                 |       | $ | 113 |   |   |   | $ | 90 |   |   |
| Interest cost on  projected benefit obligation |       |                                                 | 222        |                                                 |       |                                                 | 214        |   |   |   | 197 |   |   |
| Expected return  on assets                     |       |                                                 | (280       | )                                                    |       |                                                 | (282       | ) |   |   | (273 | ) |   |
| Net periodic pension  expense                  |       |                                                 | $          | 70                                                   |       |                                                 |       | $ | 45 |   |   |   | $ | 14 |   |   |

 

Theweighted average assumptions used to determine benefit obligations were asfollows:

| ** **                      | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Discount rate                   |       |                        | 6.00       | %                           |       |   | 5.50 | % |   |
| Rate of compensation  increases |       |                        | 5.00       | %                           |       |   | 5.00 | % |   |

 

Theweighted average assumptions used to determine net periodic benefit cost are asfollows:

| ** **                                        | ** ** | **For the year  ended  December 31,  2006** | ** ** | **For the year  ended  December 31,  2005** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Discount rate                                     |       |                                                       | 6.00       | %                                                          |       |   | 5.50 | % |   |
| Expected  long-term rate of return on plan assets |       |                                                       | 9.00       | %                                                          |       |   | 9.00 | % |   |
| Rate of compensation  increases                   |       |                                                       | 5.00       | %                                                          |       |   | 5.00 | % |   |

 

The Company expects to contribute approximately$87,732 to the pension plan during 2007.

Thepension plan assets allocation at December 31, 2006 and 2005 were as follows:

| ** **               | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Cash equivalents         |       |                        | 5          | %                           |       |   | 4 | % |   |
| Equity securities        |       |                        | 70         | %                           |       |   | 71 | % |   |
| Fixed income  securities |       |                        | 25         | %                           |       |   | 25 | % |   |
| Total                    |       |                        | 100        | %                           |       |   | 100 | % |   |

 

The pension assets aremanaged by an outside investment manager. The Company’s investment policy withrespect to pension assets is to make investments solely in the interest of theparticipants and beneficiaries of the plans and for the exclusive purpose ofproviding benefits accrued and defraying the reasonable expenses of administration.The Company strives to maintain investment diversification to assist inminimizing the risk of large losses.

***Postretirement Welfare Plan***

Motor Products provides postretirement medicalinsurance and life insurance benefits to current and former employees hiredbefore January 1, 1994 who retire from Motor Products. Employees whoretire 

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

after January 1, 2005must have twenty or more years of continuous service in order to be eligiblefor retiree medical benefits. Partial contributions from retirees are requiredfor the medical insurance benefits. The Company’s portion of the medicalinsurance premiums are funded from the general assets of the Company. TheCompany recognizes the expected cost of providing such post-retirement benefitsduring employees’ active service periods.

Thefollowing tables provide a reconciliation of the change in the accumulatedpostretirement benefit obligation and the net amount recognized in theConsolidated Balance Sheet at December 31, 2006 and December 31, 2005(in thousands):

| ** **                                                            | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Change in  postretirement benefit obligation:                         |       |                        |       |                        |       |   |   |   |   |
| Accumulated  postretirement benefit obligation at beginning of period |       |                        | $          | 2,515                       |       |   |   | $ | 2,338 |   |   |
| Service cost                                                          |       |                        | 26         |                        |       |   | 45 |   |   |
| Interest cost                                                         |       |                        | 68         |                        |       |   | 131 |   |   |
| Actuarial (gain)  loss                                                |       |                        | (1,330     | )                           |       |   | 123 |   |   |
| Benefits paid,  net of participant contributions                      |       |                        | (64        | )                           |       |   | (122 | ) |   |
| Accumulated  postretirement benefit obligation at end of period       |       |                        | $          | 1,215                       |       |   |   | $ | 2,515 |   |   |
| Accrued postretirement benefit cost at the beginning  of period       |       |                        | $          | 2,698                       |       |   |   | $ | 2,502 |   |   |
| Net periodic  postretirement cost                                     |       |                        | (3         | )                           |       |   | 300 |   |   |
| Employer  contributions                                               |       |                        | (64        | )                           |       |   | (122 | ) |   |
| Other                                                                 |       |                        | (185       | )                           |       |   | 18 |   |   |
| Accrued  postretirement benefit cost                                  |       |                        | $          | 2,446                       |       |   |   | $ | 2,698 |   |   |
| Amount recognized  to initially apply SFAS No. 158               |       |                        | (1,231     | )                           |       |   | — |   |   |
| Accrued postretirement  benefit cost at end of period                 |       |                        | $          | 1,215                       |       |   |   | $ | 2,698 |   |   |

 

Netperiodic postretirement benefit costs included in the consolidated statementsof operations for years 2006, 2005 and 2004, and are as follows (in thousands):

| ** **                          | ** ** | **For the year ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                        |       |                                                         | $          | 26 |   |   |   | $ | 68 |   |   |   | $ | 46 |   |   |
| Interest cost                       |       |                                                         | 68         |   |   |   | 191 |   |   |   | 146 |   |   |
| Amortization of  prior service cost |       |                                                         | (12        | ) |   |   | — |   |   |   | — |   |   |
| Amortization of  loss (gain)        |       |                                                         | (85        | ) |   |   | 41 |   |   |   | — |   |   |
| Total                               |       |                                                         | $          | (3 | ) |   |   | $ | 300 |   |   |   | $ | 192 |   |   |

 

During 2006, certain assumptions, relating to theCompany’s obligation for contributing a portion of retiree medical premiums,were updated to more closely reflect the Company’s contractual obligation.  This resulted in a cumulative reduction topreviously recognized net periodic postretirement benefit costs of $115,000,net of tax.  The cumulative reduction isreflected in the consolidated statement of operations for 2006, but is notincluded in the net periodic postretirement benefit cost for 2006 as presentedin the table above. The reduction resulted primarily from a change in theaccumulated postretirement benefit obligation cost at December 31, 2005,which is reflected in the above tables.

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

For measurement purposes, future increases in the percapita cost of covered health care benefits are assumed. The Company’s currentcontractual obligation requires a per capita fixed Company contribution amountthrough August 2007.  As of December 31,2006, the Company assumed an increase in its contribution of 5% applied onceevery three years beginning in 2007 to reflect expected bargaining agreements. Postretirementmedical liabilities can be extremely sensitive to changes in the assumed rateof future medical increases, and, therefore the healthcare cost trend rateassumption has a significant effect on the amounts reported.

The weighted average discount rate used in determiningthe accumulated postretirement benefit obligation was 6.00% and 5.50% as of December 31,2006 and 2005, respectively. The weighted average discount rate used todetermine the net periodic postretirement benefit cost was 5.50% for 2006 and5.75% for 2005.

The Company expects tocontribute approximately $60,000 to the postretirement welfare plan during2007.

**8.   SEGMENTINFORMATION**

SFAS No. 131, “Disclosures about Segments of anEnterprise and Related Information” requires disclosure of operating segments,which as defined, are components of an enterprise about which separatefinancial information is available that is evaluated regularly by the chiefoperating decision maker in deciding how to allocate resources and in assessingperformance.

The Company operates in one segment for themanufacture and marketing of motion control products for original equipmentmanufacturers and end user applications. In accordance with SFAS No. 131,the Company’s chief operating decision maker has been identified as the Officeof the President and Chief Operating Officer, which reviews operating resultsto make decisions about allocating resources and assessing performance for theentire Company. SFAS No. 131, which is based on a management approach tosegment reporting, establishes requirements to report selected segmentinformation quarterly and to report annually entity-wide disclosures aboutproducts and services, major customers, and the countries in which the entityholds material assets and reports revenue. All material operating units qualifyfor aggregation under SFAS No. 131 due to their similar customer base andsimilarities in: economic characteristics; nature of products and services; andprocurement, manufacturing and distribution processes. Since the Companyoperates in one segment, all financial information required by SFAS No. 131can be found in the accompanying consolidated financial statements and withinthis note.

TheCompany’s wholly owned foreign subsidiary, Premotec, located in Dordrecht, TheNetherlands and is included in the accompanying consolidated financialstatements. Financial information related to the foreign subsidiary issummarized below (in thousands):

| ** **                                  | ** ** | **For the year ended and as of December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues derived  from foreign subsidiaries |       |                                                                                  | $          | 18,685 |   |   |   | $ | 13,790 |   |   |   | $ | 5,018 |   |   |
| Identifiable assets                         |       |                                                                                  | 9,300      |   |   |   | 7,981 |   |   |   | 8,927 |   |   |

 

Sales to customers outside of the United States were$26,405,000 $20,096,000, and $13,737,000, in years 2006, 2005 and 2004.

During Years 2006 and2005, no single customer accounted for more than 10% of total revenues.

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**ALLIED MOTION TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**9.   DEFERREDCOMPENSATION PLAN**

The Company has a DeferredCompensation Plan effective January 1, 2006. The Plan provides eligiblekey employees with the opportunity to defer the receipt of base compensation,bonuses, or a combination thereof. The Plan also allows designated participantsto receive an allocation of any performance based contributions ordiscretionary amounts contributed by the Company. The Company has designatedvarious investment funds in which stated portions of each participant’s accountshall be hypothetically invested. The investment performance of these funds areallocated to the participants’ funds on a monthly basis. The deferredcompensation plan is unfunded, therefore benefits are paid from the generalassets of the Company. During and for the year ended December 31, 2006,the Company invested in the chosen investment funds in the amounts directed bythe participants. The discretionary contribution expense related to the planfor the year ended December 31, 2006 was $24,500. The Company’s board ofdirectors approved a performance contribution for 2006 based on the Companyachieving a net profit target. The performance criteria was not met for 2006,and accordingly, no performance contributions expense has been recorded.

**10.   SELECTEDQUARTERLY FINANCIAL DATA (UNAUDITED)**

Selectedquarterly financial data for each of the four quarters in years 2006, 2005 and2004 is as follows (in thousands, except per share data):

| **Year 2006**       | ** ** | ** ** | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|--------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| Revenues                 |       | $          | 21,199     |               | $          | 22,155              |       | $                  | 20,308     |                | $          | 19,106 |   |
| Gross margin             |       | 4,740      |       | 5,262              |       | 5,064               |       | 4,495              |       |
| Net income               |       | 348        |       | 578                |       | 617                 |       | 388                |       |
| Basic income per  share  |       | .05        |       | .09                |       | .10                 |       | .06                |       |
| Diluted income per share |       | .05        |       | .08                |       | .09                 |       | .06                |       |
|                          |            |            |            |                    |            |                     |            |                    |            |                     |            |  |  |  |  |

 

| **Year 2005**       | ** ** | ** ** | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|--------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| Revenues                 |       | $          | 18,455     |               | $          | 18,913              |       | $                  | 18,043     |                | $          | 18,891 |   |
| Gross margin             |       | 4,088      |       | 4,224              |       | 4,198               |       | 3,674              |       |
| Net income               |       | 168        |       | 368                |       | 383                 |       | 4                  |       |
| Basic income per  share  |       | .03        |       | .06                |       | .06                 |       | .00                |       |
| Diluted income per share |       | .02        |       | .05                |       | .06                 |       | .00                |       |
|                          |            |            |            |                    |            |                     |            |                    |            |                     |            |  |  |  |  |

 

| **Year 2004**       | ** ** | ** ** | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|--------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| Revenues                 |       | $          | 11,248     |               | $          | 15,104              |       | $                  | 18,042     |                | $          | 18,344 |   |
| Gross margin             |       | 3,047      |       | 4,064              |       | 4,563               |       | 4,784              |       |
| Net income               |       | 427        |       | 608                |       | 612                 |       | 603                |       |
| Basic income per  share  |       | .09        |       | .11                |       | .10                 |       | .10                |       |
| Diluted income per share |       | .08        |       | .10                |       | .09                 |       | .09                |       |
|                          |            |            |            |                    |            |                     |            |                    |            |                     |            |  |  |  |  |

 

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**Item 9A.**                Controlsand Procedures.

The Company’s controls and procedures include thosedesigned to ensure that material information is accumulated and communicated tothe Company’s management as appropriate to allow timely decisions regardingrequired disclosure. As of December 31, 2006 the Company’s chief executiveofficer and chief financial officer evaluated the effectiveness of the Company’sdisclosure controls and procedures designed to ensure that information isrecorded, processed, summarized and reported in a timely manner as required byExchange Act reports such as this Form 10-K and concluded that theyare effective.

There has not been anychange in the Company’s internal controls over financial reporting during thequarter ended December 31, 2006 that has materially affected or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

**PART III**

**Item 10.**                 Directors,Executive Officers and Corporate Governance.

The Company’s definitiveproxy statement which will be filed with the SEC pursuant to Registration 14Awithin 120 days of the end of the Company’s fiscal year is incorporated hereinby reference.

**Item 11.**                 ExecutiveCompensation.

The Company’s definitiveproxy statement which will be filed with the SEC pursuant to Registration 14Awithin 120 days of the end of the Company’s fiscal year is incorporated hereinby reference.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.

The Company’s definitiveproxy statement which will be filed with the SEC pursuant to Registration 14Awithin 120 days of the end of the Company’s fiscal year is incorporated hereinby reference. Also incorporated by reference is the information in the tableunder the heading “Equity Compensation Plan” included in Item 5 of the Form 10-K.

**Item 13.**                 CertainRelationships and Related Transactions, and Director Independence.

The Company’s definitiveproxy statement which will be filed with the SEC pursuant to Registration 14Awithin 120 days of the end of the Company’s fiscal year is incorporated hereinby reference.

**Item 14.**                 PrincipalAccountant Fees and Services.

The Company’s definitiveproxy statement which will be filed with the SEC pursuant to Registration 14Awithin 120 days of the end of the Company’s fiscal year is incorporated hereinby reference.

**PART IV**

**Item 15.**                 Exhibitsand Financial Statement Schedules.

a)   The followingdocuments are filed as part of this Report:

**1.   FinancialStatements**

a)                ConsolidatedBalance Sheets as of December 31, 2006 and December 31, 2005.

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b)               ConsolidatedStatements of Operations for the years ended December 31, 2006, 2005 and2004.

c)                ConsolidatedStatements of Stockholders’ Investment and Comprehensive Income for the years2006, 2005 and 2004.

d)               ConsolidatedStatements of Cash Flows for the years 2006, 2005 and 2004.

e)                Notes toConsolidated Financial Statements.

f)                  Reportof Independent Registered Public Accounting Firm.

**2.   FinancialStatement Schedules**

II. Valuation andQualifying Accounts.

**3.   Exhibits**

| Exhibit No. | ** ** | **Subject**                                                                                                                                                                                                                                                                                                       |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | Amended  and Restated Articles of Incorporation of the Company (incorporated by  reference to Exhibit 3.1 to the Company’s Form 8-K files  May 3, 2006.)                                                                                                                                      |
| 3.2              |       | Amended and restated Bylaws of the Company  (incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K  filed May 3, 2006.)                                                                                                                                                          |
| 10.0*            |       | The Amended 1991 Incentive and Nonstatutory Stock  Option Plan dated August 1, 1998. (Incorporated by reference to  Exhibit 10.19 to the Company’s Form 10-K for the fiscal year  ended June 30, 1998.)                                                                                  |
| 10.1*            |       | Year 2000 Stock Incentive Plan. (Incorporated by  reference to Exhibit A to the Company’s Proxy Statement dated  September 21, 2000.)                                                                                                                                                              |
| 10.2             |       | Stock Purchase Agreement among  Motor Products—Owosso Corporation, Motor Products—Ohio Corporation, Owosso  Corporation and Hathaway Motion Control Corporation. (Incorporated by  reference to Exhibit 10.21 to the Company’s Form 10-K for the  fiscal year ended June 30, 2002.) |
| 10.3             |       | Agreement and Plan of Merger, dated as of  February 10, 2004, by and among Allied Motion Technologies Inc., AMOT  Inc. and Owosso Corporation. (Incorporated by reference to the Company’s  Form S-4/A as filed on March 26, 2004.)                                                           |
| 10.4             |       | Share Purchase Agreement dated  July 23, 2004 by and among Premotec Holding B.V., Premotec Beheer B.V.,  Allied Motion Technologies Netherlands BV, and Allied Motion Technologies  Inc. (Incorporated by reference to Exhibit 2 to the Company’s Form 8-K  dated August 23, 2004.)      |
| 10.5*            |       | Amendment No. 1 to the Year 2000 Stock  Incentive Plan. (Incorporated by reference to Exhibit B to the Company’s  Proxy Statement dated September 30, 2002.)                                                                                                                                  |
| 10.6*            |       | Employment Agreement between Allied Motion  Technologies Inc. and Richard D. Smith, effective August 1, 2003.  (Incorporated by reference to Exhibit 10.11 to the Company’s  Form 10-K for the year ended December 31, 2003.)                                                            |
| 10.7*            |       | Change of Control Agreement between Allied Motion  Technologies Inc. and Richard D. Smith, effective July 24, 2003.  (Incorporated by reference to Exhibit 10.12 to the Company’s  Form 10-K for the year ended December 31, 2003.)                                                      |
| 10.8*            |       | Employment Agreement between Allied Motion  Technologies Inc. and Richard S. Warzala, effective March 1, 2003.  (Incorporated by reference to Exhibit 10.13 to the Company’s  Form 10-K for the year ended December 31, 2003.)                                                           |

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| 10.9*  |   | Change of Control Agreement between Hathaway  Corporation and Richard S. Warzala, effective May 1, 2002. (Incorporated  by reference to Exhibit 10.14 to the Company’s Form 10-K for  the year ended December 31, 2003.)                                                                                            |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.10* |   | Amendment No. 2 to the Year 2000 Stock  Incentive Plan. (Incorporated by reference to Exhibit B to the Company’s  Proxy Statement dated March 29, 2004.)                                                                                                                                                                 |
| 10.11  |   | Revolving Credit and Security Agreement dated  May 7, 2004 between Allied Motion Technologies Inc. and certain  subsidiaries of Allied Motion Technologies, PNC Bank, National Association  and Silicon Valley Bank. (Incorporated by reference to Exhibit 99.1 to  the Company’s Form 8-K dated February 8, 2005.) |
| 10.12  |   | Term Loan and Security Agreement dated May 7,  2004 between Allied Motion Technologies Inc. and certain subsidiaries of  Allied Motion Technologies and PNC Bank, National Association. (Incorporated  by reference to Exhibit 99.2 to the Company’s Form 8-K dated  February 8, 2005.)                             |
| 10.13  |   | Term Loan and Security Agreement dated May 7,  2004 between Allied Motion Technologies Inc. and certain subsidiaries of  Allied Motion Technologies and Silicon Valley Bank. (Incorporated by reference  to Exhibit 99.3 to the Company’s Form 8-K dated  February 8, 2005.)                                        |
| 10.14  |   | First Amendment to Revolving Credit and Security  Agreement, Term Loan and Security Agreements, and Related Documents dated as  of August 23, 2004. (Incorporated by reference to Exhibit 99.4 to  the Company’s Form 8-K dated February 8, 2005.)                                                                  |
| 10.15  |   | Second Amendment to Revolving Credit and Security  Agreement, Term Loan and Security Agreements, and Related Documents dated as  of November 15, 2004. (Incorporated by reference to Exhibit 99.5 to  the Company’s Form 8-K dated February 8, 2005.)                                                               |
| 10.16  |   | Third Amendment to Revolving Credit and Security  Agreement, Term Loan and Security Agreements, and Related Documents dated as  of July 11, 2005. (Incorporated by reference to Exhibit 10.16 to  the Company’s Form 10-K for the year ended December 31,  2005.)                                                   |
| 10.17  |   | Fourth Amendment to Revolving Credit and Security  Agreement, Term Loan and Security Agreements, and Related Documents dated as  of November 1, 2005. (Incorporated by reference to Exhibit 10.17 to  the Company’s Form 10-K for the year ended December 31,  2005.)                                               |
| 10.18* |   | Deferred Compensation Plan effective January, 1 2006  (filed herewith).                                                                                                                                                                                                                                                                      |
| 10.19* |   | First Amendment to the Allied Motion Technologies  Inc. Deferred Compensation Plan adopted August 2, 2006 (filed herewith).                                                                                                                                                                                                             |
| 14.1   |   | Code of Ethics for chief executive officer,  president and senior financial officers adopted October 23, 2003.  (Incorporated by reference to Exhibit 14.1 to the Company’s Form 10-K  for the year ended December 31, 2003.)                                                                                       |
| 21     |   | List of Subsidiaries (filed herewith)                                                                                                                                                                                                                                                                                                        |
| 23.1   |   | Consent of Ehrhardt Keefe Steiner & Hottman  PC (filed herewith).                                                                                                                                                                                                                                                                   |
| 23.2   |   | Consent of KPMG LLP (filed herewith)                                                                                                                                                                                                                                                                                                         |
| 31     |   | Certification of the Chief Executive Officer and Chief  Financial Officer pursuant to Rule 13a—14(a) or 15d—14(a) of  the Securities Exchange Act of 1934, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                             |
| 32     |   | Certification of the Chief Executive Officer and  Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed  herewith).                                                                                                                              |

 

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*                    Denotesmanagement contract or compensatory plan or arrangement.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

|        | ALLIED MOTION TECHNOLOGIES INC.        |
|--------|----------------------------------------|
|   | By                                     |   /s/ RICHARD D. SMITH |   |
|   | Richard D. Smith                       |
|   | *Chief Executive Officer,*             |
|   | *Chief Financial Officer and Director* |
|   | Date: March 15,  2007             |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant in thecapacities and on the dates indicated.

|                         | **Signatures** | ** **                                | ** ** | ** **           | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|-------------------------|----------------|-------------------------------------------|------------|----------------------|-----------|------------|------------|------------|----------|------------|
| /s/ RICHARD D.  SMITH   |           | Chief Executive  Officer, Chief Financial |       | March 15,  2007 |
| Richard  D. Smith       |           | Officer and Director                      |       |                 |
| /s/ RICHARD S.  WARZALA |           | President, Chief  Operating Officer and   |       | March 15,  2007 |
| Richard  S. Warzala     |           | Director                                  |       |                 |
| /s/ DELWIN D. HOCK      |           | Chairman of the  Board of Directors       |       | March 15,  2007 |
| Delwin  D. Hock         |           |                                      |       |                 |
| /s/ EUGENE E. PRINCE    |           | Director                                  |       | March 15,  2007 |
| Eugene  E. Prince       |           |                                      |       |                 |
| /s/ GEORGE J. PILMANIS  |           | Director                                  |       | March 15,  2007 |
| George  J. Pilmanis     |           |                                      |       |                 |
| /s/ GRAYDON D. HUBBARD  |           | Director                                  |       | March 15,  2007 |
| Graydon  D. Hubbard     |           |                                      |       |                 |
| /s/ MICHEL M. ROBERT    |           | Director                                  |       | March 15,  2007 |
| Michel M. Robert        |           |                                      |       |                 |

 

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**ALLIED MOTION TECHNOLOGIES INC.SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS(In thousands)**

| ** **                                   | ** ** | **Balance at   Beginning   of Period** | ** ** | **Charged to   Costs and   Expenses** | ** ** | **Deductions   from   Reserves** | ** ** | **Other** | ** ** | **Balance   at End of   Period** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------|------------|-----------|------------|------------------------------------------------------|------------|
| **Year Ended December 31,  2006:**      |       |                                                       |       |                                                      |       |                                       |       |      |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Reserve for bad debts                        |       |                                                       | $          | 281                                                       |       |                                       |       | $         | 250        |                                                 |       |   | $ | (243 | ) |   |   | $ | 5 |   |   |   | $ | 293 |   |   |
| Reserve for excess or obsolete inventories   |       |                                                       | $          | 1,682                                                     |       |                                       |       | $         | 449        |                                                 |       |   | $ | (501 | ) |   |   | $ | 26 |   |   |   | $ | 1,656 |   |   |
| Valuation allowance for deferred tax assets  |       |                                                       | $          | 315                                                       |       |                                       |       | $         | —     |                                                 |       |   | $ | (97 | ) |   |   | $ | — |   |   |   | $ | 218 |   |   |
| **Year  Ended December 31, 2005:**      |       |                                                       |       |                                                      |       |                                       |       |      |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Reserve for bad debts                        |       |                                                       | $          | 235                                                       |       |                                       |       | $         | 146        |                                                 |       |   | $ | (92 | ) |   |   | $ | (8 | ) |   |   | $ | 281 |   |   |
| Reserve for excess or obsolete inventories   |       |                                                       | $          | 1,496                                                     |       |                                       |       | $         | 586        |                                                 |       |   | $ | (348 | ) |   |   | $ | (52 | ) |   |   | $ | 1,682 |   |   |
| Valuation allowance for deferred tax assets  |       |                                                       | $          | 352                                                       |       |                                       |       | $         | —     |                                                 |       |   | $ | (37 | ) |   |   | $ | — |   |   |   | $ | 315 |   |   |
| **Year  Ended December 31, 2004:**      |       |                                                       |       |                                                      |       |                                       |       |      |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Reserve for bad debts                        |       |                                                       | $          | 106                                                       |       |                                       |       | $         | 61         |                                                 |       |   | $ | (32 | ) |   |   | $ | 100 |   |   |   | $ | 235 |   |   |
| Reserve for excess or obsolete inventories   |       |                                                       | $          | 805                                                       |       |                                       |       | $         | 136        |                                                 |       |   | $ | (242 | ) |   |   | $ | 797 |   |   |   | $ | 1,496 |   |   |
| Valuation  allowance for deferred tax assets |       |                                                       | $          | 352                                                       |       |                                       |       | $         | 59         |                                                 |       |   | $ | (59 | ) |   |   | $ | — |   |   |   | $ | 352 |   |   |

 

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